UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
2002
Commission file number 1-5153
Marathon Oil Corporation
(Exact
(Exact name of registrant as specified in its charter)
Delaware 25-0996816
(State of Incorporation) (I.R.S. Employer
Identification No.)
Delaware | 25-0996816 | |||
(State of Incorporation) | (I.R.S. Employer Identification No.) |
5555 San Felipe Road, Houston, TX 77056-2723
(Address
(Address of principal executive offices)
Tel. No. (713) 629-6600
Securities registered pursuant to Section 12(b) of the Act:*
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Title of Each Class
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Common Stock, par value $1.00 6.75% Convertible Quarterly Income
Preferred Securities (Initial
Rights to Purchase Series A Junior Liquidation Amount $50 per
Preferred Stock (Currently Traded Security)**(b)
with Common Stock)
7% Guaranteed Notes Due 2002 of
Marathon Oil Company(c)
6.50% Cumulative Convertible Preferred
(Liquidation Preference $50.00 per
share)(a)
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Title of Each Class | ||
Common Stock, par value $1.00* | Rights to Purchase Series A Junior Preferred Stock (Traded with Common Stock)** | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X]þ No [_]
¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]
þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No ¨
Aggregate market value of Common Stock held by non-affiliates as of January 31, 2002: $92003: $6 billion. The amount shown is based on the closing pricesprice of the registrant'sregistrant’s Common Stock on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are "affiliates"“affiliates” within the meaning of Rule 405 under the Securities Act of 1933.
There were 309,518,016309,863,304 shares of Marathon Oil Corporation Common Stock outstanding as of January 31, 2002.
2003.
Documents Incorporated By Reference:
Portions of the registrant'sregistrant’s proxy statement relating to its 20022003 annual meeting of stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, are incorporated by reference to the extent set forth in Part III, Items 10-13 of this report.
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* These securities are listed on the New York Stock Exchange. In addition,
the Common Stock is listed on the Chicago Stock Exchange and the Pacific
Exchange.
** Issued by USX Capital Trust I.
(a) These securities were converted into the right to receive cash of $50 and
are no longer outstanding. A certification and notice of termination of
registration was filed with the SEC in January 2002.
(b) These securities were redeemed and are no longer outstanding. A
certification and notice of termination of registration was filed with the
SEC in January 2002.
(c) The obligations of Marathon Oil Company, a wholly owned subsidiary of the
registrant, have been guaranteed by the registrant.
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| * | The Common Stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Stock Exchange. |
| ** | The Preferred Stock Purchase Rights expired on January 31, 2003, pursuant to the terms of the Rights Agreement, as amended through January 29, 2003, between Marathon Oil Corporation and National City Bank, as rights agent. |
MARATHON OIL CORPORATION
Unless the context otherwise indicates, references in this Form 10-K to "Marathon," "we,"“Marathon,” “we,” or "us"“us” are references to Marathon Oil Corporation, its wholly owned and majority owned subsidiaries, and its ownership interest in equity affiliatesinvestees (corporate entities, partnerships, limited liability companies and other ventures, in which Marathon exerts significant influence by virtue of its ownership interest, typically between 20 and 50 percent).
PART I | ||||
Business and | 3 | |||
Legal | 27 | |||
Submission of Matters to a Vote of Security | 29 | |||
PART II | ||||
Market for | 29 | |||
Selected Financial | 29 | |||
Management’s Discussion and Analysis of Financial Condition and Results of | 30 | |||
Quantitative and Qualitative Disclosures About Market | 51 | |||
Consolidated Financial Statements and Supplementary | F-1 | |||
Changes in and Disagreements With Accountants on Accounting and Financial | 55 | |||
PART III | ||||
Directors and Executive Officers of The | 55 | |||
Management | 55 | |||
Security Ownership of Certain Beneficial Owners and | 55 | |||
Certain Relationships and Related | 56 | |||
PART IV | ||||
Controls and Procedures | 56 | |||
Exhibits, Financial Statement Schedules, and Reports on Form | 57 | |||
64 | ||||
GLOSSARY OF CERTAIN DEFINED | 67 | |||
Disclosures Regarding Forward-Looking Statements
This annual report on Form 10-K, particularly Item 1. and Item 2. Business and Properties, Item 3. Legal Proceedings, Item 7. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, include forward-
lookingforward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements typically contain words such as "anticipates"“anticipates”, "believes"“believes”, "estimates"“estimates”, "expects"“expects”, "forecasts"“forecasts”, "predicts"“plans”, “predicts” or "projects"“projects” or variations of these words, suggesting that future outcomes are uncertain. In accordance with "safe
harbor"“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements.
Forward-looking statements with respect to Marathon may include, but are not limited to, levels of revenues, gross margins, income from operations, net income or earnings per share; levels of capital, exploration, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital, exploration or maintenance projects; volumes of production, sales, throughput or shipments of liquid hydrocarbons, natural gas and refined products; levels of worldwide prices of liquid hydrocarbons, natural gas and refined products; levels of reserves, proved or otherwise, of liquid hydrocarbons or natural gas; the acquisition or divestiture of assets; the effect of restructuring or reorganization of business components; the potential effect of judicial proceedings on the business and financial condition; and the anticipated effects of actions of third parties such as competitors, or federal, state or local regulatory authorities.
The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Marathon'sMarathon’s expectations as to revenues, margins and income are based upon assumptions as to future prices and volumes of liquid hydrocarbons, natural gas and refined products. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world'sworld’s major oil and gas producing areas, including OPEC member countries. Any substantial decline in such prices could have a material adverse effect on Marathon'sMarathon’s results of operations. A decline in such prices could also adversely affect the quantity of liquid hydrocarbons and natural gas that can be economically produced and the amount of capital available for exploration and development.
Marathon uses commodity-based and foreign currencyfinancial instrument related derivative instruments such as futures, forwards, swaps, and options to manage exposure to price fluctuations. While commodity-based derivative instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. Levels of hedging activity vary among oil industry competitors and could affect Marathon'sMarathon’s competitive position with respect to those competitors.
Liquidity Factors
Marathon's
Marathon’s ability to finance its future business requirements through internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources is affected by the performance of its operations (as measured by various factors, including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by Marathon'sMarathon’s outstanding debt and credit ratings by investor services.
Factors Affecting Exploration and Production Operations
Projected production levels for liquid hydrocarbons and natural gas are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, production decline rates for mature fields, reserve replacement rates, drilling rig availability and geological and operating considerations. These assumptions may prove to be inaccurate. Exploration and production (“E&P”) operations are subject to various hazards, including acts of war or terrorist acts and the governmental or military response thereto, explosions, fires and uncontrollable flows of oil and gas. Offshore production and marine operations in areas such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the Celtic Sea, offshore Nova Scotia and offshore 2
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Factors Affecting Refining, Marketing and Transportation Operations
Marathon conducts domestic refining, marketing and transportation (“RM&T”) operations primarily through its 62 percent owned consolidated subsidiary, Marathon Ashland Petroleum LLC ("MAP"(“MAP”). MAP's operations are conducted mainlyMAP refines, markets and transports crude oil and petroleum products, primarily in the Midwest, Southeast, Ohio River Valley and the upper Great Plains.Plains and southeastern United States. The profitability of these operations depends largely on the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. MAP is a purchaser of crude oil in order to satisfy its refinery throughput requirements. As a result, its overall profitability could be adversely affected by rising crude oil and other feedstock prices whichthat are not recovered in the marketplace. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products. Gross margins on merchandise sold at retail outlets tend to moderatebe less volatile than the volatility experienced ingross margin from the retail sale of gasoline and diesel fuel. Environmental regulations, particularly the 1990 Amendments to the Clean Air Act, have imposed (and are expected to continue to impose) increasingly stringent and costly requirements on refining and marketing operations whichthat may have an adverse effect on margins. Refining,
marketingmargins and transportationfinancial condition. RM&T operations are subject to business interruptions due to unforeseen events such as explosions, fires, crude oil or refined product spills, inclement weather or labor disputes. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions.
Factors Affecting Other Energy Related Businesses
Marathon operates other businesses that market and transport its own and third-party natural gas, crude oil and products manufactured from natural gas, such as LNG and methanol, primarily in the United States, Europe and West Africa. The profitability of these operations depends largely on commodity prices, volume deliveries, margins on resale gas, and demand. OERB operations could be impacted by unforeseen events such as explosions, fires, product spills, inclement weather or availability of LNG vessels. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions.
Technology Factors
Longer-term projections of corporate strategy, including the viability, timing or expenditures required for capital projects, can be affected by changes in technology, especially innovations in processes used in the exploration, production or refining of hydrocarbons. While specific future changes are difficult to project, recent innovations affecting the oil industry include the development of three-dimensional seismic imaging, and
deep-waterdeepwater and horizontal drilling capabilities.
capabilities, and improved gas transportation and processing options.
PART I
Item 1. and 2. Business and Properties
General
Marathon Oil Corporation was originally organized in 2001 as USX HoldCo, Inc., a wholly owned subsidiary of USX Corporation ("Old USX").Corporation. As a result of a reorganization completed in July 2001 (the “Holding Company Reorganization”), USX HoldCo, Inc. (1) became the parent entity of the consolidated enterprise (the former USX Corporation was merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to USX Corporation. In connection with the Separationtransaction discussed below,in the next paragraph (the “Separation”), USX Corporation (formerly USX HoldCo, Inc.) changed its name to Marathon Oil Corporation. The accompanying consolidated financial statements reflect
Marathon Oil Corporation and its subsidiaries as the continuation of the
consolidated enterprise. In this Form 10-K, all references to "United States
Steel" mean United States Steel Corporation, its predecessors (including,
where applicable, the U.S. Steel Group of USX Corporation) and its
subsidiaries.
Prior to December 31, 2001, Marathon had two outstanding classes of common stock: USX-Marathon Group common stock, ("Marathon Stock"which was intended to reflect the performance of Marathon’s energy business, and USX-U.S. Steel Group common stock (“Steel Stock”), which was intended to reflect the performance of Marathon's energy business, and USX-U. S. Steel
Group common stock ("Steel Stock"), which was intended to reflect the
performance of Marathon'sMarathon’s steel business. As described further in Note 2 to
the Financial Statements, onOn December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation ("(“United States Steel"Steel”) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis ("the Separation").
basis.
In connection with the Separation, Marathon'sMarathon’s certificate of incorporation was amended on December 31, 2001 and, from that date, Marathon has only one class of common stock authorized.
Marathon’s principal operating subsidiaries are Marathon Oil Company and MAP. Marathon Oil Company and its predecessors have been engaged in the oil and gas business since 1887. MAP is 62 percent owned by Marathon and 38 percent owned by Ashland Inc.
Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned subsidiary
Marathon Ashland Petroleum LLC ("MAP");MAP; and other energy related businesses.
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The Separation
Operating Highlights
During 2002, Marathon:
Segment and Geographic Information
For operating segment and geographic information, see Note 7 to the Consolidated Financial Statements on page F-19.
Exploration and Production
Marathon is currently conducting exploration and development activities in 10 countries. Principal exploration activities are in the United States, the United Kingdom, Angola, Canada, Equatorial Guinea and Norway. Principal development activities are in the United States, the United Kingdom, Canada, Equatorial Guinea, Gabon, Ireland, the Netherlands and Norway. Marathon is also pursuing opportunities in north and west Africa, the Middle East, southeast Asia and Russia.
At year-end 2002, Marathon was originally organizedproducing crude oil and/or natural gas in nine countries, including the United States. Marathon’s worldwide liquid hydrocarbon production, including Marathon’s proportionate share of equity investees’ production, decreased less than one percent from 2001 levels. Marathon’s 2002 worldwide sales of natural gas production, including Marathon’s proportionate share of equity investees’ production, decreased approximately three percent from 2001. In addition to sales of 481 net million cubic feet per day (“mmcfd”) of international natural gas production, Marathon sold 4 net mmcfd of natural gas acquired for injection and resale during 2002. In total, Marathon’s 2002 worldwide production averaged 412,000 barrels of oil equivalent (“BOE”) per day. In 2003 and 2004, Marathon’s worldwide production is expected to average between 390,000 and 395,000 BOE per day, excluding asset sales and dispositions.
The above projection of 2003 and 2004 worldwide liquid hydrocarbon production and natural gas volumes is a forward-looking statement. Some factors that could potentially affect timing and levels of production include pricing, supply and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, reserve estimates, reserve replacement rates, production decline rates of mature fields,
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timing of commencing production from new wells, drilling rig availability, future acquisitions or dispositions of producing properties, and other geological, operating and economic considerations. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statement.
United States
Including Marathon’s proportionate share of equity investee production, approximately 60 percent of Marathon’s 2002 worldwide liquid hydrocarbon production and 61 percent of its worldwide natural gas production was produced from U.S. operations. Marathon’s ongoing U.S. strategy is to apply its technical expertise in fields with undeveloped potential, to dispose of interests in non-core properties with limited upside potential and high production costs and to acquire interests in properties with development potential.
During 2002, Marathon drilled 19 gross (12 net) exploratory wells of which 12 gross (8 net) wells encountered hydrocarbons. Of these 12 wells, 2 gross (1 net) wells were temporarily suspended or are in the process of completing.
Exploration expenditures in the United States during the three-year period ended December 31, 2002 totaled $535 million, of which $184 million was incurred in 2002. Development expenditures in the United States during the three-year period ended December 31, 2002, including Marathon’s 85 percent equity interest in the development expenditures of MKM Partners L. P. (“MKM”), totaled $950 million, of which $295 million was incurred in 2002.
Marathon’s principal U.S. exploration, development and producing areas are located in the Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma, Texas and Wyoming.
Gulf of Mexico –During 2002, Marathon’s Gulf of Mexico production averaged 62,500 net barrels per day (“bpd”) of liquid hydrocarbons and 103 net mmcfd of natural gas, representing 50 percent and 14 percent of Marathon’s total U.S. liquid hydrocarbon and natural gas production, respectively. Liquid hydrocarbon and natural gas production decreased by 9,100 net bpd and by 8 net mmcfd, respectively, from the prior year, mainly due to adverse weather from tropical storms Isidore and Lili, well interventions and natural field decline. At year-end 2002, Marathon held interests in 10 producing fields and 17 platforms, of which 7 platforms are operated by Marathon.
Production from Marathon’s interests in the deepwater Gulf of Mexico accounted for approximately 93 percent of its total Gulf of Mexico production in 2002. Major components of Marathon’s deepwater portfolio include the Marathon-operated Ewing Bank 873, 917, and 963 and the outside-operated Green Canyon 244, Viosca Knoll 786 and Mississippi Canyon 348.
The Gulf of Mexico continues to be a core area for Marathon with the potential to add new reserves and increase production. At the end of 2002, Marathon had interests in 155 blocks in the Gulf of Mexico, including 122 in the deepwater area. In 2003, Marathon plans to drill, or complete drilling operations on, three or four deepwater wells, including continued appraisal of the Neptune discovery.
The Neptune 3 discovery, located in Atwater Valley Block 617, was drilled to a total depth of 18,643 feet and encountered approximately 150 feet of net pay in two primary intervals. The well is located on the southern portion of the structure and is on trend with the Neptune 1 and 2 wells drilled several years ago on Blocks 575 and 574, respectfully, which were also successful. The Neptune 4 well, located in Block 573 along the northern portion of the structure, did not encounter hydrocarbons and was temporarily abandoned in early January 2003. Marathon holds a 30 percent working interest in the five blocks comprising the Neptune unit. Further appraisal drilling of Neptune is anticipated in 2003 to determine commerciality.
The Ozona Deep discovery, located in Garden Banks Block 515 was appraised with the drilling of two sidetrack wells in 2002 and was determined to be a smaller, more complicated hydrocarbon accumulation than anticipated. Determination of commerciality is ongoing. Marathon is operator and has a 68 percent working interest.
The Camden Hills field, located in the deepwater Gulf of Mexico on Mississippi Canyon Block 348, was discovered in August 1999. It has been developed as a part of the Canyon Express project, which links wells of the Aconcagua, Kings Peak and Camden Hills gas fields, approximately 150 miles southeast of New Orleans, tying to Williams’ Canyon Station platform on Main Pass 261 through the Canyon Express pipeline infrastructure. The Marathon operated Camden Hills startup in October 2002 sets the world record water depth for production at 7,209 feet, flowing through the world’s third longest gas gathering line at 57 miles. The Camden Hills wells
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achieved their designed peak gross rate of 100 mmcfd in November 2002. Marathon is operator of the Camden Hills field with a 50 percent interest and also has a 10 percent interest in the Canyon Express pipeline infrastructure.
Alaska– Marathon’s primary focus in Alaska is the expansion of its natural gas business through exploration, development and marketing. Marathon’s production from Alaska averaged 166 net mmcfd of natural gas in 2002, compared with 179 net mmcfd in 2001. The decrease in 2002 from 2001 is primarily due to mild temperatures in the first and fourth quarters that reduced local utility demands.
During 2002, Marathon completed successful drilling operations on four wells in Alaska. Included in this program was one well related to the natural gas discovery at the Ninilchik unit on the Kenai peninsula, approximately 35 miles south of Kenai, Alaska. Two wells are scheduled for drilling in 2003, in anticipation of first production on or before January 1, 2004. Additional drilling will occur to fully assess and develop the Ninilchik unit.
Marathon is operator of the Ninilchik unit with a 60 percent interest. Marathon and a co-venturer have formed Kenai Kachemak Pipeline Company LLC to transport natural gas from the Ninilchik unit and other potential southern Kenai peninsula gas prospects for sales into the existing Cook Inlet natural gas infrastructure.
New Mexico– Production in New Mexico, primarily from the Indian Basin field, averaged 17,300 net bpd and 137 net mmcfd in 2002, compared with 15,000 net bpd and 150 net mmcfd in 2001. The increase in liquid hydrocarbon production was primarily due to ongoing development of the Indian Basin field and was preceded by the expansion in 2000 of Marathon’s Indian Basin gas plant. Gas production was down primarily as a result of the disposition of certain properties in the San Juan Basin.
In 2002, eight Marathon operated development wells were completed in the Indian Basin field targeting both oil and gas, focused in the eastern area of the field. These new wells, combined with several recompletions of existing gas wells, increased gross oil production from 6,500 bpd to over 9,000 bpd. These wells also helped keep gas production relatively flat in 2002, ending the year at 165 gross mmcfd from Marathon-operated wells. In 2003, seven new well completions and several recompletions are planned in the east Indian Basin area targeting both oil and gas.
Oklahoma– Gas production for 2002 averaged 108 net mmcfd representing 15 percent of Marathon’s total U.S. gas production, compared with 124 net mmcfd in 2001. The decrease in gas production was primarily due to the natural field decline in Knox Morrow.
In 2002, Marathon’s southern Anadarko Basin exploration efforts concentrated on the western extension of the Cement field Sycamore/Springer play as well as the Granite Wash/Cisco prospects located in the Marlow field. Exploration drilling efforts resulted in four discoveries.
Marathon drilled or participated in the drilling of 14 development wells to further develop the 1998 Granite Wash discovery in western Oklahoma. Current net production from the Granite Wash area stands at approximately 24 mmcfd. In 2003, Granite Wash development will continue as Marathon plans to participate in the drilling of ten additional development wells.
Southern Oklahoma’s 2002 development efforts focused on Springer/Sycamore development in the Cement field. Marathon participated in the drilling of eleven Springer/Sycamore development wells in 2002. Total Springer/Sycamore production in the Cement field is currently 29 net mmcfd. In 2003, Marathon plans to continue its Cement Springer/Sycamore development by drilling, or participating in the drilling of seven additional wells. Development plans for 2003 include participation in the drilling of six wells targeting Cisco/Hoxbar development in the Marlow field, located in Stephens County, Oklahoma. Development drilling of an Arbuckle test began late in the year and will continue into early 2003.
Texas– Onshore production for 2002 averaged 15,892 net bpd of liquid hydrocarbons and 84 net mmcfd of natural gas, representing 13 percent of Marathon’s total U.S. liquid hydrocarbon and 11 percent of natural gas production. Liquid production volumes decreased by 1,506 net bpd from 2001 levels and gas volumes decreased by 27 net mmcfd from 2001 levels. The volume decreases were due to property dispositions and natural field decline.
In east Texas, Marathon drilled 15 wells in the Mimms Creek field with drilling operations continuing at year-end. The 2002 drilling program has resulted in Mimms Creek’s net production increasing from 5 mmcfd to a peak of 11 mmcfd. Current net production in the Mimms Creek field is 9 mmcfd.
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In the James Lime play, Marathon drilled six wells in the Bridges East field. In 2003, two more wells are projected to be drilled.
Wyoming– Liquid hydrocarbon production for 2002 averaged 22,800 net bpd compared with 24,600 net bpd in 2001, representing 18 percent of Marathon’s total U.S. liquid hydrocarbon production. Average gas production increased to 125 net mmcfd in 2002, compared to 90 net mmcfd in 2001, as USX HoldCo,a result of additional coal bed natural gas wells coming on line in the Powder River Basin (“PRB”) and the acquisition of additional interests in coal bed natural gas wells in the PRB.
In early 2001, Marathon completed the acquisition of Pennaco Energy Inc. ("USX
HoldCo", creating a new core area of coal bed natural gas production in the PRB of Wyoming. Marathon expanded its PRB assets by approximately one-third in May 2002 as a result of the acquisition of the assets owned by its major partner in this basin. Marathon now controls more than 650,000 net acres in northeast Wyoming and southeast Montana and is the largest individual acreage holder in the PRB. This area remains one of the most active onshore natural gas plays in the continental U.S. During 2002, Marathon drilled approximately 164 net wells. Development activity together with acquisitions increased proved year-end 2002 reserves of coal bed natural gas to 417 net bcf as compared to year-end 2001 reserves of approximately 256 net bcf. For 2002, annualized production rates of coal bed natural gas were 79 net mmcfd, an increase of 32 net mmcfd from a year earlier. The December 2002 rate averaged 91 net mmcfd. The 2003 plan is currently estimated to include the drilling of 400 to 500 net coal bed natural gas wells in the PRB.
International
Europe
U.K. North Sea– Marathon’s primary asset in the U.K. North Sea is in the Brae area where it is the operator and owns a 42 percent interest in the South, Central, North, and West Brae fields and a 38 percent interest in the East Brae field. Production from the Brae area averaged 20,100 net bpd of liquid hydrocarbons in 2002, compared with 21,700 net bpd in 2001. The decrease resulted from the natural decline in existing fields partially offset by successful development and remedial well work.
Marathon’s total Brae gas sales from all sources averaged 198 net mmcfd in 2002, compared with 242 net mmcfd in 2001. Of these totals, 194 mmcfd and 234 mmcfd was Brae-area gas in 2002 and 2001, respectively, and 4 mmcfd and 8 mmcfd was gas acquired for injection and subsequent resale in 2002 and 2001, respectively. The decrease resulted from decreased allocated capacity on the Scottish Area Gas Evacuation (“SAGE”) system due to become a holding companythe Beryl field coming on line.
The Brae A platform and facilities act as the host for the two principal businessesunderlying South Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. The North Brae field, which is produced via the Brae B platform, and the East Brae field are gas-condensate fields. These fields are produced using the gas cycling technique, whereby gas is injected into the reservoir for pressure maintenance, improved sweep efficiency and increased condensate liquid recovery. Although partial cycling continues, the majority of North Brae gas is being transferred to the East Brae reservoir for pressure maintenance and sales.
The strategic location of the former parent company, Old USX:
.Brae A, Brae B and East Brae platforms and pipeline infrastructure has generated third-party processing and transportation business since 1986. Currently, there are 18 agreements with third-party fields contracted to use the steelBrae system. In addition to generating processing and pipeline tariff revenue, this third-party business also has a favorable impact on Brae-area operations by optimizing infrastructure usage and extending the economic life of the facilities.
The Brae group owns a 50 percent interest in the outside-operated SAGE system. The other 50 percent is owned by the Beryl group. The SAGE pipeline provides transportation for Brae and Beryl area gas and has a total wet gas capacity of approximately 1.0 bcfd. The SAGE terminal at St. Fergus in northeast Scotland provides processing for gas from the SAGE pipeline and processing for 0.8 bcfd of third party gas from the Britannia field.
Marathon is continuing its development of the Brae area. During 2002, Marathon participated in a successful Central Brae well. The well was completed as a producer from the Brae B platform in February 2002. An additional Central Brae well, drilled from the Brae B platform, is planned for 2003.
In August 2002, the Braemar development in which Marathon has a 28 percent interest was sanctioned. The development is comprised of a single subsea well development tied back to the East Brae platform. First oil from the field is scheduled for October 2003. In August 2002, a 16-inch pipeline link, Linkline, between the Marathon
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operated Brae B platform and the outside-operated Miller platform was sanctioned. Marathon has a 19 percent interest in the Linkline. The Linkline will initially be used for transportation of Braemar gas that has been sold to the Miller group for their water alternating gas project in the Miller field.
As part of an ongoing rationalization of the European Business Unit, Marathon reduced its U.K. leasehold interests from 34 blocks at the start of 2002 to 24 blocks as of December 31, 2002.
U.K. Atlantic Margin –Marathon has a non-operated interest averaging approximately 30 percent in the Foinhaven area. This is made up of a 28 percent interest in the main Foinhaven field, 47 percent of East Foinhaven and 20 percent of the single well T35 accumulation.
Production from the Foinaven fields averaged 31,000 net bpd and 9 net mmcfd in 2002, compared to 24,000 net bpd in 2001. Sales of Foinaven-associated gas via the West of Shetland pipeline system commenced in April 2002. All sales are to the outside-operated Magnus group. Full Foinaven export rates of gross 50 mmcfd were achieved in November after Magnus commissioned their gas injection compressor.
Ireland– Marathon holds a 100 percent interest in the Kinsale Head, Ballycotton and Southwest Kinsale fields in the Irish Celtic Sea. Natural gas sales were 81 net mmcfd in 2002, compared with 79 net mmcfd in 2001.
In fourth quarter 2002, Marathon announced it will be drilling and developing an additional subsea gas well in the Kinsale Head area. The Greensand subsea gas well, which is expected to be drilled in 2003, is designed to enhance the productivity of the main Kinsale Head natural gas producing Greensand reservoir. The well will target the southwestern part of the reservoir that is not being adequately drained by existing Kinsale Head platform wells.
During 2002, an agreement was entered into with the Seven Heads group to provide gas processing and transportation services, as well as field operating services for the Seven Heads gas being brought to the Kinsale offshore production facilities beginning in 2003. This agreement will result in Marathon providing capacity to process and transport between 60 mmcfd to 100 mmcfd of Seven Heads gas and enhances the value and utilization of Marathon’s Kinsale Head infrastructure.
During 2001, a petroleum lease was issued for the Corrib field in License 2/93, located 40 miles off the west coast of Ireland. The development will consist of six subsea wells, tied back to a processing terminal onshore via a 20-inch pipeline. Final planning approval for the onshore terminal is expected by the end of the first quarter of 2003. With approximately two years of onshore and offshore construction activities thereafter, production startup is targeted for first quarter of 2005. Marathon has an 18 percent non-operating interest in the Corrib field.
Norway– In the Norwegian North Sea, total net production averaged 800 bpd and 15 mmcfd in 2002. In 2000, Marathon participated in a project to modify the Heimdal platform to a processing and transportation center for third-party business. Marathon owns a 24 percent interest in the Heimdal field and gas-condensate processing center.
Marathon owns a 47 percent interest in the Vale field which is located northeast of the Heimdal field in 374 feet of water. This single subsea well tied back to the Heimdal platform came on line in June 2002. A further exploration prospect exists on this license and it is planned to drill in late 2003 or early 2004.
Following the successful acquisition of a 20 percent interest in license PL102, the Norwegian government approved the outside-operated Byggve/Skirne gas-condensate field plan of development. This two well development will be tied back to the Heimdal platform gas processing center, with first production expected early 2004. Condensate export will be via the Heimdal-Brae-Forties system and gas export via the Gasled, Statpipe or Vesterled systems.
Marathon also obtained interests in licenses PL088, PL150 and PL203 through acquisitions in 2001 and 2002. Ownership is currently 50 percent in licenses PL088 and PL150, and 65 percent in license PL203. Marathon obtained operatorship of the PL203 license from the Norwegian government in June 2002 and established an office in Stavanger, Norway. To further delineate and evaluate these licenses, two exploration wells are expected to be drilled on PL203 and one on PL088 in 2003.
In the Norwegian North Sea, between the Heimdal field and the U.K. North Sea Brae area, Marathon is evaluating the exploration potential on three additional licenses (PL025, PL187 and PL204) where Marathon holds interests of between 10 and 30 percent.
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Netherlands– Marathon’s 50 percent equity method interest in CLAM Petroleum B. V. (“CLAM”) provides a five percent entitlement in the production from 25 gas fields, which provided sales of 25 net mmcfd of natural gas in 2002, compared with 31 net mmcfd in 2001. The decrease was mainly due to a planned shutdown to install and commission new export compression modules. In 2002, CLAM participated in four development wells and four exploration wells in the Dutch sector of the North Sea.
Independent of its interest in CLAM, Marathon holds a 24 percent working interest in the A-15 Block in the Dutch sector of the North Sea. Evaluation of the exploration potential is expected to continue during 2003.
West Africa
Equatorial Guinea—During 2002, in two separate transactions, Marathon acquired interests in the Alba field and certain other related assets.
On January 3, 2002, Marathon acquired certain interests from CMS Energy Corporation for $1.005 billion. Marathon acquired three entities that owned a combined 52 percent working interest in the Alba production sharing contract (“Alba PSC”) and a net 43 percent interest in an onshore liquefied petroleum gas processing plant through an equity method investee. Additionally, Marathon acquired a 45 percent net interest in an onshore methanol production plant through an equity method investee, which is reported in the Other Energy Related Business (“OERB”) segment.
On June 20, 2002, Marathon acquired 100 percent of the outstanding stock of Globex Energy, Inc. (“Globex”) for $155 million. Globex owned an additional 11 percent working interest in the Alba PSC and an additional net 9 percent interest in the onshore liquefied petroleum gas processing plant.
The existing production facilities include two offshore platforms, five wells and an onshore condensate stabilization plant. These facilities currently produce gross hydrocarbon volumes of 22,000 bpd of condensate and 130 mmcfd of gas.
The government of Equatorial Guinea approved the Alba PSC phase 2 development plan. The phase 2 development plan increases gross production capacity and expands the condensate recovery and LPG facilities to increase liquids processing capabilities. The first phase of additional development targeted for the Alba field is known as phase 2A. The project includes two new shallow water platforms, twelve new production and sale business,gas injection wells, pipelines and expansion of onshore condensate processing facilities and gas reinjection compression on Bioko Island. It is expected to increase gross condensate production to 46,000 (26,000 net) bpd. Gas not used in methanol production or fuel will be moved offshore for reinjection at a rate of approximately 600 gross mmcfd. The government of Equatorial Guinea approved the steel mill2A project in September 2002. Construction of this project has commenced, with startup scheduled for fourth quarter of 2003. The second phase of additional development is known as phase 2B. This project is scheduled to further ramp up production in fourth quarter of 2004. The project includes a new LPG cryogenic gas plant and associated storage, marine terminal and fractionation equipment for propane and heavier gas components. This addition will accommodate additional gross production of 8,000 (4,000 net) bpd of condensate and 13,000 (7,500 net) bpd of LPG. Design work for this phase commenced during 2002 and the plan of development for phase 2B received government approval at the end of 2002. Future development of the Alba field is being considered to monetize the gas.
As a result of these acquisitions and the approval of the phase 2 development plan, Marathon added 305 million BOE to its proved reserves.
In 2002, Marathon drilled two development wells and acquired a three-dimensional (“3-D”) seismic survey in preparation for the production ramp-up associated with the phase 2 development of the Alba field. Production averaged 8,500 net bpd and 53 net mmcfd in 2002. The 2003 drilling program is scheduled for a total of six wells. Exploration plans for 2003 include the drilling of up to four wells, one of which will be a deeper test of the Alba field.
Gabon– Marathon is operator of the Tchatamba South, Tchatamba West and Marin fields with a 56 percent working interest. Production in Gabon averaged 16,700 net bpd of liquid hydrocarbons in 2002, compared with 16,000 net bpd in 2001.
In 2002, Marathon installed a 44-kilometer pipeline from the Tchatamba field to the outside-operated Cap Lopez pipeline system onshore and began producing oil into that line in December. The leased floating storage and offloading facility was released in January 2003, improving long-term reliability of export operations. Also in 2002, Marathon installed production facilities for the development of the Azile reservoir. The first completion in the Azile reservoir is scheduled for the first quarter of 2003. A development well is targeted for the Madiela reservoir for the first quarter of 2003.
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Angola –In May 1999, Marathon was awarded working interests of 10 percent each in Blocks 31 and 32 offshore Angola. In September 2002, Marathon was awarded an additional 20 percent working interest in Block 32. Marathon participated in the first ultra-deepwater discovery offshore Angola in Block 31. The discovery, the Plutao 1-A, was drilled to a depth of 14,607 feet in 6,628 feet of water and tested 5,357 bpd through a 48/64 inch choke. Two exploration wells are planned for 2003 in Block 31. In Block 32, Marathon and co-venturers drilled the Gindungo 1 well to a depth of 15,665 feet in 4,756 feet of water. Plans are to test two zones in this well. One or two additional wells are planned for 2003 in Block 32.
Other International
Australia—Through the Globex acquisition, Marathon acquired a 13 percent working interest in the Stag field and three exploration blocks offshore western Australia. Current net production averages approximately 1,600 net bpd.
Canada– Net production in Canada averaged 4,300 bpd and 104 mmcfd in 2002, compared with 11,000 bpd and 123 mmcfd in 2001. The decline in production was related to divestitures of non-core conventional oil and gas and all heavy oil assets during 2001. Marathon’s onshore Canadian exploration efforts are concentrated in two areas of western Canada.
In south central Alberta, the success of Marathon’s drilling program exceeds ninety percent. The wells are shallow and the geologic setting is such that each well has several reservoir objectives. For 2003, 35 core area step-out wells are planned.
The second area of focus in western Canada is in the Milo Lake area of northern British Columbia. During 2002 and 2001, Marathon drilled two successful wells. The 2003 program includes plans to finish the installation of production facilities and pipelines, tie-in the two successful wells, startup production and drill three additional prospects.
In addition to three existing leases, Marathon was awarded two additional offshore Nova Scotia deepwater exploration licenses in 2002. Marathon has a 100 and 50 percent interest in exploration licenses (“EL”) 2410 and 2411, respectively. Marathon sold its 34 percent interest in EL 2384 (Torbrook) in 2002. This brings Marathon’s total offshore Nova Scotia exploration license acreage to 1.3 million gross acres, positioning Marathon as a major player in the developing deepwater Atlantic Canada Gas Province. One deepwater gas discovery well was drilled in 2002 in EL 2377 (Annapolis). It is anticipated that one to two deepwater wells will be drilled on Annapolis in 2003, and that an extensive 3-D seismic survey will be acquired on EL 2410 (Cortland) and EL 2411 (Empire) licenses.
The above discussions include forward-looking statements concerning various projects, drilling plans, expected production and sales levels, reserves and dates of initial production, which are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, coke,
taconite pellets and coal transportation businessregulatory constraints, reserve estimates, production decline rates of mature fields, reserve replacement rates, drilling rig availability, license relinquishments and other steel-
related businesses comprisinggeological, operating and economic considerations. Offshore production and marine operations in areas such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the Celtic Sea, offshore Nova Scotia and offshore West Africa are also subject to severe weather conditions, such as hurricanes or violent storms or other hazards. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations and tax regulations, which could adversely affect the economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations.
Reserves
At December 31, 2002, Marathon’s net proved liquid hydrocarbon and natural gas reserves, including its proportionate share of equity investees’ net proved reserves, totaled approximately 1.3 billion BOE, of which 56 percent were located in the United States. (For purposes of determining BOE, natural gas volumes are converted to approximate liquid hydrocarbon barrels by dividing the natural gas volumes expressed in thousands of cubic feet (“mcf “) by six. The liquid hydrocarbon volume is added to the barrel equivalent of gas volume to obtain BOE.) On a BOE basis, excluding dispositions, Marathon replaced 262 percent of its 2002 worldwide oil and gas production. Including dispositions, Marathon replaced 259 percent of worldwide oil and gas production.
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The table below sets forth estimated quantities of net proved oil and gas reserves at the end of each of the last three years.
Estimated Quantities of Net Proved Oil and Gas Reserves at December 31
Developed | Developed and Undeveloped | |||||||||||
(Millions of Barrels) | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||
Liquid Hydrocarbons | ||||||||||||
United States | 226 | 243 | 414 | 245 | 268 | 458 | ||||||
Europe | 63 | 69 | 74 | 76 | 88 | 108 | ||||||
West Africa | 113 | 14 | 18 | 203 | 17 | 23 | ||||||
Other International | 11 | 11 | 39 | 13 | 13 | 128 | ||||||
Total Consolidated | 413 | 337 | 545 | 537 | 386 | 717 | ||||||
Equity Investees(a) | 177 | 178 | — | 183 | 184 | — | ||||||
WORLDWIDE | 590 | 515 | 545 | 720 | 570 | 717 | ||||||
Developed reserves as % of total net proved reserves | 81.9% | 90.4% | 76.0% | |||||||||
(Billions of Cubic Feet) | ||||||||||||
Natural Gas | ||||||||||||
United States | 1,206 | 1,308 | 1,421 | 1,724 | 1,793 | 1,914 | ||||||
Europe | 408 | 473 | 563 | 562 | 615 | 614 | ||||||
West Africa | 552 | — | — | 653 | — | — | ||||||
Other International | 290 | 308 | 381 | 379 | 399 | 477 | ||||||
Total Consolidated | 2,456 | 2,089 | 2,365 | 3,318 | 2,807 | 3,005 | ||||||
Equity Investee(b) | 36 | 32 | 52 | 59 | 51 | 89 | ||||||
WORLDWIDE | 2,492 | 2,121 | 2,417 | 3,377 | 2,858 | 3,094 | ||||||
Developed reserves as % of total net proved reserves | 73.8% | 74.2% | 78.1% | |||||||||
(Millions of Barrels) | ||||||||||||
Total BOE | ||||||||||||
United States | 427 | 461 | 651 | 532 | 567 | 777 | ||||||
Europe | 132 | 148 | 168 | 170 | 190 | 211 | ||||||
West Africa | 205 | 14 | 18 | 312 | 17 | 23 | ||||||
Other International | 59 | 62 | 103 | 76 | 79 | 208 | ||||||
Total Consolidated | 823 | 685 | 940 | 1,090 | 853 | 1,219 | ||||||
Equity Investees(a) | 183 | 183 | 9 | 193 | 193 | 15 | ||||||
WORLDWIDE | 1,006 | 868 | 949 | 1,283 | 1,046 | 1,234 | ||||||
Developed reserves as % of total net proved reserves | 78.4% | 83.0% | 76.9% | |||||||||
| (a) | Represents Marathon’s equity interests in MKM and CLAM in 2002 and 2001 and CLAM in 2000. |
| (b) | Represents Marathon’s equity interest in CLAM. |
The above estimates, which are forward-looking statements, are based on a number of assumptions, including (among others) prices, presently known physical data concerning size and character of the reservoirs, economic recoverability, production experience and other operating considerations. To the extent these assumptions prove inaccurate, actual recoveries could be different than current estimates.
For additional details of estimated quantities of net proved oil and gas reserves at the end of each of the last three years, see “Consolidated Financial Statements and Supplementary Data – Supplementary Information on Oil and Gas Producing Activities – Estimated Quantities of Proved Oil and Gas Reserves” on pages F-40 through F-42. Marathon has filed reports with the U.S. Steel Group;Department of Energy (“DOE”) for the years 2001 and 2000 disclosing the year-end estimated oil and gas reserves. Marathon will file a similar report for 2002. The year-end estimates reported to the DOE are the same as the estimates reported in the Supplementary Information on Oil and Gas Producing Activities.
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Delivery Commitments
Marathon has commitments to deliver fixed and determinable quantities of natural gas to customers under a variety of contractual arrangements.
In Alaska, Marathon has two long-term sales contracts with the local utility companies, which obligates Marathon to supply approximately 241 bcf of natural gas over the remaining life of these contracts. In addition, Marathon has a 30 percent ownership interest in a Kenai, Alaska, LNG plant and a proportionate share of the long-term LNG sales obligation to two Japanese utility companies. This obligation is estimated to total 155 bcf through the remaining life of the contract, which terminates March 31, 2009. These commitments are structured with variable-pricing terms. Marathon’s production from various gas fields in the Cook Inlet supply the natural gas to service these contracts. Marathon’s proved reserves and estimated production rates in the Cook Inlet sufficiently meet these contractual obligations.
In the U.K., Marathon has two long-term sales contracts with utility companies, which obligate Marathon to supply approximately 236 bcf of natural gas through September 2009. Marathon’s Brae area production, together with natural gas acquired for injection and subsequent resale, will supply the natural gas to service these contracts. Marathon’s Brae area proved reserves, acquired natural gas contracts and estimated production rates sufficiently meet these contractual obligations. The terms of these gas sales contracts also reflect variable-pricing structures.
Oil and Natural Gas Production
The following tables set forth daily average net production of liquid hydrocarbons and natural gas for each of the last three years:
Net Liquid Hydrocarbons Production(a) (e) | ||||||
(Thousands of Barrels per Day) | 2002 | 2001 | 2000 | |||
United States(b) | 117 | 127 | 131 | |||
Europe(c) | 52 | 46 | 29 | |||
West Africa(c) | 25 | 16 | 16 | |||
Other International(c) | 5 | 11 | 20 | |||
Total Consolidated | 199 | 200 | 196 | |||
Equity Investees (MKM, CLAM and Sakhalin Energy)(c) | 8 | 9 | 11 | |||
WORLDWIDE | 207 | 209 | 207 | |||
Net Natural Gas Production(d) (e) | ||||||
(Millions of Cubic Feet per Day) | 2002 | 2001 | 2000 | |||
United States(b) | 745 | 793 | 731 | |||
Europe | 299 | 318 | 327 | |||
West Africa | 53 | — | — | |||
Other International | 104 | 123 | 143 | |||
Total Consolidated | 1,201 | 1,234 | 1,201 | |||
Equity Investees (CLAM) | 25 | 31 | 29 | |||
WORLDWIDE | 1,226 | 1,265 | 1,230 | |||
| (a) | Includes crude oil, condensate and natural gas liquids. |
| (b) | Amounts reflect production from leasehold ownership, after royalties and interests of others. |
| (c) | Amounts reflect equity tanker liftings, truck deliveries and direct deliveries of liquid hydrocarbons. The amounts correspond with the basis for fiscal settlements with governments. Crude oil purchases, if any, from host governments are not included. |
| (d) | Amounts exclude volumes purchased from third parties for injection and subsequent resale of 4 mmcfd in 2002, 8 mmcfd in 2001 and 11 mmcfd in 2000. |
| (e) | Amounts reflect production after royalties, excluding the U.K., Ireland and the Netherlands where amounts shown are before royalties. |
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Productive and Drilling Wells
The following tables set forth productive wells and service wells for each of the last three years and drilling wells as of December 31, 2002.
Gross and Net Wells
2002 | Productive Wells(a) | Service Wells(b) | Drilling Wells(c) | |||||||||||||
Oil | Gas | |||||||||||||||
Gross | Net | Gross | Net | Gross | Net | Gross | Net | |||||||||
United States | 6,495 | 2,715 | 4,577 | 2,876 | 2,752 | 807 | 25 | 12 | ||||||||
Europe | 53 | 20 | 62 | 34 | 26 | 9 | — | — | ||||||||
West Africa | 6 | 3 | 9 | 5 | 1 | 1 | 1 | 1 | ||||||||
Other International | 485 | 226 | 1,529 | 1,032 | 47 | 16 | 2 | 2 | ||||||||
Total Consolidated | 7,039 | 2,964 | 6,177 | 3,947 | 2,826 | 833 | 28 | 15 | ||||||||
Equity Investees(d) | 2,298 | 742 | 85 | 4 | 1,002 | 174 | 2 | — | ||||||||
WORLDWIDE | 9,337 | 3,706 | 6,262 | 3,951 | 3,828 | 1,007 | 30 | 15 | ||||||||
Service Wells(b) | ||||||||||||||||
2001 | Productive Wells(a) | |||||||||||||||
Oil | Gas | |||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||
United States | 6,550 | 2,415 | 4,828 | 2,935 | 2,852 | 856 | ||||||||||
Europe | 53 | 20 | 63 | 35 | 27 | 9 | ||||||||||
West Africa | 6 | 3 | — | — | — | — | ||||||||||
Other International | 529 | 242 | 1,463 | 989 | 44 | 17 | ||||||||||
Total Consolidated | 7,138 | 2,680 | 6,354 | 3,959 | 2,923 | 882 | ||||||||||
Equity Investees(d) | 2,002 | 609 | 83 | 4 | 1,142 | 243 | ||||||||||
WORLDWIDE | 9,140 | 3,289 | 6,437 | 3,963 | 4,065 | 1,125 | ||||||||||
2000 | Productive Wells(a) | Service Wells(b) | ||||||||||||||
Oil | Gas | |||||||||||||||
Gross | Net | Gross | Net | Gross | Net | |||||||||||
United States | 8,013 | 3,113 | 2,526 | 1,275 | 3,103 | 976 | ||||||||||
Europe | 54 | 18 | 66 | 34 | 25 | 9 | ||||||||||
West Africa | 6 | 3 | — | — | — | — | ||||||||||
Other International | 921 | 662 | 1,450 | 1,084 | 136 | 109 | ||||||||||
Total Consolidated | 8,994 | 3,796 | 4,042 | 2,393 | 3,264 | 1,094 | ||||||||||
Equity Investees(d) | — | — | 85 | 5 | — | — | ||||||||||
WORLDWIDE | 8,994 | 3,796 | 4,127 | 2,398 | 3,264 | 1,094 | ||||||||||
| (a) | Includes active wells and wells temporarily shut-in. Of the gross productive wells, gross wells with multiple completions operated by Marathon totaled 357, 341 and 469 in 2002, 2001 and 2000, respectively. Information on wells with multiple completions operated by other companies is not available to Marathon. |
| (b) | Consist of injection, water supply and disposal wells. |
| (c) | Consist of exploratory and development wells. |
| (d) | Represents MKM and CLAM in 2002 and 2001, and CLAM in 2000. |
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Drilling Activity
The following table sets forth, by geographic area, the number of net productive and dry development and exploratory wells completed in each of the last three years (references to “net” wells or production indicate Marathon’s ownership interest or share, as the context requires):
Net Productive and Dry Wells Completed(a)
2002 | 2001 | 2000 | |||||
United States(b) | |||||||
Development(c) | – Oil | 8 | 10 | 23 | |||
– Gas | 174 | 751 | 109 | ||||
– Dry | 1 | 1 | 2 | ||||
Total | 183 | 762 | 134 | ||||
Exploratory(d) | – Oil | 2 | 2 | 2 | |||
– Gas | 5 | 9 | 6 | ||||
– Dry | 6 | 8 | 5 | ||||
Total | 13 | 19 | 13 | ||||
Total United States | 196 | 781 | 147 | ||||
International(e) | |||||||
Development(c) | – Oil | 2 | 1 | 12 | |||
– Gas | 28 | 54 | 111 | ||||
– Dry | 3 | 5 | 5 | ||||
Total | 33 | 60 | 128 | ||||
Exploratory(d) | – Oil | — | — | 4 | |||
– Gas | 20 | 16 | 26 | ||||
– Dry | 3 | 5 | 14 | ||||
Total | 23 | 21 | 44 | ||||
Total International | 56 | 81 | 172 | ||||
Total Worldwide | 252 | 862 | 319 | ||||
| (a) | Includes the number of wells completed during the applicable year regardless of the year in which drilling was initiated. Does not include any wells where drilling operations were continuing or were temporarily suspended as of the end of the applicable year. A dry well is a well found to be incapable of producing hydrocarbons in sufficient quantities to justify completion. A productive well is an exploratory or development well that is not a dry well. |
| (b) | Includes Marathon’s equity interest in MKM. The reduction from 2001 is primarily the result of fewer coal bed natural gas wells being drilled in Wyoming. |
| (c) | Indicates wells drilled in the proved area of an oil or gas reservoir. |
| (d) | Includes both wildcat and delineation wells. |
| (e) | Includes Marathon’s equity interest in CLAM and, in 2000, Marathon’s equity interest in Sakhalin Energy Investment Company Ltd. (“Sakhalin Energy”). |
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Oil and Gas Acreage
The following table sets forth, by geographic area, the developed and undeveloped oil and gas acreage that Marathon held as of December 31, 2002:
Gross and Net Acreage
Developed | Undeveloped | Developed and Undeveloped | ||||||||||
(Thousands of Acres) | Gross | Net | Gross | Net | Gross | Net | ||||||
United States | 1,682 | 404 | 3,372 | 1,636 | 5,054 | 2,040 | ||||||
Europe | 378 | 302 | 1,394 | 491 | 1,772 | 793 | ||||||
West Africa | 68 | 42 | 3,204 | 937 | 3,272 | 979 | ||||||
Other International | 746 | 448 | 3,344 | 1,935 | 4,090 | 2,383 | ||||||
Total Consolidated | 2,874 | 1,196 | 11,314 | 4,999 | 14,188 | 6,195 | ||||||
Equity Investees(a) | 529 | 63 | 400 | 23 | 929 | 86 | ||||||
WORLDWIDE | 3,403 | 1,259 | 11,714 | 5,022 | 15,117 | 6,281 | ||||||
| (a) | Represents Marathon’s equity interests in MKM and CLAM. |
Refining, Marketing and Transportation
RM&T operations are primarily conducted by MAP and its subsidiaries, including its wholly owned subsidiaries, Speedway SuperAmerica LLC and Marathon Ashland Pipe Line LLC. Marathon holds a 62 percent interest in MAP and Ashland Inc. holds the remaining 38 percent interest.
Refining
MAP owns and operates seven refineries with an aggregate refining capacity of 935,000 barrels of crude oil per day. The table below sets forth the location and daily throughput capacity of each of MAP’s refineries as of December 31, 2002:
In-Use Refining Capacity | ||
(Barrels per Day) | ||
Garyville, LA | 232,000 | |
Catlettsburg, KY | 222,000 | |
Robinson, IL | 192,000 | |
Detroit, MI | 74,000 | |
Canton, OH | 73,000 | |
Texas City, TX | 72,000 | |
St. Paul Park, MN | 70,000 | |
TOTAL | 935,000 | |
MAP’s refineries include crude oil atmospheric and vacuum distillation, fluid catalytic cracking, catalytic reforming, desulfurization and sulfur recovery units. The refineries have the capability to process a wide variety of crude oils and to produce typical refinery products, including reformulated gasoline. MAP’s refineries are integrated via pipelines and barges to maximize operating efficiency. The transportation links that connect the refineries allow the movement of intermediate products to optimize operations and the production of higher margin products. For example, naphtha may be moved from Texas City and Catlettsburg to Robinson where excess reforming capacity is available; gas oil may be moved from Robinson to Detroit and Catlettsburg where excess fluid catalytic cracking unit capacity is available; and light cycle oil may be moved from Texas City to Robinson where excess desulfurization capacity is available.
MAP also produces asphalt cements, polymerized asphalt, asphalt emulsions and industrial asphalts. MAP manufactures petroleum pitch, primarily used in the graphite electrode, clay target and refractory industries. Additionally, MAP manufactures aromatics, aliphatic hydrocarbons, cumene, base lube oil, polymer grade propylene and slack wax.
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During 2002, MAP’s refineries processed 906,000 bpd of crude oil and 148,000 bpd of other charge and blend stocks. The following table sets forth MAP’s refinery production by product group for each of the last three years:
Refined Product Yields
(Thousands of Barrels per Day) | 2002 | 2001 | 2000 | |||
Gasoline | 581 | 581 | 552 | |||
Distillates | 285 | 286 | 278 | |||
Propane | 21 | 22 | 20 | |||
Feedstocks and Special Products | 80 | 69 | 74 | |||
Heavy Fuel Oil | 20 | 39 | 43 | |||
Asphalt | 72 | 76 | 74 | |||
TOTAL | 1,059 | 1,073 | 1,041 | |||
Planned maintenance activities requiring temporary shutdown of certain refinery operating units (“turnarounds”) are periodically performed at each refinery. MAP completed major turnarounds at its Robinson and St. Paul Park refineries in the fourth quarter of 2002.
The Garyville, Louisiana coker unit project achieved mechanical completion in October 2001 and was operating at full production capacity by mid-December 2001. To supply this new unit, MAP entered into a multi-year contract with P.M.I. Comercio Internacional, S.A. de C.V., an affiliate of Petroleos Mexicanos S.A., to purchase approximately 90,000 bpd of heavy Mayan crude oil. The contract was increased to approximately 100,000 bpd in July 2002.
At its Catlettsburg, Kentucky refinery, MAP has initiated a multi-year $350 million integrated investment program to upgrade product yield realizations and reduce fixed and variable manufacturing expenses. This program involves the expansion, conversion and retirement of certain refinery processing units that, in addition to improving profitability, will reduce the refinery’s total gasoline pool sulfur below 30 parts per million, thereby eliminating the need for additional low sulfur gasoline compliance investments at the refinery. The project is expected to be completed in late 2003.
Marketing
In 2002, MAP’s refined product sales volumes (excluding matching buy/sell transactions) totaled 19.1 billion gallons (1,247,000 bpd). Excluding sales related to matching buy/sell transactions, the wholesale distribution of petroleum products to private brand marketers and to large commercial and industrial consumers, primarily located in the Midwest, the upper Great Plains and the Southeast, and sales in the spot market, accounted for about 68 percent of MAP’s refined product sales volumes in 2002. Approximately 48 percent of MAP’s gasoline volumes and 90 percent of its distillate volumes were sold on a wholesale or spot market basis to independent unbranded customers or other wholesalers in 2002.
About half of MAP’s propane is sold into the home heating markets and industrial consumers purchase the balance. Propylene, cumene, aromatics, aliphatics, and sulfur are marketed to customers in the chemical industry. Base lube oils and slack wax are sold throughout the United States. Pitch is also sold domestically, but approximately 10 percent of pitch products are exported into growing markets in Canada, Mexico, India, and South America.
MAP markets asphalt through owned and leased terminals throughout the Midwest and Southeast. The MAP customer base includes approximately 900 asphalt-paving contractors, government entities (states, counties, cities and townships) and asphalt roofing shingle manufacturers.
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The following table sets forth the volume of MAP’s consolidated refined product sales by product group for each of the last three years:
Refined Product Sales
(Thousands of Barrels per Day) | 2002 | 2001 | 2000 | |||
Gasoline | 773 | 748 | 746 | |||
Distillates | 346 | 345 | 352 | |||
Propane | 22 | 21 | 21 | |||
Feedstocks and Special Products | 82 | 71 | 69 | |||
Heavy Fuel Oil | 20 | 41 | 43 | |||
Asphalt | 75 | 78 | 75 | |||
TOTAL | 1,318 | 1,304 | 1,306 | |||
Matching Buy/Sell Volumes included in above | 71 | 45 | 52 | |||
MAP sells reformulated gasoline in parts of its marketing territory, primarily Chicago, Illinois; Louisville, Kentucky; Northern Kentucky; and Milwaukee, Wisconsin. MAP also sells low-vapor-pressure gasoline in nine states.
As of December 31, 2002, MAP supplied petroleum products to about 3,800 Marathon and Ashland branded retail outlets located primarily in Michigan, Ohio, Indiana, Kentucky and Illinois. Branded retail outlets are also located in Florida, Georgia, Wisconsin, West Virginia, Minnesota, Tennessee, Virginia, Pennsylvania, North Carolina, South Carolina and Alabama.
Retail sales of gasoline and diesel fuel were also made through company-operated outlets by a wholly owned MAP subsidiary, Speedway SuperAmerica LLC (“SSA”). As of December 31, 2002, this subsidiary had 2,006 retail outlets in 13 states that sold petroleum products and convenience-store merchandise and services, primarily under the brand names “Speedway” and “SuperAmerica”. Excluding the former SSA travel centers contributed to Pilot Travel Centers LLC (“PTC”) in 2001, SSA’s revenues from the sale of convenience-store merchandise totaled $2.4 billion in 2002, compared with $2.3 billion in 2001. Profit levels from the sale of such merchandise and services tend to be less volatile than profit levels from the retail sale of gasoline and diesel fuel.
PTC, a joint venture with Pilot Corporation (“Pilot”), is the largest operator of travel centers in the United States with about 225 locations in 34 states. The travel centers offer diesel fuel, gasoline and a variety of other services, including on-premises brand name restaurants. PTC provides MAP with the opportunity to participate in the travel center business on a nationwide basis. Pilot and MAP each own a 50 percent interest in PTC.
On February 27, 2003, PTC purchased 60 retail travel centers including fuel inventory, merchandise and supplies. The 60 locations are in 15 states, primarily in the Midwest, Southeast and Southwest regions of the country.
During 2002, SSA sold all of its convenience stores in Tennessee and Louisiana and most of its stores in Georgia. On February 7, 2003, SSA announced the signing of a definitive agreement to sell all 193 of its convenience stores located in Florida, South Carolina, North Carolina and Georgia for $140 million plus store inventory. The transaction is anticipated to close in the second quarter of 2003, subject to any necessary regulatory approvals and customary closing conditions. MAP’s retail marketing strategy is focused on SSA’s Midwest operations, additional growth in the Marathon brand and continued growth for PTC.
Supply and Transportation
MAP obtains the crude oil it processes from negotiated contracts and spot purchases or exchanges. In 2002, MAP’s net purchases of U.S. produced crude oil for refinery input averaged 433,000 bpd, including a net 44,000 bpd from Marathon. In 2002, Canada was the source for 13 percent or 114,000 bpd of crude oil processed and other foreign sources supplied 39 percent or 359,000 bpd of the crude oil processed by MAP’s refineries, including approximately 215,000 bpd from the Middle East. This crude was acquired from various foreign national oil companies, producing companies and traders.
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MAP operates a system of pipelines and terminals to provide crude oil to its refineries and refined products to its marketing areas. At December 31, 2002, MAP owned, leased or had an ownership interest in approximately 3,410 miles of crude oil trunk lines and 3,732 miles of product trunk lines. MAP owned a 47 percent interest in LOOP LLC (“LOOP”), which is the owner and operator of the only U.S. deepwater oil port, located 18 miles off the coast of Louisiana; a 50 percent interest in LOCAP LLC, which owns a crude oil pipeline connecting LOOP and the Capline system; and a 37 percent interest in the Capline system, a large diameter crude oil pipeline extending from St. James, Louisiana to Patoka, Illinois.
MAP also has a 33 percent ownership interest in Minnesota Pipe Line Company, which owns a crude oil pipeline in Minnesota. Minnesota Pipe Line Company provides MAP with access to crude oil common carrier transportation from Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity of MAP’s St. Paul Park, Minnesota refinery.
As of December 31, 2002, MAP had a 33 percent ownership interest in Centennial Pipeline LLC, and Marathon Ashland Pipe Line LLC has been designated operator of the pipeline. The Centennial Pipeline system that connects Gulf Coast refineries with the Midwest market has the initial design capacity to transport approximately 210,000 barrels per day of refined petroleum products and began deliveries of refined products in April 2002.
On February 10, 2003, MAP increased its ownership in Centennial Pipeline LLC from 33 percent to 50 percent and as of that date, Centennial Pipeline LLC is owned 50 percent each by MAP and TE Products Pipeline Company, Limited Partnership.
A MAP subsidiary, Ohio River Pipe Line LLC (“ORPL”), is building a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company, and the pipeline will be an interstate common carrier pipeline. The pipeline is currently known as Cardinal Products Pipeline and is expected to initially move approximately 50,000 barrels per day of refined petroleum into the central Ohio region. ORPL has secured all of the rights-of-way required to build the pipeline, and final permits required to build the pipeline have been approved. Construction on the pipeline began in August 2002, with startup of the pipeline expected midyear 2003.
MAP’s eighty-six light product and asphalt terminals are strategically located throughout the Midwest, upper Great Plains and Southeast. These facilities are supplied by a combination of pipelines, barges, rail cars and/or trucks. MAP’s marine transportation operations include towboats and barges that transport refined products on the Ohio, Mississippi and Illinois rivers, their tributaries and the Intercoastal Waterway. MAP also leases and owns rail cars in various sizes and capacities for movement and storage of petroleum products and a large number of tractors, tank trailers and general service trucks.
The above RM&T discussions include forward-looking statements concerning anticipated completion of refinery projects, start-up of a pipeline project and the disposition of SSA stores. Some factors that could potentially cause actual results for the refinery and pipeline projects to differ materially from present expectations include (among others) price of petroleum products, levels of cash flow from operations, unforeseen hazards such as weather conditions and the completion of construction. Some factors that could affect the SSA store sales include the inability or delay in obtaining necessary government and third party approvals, and satisfaction of customary closing conditions. This forward-looking information may prove to be inaccurate and actual results may differ from those presently anticipated.
Other Energy Related Businesses
Marathon operates other businesses that market and transport its own and third-party natural gas, crude oil and products manufactured from natural gas, such as LNG and methanol, primarily in the United States, Europe and West Africa. Some of these businesses, as well as other business projects under development, comprise Marathon’s emerging integrated gas strategy.
Marathon owns an interest in the following pipeline systems that were not contributed to MAP: a 29 percent interest in Odyssey Pipeline LLC and a 28 percent interest in Poseidon Oil Pipeline Company, LLC (both Gulf of Mexico crude oil pipeline systems); a 24 percent interest in Nautilus Pipeline Company, LLC and a 24 percent interest in Manta Ray Offshore Gathering Company, LLC (both Gulf of Mexico natural gas pipeline systems); and a 17 percent interest in Explorer Pipeline Company and a 3 percent interest in Colonial Pipeline Company (both light product pipeline systems extending from the Gulf of Mexico to the Midwest and East Coast, respectively).
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Marathon owns a 34 percent ownership interest in the Neptune natural gas processing plant located in St. Mary Parish, Louisiana, which commenced operations on March 20, 2000. The plant has the capacity to process 300 mmcfd of natural gas, which is transported on the Nautilus pipeline system.
In addition to the sale of its own oil and natural gas production, Marathon purchases oil and gas from third party producers and marketers for resale.
Marathon owns a 30 percent ownership in a Kenai, Alaska, natural gas liquefication plant and leases two 87,500 cubic meter tankers used to transport LNG to customers in Japan. Feedstock for the plant is supplied from a portion of Marathon’s natural gas production in the Cook Inlet. From the first production in 1969, the LNG has been sold under a long-term contract with two of Japan’s largest utility companies. Marathon has a 30 percent participation in this contract, which has been extended to continue through March 31, 2009. LNG deliveries totaled 63 gross bcf (19 net bcf) in 2002.
On January 3, 2002, Marathon acquired a 45 percent interest in a methanol plant located in Malabo, Equatorial Guinea from CMS Energy. Feedstock for the plant is supplied from a portion of Marathon’s natural gas production in the Alba field. Methanol production totaled 719,000 gross metric tons (324,000 net metric tons) in 2002. Production from the plant is used to supply customers in Europe and the U.S.
In August 2002, Marathon acquired the rights to deliver up to 58 bcf of LNG annually to the Elba Island LNG terminal in Savannah, Georgia. The contract has a 17-year term with an option to extend for an additional five-year period. The agreement provides for the right to deliver LNG under a put option with the operator of the facility and, under certain conditions, take redelivery of natural gas for onward sale to third parties.
Marathon’s Atlantic Basin integrated gas activity centers around the monetization of Marathon’s gas reserves from the Alba field. This proposed project would involve construction of an LNG facility located on Bioko Island, Equatorial Guinea. LNG is likely to be shipped to the United States or Europe where it will be regasified and sold into the marketplace. Approvals are required from the partners and government of Equatorial Guinea.
Marathon’s Pacific Basin integrated gas activity centers around construction of the Tijuana Regional Energy Center. The proposed project, to be located near Tijuana, Mexico, is an integrated complex planned to consist of a 750 mmcf per day LNG offloading terminal and regasification plant, a 1,200-megawatt power generation plant, a 20-million gallon per day water desalination plant, wastewater treatment facilities and natural gas pipeline infrastructure. Currently, Marathon is proceeding with regulatory reviews and permits as required by federal authorities in Mexico. Assuming regulatory approval and the development of a successful commercial structure and financing plan, construction of the facilities is scheduled to begin in 2003 with expected startup in 2006.
The above OERB discussion contains forward looking statements concerning the Tijuana Regional Energy Center. Some factors, but not necessarily all factors that could adversely affect these expected results include unforeseen difficulty in negotiation of definitive agreements among project participants, identification of additional participants to reach optimum levels of participation, inability or delay in obtaining necessary government and third-party approvals, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects, environmental issues, availability or construction of sufficient LNG vessels, and government review and approval of the required permits.
Competition and Market Conditions
Strong competition exists in all sectors of the oil and gas industry and, in particular, in the exploration and productiondevelopment of new reserves. Marathon competes with major integrated and independent oil and gas companies for the acquisition of oil and gas leases and other energy businesses
conducted by Marathon Oil Company, an Ohio corporation,properties, for the equipment and labor required to develop and operate those properties and in the marketing of oil and natural gas to end-users. Many of Marathon’s competitors have financial and other subsidiaries comprisingresources greater than those available to Marathon. As a consequence, Marathon may be at a competitive disadvantage in bidding for the rights to explore for oil and gas. Acquiring the more attractive exploration opportunities frequently requires competitive bids involving front-end bonus payments or commitments-to-work programs. Marathon Group.
In a series of transactions (the "Holding Company Reorganization") Old USX
completed on July 2, 2001:
. USX HoldCo became the holding company for Marathon Oil Companyalso competes in attracting and United States Steel LLC;
. Old USX was merged with and into United States Steel LLC;
. USX HoldCo assumed a substantial part of the outstanding indebtedness,
obligations under various capital and operating leases and guarantee
obligationsretaining personnel, including geologists, geophysicists and other contingent liabilitiesspecialists. Based on industry sources, Marathon believes it currently ranks eighth among U.S.-based petroleum corporations on the basis of Old USX;2001 worldwide liquid hydrocarbon and natural gas production.
Marathon through MAP must also compete with a large number of other companies to acquire crude oil for refinery processing and in the distribution and marketing of a full array of petroleum products. MAP believes it ranks sixth among U.S. petroleum companies on the basis of crude oil refining capacity as of January 1, 2003. MAP competes in four distinct markets – wholesale, spot, branded and retail distribution—for the sale of refined products and believes it competes with about forty companies in the wholesale distribution of petroleum products to private brand marketers and large commercial and industrial consumers; about eighty-seven companies in the sale of petroleum products in the spot market; eleven refiner/marketers in the supply of branded petroleum
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products to dealers and jobbers; and approximately six hundred petroleum product retailers in the retail sale of petroleum products. Marathon competes in the convenience store industry through SSA’s retail outlets. The retail outlets offer consumers gasoline, diesel fuel (at selected locations) and a broad mix of other merchandise and services. Some locations also have on-premises brand-name restaurants such as Subway™ and Taco Bell™. USX HoldCo changedMarathon also competes in the travel center industry through its name50 percent ownership in PTC.
Marathon’s operating results are affected by price changes in crude oil, natural gas and petroleum products, as well as changes in competitive conditions in the markets it serves. Generally, results from production operations benefit from higher crude oil and natural gas prices while refining and marketing margins may be adversely affected by crude oil price increases. Market conditions in the oil and gas industry are cyclical and subject to USX Corporation.
global economic and political events and new and changing governmental regulations.
The Separation
On December 31, 2001, pursuant to an Agreement and Plan of Reorganization dated as of July 31, 2001 ("(“Reorganization Agreement"Agreement”), Marathon completed the Separation, transaction, in which:
.
Marathon and its subsidiaries are continuing the energy business that comprised the Marathon Group of Old USX.
USX Corporation.
Assumption of Indebtedness and Other Obligations by United States Steel
Prior to the Separation, Old USX, and then Marathon managed most of its financial activities on a centralized, consolidated basis and, in its financial statements, attributed amounts that related primarily to the following items to the Marathon Group and the U.S. Steel Group on the basis of their cash flows for the applicable periods and the initial capital structure for each group:
.
The following items, however, were specifically attributed to, and reflected in their entirety in the financial statements of, the group to which they related:
.
These attributions were for accounting purposes only and did not reflect the legal ownership of cash or the legal obligations to pay and discharge debt or other obligations.
In connection with the Separation:
.
20
These arrangements requirerequired a post-Separation cash settlement of $54 million between Marathon and United States Steel following the audit of the balance sheets for both the Marathon Group and the U. S. Steel Group as of December 31, 2001, in order to ensure that the Value Transfer was $900 million. At December 31, 2001, Marathon had a $54 million settlement receivable from United States Steel arising from the allocation of net debt and other financings at the time of the Separation, which was paid on February 6, 2002.
As a result of its assumption of various items of indebtedness and other obligations from its former parent entity in the Holding Company Reorganization, Marathon remained obligated after the Separation for the following items of indebtedness and other obligations that were attributed to the U.S. Steel Group in accordance with the provisions of the Reorganization Agreement (amounts as of December 31, 2001):
. approximately $470 million of Agreement:
As contemplated by the Reorganization Agreement, Marathon and United States Steel entered into a financial matters agreement to reflect United States Steel'sSteel’s agreement to assume and discharge all Marathon'sof Marathon’s obligations referred to above. For additional information relating to the financial matters agreement, see “Relationship Between Marathon and United States Steel After the Separation – Financial Matters Agreement” below.
Relationship Between Marathon and United States Steel After the Separation
As a result of the Separation, Marathon and United States Steel are separate companies, and neither has any ownership interest in the other. Thomas J. Usher is chairman of the board of both companies, and, as of December 31, 2002, four of the nine remaining members of Marathon’s board of directors are also directors of United States Steel.
In connection with the Separation and pursuant to the Plan of Reorganization, Marathon and United States Steel have entered into a series of agreements governing their relationship subsequent to the Separation and providing for the allocation of tax and certain other liabilities and obligations arising from periods prior to the Separation. The following is a description of the material terms of those agreements.
Financial Matters Agreement
Marathon and United States Steel have a financial matters agreement that provides for United States Steel’s assumption of the obligations under Marathon’s outstanding industrial revenue bonds, the sale-leaseback financing arrangement and the lease and guarantee obligations referred to above under “The Separation— Assumption of Indebtedness and Other Obligations by United States Steel” on page 20. Under the financial matters agreement, United States Steel has assumed and agreed to discharge all Marathon’s principal repayment, interest payment and other payment obligations under thethose industrial revenue bonds the capital lease arrangement and the guarantees associated with the
other lease and similarguarantee arrangements described above, including any amounts due on any default or acceleration of any of those obligations, referred to above. In addition, the
financial matters agreement requires United States Steel to use commercially
reasonable efforts to have Marathon released from its obligations under the
other guarantees referred to above. than any default caused by Marathon.
The financial matters agreement also provides that, on or before the tenth anniversary of the Separation, United States Steel will provide for Marathon'sMarathon’s discharge from any remaining liability under any of the assumed industrial revenue bonds. United States Steel may accomplish that discharge by refinancing or, to the extent not refinanced, paying Marathon an amount equal to the remaining principal amount of, all accrued and unpaid debt service outstanding on, and any premium required to immediately retire, the then outstanding industrial revenue bonds. Only $1.8$2 million of the industrial revenue bonds are scheduled to mature in the period extending through 2012. For additional information relating toDecember 31, 2009.
Under the financial matters agreement, see "Relationship Between Marathon and United States Steel Aftershall have the Separation - Financial Matters Agreement" on page 7.
Effects on Historical Relationship
Historically,right to exercise all of the U.S. Steel Group has funded its negative operating cash
flow with cash supplied by Marathon, a portion of which was reflected as a
paymentexisting contractual rights under the tax allocation policy andlease obligations assumed from Marathon, including all rights related to purchase
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options, prepayments or the remaindergrant or release of which was
represented by increased amounts of debt attributed by Marathon. As a stand-
alone company,security interests. United States Steel will needshall have no right to increase amounts due under or lengthen the term of any of the assumed lease obligations without the prior consent of Marathon other than extensions set forth in the terms of the assumed lease obligations.
The financial matters agreement also requires United States Steel to use commercially reasonable efforts to have Marathon released from its obligations under a guarantee Marathon provided with respect to all United States Steel’s obligations under a partnership agreement between United States Steel, as general partner, and General Electric Credit Corporation of Delaware and Southern Energy Clairton, LLC, as limited partners. United States Steel may dissolve the partnership under certain circumstances including if it is required to fund anyaccumulated cash shortfalls of its negative
operating cash flowthe partnership in excess of $150 million. In addition to the normal commitments of a general partner, United States Steel has indemnified the limited partners for certain income tax exposures.
The financial matters agreement requires Marathon to use commercially reasonable efforts to take all necessary action or refrain from external sources,acting so as to assure compliance with all covenants and adequate sources may be
unavailableother obligations under the documents relating to the assumed obligations to avoid the occurrence of a default or the costacceleration of such funding may adversely impact the payment obligations under the assumed obligations. The agreement also obligates Marathon to use commercially reasonable efforts to obtain and maintain letters of credit and other liquidity arrangements required under the assumed obligations.
United States Steel.
As discussed below,Steel’s obligations to Marathon under the financial matters agreement are general unsecured obligations that rank equal to United States Steel’s accounts payable and other general unsecured obligations. The financial matters agreement does not contain any financial covenants, and United States Steel is free to incur additional debt, and grant mortgages on or security interests in its property and sell or transfer assets without Marathon'sour consent. United States Steel is more highly
leveraged than Marathon, has a noninvestment grade credit rating and has
granted security interests in some of its assets, including its accounts
receivable and inventory. Additionally, United States Steel's operations are
capital intensive. United States Steel's business also requires substantial
expenditures for routine maintenance. The steel business is highly competitive
and a large number of industry participants have sought protection under
bankruptcy laws in recent periods.
Relationship Between Marathon and United States Steel After the Separation
As a result of the Separation, Marathon and United States Steel are
separate companies, and neither has any ownership interest in the other.
Thomas J. Usher is chairman of the board of both companies, and four of the
remaining nine members of Marathon's board of directors are also directors of
United States Steel.
5
In connection with the Separation and pursuant to the Plan of
Reorganization, Marathon and United States Steel have entered into a series of
agreements governing their relationship subsequent to the Separation and
providing for the allocation of tax and certain other liabilities and
obligations arising from periods prior to the Separation. Set forth below is a
description of the material terms of those agreements.
Tax Sharing Agreement
Marathon and United States Steel have a tax sharing agreement that applies to each of their consolidated tax reporting groups. Provisions of this agreement include the following:
.
Under the general tax sharing principles in effect prior to the Separation:
.
In accordance with the tax sharing agreement, at the time of the Separation, Marathon made a preliminary settlement with United States Steel of approximately $440 million as the net tax sharing payments owed to it for the year ended December 31, 2001 under the pre-Separation tax sharing principles.
The tax sharing agreement also addresses the handling of tax audits and contests and other matters respecting taxable periods, or portions of taxable periods, ended prior to December 31, 2001.
In the tax sharing agreement, each of Marathon and United States Steel promised the other party that it:
.
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The proscribedprescribed actions and transactions include:
.
In case a taxing authority seeks to collect a tax liability from one party whichthat the tax sharing agreement has allocated to the other party, the other party has agreed in the sharing agreement to indemnify the first party against that liability.
Even if the Separation otherwise qualifiesqualified for tax-free treatment under section 355 of the Internal Revenue Code, the Separation may become taxable to Marathon under section 355(e) of the Internal Revenue Code if capital stock representing a 50 percent or greater interest in either Marathon or United States Steel is acquired, directly or indirectly, as part of a plan or series of related transactions that include the Separation. For this purpose, a "50“50 percent or greater interest"interest” means capital stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of capital stock. To minimize this risk, both Marathon and United States Steel agreed in the tax sharing agreement that they would not enter into any transactions or make any change in their equity structures that could cause the 6
Although the tax sharing agreement allocates tax liabilities relating to taxable periods ending on or prior to the Separation, each of Marathon and United States Steel, as members of the same consolidated tax reporting group during any portion of a taxable period ended on or prior to the date of the Separation, is jointly and severally liable under the Internal Revenue Code for the federal income tax liability of the entire consolidated tax reporting group for that year. To address the possibility that the taxing authorities may seek to collect all or part of a tax liability from one party where the tax sharing agreement allocates that liability to the other party, the agreement includes indemnification provisions that would entitle the party from whom the taxing authorities are seeking collection to obtain indemnification from the other party, to the extent the agreement allocates that liability to that other party. Marathon can provide no assurance, however, that United States Steel will be able to meet its indemnification obligations, if any, to Marathon that may arise under the tax sharing agreement.
Transition Services Agreement
Marathon and United States Steel have a transition services agreement that
will govern the provision of the following services until December 31, 2002:
. common corporate support services; and
. inter-unit computer services.
Common corporate support services include services personnel at the former
Pittsburgh corporate headquarters historically provided prior to the
Separation. These include accounting, finance and financial management,
government affairs, investor relations, public affairs and tax services. Most
of these personnel now work for Marathon or United States Steel. Each company
has agreed to provide these services to the other, to the extent it is able to
do so and the other company cannot satisfy its own needs.
Inter-unit computer services consist of computer and information technology
services either company historically provided to the former Pittsburgh
corporate headquarters or to the other company.
A company providing common corporate support or inter-unit computer
services under the transition services agreement will be entitled to recover
the costs it incurs in providing those services.
The transition services agreement also includes each company's grant to the
other company and its subsidiaries of a nonexclusive, fully paid, worldwide
license for their internal use only of the granting company's computer
programs, software, source code and know-how that were utilized prior to the
Separation or are utilized under the transition services agreement to provide
common corporate support or inter-unit computer services to the other company
and its subsidiaries.
Financial Matters Agreement
Marathon and United States Steel have a financial matters agreement that
provides for United States Steel's assumption of the obligations under
Marathon's outstanding industrial revenue bonds, the sale-leaseback financing
arrangement and the lease and guarantee obligations referred to above under
"The Separation--Assumption of Indebtedness and Other Obligations by United
States Steel" on page 5. Under the financial matters agreement, United States
Steel has assumed and agreed to discharge all Marathon's principal repayment,
interest payment and other obligations under those industrial revenue bonds
and lease and guarantee arrangements described above, including any amounts
due on any default or acceleration of any of those obligations, other than any
default caused by Marathon.
The financial matters agreement also provides that, on or before the tenth
anniversary of the Separation, United States Steel will provide for Marathon's
discharge from any remaining liability under any of the assumed industrial
revenue bonds.
The financial matters agreement also requires United States Steel to use
commercially reasonable efforts to have Marathon released from its obligations
under a guarantee Marathon provided with respect to all United States Steel's
obligations under a partnership agreement between United States Steel, as
general partner, and General Electric Credit Corporation of Delaware and
Southern Energy Clairton, LLC, as limited partners.
7
United States Steel may dissolve the partnership under certain circumstances
including if it is required to fund accumulated cash shortfalls of the
partnership in excess of $150 million. In addition to the normal commitments
of a general partner, United States Steel has indemnified the limited partners
for certain income tax exposures. As of December 31, 2001, United States Steel
had no unpaid outstanding obligations to the limited partners.
The financial matters agreement requires Marathon to use commercially
reasonable efforts to take all necessary action or refrain from acting so as
to assure compliance with all covenants and other obligations under the
documents relating to the assumed obligations to avoid the occurrence of a
default or the acceleration of the payment obligations under the assumed
obligations. The agreement also obligates Marathon to use commercially
reasonable efforts to obtain and maintain letters of credit and other
liquidity arrangements required under the assumed obligations.
United States Steel's obligations to Marathon under the financial matters
agreement are general unsecured obligations which rank equal to United States
Steel's accounts payable and other general unsecured obligations. The
financial matters agreement does not contain any financial covenants, and
United States Steel is free to incur additional debt, grant mortgages on or
security interests in its property and sell or transfer assets without our
consent.
License Agreement
Marathon and United States Steel have entered into a license agreement under which Marathon granted to United States Steel a nonexclusive,non-exclusive, fully paid, worldwide license to use the "USX"“USX” name and various trade secrets, know-
howknow-how and intellectual property rights previously used in connection with the business of both companies. The license agreement provides that United States Steel may use these rights solely in the conduct of its internal business. It also provides United States Steel with the right to sublicense these rights to any of its subsidiaries. The license agreement provides for a perpetual term, so long as United States Steel performs its obligations under the agreement.
Insurance Assistance Agreement
Marathon and United States Steel have an insurance assistance agreement, which provides for:
.
Under the insurance assistance agreement:
.
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Transition Services Agreement
Marathon and Production
Oil and Natural Gas Exploration and Development
Marathon is currently conducting exploration and development activities in
11 countries, including its January 2002 acquisition of interests in
Equatorial Guinea, West Africa. Principal exploration activities are in the United States Steel had a transition services agreement that governed the United Kingdom, Angola, Canada, and Norway. Principal
development activities are in the
8
United States, the United Kingdom, Canada, Equatorial Guinea, Gabon, Ireland,
the Netherlands and Norway. Marathon is also pursuing opportunities in North
and West Africa, the Middle East, Southeast Asia and the Commonwealth of
Independent States.
The following table sets forth, by geographic area, the number of net
productive and dry development and exploratory wells completed in eachprovision of the last three years (references to "net" wells or production indicate Marathon's
ownership interest or share, as the context requires):
Net Productivecommon corporate support services and Dry Wells Completed(a)
2001 2000 1999
- ----------------------------------------------------
United States(b)
Development(c) - Oil 10 23 11
- Gas 751 109 54
- Dry 3 2 1
--- --- ---
Total 764 134 66
Exploratory(d) - Oil 2 2 5
- Gas 9 6 9
- Dry 6 5 13
--- --- ---
Total 17 13 27
--- --- ---
Total United States 781 147 93
International(e)
Development(c) - Oil 1 12 42
- Gas 54 111 55
- Dry 5 5 11
--- --- ---
Total 60 128 108
Exploratory(d) - Oil 0 4 2
- Gas 16 26 14
- Dry 5 14 16
--- --- ---
Total 21 44 32
Total International 81 172 140
--- --- ---
Total Worldwide 862 319 233
- ----------------------------------------------------
(a) Includes the number of wells completed during the applicable year
regardless of the year in which drilling was initiated. Does not include any
wells where drilling operations were continuing or were temporarily suspended
as of the end of the applicable year. A dry well is a well found to be
incapable of producing hydrocarbons in sufficient quantities to justify
completion. A productive well is an exploratory or development well that is
not a dry well.
(b) Includes Marathon's equity interest in MKM Partners L.P. ("MKM"). Also
includes Marathon's ownership of Pennaco Energy Company ("Pennaco"), acquired
in February 2001. Pennaco is a coal bed methane exploration and production
company with a very active drilling program.
(c) Indicates wells drilled in the proved area of an oil or gas reservoir.
(d) Includes both wildcat and delineation wells.
(e) Includes Marathon's equity interest in CLAM Petroleum B.V. ("CLAM") and in
2000 and 1999 Marathon's equity interest in Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy").
United States
In the United States during 2001, Marathon drilled 26 gross (19 net)
wildcat and delineation ("exploratory") wells of which 20 gross (12 net) wells
encountered hydrocarbons. Of these 20 wells, 2 gross (1 net) wells were
temporarily suspended, and will be reported in the Net Productive and Dry
Wells Completed table in Marathon's future reports when completed. Marathon's
principal domestic exploratory and development activities in 2001 were in the
U.S. Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma, Texas and
Wyoming.
Exploration expenditures in the United States during the three-year period
endedinter-unit computer services until December 31, 2001, including Marathon's 85 percent equity interest in
MKM's exploration expenditures, totaled $492 million, of which $190 million
was incurred in 2001. Development expenditures in2002. Common corporate support services included services personnel at the United States duringformer Pittsburgh corporate headquarters historically provided prior to the three-year period ended December 31, 2001, including Marathon's 85 percent
equity interest in MKM's development expenditures, totaled $887 million, of
which $367 million was incurred in 2001.
9
The following is a summary of recent, significant exploration and
development activity in the United States including discussion, as deemed
appropriate, of completed wells, wells being drilled and wells under
evaluation.
Gulf of Mexico - The Gulf of Mexico ("Gulf") continues to be a core area
for MarathonSeparation.
Obligations Associated with the potential to add new reserves and increase production.
At the end of 2001, Marathon had interests in 145 blocks in the Gulf,
including 110 in the deepwater area. In 2002, Marathon plans to drill, or
complete drilling operations on, three or four deepwater wells, including
appraisal of the Ozona Deep discovery.
Marathon's 2001 Gulf exploration drilling program was delayed due to the
cancellation of the contract for the Cajun Express drilling rig in early July
2001. Of the two wells originally scheduled to be drilled with this rig, the
Flathead prospect was delayed until December 2001, and resumption of drilling
operations on the Redwood prospect were delayed until January 2002.
The Flathead prospect, located in Walker Ridge Block 30, was plugged back
to a shallower depth and temporarily abandoned. After further evaluations,
Marathon will consider possible options to reenter and sidetrack this well.
Marathon holds a 100 percent interest in Block 30. The Redwood prospect,
located in Green Canyon Block 1001, completed drilling operations in 2002 and
was abandoned as a dry hole. Marathon held a 75 percent interest in Block
1001. Marathon held an 8.25 percent interest in the Timber Wolf prospect,
located in Mississippi Canyon 555, which was temporarily abandoned pending
further evaluation. Additionally, Marathon participated in the drilling of two
other Gulf prospects in 2001. The Paris Carver prospect, located in Green
Canyon Block 601, did not encounter hydrocarbons and was abandoned. Marathon
holds a 50 percent interest in Block 601. The Ozona Deep prospect, located in
Garden Banks Block 515 resulted in a deepwater discovery. The well was drilled
to a total measured depth of 26,352 feet and encountered approximately 345
feet of net pay in two primary intervals. Further appraisal drilling is
expected to be conducted during 2002 to determine a plan of development.
Marathon is operator and has a 68 percent working interest.
The Camden Hills field, located in the deepwater Gulf on Mississippi Canyon
Block 348 in approximately 7,200 feet of water, was discovered in August 1999
and confirmed by a subsequent well in January 2000. Development is being
achieved with the sharing of infrastructure that will service two other fields
in the area. The Canyon Express natural gas gathering system will link three
gas fields, including Camden Hills, to a host processing platform named Canyon
Station. Completion of the discovery well is underway, and installation of the
Canyon Express pipeline began in January 2002 after a three-month delay in
obtaining permits. Despite the delays, first gas production continues to be
targeted for mid-2002. Marathon is operator of the Camden Hills field with a
50.03 percent interest.
Alaska - During 2001, Marathon completed successful drilling operations on
six wells in Alaska. Included in this program were two exploration wells
related to the recently announced natural gas discovery on the Ninilchik Unit
on the Kenai Peninsula, approximately 35 miles south of Kenai, Alaska. Proved
remaining reserves at year-end 2001 are approximately 19 billion net cubic
feet ("bcf") of natural gas. One well is scheduled for drilling in 2002, with
additional drilling anticipated during 2003 to further delineate the upside
potential of the structure. Marathon is operator of the Ninilchik Unit with a
60 percent interest. Marathon and a co-venturer have formed the Kenai Kachemak
Pipeline Company, LLC, to transport natural gas from the Ninilchik Unit and
other potential southern Kenai Peninsula gas prospects for sales into the
existing Cook Inlet natural gas infrastructure. Initial production from the
Ninilchik Field is planned for early 2004 commensurate with completion of
pipeline construction.
Marathon announced first natural gas production from its 100 percent owned
Wolf Lake Field in November 2001. The Wolf Lake Field is located within the
Kenai National Wildlife Refuge approximately 12 miles northeast of Soldotna,
Alaska. Ultimate development at the Wolf Lake Field may require up to six
natural gas wells at three sites. One well is expected to be drilled in 2002.
New Mexico - In 2001, nine development wells were completed in the Indian
Basin field to take advantage of Marathon's earlier expansion of the Indian
Basin gas plant. Focus continued this year in the eastern area of the field
which accounted for seven of the new wells. These wells extended last year's
record gross production of 160 million cubic feet per day ("mmcfd") to 180
mmcfd from Marathon-operated wells. These new wells, combined with several
recompletions of existing gas wells, more than doubled oil production from the
field to 6,500 gross barrels of liquid hydrocarbons a day ("bpd"). In 2002,
six new well completions and several recompletions are planned in the east
Indian Basin area targeting both oil and gas.
Oklahoma - Marathon's 2001 Southern Anadarko Basin exploration efforts
focused on a continued Western Oklahoma Granite Wash program, as well as the
Cement field Springer/Sycamore play. Exploration drilling efforts resulted in
seven successful discoveries. The acquisition of approximately 250 square
miles of 3-D seismic data has helped in identifying seven exploration projects
(five Granite Wash, two Cement) that are scheduled to be drilled in 2002.
10
Marathon continued to develop the 1998 Granite Wash discovery by drilling
16 development wells in 2001. Current production rates from the Granite Wash
play are approximately 24 net mmcfd and 1,300 net bpd. In 2002, current plans
are to drill, or participate in the drilling of, 14 additional Granite Wash
development wells.
Marathon drilled, or participated in the drilling of, 13 development wells
in the Carter Knox field in 2001. Most of this activity focused on completing
the development plan associated with properties acquired in 2000.
Drilling activity continued in the Cement field where efforts focused on
continued Springer/Sycamore development. Six development wells were drilled in
2001, resulting in current production rates of 24 net mmcfd, a 60 percent
increase over 2000 levels. In 2002, Marathon expects to drill, or participate
in the drilling of, eight additional development wells.
Texas - In West Texas, Marathon formed a joint venture with Kinder Morgan
Energy Partners, L.P. ("Kinder Morgan"), which commenced operations in January
2001. The formation of the joint venture included contribution of interests in
the Yates and SACROC assets. Marathon and Kinder Morgan have equal voting
rights and control is shared equally by both partners. As such, the joint
venture is accounted for on the equity method of accounting in which Marathon
recognizes its 85 percent share of earnings from the partnership. This
transaction has allowed Marathon to expand its interests in the Permian Basin
and has improved access to materials for use in enhanced recovery techniques
in the Yates field.
Wyoming - On February 9, 2001, Marathon completed the acquisition of
Pennaco Energy Company ("Pennaco"), creating a new core area of coal bed
methane production in the Powder River Basin of Wyoming. Pennaco controls more
than 400,000 net acres in northeast Wyoming and southeast Montana and is the
third largest operator in this very active play. Marathon was successful in
retaining the Pennaco expertise in coal bed methane operations and, as a
result, was able to execute a significant 2001 drilling program of
approximately 660 net wells, which exceeded previous Pennaco annual records.
For 2001, annualized production rates averaged 47 net mmcfd, with the December
rate reaching 59 net mmcfd. Proved remaining reserves at year-end 2001 are
approximately 256 net bcf of natural gas.
International
Outside the United States during 2001, Marathon drilled 31 gross (18 net)
exploratory wells in 6 countries. Of these 31 wells, 22 gross (14 net) wells
encountered hydrocarbons, of which 1 gross well was temporarily suspended.
Marathon's expenditures for international oil and natural gas exploration
activities, including Marathon's 50 percent equity interest in CLAM's
exploration expenditures and former 37.5 percent equity interest in Sakhalin
Energy's exploration expenditures, during the three-year period ended December
31, 2001, totaled $338 million, of which $91 million was incurred in 2001.
Marathon's international development expenditures, including its proportionate
share of CLAM and Sakhalin Energy's development expenditures, during the
three-year period ended December 31, 2001, totaled $722 million, of which $265
million was incurred in 2001.
On January 3, 2002, Marathon announced the completed acquisition of
interests in Equatorial Guinea, West Africa. Through this transaction,
Marathon acquired a 52.4 percent interest in, and operatorship of, the
offshore Alba Block, which contains the currently producing Alba gas field as
well as undeveloped oil and gas discoveries and several possible exploration
prospects; a 37.6 percent interest in the adjacent offshore Block D; a 52.4
percent interest in a condensate separation facility onshore Bioko Island; a
45 percent interest in a joint venture onshore methanol production plant; and
a 43.2 percent interest in an onshore Liquefied Petroleum Gas ("LPG")
processing plant. The acquisition will provide an estimated 250 million
barrels of oil equivalent ("BOE") to Marathon's proved reserves in 2002.
The following is a summary of recent, significant exploration and
development activity outside the United States including discussion, as deemed
appropriate, of completed wells, wells being drilled and wells under
evaluation.
United Kingdom - Marathon has interests in 34 blocks in the United Kingdom
("U.K.") and other areas offshore of the U.K. In 2000, Marathon acquired an
interest in the BP-operated Foinaven development in the U.K. Atlantic Margin.
Marathon's interest is 28 percent in the main Foinaven field (T34), 20 percent
in the deeper T35 Foinaven field and 47 percent in the East Foinaven field.
First production was achieved in September 2001 from the East Foinaven field,
which is estimated to have proved net remaining reserves at year-end 2001 of
approximately 14 million barrels of liquid hydrocarbons. The satellite field
is produced via subsea completions that flow into the existing floating
production, storage and offloading ("FPSO") vessel. A third production well is
planned at East Foinaven in 2003. Infill drilling in the main Foinaven field
was successful in 2001 with one
11
sidetrack, one water injector and two new producers being brought on line.
Infill drilling of two additional production wells is expected to continue
through spring 2002. Fluid handling upgrades on the FPSO in 2001 have allowed
record daily production levels for the field of 132,300 gross bpd.
As an interest owner in Foinaven, Marathon also has an 11.465 percent
working interest in the West of Shetland gas evacuation line. The line, which
is installed and ready for commissioning, will take gas from fields in the
West of Shetlands area to the BP-operated Magnus platform for injection and
enhanced oil recovery purposes. Gas from the Foinaven field, which is
currently injected for disposal, will be sold to the Magnus group, with sales
expected to commence in early 2002 upon completion of work by the Magnus
group.
Marathon is continuing its development of the Brae area in the U.K. North
Sea where it is the operator and owns a 41.6 percent interest in the South,
Central and North Brae fields and a 38.5 percent interest in the East Brae
field. Marathon's share in the West Brae/Sedgwick joint development increased
from 28.1 percent to 41.6 percent in September 2001 when the limit on
Sedgwick's share of production from the development was reached. During 2001,
Marathon participated in a successful Brae area well that was drilled to a
deeper exploration target. The well was completed as a gas and condensate
producer from the Brae B platform in June 2001. Well performance continues to
be monitored to assess upside potential.
Angola - In May 1999, Marathon was awarded interests in Blocks 31 and 32
offshore Angola. The blocks, which are located approximately 90 miles
northwest of Luanda in water depths between 5,400 and 9,200 feet, are adjacent
to Blocks 15, 17 and 18, where major discoveries by others have been made.
Marathon presently holds a 10 percent working interest in Blocks 31 and 32,
which are operated by co-venturers. Surveys of 3-D seismic data have been
acquired over both blocks and advanced processing and interpretation of this
data continues. One unsuccessful exploration well was drilled on Block 31 in
2001. Two additional wells in Block 31 are scheduled to begin drilling in the
second and third quarters of 2002. The initial exploration well in Block 32 is
expected to be drilled during the second half of 2002.
Canada - In November 2001, Marathon was awarded two additional offshore
Nova Scotia deepwater exploration licenses, with an effective date of January
1, 2002. Marathon has a 100 and 50 percent interest in exploration licenses
("EL") 2410 and 2411, respectively. This brings Marathon's total offshore Nova
Scotia exploration license acreage to 1.9 million acres, positioning Marathon
as a major player in the developing deepwater Atlantic Canada Gas Province.
One shallow-water well was drilled in 2001 in EL 2376 (Southampton), which did
not encounter hydrocarbons in commercial quantities. It is anticipated that
one deepwater well will be completed in EL 2377 (Annapolis) in 2002.
In Western Canada, Marathon anticipates drilling six wells in three
exploration plays during 2002. Three wells will test the Milo pinnacle reef
play, two wells will test the thrust Debolt foothills play, and one well will
test a Southern Alberta tight gas sand play. Five of these wells are expected
to be completed late first quarter 2002.
Denmark - In June 1998, Marathon acquired one block in Denmark. A 3-D
seismic program was completed in 1999, and evaluation of the data continues in
2002.
Gabon - In fourth quarter 2001, activities commenced to develop the Azile
reservoir of the Tchatamba South field. One existing well is planned for
recompletion, and facilities will be added to process the crude oil, which has
a higher sulfur content than the existing production. First production from
the Azile reservoir is planned for December 2002. Marathon is operator of the
Tchatamba South, West and Marin fields in Gabon, with a 56.25 percent working
interest.
Ireland - The Southwest Kinsale field was converted to a gas storage field
in 2001. The Southwest Kinsale field, located in the Celtic Sea 30 miles south
of Cork, was brought on line in 1999 through a single subsea well tied back to
the Kinsale Head field's Bravo platform. In April 2001, gas injection
commenced through this existing well and, by October 2001, two additional
wells were drilled and tied back to the existing infrastructure. This gas
storage facility, which is the first in Ireland, was fully operational in
October 2001. Marathon has a 100 percent interest in this field.
During 2001, a Petroleum Lease was issued for the Corrib field in the Slyne
Trough License 2/93, located 40 miles off the west coast of Ireland. An
additional appraisal well was drilled in the field in 2001, bringing the total
number of wells drilled and suspended as producers in the Corrib field to
five. Development work on the terminal, offshore pipelines, and subsea well
equipment will continue during 2002. First gas production is expected at the
beginning of 2004. Marathon has an 18.5 percent interest in the Corrib field.
Norway - In 2000, Marathon participated in a project to modify the Heimdal
platform to a processing and transportation center for third-party business.
Marathon owns a 23.798 percent interest in the Heimdal field and platform.
Production of the remaining gas (remnant gas) from the Heimdal field was
reinstated on the platform in August 2001, followed by the start-up of two
planned third-party projects.
12
In November 2000, Marathon approved the development of the Vale field,
located northeast of the Heimdal field. The single well was successfully
drilled and the flowline installed. Topside modifications on the Heimdal
platform continue, and the well is expected to be completed and brought on
line second quarter 2002. Marathon owns a 46.904 percent interest in this
field. An exploration well between the Vale and Heimdal fields has been
deferred until 2003 due to platform capacity constraints.
In January 2002, Marathon closed its acquisition of varied interests in
five licenses in the Norwegian Sector of the North Sea. In the Heimdal area of
the North Sea, Marathon acquired an 18.6 percent interest in License 088,
which contains the Peik gas condensate discovery; a 20 percent interest in
License 102, which contains the Byggve and Skirne gas discoveries and the East
Heimdal oil discovery; and a 10 percent interest in License 150, which also
contains an oil discovery. Approval of a plan of development is expected in
early 2002 for combined development of the Byggve and Skirne fields with first
production expected in early 2004. Close to the Brae fields, Marathon acquired
a 28.2 percent interest in License 025, which contains the Gudrun oil and gas
condensate discovery; and a 10 percent interest in adjacent License 187. In
December 2001, Marathon also successfully bid for an additional license in the
Heimdal area. Pending Norwegian governmental approvals, this could result in
Marathon becoming operator under the license in 2002.
Netherlands - In 2001, Marathon, through its 50 percent equity interest in
CLAM, participated in one development well and four exploration wells in the
Dutch sector of the North Sea. The Q4-A3 development well successfully
completed the planned development of the Q4-A field. CLAM has a 19.8 percent
interest in the field. The exploration well K15-16 was drilled into the K15-
Mike Prospect and discovered the K15-FK field. It was suspended as a future
producer. CLAM has a 9.95 percent interest in the K15-FK field. The Q4-10
exploratory well was drilled into the Q1-Deep Prospect, discovering the Q1-B
field. The well was suspended as a future producer. CLAM has a 3.6 percent
interest in the field. Two delineation wells were drilled into potential
extensions of the F16-E field. The E18-4 well proved up additional reserves
and was suspended as a future producer. The E18-5 well was abandoned as a dry
hole. CLAM's interest in the F16-E field is 4.2 percent.
In 1998, CLAM was awarded two blocks in the Danish sector of the North Sea.
Surveys of 3-D seismic data were acquired in 1999 and two exploration wells
were drilled in 2000, both of which were dry. CLAM is seeking ways of meeting
the minimum requirements of the Danish authorities for relinquishment of the
two blocks at a minimum cost.
Independent of its interest in CLAM, Marathon holds a 24 percent working
interest in the A-15 Block in the Dutch sector of the North Sea. Evaluation of
the deeper sands is expected to continue during 2002.
The above discussions include forward-looking statements concerning various
projects, plans to acquire interests in licenses, drilling plans, expected
production and sales levels, reserves and dates of initial production, which
are based on a number of assumptions, including (among others) prices, amount
of capital available for exploration and development, worldwide supply and
demand for petroleum products, regulatory constraints, reserve estimates,
production decline rates of mature fields, reserve replacement rates, drilling
rig availability, license relinquishments and other geological, operating and
economic considerations. Offshore production and marine operations in areas
such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the
Celtic Sea, offshore Nova Scotia and offshore West Africa are also subject to
severe weather conditions, such as hurricanes or violent storms or other
hazards. The plan to acquire an additional license in the Norwegian sector of
the North Sea is subject to the execution and closing of definitive
agreements, and the receipt of necessary approvals from the applicable
Norwegian authorities. In addition, development of new production properties
in countries outside the United States may require protracted negotiations
with host governments and is frequently subject to political considerations
and tax regulations, which could adversely affect the economics of projects.
To the extent these assumptions prove inaccurate and/or negotiations and other
considerations are not satisfactorily resolved, actual results could be
materially different than present expectations.
Reserves
At December 31, 2001, Marathon's net proved liquid hydrocarbon and natural
gas reserves, including its proportionate share of equity investee net proved
reserves, totaled approximately 1 billion barrels on a barrel of oil
equivalent ("BOE") basis, of which 72 percent were located in the United
States. (For purposes of determining BOE, natural gas volumes are converted to
approximate liquid hydrocarbon barrels by dividing the natural gas volumes
expressed in thousands of cubic feet ("mcf") by 6. The liquid hydrocarbon
volume is added to the barrel equivalent of gas volume to obtain BOE.) On a
BOE basis, excluding dispositions, Marathon replaced 62 percent of its
worldwide oil and gas production.
13
The table below sets forth estimated quantities of net proved oil and gas
reserves at the end of each of the last three years.
Estimated Quantities of Net Proved Oil and Gas Reserves at December 31
Developed &
Developed Undeveloped
----------------- -----------------
(Millions of Barrels) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
Liquid Hydrocarbons
United States............................ 243 414 476 268 458 520
Europe................................... 69 74 90 88 108 90
Other International...................... 25 57 72 30 151 187
----- ----- ----- ----- ----- -----
Total Consolidated...................... 337 545 638 386 717 797
Equity Investees(a)...................... 178 - 69 184 - 77
----- ----- ----- ----- ----- -----
WORLDWIDE.................................. 515 545 707 570 717 874
===== ===== ===== ===== ===== =====
Developed reserves as % of total net proved
reserves.................................. 90.4% 76.0% 80.9%
(Billions of Cubic Feet)
Natural Gas
Natural Gas United States................ 1,308 1,421 1,550 1,793 1,914 2,057
Europe................................... 473 563 741 615 614 774
Other International...................... 308 381 497 399 477 833
----- ----- ----- ----- ----- -----
Total Consolidated...................... 2,089 2,365 2,788 2,807 3,005 3,664
Equity Investee(b)....................... 32 52 65 51 89 123
----- ----- ----- ----- ----- -----
WORLDWIDE.................................. 2,121 2,417 2,853 2,858 3,094 3,787
===== ===== ===== ===== ===== =====
Developed reserves as % of total net proved
reserves.................................. 74.2% 78.1% 75.3%
(Millions of Barrels)
Total BOEs
United States............................ 461 651 734 567 777 863
Europe................................... 148 168 213 190 211 219
Other International...................... 76 121 155 96 231 326
----- ----- ----- ----- ----- -----
Total Consolidated...................... 685 940 1,102 853 1,219 1,408
Equity Investees(a)...................... 183 9 80 193 15 98
----- ----- ----- ----- ----- -----
WORLDWIDE.................................. 868 949 1,182 1,046 1,234 1,506
===== ===== ===== ===== ===== =====
Developed reserves as % of total net proved
reserves.................................. 83.0% 76.9% 78.5%
- --------------------------------------------------------------------------------
(a) Represents Marathon's equity interests in MKM and CLAM in 2001 and CLAM
and Sakhalin Energy in 2000 and 1999.
(b) Represents Marathon's equity interests in CLAM.
The above estimates, which are forward-looking statements, are based on a
number of assumptions, including (among others) prices, presently known
physical data concerning size and character of the reservoirs, economic
recoverability, production experience and other operating considerations. To
the extent these assumptions prove inaccurate, actual recoveries could be
materially different than current estimates.
For additional details of estimated quantities of net proved oil and gas
reserves at the end of each of the last three years, see "Consolidated
Financial Statements and Supplementary Data - Supplementary Information on Oil
and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas
Reserves" on pages F-36 through F-38. Marathon has filed reports with the U.S.
Department of Energy ("DOE") for the years 2000 and 1999 disclosing the year-
end estimated oil and gas reserves. Marathon will file a similar report for
2001. The year-end estimates reported to the DOE are the same as the estimates
reported in the Consolidated Supplementary Data.
Delivery Commitments
Marathon has commitments to deliver fixed and determinable quantities of
natural gas to customers under a variety of contractual arrangements.
In Alaska, Marathon has two long-term sales contracts with the local
utility companies, which obligates Marathon to supply approximately 270 bcf of
natural gas over the remaining life of these contracts. In addition, Marathon
has a 30 percent ownership interest in a Kenai, Alaska, liquefied natural gas
("LNG") plant and a proportionate share of the long-term LNG sales obligation
to two Japanese utility companies. This obligation is
14
estimated to total 178 bcf through the remaining life of the contract, which
terminates March 31, 2009. These commitments are structured with variable-
pricing terms. Marathon's production from various gas fields in the Cook Inlet
supply the natural gas to service these contracts. Marathon's proved reserves
and estimated production rates in the Cook Inlet sufficiently meet these
contractual obligations.
In the U.K., Marathon has two long-term sales contracts with utility
companies, which obligate Marathon to supply approximately 269 bcf of natural
gas over the remaining life of these contracts. Marathon's Brae-area
production, together with natural gas acquired for injection and subsequent
resale, will supply the natural gas to service these contracts. Marathon's
Brae-area proved reserves, acquired natural gas contracts and estimated
production rates sufficiently meet these contractual obligations. The terms of
these gas sales contracts also reflect variable-pricing structures.
Oil and Gas Acreage
The following table sets forth, by geographic area, the developed and
undeveloped oil and gas acreage that Marathon heldSeparation as of December 31, 2001:
Gross and Net Acreage
Developed &
Developed Undeveloped Undeveloped
----------- ------------ ------------
(Thousands of Acres) Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------
United States............................. 1,955 845 3,435 1,862 5,390 2,707
Europe.................................... 351 289 1,843 881 2,194 1,170
Other International....................... 889 521 6,111 2,190 7,000 2,711
----- ----- ------ ----- ------ -----
Total Consolidated........................ 3,195 1,655 11,389 4,933 14,584 6,588
Equity Investees(a)....................... 529 63 302 69 831 132
----- ----- ------ ----- ------ -----
WORLDWIDE................................. 3,724 1,718 11,691 5,002 15,415 6,720
- --------------------------------------------------------------------------------
(a) Represents Marathon's equity interests in MKM and CLAM.
Oil and Natural Gas Production
The following tables set forth daily average net production of liquid
hydrocarbons and natural gas for each of the last three years:
Net Liquid Hydrocarbons Production(a)
(Thousands of Barrels per Day) 2001 2000 1999
- --------------------------------------------------------------------------------
United States(b).............................................. 127 131 145
Europe(c)..................................................... 46 29 31
Other International(c)........................................ 27 36 31
----- ----- -----
Total Consolidated.......................................... 200 196 207
Equity Investees (MKM, CLAM & Sakhalin Energy)(c)............. 9 11 1
----- ----- -----
WORLDWIDE..................................................... 209 207 208
===== ===== =====
Net Natural Gas Production(d)
(Millions of Cubic Feet per Day)
United States(b).............................................. 793 731 755
Europe(e)..................................................... 318 327 326
Other International(e)........................................ 123 143 163
----- ----- -----
Total Consolidated.......................................... 1,234 1,201 1,244
Equity Investees (CLAM and MKM)(e)............................ 31 29 36
----- ----- -----
WORLDWIDE..................................................... 1,265 1,230 1,280
- --------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas liquids.
(b) Amounts reflect production from leasehold ownership, after royalties and
interests of others.
(c) Amounts reflect equity tanker liftings, truck deliveries and direct
deliveries of liquid hydrocarbons before royalties, if any, excluding Canada,
Gabon, Russia and the United States where amounts shown are after royalties.
The amounts correspond with the basis for fiscal settlements with
governments. Crude oil purchases, if any, from host governments are not
included.
(d) Amounts exclude volumes purchased from third parties for injection and
subsequent resale of 8 mmcfd in 2001 and 11 and 16 mmcfd in 2000 and 1999,
respectively.
(e) Amounts reflect production before royalties, excluding Canada and the
United States where amounts shown are after royalties.
15
At year-end 2001, Marathon was producing crude oil and/or natural gas in
seven countries, including the United States. Marathon's worldwide liquid
hydrocarbon production, including Marathon's proportionate share of equity
investees' production, increased one percent over 2000 levels. Marathon's 2001
worldwide sales of natural gas production, including Marathon's proportionate
share of equity investees' production, increased approximately three percent
from 2000. In addition to sales of 441 net mmcfd of international natural gas
production, Marathon sold 8 net mmcfd of natural gas acquired for injection
and resale during 2001. In total, Marathon's 2001 worldwide production
averaged 421,000 BOE per day. In 2002 Marathon's worldwide production is
expected to average 430,000 BOE per day.
The above projection of 2002 worldwide liquid hydrocarbon production and
natural gas volumes is a forward-looking statement. Some factors that could
potentially affect timing and levels of production include pricing, supply and
demand for petroleum products, amount of capital available for exploration and
development, regulatory constraints, reserve estimates, reserve replacement
rates, production decline rates of mature fields, timing of commencing
production from new wells, drilling rig availability, future acquisitions of
producing properties, and other geological, operating and economic
considerations. These factors (among others) could cause actual results to
differ materially from those set forth in the forward-looking statement.
United States
Including Marathon's proportionate share of equity investee production,
approximately 65 percent of Marathon's 2001 worldwide liquid hydrocarbon
production, and 63 percent of its worldwide natural gas production were from
domestic operations. Marathon's principal domestic producing areas are located
in the U.S. Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma,
Texas and Wyoming. Marathon's ongoing domestic growth strategy is to apply its
technical expertise in fields with undeveloped potential, to dispose of
interests in non-core properties with limited upside potential and high
production costs, and to acquire significant working interests in properties
with high development potential.
Gulf of Mexico - During 2001, Marathon's Gulf of Mexico production averaged
71,600 net bpd of liquid hydrocarbons and 112 net mmcfd of natural gas,
representing 53 percent and 14 percent of Marathon's total U.S. liquid
hydrocarbon and natural gas production, respectively. Liquid hydrocarbon and
natural gas production increased by 10,000 net bpd and by 24 net mmcfd,
respectively, from the prior year, mainly due to the ramp up and full year's
production from Viosca Knoll 786 (Petronius) and the addition of Ursa which
Marathon acquired in the December 2000 Sakhalin Energy exchange with Shell. At
year-end 2001, Marathon held working interests in 9 producing fields and 17
platforms, of which 7 platforms are operated by Marathon.
Production from Marathon's interests in the deepwater Gulf accounted for
approximately 93 percent of total Gulf of Mexico production in 2001. Major
components of Marathon's deepwater portfolio include the Marathon-operated
Ewing Bank 873, 917, and 963 and the co-venturer operated Green Canyon 244 and
Viosca Knoll 786.
Alaska - Marathon's production from Alaska averaged 179 net mmcfd of
natural gas in 2001, compared with 160 net mmcfd in 2000. Marathon's primary
focus in Alaska is the expansion of its natural gas business through
exploration, development and marketing.
New Mexico - Production in New Mexico, primarily from the Indian Basin
field, averaged 15,000 net bpd and 150 net mmcfd in 2001, compared with 12,600
net bpd and 121 net mmcfd in 2000. The increase in gas production was
primarily due to ongoing development of the eastern area of the Indian Basin
field and was preceded by the expansion in 2000 of Marathon's Indian Basin Gas
Plant.
Oklahoma - Gas production for 2001 averaged 124 net mmcfd, representing 16
percent of Marathon's total U.S. gas production, compared with 151 net mmcfd
in 2000. The decrease in gas production was primarily due to the decline in
Knox Morrow production.
Texas - Onshore production for 2001 averaged 17,400 net bpd of liquid
hydrocarbons and 111 net mmcfd of natural gas, representing 13 percent of
Marathon's total U.S. liquid hydrocarbon and 14 percent of natural gas
production. Liquid production volumes decreased by 6,000 net bpd from 2000
levels, and gas volumes decreased by 21 net mmcfd from 2000 levels. The volume
decreases were mainly due to natural decline and reduced net volumes from the
Yates field due to the contribution of Yates assets to the MKM joint venture.
Wyoming - Liquid hydrocarbon production for 2001 averaged 24,600 net bpd,
representing 18 percent of Marathon's total U.S. liquid hydrocarbon
production. Average gas production increased to 90 net mmcfd in 2001 compared
to 45 net mmcfd in 2000, as a result of the Pennaco acquisition.
16
International
Marathon holds interests in liquid hydrocarbon and/or natural gas
production in the U.K. North Sea, the U.K. Atlantic Margin, the Irish Celtic
Sea, the Norwegian North Sea, Canada and Gabon. In addition, Marathon has
interests through an equity investee in the Netherlands North Sea and recently
completed an acquisition of interests in Equatorial Guinea, West Africa.
U.K. North Sea - Production from the Brae area averaged 21,700 net bpd of
liquid hydrocarbons in 2001, compared with 26,500 net bpd in 2000. The
decrease is mainly within the Central and East Brae fields, reflecting field
decline.
The Brae A platform and facilities act as the host for the underlying South
Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. The
North Brae field, which is produced via the Brae B platform, and the East Brae
field are gas condensate fields. These fields are produced using the gas
cycling technique, whereby gas is injected into the reservoir for pressure
maintenance, improved sweep efficiency and increased condensate liquid
recovery. Although partial cycling continues, the majority of North Brae gas
is being transferred to the East Brae reservoir for pressure maintenance and
sales.
The strategic location of the Brae A, Brae B and East Brae platforms and
pipeline infrastructure has generated significant third-party processing and
transportation business since 1986. Currently, there are 14 agreements with
third-party fields contracted to use the Brae system. In addition to
generating processing and pipeline tariff revenue, this third-party business
also has a favorable impact on Brae area operations by optimizing
infrastructure usage and extending the economic life of the facilities.
Marathon owns a 41.6 percent interest in the Brae group which owns a 50
percent interest in the Scottish Area Gas Evacuation ("SAGE") system. The
other 50 percent is owned by the Beryl group, which operates the system. The
SAGE system provides pipeline transportation and onshore processing for Brae-
area gas and has a total wet gas capacity of approximately 1.0 bcfd. Pipelines
connect the Brae, Britannia, Beryl and Scott fields to the SAGE gas processing
terminal at St. Fergus in northeast Scotland.
Marathon's total United Kingdom gas sales from all sources averaged 242 net
mmcfd in 2001, compared with 223 net mmcfd in 2000. Of these totals, 234 mmcfd
and 212 mmcfd was Brae-area gas in 2001 and 2000, respectively, and 8 mmcfd
and 11 mmcfd was gas acquired for injection and subsequent resale in 2001 and
2000, respectively.
U.K. Atlantic Margin - Production from the Foinaven fields averaged 24,300
net bpd of liquid hydrocarbons in 2001.
Ireland - Marathon holds a 100 percent working interest in the Kinsale
Head, Ballycotton and Southwest Kinsale fields in the Irish Celtic Sea.
Natural gas sales were 79 net mmcfd in 2001, compared with 115 net mmcfd in
2000. This reduction is due to natural field declines and changes to the
production profile of the Southwest Kinsale field. The Southwest Kinsale field
has been converted to a gas storage reservoir, where gas is injected in the
summer and produced to meet peak demand in the winter.
Norway - In the Norwegian North Sea, Marathon holds a 23.8 percent working
interest in the Heimdal field. Production of the remaining remnant gas from
Heimdal commenced in August 2001 with sales of 5 net mmcfd. Marathon also
holds a 46.904 percent working interest in the Vale field. The Vale single
well sub-sea development will be tied back to the Heimdal platform, with first
production expected early 2002.
Canada - Production in Canada averaged 11,000 bpd and 123 mmcfd in 2001,
compared with 18,400 bpd and 143 mmcfd in 2000. During 2001, Marathon executed
a strategic plan to rationalize operations in Western Canada. As a result,
Marathon disposed of a significant number of non-core conventional oil and gas
properties as well as all heavy oil assets, equating to approximately 127
million BOE of net remaining proved reserves. Annualized production sold
approximated 9,800 net bpd and 30 net mmcfd.
Gabon - Production in Gabon averaged 16,000 net bpd of liquid hydrocarbons
in 2001, compared with 15,800 net bpd in 2000. This increase reflected a full
year of production from the Cap Lopez formation of the Tchatamba South field,
which began production in December 2000, and a full year of production from
the Tchatamba West field, which began production in November 2000. These
additions were partially offset by a reduction in Marathon's net share of
gross production, based on the payout terms of the production sharing contract
with Gabonese authorities.
17
Netherlands - Marathon's 50 percent equity interest in CLAM provides a 5
percent entitlement in the production from 25 gas fields, which provided sales
of 31 net mmcfd of natural gas in 2001, compared with 29 net mmcfd in 2000.
The following tables set forth productive wells and service wells for each
of the last three years and drilling wells as of December 31, 2001.
Gross and Net Wells
2001 Productive Wells(a)
- ---- ------------------------
Service Drilling
Oil Gas Wells(b) Wells(c)
------------ ----------- ----------- ---------
Gross Net Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------
United States.................... 6,550 2,415 4,828 2,935 2,852 856 25 18
Europe........................... 53 20 63 35 27 8 3 1
Other International.............. 508 251 1,352 986 52 25 3 1
------ ----- ----- ----- ----- ----- --- ---
Total Consolidated............. 7,111 2,686 6,243 3,956 2,931 889 31 20
Equity Investees(d).............. 2,002 609 83 4 1,142 243 1 0
------ ----- ----- ----- ----- ----- --- ---
WORLDWIDE........................ 9,113 3,295 6,326 3,960 4,073 1,132 32 20
====== ===== ===== ===== ===== ===== === ===
2000(e) Productive Wells(a)
- ------- ------------------------
Service
Oil Gas Wells(b)
------------ ----------- -----------
Gross Net Gross Net Gross Net
United States.................... 8,013 3,113 2,526 1,275 3,103 976
Europe........................... 54 18 66 34 25 9
Other International.............. 927 665 1,450 1,084 136 109
------ ----- ----- ----- ----- -----
Total Consolidated............. 8,994 3,796 4,042 2,393 3,264 1,094
Equity Investee(d)............... - - 85 5 - -
------ ----- ----- ----- ----- -----
WORLDWIDE........................ 8,994 3,796 4,127 2,398 3,264 1,094
====== ===== ===== ===== ===== =====
1999 Productive Wells(a)
- ---- ------------------------
Service
Oil Gas Wells(b)
------------ ----------- -----------
Gross Net Gross Net Gross Net
United States.................... 8,654 3,205 3,122 1,396 3,617 1,056
Europe........................... 36 14 65 33 18 7
Other International.............. 1,590 754 1,746 1,214 461 133
------ ----- ----- ----- ----- -----
Total Consolidated............. 10,280 3,973 4,933 2,643 4,096 1,196
Equity Investees(d).............. 5 2 83 4 1 -
------ ----- ----- ----- ----- -----
WORLDWIDE........................ 10,285 3,975 5,016 2,647 4,097 1,196
- --------------------------------------------------------------------------------
(a) Includes active wells and wells temporarily shut-in. Of the gross
productive wells, gross wells with multiple completions operated by Marathon
totaled 442, 469 and 478 in 2001, 2000 and 1999, respectively. Information on
wells with multiple completions operated by other companies is not available
to Marathon.
(b) Consist of injection, water supply and disposal wells.
(c) Consist of exploratory and development wells.
(d) Represents MKM and CLAM in 2001, CLAM in 2000 and CLAM and Sakhalin Energy
in 1999.
(e) Certain amounts have been restated.
18
Refining, Marketing and Transportation
Refining, Marketing and Transportation ("RM&T") operations are primarily
conducted by MAP and its subsidiaries, including its wholly-owned
subsidiaries, Speedway SuperAmerica LLC and Marathon Ashland Pipe Line LLC.
Marathon holds a 62 percent interest in MAP and Ashland Inc. holds the
remaining 38 percent interest.
Refining
MAP owns and operates seven refineries with an aggregate refining capacity
of 935,000 barrels of crude oil per day. The table below sets forth the
location and daily throughput capacity of each of MAP's refineries as of
December 31, 2001:
In-Use Refining Capacity
(Barrels per Day)
Garyville, LA............... 232,000
Catlettsburg, KY............ 222,000
Robinson, IL................ 192,000
Detroit, MI................. 74,000
Canton, OH.................. 73,000
Texas City, TX.............. 72,000
St. Paul Park, MN........... 70,000
-------
TOTAL....................... 935,000
=======
MAP's refineries include crude oil atmospheric and vacuum distillation,
fluid catalytic cracking, catalytic reforming, desulfurization and sulfur
recovery units. The refineries have the capability to process a wide variety
of crude oils and to produce typical refinery products, including reformulated
gasoline. MAP's refineries are integrated via pipelines and barges to maximize
operating efficiency. The transportation links that connect the refineries
allow the movement of intermediate products to optimize operations and the
production of higher margin products. For example, naphtha may be moved from
Texas City and Catlettsburg to Robinson where excess reforming capacity is
available, gas oil may be moved from Robinson to Detroit and Catlettsburg
where excess fluid catalytic cracking unit capacity is available, and light
cycle oil may be moved from Texas City to Robinson where excess
desulfurization capacity is available.
MAP also produces asphalt cements, polymerized asphalt, asphalt emulsions
and industrial asphalts. MAP manufactures petroleum pitch, primarily used in
the graphite electrode, clay target and refractory industries. Additionally,
MAP manufactures aromatics, aliphatic hydrocarbons, cumene, base lube oil,
polymer grade propylene and slack wax.
19
During 2001, MAP's refineries processed 929,000 bpd of crude oil and
143,000 bpd of other charge and blend stocks. The following table sets forth
MAP's refinery production by product group for each of the last three years:
Refined Product Yields
(Thousands of Barrels per Day) 2001 2000 1999
- --------------------------------------------------------------------------------
Gasoline...................................................... 581 552 566
Distillates................................................... 286 278 261
Propane....................................................... 22 20 22
Feedstocks & Special Products................................. 69 74 66
Heavy Fuel Oil................................................ 39 43 43
Asphalt....................................................... 76 74 69
----- ----- -----
TOTAL......................................................... 1,073 1,041 1,027
===== ===== =====
Planned maintenance activities requiring temporary shutdown of certain
refinery operating units ("turnarounds") are periodically performed at each
refinery. MAP completed a major turnaround at its Detroit refinery in 2001.
The Garyville, Louisiana coker unit project achieved mechanical completion
in October 2001 and was operating at full production capacity by mid-December
2001. This unit allows for the use of heavier, lower-cost crude and reduces
the production of heavy fuel oil. To supply this new unit, MAP entered into a
multi-year contract with P.M.I. Comercio Internacional, S.A. de C.V. ("PMI"),
an affiliate of Petroleos Mexicanos ("PEMEX"), to purchase approximately
90,000 bpd of heavy Mayan crude oil.
Marketing
In 2001, MAP's refined product sales volumes (excluding matching buy/sell
transactions) totaled 19.3 billion gallons (1,259,000 bpd). Excluding sales
related to matching buy/sell transactions, the wholesale distribution of
petroleum products to private brand marketers and to large commercial and
industrial consumers, primarily located in the Midwest, the upper Great Plains
and the Southeast, and sales in the spot market, accounted for about 65
percent of MAP's refined product sales volumes in 2001. Approximately 47
percent of MAP's gasoline volumes and 82 percent of its distillate volumes
were sold on a wholesale or spot market basis to independent unbranded
customers or other wholesalers in 2001.
20
MAP markets asphalt through owned and leased terminals throughout the
Midwest and Southeast. The MAP customer base includes approximately 900
asphalt paving contractors, government entities (states, counties, cities and
townships) and asphalt roofing shingle manufacturers.
The following table sets forth the volume of MAP's consolidated refined
product sales by product group for each of the last three years:
Refined Product Sales
(Thousands of Barrels per Day) 2001 2000 1999
- --------------------------------------------------------------------------------
Gasoline...................................................... 748 746 714
Distillates................................................... 345 352 331
Propane....................................................... 21 21 23
Feedstocks & Special Products................................. 71 69 66
Heavy Fuel Oil................................................ 41 43 43
Asphalt....................................................... 78 75 74
----- ----- -----
TOTAL......................................................... 1,304 1,306 1,251
===== ===== =====
Matching Buy/Sell Volumes included in above................... 45 52 45
MAP sells reformulated gasoline in parts of its marketing territory,
primarily Chicago, Illinois; Louisville, Kentucky; Northern Kentucky; and
Milwaukee, Wisconsin. MAP also markets low-vapor-pressure gasoline in nine
states.
As of December 31, 2001, MAP supplied petroleum products to about 3,8002002, Marathon and Ashland branded retail outlets located primarily in Michigan,
Ohio, Indiana, Kentucky and Illinois. Branded retail outlets are also located
in Florida, West Virginia, Georgia, Wisconsin, Minnesota, Tennessee, Virginia,
Pennsylvania, North Carolina, South Carolina and Alabama.
In 2001, retail sales of gasoline and diesel fuel were also made through
company-operated outlets by a wholly owned MAP subsidiary, Speedway
SuperAmerica LLC ("SSA"). As of December 31, 2001, this subsidiary had 2,104
retail outlets in 16 states which sold petroleum products and convenience-
store merchandise and services, primarily underhas identified the brand names "Speedway" and
"SuperAmerica". Excluding the travel centers contributed to Pilot Travel
Centers LLC, as described below, SSA's revenuesfollowing obligations totaling $705 million that arise from the saleSeparation of convenience-
store merchandise totaled $2.3 billionUnited States Steel:
Of the total number$705 million, obligations of MAP employees, 21,223$556 million and corresponding receivables from United States Steel were employeesrecorded on Marathon’s consolidated balance sheet. The remaining $149 million was related to off-balance sheet arrangements and contingent liabilities of Speedway SuperAmerica LLC, most of whom were employees at retail
marketing outlets.
Certain hourly employees at the Catlettsburg and Canton refineries are
represented by the Paper, Allied-Industrial, Chemical and Energy Workers
International Union under labor agreements that expired on January 31, 2002.
Negotiations are underway on new collective bargaining agreements. Certain
hourly employees at the Texas City refinery are represented by the same union
under a labor agreement that is scheduled to expire on March 31, 2002. Certain
hourly employees at the St. Paul Park and Detroit refineries are represented
by the International Brotherhood of Teamsters under labor agreements that are
scheduled to expire on May 31, 2002 and January 31, 2003, respectively.
Properties
The location and general character of the principal oil and gas properties,
refineries and gas plants, pipeline systems and other important physical
properties of Marathon are described above. Except for oil and gas producing
properties, which generally are leased, or as otherwise stated, such
properties are held in fee. The plants and facilities have been constructed or
acquired over a period of years and vary in age and operating efficiency. At
the
23
date of acquisition of important properties, titles were examined and opinions
of counsel obtained, but no title examination has been made specifically for
the purpose of this document. The properties classified as owned in fee
generally have been held for many years without any material unfavorably
adjudicated claim.
The basis for estimating oil and gas reserves is set forth in "Consolidated
Financial Statements and Supplementary Data - Supplementary Information on Oil
and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas
Reserves" on pages F-36 and F-37.
Unless otherwise indicated, all reserves shown are as of December 31, 2001.
Property, Plant and Equipment Additions
For property, plant and equipment additions, see "Management's Discussion
and Analysis of Financial Condition, Cash Flows and Liquidity - Capital
Expenditures" on page 37.
United States Steel.
Environmental Matters
Marathon maintains a comprehensive environmental policy overseen by the Corporate Governance and Public Policy Committee of Marathon'sMarathon’s Board of Directors. Marathon'sMarathon’s Health, Environment and Safety organization has the responsibility to ensure that Marathon'sMarathon’s operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Health, Environment and Safety Management Committee, which is comprised of officers of Marathon, is charged with reviewing its overall performance with various environmental compliance programs. Marathon has also formed an Emergency Management Team, composed of senior management, which will oversee the response to any major emergency environmental incident involving Marathon or any of its properties.
Marathon's
Marathon’s businesses are subject to numerous laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act ("CAA"(“CAA”) with respect to air emissions, the Clean Water Act ("CWA"(“CWA”) with respect to water discharges, the Resource Conservation and Recovery Act ("RCRA"(“RCRA”) with respect to solid and hazardous waste treatment, storage and disposal, the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"(“CERCLA”) with respect to releases and remediation of hazardous substances and the Oil Pollution Act of 1990 ("OPA-90"(“OPA-90”) with respect to oil pollution and response. In addition, many states where Marathon operates have similar laws dealing with the same matters.
24
These laws and their associated regulations are subject to frequent change and many of them have become more stringent. In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and impose liability on Marathon for the conduct of others or conditions others have caused, or for Marathon'sMarathon’s acts that complied with all applicable requirements when we performed them. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable, due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been finalized or, in some instances, are undergoing revision. These environmental laws and regulations, particularly the 1990 Amendments to the CAA and its implementing regulations, new water quality standards and stricter fuel regulations, could result in increased capital, operating and compliance costs.
For a discussion of environmental capital expenditures and costs of compliance for air, water, solid waste and remediation, see "Management's“Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies"Contingencies” on page 4043 and "Legal Proceedings"“Legal Proceedings” on page 26.
27.
Marathon has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures are not ultimately reflected in the prices of Marathon'sMarathon’s products and services, Marathon'sMarathon’s operating results will be adversely affected. Marathon believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil or refined products.
In connection with government inspections at some of its refineries,
During the past decade, MAP has received a number of notices of alleged violations of environmental laws from the U.S. Environmental Protection Agency (the "EPA"“EPA”) and state environmental agencies. In some cases, MAP has entered into consent decrees or orders that require it to pay fines or install pollution controls to settle its alleged liability. For example, MAP agreedThe most significant of these examples was MAP’s agreement to settle alleged violations of
24
signed on May 11,in 2001. The agreementconsent decree requires MAP to complete certain agreed upon environmental control programs with total one-time expenditures of approximately $360 million over an eight-year period.
The current estimated cost to complete these programs is approximately $300period, with about $230 million in expendituresremaining over the next sevensix years. The agreementimpact of this settlement on on-going operating expenses is not expected to be material. The decree also requires MAP to perform supplemental environmental projects which are expected towill cost approximately $8$9 million. These supplemental environmental projects are beingwere undertaken as part of this settlement of an enforcement action for alleged CAA violations. In addition, MAP paid a $3.8 million penalty in 2001. MAP believes that this settlement will provide increased permitting and operating flexibility while achieving emission reductions.
Air
Of particular significance to MAP are new EPA regulations that require
substantially reduced sulfur levels in the manufacture of gasoline and diesel fuel. Marathon estimates that MAP'sMAP’s combined capital costs to achieve compliance with these rules could amount to approximately $700$900 million, which includes costs that could be incurred as part of other refinery upgrade projects, between 2002 and 2006. Some factors that could potentially affect MAP'sMAP’s gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating and logistical considerations, further refinement of preliminary engineering studies and project scopes and unforeseen hazards.
In July 1997, the EPA promulgated more stringent revisions to the National Ambient Air Quality Standards ("NAAQS"(“NAAQS”) for ozone and particulate matter. These revisions had been vacated by the Court of Appeals for the District of Columbia and remanded to the EPA for further action. The EPA sought review of the matter by the United States Supreme Court, and the Supreme Court heard the case in the fall of 2000. On February 27, 2001, the Supreme Court affirmed in part, reversed in part and remanded the case to the EPA to develop a reasonable interpretation of the nonattainmentnon-attainment implementation provisions insofar as they relate to the revised ozone NAAQS. On remand, the EPA stood firm on the new eight-hour ozone standard and recently stated its intention to promulgate a final rule by December 2003, but another part of this case remains with the D.C. Circuit Court of Appeals for further determination. Additionally, in 1998, the EPA published a nitrogen oxide ("NOx"(“NOx”) State Implementation Plan ("SIP"(“SIP”) call, which would require some 22approximately 20 states, including many states where Marathon has operations, to revise their SIPs to reduce NOx emissions. In December 1999, the EPA granted a petition from several northeastern states requesting that stricter NOx standards be adopted byrequired of “upwind” midwestern states, including several states where Marathon has refineries. The impact of the revised NAAQS and NOx standards could be significant to Marathon, but the potential financial effects cannot be reasonably estimated until the EPA takes further action on the revised ozone NAAQS (along with any further judicial review) and the states, as necessary, develop and implement revised SIPs in response to the revised NAAQS and NOx standards.
25
Water
Marathon maintains numerous discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA and has implemented systems to oversee its compliance efforts. In addition, Marathon is regulated under OPA-90, which amended the CWA. Among other requirements, OPA-90 requires the owner or operator of a tank vessel or a facility to maintain an emergency plan to respond to releases of oil or hazardous substances. Also, in case of such releases OPA-90 requires responsible companies to pay resulting removal costs and damages, provides for substantial
civil penalties and imposes criminal sanctions for violations of its provisions.
Additionally, OPA-90 requires that new tank vessels entering or operating in domesticU.S. waters be double-hulleddouble hulled and that existing tank vessels that are not double-hulled be retrofitted or removed from domesticU.S. service, according to a phase-out schedule. MostAs of December 31, 2002, all of the barges used in MAP'sMAP’s river transportation operations meet the double-hulled requirements of OPA-90. Single-hulled barges
owned and operated by MAP are in the process of being phased out. Displaced
single-hulled barges will be divested or recycled into docks or floats within
MAP's system.
Marathon operates facilities at which spills of oil and hazardous substances could occur. Several coastal states in which Marathon operates have passed state laws similar to OPA-90, but with expanded liability provisions, including provisions for cargo owner responsibility as well as ship owner and operator responsibility. Marathon has implemented emergency oil response plans for all of its components and facilities covered by OPA-90.
Solid Waste
Marathon continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of underground storage tanks ("USTs"(“USTs”) containing regulated substances. Since the EPA has not yet promulgated implementing regulations for all provisions of RCRA and has not yet made clear the
25
Remediation
Marathon owns or operates certain retail outlets where, during the normal course of operations, releases of petroleum products from USTs have occurred. Federal and state laws require that contamination caused by such releases at these sites be assessed and remediated to meet applicable standards. The enforcement of the UST regulations under RCRA has been delegated to the states, which administer their own UST programs. Marathon'sMarathon’s obligation to remediate such contamination varies, depending on the extent of the releases and the stringency of the laws and regulations of the states in which it operates. A portion of these remediation costs may be recoverable from the appropriate state UST reimbursement fund once the applicable deductible has been satisfied. Accruals for remediation expenses and associated reimbursements are established for sites where contamination has been determined to exist and the amount of associated costs is reasonably determinable.
As a general rule, Marathon and Ashland retained responsibility for certain remediation costs arising out of the prior ownership and operation of businesses transferred to MAP. Such continuing responsibility, in certain situations, may be subject to threshold or sunset agreements, which gradually diminish this responsibility over time.
Properties
The location and general character of the principal oil and gas properties, refineries and gas plants, pipeline systems and other important physical properties of Marathon have been described previously. Except for oil and gas producing properties, which generally are leased, or as otherwise stated, such properties are held in fee. The plants and facilities have been constructed or acquired over a period of years and vary in age and operating efficiency. At the date of acquisition of important properties, titles were examined and opinions of counsel obtained, but no title examination has been made specifically for the purpose of this document. The properties classified as owned in fee generally have been held for many years without any material unfavorably adjudicated claim.
26
The basis for estimating oil and gas reserves is set forth in “Consolidated Financial Statements and Supplementary Data – Supplementary Information on Oil and Gas Producing Activities – Estimated Quantities of Proved Oil and Gas Reserves” on pages F-40 through F-42.
Property, Plant and Equipment Additions
For property, plant and equipment additions, see “Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity – Capital Expenditures” on page 38.
Employees
Marathon had 28,166 active employees as of December 31, 2002, including 25,166 MAP employees. Of the total number of MAP employees, 18,705 were employees of Speedway SuperAmerica LLC, most of whom were employees at retail marketing outlets.
Certain hourly employees at the Catlettsburg and Canton refineries are represented by the Paper, Allied-Industrial, Chemical and Energy Workers International Union under labor agreements that expire on January 31, 2006. The same union represents certain hourly employees at the Texas City refinery under a labor agreement that expires on March 31, 2006. The International Brotherhood of Teamsters represents certain hourly employees at the St. Paul Park and Detroit refineries under labor agreements that are scheduled to expire on May 31, 2006 and January 31, 2007, respectively.
Available Information
Our Internet address is www.marathon.com. We make available, free of charge through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the SEC.
Marathon is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are included below in this discussion. The ultimate resolution of these contingencies could, individually or in the aggregate, be material. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.
Natural Gas Royalty Litigation
Marathon was served in two qui tam cases, which allege that federal and Indian lessees violated the False Claims Act with respect to the reporting and payment of royalties on natural gas and natural gas liquids. The first case,U.S. ex rel Jack J. Grynberg v. Alaska Pipeline Co., et al.al. is primarily a gas measurement case, and the second case,U.S. ex rel Harrold e. Wright vv. Agip Petroleum Co. et al,is primarily a gas valuation case. These cases assert that false claims have been filed by lessees and that penalties, damages and interest total more than $25 billion. The Department of Justice has announced that it would intervene or has reserved judgment on whether to intervene against specified oil and gas companies and also announced that it would not intervene against certain other defendants including Marathon. In July 2001, the court in the consolidated proceeding denied defendants'defendants’ motions to dismiss. The matters are in the discovery phase and Marathon intends to vigorously defend these cases.
Cajun Express Arbitration
In September, 2002, Marathon canceledsettled its pending arbitration with Transocean Sedco Forex Inc. arising from Marathon’s cancellation of the Cajun Express rig contract on July 5, 2001. Transocean’s July 19, 2001 for
persistent non-performance. Transocean Sedco Forex Inc. gave notice of its demand for arbitration on July 19, 2001 in which it sought net lost revenue of an unspecified amount. The contract may have generated $90 million dollars in gross revenues over the remainder of the 18 month period. Arbitration is
scheduled for May 13, 2002The settlement terms included payment of a portion of the disputed claim resulting in Houston, Texas before one arbitrator applying
the American Arbitration Association commercial rules. Marathon believes it
properly canceled the contract and intends to vigorously defend against this
claim.
a $9 million after-tax loss.
27
Environmental Proceedings
The following is a summary of proceedings involving Marathon that were pending or contemplated as of December 31, 2001,2002, under federal and state environmental laws. Except as described herein, it is not possible to predict accurately the ultimate outcome of these matters; however, management'smanagement’s belief set forth in the first paragraph under Item 3. "Legal Proceedings"“Legal Proceedings” above takes such matters into account.
Claims under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"(“CERCLA”) and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expeditefacilitate the cleanup of hazardous substances without regard to fault. Potentially responsible parties ("PRPs"(“PRPs”) for each site include present and former owners and operators of, transporters to and generators of the 26
the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, Marathon is unable to reasonably estimate its ultimate cost of compliance with CERCLA.
Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from those stated in the forward-looking statements.
At December 31, 2001,2002, Marathon had been identified as a PRP at a total of 1311 CERCLA waste sites. Based on currently available information, which is in many cases preliminary and incomplete, Marathon believes that its liability for cleanup and remediation costs in connection with all but one of these sites will be under $1 million per site, and most will be under $100,000. Marathon believes that its liability for cleanup and remediation costs in connection with the one remaining site will be under $4 million.
In addition, there are threefour sites where Marathon has received information requests or other indications that it may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability.
There are also 11482 additional sites, excluding retail marketing outlets, related to Marathon where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 1310 were associated with properties conveyed to MAP by Ashland which have retained liability for all costs associated with remediation. Based on currently available information, which is in many cases preliminary and incomplete, Marathon believes that its liability for cleanup and remediation costs in connection with 1812 of these sites will be under $100,000 per site, 3228 sites have potential costs between $100,000 and $1 million per site, 1213 sites may involve remediation costs between $1 million and $5 million per site and 76 sites have incurred remediation costs of more than $5 million per site. Of the 76 sites, only 1 site as described in the following paragraph has future costs that are estimated to exceed $5 million. There are 3213 sites with insufficient information to estimate anyfuture remediation costs.
There is one site that involves a remediation program in cooperation with the Michigan Department of Environmental Quality at a closed and dismantled refinery site located near Muskegon, Michigan. During the next 10 to 20 years, Marathon anticipates spending less than $7 million at this site. Expenditures in 20022003 are expected to be approximately $500,000. Additionally, negotiations are taking place with the Michigan Department of Environmental Quality to eventually perform a risk-based closure on this site.
In May
On December 3, 2001, MarathonIllinois EPA (“IEPA”) issued a NOV to MAP arising out of the sinking of a floating roof on a storage tank at a Martinsville, Illinois facility. A storm and heavy rainfall caused the floating roof to sink. MAP settled, in a consent decree, EPA allegations
that the Robinson refinery did not qualify forbelieves it may have an exemption under the National
Emission Standards for Benzene Waste Operations pursuantemergency or malfunction defense. This matter has been referred to the CAA. The
government had alleged inIllinois Attorney General’s office for enforcement proceedings.
In March, 2002, MAP attended a federal court lawsuit that the refinery's Total
Annual Benzene releases exceeded the limitation of 10 megagrams per year, and
as a result, the refinery was in violation of the benzene waste emission
control, record keeping, and reporting requirements. The consent decree was
approved by the court on July 26, 2001 and requires Marathon and MAP to pay a
combined $1.6 million civil penalty and install various controls and other
improvements. Marathon and MAP were also required to perform $125,000 in
supplemental environmental projects, with these projects undertaken in
connectionmeeting with the Illinois EPA concerning MAP’s self reporting of possible emission exceedences and permitting issues related to some storage tanks at MAP’s Robinson, Illinois facility. In late April, MAP submitted to IEPA a comprehensive settlement of an enforcement action undertakenproposal which was rejected by the
United States.
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and
Robinson refineries, covering complianceIEPA. We have had subsequent discussions with the CAA, the CWA, reporting
obligations under the Emergency Planning and Community Right to Know Act,
CERCLAIEPA and the handling of process waste. The EPA served a number of Notices
of Violation ("NOV")Illinois Attorney General’s office and Findings of Violation as a result of these
inspections, but these allegations were resolved as part ofanticipate additional meetings and discussions in the New Source
Review consent decree which MAP agreed to on May 11, 2001. MAP's settlement
with the EPA includes all of MAP's refineries and commits MAP to specific
control technologies and implementation schedules for environmental
expenditures and improvements to MAP's refineries over approximately an eight
year period. coming months.
28
The current estimated cost to complete these programs is
approximately $300 million in expenditures over the next seven years. MAP is
also committed to the performance of about $8 million in supplemental
environmental projects and has paid an aggregate civil penalty in 2001 of $3.8
million, as part of this settlement of an enforcement action for alleged CAA
violations. MAP believes that this settlement will provide MAP with increased
permitting and operating flexibility while achieving significant emission
reductions. The court approved this consent decree on August 28, 2001.
27
In 2000, the Kentucky Natural Resources and Environmental Cabinet ("Cabinet") sent(the “Cabinet) issued the MAP Catlettsburg, Refining, LLCKentucky refinery a NOV seeking a $150,000Notice of Violation regarding the Tank 845 rupture which occurred in November of 1999. The tank rupture caused the tank’s contents to be released onto the ground and adjoining retention area. MAP has been involved in discussions with the Cabinet to resolve this matter through an agreed Administrative Order. MAP is optimistic that this matter may be resolved in 2003 and the civil penalty for a tank rupture and spill atwill be in the Catlettsburg refinery. This matter
is pending.
range of $90,000 to $120,000.
In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in the form of an Agreed-to Administrative Order which was finalized and entered in January 2002 and required payment of a $170,000 penalty and reimbursement of past response costs up to $131,000.
MAP entered into a Consent Decree in July of 2002 with the State of Ohio regarding air compliance matters at its Canton refinery during both Ashland’s and MAP’s term of ownership and operation. The Consent Decree required $350,000 in payments which included a penalty of $216,500, several Supplemental Environmental Projects and the funding of a community notification system. The Consent Decree is being implemented.
In July, 2002, Marathon received a Notice of Enforcement from the State of Texas for alleged excess air emissions from its Yates Gas Plant and production operations on its Kloh lease. The Notices did not compute a penalty or fine for these pending enforcement actions.
Item 4. Submission of Matters to a Vote of Security Holders
A description of the matters voted upon by the stockholders of USX
Corporation at an October 25, 2001 special meeting was reported in USX
Corporation's Form 10-Q for the quarter ended September 30, 2001.
Not applicable.
PART II
Item 5. Market for Registrant'sRegistrant’s Common Equity and Related Stockholder Matters
The principal market on which the Company'sCompany’s common stock is traded is the New York Stock Exchange. Information concerning the high and low sales prices for the common stock as reported in the consolidated transaction reporting system and the frequency and amount of dividends paid during the last two years is set forth in "Selected“Selected Quarterly Financial Data (Unaudited)"” on page F-33.
F-37.
As of January 31, 2002,2003, there were 69,26464,857 registered holders of Marathon common stock.
The Board of Directors intends to declare and pay dividends on Marathon common stock based on the financial condition and results of operations of Marathon Oil Corporation, although it has no obligation under Delaware law or the Restated Certificate of Incorporation to do so. In determining its dividend policy with respect to Marathon common stock, the Board will rely on the financial statements of Marathon. Dividends on Marathon common stock are limited to legally available funds of Marathon.
On January 29, 2003, Marathon amended the Rights Agreement, dated as of September 28,
Item 6. Selected Financial Data(a)
Data
See page F-46.
29
Marathon Oil Corporation ("Marathon"(“Marathon”). Marathon, formerly USX Corporation, is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned subsidiary, Marathon Ashland Petroleum LLC ("MAP"(“MAP”); and other energy related businesses. The Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements.
Marathon's
Prior to December 31, 2001, financialMarathon had two outstanding classes of common stock: USX–Marathon Group common stock, which was intended to reflect the performance benefited from strong worldwide
natural gas pricesof Marathon’s energy business, and domestic refining margins. However, laterUSX–U. S. Steel Group common stock (“Steel Stock”), which was intended to reflect the performance of Marathon’s steel business. On December 31, 2001, USX Corporation disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation (“United States Steel”) to holders of Steel Stock in the year,
performance was negatively impacted by lower crude oilexchange for all outstanding shares of Steel Stock on a one-for-one basis (the “Separation”) and natural gas prices,
as well as lower downstream margins, primarily from decreased demand caused by
the general downturn in the global economy and warmer than normal weather.
changed its name to Marathon Oil Corporation.
Certain sections of Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting the businesses of Marathon. These statements typically contain words such as "anticipates"“anticipates”, "believes"“believes”, "estimates"“estimates”, "expects"“expects”, "targets"“targets” or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor"“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, thatwhich could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of Marathon, see "Disclosures“Disclosures Regarding Forward-Looking Statements"Statements” on page 2.
Management's
Unless specifically noted, amounts for MAP do not reflect any reduction for the 38 percent interest held by Ashland Inc. (“Ashland”).
Management’s Discussion and Analysis of Critical Accounting Policies
Estimates
The preparation of consolidated financial statements for Marathonin accordance with generally accepted accounting principles requires management to make estimates and judgmentsassumptions that affect the reported amounts reported inof assets and liabilities, the primary financial statementsdisclosure of contingent assets and liabilities at year end and the related footnote disclosures.
Marathon considersreported amounts of revenues and expenses during the following accounting policies to be most significantly
impacted byyear. Actual results could differ from the estimates and judgmentsassumptions used.
Certain accounting estimates are considered to be critical a) if such estimates require assumptions about matters that are dependent on events remote in time that may or may not occur, are not capable of being readily calculated from generally accepted methodologies, or cannot be derived with some degree of precision from available data and b) if different estimates that reasonably could have been used or changes in the preparationestimate that are reasonably likely to occur would have had a material impact on the presentation of its
consolidated financial statements.
Deferred Taxescondition, changes in financial condition or results of operations.
Estimated Net Recoverable Quantities of Oil and gas exploration and production is a global business. As a result,
Marathon is subject to taxation on its income in numerous jurisdictions. State
and local income taxes are deductible and foreign income taxes in certain
circumstances are creditable against U. S. federal income taxes. These
interrelationships complicate the assessment of the realizability of deferred
income tax assets. Marathon considers future taxable income in making such
assessments. Numerous judgments and assumptions are inherent in the
determination of future taxable income, including factors such as future
operating conditions (particularly as related to prevailing oil prices). The
30
judgments and assumptions used in determining future taxable income are
consistent with those used for other financial statement purposes, including
the determination of possible impairment of long-lived assets held and used.
Additionally, generally accepted accounting principles require that Marathon
consider any prudent and feasible tax planning strategies that would minimize
the amount of deferred tax liabilities recognized or the amount of any
valuation allowance recognized against deferred tax assets. The principal tax
planning strategy available to Marathon relates to the permanent reinvestment
of the earnings of foreign subsidiaries. As a result of the complexities
inherent in multiple tax jurisdictions and the focus of generally accepted
accounting principles on the proper measurement of deferred taxes recorded on
the balance sheet, deferred tax adjustments included in the provision for
income taxes do not necessarily correspond with amounts reported in income
before income taxes.
Property, Plant and Equipment
Gas
Marathon uses the successful efforts method of accounting for its oil and gas producing activities. The successful efforts method inherently relies upon the estimation of proved reserves, which includes provedboth developed and proved
undeveloped volumes.undeveloped. The existence and the estimated amount of proved reserves affects, among other things, whether or not certain costs are capitalized or expensed, the amount and timing of costs depleted or amortized into income and whether
or not the costs capitalizedpresentation of supplemental information on oil and gas producing activities. Both the expected future cash flows to be generated by oil and gas producing properties and the expected future taxable income available to realize the value of deferred tax assets, which are discussed further below, rely in the balance sheet should be impaired.
Marathon'spart on estimates of net recoverable quantities of oil and gas.
Marathon’s estimation of total proved reservesnet recoverable quantities of oil and gas is a highly technical process performed primarily by in-house reservoir engineers and geoscience professionals. The actual recoverability of hydrocarbons can vary from estimated amounts. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of proved reservesnet recoverable quantities of oil and gas are subject to potentially substantial changes, either positively or negatively, as additional information becomes available and as contractual, economic and economicpolitical conditions change.
30
Expected Future Cash Flows Generated by Certain Oil and Gas Producing Properties
Marathon adheresmust estimate the expected future cash flows to Statement of Financial Accounting Standard ("SFAS") No.
19 for recognizing any impairment of capitalized costs relating to unproved
property investments. Generally, the greatest portion of these costs relate to
the acquisition of leasehold interests. The costs incurred are capitalizedbe generated by its oil and periodically evaluated as to recoverability, based on changes brought about by
general economic factors and potential shiftsgas producing properties in the business strategy
employed by management. Marathon considers a combination of time and geologic
factorsorder to evaluate the possible need forto impair the carrying value of those properties. An impairment of these capitalized costs.
Contingent Liabilities
Marathon accrues liabilities for income and other tax deficiencies in
accordance with SFAS No. 5. Such contingent obligations are assessed regularly
by Marathon's in-house tax legal counsel and advisers. In certain
circumstances, outside legal counsel is utilized. Each potential issue is
assessed individually, although accrued liabilities are aggregated and
recorded by jurisdiction and by typeany one of tax. Although it is difficult to
predict with any degree of certainty the ultimate outcome of examinations of
open tax years, management believes that the recorded amounts are reasonable.
Marathon accrues its environmental remediation liabilities in accordance
with American Institute of Certified Public Accountants ("AICPA") Statement of
Position 96-1. Liabilities for litigation claims and settlements are accrued
in accordance with SFAS No. 5. Such contingent obligations are assessed
regularly by Marathon's in-house legal counsel. In certain circumstances,
outside legal counsel is utilized. Both environmental remediation liabilities
and liabilities for litigation claims and settlements are recognized basedMarathon’s three largest fields could have a material impact on the likelihoodpresentation of a third party having a viable claim against Marathon's
assets. Each potential liability is assessed individually. For additional
information on environmental liabilities, see Note 3 to the Financial
Statements.
Employee Related Benefits
Accounting for pensions and other postretirement benefits involves several
assumptions relating to expected rates of return on plan assets, determination
of discount rates for remeasuring plan obligations, determination of inflation
rates regarding compensation levels and health care cost projections. Marathon
develops its demographics and utilizes the work of actuaries to assist with
the measurement of employee related obligations. The assumptions used vary
from year-to-year, which will affect futurefinancial condition, changes in financial condition or results of operations. Any
differences among these assumptions and Marathon's actual return on assets,
financial market-based discount rates,Those fields – the Alba field offshore Equatorial Guinea, the Yates field in west Texas and the Brae Area Complex offshore the United Kingdom – comprise approximately 46 percent of Marathon’s total proved oil and gas reserves. The expected future cash flows from these properties require assumptions about matters such as the prevailing level of cost sharing
provisionsfuture oil and gas prices, estimated recoverable quantities of oil and gas, expected field performance and the political environment in the host country.
Long-lived assets held and used in operations must be impaired when the carrying value is not recoverable and exceeds the fair value. Recoverability of the carrying value is determined by comparison with the undiscounted expected future cash flows to be generated by those assets. As of December 31, 2002, no impairment in the value of the Alba field or the Brae Area Complex was indicated.
Marathon’s interest in the Yates field is held through its investment in MKM Partners L.P., which is accounted for under the equity method. Equity method investments must be impaired when a loss in value occurs that is other than a temporary decline. As of December 31, 2002, no impairment in the value of MKM Partners L.P. was indicated.
Expected Future Taxable Income
Marathon must estimate its expected future taxable income in order to assess the realizability of its deferred income tax assets. As of December 31, 2002, Marathon reported net deferred tax assets of $1.103 billion, which represented gross assets of $1.585 billion net of valuation allowances of $482 million.
Numerous assumptions are inherent in the estimation of future taxable income, including assumptions about matters that are dependent on future events, such as future operating conditions (particularly as related to prevailing oil and gas prices) and future financial conditions. The estimates and assumptions used in determining future taxable income are consistent with those used in Marathon’s internal budgets, forecasts and strategic plans.
In determining its overall estimated future taxable income for purposes of assessing the need for additional valuation allowances, Marathon considers proved and risk-adjusted probable and possible reserves related to its existing producing properties, as well as estimated quantities of oil and gas related to undeveloped discoveries if, in the judgment of Marathon management, it is likely that development plans will also impactbe approved in the foreseeable future. In assessing the propriety of releasing an existing valuation allowance, Marathon considers the preponderance of evidence concerning the realization of the deferred tax asset.
Additionally, Marathon must consider any prudent and feasible tax planning strategies that might minimize the amount of deferred tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets, if management has the ability to implement these strategies and the expectation of implementing these strategies if the forecasted conditions actually occurred. The principal tax planning strategy available to Marathon relates to the permanent reinvestment of the earnings of foreign subsidiaries. Assumptions related to the permanent reinvestment of the earnings of foreign subsidiaries are reconsidered annually to give effect to changes in Marathon’s portfolio of producing properties and in its tax profile.
Marathon’s deferred tax assets include $393 million relating to Norwegian net operating loss carryforwards (“NOLs”). Marathon has established a valuation allowance of $363 million against these NOLs. Currently Marathon generates income from the Heimdal and Vale fields in the Norwegian North Sea. Marathon acquired additional interests in Norway in 2001 and 2002. These interests currently have no proved reserves and generate no income, although some interests hold undeveloped discoveries. To the extent that these newly acquired interests demonstrate the capability to generate future resultstaxable income, Marathon may be able to release some or all of operations.
31
Management'sits $363 million valuation allowance in future periods.
Net Realizable Value of Receivables from United States Steel
As described further in “Management’s Discussion and Analysis of IncomeFinancial Condition, Cash Flows and Operations
RevenuesLiquidity – Obligations Associated with the Separation of United States Steel” on page 41, Marathon remains obligated (primarily or contingently) for certain debt and Other Incomeother financial arrangements for eachwhich United States Steel has assumed responsibility for repayment under the terms of the last three years are summarized
inSeparation. As of December 31, 2002,
31
Marathon has reported receivables from United States Steel of $556 million, representing the following table:
Marathon may continue to be exposed to the joint venture formationrisk of nonpayment by United States Steel on a significant portion of this receivable until December 31, 2011. Of the $556 million, $469 million, or 84 percent, relates to industrial revenue bonds that are due in 2011 or later. The Financial Matters Agreement between Marathon and Kinder Morgan Energy Partners, L.P.
E&P segment revenues decreased by $107 million in 2001 from 2000 following
an increase of $1,583 million in 2000 from 1999. The decrease in 2001 was
primarily due to lower domestic liquid hydrocarbon production and prices,
partially offset by higher domestic natural gas prices and production, and
gains from derivative activities. The increase in 2000 was primarily due to
higher worldwide liquid hydrocarbon and natural gas prices, partially offset
by lower domestic liquid hydrocarbon and worldwide natural gas production.
RM&T segment revenues decreased by $1,493 million in 2001 from 2000
following an increase of $8,773 million in 2000 from 1999. The decrease in
2001 primarily reflected lower refined product prices. The increase in 2000
primarily reflected higher refined product prices and increased refined
product sales volumes.
Other energy related businesses segment revenues increased by $224 million
in 2001 from 2000 following an increase of $856 million in 2000 from 1999. The
increase in 2001 reflected higher natural gas prices and crude oil resale
activity, partially offset by lower crude oil prices and natural gas resale
activity. The increase in 2000 reflected higher natural gas and crude oil
resale activity accompanied by higher crude oil and natural gas prices.
For additional discussion of revenues, see Note 10 toUnited States Steel provides that, on or before the Financial
Statements.
32
Income from operations for eachtenth anniversary of the last three yearsSeparation, which is summarized in
the following table:
(Dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
E&P
Domestic............................................. $1,124 $1,111 $ 494
International........................................ 297 420 124
------ ------ ------
Income of E&P reportable segment..................... 1,421 1,531 618
RM&T(a) 1,914 1,273 611
Other energy related businesses........................ 60 42 61
------ ------ ------
Income for reportable segments....................... 3,395 2,846 1,290
Items not allocated to reportable segments:
Administrative expenses............................... (162) (136) (108)
Gain on offshore lease resolution with U.S.
Government........................................... 59 - -
Gain/(loss) on disposal of assets(b).................. (221) 124 (36)
Charge on formation of MKM Partners L.P. JV(c)........ - (931) -
Impairment of oil and gas properties, and assets held
for sale(d).......................................... - (197) (16)
Gain (loss) on ownership change in MAP................ (6) 12 17
IMV reserve adjustment(e)............................. (72) - 551
Reorganization charges including pension settlement
(loss)/gain & benefit accruals(f).................... (14) (70) 15
SG&A costs applicable to Steel Stock.................. (25) (18) (12)
------ ------ ------
Total income from operations........................ $2,954 $1,630 $1,701
- -------------------------------------------------------------------------------
(a) Amounts include 100 percent of MAP.
(b) In 2001, represents a loss on the sale of certain Canadian assets. The net
gain in 2000 represents a gain on the disposition of Angus/Stellaria, a gain
on the Sakhalin exchange, a gain on the sale of Speedway SuperAmerica LLC
("SSA") non-core stores, and a loss on the saleDecember 31, 2011, United States Steel will provide for Marathon’s discharge from any remaining liability under any of the Howard Glasscock
field.assumed industrial revenue bonds.
As of December 31, 2002, Marathon’s cash-adjusted debt-to-capital ratio (which includes debt for which United States Steel has assumed responsibility for repayment) was 44.5 percent. The net loss in 1999 represents a loss onassessment of Marathon’s liquidity and capital resources may be impacted by expectations concerning United States Steel’s ability to satisfy its obligations.
For instance, if the saledebt for which United States Steel has assumed responsibility for repayment were excluded from the computation, Marathon’s cash-adjusted debt-to-capital ratio as of Scurlock Permian
LLC, certain domestic production properties, and Carnegie Natural Gas Company
and affiliated subsidiaries, and a gain on certain Egyptian properties.
(c) Represents a charge related toDecember 31, 2002 would have been approximately 41 percent. On the joint venture formation between
Marathon and Kinder Morgan Energy Partners, L.P.
(d) Represents in 2000, an impairment of certain oil and gas properties,
primarily in Canada, and assets held for sale. Represents in 1999, an
impairment of certain domestic properties.
(e) The inventory market valuation ("IMV") reserve reflectsother hand, if the extent to
which the recorded LIFO cost basis of crude oil and refined products
inventories exceeds net realizable value. For additional discussion of the
IMV, see Note 19 to the Financial Statements.
(f) Represents reorganization charges in 2001 and 2000 and pension settlement
gains/(losses) and various benefit accruals resulting from retirement plan
settlements and voluntary early retirement programs in 2000 and 1999. 2001
reorganization charges include costs related to the Separationreceivable from United States Steel.
33
Income for reportable segments increased by $549 millionSteel had been written off as unrealizable, the cash-adjusted debt-to-capital ratio as of December 31, 2002 would have been approximately 46 percent. (If United States Steel were not able to satisfy its obligations, other adjustments in 2001 from 2000,
mainly dueaddition to a higher refining and wholesale marketing margin. Income for
reportable segments increased by $1,556 in 2000 from 1999, mainly due to
higher worldwide liquid hydrocarbon and natural gas prices, and higher refined
product margins, partially offset by decreased natural gas volumes.
Average Volumes and Selling Prices
2001 2000 1999
- ------------------------------------------------------------------------------
(thousands of barrels per day)
Net liquids production(a) - U.S. 127 131 145
- International(b) 73 65 62
------- ------- -------
- Total consolidated 200 196 207
- Equity investees(c) 9 11 1
------- ------- -------
- Worldwide 209 207 208
(millions of cubic feet per day)
Net natural gas production - U.S. 793 731 755
- International - equity 441 470 489
- International - other(d) 8 11 16
------- ------- -------
- Total consolidated 1,242 1,212 1,260
- Equity investee(e) 31 29 36
------- ------- -------
- Worldwide 1,273 1,241 1,296
- ------------------------------------------------------------------------------
(dollars per barrel)
Liquid hydrocarbons(a)(f) - U.S. $ 20.62 $ 25.55 $ 16.01
- International 23.26 26.54 16.90
(dollars per mcf)
Natural gas(f) - U.S. $ 3.69 $ 3.49 $ 2.07
- International - equity 2.97 2.76 1.90
(thousands of barrels per day)
Refined products sold(g) 1,304 1,306 1,251
Matching buy/sell volumes included in above 45 52 45
- ------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas liquids.
(b) Represents equity tanker liftings, truck deliveries and direct deliveries.
(c) Represents Marathon's equity interest in MKM Partners L.P. ("MKM") and
CLAM Petroleum B.V. ("CLAM") for 2001 and Sakhalin Energy Investment Company
Ltd. ("Sakhalin Energy") and CLAM for 2000 and 1999.
(d) Represents gas acquired for injection and subsequent resale.
(e) Represents Marathon's equity interest in CLAM.
(f) Prices exclude gains/losses from hedging activities, equity investees and
gas purchased for injection and subsequent resale.
(g) Refined products sold and matching buy/sell volumes include 100 percent of
MAP.
Domestic E&P income increased by $13 million in 2001 from 2000 following an
increase of $617 million in 2000 from 1999. The increase in 2001 was primarily
due to gains from derivative activities and higher natural gas volumes and
prices, partially offset by lower liquid hydrocarbon prices.
The increase in 2000 was primarily due to higher liquid hydrocarbon and
natural gas prices, partially offset by lower liquid hydrocarbon and natural
gas volumes due to natural field declines and asset sales, and losses from
derivative activities.
International E&P income decreased by $123 million in 2001 from 2000
following an increase of $296 million in 2000 from 1999. The decrease in 2001
was primarily due to lower liquid hydrocarbon prices, increased depreciation
expense due primarily to 2000 reserve write downs and lower natural gas
volumes, partially offset by increased natural gas prices, lower dry well
expense, and lower foreign royalty and geophysical contract expenditures.
The increase in 2000 was mainly due to higher liquid hydrocarbon and
natural gas prices, higher liquid hydrocarbon liftings, primarily in Russia
and Gabon, and lower dry well expense, partially offset by lower natural gas
volumes.
34
RM&T segment income increased by $641 million in 2001 from 2000 following
an increase of $662 million in 2000 from 1999. The increase in 2001 was
primarily due to a higher refining and wholesale marketing gross margin
partially offset by lower SSA gasoline and distillate sales volumes and
increased refining and wholesale marketing transportation expense.
The increase in 2000 was primarily due to higher refined product margins,
partially offset by higher operating expenses for SSA, higher administrative
expenses including increased variable pay plan costs, and higher
transportation costs.
Other energy related businesses segment income increased by $18 million in
2001 following a decrease of $19 million in 2000 from 1999. The increase in
2001 was primarily a result of higher crude oil purchase and resale activity
accompanied by increased margins and losses from derivative activities
recorded in 2000. The decrease in 2000 was primarily due to losses from
derivative activities and the reversal of pipeline abandonment accruals
recorded in 1999.
Items not allocated to reportable segments:
IMV reserve adjustment - When Marathon was acquired in March 1982, crude
oil and refined product prices were at historically high levels. In applying
the purchase method of accounting, crude oil and refined product inventories
were revalued by reference to current prices at the time of acquisition, and
this became the new LIFO cost basiswrite-off of the inventories. receivable may be necessary.)
Net Realizable Value of Inventories
Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, when the cost basis of Marathon’s inventories of liquid hydrocarbons and refined petroleum products exceed market value, Marathon establishedestablishes an IMVinventory market valuation (“IMV”) reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustmentsAdjustments to the IMV reserve result in noncash charges or credits to income from operations.
When Marathon Oil Company was acquired in March 1982, prices of liquid hydrocarbons and refined petroleum products were at historically high levels. In applying the purchase method of accounting, inventories of liquid hydrocarbons and refined petroleum products were revalued by reference to current prices at the time of acquisition. This became the new LIFO cost basis of the inventories.
When Marathon acquired the crude oil and refined petroleum product inventories associated with Ashland'sAshland’s RM&T operations on January 1, 1998, Marathon established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered.
Since the prices of liquid hydrocarbons and refined petroleum products do not correlate perfectly, there is no absolute price threshold below which an IMV adjustment will be recognized. However, generally, Marathon will establish an IMV reserve when crude oil prices fall below $21 per barrel. As of December 31, 2002, no IMV reserve had been recognized.
Contingent Liabilities
Marathon accrues contingent liabilities for income and other tax deficiencies, environmental remediation, product liability claims and litigation claims when such contingencies are probable and estimable. These contingent obligations are assessed regularly by Marathon’s in-house legal counsel. In certain circumstances, outside legal counsel is utilized. For additional information on contingent liabilities, see “Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies” on page 43.
Pensions and Other Postretirement Benefit Obligations
Accounting for these benefits involves assumptions related to the appropriate discount rate for measuring the present value of plan obligations, the expected rates of return on plan assets, the rate of future increases in
32
compensation levels and health care cost projections. Marathon develops its demographics and utilizes the work of outside actuaries to assist in the measurement of these obligations.
Effective December 31, 2002, Marathon revised the actuarial assumptions related to its pension and other postretirement benefit plans. The discount rate was lowered from 7 percent to 6.5 percent. The expected rate of return on plan assets was reduced from 9.5 percent to 9 percent. The annual rate of increase in per capita cost of covered health care benefits was increased from 7.5 percent to 10 percent.
Based on the actual 2002 results for the various plans and the revisions to the underlying assumptions, Marathon recognized an unfavorable additional minimum pension adjustment to other comprehensive income (loss) of $33 million at December 31, 2002. Marathon expects that pension and other postretirement plan expense in 2003 will increase approximately $75 million from 2002 levels, of which approximately $45 million relates to MAP. MAP is required to fund a cash contribution of approximately $35 million to its pension plan in the third quarter of 2003.
As of December 31, 2002, the allocation of pension plan assets approximated 75 percent in equity securities, 22 percent in bonds and 3 percent in other investments, which is consistent with the expectations underlying the rate-of-return assumptions. The average rate-of-return on Marathon’s plan assets achieved by its investment advisor has historically exceeded the current expected rate-of-return.
Management’s Discussion and Analysis of Income and Operations
Revenuesfor each of the last three years are summarized in the following table:
(In millions) | 2002 | 2001 | 2000 | |||||||||
Exploration & production (“E&P”) | $ | 3,880 |
| $ | 4,524 |
| $ | 4,623 |
| |||
Refining, marketing & transportation (“RM&T”) |
| 26,399 |
|
| 27,247 |
|
| 28,777 |
| |||
Other energy related businesses (“OERB”) |
| 2,122 |
|
| 2,062 |
|
| 1,919 |
| |||
Segment revenues |
| 32,401 |
|
| 33,833 |
|
| 35,319 |
| |||
Elimination of intersegment revenues |
| (937 | ) |
| (728 | ) |
| (765 | ) | |||
Elimination of sales to United States Steel |
| – |
|
| (30 | ) |
| (60 | ) | |||
Total revenues | $ | 31,464 |
| $ | 33,075 |
| $ | 34,494 |
| |||
Items included in both revenues and costs and expenses: | ||||||||||||
Consumer excise taxes on petroleum products and merchandise | $ | 4,250 |
| $ | 4,404 |
| $ | 4,344 |
| |||
Matching crude oil and refined product buy/sell transactions settled in cash: | ||||||||||||
E&P | $ | 289 |
| $ | 454 |
| $ | 643 |
| |||
RM&T |
| 4,191 |
|
| 3,797 |
|
| 3,811 |
| |||
Total buy/sell transactions | $ | 4,480 |
| $ | 4,251 |
| $ | 4,454 |
| |||
E&P segment revenues decreased by $644 million in 2002 from 2001 and $99 million in 2001 from 2000. The 2002 decrease was primarily due to lower worldwide natural gas prices, lower volumes, and lower derivative gains, partially offset by higher worldwide liquid hydrocarbon prices. The decrease in 2001 was primarily due to lower domestic liquid hydrocarbon production and prices, partially offset by higher domestic natural gas prices and production, and gains from derivative activities.
RM&T segment revenues decreased by $848 million in 2002 from 2001 and $1.530 billion in 2001 from 2000. The decrease in 2002 and 2001 was primarily due to lower refined product prices.
OERB segment revenues increased by $60 million in 2002 from 2001 and $143 million in 2001 from 2000. The increase in 2002 reflected a favorable effect from increased natural gas and crude oil resale activity partially offset by lower natural gas prices. The increase in 2001 reflected higher natural gas prices and crude oil resale activity, partially offset by lower crude oil prices and natural gas resale activity.
33
Average Volumes and Selling Prices
2002 | 2001 | 2000 | |||||||||
(thousands of barrels per day) | |||||||||||
Net liquids production(a) | – Domestic |
| 117 |
| 127 |
| 131 | ||||
– International(b) |
| 82 |
| 73 |
| 65 | |||||
– Total consolidated |
| 199 |
| 200 |
| 196 | |||||
– Equity investees(c) |
| 8 |
| 9 |
| 11 | |||||
– Worldwide |
| 207 |
| 209 |
| 207 | |||||
(millions of cubic feet per day) | |||||||||||
Net natural gas production | – Domestic |
| 745 |
| 793 |
| 731 | ||||
– International – equity |
| 456 |
| 441 |
| 470 | |||||
– International – other(d) |
| 4 |
| 8 |
| 11 | |||||
– Total consolidated |
| 1,205 |
| 1,242 |
| 1,212 | |||||
– Equity investee(e) |
| 25 |
| 31 |
| 29 | |||||
– Worldwide |
| 1,230 |
| 1,273 |
| 1,241 | |||||
(dollars per barrel) | |||||||||||
Liquid hydrocarbons(a)(f) | – Domestic | $ | 22.00 | $ | 20.62 | $ | 25.55 | ||||
– International |
| 23.83 |
| 23.37 |
| 26.74 | |||||
– Total consolidated |
| 22.76 |
| 21.63 |
| 25.95 | |||||
– Equity investee(c) |
| 24.59 |
| 23.41 |
| 29.64 | |||||
– Worldwide |
| 22.84 |
| 21.71 |
| 26.14 | |||||
(dollars per mcf) | |||||||||||
Natural gas(f) | – Domestic | $ | 2.87 | $ | 3.69 | $ | 3.49 | ||||
– International – equity |
| 2.53 |
| 3.16 |
| 2.96 | |||||
– Total consolidated |
| 2.74 |
| 3.50 |
| 3.28 | |||||
– Equity investee(e) |
| 3.05 |
| 3.39 |
| 2.75 | |||||
– Worldwide |
| 2.75 |
| 3.49 |
| 3.27 | |||||
(thousands of barrels per day) | |||||||||||
Refined products sold |
| 1,318 |
| 1,304 |
| 1,306 | |||||
Matching buy/sell volumes included in above |
| 71 |
| 45 |
| 52 | |||||
| (a) | Includes crude oil, condensate and natural gas liquids. |
| (b) | Represents equity tanker liftings, truck deliveries and direct deliveries. |
| (c) | Represents Marathon’s equity interest in MKM Partners L.P. (“MKM”) and CLAM Petroleum B.V. (“CLAM”) for 2002 and 2001 and Sakhalin Energy Investment Company Ltd. (“Sakhalin Energy”) and CLAM for 2000. |
| (d) | Represents gas acquired for injection and subsequent resale. |
| (e) | Represents Marathon’s equity interest in CLAM. |
| (f) | Prices exclude derivative gains and losses. |
34
Income from operationsfor each of the last three years is summarized in the following table:
(In millions) | 2002 | 2001 | 2000 | |||||||||
E&P | ||||||||||||
Domestic | $ | 687 |
| $ | 1,122 |
| $ | 1,110 |
| |||
International |
| 346 |
|
| 297 |
|
| 420 |
| |||
E&P segment income |
| 1,033 |
|
| 1,419 |
|
| 1,530 |
| |||
RM&T |
| 356 |
|
| 1,914 |
|
| 1,273 |
| |||
OERB |
| 78 |
|
| 62 |
|
| 43 |
| |||
Segment income |
| 1,467 |
|
| 3,395 |
|
| 2,846 |
| |||
Items not allocated to segments: | ||||||||||||
Administrative expenses(a) |
| (194 | ) |
| (187 | ) |
| (154 | ) | |||
IMV reserve adjustment(b) |
| 72 |
|
| (72 | ) |
| – |
| |||
Gain (loss) on ownership change in MAP |
| 12 |
|
| (6 | ) |
| 12 |
| |||
Gain on offshore lease resolution with U.S. Government |
| – |
|
| 59 |
|
| – |
| |||
Gain (loss) on disposal of assets(c) |
| 24 |
|
| (221 | ) |
| 124 |
| |||
Charge on formation of MKM Partners L.P. JV(d) |
| – |
|
| – |
|
| (931 | ) | |||
Impairment of oil and gas properties and assets held for sale(e) |
| – |
|
| – |
|
| (197 | ) | |||
Reorganization charges including pension settlement gain (loss) and benefit accruals(f) |
| – |
|
| (14 | ) |
| (70 | ) | |||
Contract settlement(g) |
| (15 | ) |
| – |
|
| – |
| |||
Total income from operations | $ | 1,366 |
| $ | 2,954 |
| $ | 1,630 |
| |||
| (a) | Includes administrative expenses related to Steel Stock of $25 million for 2001 and $18 million for 2000. |
| (b) | The IMV reserve reflects the extent to which the recorded LIFO cost basis of inventories of liquid hydrocarbons and refined petroleum products exceeds net realizable value. |
| (c) | In 2002, represents gain on exchange of certain oil and gas properties with XTO Energy, Inc. In 2001, represents a loss on the sale of certain Canadian assets. The net gain in 2000 represents a gain on the disposition of Angus/Stellaria, a gain on the Sakhalin exchange, a gain on the sale of SSA non-core stores, and a loss on the sale of the Howard Glasscock field. |
| (d) | Represents a charge related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. |
| (e) | Represents in 2000, an impairment of certain oil and gas properties, primarily in Canada, and assets held for sale. |
| (f) | Represents reorganization charges in 2001 and 2000 and pension settlement gains (losses) and various benefit accruals resulting from retirement plan settlements and voluntary early retirement programs in 2000. 2001 reorganization charges include costs related to the Separation from United States Steel. |
| (g) | Represents a settlement arising from the cancellation of the Cajun Express rig contract on July 5, 2001. |
Domestic E&P incomedecreased by $435 million in 2002 from 2001 following an increase of $12 million in 2001 from 2000. The decrease in 2002 was primarily due to lower natural gas prices, lower volumes, lower derivative gains and higher dry well expense, partially offset by higher liquid hydrocarbon prices.
The increase in 2001 was primarily due to gains from derivative activities and higher natural gas volumes and prices, partially offset by lower liquid hydrocarbon prices.
International E&P income increased by $49 million in 2002 from 2001 following a decrease of $123 million in 2001 from 2000. The increase in 2002 was a result of higher production volumes and higher derivative gains partially offset by lower natural gas prices.
The decrease in 2001 was primarily due to lower liquid hydrocarbon prices, increased depletion expense due primarily to 2000 reserve reductions and lower natural gas volumes, partially offset by increased natural gas prices, lower dry well expense, and lower foreign royalty and geophysical contract expenditures.
RM&T segment income decreased by $1.558 billion in 2002 from 2001 following an increase of $641 million in 2001 from 2000. In 2002, the refining and wholesale marketing margin was severely compressed as crude oil costs increased while average refined product prices decreased.
Gains on the sale of SSA stores included in segment income were $37 million, $23 million, and $7 million for 2002, 2001, and 2000, respectively.
The increase in 2001 was primarily due to a higher refining and wholesale marketing margin partially offset by lower SSA gasoline and distillate sales volumes and increased refining and wholesale marketing transportation expense.
35
OERB segment income increased by $16 million in 2002 following an increase of $19 million in 2001 from 2000. The increase in 2002 reflected a favorable effect of $26 million from increased margins in gas marketing activities and mark-to-market valuation changes in associated derivatives and earnings of $11 million from Marathon’s equity investment in the Equatorial Guinea methanol plant, partially offset by predevelopment costs associated with emerging integrated gas projects.
The increase in 2001 was primarily a result of higher crude oil purchase and resale activity accompanied by increased margins and losses from derivative activities recorded in 2000.
Items not allocated to segments:
Administrative expensesincreased by $7 million in 2002 following an increase of $33 million in 2001 from 2000. Unallocated administrative expenses associated with corporate activities are not included in segment income. The increase in 2002 primarily reflected increased state franchise tax expense.
The increase in 2001 was primarily due to the portion of costs related to the development of an enterprise-wide software application that could not be capitalized and costs resulting from activities related to the Separation.
IMV reserve adjustment– In 2002, the IMV reserve adjustment resulted in a chargecredit to income from operations of $72 million. No adjustment was required in 2000. The unfavorable
2001favorable 2002 IMV reserve adjustment was primarily due to an increase in crude oil and refined petroleum product prices, reversing the significant2001 IMV charge to income that resulted from a decrease in crude oil and refined petroleum product prices which occurred duringat December 31, 2001. For additional information on this adjustment, see “Management’s Discussion and Analysis of Critical Accounting Estimates – Net Realizable Value of Inventories” on page 32.
Gain (loss) on ownership change in MAPreflects the fourth quartereffects of 2001.
contributions to MAP of certain environmental capital expenditures funded by Marathon and Ashland. In accordance with MAP’s limited liability company agreement, in certain instances, environmental capital expenditures are funded by the original owner of the assets, but no change in ownership interest may result from these contributions. An excess of Ashland funded improvements over Marathon funded improvements results in a net gain and an excess of Marathon funded improvements over Ashland funded improvements results in a net loss.
Other items not allocated to segments – Certain nonoperating or infrequently occurring items are not allocated to segments. Such items in the aggregate had a net favorable effect on income from operations of $9 million in 2002 and net unfavorable effects of $176 million in 2001 and $1.074 billion in 2000. A loss on the sale of certain Canadian assets of $221 million was included in 2001 and a charge related to the formation of MKM of $931 million was included in 2000.
Net interest and other financial costs decreasedincreased by $95 million in 2002 from 2001, following a decrease of $63 million in 2001 from 2000, following a decrease of $52 million2000. The increase in 20002002 was primarily due to higher average debt levels resulting from 1999.acquisitions and the Separation. The decrease in 2001 was primarily due to lower average debt levels and increased capitalized interest on RM&T projects. The decrease in 2000 was primarily due
to lower average debt levels and increased interest income. For additional
details, see Note 7 to the Financial Statements.
The minority
Minority interest in income of MAP, which represents Ashland'sAshland’s 38 percent ownership interest, increaseddecreased by $531 million in 2002 from 2001, following an increase of $206 million in 2001 from 2000. MAP income was significantly lower in 2002 compared to 2001 as discussed above in the RM&T segment. MAP income was higher in 2001 compared to 2000 following an increase of $51as discussed above in the RM&T segment.
Provision for income taxeswas $389 million in 2000 from 1999. The increase in 2001
and 2000 was primarily due to higher MAP income.
The provision for income taxes was2002, compared with $759 million in 2001 compared withand $476 million in 2000 and $320 in 1999.2000. The higher 20012002 provision is primarilyincluded a one-time, deferred tax charge of $61 million as a result of increased income from operations.the enactment of a supplemental tax in the United Kingdom (“U.K.”). The 2000 provision included a one-time, noncash deferred tax charge of $235 million as a result of the change in the amount, timing and nature of expected future foreign source income due to the exchange of Marathon'sMarathon’s interest in Sakhalin Energy for other oil and gas producing interests. For additional discussion
36
The following is an analysis of income taxes, see Note 18 to
the Financial Statements.
effective tax rate for the periods presented:
2002 | 2001 | 2000 | |||||||
Statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
Effects of foreign operations(a) | 5.4 |
| (1.5 | ) | 19.5 |
| |||
State and local income taxes after federal income tax effects | 3.9 |
| 3.2 |
| 0.6 |
| |||
Other federal tax effects | (2.3 | ) | (0.2 | ) | (2.0 | ) | |||
Effective tax rate | 42.0 | % | 36.5 | % | 53.1 | % | |||
| (a) | The deferred tax effect related to the enactment of a supplemental tax in the U.K. increased the effective tax rate 6.4 percent in 2002. The deferred tax effect resulting from the exchange of Marathon’s interest in Sakhalin Energy increased the effective tax rate 26.2 percent in 2000. The release of a foreign valuation allowance decreased the effective tax rate 3.3 percent in 2000. |
Discontinued operationsin 2001 represents the net income or loss attributed to Steel Stock, adjusted for certain corporate administrative expenses and interest expense (net of income tax effects). The loss on disposition of United States Steel Corporation represents the excess of the net investment in United States Steel over the aggregate fair market value of the outstanding shares of the Steel Stock at the time of the Separation. For
additional discussion
Extraordinary loss from early extinguishment of discontinued operations, see Note 2debt in 2002 was attributable to the Financial
Statements.
retirement of $337 million aggregate principal amount of debt resulting in an extraordinary loss of $33 million (net of tax of $20 million).
Cumulative effect of changes in accounting principles of $13 million, net of a tax provision of $7 million in 2002 represents the adoption of recently issued interpretations by the FASB of SFAS No. 133 in which Marathon must recognize in income the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom. The $8 million loss, net of a tax benefit of $5 million, in 2001 was an unfavorable transition adjustment related to the initial adoption of SFAS No. 133.
Net income decreasedincreased by $359 million in 2002 from 2001, following a decrease of $254 million in 2001 from 2000, following a
decrease of $287 million in 2000 from 1999, primarily reflecting the factors discussed above.
35
Management's
Management’s Discussion and Analysis of Financial Condition, Cash Flows and Liquidity
Financial Condition
Current assets decreased $574increased $68 million from year-end 2000,2001, primarily due to a decreasean increase in receivables and assets held for sale,inventories, partially offset by an
increasea decrease in cash and cash equivalents. The decreaseincrease in receivables was mainly due to lowerhigher year-end commodity prices partially offset by a decrease in derivative assets and the decreaseincrease in assets held for
saleinventories was primarily the result of the contributionhigher prices of the Yates field assets to
the MKM Partners L.P. joint venture. The increase in cashliquid hydrocarbons and refined petroleum products that reversed 2001’s IMV reserve. Cash and cash equivalents primarily resulted from cash balances which were attributedat year-end 2001 included amounts in part to United
States Steelpreparation for the acquisition of Equatorial Guinea interests and the repayment of preferred securities in prior years.
January 2002.
Current liabilities decreased $544increased $191 million from year-end 2000,2001, primarily due to a decreasean increase in accounts payable including accounts payable to United
States Steel,and accrued taxes partially offset by an increase in redeemablethe repayment of preferred securities. The decreaseincrease in accounts payable was due to lowerhigher priced year-end commodity prices. The
decrease in accounts payable to United States Steel resulted from the
settlement of 2001 income taxes with United States Steel upon Separation.
Under Marathon's previous tax allocation policy, income tax settlements with
United States Steel generally occurred in March of the following year.
Obligations to repay preferred securities reflect securities that became
redeemable or that were converted to a right to receive cash upon Separation.
These obligations were paid in January 2002.
crude purchases at MAP.
Investments and long-term receivablesincreased $714$558 million from year-end 2000,2001, primarily due to the contribution of assets to MKM Partners L.P. and
Pilot Travel Centers LLC joint ventures.
Net investment in United States Steel was eliminated with the dispositionacquisitions of the steel business.
Long-term receivables from United States Steel of $551 million represents
long-term debt for which United States Steel has assumed responsibility for
repayment.
Equatorial Guinea interests.
37
Net property, plant and equipmentincreased $203$838 million from year-end 2000,2001, primarily due to the acquisitionacquisitions of Pennaco Energy, Inc. ("Pennaco"),
completion of the coker unit at the Garyville refinery and implementation of
an integrated software system, partially offset by the sale of certain
Canadian assets and the contribution of travel centers to Pilot Travel Centers
LLC.Equatorial Guinea interests. Net property, plant and equipment for each of the last threetwo years is summarized in the following table:
(Dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
E&P
Domestic............................................. $ 2,851 $ 2,229 $ 3,435
International........................................ 2,472 2,924 2,987
------- ------- --------
Total E&P........................................... 5,323 5,153 6,422
RM&T(a)............................................... 4,010 4,035 3,712
Other(b).............................................. 245 187 159
------- ------- --------
Total.............................................. $ 9,578 $ 9,375 $ 10,293
- --------------------------------------------------------------------------------
(a) Amounts include 100 percent
(In millions) | 2002 | 2001 | ||||
E&P | ||||||
Domestic | $ | 2,720 | $ | 2,839 | ||
International |
| 3,186 |
| 2,471 | ||
Total E&P |
| 5,906 |
| 5,310 | ||
RM&T |
| 4,234 |
| 4,010 | ||
OERB |
| 67 |
| 55 | ||
Corporate |
| 183 |
| 177 | ||
Total | $ | 10,390 | $ | 9,552 | ||
Goodwill increased $186 million from year-end 2001. The increase is primarily due to the acquisitions of MAP.
(b) Includes other energy related businessesEquatorial Guinea interests. Significant factors that resulted in the recognition of goodwill in these acquisitions include: the ability to acquire an established business with an assembled workforce and other miscellaneous corporate
net property, planta proven track record and equipment.
a strategic acquisition in a core geographic area.
Intangiblesincreased $58 million from year-end 2001 primarily due to the acquisition of the contractual right to deliver to the Elba Island LNG re-gasification terminal.
Long-term debtat December 31, 20012002 was $3,432 million,$4.410 billion, an increase of $1,495$978 million from year-end 2000. The increase in2001. Public debt totaling $1.850 billion was mainly dueissued to fund the additional net debtpurchase price and other financings retained by Marathon upon Separation.
See Notes 2 and 13 to the Financial Statements.
Preferred stock of subsidiary of $184 million was redeemed in 2001. See
Note 23 to the Financial Statements.
Stockholders' equity decreased $1,824 million from year-end 2000, primarily
reflecting the distribution of Steel Stock to holdersassociated costs of the former USX-U.S.
Steel Group common stock.
acquisitions of Equatorial Guinea interests, to refinance $337 million aggregate principal amount of existing debt, to reduce outstanding commercial paper and for other general corporate purposes.
Cash Flows
Net cash provided from operating activities (for continuing operations)totaled $2,919 million$2.405 billion in 2002, compared with $2.919 billion in 2001 compared with $3,146 millionand $3.146 billion in 2000 and
$2,008 million in 1999.2000. The decrease in 20012002 mainly reflected unfavorable
working capital changes partially offset byreflects the favorable effects of improved
net income (excluding noncash items).
36
Net cash provided from operating activities (for discontinued operations)totaled $717 million in 2001, compared with net cash used in operating activities of $615 million in 2000 and $72 million in 1999.2000. This activity is related to the business of United States Steel.
Net cash used in investing activities (for continuing operations)totaled $1,999 million$2.666 billion in 2002, compared with $1.999 billion in 2001 compared withand $923 million in 2000 and $1,174 million
in 1999.2000. The increase in 20012002 primarily resulted from the acquisitionacquisitions of Pennaco,Equatorial Guinea interests and decreased asset disposals, and increasedpartially offset by decreased capital expenditures. Proceeds of $152 million from the disposal of assets in 2002 were primarily from the sale of SSA stores and the sale of San Juan Basin assets. Proceeds from the disposal of assets in 2001 of $296 million were primarily from the sale of certain Canadian assets, SSA stores, and various domestic producing properties. Proceeds in 2000 were mainly from the Sakhalin exchange, the disposition of Marathon'sMarathon’s interest in the Angus/Stellaria development in the Gulf of Mexico, the sale of non-core SSA stores and the sale of other domestic production properties. Proceeds in 1999 were mainly from the sale of Scurlock
Permian LLC, over 150 non-strategic domestic and international production
properties and Carnegie Natural Gas Company and affiliated subsidiaries.
Capital expendituresfor each of the last three years are summarized in the following table:
(In millions) | 2002 | 2001 | 2000 | ||||||
E&P(a) | |||||||||
Domestic | $ | 416 | $ | 537 | $ | 513 | |||
International |
| 457 |
| 400 |
| 226 | |||
Total E&P |
| 873 |
| 937 |
| 739 | |||
RM&T |
| 621 |
| 591 |
| 656 | |||
OERB |
| 49 |
| 4 |
| 5 | |||
Corporate |
| 31 |
| 107 |
| 25 | |||
Total | $ | 1,574 | $ | 1,639 | $ | 1,425 | |||
| (a) | Amounts exclude the acquisitions of the Equatorial Guinea interests in |
38
Capital expenditures in 2002 totaled $1.574 billion excluding the acquisitionacquisitions of Pennaco.
(b) Amounts include 100 percent of MAP.
(c) Includes other energy related business and other miscellaneous corporate
capital expenditures.
During 2001, Domestic E&P capitalEquatorial Guinea interests, compared with $1.639 billion in 2001. The $65 million decrease mainly reflected decreased spending mainly included exploration and
development drilling in the Gulf of Mexico, and natural gas developments in
gas basins throughout the western United States. International E&P projects
included projectssegment offset by increased spending in the North Sea, primarilyRM&T segment. The decrease in the newly acquired Foinaven
field, naturalE&P segment was primarily due to the drilling of fewer gas developmentswells in Canada and exploration drillingthe United States in Nova
Scotia and Angola. RM&T spending2002 partially offset by MAP primarily consisted of refinery
modifications, includinghigher capital expenditures for completion of a pipeline in Gabon, for a pipeline construction contract in Ireland and for development expenditures in Equatorial Guinea. The increase in the coker projectRM&T segment was attributable to increased spending on the multi-year integrated investment program at the GaryvilleMAP’s Catlettsburg refinery and upgrades and expansions of retail marketing outlets. Other
spending primarily consisted of the implementation of an integrated software
system.
Capital expenditures, excluding the portion of exploration expenditures
expected to be expensed, are estimated to be approximately $1.7 billion in
2002, a slight increase over 2001 levels. Domestic E&P spending for 2002 will
be primarily focused on onshore natural gas exploration and development and
offshore deepwater Gulf exploration. International E&P will primarily continue
oil developments in the U.K. North Sea and natural gas developments in Canada
and exploration in Angola. RM&T spending by MAP will primarily consist of
refinery improvements, including the Catlettsburg refinery repositioning
project, upgrades and expansions of retail marketing outlets and
transportation assets, including construction of the Cardinal Products Pipe
Line. See "Management's DiscussionPipeline in 2002, partially offset by lower capital expenditures for SSA retail outlets and Analysiscompletion of Financial Condition and
Results of Operations--Outlook" on page 42, for additional discussion on the Catlettsburg refinery repositioning project. Other Marathon spending will
include funds for natural gas and crude oil marketing and transportation
projects as well as various other corporate capital expenditures. An
additional $1.1 billion is anticipated for upstream acquisition expenditures,
including the recently completed acquisition of interestsGaryville coker construction in Equatorial
Guinea.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at year-end 2001 were $297 million, compared with $457
million at year-end 2000. For further discussion on commitments, see
"Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity - Liquidity and Capital Resources" on page 38.
2001.
Costs incurred for the periods ended December 31, 2002, 2001, 2000, and 19992000 relating to the development of proved undeveloped oil and gas reserves, including Marathon'sMarathon’s proportionate share of equity investee'sinvestees’ costs incurred, were $404 million, $365 million, $316 million, and $333$316 million, respectively. As of December 31, 2001,2002, estimated future development costs relating to the development of proved undeveloped oil and gas reserves for the years 20022003 through 20042005 are projected to be $308$464 million, $155$139 million, and $40$67 million, respectively.
Net cash used in investing activities (for discontinued operations)totaled $245 million in 2001, compared with $270 million in 2000 and $294 million in
1999.2000. This activity related to the business of United States Steel.
37
Net cash used inprovided by financing activitiestotaled $1,290$88 million in 2002, compared with net cash used of $1.290 billion in 2001 and $911 million in 2000. The increase was primarily due to financing associated with the two acquisitions of Equatorial Guinea interests of approximately $1.2 billion. This was partially offset by the early extinguishment of $337 million aggregate principal amount of debt and the $295 million repayment of preferred securities that became redeemable or were converted to a right to receive cash upon the Separation. In early January 2002, Marathon paid $185 million to retire the 6.75% Convertible Quarterly Income Preferred Securities and $110 million to retire the 6.50% Cumulative Convertible Preferred Stock. Additionally, distributions to minority shareholder of MAP were $176 million in 2002, compared to $577 million in 2001 compared with $911and $420 million in 2000 and $480 million in 1999. Marathon manages
its financing activities on a centralized, consolidated basis. Generally,
financing transactions were not separately associated with either continuing
or discontinued operations but rather were attributed to both businesses.2000. The cash used in 2001 primarily reflects distributions to minority shareholder of MAP, dividends paid and the redemption of the 8.75%8.75 percent Cumulative Monthly Income Preferred Shares ("MIPS").Shares. The cash used in 2000 primarily reflects distributions to minority shareholder of MAP, dividends paid and a stock repurchase program. The cash used in 1999 reflects distributions to minority
shareholder of MAP and dividends paid, offset by other net borrowings.
Debt Rating
Marathon's senior debt is currently rated investment grade by Standard and
Poor's Corporation, Moody's Investor Services, Inc. and Fitch Ratings with
ratings of BBB+, Baa1, and BBB+, respectively.
program for Marathon.
Derivative Instruments
See "Quantitative“Quantitative and Qualitative Disclosures About Market Risk"Risk” on page 45,51, for a discussion of derivative instruments and associated market risk.
Liquidity and Capital Resources
Marathon's
Marathon’s main sources of liquidity and capital resources are internally generated cash flow from operations, committed and uncommitted credit facilities, and access to both the debt and equity capital markets. Marathon'sMarathon’s ability to access the debt capital market is supported by its investment grade credit ratings. Because of the liquidity and capital resource alternatives available to Marathon, including internally generated cash flow, Marathon'sMarathon’s management believes that its short-term and long-term liquidity is adequate to fund operations, including its capital spending program, repayment of debt maturities for the years 2002, 2003, 2004, and 2004,2005, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in
Note 26 to the Financial Statements).
contingencies.
Marathon’s senior unsecured debt is currently rated investment grade by Standard and Poor’s Corporation, Moody’s Investor Services, Inc. and Fitch Ratings with ratings of BBB+, Baa1, and BBB+, respectively.
Marathon has a committed $1,354 million$1.354 billion long-term revolving credit facility that terminates in November 2005 and a committed $451$574 million 364-day revolving credit facility that terminates in November 2003. At December 31, 2002, there were no borrowings against these facilities. In April 2002, Marathon initiated a $1.350 billion commercial paper program that is backed by the long-term revolving credit facility. At December 31, 2001, $4752002, $100 million had been drawn against these facilities.of commercial paper was outstanding. Additionally, at December 31, 2001,2002, Marathon had an aggregateother uncommitted short-term lines of $550credit totaling $200 million, in three other
short-term credit facilities, of which no amounts were drawn.
MAP currently has a committed $350 million long-termshort-term revolving credit facility andwhich expires in July 2003. Additionally, MAP has a committed $100$190 million 364-day revolving credit facility.agreement with Ashland that expires in March 2003. As of December 31, 2001,2002, MAP did not have any borrowings against these facilities or under its
$190 million revolving credit agreement withfacilities. Marathon and Ashland Inc.
Certain securities became redeemable or were convertedare investigating other alternatives to a rightprovide other liquidity in to receive cash upon the Separation of United States Steel. MAP.
39
In early January 2002, Marathon paid $185 million to retirefiled a new universal shelf registration statement with the 6.75% Convertible Quarterly
Income Preferred Securities and $110 million to retire the 6.50% Cumulative
Convertible Preferred Stock.
Exchange Commission registering $2.7 billion aggregate amount of common stock, preferred stock and other equity securities, debt securities, trust preferred securities and/or other securities, including securities convertible into or exchangeable for other equity or debt securities. As of December 31, 2002, no securities had been offered under this shelf registration statement.
In early March 2002, Marathon issued notes of $1.450 billion as follows: $450 million due 2012, and
$550 million due 2032 and $450 million due 2007, bearing interest at 6.125 percent, and 6.8 percent and 5.375 percent, respectively. Additionally, Marathon Global Funding Corporation, a 100 percent owned consolidated finance subsidiary of Marathon, issued notes of $400 million due 2012, bearing interest at 6.0 percent. Marathon has fully and unconditionally guaranteed the securities of Marathon Global Funding.
Marathon used the net proceeds to repay amounts borrowedof these borrowings to fund the purchase price and associated costs of the January 2002 acquisition of interests in oil and gas properties and related assets in Equatorial Guinea, West Africa. Marathon initially funded this acquisition throughto refinance existing debt, to reduce outstanding commercial paper and for other general corporate purposes. The debt repurchased and retired early had average terms to maturity of between two and 21 years bearing interest at rates ranging from 8.125 percent to 9.375 percent per year, or a combinationweighted average of borrowings under long-term and short-term revolving credit facilities,
borrowings under other short-term credit facilities and cash on hand.
Marathon is not dependent on off-balance sheet arrangements to meet its
liquidity and capital resource needs. Marathon has used and may use9.04 percent per year. The retirement of $337 million aggregate principal amount of debt in the
future off-balance sheet arrangements to fund specific projects. The largest
category2002 resulted in an extraordinary loss of off-balance sheet arrangements is operating lease obligations, for
which contractual cash obligations totaled $422$33 million at December 31, 2001.
Of that total, $160 million related to three agreements which covered two LNG
tankers and Marathon's headquarters building, respectively. Under those three
arrangements, Marathon does not have an ownership interest in the entities
that hold the leased assets nor does Marathon hold title to the respective
leased assets. These entities were established by financial institutions for
the purpose(net of leasing specific assets to Marathon. Such entities are limited
in the typetax of business activity that can be transacted.
38
The table below provides aggregated information on Marathon'sMarathon’s obligations
and commitments to make future payments under existing contracts as of December 31, 2001:
2002:
Summary of Contractual Cash Obligations and Commercial
(Dollars in millions) | Total | 2003 | 2004- 2005 | 2006- 2007 | Later Years | ||||||||||
Short and long-term debt (a) | $ | 4,485 | $ | 156 | $ | 413 | $ | 752 | $ | 3,164 | |||||
Sale-leaseback financing (includes imputed interest) (a) |
| 118 |
| 11 |
| 22 |
| 31 |
| 54 | |||||
Capital lease obligations |
| 9 |
| 1 |
| 2 |
| 2 |
| 4 | |||||
Operating lease obligations(a) |
| 598 |
| 129 |
| 255 |
| 99 |
| 115 | |||||
Operating lease obligations under sublease(a) |
| 96 |
| 23 |
| 32 |
| 14 |
| 27 | |||||
Purchase obligations: | |||||||||||||||
Unconditional purchase obligation(b) |
| 70 |
| 5 |
| 11 |
| 11 |
| 43 | |||||
Contracts to acquire property, plant and equipment |
| 443 |
| 370 |
| 48 |
| 6 |
| 19 | |||||
Crude, refinery feedstock and refined products contracts(c) |
| 7,828 |
| 5,001 |
| 1,992 |
| 823 |
| 12 | |||||
Transportation and related contracts |
| 772 |
| 88 |
| 153 |
| 130 |
| 401 | |||||
LNG facility operating costs(d) |
| 228 |
| 14 |
| 29 |
| 29 |
| 156 | |||||
Service and materials contracts(e) |
| 144 |
| 50 |
| 47 |
| 18 |
| 29 | |||||
Commitments for oil and gas exploration (non-capital) (f) |
| 33 |
| 12 |
| 21 |
| — |
| — | |||||
Total purchase obligations |
| 9,518 |
| 5,540 |
| 2,301 |
| 1,017 |
| 660 | |||||
Other long-term liabilities reflected on the Consolidated Balance Sheet: | |||||||||||||||
Accrued LNG facility operating costs (d) |
| 15 |
| — |
| 2 |
| 2 |
| 11 | |||||
Total other long-term liabilities |
| 15 |
| — |
| 2 |
| 2 |
| 11 | |||||
Total contractual cash obligations(g) | $ | 14,839 | $ | 5,860 | $ | 3,027 | $ | 1,917 | $ | 4,035 | |||||
| (a) | Upon the Separation, United States Steel assumed certain debt and lease obligations. Such amounts have been included in the above table to reflect the fact that Marathon remains primarily liable. |
| (b) | Marathon is a party to a long-term transportation services agreement with a natural gas transmission company. This agreement is used by the natural gas transmission company to secure its financing. This arrangement represents an indirect guarantee of indebtedness. Therefore, this amount has also been disclosed as a guarantee. See Note 25 to the Consolidated Financial Statements for a complete discussion of Marathon’s guarantees. |
| (c) | The majority of 2003’s contractual obligations to purchase crude oil, refinery feedstock and refined products relate to contracts to be satisfied within the first 180 days of the year. |
| (d) | Marathon has acquired the right to deliver to the Elba Island LNG re-gasification terminal 58 bcf of natural gas per year. The agreement’s primary term ends in 2018. Pursuant to this agreement, Marathon has also bound itself to a commitment to pay for a portion of the operating costs of the LNG re-gasification terminal. |
| (e) | Services and materials contracts include contracts to purchase services such as utilities, supplies and various other maintenance and consulting services. |
| (f) | Commitments for oil and gas exploration (non-capital) include estimated costs within contractually obligated exploratory work programs that are subject to immediate expense, such as geological and geophysical costs. |
| (g) | Includes $719 million of contractual cash obligations |
40
Contractual cash obligations under
sublease............................... 96 18 38 10 30
Commercial commitments related to United
States Steel
Guarantees of indebtedness of others..... 28 5 -- -- 23
------ --- --- ----- -----
Total amounts related to United States
Steel..................................... 741 41 66 38 596
------ --- --- ----- -----
Total contractual obligations and
commercial commitments.................... $4,777 546 836 1,094 2,301
- --------------------------------------------------------------------------------
Marathon remains primarily obligated for certain debtwhich the ultimate settlement amounts are not fixed and determinable have been excluded from the above table. These include derivative contracts that are sensitive to future changes in commodity prices and other financings
for which United States Steel has assumed responsibility for repayment under
the terms of the Separation. In addition, factors.
Marathon remains contingently liable
for certain operating lease obligations of United States Steel. Marathon has
also guaranteed certain obligations related to the business of United States
Steel.
United States Steel is the sole general partner of Clairton 1314B
Partnership, L.P., which owns certain coke-making facilities formerly owned by
United States Steel. Marathon has guaranteed to the limited partners all
obligations of United States Steel under the partnership documents. United
States Steel may dissolve the partnership under certain circumstances,
including if it is required to fund accumulated cash shortfalls of the
partnership in excess of $150 million. In addition to the normal commitments
of a general partner, United States Steel has indemnified the limited partners
for certain income tax exposures. As of December 31, 2001, United States Steel
had no unpaid outstanding obligations to the limited partners and,
accordingly, no amounts were reflected in the above table for this guarantee.
Excluded from the table is indebtedness of equity investees which Marathon
does not support through guarantees or otherwise. If Marathon were obligated
to share in this debt on a pro rata basis, its share would have been
approximately $353 million as of December 31, 2001. In the event of default by
any of these equity investees, Marathon has no obligation to support the debt;
however, any such default could adversely impact our financial investment in
the respective equity investee.
The table excludes commitments to transport crude oil, natural gas and
refined products that were not negotiated as part of arranging the financing
of the transportation facilities under contract, which totaled $780 million at
December 31, 2001. The table also excludes contractual obligations under long-
term agreements to purchase crude oil, refinery feedstock and refined products
used in day-to-day operations to generate revenues.
Marathon management'smanagement’s opinion concerning liquidity and Marathon'sMarathon’s ability to avail itself in the future of the financing options mentioned in the above forward-looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that affect the availability of financing include the performance of Marathon (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the global financial climate, and, in particular, with respect to borrowings, the levels of Marathon'sMarathon’s outstanding debt and credit ratings by rating agencies.
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Management's
Off Balance Sheet Arrangements
Off-balance sheet arrangements comprise those arrangements that may potentially impact Marathon’s liquidity, capital resources and results of operations, even though such arrangements may not be currently recorded as liabilities. Although off-balance sheet arrangements serve a variety of Marathon’s business purposes, Marathon is not dependent on these arrangements to meet its liquidity and capital resources; nor is management aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity or capital resources.
One off-balance sheet arrangement in which Marathon participants is in the leasing of two tankers to transport LNG. If Marathon were to purchase such assets rather than lease them, it would assume a liability for the financing. In 2002, Marathon’s share of operating lease payments under this arrangement was $5 million. For additional details on this arrangement, refer to Note 24 to the Consolidated Financial Statements on page F-33.
Marathon has also provided various forms of guarantees of unconsolidated affiliates, United States Steel and certain lease contracts. These arrangements are described in Note 25 to the Consolidated Financial Statements on page F-34.
Marathon also is a party to agreements that would require Marathon to purchase, under certain circumstances, its joint venture partners’ interests in MAP and in Pilot Travel Centers LLC (“PTC”). These put/call agreements are described in Note 25 to the Consolidated Financial Statements.
Nonrecourse Indebtedness of Investees
Certain equity investees of Marathon have incurred indebtedness that Marathon does not support through guarantees or otherwise. If Marathon were obligated to share in this debt on a pro rata basis, its share would have been approximately $331 million as of December 31, 2002. Of this amount, $159 million relates to PTC. Additionally, PTC expects to incur additional indebtedness in connection with its recent acquisition of 60 retail travel centers, of which Marathon’s pro rata share would be $84 million. In the event of default by any of these equity investees, Marathon has no obligation to support the debt.
Obligations Associated with the Separation of United States Steel
Marathon remains obligated (primarily or contingently) for certain debt and other financial arrangements for which United States Steel has assumed responsibility for repayment under the terms of the Separation. In the event of United States Steel’s failure to satisfy these obligations, Marathon would become responsible for repayment. As of December 31, 2002, Marathon has identified the following obligations totaling $705 million that have been assumed by United States Steel:
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Of the total $705 million, obligations of $556 million and corresponding receivables from United States Steel were recorded on Marathon’s consolidated balance sheet (current portion—$9 million; long-term portion—$547 million). The remaining $149 million was related to off-balance sheet arrangements and contingent liabilities of United States Steel.
Each of Marathon and United States Steel, as members of the same consolidated tax reporting group during taxable periods ended on or prior to December 31, 2001, is jointly and severally liable for the federal income tax liability of the entire consolidated tax reporting group for those periods. Marathon and United States Steel have entered into a tax sharing agreement that allocates tax liabilities relating to taxable periods ended on or prior to December 31, 2001. To address the possibility that the taxing authorities may seek to collect a tax liability from one party where the tax sharing agreement allocates that liability to the other party, the agreement includes indemnification provisions.
As of December 31, 2001, Marathon had identified obligations totaling $704 million that had been assumed by United States Steel. Also, as of December 31, 2001, Marathon had a $54 million settlement receivable from United States Steel arising from the allocation of net debt and other financings at the time of the Separation, which was paid on February 6, 2002. During 2002, increases resulting from the extension of certain operating lease obligations were partially offset by decreases in obligations assumed by United States Steel resulting from scheduled payments. Under the Financial Matters Agreement, United States Steel has all of the existing contractual rights under the leases assumed from Marathon, including all rights related to purchase options, prepayments or the grant or release of security interests. However, United States Steel has no right to increase amounts due under or lengthen the term of any of the assumed leases, other than extensions set forth in the terms of any of the assumed leases.
The table below provides aggregated information on the portion of Marathon’s obligations to make future payments under existing contracts that have been assumed by United States Steel as of December 31, 2002:
Summary of Contractual Cash Obligations Assumed by United States Steel
(Dollars in millions) | Total | 2003 | 2004- 2005 | 2006- 2007 | Later Years | ||||||||||
Contractual obligations assumed by United States Steel | |||||||||||||||
Long-term debt | $ | 470 | $ | – | $ | – | $ | – | $ | 470 | |||||
Sale-leaseback financing (includes imputed interest) |
| 118 |
| 11 |
| 22 |
| 31 |
| 54 | |||||
Operating lease obligations |
| 53 |
| 5 |
| 14 |
| 16 |
| 18 | |||||
Operating lease obligations under sublease |
| 78 |
| 18 |
| 25 |
| 9 |
| 26 | |||||
Total contractual obligations assumed by United States Steel | $ | 719 | $ | 34 | $ | 61 | $ | 56 | $ | 568 | |||||
United States Steel reported in its Form 10-Q for the quarterly period ended September 30, 2002, that it has significant restrictive covenants related to its indebtedness including cross-default and cross-acceleration clauses on selected debt that could have an adverse effect on its financial position and liquidity. However, United States Steel management believes that its liquidity will be adequate to satisfy its obligations for the foreseeable future. If there is a prolonged delay in the recovery of the manufacturing sector of the U.S. economy, United States Steel believes that it can maintain adequate liquidity through a combination of deferral of nonessential capital spending, sale of non-strategic assets and other cash conservation measures.
On January 28, 2003, United States Steel announced, in a press release reporting 2002 fourth quarter and full-year results, that available sources of liquidity at the end of 2002 were $1.03 billion. In February 2003, United States Steel issued mandatory convertible preferred shares for net proceeds of approximately $242 million. United States Steel has announced its interest in acquiring the assets of bankrupt National Steel Corporation.
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Management’s Discussion and Analysis of Environmental Matters, Litigation and Contingencies
Marathon has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of Marathon'sMarathon’s products and services, operating results will be adversely affected. Marathon believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business power business or the marine transportation of crude oil and refined products.
Marathon's
Marathon’s environmental expenditures for each of the last three years were(a)were(a):
(In millions) | 2002 | 2001 | 2000 | ||||||
Capital | $ | 148 | $ | 110 | $ | 73 | |||
Compliance | |||||||||
Operating & maintenance |
| 187 |
| 199 |
| 176 | |||
Remediation(b) |
| 44 |
| 34 |
| 30 | |||
Total | $ | 379 | $ | 343 | $ | 279 | |||
| (a) | Amounts are determined based on American Petroleum Institute survey guidelines and include 100 percent of MAP. |
| (b) | These amounts include spending charged against remediation reserves, where permissible, but exclude noncash provisions recorded for environmental remediation. |
Marathon’s environmental capital expenditures accounted for fournine percent of total capital expenditures in 2002, seven percent in 2001, and five percent in 2000.
During 2000 and three percent in
1999.
During 1999 through 2001,2002, compliance expenditures represented one percent of Marathon'sMarathon’s total operating costs. Remediation spending during this period was primarily related to retail marketing outlets whichthat incur ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping.
Marathon has been notified that it is a potentially responsible party ("PRP"(“PRP”) at 1311 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"(“CERCLA”) as of December 31, 2001. 2002.
In addition, there are threefour sites where Marathon has received information requests or other indications that Marathon may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. At many of these sites, Marathon is one of a number of parties involved and the total cost of remediation, as well as Marathon’s share thereof, is frequently dependent upon the outcome of investigations and remedial studies.
There are also 11482 additional sites, excluding retail marketing outlets, related to Marathon where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 1310 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation.
At many of these sites, Marathon is one of a number of parties involved and
the total cost of remediation, as well as Marathon's share thereof, is
frequently dependent upon the outcome of investigations and remedial studies.
Marathon accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs iscan be reasonably determinable.estimated. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 26 to the
Financial Statements.
New or expanded environmental requirements, which could increase Marathon'sMarathon’s environmental costs, may arise in the future. Marathon intends to comply with all legal requirements regarding the environment, but since manynot all of them are
not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it probably is not possible to predict accuratelyall of the ultimate costcosts of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, Marathon does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2002. Marathon's2003.
43
Marathon’s environmental capital expenditures are expected to be approximately $130$173 million in 2002.2003. Predictions beyond 20022003 can only be broad-based estimates, which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified 40
$157$300 million in 2003;2004; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed.
New Tier II gasoline rules, which were finalized by the EPA in February 2000, and the diesel fuel rules, which were finalized in January 2001, require substantially reduced sulfur levels.levels for gasoline and diesel. The combined capital costs to achieve compliance with the gasoline and diesel regulations could amount to approximately $700$900 million, which includes costs that could be incurred as part of other refinery upgrade projects, between 2002 and 2006. This is a forward-looking statement. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating and logistical considerations, further refinement of preliminary engineering studies and project scopes, and unforeseen hazards.
In May 2001, Marathon andMarch 2002, MAP settled, inattended a consent decree, EPA allegations
that the Robinson refinery did not qualify for an exemption under the National
Emission Standards for Benzene Waste Operations pursuant to the Clean Air Act
("CAA"). The government had alleged in a federal court lawsuit that the
refinery's Total Annual Benzene releases exceeded the limitation of 10
megagrams per year, and as a result, the refinery was in violation of the
benzene waste emission control, record keeping, and reporting requirements.
The consent decree was approved by the court on July 26, 2001 and requires
Marathon and MAP to pay a combined $1.6 million civil penalty, perform
$125,000 in supplemental environmental projects, as part of an enforcement
action for alleged CAA violations, and install various controls and other
improvements.
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and
Robinson refineries, covering compliancemeeting with the CAA, the Clean Water Act,Illinois EPA concerning MAP’s self reporting obligations under the Emergency Planningof possible emission exceedences and Community Rightpermitting issues related to Know
Act, CERCLAsome storage tanks at MAP’s Robinson, Illinois facility. In late April, MAP submitted to IEPA a comprehensive settlement proposal that was rejected by IEPA. MAP has had subsequent discussions with IEPA and the handling of process waste. The EPA servedIllinois Attorney General’s office and anticipates additional meetings and discussions in the coming months.
During 2001 MAP entered into a number of
Notices of Violation ("NOV") and Findings of Violation as a result of these
inspections, but these allegations were resolved as part of the New Source Review consent decree which MAP agreed to on May 11, 2001. MAP'sand settlement of alleged Clean Air Act (“CAA”) and other violations with the EPA includescovering all of MAP's refineries and commitsMAP’s refineries. The settlement committed MAP to specific control technologies and implementation schedules for environmental expenditures and improvements to MAP'sMAP’s refineries over approximately an eight-year period. The total one-time expenditures for these environmental projects is approximately $360 million over the eight year period. The current estimated cost to complete these programs is
approximately $300period, with about $230 million in expendituresremaining over the next sevensix years. The impact of the settlement on on-going operating expenses is expected to be immaterial. In addition, MAP is
also committed to the performance of about $8 million inhas nearly completed certain agreed upon supplemental environmental projects and has paid an aggregate civil penalty in 2001 of $3.8
million, as part of this settlement of an enforcement action for alleged CAA violations.violations, at a cost of $9 million. MAP believes that this settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions.
MAP entered into a Consent Decree in July of 2002 with the State of Ohio regarding air compliance matters at its Canton refinery during both Ashland’s and MAP’s term of ownership and operation. The court approved this consent decree on August 28, 2001.
In 2000,Consent Decree required $350,000 in payments which included a penalty of $216,500, several Supplemental Environmental Projects and the Kentucky Natural Resourcesfunding of a community notification system. The Consent Decree is being implemented.
MAP used MTBE as an octane enhancer and Environmental Cabinet sent
Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associatedoxygenate in reformulated gasoline to comply with applicable laws for many years. The maximum amount of MTBE in gasoline is 15 percent by volume. Approximately 7 percent of MAP’s 2001 gasoline production contained MTBE. MAP had three MTBE units at its refineries in Detroit, Robinson and Catlettsburg with a pipeline spill earlier that yearcombined book value of approximately $10 million at December 31, 2001. Because several states in Winchester, Kentucky. MAP has settled this
NOVMAP’s marketing area have passed laws banning MTBE as a gasoline component in the formfuture, MAP decided in the first quarter of an Agreed-to Administrative Order2002 to begin to phase out production of MTBE and to reduce the remaining estimated useful life of the MTBE units. MTBE production was discontinued in October 2002, by which was finalized and
entered in January 2002 and required payment of a $170,000 penalty and
reimbursement of past response costs up to $131,000.
time the MTBE units were fully depreciated.
Marathon is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. See Note 2625 to the Consolidated Financial Statements on page F-34 for a discussion of certain of these matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathon. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to Marathon. See
"Management's Discussion
Other Contingencies
MAP has instituted a number of process and Analysisfacility modifications at its Catlettsburg refinery to correct the operating conditions that led to a product quality issue in 2002. MAP has been working with some regional gasoline jobbers and dealers since August 2002 to remedy certain product quality issues in gasoline produced at
44
this refinery. As a part of Financial Condition, Cash Flowsits response to the situation, MAP has inspected a large number of retail, terminal and Liquidity" on page 36.
41
Credit Risk
Marathon is exposed to credit risk in the form of possible nonpayment by counterparties, a significant portion of which are concentrated in energy related industries. To mitigate this risk, the creditworthiness of customers and other counterparties is subject to ongoing review. When deemed appropriate, Marathon requires prepayment, letters of credit, netting agreements or other security to reduce its exposure. Marathon has taken steps throughout 2002 to manage its exposures to those “energy merchant” firms whose creditworthiness has deteriorated. Where appropriate, Marathon has either obtained security to support its continued sales or has ceased business activity with the affected entities.
Marathon has significant exposures to United States Steel arising from the separation. Those exposures are discussed in “Obligations Associated with the Separation of United States Steel”.
45
Outlook
Exploration and Production
The outlook regarding Marathon'sMarathon’s upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world'sworld’s major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on Marathon'sMarathon’s results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development.
In 2002, worldwide
Marathon estimates its 2003 and 2004 production is expectedwill average 390,000 to average 430,000395,000 barrels of oil equivalent per day split evenly between liquid hydrocarbons and natural gas,
including Marathon's proportionate share(“BOEPD”), excluding the effect of equity investee'sany acquisitions or dispositions. This compares to 2002 production and
future acquisitions.
On January 3, 2002, Marathon completed its acquisition of CMS Energy's
interests in Equatorial Guinea. For a total cash consideration of $993
million, excluding working capital adjustments, Marathon acquired:
. a 52.4 percent interest in, and operatorship of, the offshore Alba
Block, which contains the currently producing Alba gas field as well as
undeveloped oil and gas discoveries and several possible exploration
prospects;
. a 37.6 percent interest in the adjacent offshore Block D;
. a 52.4 percent interest in an onshore condensate separation facility;
. a 45 percent interest in a joint venture onshore methanol production
plant;
. a 43.2 percent interest in an onshore liquefied petroleum gas processing
plant.
In 2002, Marathon plans to drill, or complete drilling operations on three
or four deepwater wells in the Gulf of Mexico, including the appraisal of the
Ozona Deep discovery.
Other majorslightly over 412,000 BOEPD.
Major upstream projects,activities, which are currently underway or under evaluation, and are expectedinclude:
In Equatorial Guinea, Marathon secured government approval of the Alba field phase 2B liquefied petroleum gas (LPG) expansion project, complementing the phase 2A offshore and condensate expansion project. Upon completion of phase 2A (fourth quarter 2003) and phase 2B (fourth quarter 2004), gross production is expected to be aggregatedincrease from numerous U.K.40,000 (22,000 net) BOEPD to approximately 90,000 (50,000 net) BOEPD. This new total volume will consist of 54,000 (30,000 net) bpd of condensate, 16,000 (9,000 net) bpd of LPG and Norwegian
North Sea producers for transportation to Bacton where it would then be sold
to commercial, industrial and residential customers. Marathon estimates that
the pipeline could begin operations in 2005.
120 (68 net) mmcfd of natural gas.
The above discussion includes forward-looking statements with respect to the timing and levels of Marathon'sMarathon’s worldwide liquid hydrocarbon and natural gas production, and the exploration drilling program.program and additional resources. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production and the exploration drilling program include acts of war or terrorist acts and the governmental or military response, thereto, pricing, supply and demand for petroleum products, amount of capital available for exploration and development, occurrence of 42
acquisitions/acquisitions or dispositions of oil and gas properties, regulatory constraints, timing of commencing production from new wells, drilling rig availability and other geological, operating and economic considerations. TheseThe forward-looking information related to production is based on certain assumptions, including, among others, presently known physical data concerning size and character of reservoirs, economic recoverability, technology development, future drilling success, production experience, industry economic conditions, levels of cash flow from operations and operating conditions. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. Some factors that could affect the planned
construction of the LNG re-gasification, power generation
46
Refining, Marketing and related
facilities, as well as the North Sea pipeline transportation and related
facilities, include, but are not limited to, unforeseen difficulty in the
negotiation of definitive agreements among project participants,
identification of additional participants to reach optimum levels of
participation, inability or delay in obtaining necessary government and third
party approvals, arranging sufficient project financing, unanticipated changes
in market demand or supply, competition with similar projects, and
environmental and permitting issues. Additionally, the LNG project could be
impacted by the availability or construction of sufficient LNG vessels.
Marathon's downstreamTransportation
Marathon’s RM&T segment income is largely dependent upon the refining and wholesale marketing margin for refined products, the retail gross margin for gasoline and distillates, and the gross margin on retail merchandise sales. The refining and wholesale marketing margin reflects the difference between the wholesale selling prices of refined products and the cost of raw materials refined, purchased product costs and manufacturing expenses. Refining and wholesale marketing margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, the seasonal pattern of certain product sales, crude oil costs, manufacturing costs, the available supply of crude oil and refined products, and logistical constraints. The retail gross margin for gasoline and distillates reflects the difference between the retail selling prices of these products and their wholesale cost, including secondary transportation. Retail gasoline and distillate margins have also been historically volatile, but tend to be counter cyclicalcountercyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations whichthat impact driving conditions. The gross margin on retail merchandise sales tends to be less volatile than the retail gasoline and distillate margin. Factors affecting the gross margin on retail merchandise sales include consumer demand for merchandise items and the level of economic activity in the marketing area.
At its Catlettsburg, Kentucky refinery, MAP has initiated a multi-year $350 million integrated investment program to upgrade product yield realizations and reduce fixed and variable manufacturing expenses. This program involves the expansion, conversion and retirement of certain refinery processing units which,that, in addition to improving profitability, will reduce the refinery'srefinery’s total gasoline pool sulfur below 30 ppm, thereby eliminating the need for additional clean fuels programlow sulfur gasoline compliance investments at the refinery. The project is expected to be completed in 2004.
MAP is working to improve its logistics network and Marathon Ashland Pipe
Line LLC has been designated operator of the Centennial Pipeline, owned
jointly by Panhandle Eastern Pipe Line Company, a subsidiary of CMS Energy
Corporation, MAP, and TE Products Pipe Line Company, Limited Partnership. The
new pipeline, which will connect the Gulf Coast refiners with the Midwest
market, will have the capacity to transport approximately 210,000 barrels per
day of refined petroleum products and is expected to be operational in the
first quarter of 2002.
late 2003.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"(“ORPL”), plans to buildis building a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline is currently known as Cardinal Products Pipe LinePipeline and is expected to initially move about 50,000 barrels per day of refined petroleum into the central Ohio region. As of December 2001,June 2002, ORPL hashad secured all of the rights-of-way required to build the pipeline. Applications forpipeline, and on August 2, 2002, the remaining constructionfinal permits have been filed.required to build the pipeline were approved. Construction is currently
planned for summerbegan in August 2002 pending receipt of permits, withand start-up of the pipeline is expected to follow in first halfmid-year 2003.
On February 7, 2003, MAP, through SSA, announced the signing of a definitive agreement to sell all 193 of its convenience stores located in Florida, South Carolina, North Carolina and Georgia for $140 million plus store inventory. The transaction is anticipated to close in the second quarter of 2003, subject to any necessary regulatory approvals and customary closing conditions.
MAP’s retail marketing strategy is focused on SSA’s Midwest operations, additional growth in the Marathon brand and continued growth for PTC.
On February 10, 2003, MAP increased its ownership in Centennial Pipeline LLC from 33 percent to 50 percent. MAP paid $20 million for the increased ownership interest. As of February 10, 2003, Centennial is owned 50 percent each by MAP and TE Products Pipeline Company, Limited Partnership.
On February 27, 2003, MAP’s 50 percent owned Pilot Travel Centers LLC (“PTC”) purchased 60 retail travel centers including fuel inventory, merchandise and supplies. The 60 locations are in 15 states, primarily in the Midwest, Southeast and the Southwest regions of the country.
The above discussion includes forward-looking statements with respect to the Catlettsburg refinery, the Cardinal Products Pipeline system and the Centennial Pipeline and Cardinal Products
Pipe Line systems.disposition of SSA stores. Some factors whichthat could potentially cause the actual results from the Catlettsburg investment program to differ materially from current expectations include the price of petroleum products, levels of cash flows from operations, obtaining the necessary construction and environmental
permits, unforeseen hazards such as weather conditions, the completion of construction and regulatory approval constraints. The primaryA factor which could impact the Centennial Pipeline
system, is unforeseen hazards. Some factors, whichthat could impact the Cardinal Products Pipe Line, include obtaining the necessary permits andPipeline is completion of construction. Some factors that could affect the SSA stores sale include inability or delay in obtaining necessary government and third-party approvals, and satisfaction of customary closing conditions. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
43
47
Other Energy Related Businesses
Marathon has proposed plans and awarded a front end engineering and design contract for a major LNG regasification and power generation complex near Tijuana in the Mexican state of Baja California to be called the Tijuana Regional Energy Center. The proposed project is an integrated complex planned to consist of a 750 mmcf per day LNG offloading terminal and regasification plant, a 1,200-megawatt power generation plant, a 20-million gallon per day water desalination plant, wastewater treatment facilities and natural gas pipeline infrastructure. Construction of the facilities is scheduled to begin in 2003 with expected startup in 2006.
Marathon has awarded a FEED contract for the proposed phase 3 LNG project in Equatorial Guinea. The phase 3 expansion involves the construction of a LNG liquefaction plant and related facilities to further commercialize the gas resources in the Alba field. This project would be complemented by the long-term LNG delivery rights at Elba Island, Georgia.
In the North Sea, Marathon will continue discussions with interested parties in evaluating the best transportation alternatives to bring Norwegian gas to the U.K. market utilizing Marathon’s Brae infrastructure.
On October 1, 2002, Marathon announced the signing of a letter of intent with Rosneft Oil Company to participate in Urals North American Marketing, a venture that would transport and market Urals crude to the North American market. The venture is subject to the signing of definitive agreements and obtaining necessary U.S. and Russian government approvals. Expected start-up would be in the fourth quarter of 2003.
The above discussion includes forward-looking statements with respect to the planned construction of LNG re-gasification, power generation and related facilities, and the participation in a venture to transport and market Urals crude to North America. Some factors that could affect the planned construction of the LNG re-gasification, power generation and related facilities, include, but are not limited to, unforeseen difficulty in the negotiation of definitive agreements among project participants, identification of additional participants to reach optimum levels of participation, inability or delay in obtaining necessary government and third-party approvals, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects and environmental and permitting issues. Additionally, the LNG project could be impacted by the availability or construction of sufficient LNG vessels. Factors that could impact the transporting and marketing of Urals crude to the North American market include the inability or delay in obtaining necessary government and third-party approvals, unforeseen difficulty in the negotiation of definitive agreements among project participants, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects and environmental and permitting issues. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
Corporate Matters
On February 6, 2003, Marathon announced it had approved a capital, investment and exploration expenditure budget of almost $2 billion for 2003. The budget includes E&P spending of $1.1 billion and $732 million for RM&T projects, with the remaining $121 million balance designated for OERB and corporate activities. Marathon also announced the intention to sell approximately $400 million in non-core assets to enhance financial flexibility.
The above discussion includes forward-looking statements with respect to expected capital, investment and exploration expenditures, as well as planned asset dispositions. This forward-looking information is based on certain assumptions including (among others), property dispositions, prices, worldwide supply and demand for petroleum products, regulatory impacts and constraints, timing and results of future exploitation and development drilling, levels of company cash flow, drilling rig availability and other geological operating and economic considerations. The forward-looking information concerning asset dispositions is based upon certain assumptions including the identification of buyers and the negotiation of acceptable prices and other terms, as well as other customary closing conditions. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
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Accounting Standards
Adopted in 2001 - the reporting periods
Effective January 1, 2001, Marathon adopted Statement of Financial Accounting Standards No. 133 "Accounting“Accounting for Derivative Instruments and Hedging Activities"Activities” (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Statement, as amended,statement requires recognition of all derivatives at fair
value as either assets or liabilities. For additional information, see Note 4liabilities at fair value. The transition adjustment related to adopting SFAS No. 133 on January 1, 2001, was recognized as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income was $8 million, net of a tax benefit of $5 million. The unfavorable cumulative effect on other comprehensive income (loss) (OCI) was $8 million, net of a tax benefit of $4 million.
Since the Financial Statements.
To be adopted in future periods - In June 2001,issuance of SFAS No. 133, the Financial Accounting Standards Board (FASB) has issued several interpretations. As a result, Marathon has recognized in income the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom. As of January 1, 2002, Marathon recognized a favorable cumulative effect of a change in accounting principle of $13 million, net of tax of $7 million.
Effective January 1, 2002, Marathon adopted the following Statements of Financial Accounting Standards Standards:
SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method, eliminating the usemethod. The transitional provisions of
the pooling method. This Statement also establishes for all business
combinations made after June 30, 2001, specific criteria for the allocation of
the purchase price to intangible assets separately from goodwill. SFAS No. 141 also requires that the excess of fair value of acquiredrequired Marathon to reclassify $11 million from identifiable intangible assets over cost in a
business combination (negative goodwill) be recognized immediately as an
extraordinary gain, rather than deferred and amortized. Marathon will account
for the acquisition of certain interests from CMS Energy into goodwill at January 2002 under
SFAS No. 141.
1, 2002.
SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS No. 142
are: 1) goodwill and intangible assets with indefinite lives will no longer be
amortized; 2) goodwill and intangible assets with indefinite lives must be
tested for impairment at least annually; and 3) the amortization period for
intangible assets with finite lives will no longer be limited to forty years.
Marathon will adopt SFAS No. 142 effectiveEffective January 1, 2002, as required. At
that time, the annualMarathon ceased amortization of existing goodwill, which results in a favorable impact on annual income of approximately $3 million, net of tax, will cease ontax. Marathon has completed the unamortized portion associated with previous
acquisitions and certain investments accounted for under the equity method. Arequired transitional impairment test is required for existing goodwill as of the date of adoptionadoption. No impairment of this Standard, which must be completed within the first year.
Any impairment loss resulting from applying the transitional goodwill impairment test will be reported as a change in accounting principle. Goodwill
recorded after adoption of this Standard is to be tested for impairment at
least annually and any resulting impairment is not considered part of the
change in accounting principle.
SFAS No. 143 establishes a new accounting model for the recognition and
measurement of retirement obligations associated with tangible long-lived
assets. SFAS No. 143 requires that an asset retirement cost be capitalized as
part of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. Marathon will adopt this
Statement effective January 1, 2003, as required. The transition adjustment
resulting from the adoption of SFAS No. 143 will be reported as a cumulative
effect of a change in accounting principle. At this time, Marathon cannot
reasonably estimate the effect of the adoption of this Statement on either its
financial position or results of operations.
In August 2001, the FASB approved was indicated.
SFAS No. 144 "Accounting for Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement establishes a single accounting model for long-lived assets to be disposed of by sale and provides additional implementation guidance for assets to be held and used and assets to be disposed of other than by sale. For long-lived assets to be disposed of by sale, SFAS No. 144 broadens the definition of those disposals that should be reported separately as discontinued operations. The adoption of SFAS No. 144 had no initial effect on Marathon’s financial statements.
In late 2002 and early 2003, the FASB issued the following:
Each of these pronouncements required the immediate adoption of certain disclosure requirements, which have been reflected in these financial statements. The accounting requirements of these pronouncements will be adopted in future periods.
To be adopted in future periods
In 2001, the FASB issued Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” (SFAS No. 143). This statement requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For Marathon, asset retirement obligations primarily relate to the abandonment of oil and gas producing facilities. Under previous accounting standards, such obligations were recognized over the life of the producing assets on a units-of-production basis.
While certain assets such as refineries, crude oil and product pipelines and marketing assets have retirement obligations covered by SFAS No. 143, those obligations are not expected to be recognized since the fair value cannot be estimated due to the uncertainty of the settlement date of the obligation.
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Effective January 1, 2003, Marathon will adopt SFAS No. 143, as required. The cumulative effect on net income of adopting SFAS No. 143 is expected to be a net favorable effect of approximately $5 million. At the time of adoption, total assets will increase approximately $120 million, and total liabilities will increase approximately $115 million. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.
Previous accounting standards used the units-of-production method to match estimated future retirement costs with the revenues generated from the producing assets. In contrast, SFAS No. 143 requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time. The depreciation will generally be determined on a units-of-production basis, while the accretion to be recognized will escalate over the life of the producing assets, typically as production declines. Because of the long lives of the underlying producing assets, the impact on net income in the near term is not expected to be material.
In the second quarter of 2002, the FASB issued Statement prospectivelyof Financial Accounting Standards No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS No. 145) and Statement of Financial Accounting Standards No. 146 “Accounting for Exit or Disposal Activities” (SFAS No. 146). SFAS No. 145 has a dual effective date. The provisions relating to the early extinguishment of debt will be adopted by Marathon on January 1, 2002. The timing2003. As a result, losses from the early extinguishment of classifying a long-
lived assetdebt in 2002, which are currently reported as heldextraordinary items, will be reported in income from continuing operations in comparative financial statements subsequent to the adoption of SFAS No. 145. SFAS No. 146 will be effective for sale mayexit or disposal activities that are initiated after December 31, 2002.
SFAS No. 148 provides alternative methods for the transition of the accounting for stock-based compensation from the intrinsic value method to the fair value method. Effective January 1, 2003, Marathon plans to apply the fair value method to future grants and any modified grants of stock-based compensation. Based upon this change, as compared toand assuming the number of stock options granted in 2003 approximates the number of those granted in 2002, the estimated impact on Marathon’s 2003 earnings would not be materially different than under previous accounting standards.
44
Effective for any guarantees issued or modified January 1, 2003 or after, FIN 45 requires the fair-value measurement and recognition of a liability for the issuance of certain guarantees. Enhanced disclosure requirements will continue to apply to both new and existing guarantees subject to FIN 45.
FIN 46 identifies certain off-balance sheet arrangements that meet the definition of a variable interest entity (VIE). The primary beneficiary of a VIE is the party that is exposed to the majority of the risks and/or returns of the VIE. In future accounting periods, the primary beneficiary will be required to consolidate the VIE. In addition, more extensive disclosure requirements apply to the primary beneficiary, as well as other significant investors. Although Marathon participates in an arrangement that is subject to the disclosure requirements of FIN 46, Marathon would not be deemed to be a primary beneficiary under the new rules.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
Marathon uses commodity-based and foreign currency derivative instruments
to manage its price risk.
Management has authorized the use of futures, forwards, swaps and options to manage exposure to market fluctuations related to commodities, interest rates, and foreign currency.
Marathon uses commodity-based derivatives to manage price fluctuationsrisk related to the purchase, production or sale of crude oil, natural gas, and refined products. For transactions that qualify for hedge accounting under SFAS No.
133,To a lesser extent, Marathon is exposed to the changes in fair valuerisk of price fluctuations on natural gas liquids and on petroleum feedstocks used as raw materials.
The approach of Marathon’s E&P segment to the use of commodity derivative instruments are classified
within Other Comprehensive Income, if the hedge qualifies as a Cash Flow
Hedge. The resulting deferred gains or losses are subsequently recognized in
income from operations, in the same period as the underlying physical
transaction. If the hedge position qualifies as a Fair Value Hedge, the
resulting gains or losses from the change in fair valueis selective and opportunistic. When it is deemed to be advantageous, Marathon may lock-in market prices on portions of both the hedged
item and the related derivative, are reflected within income in that period.
Marathon alsoits future production.
Marathon’s RM&T segment uses commodity derivative instruments to economically hedgemitigate the price risk but
designates such strategies as nonhedge. Changes in fair value for these
contracts is reflected within income in that period. Derivative instruments
used for tradingassociated with crude oil and other activities are marked-to-marketfeedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products.
Marathon’s OERB segment is exposed to market risk associated with the resulting
gains or losses are recognized inpurchase and subsequent resale of natural gas. Marathon uses commodity derivative instruments to mitigate the current period in income from
operations. While Marathon'sprice risk on purchased volumes and anticipated sales volumes.
As market conditions change, Marathon evaluates its risk management activities generally reduce
market risk exposure due to unfavorable commodity price changes for raw
material purchasesprogram and products sold, such activities can also encompasscould enter into strategies that assume price risk.
market risk whereby cash settlement of commodity-based derivatives will be based on market prices.
From time to time, Marathon uses financial derivative instruments to manage interest rate and foreign currency exposures. As Marathon enters into derivatives, assessments are made as to the qualification of each transaction for hedge accounting.
Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose Marathon to material risk. TheHowever, the use of derivative instruments could materially affect Marathon'sMarathon’s results of operations in particular quarterly or annual periods. However, managementManagement believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of
accounting policies related to derivative instruments, see Note 3 to the
Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, Marathon is exposed to market risk or price fluctuations related to the purchase, production or sale of crude oil, natural gas and refined products. To a lesser extent, Marathon is exposed to the risk of price fluctuations on natural gas liquids and petroleum feedstocks used as raw materials.
Marathon's market risk
Marathon’s strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, Marathon uses
fixed-priceAs part of achieving Marathon’s strategy, certain fixed-priced physical contracts andare hedged using derivative commodity instruments to manage a minor
portion of its commodity pricethat assume market risk. Marathon uses fixed-price contracts for
portionswill use a variety of its natural gas production to manage exposure to fluctuations in
natural gas prices. Certain derivative commodity instruments, have the effect
of restoring the equity portion of fixed-price sales of natural gas to
variable market-based pricing. These instruments are usedincluding option combinations, as part of Marathon'sthe overall risk management programs.
45
Quantitative and Qualitative Disclosures About Marketprogram to manage commodity price risk within its different businesses.
51
Commodity Price Risk CONTINUED
Sensitivity analyses of the incremental effects on pretax income from operations (“IFO”) of hypothetical 10 percent and 25 percent changes in commodity prices for open derivative commodity instruments as of December 31, 20012002 and December 31, 2000,2001, are provided in the following table:(a)
(In millions) | ||||||||||||||||
Incremental Decrease in IFO Assuming a Hypothetical Price Change of(a) | ||||||||||||||||
2002 | 2001 | |||||||||||||||
Derivative Commodity Instruments(b)(c) | 10% | 25% | 10% | 25% | ||||||||||||
Crude oil(d) | $ | 32.1 | (e) | $ | 131.6 | (e) | $ | 25.3 | (e) | $ | 57.6 | (e) | ||||
Natural gas(d) |
| 38.6 | (e) |
| 119.4 | (e) |
| 8.6 | (e) |
| 18.2 | (e) | ||||
Refined products(d) |
| 1.5 | (e) |
| 6.5 | (e) |
| 1.6 | (f) |
| 6.3 | (f) | ||||
| (a) | Marathon remains at risk for possible changes in |
| (b) | Net open contracts for the combined E&P and OERB segments varied throughout 2002, from a low of 16,556 contracts at February 16 to a high of 43,678 contracts at October 1, and averaged 31,340 for the year. The number of net open contracts for the RM&T segment varied throughout 2002, from a low of 1 contract at March 4 to a high of 19,209 contracts at December 26, and averaged 4,865 for the year. The derivative commodity instruments used and hedging positions taken will vary and, because of these variations in the composition of the portfolio over time, the number of open contracts by itself cannot be used to predict future income effects. |
| (c) | The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. |
| (d) | The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in IFO when applied to the derivative commodity instruments used to hedge that commodity. |
| (e) | Price increase. |
| (f) | Price decrease. |
E&P Segment—As of December 31, 2002, Marathon has entered into zero-cost collars on 225 mmcfd of its U.S. natural gas production for January through December 2003, whereby Marathon will receive up to an average $4.72 per mcf but no less than an average $3.72 per mcf. Of the 225 mmcfd, 215 mmcfd currently qualify for hedge accounting, with the non-qualified gas volumes being marked-to-market and included in income. Additionally, Marathon has also entered into zero-cost collars on 29,000 bpd of its U.S. and U.K. crude oil for January through December 2003, whereby Marathon will receive up to an average $28.55 per bbl but no less than an average $23.01 per bbl. All 29,000 bpd currently qualify for hedge accounting.
Subsequent to December 31, 2001, would cause future
pretax income effects2002, Marathon has entered into zero-cost collars on an additional 60 mmcfd of its U.S. natural gas production for the last half of 2003, whereby Marathon will receive up to differ from those presentedan average $5.94 per mcf but no less than an average $4.25 per mcf. Marathon has also placed derivatives on 50 mmcfd at an average of $5.02 per mcf for 2004 relating to the Powder River Basin area. All 60 mmcfd for the last half of 2003 and 50 mmcfd for 2004 currently qualify for hedge accounting. Additionally, Marathon has also used other derivative instruments to sell forward, 37,000 bpd of its U.S. and U.K. crude oil for the last half of 2003 at an average of $26.33 per bbl. All 37,000 bpd currently qualify for hedge accounting.
As of December 31, 2002, Marathon had hedged approximately 18 percent and 15 percent of its forecasted 2003 worldwide equity natural gas and liquid hydrocarbon production, respectively. Subsequent to December 31, 2002, Marathon has hedged an additional 3 percent and 10 percent of its forecasted 2003 worldwide equity natural gas and liquid hydrocarbon production, respectively.
Derivative gains included in the table.
(b) The numberE&P segment were $52 million and $85 million for 2002 and 2001, respectively. Gains of net open contracts varied throughout 2001,$23 million from a low of
19,040 contracts at July 18, to a high of 41,298 contracts at November 8, and
averaged 29,279discontinued cash flow hedges for the year. The derivative commodity instruments used and
hedging positions taken also varied throughout 2001, and will continue to
vary2002 are included in the future. Because of these variations in the composition of the
portfolio over time, the number of open contracts, by itself, cannot be used
to predict futureaforementioned amounts. These gains were reclassified from accumulated other comprehensive income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes(loss) as it is no longer probable that the physical and paper indices are perfectly correlated. Gains and losses on
options are based on changes in intrinsic value only.
(d) The direction of the price change used in calculating the sensitivity
amount for each commodity reflects that which would result in the largest
incremental decrease in pretax income when applied to the derivative
commodity instruments used to hedge that commodity.
(e) Price increase.
(f) Price decrease.
Marathon uses derivative instruments in its exploration and production
("E&P") operations to mitigate the price risk associated with equity
production of crude oil and natural gas volumes. In addition, Marathon has
sold forward a specified volume of natural gas. Marathon has used derivatives
to convert the fixed price in this contract to market prices. The underlying
physical contract matures in 2008. Marathon recorded total net pretax
derivative gains/(losses) of approximately $85 million in 2001 and $(47)
million in 2000. The amounts for 1999 were diminimus.
Marathon's refining, marketing, and transportation (RM&T)original forecasted transactions will occur.
RM&T Segment —Marathon’s RM&T operations generally use derivative commodity instruments to lock-in costsmitigate the price risk of certain crude oil and other feedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. Marathon'sDerivative losses included in RM&T operations recorded total net pretax derivative gains/(losses), net of the 38
percent minority interest in MAP, of approximately $130 million in 2001,
$(127) million in 2000, and $13segment income were $124 million for 1999. Marathon's2002 compared with gains of $210 million for 2001. RM&T’s trading activity gains/(losses) are included in the afore-mentioned amountsgains and totaled $3
million in 2001, $(11) million in 2000losses were not significant for 2002 and $5 million in 1999, respectively.
Marathon's other energy related businesses are exposed to market risk
associated with the purchase and subsequent resale of natural gas. 2001.
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OERB Segment —Marathon useshas used derivative instruments to mitigateconvert the fixed price risk onof a long-term gas sales contract to market prices. The underlying physical contract is for a specified annual quantity of gas and matures in 2008. Similarly, Marathon will use derivative instruments to convert shorter term (typically less than a year) fixed price contracts to market prices in its ongoing purchase for resale activity; and to hedge purchased volumesgas injected into storage for subsequent resale. Derivative losses included in OERB segment income were $8 million and anticipated sales volumes. Marathon recorded net pretax derivative
gains/(losses) of $(29)$29 million infor 2002 and 2001, $13 million in 2000 and $3 million in
1999, respectively.
Other Commodity Risk
Marathon is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange (NYMEX)(“NYMEX”) contracts for natural gas are priced at Louisiana'sLouisiana’s Henry Hub, while the underlying quantities of natural gas may be produced and sold in the Western United States at prices that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk.
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Quantitative and Qualitative Disclosures About Market Risk CONTINUED
Marathon is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions.
Interest Rate Risk
Marathon is subject to the effects of interest rate fluctuations affecting the fair value of certain non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10 percent decrease in year-end 2001 and 2000 interest rates is provided in the following table:
(In millions) | ||||||||||||
December 31, 2002 | December 31, 2001 | |||||||||||
Financial Instruments(a) | Fair Value(b) | Incremental Increase in Fair Value(c) | Fair Value(b) | Incremental Increase in Fair Value(c) | ||||||||
Financial assets: | ||||||||||||
Investments and long-term receivables | $ | 223 | $ | – | $ | 160 | $ | – | ||||
Interest rate swap agreements | $ | 12 | $ | 8 | $ | – | $ | – | ||||
Financial liabilities: | ||||||||||||
Long-term debt(d)(e) | $ | 5,008 | $ | 194 | $ | 3,830 | $ | 127 | ||||
| (a) | Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest approximate carrying value and are relatively insensitive to changes in |
| (b) | See Notes 14 and 15 to the Consolidated Financial Statements for carrying value of instruments. |
| (c) | For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of Marathon’s long-term debt at December 31, |
| (d) | Includes amounts due within one year. |
| (e) | Fair |
At December 31, 2002 and 2001, and 2000, Marathon'sMarathon’s portfolio of long-term debt was substantially comprised of fixed-ratefixed rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $127$194 million increase in the fair value of long-term debt assuming a hypothetical 10 percent decrease in interest rates. However, Marathon'sMarathon’s sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect Marathon'sMarathon’s results and cash flows only to the extent that Marathon would elect to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value.
Marathon has initiated a program to manage its exposure to interest rate movements by utilizing financial derivative instruments. The primary objective of this program is to reduce the Company’s overall cost of borrowing
53
by managing the fixed and floating interest rate mix of the debt portfolio. In 2002, Marathon entered into seven interest rate swap agreements, designated as fair value hedges, which effectively resulted in an exchange of existing obligations to pay fixed interest rates for obligations to pay floating rates. The following table summarizes Marathon’s interest rate swap activity as of December 31, 2002 and March 1, 2003:
As of December 31, 2002 | ||||||||||||
Floating Rate to be Paid | Fixed Rate to be Received | Notional Amount ($Millions) | Swap Maturity | 12/31/02 Fair Value ($Millions) | ||||||||
Six Month LIBOR +1.935% Six Month LIBOR +3.204% | 5.375 6.850 | % % | $ $ | 450 200 | 2007 2008 | $ $ | 8 4 | |||||
Cumulative as of March 1, 2003 | ||||||||||||
Floating Rate to be Paid | Fixed Rate to be Received | Notional Amount ($Millions) | Swap Maturity | |||||||||
Six Month LIBOR +4.140% | 6.650 | % | $ | 100 | 2006 | |||||||
Six Month LIBOR +1.935% | 5.375 | % | $ | 450 | 2007 | |||||||
Six Month LIBOR +3.285% | 6.850 | % | $ | 400 | 2008 | |||||||
During 2002, Marathon entered into U.S. Treasury Rate lock agreements to hedge pending issuances of new debt. The U.S. Treasury Rate lock agreements, which were designated and effective as cash flow hedges, were settled for a net of $14 million concurrent with the issuance of the new debt. The $9 million, net of tax, unrecognized loss is being reclassified from accumulated other comprehensive income (loss) to net interest and other financial cost over the life of the new debt.
Foreign Currency Exchange Rate Risk
Marathon is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than the U.S. dollar. Marathon has used on occasion forward currency contracts or other derivative instruments to manage this risk. At December 31, 2002 and 2001, Marathon had no open forward currency contracts in place. At December
31, 2000, Marathon had open Canadian dollar forward purchase contracts with a
total carrying value of approximately $14 million. A 10 percent increase in
the December 31, 2000, Canadian dollar to U.S. dollar forward rate, would have
resulted in a charge to income of approximately $1 million.
Safe Harbor
Marathon's
Marathon’s quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management'smanagement’s opinion about risks associated with the use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas, refined products and other feedstocks. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to Marathon'sMarathon’s hedging programs may differ materially from those discussed in the forward-looking statements.
47
54
Item 8. Financial Statements and Supplementary Data
MARATHON OIL
CORPORATION
Index to 2001 Consolidated Financial Statements and Supplementary Data
MARATHON OIL CORPORATION
Index to 2002 Consolidated Financial Statements and Supplementary Data
Page | ||
F-1 | ||
Audited Consolidated Financial Statements: | ||
Report of Independent | F-1 | |
Consolidated Statement of | F-2 | |
Consolidated Balance | F-4 | |
Consolidated Statement of Cash | F-5 | |
Consolidated Statement of | F-6 | |
Notes to Consolidated Financial | F-8 | |
Selected Quarterly Financial | F-37 | |
F-37 | ||
F-38 | ||
F-44 | ||
F-46 |
The accompanying consolidated financial statements of Marathon Oil Corporation (formerly USX Corporation)and its consolidated subsidiaries (Marathon) are the responsibility of management and have been prepared by
Marathon Oil Corporation in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on best judgments and estimates. The financial information displayed in other sections of this report is consistent with these financial statements.
Marathon Oil Corporation seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization.
Marathon Oil Corporation has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, Marathon Oil
Corporation'sMarathon’s independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagementindependent directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated financial statements.
/s/ Clarence P. Cazalot, Jr. /s/ John T. Mills /s/ Albert G. Adkins
Clarence P. Cazalot, Jr. John T. Mills Albert G. Adkins
President and Chief Financial Officer Vice President-
Chief Executive Officer Accounting and Controller
|
|
| ||
Clarence P. Cazalot, Jr. | John T. Mills | Albert G. Adkins | ||
President and | Chief Financial Officer | Vice President– | ||
Chief Executive Officer | Accounting and Controller |
Report of Independent Accountants
To the Stockholders of Marathon Oil Corporation:
In our opinion, the accompanying consolidated financial statements appearing on pages F-2 through F-32F-36 present fairly, in all material respects, the financial position of Marathon Oil Corporation and its subsidiaries (Marathon) at December 31, 20012002 and 2000,2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001,2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Marathon'sMarathon’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 42 to the financial statements, Marathon changed its method of accounting for certain long-term natural gas sales contracts in 2002 and its method of accounting for derivatives in 2001.
As discussed in Note 23 to the financial statements, on December 31, 2001, Marathon distributed its steel business to the holders of USX-U. S.USX–U.S. Steel Group common stock and has accounted for this business as a discontinued operation.
/s/
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
Houston, Texas
February 15, 2002
18, 2003
F-1
Consolidated Statement of Income
(Dollars in millions) 2001 2000 1999
- ------------------------------------------------------------------------------
Revenues and other income:
Revenues $ 33,019 $ 34,427 $ 23,549
Dividend and investee income 138 102 69
Net losses on disposal of assets (177) (785) -
Gain (loss) on ownership change in
Marathon Ashland Petroleum LLC (6) 12 17
Other income 92 43 31
-------- -------- --------
Total revenues and other income 33,066 33,799 23,666
-------- -------- --------
Costs and expenses:
Cost of revenues (excludes items shown below) 23,255 25,417 16,612
Selling, general and administrative expenses 726 643 498
Depreciation, depletion and amortization 1,236 1,245 950
Taxes other than income taxes 4,679 4,626 4,218
Exploration expenses 144 238 238
Inventory market valuation charges (credits) 72 - (551)
-------- -------- --------
Total costs and expenses 30,112 32,169 21,965
-------- -------- --------
Income from operations 2,954 1,630 1,701
Net interest and other financial costs 173 236 288
Minority interest in income of
Marathon Ashland Petroleum LLC 704 498 447
-------- -------- --------
Income from continuing operations before income
taxes 2,077 896 966
Provision for income taxes 759 476 320
-------- -------- --------
Income from continuing operations 1,318 420 646
Discontinued operations
Income (loss) from discontinued operations (169) (9) 59
Loss on disposition of United States Steel
Corporation (984) - -
-------- -------- --------
Income before extraordinary losses and
cumulative effect of change in accounting
principle 165 411 705
Extraordinary losses - - (7)
Cumulative effect of change in accounting
principle (8) - -
-------- -------- --------
Net income $ 157 $ 411 $ 698
- ------------------------------------------------------------------------------
Included in revenues and costs and expenses for 2001, 2000 and 1999 were $4,404
million, $4,344 million and $3,973 million, respectively, representing consumer
excise taxes on petroleum products and merchandise.
(Dollars in millions) | 2002 | 2001 | 2000 | |||||||||
Revenues and other income: | ||||||||||||
Sales and other operating revenues (including consumer excise taxes) | $ | 30,595 |
| $ | 32,599 |
| $ | 34,181 |
| |||
Sales to related parties |
| 869 |
|
| 476 |
|
| 313 |
| |||
Income from equity method investments |
| 137 |
|
| 118 |
|
| 81 |
| |||
Net gains (losses) on disposal of assets |
| 65 |
|
| (177 | ) |
| (785 | ) | |||
Gain (loss) on ownership change in Marathon Ashland Petroleum LLC |
| 12 |
|
| (6 | ) |
| 12 |
| |||
Other income |
| 42 |
|
| 112 |
|
| 64 |
| |||
Total revenues and other income |
| 31,720 |
|
| 33,122 |
|
| 33,866 |
| |||
Costs and expenses: | ||||||||||||
Cost of revenues (excludes items shown below) |
| 23,574 |
|
| 23,233 |
|
| 25,403 |
| |||
Purchases from related parties |
| 100 |
|
| 83 |
|
| 87 |
| |||
Consumer excise taxes |
| 4,250 |
|
| 4,404 |
|
| 4,344 |
| |||
Depreciation, depletion and amortization |
| 1,201 |
|
| 1,233 |
|
| 1,052 |
| |||
Property impairments |
| 14 |
|
| 3 |
|
| 193 |
| |||
Selling, general and administrative expenses |
| 845 |
|
| 721 |
|
| 637 |
| |||
Other taxes |
| 258 |
|
| 275 |
|
| 282 |
| |||
Exploration expenses |
| 184 |
|
| 144 |
|
| 238 |
| |||
Inventory market valuation charges (credits) |
| (72 | ) |
| 72 |
|
| – |
| |||
Total costs and expenses |
| 30,354 |
|
| 30,168 |
|
| 32,236 |
| |||
Income from operations |
| 1,366 |
|
| 2,954 |
|
| 1,630 |
| |||
Net interest and other financing costs |
| 268 |
|
| 173 |
|
| 236 |
| |||
Minority interest in income of |
| 173 |
|
| 704 |
|
| 498 |
| |||
Income from continuing operations before income taxes |
| 925 |
|
| 2,077 |
|
| 896 |
| |||
Provision for income taxes |
| 389 |
|
| 759 |
|
| 476 |
| |||
Income from continuing operations |
| 536 |
|
| 1,318 |
|
| 420 |
| |||
Discontinued operations | ||||||||||||
Loss from discontinued operations |
| – |
|
| (169 | ) |
| (9 | ) | |||
Loss on disposition of United States Steel Corporation |
| – |
|
| (984 | ) |
| – |
| |||
Income before extraordinary loss and cumulative effect of changes in accounting principles |
| 536 |
|
| 165 |
|
| 411 |
| |||
Extraordinary loss from early extinguishment of debt |
| (33 | ) |
| – |
|
| – |
| |||
Cumulative effect of changes in accounting principles |
| 13 |
|
| (8 | ) |
| – |
| |||
Net income | $ | 516 |
| $ | 157 |
| $ | 411 |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Income Per Common Share
(Dollars in millions, except per share data) 2001 2000 1999
- ---------------------------------------------------------------------
MARATHON COMMON STOCK
Income from continuing operations
applicable to Common Stock $ 1,317 $ 420 $ 646
------- ------ ------
Net income applicable to Common Stock $ 377 $ 432 $ 654
------- ------ ------
Per Share Data
Basic and diluted:
Income from continuing operations $ 4.26 $ 1.35 $ 2.09
------- ------ ------
Net income $ 1.22 $ 1.39 $ 2.11
------- ------ ------
STEEL STOCK
Net income (loss) applicable to Steel Stock $ (243) $ (29) $ 35
------- ------ ------
Per Share Data
Basic:
Net income (loss) $ (2.73) $ (.33) $ .40
------- ------ ------
Diluted:
Net income (loss) $ (2.74) $ (.33) $ .40
- ---------------------------------------------------------------------
(Dollars in millions, except per share data) | 2002 | 2001 | 2000 | ||||||||
MARATHON COMMON STOCK | |||||||||||
Income from continuing operations applicable to Common Stock | $ | 536 | $ | 1,317 |
| $ | 420 |
| |||
Net income applicable to Common Stock | $ | 516 | $ | 377 |
| $ | 432 |
| |||
Per Share Data | |||||||||||
Income from continuing operations | $ | 1.72 | $ | 4.26 |
| $ | 1.35 |
| |||
Net income | $ | 1.66 | $ | 1.22 |
| $ | 1.39 |
| |||
STEEL STOCK | |||||||||||
Net loss applicable to Steel Stock | $ | – | $ | (243 | ) | $ | (29 | ) | |||
Per Share Data | |||||||||||
Net loss | $ | – | $ | (2.73 | ) | $ | (.33 | ) | |||
Diluted: | |||||||||||
Net loss | $ | – | $ | (2.74 | ) | $ | (.33 | ) | |||
See Note 8,6 for a description and computation of income per common share.
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Consolidated Balance Sheet
(Dollars in millions) December 31 2001 2000
- -----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 657 $ 340
Receivables, less allowance for doubtful accounts of $8
and $3 1,708 2,262
Receivables from United States Steel 64 5
Inventories 1,851 1,867
Assets held for sale 16 330
Deferred income tax benefits 13 60
Other current assets 102 121
-------- --------
Total current assets 4,411 4,985
Investments and long-term receivables 1,076 362
Net investment in United States Steel - 1,919
Receivables from United States Steel 551 -
Property, plant and equipment - net 9,578 9,375
Prepaid pensions 207 207
Other noncurrent assets 306 303
-------- --------
Total assets $ 16,129 $ 17,151
- -----------------------------------------------------------------------------
Liabilities
Current liabilities:
Notes payable $ - $ 80
Accounts payable 2,431 3,019
Payable to United States Steel 28 366
Payroll and benefits payable 243 230
Accrued taxes 171 108
Accrued interest 85 61
Obligations to repay preferred securities 295 -
Long-term debt due within one year 215 148
-------- --------
Total current liabilities 3,468 4,012
Long-term debt 3,432 1,937
Deferred income taxes 1,297 1,354
Employee benefits 677 648
Payable to United States Steel 8 97
Deferred credits and other liabilities 344 315
Preferred stock of subsidiary - 184
Minority interest in Marathon Ashland Petroleum LLC 1,963 1,840
Stockholders' Equity
Preferred stock -
6.50% Cumulative Convertible issued -
2,413,487 shares ($121 liquidation preference) at
December 31, 2000 - 2
Common stocks:
Common Stock issued - 312,165,978 shares at December 31,
2001 and 2000 (par value $1 per share, authorized
550,000,000 shares) 312 312
Steel Stock issued - 88,767,395 shares at December 31,
2000
(par value $1 per share, authorized 200,000,000 shares) - 89
Securities exchangeable solely into Common Stock -
issued - 281,148 shares at December 31, 2000 - -
Common Stock held in treasury - 2,770,929 shares at
December 31, 2001 and 3,899,714 shares at December 31,
2000 (74) (104)
Additional paid-in capital 3,035 4,676
Retained earnings 1,643 1,847
Accumulated other comprehensive income (loss) 34 (50)
Deferred compensation (10) (8)
-------- --------
Total stockholders' equity 4,940 6,764
-------- --------
Total liabilities and stockholders' equity $ 16,129 $ 17,151
- -----------------------------------------------------------------------------
(Dollars in millions) | December 31 | 2002 | 2001 | |||||||
Assets | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 488 |
| $ | 657 |
| ||||
Receivables, less allowance for doubtful accounts of $6 and $4 |
| 1,807 |
|
| 1,672 |
| ||||
Receivables from United States Steel |
| 9 |
|
| 64 |
| ||||
Receivables from related parties |
| 38 |
|
| 36 |
| ||||
Inventories |
| 1,984 |
|
| 1,851 |
| ||||
Other current assets |
| 153 |
|
| 131 |
| ||||
Total current assets |
| 4,479 |
|
| 4,411 |
| ||||
Investments and long-term receivables, less allowance for doubtful |
| 1,634 |
|
| 1,076 |
| ||||
Receivables from United States Steel |
| 547 |
|
| 551 |
| ||||
Property, plant and equipment – net |
| 10,390 |
|
| 9,552 |
| ||||
Prepaid pensions |
| 201 |
|
| 207 |
| ||||
Goodwill |
| 274 |
|
| 88 |
| ||||
Intangibles |
| 119 |
|
| 61 |
| ||||
Other noncurrent assets |
| 168 |
|
| 183 |
| ||||
Total assets | $ | 17,812 |
| $ | 16,129 |
| ||||
Liabilities | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 2,847 |
| $ | 2,407 |
| ||||
Payables to United States Steel |
| 28 |
|
| 28 |
| ||||
Payables to related parties |
| 10 |
|
| 24 |
| ||||
Payroll and benefits payable |
| 198 |
|
| 243 |
| ||||
Accrued taxes |
| 307 |
|
| 171 |
| ||||
Accrued interest |
| 108 |
|
| 85 |
| ||||
Obligations to repay preferred securities |
| – |
|
| 295 |
| ||||
Long-term debt due within one year |
| 161 |
|
| 215 |
| ||||
Total current liabilities |
| 3,659 |
|
| 3,468 |
| ||||
Long-term debt |
| 4,410 |
|
| 3,432 |
| ||||
Deferred income taxes |
| 1,445 |
|
| 1,297 |
| ||||
Employee benefit obligations |
| 847 |
|
| 677 |
| ||||
Asset retirement obligations |
| 223 |
|
| 193 |
| ||||
Payables to United States Steel |
| 7 |
|
| 8 |
| ||||
Deferred credits and other liabilities |
| 168 |
|
| 151 |
| ||||
Minority interest in Marathon Ashland Petroleum LLC |
| 1,971 |
|
| 1,963 |
| ||||
Commitments and contingencies |
| – |
|
| – |
| ||||
Stockholders’ Equity | ||||||||||
Common Stock issued – 312,165,978 shares at December 31, 2002 and 2001 (par value $1 per share, authorized 550,000,000 shares) |
| 312 |
|
| 312 |
| ||||
Common Stock held in treasury – 2,292,986 shares at December 31, 2002 and 2,770,929 shares at December 31, 2001 |
| (60 | ) |
| (74 | ) | ||||
Additional paid-in capital |
| 3,032 |
|
| 3,035 |
| ||||
Retained earnings |
| 1,874 |
|
| 1,643 |
| ||||
Accumulated other comprehensive income (loss) |
| (69 | ) |
| 34 |
| ||||
Unearned compensation |
| (7 | ) |
| (10 | ) | ||||
Total stockholders’ equity |
| 5,082 |
|
| 4,940 |
| ||||
Total liabilities and stockholders’ equity | $ | 17,812 |
| $ | 16,129 |
| ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Consolidated Statement of Cash Flows
(Dollars in millions) 2001 2000 1999
- ---------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents
Operating activities:
Net income $ 157 $ 411 $ 698
Adjustments to reconcile to net cash provided
from operating activities:
Cumulative effect of change in accounting
principle 8 - -
Extraordinary losses - - 7
Loss (income) from discontinued operations 169 9 (59)
Loss on disposition of United States Steel 984 - -
Minority interest in income of Marathon
Ashland Petroleum LLC 704 498 447
Depreciation, depletion and amortization 1,236 1,245 950
Exploratory dry well costs 60 86 109
Inventory market valuation charges (credits) 72 - (551)
Deferred income taxes (217) (240) 105
Net losses on disposal of assets 177 785 -
Changes in: Current receivables 172 (377) (844)
Inventories (66) 17 (63)
Current accounts payable and accrued
expenses (601) 717 1,106
All other - net 64 (5) 103
------- ------- -------
Net cash provided from continuing operations 2,919 3,146 2,008
Net cash provided from (used in)
discontinued operations 717 (615) (72)
------- ------- -------
Net cash provided from operating activities 3,636 2,531 1,936
------- ------- -------
Investing activities:
Capital expenditures (1,639) (1,425) (1,378)
Acquisition of Pennaco Energy, Inc. (506) - -
Disposal of assets 296 539 356
Cash held by United States Steel upon
disposition (147) - -
Restricted cash - withdrawals 67 271 45
- deposits (62) (268) (44)
Investees - investments (17) (65) (59)
- loans and advances (6) (6) (70)
- returns and repayments 10 10 1
All other - net 5 21 (25)
------- ------- -------
Net cash used in continuing operations (1,999) (923) (1,174)
Net cash used in discontinued operations (245) (270) (294)
------- ------- -------
Net cash used in investing activities (2,244) (1,193) (1,468)
Financing activities:
Commercial paper and revolving credit
arrangements--net (51) 62 (381)
Other debt - borrowings 649 273 810
- repayments (758) (339) (242)
Redemption of preferred stock of subsidiary (223) - -
Preferred stock repurchased - (12) (2)
Common stock - issued - - 89
- repurchased (1) (105) -
Treasury common stock reissued 12 1 -
Dividends paid (341) (371) (354)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (577) (420) (400)
------- ------- -------
Net cash used in financing activities (1,290) (911) (480)
------- ------- -------
Effect of exchange rate changes on cash:
Continuing operations (3) (2) (1)
Discontinued operations (1) 1 -
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 98 426 (13)
Cash and cash equivalents at beginning of year 559 133 146
------- ------- -------
Cash and cash equivalents at end of year $ 657 $ 559 $ 133
- ---------------------------------------------------------------------------
Cash and cash equivalents at end of year for 2000 and 1999 include $219 million
and $22 million, respectively, of cash held by United States Steel.
(Dollars in millions) | 2002 | 2001 | 2000 | |||||||||
Increase (decrease) in cash and cash equivalents | ||||||||||||
Operating activities: | ||||||||||||
Net income | $ | 516 |
| $ | 157 |
| $ | 411 |
| |||
Adjustments to reconcile to net cash provided from operating activities: | ||||||||||||
Cumulative effect of changes in accounting principles |
| (13 | ) |
| 8 |
|
| – |
| |||
Extraordinary loss from early extinguishment of debt |
| 33 |
|
| – |
|
| – |
| |||
Loss from discontinued operations |
| – |
|
| 169 |
|
| 9 |
| |||
Loss on disposition of United States Steel |
| – |
|
| 984 |
|
| – |
| |||
Minority interest in income of Marathon Ashland Petroleum LLC |
| 173 |
|
| 704 |
|
| 498 |
| |||
Depreciation, depletion and amortization |
| 1,201 |
|
| 1,233 |
|
| 1,052 |
| |||
Property impairments |
| 14 |
|
| 3 |
|
| 193 |
| |||
Exploratory dry well costs |
| 100 |
|
| 60 |
|
| 86 |
| |||
Inventory market valuation charges (credits) |
| (72 | ) |
| 72 |
|
| – |
| |||
Deferred income taxes |
| 96 |
|
| (217 | ) |
| (240 | ) | |||
Net losses (gains) on disposal of assets |
| (65 | ) |
| 177 |
|
| 785 |
| |||
Changes in: Current receivables |
| (110 | ) |
| 172 |
|
| (377 | ) | |||
Inventories |
| (51 | ) |
| (66 | ) |
| 17 |
| |||
Accounts payable and other current liabilities |
| 614 |
|
| (601 | ) |
| 717 |
| |||
All other – net |
| (31 | ) |
| 64 |
|
| (5 | ) | |||
Net cash provided from continuing operations |
| 2,405 |
|
| 2,919 |
|
| 3,146 |
| |||
Net cash provided from (used in) discontinued operations |
| – |
|
| 717 |
|
| (615 | ) | |||
Net cash provided from operating activities |
| 2,405 |
|
| 3,636 |
|
| 2,531 |
| |||
Investing activities: | ||||||||||||
Capital expenditures |
| (1,574 | ) |
| (1,639 | ) |
| (1,425 | ) | |||
Acquisitions |
| (1,160 | ) |
| (506 | ) |
| – |
| |||
Disposal of assets |
| 152 |
|
| 296 |
|
| 539 |
| |||
Cash held by United States Steel upon disposition |
| – |
|
| (147 | ) |
| – |
| |||
Receivable from United States Steel |
| 54 |
|
| – |
|
| – |
| |||
Restricted cash – withdrawals |
| 91 |
|
| 67 |
|
| 271 |
| |||
– deposits |
| (123 | ) |
| (62 | ) |
| (268 | ) | |||
Investments – contributions |
| (111 | ) |
| (17 | ) |
| (65 | ) | |||
– loans and advances |
| – |
|
| (6 | ) |
| (6 | ) | |||
– returns and repayments |
| 5 |
|
| 10 |
|
| 10 |
| |||
All other – net |
| – |
|
| 5 |
|
| 21 |
| |||
Net cash used in continuing operations |
| (2,666 | ) |
| (1,999 | ) |
| (923 | ) | |||
Net cash used in discontinued operations |
| – |
|
| (245 | ) |
| (270 | ) | |||
Net cash used in investing activities |
| (2,666 | ) |
| (2,244 | ) |
| (1,193 | ) | |||
Financing activities: | ||||||||||||
Commercial paper and revolving credit arrangements – net |
| (375 | ) |
| (51 | ) |
| 62 |
| |||
Other debt – borrowings |
| 1,828 |
|
| 537 |
|
| – |
| |||
– repayments |
| (604 | ) |
| (646 | ) |
| (66 | ) | |||
Redemption of preferred stock of subsidiary |
| (185 | ) |
| (223 | ) |
| – |
| |||
Preferred stock repurchased |
| (110 | ) |
| – |
|
| (12 | ) | |||
Treasury common stock – proceeds from issuances |
| 2 |
|
| 12 |
|
| 1 |
| |||
– purchases |
| (7 | ) |
| (1 | ) |
| (105 | ) | |||
Dividends paid – Common Stock |
| (285 | ) |
| (284 | ) |
| (274 | ) | |||
– Steel Stock |
| – |
|
| (49 | ) |
| (89 | ) | |||
– Preferred stock |
| – |
|
| (8 | ) |
| (8 | ) | |||
Distributions to minority shareholder of |
| (176 | ) |
| (577 | ) |
| (420 | ) | |||
Net cash provided from (used in) financing activities |
| 88 |
|
| (1,290 | ) |
| (911 | ) | |||
Effect of exchange rate changes on cash: | ||||||||||||
Continuing operations |
| 4 |
|
| (3 | ) |
| (2 | ) | |||
Discontinued operations |
| – |
|
| (1 | ) |
| 1 |
| |||
Net increase (decrease) in cash and cash equivalents |
| (169 | ) |
| 98 |
|
| 426 |
| |||
Cash and cash equivalents at beginning of year |
| 657 |
|
| 559 |
|
| 133 |
| |||
Cash and cash equivalents at end of year | $ | 488 |
| $ | 657 |
| $ | 559 |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Consolidated Statement of Stockholders'Stockholders’ Equity
Dollars in
millions Shares in thousands
------------------- -------------------------
2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
Preferred stock -
6.50% Cumulative Convertible:
Balance at beginning of year $ 2 $ 3 $ 3 2,413 2,715 2,768
Repurchased - (1) - (9) (302) (53)
Converted into Steel Stock - - - (1) - -
Exchanged for debt - - - (195) - -
Converted to right to receive
cash at Separation (2) - - (2,208) - -
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ 2 $ 3 - 2,413 2,715
- --------------------------------------------------------------------------------
Common stocks:
Common Stock:
Balance at beginning of year $ 312 $ 312 $ 308 312,166 311,767 308,459
Issued in public offering - - - - - 67
Issued for:
Employee stock plans - - 3 - 391 2,903
Dividend Reinvestment and
Direct Stock Purchase Plan - - - - - 120
Exchangeable Shares - - 1 - 8 218
----- ----- ----- ------- ------- -------
Balance at end of year $ 312 $ 312 $ 312 312,166 312,166 311,767
- --------------------------------------------------------------------------------
Steel Stock:
Balance at beginning of year $ 89 $ 88 $ 88 88,767 88,398 88,336
Issued for:
Employee stock plans - 1 - 430 369 62
Conversion of preferred stock - - - 1 - -
Exchanged for investment in
United States Steel (89) - - (89,198) - -
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ 89 $ 88 - 88,767 88,398
- --------------------------------------------------------------------------------
Securities exchangeable solely
into
Common Stock:
Balance at beginning of year $ - $ - $ 1 281 289 507
Exchanged for Common Stock - - (1) (281) (8) (218)
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ - $ - - 281 289
- --------------------------------------------------------------------------------
Treasury common stocks, at
cost:
Common Stock:
Balance at beginning of year $(104) $ - $ - (3,900) - -
Repurchased (1) (105) - (27) (3,957) -
Reissued for:
Exchangeable shares 7 - - 281 - -
Employee stock plans 24 1 - 875 43 -
Nonemployee directors
deferred compensation plan - - - - 14 -
----- ----- ----- ------- ------- -------
Balance at end of year $ (74) $(104) $ - (2,771) (3,900) -
- --------------------------------------------------------------------------------
Steel Stock:
Balance at beginning of year $ - $ - $ - - - -
Repurchased - - - (20) - -
Reissued for employee stock
plans - - - 18 - -
Distributed to United States
Steel - - - 2 - -
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ - $ - - - -
- --------------------------------------------------------------------------------
(Table
Dollars in millions | Shares in thousands | ||||||||||||||||||||
2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||||||
Preferred stock: | |||||||||||||||||||||
6.50% Cumulative Convertible: | |||||||||||||||||||||
Balance at beginning of year | $ | – |
| $ | 2 |
| $ | 3 |
| – |
| 2,413 |
| 2,715 |
| ||||||
Repurchased |
| – |
|
| – |
|
| (1 | ) | – |
| (9 | ) | (302 | ) | ||||||
Converted into Steel Stock |
| – |
|
| – |
|
| – |
| – |
| (1 | ) | – |
| ||||||
Exchanged for debt |
| – |
|
| – |
|
| – |
| – |
| (195 | ) | – |
| ||||||
Converted to right to receive cash at Separation |
| – |
|
| (2 | ) |
| – |
| – |
| (2,208 | ) | – |
| ||||||
Balance at end of year | $ | – |
| $ | – |
| $ | 2 |
| – |
| – |
| 2,413 |
| ||||||
Common stocks: | |||||||||||||||||||||
Common Stock: | |||||||||||||||||||||
Balance at beginning of year | $ | 312 |
| $ | 312 |
| $ | 312 |
| 312,166 |
| 312,166 |
| 311,767 |
| ||||||
Issued for: | |||||||||||||||||||||
Employee stock plans |
| – |
|
| – |
|
| – |
| – |
| – |
| 391 |
| ||||||
Exchangeable Shares |
| – |
|
| – |
|
| – |
| – |
| – |
| 8 |
| ||||||
Balance at end of year | $ | 312 |
| $ | 312 |
| $ | 312 |
| 312,166 |
| 312,166 |
| 312,166 |
| ||||||
Steel Stock: | |||||||||||||||||||||
Balance at beginning of year | $ | – |
| $ | 89 |
| $ | 88 |
| – |
| 88,767 |
| 88,398 |
| ||||||
Issued for: | |||||||||||||||||||||
Employee stock plans |
| – |
|
| – |
|
| 1 |
| – |
| 430 |
| 369 |
| ||||||
Conversion of preferred stock |
| – |
|
| – |
|
| – |
| – |
| 1 |
| – |
| ||||||
Distributed to United States Steel shareholders |
| – |
|
| (89 | ) |
| – |
| – |
| (89,198 | ) | – |
| ||||||
Balance at end of year | $ | – |
| $ | – |
| $ | 89 |
| – |
| – |
| 88,767 |
| ||||||
Securities exchangeable solely into Common Stock: | |||||||||||||||||||||
Balance at beginning of year | $ | – |
| $ | – |
| $ | – |
| – |
| 281 |
| 289 |
| ||||||
Exchanged for Common Stock |
| – |
|
| – |
|
| – |
| – |
| (281 | ) | (8 | ) | ||||||
Balance at end of year | $ | – |
| $ | – |
| $ | – |
| – |
| – |
| 281 |
| ||||||
Treasury common stocks, at cost: | |||||||||||||||||||||
Common Stock: | |||||||||||||||||||||
Balance at beginning of year | $ | (74 | ) | $ | (104 | ) | $ | – |
| (2,771 | ) | (3,900 | ) | – |
| ||||||
Repurchased |
| (7 | ) |
| (1 | ) |
| (105 | ) | (297 | ) | (27 | ) | (3,957 | ) | ||||||
Reissued for: | |||||||||||||||||||||
Exchangeable Shares |
| – |
|
| 7 |
|
| – |
| – |
| 281 |
| – |
| ||||||
Employee stock plans |
| 19 |
|
| 24 |
|
| 1 |
| 727 |
| 875 |
| 43 |
| ||||||
Non-employee directors deferred compensation plan |
| 2 |
|
| – |
|
| – |
| 48 |
| – |
| 14 |
| ||||||
Balance at end of year | $ | (60 | ) | $ | (74 | ) | $ | (104 | ) | (2,293 | ) | (2,771 | ) | (3,900 | ) | ||||||
Steel Stock: | |||||||||||||||||||||
Balance at beginning of year | $ | – |
| $ | – |
| $ | – |
| – |
| – |
| – |
| ||||||
Repurchased |
| – |
|
| – |
|
| – |
| – |
| (20 | ) | – |
| ||||||
Reissued for employee stock plans |
| – |
|
| – |
|
| – |
| – |
| 18 |
| – |
| ||||||
Distributed to United States Steel |
| – |
|
| – |
|
| – |
| – |
| 2 |
| – |
| ||||||
Balance at end of year | $ | – |
| $ | – |
| $ | – |
| – |
| – |
| – |
| ||||||
(Table continued on next page)
F-6
Comprehensive
Stockholders' Equity Income
------------------------ -------------------
(Dollars in millions) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year $ 4,676 $ 4,673 $4,587
Marathon Stock issued 4 9 92
Steel Stock issued 8 5 2
Exchanged for investment in
United States Steel (1,526) - -
Exchangeable Shares exchanged
for Common Stock (9) - (6)
6.50% Preferred stock:
Repurchased - (11) (2)
Converted to right to receive
cash at Separation (118) - -
------- ------- ------
Balance at end of year $ 3,035 $ 4,676 $4,673
- --------------------------------------------------------------------------------
Deferred compensation net of
taxes:
Balance at beginning of year $ (8) $ - $ 1
Change during year (11) (8) (1)
Transfer to United States Steel 9 - -
------- ------- ------
Balance at end of year $ (10) $ (8) $ -
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $ 1,847 $ 1,807 $1,467
Net income 157 411 698 $ 157 $ 411 $ 698
Excess redemption value over
carrying value of preferred
securities (20) - -
Dividends on preferred stock (8) (8) (9)
Dividends on Common Stock (per
share: $.92 in 2001, $.88 in
2000 and $.84 in 1999) (284) (274) (261)
Dividends on Steel Stock (per
share $.55 in 2001 and $1.00
in 2000 and 1999) (49) (89) (88)
------- ------- ------
Balance at end of year $ 1,643 $ 1,847 $1,807
- --------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) net of taxes(a):
Minimum pension liability
adjustments:
Balance at beginning of year $ (21) $ (10) $ (37)
Changes during year (13) (11) 27 (13) (11) 27
Reclassified to earnings 20 - - 20 - -
------- ------- ------
Balance at end of year (14) (21) (10)
------- ------- ------
Foreign currency translation
adjustments:
Balance at beginning of year $ (29) $ (17) $ (11)
Changes during year (3) (12) (6) (3) (12) (6)
Reclassified to earnings 29 - - 29 - -
------- ------- ------
Balance at end of year (3) (29) (17)
------- ------- ------
Unrealized holding losses on
investments:
Balance at beginning of year $ - $ - $ -
Changes during year - - (1) - - (1)
Reclassified to earnings - - 1 - - 1
------- ------- ------
Balance at end of year - - -
------- ------- ------
Deferred gains (losses) on
derivative instruments:
Balance at beginning of year $ - $ - $ -
Cumulative effect adjustment (8) - - (8) - -
Reclassification of the
cumulative effect adjustment
into earnings 23 - - 23 - -
Changes in fair value 34 - - 34 - -
Reclassification to earnings 2 - - 2 - -
------- ------- ------
Balance at end of year $ 51 $ - $ -
------- ------- ------
Total balances at end of year $ 34 $ (50) $ (27)
- --------------------------------------------------------------------------------
Total comprehensive income $ 241 $ 388 $ 719
- --------------------------------------------------------------------------------
Total stockholders' equity $ 4,940 $ 6,764 $6,856
- --------------------------------------------------------------------------------
(a) Related income tax provision
(credit): 2001 2000 1999
Minimum pension liability
adjustments $ 4 $ (4) $ 13
Foreign currency translation
adjustments - (1) (3)
Net deferred gains on
derivative instruments 27 - -
Stockholders’ Equity | Comprehensive Income | |||||||||||||||||||||||
(Dollars in millions) | 2002 | 2001 | 2000 | 2002 | 2001 | 2000 | ||||||||||||||||||
Additional paid-in capital: | ||||||||||||||||||||||||
Balance at beginning of year | $ | 3,035 |
| $ | 4,676 |
| $ | 4,673 |
| |||||||||||||||
Common Stock issued |
| – |
|
| 4 |
|
| 9 |
| |||||||||||||||
Treasury Common Stock reissued |
| (3 | ) |
| – |
|
| – |
| |||||||||||||||
Steel Stock issued |
| – |
|
| 8 |
|
| 5 |
| |||||||||||||||
Steel Stock distributed to United States Steel shareholders |
| – |
|
| (1,526 | ) |
| – |
| |||||||||||||||
Exchangeable Shares exchanged for Common Stock |
| – |
|
| (9 | ) |
| – |
| |||||||||||||||
6.50% Preferred stock: | ||||||||||||||||||||||||
Repurchased |
| – |
|
| – |
|
| (11 | ) | |||||||||||||||
Converted to right to receive cash at Separation |
| – |
|
| (118 | ) |
| – |
| |||||||||||||||
Balance at end of year | $ | 3,032 |
| $ | 3,035 |
| $ | 4,676 |
| |||||||||||||||
Unearned compensation: | ||||||||||||||||||||||||
Balance at beginning of year | $ | (10 | ) | $ | (8 | ) | $ | – |
| |||||||||||||||
Change during year |
| 3 |
|
| (11 | ) |
| (8 | ) | |||||||||||||||
Transferred to United States Steel |
| – |
|
| 9 |
|
| – |
| |||||||||||||||
Balance at end of year | $ | (7 | ) | $ | (10 | ) | $ | (8 | ) | |||||||||||||||
Retained earnings: | ||||||||||||||||||||||||
Balance at beginning of year | $ | 1,643 |
| $ | 1,847 |
| $ | 1,807 |
| |||||||||||||||
Net income |
| 516 |
|
| 157 |
|
| 411 |
| $ | 516 |
| $ | 157 |
| $ | 411 |
| ||||||
Excess redemption value over carrying value of preferred securities |
| – |
|
| (20 | ) |
| – |
| |||||||||||||||
Dividends paid on: | ||||||||||||||||||||||||
Preferred stock |
| – |
|
| (8 | ) |
| (8 | ) | |||||||||||||||
Common Stock (per share: $.92 in 2002, $.92 in 2001 and $.88 in 2000) |
| (285 | ) |
| (284 | ) |
| (274 | ) | |||||||||||||||
Steel Stock (per share: $.55 in 2001 and $1.00 in 2000) |
| – |
|
| (49 | ) |
| (89 | ) | |||||||||||||||
Balance at end of year | $ | 1,874 |
| $ | 1,643 |
| $ | 1,847 |
| |||||||||||||||
Accumulated other comprehensive income (loss)(a): | ||||||||||||||||||||||||
Minimum pension liability adjustments: | ||||||||||||||||||||||||
Balance at beginning of year | $ | (14 | ) | $ | (21 | ) | $ | (10 | ) | |||||||||||||||
Changes during year |
| (33 | ) |
| (13 | ) |
| (11 | ) |
| (33 | ) |
| (13 | ) |
| (11 | ) | ||||||
Reclassified to income |
| – |
|
| 20 |
|
| – |
|
| – |
|
| 20 |
|
| – |
| ||||||
Balance at end of year |
| (47 | ) |
| (14 | ) |
| (21 | ) | |||||||||||||||
Foreign currency translation adjustments: | ||||||||||||||||||||||||
Balance at beginning of year | $ | (3 | ) | $ | (29 | ) | $ | (17 | ) | |||||||||||||||
Changes during year |
| 2 |
|
| (3 | ) |
| (12 | ) |
| 2 |
|
| (3 | ) |
| (12 | ) | ||||||
Reclassified to income |
| – |
|
| 29 |
|
| – |
|
| – |
|
| 29 |
|
| – |
| ||||||
Balance at end of year |
| (1 | ) |
| (3 | ) |
| (29 | ) | |||||||||||||||
Deferred gains (losses) on derivative instruments: | ||||||||||||||||||||||||
Balance at beginning of year | $ | 51 |
| $ | – |
| $ | – |
| |||||||||||||||
Cumulative effect adjustment |
| – |
|
| (8 | ) |
| – |
|
| – |
|
| (8 | ) |
| – |
| ||||||
Reclassification of the cumulative effect adjustment into income |
| (1 | ) |
| 23 |
|
| – |
|
| (1 | ) |
| 23 |
|
| – |
| ||||||
Changes in fair value |
| (36 | ) |
| 34 |
|
| – |
|
| (36 | ) |
| 34 |
|
| – |
| ||||||
Reclassification to income |
| (35 | ) |
| 2 |
|
| – |
|
| (35 | ) |
| 2 |
|
| – |
| ||||||
Balance at end of year | $ | (21 | ) | $ | 51 |
| $ | – |
| |||||||||||||||
Total balances at end of year | $ | (69 | ) | $ | 34 |
| $ | (50 | ) | |||||||||||||||
Total comprehensive income | $ | 413 |
| $ | 241 |
| $ | 388 |
| |||||||||||||||
Total stockholders’ equity | $ | 5,082 |
| $ | 4,940 |
| $ | 6,764 |
| |||||||||||||||
(a) Related income tax provision (credit): |
| 2002 |
|
| 2001 |
|
| 2000 |
| |||||||||||||||
Minimum pension liability adjustments | $ | (25 | ) | $ | (4 | ) | $ | (4 | ) | |||||||||||||||
Foreign currency translation adjustments |
| – |
|
| – |
|
| (1 | ) | |||||||||||||||
Net deferred gains (losses) on derivative instruments |
| (11 | ) |
| 27 |
|
| – |
| |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1. Summary of Principal Accounting Policies
Basis of Presentationpresentation – Marathon Oil Corporation (Marathon) was originally organized in 2001 as USX HoldCo, Inc., a wholly owned subsidiary of USX Corporation. As a result of a reorganization transaction completed in July 2001, USX HoldCo, Inc. (1) became the parent entity of the consolidated enterprise (the former USX Corporation was merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to USX Corporation. In connection with the Separation transaction discussed below,in the next paragraph (the Separation), USX Corporation changed its name to Marathon Oil Corporation. The accompanying consolidated financial statements reflect Marathon Oil Corporation and its subsidiaries as the continuation of the consolidated enterprise.
Prior to December 31, 2001, Marathon had two outstanding classes of common stock: USX-MarathonUSX- Marathon Group common stock (Marathon(Common Stock), which was intended to reflect the performance of Marathon'sMarathon’s energy business, and USX-U. S.USX—U.S. Steel Group common stock (Steel Stock), which was intended to reflect the performance of Marathon'sMarathon’s steel business. As described further in Note 2,3, on December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation (United States Steel) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis (the
Separation).
basis.
In connection with the Separation, Marathon'sMarathon’s certificate of incorporation was amended on December 31, 2001 and, from that date, Marathon has only one class of common stock authorized.
Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned consolidated subsidiary Marathon Ashland Petroleum LLC (MAP); and other energy related businesses.
- -------------------------------------------------------------------------------
Principles applied in consolidation – These consolidated financial statements include the accounts of the businesses comprising Marathon.
The assets and liabilities of MAP are consolidated in these financial statements and minority interest representing 38 percent of the carrying value of the net assets of MAP has been recognized. Under certain circumstances, the MAP Limited Liability Company Agreement requires unanimous approval of certain matters brought to the MAP Board of Managers. Marathon does not believe that the rights of the minority shareholder of MAP are substantive because the likelihood of those rights being triggered is remote.
Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly owned gas processing plants are consolidated on a pro rata basis.
Investments in entities over which Marathon has significant influence are accounted for using the equity method of accounting and are carried at Marathon’s share of net assets plus loans and advances. Differences in the basis of the investment and the separate net asset value of the investee, if any, are amortized into income in accordance with the underlying remaining useful life of the associated assets.
Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost.
Income from equity method investments represents Marathon’s proportionate share of income from equity method investments. Other income includes dividend income from other investments. Dividend income is recognized when dividend payments are received.
Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated investee are recognized in the period of change.
Use of estimates – The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Items subject to such estimates and assumptions include the carrying value of property, plant and equipment, goodwill, intangibles and equity method investments; valuation allowances for receivables, inventories and deferred income tax assets; environmental remediation liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; assets and obligations related to employee benefits; and the classification of gains or losses on cash flow hedges of forecasted transaction. Actual results could differ from the estimates and assumptions used.
Income per common share – Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share assumes exercise of stock options and warrants and conversion of convertible debt and preferred securities, provided the effect is not antidilutive.
F-8
Segment information – Marathon’s operations consist of three reportable operating segments:
Segment income represents income from operations allocable to operating segments. Marathon corporate general and administrative costs are not allocated to operating segments. These costs primarily consist of employment costs (including pension effects), professional services, facilities and other related costs associated with corporate activities. Inventory market valuation adjustments and gain (loss) on ownership change in MAP also are not allocated to operating segments. Additionally, certain nonoperating or infrequently occurring items are not allocated to operating segments (see segment income reconcilement table on page F-20).
Information on assets by segment is not provided as it is not reviewed by the chief operating decision maker.
Revenue recognition– Revenues are recognized when products are shipped or services are provided to customers and the sales price is fixed or determinable and collectibility is reasonably assured. Costs associated with revenues are recorded in costs of revenues.
Marathon recognizes revenues from the production of oil and gas in the United States when title is transferred. Outside the United States, revenues are recognized at the time of lifting. Royalties on the production of oil and gas are either paid in cash or settled through the delivery of volumes. Marathon includes royalties in its revenue and cost of revenues when settlement of royalties is paid in cash, while settlement of royalties based on the delivery of volumes are excluded from revenue and cost of revenues.
Rebates from vendors are recognized as revenues when the initiating transaction occurs. Incentives that are derived from contractual provisions are accrued based on past experience and recognized within cost of revenues.
Matching buy/sell transactions settled in cash are recorded in both revenues and costs of revenues as separate sales and purchase transactions.
Marathon follows the sales method of accounting for gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance situation.
Cash and cash equivalents – Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less.
Inventories – Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses.
Derivative instruments – Marathon uses commodity-based derivatives and financial instrument related derivatives to manage its exposure to commodity price risk, interest rate risk or foreign currency risk. Management has authorized the use of futures, forwards, swaps and combinations of options related to the purchase, production or sale of crude oil, natural gas and refined products, fair value of certain assets and liabilities, future interest expense and also certain business transactions denominated in foreign currencies. Changes in the fair value of all derivatives are recognized immediately in income, within revenues, costs of revenues or net interest and other financing costs, unless the derivative qualifies as a hedge of future cash flows or certain foreign currency exposures. Cash flows related to the use of derivatives are classified in operating activities with the underlying hedged transaction.
For derivatives qualifying as hedges of future cash flows or certain foreign currency exposures, the effective portion of any changes in fair value is recognized in a component of stockholders’ equity called other comprehensive income and then reclassified to income, within revenues, costs of revenues or net interest and other financing costs, when the underlying anticipated transaction occurs . Any ineffective portion of such hedges is recognized in income as it occurs. For discontinued cash flow hedges prospective changes in the fair value of the derivative are recognized in income. Any gain or loss accumulated in other comprehensive income at the time a hedge is discontinued continues to be
F-9
deferred until the original forecasted transaction occurs. However, if it is determined that the likelihood of the original forecasted transaction occurring is no longer probable, the entire gain or loss accumulated in other comprehensive income is immediately reclassified into income. |
For derivatives designated as hedges of the fair value of recognized assets, liabilities or firm commitments, changes in the fair value of both the hedged item and the related derivative are recognized immediately in income, within revenues, costs of revenues or net interest and other financing costs, with an offsetting effect included in the basis of the hedged item. The net effect is to reflect in income the extent to which the hedge is not effective in achieving offsetting changes in fair value.
Property, plant and equipment – Marathon uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties are depreciated and depleted by the units-of-production method. Support equipment and other property, plant and equipment are depreciated over their estimated useful lives.
Marathon evaluates its oil and gas producing properties for impairment of value on a field-by-field basis or, in certain instances, by logical grouping of assets if there is significant shared infrastructure, using undiscounted future cash flows based on total proved and risk-adjusted probable and possible reserves. Oil and gas producing properties deemed to be impaired are written down to their fair value, as determined by discounted future cash flows based on total proved and risk-adjusted probable and possible reserves or, if available, comparable market values. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment. Other unproved properties are amortized over their remaining holding period.
For property, plant and equipment unrelated to oil and gas producing activities, depreciation is computed on the straight-line method over their estimated useful lives, which range from 3 to 42 years.
When property, plant and equipment depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of property, plant and equipment are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are reclassified as held for sale. Proceeds from disposal of property, plant and equipment depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income.
Major maintenance activities – Marathon incurs planned major maintenance costs primarily for refinery turnarounds. Such costs are expensed in the same annual period as incurred; however, estimated annual turnaround costs are recognized in income throughout the year on a pro rata basis.
Environmental remediation liabilities – Environmental remediation expenditures are capitalized if the costs mitigate or prevent future contamination or if the costs improve existing assets’ environmental safety or efficiency. Marathon provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs can be reasonably estimated. The timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted when the estimated amounts are reasonably fixed and determinable. If recoveries of remediation costs from third parties are probable, a receivable is recorded.
Asset retirement obligations – Estimated abandonment and dismantlement costs of offshore production facilities are accrued over the life of the producing assets on a units-of-production method.
Deferred taxes – Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of deferred tax assets is assessed periodically based on several interrelated factors. These factors include Marathon’s expectation to generate sufficient future taxable income including future foreign source income, tax credits, operating loss carryforwards, and management’s intent regarding the permanent reinvestment of the income from certain foreign subsidiaries.
Pensions and other postretirement benefits – Marathon has noncontributory defined benefit pension plans covering substantially all domestic employees, international employees located in Ireland and the United Kingdom, and most MAP employees. Benefits under these plans are based primarily upon years of service and final average pensionable earnings. MAP also participates in a multiemployer plan that provides coverage for less than 5% of its employees. The benefits provided include both pension and health care.
F-10
Marathon also has a retiree health plan covering most employees upon their retirement. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, subject to various cost sharing features. In addition, life insurance benefits are provided to certain nonunion and most union represented employees primarily based on annual base salary at retirement. Retiree health and life insurance benefits (other benefits) have not been prefunded.
Stock-based compensation – The Marathon Oil Corporation 1990 Stock Plan authorizes the Compensation Committee of the board of directors of Marathon to grant restricted stock, stock options and stock appreciation rights to key management employees. Up to 0.5 percent of the outstanding stock, as determined on December 31 of the preceding year, is available for grants during each calendar year the 1990 Plan is in effect. In addition, awarded shares that do not result in shares being issued are available for subsequent grant, and any ungranted shares from prior years’ annual allocations are available for subsequent grant during the years the 1990 Plan is in effect.
Stock options represent the right to purchase shares of stock at the market value of the stock at date of grant. Certain options contain the right to receive cash and/or common stock equal to the excess of the fair market value of shares of common stock, as determined in accordance with the plan, over the option price of shares. Most stock options vest after a one-year service period and all expire 10 years from the date they are granted.
Restricted stock represents stock granted for such consideration, if any, as determined by the Compensation Committee, subject to forfeiture provisions and restrictions on transfer. Those restrictions may be removed as conditions such as performance, continuous service and other criteria are met. Restricted stock is issued at the market price per share at the date of grant and vests over service periods that range from one to five years.
Marathon also has a restricted stock plan for certain salaried employees that are not officers of Marathon. Participants in the plan are awarded restricted stock by the Compensation Committee based on their performance within certain guidelines. 50% of the awarded stock vests at the end of two years from the date of grant and the remaining 50% vests in four years from the date of grant. Prior to vesting, the employee has the right to vote such stock and receive dividends thereon. The nonvested shares are not transferable and are retained by the Corporation until they vest.
In connection with the Separation, a special restricted stock program for most employees other than officers of Marathon was implemented. On January 23, 2002, participants were awarded a one-time grant of ten shares, which vested one year after the date of grant. Prior to vesting, the employee had the right to vote such stock and receive dividends thereon. The nonvested shares were not transferable and were retained by the Corporation until they vested.
Unearned compensation is charged to equity when the restricted stock is granted. Amounts related to the 1990 Stock Plan are subsequently adjusted for changes in the market value of the underlying stock. Compensation expense is recognized over the balance of the vesting period and is adjusted if conditions of the restricted stock grant are not met.
Marathon uses the intrinsic value model for accounting for stock-based compensation. The following net income and per share data illustrates the effect on net income and net income per share if the fair value method had been applied to all outstanding and unvested awards in each period.
(In millions, except per share data) | 2002 | 2001 | 2000 | |||||||||
Net income applicable to Common Stock | ||||||||||||
As reported | $ | 516 |
| $ | 377 |
| $ | 432 |
| |||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
| 5 |
|
| 5 |
|
| 1 |
| |||
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects |
| (16 | ) |
| (11 | ) |
| (6 | ) | |||
Pro forma net income applicable to Common Stock | $ | 505 |
| $ | 371 |
| $ | 427 |
| |||
Basic and diluted net income per share | ||||||||||||
– As reported | $ | 1.66 |
| $ | 1.22 |
| $ | 1.39 |
| |||
– Pro forma | $ | 1.63 |
| $ | 1.20 |
| $ | 1.38 |
| |||
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The above pro forma amounts were based on a Black-Scholes option-pricing model, which included the following information and assumptions:
(In millions, except per share data) | 2002 | 2001 | 2000 | |||||||||
Weighted-average grant-date exercise price per share | $ | 28.12 |
| $ | 32.52 |
| $ | 25.18 |
| |||
Expected annual dividends per share | $ | .92 |
| $ | .92 |
| $ | .88 |
| |||
Expected life in years |
| 5 |
|
| 5 |
|
| 5 |
| |||
Expected volatility |
| 35 | % |
| 34 | % |
| 33 | % | |||
Risk free interest rate |
| 4.5 | % |
| 4.9 | % |
| 6.5 | % | |||
Weighted-average grant-date fair value of options granted during the year, as calculated from above | $ | 7.79 |
| $ | 9.45 |
| $ | 7.51 |
| |||
Concentrations of credit risk– Marathon is exposed to credit risk in the event of nonpayment by counterparties, a significant portion of which are concentrated in energy related industries. The creditworthiness of customers and other counterparties is subject to continuing review, including the use of master netting agreements, where appropriate. While no single customer accounts for more than 5% of annual revenues, Marathon has significant exposures to United States Steel arising from the Separation. These exposures are discussed in Note 3.
Reclassifications—Certain reclassifications of prior years’ data have been made to conform to 2002 classifications.
2. Discontinued OperationsNew Accounting Standards
Adopted in the reporting periods –Effective January 1, 2001, Marathon adopted Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This statement requires recognition of all derivatives as either assets or liabilities at fair value. The transition adjustment related to adopting SFAS No. 133 on January 1, 2001, was recognized as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income was $8 million, net of a tax benefit of $5 million. The unfavorable cumulative effect on other comprehensive income (loss) (OCI) was $8 million, net of a tax benefit of $4 million.
Since the issuance of SFAS No. 133, the Financial Accounting Standards Board (FASB) has issued several interpretations. As a result, Marathon has recognized in income the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom. As of January 1, 2002, Marathon recognized a favorable cumulative effect of a change in accounting principle of $13 million, net of tax of $7 million.
Effective January 1, 2002, Marathon adopted the following Statements of Financial Accounting Standards:
SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method. The transitional provisions of SFAS No. 141 required Marathon to reclassify $11 million from identifiable intangible assets to goodwill at January 1, 2002.
SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. Effective January 1, 2002, Marathon ceased amortization of existing goodwill, which results in a favorable impact on annual income of approximately $3 million, net of tax. Marathon has completed the required transitional impairment test for existing goodwill as of the date of adoption. No impairment of goodwill was indicated.
SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and provides additional implementation guidance for assets to be held and used and assets to be disposed of other than by sale. For long-lived assets to be disposed of by sale, SFAS No. 144 broadens the definition of those disposals that should be reported separately as discontinued operations. The adoption of SFAS No. 144 had no initial effect on Marathon’s financial statements.
In late 2002 and early 2003, the FASB issued the following:
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Each of these pronouncements required the immediate adoption of certain disclosure requirements, which have been reflected in these financial statements. The accounting requirements of these pronouncements will be adopted in future periods.
To be adopted in future periods –In 2001, the FASB issued Statement of Financial Accounting Standards No. 143 “Accounting for Asset Retirement Obligations” (SFAS No. 143). This statement requires that the fair value of an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The present value of the estimated asset retirement costs is capitalized as part of the carrying amount of the long-lived asset. For Marathon, asset retirement obligations primarily relate to the abandonment of oil and gas producing facilities. Under previous accounting standards, such obligations were recognized over the life of the producing assets on a units-of-production basis.
While certain assets such as refineries, crude oil and product pipelines and marketing assets have retirement obligations covered by SFAS No. 143, those obligations are not expected to be recognized since the fair value cannot be estimated due to the uncertainty of the settlement date of the obligation.
Effective January 1, 2003, Marathon will adopt SFAS No. 143, as required. The cumulative effect on net income of adopting SFAS No. 143 is expected to be a net favorable effect of approximately $5 million. At the time of adoption, total assets will increase approximately $120 million, and total liabilities will increase approximately $115 million. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and gas, future inflation rates and the credit-adjusted risk-free interest rate.
Previous accounting standards used the units-of-production method to match estimated future retirement costs with the revenues generated from the producing assets. In contrast, SFAS No. 143 requires depreciation of the capitalized asset retirement cost and accretion of the asset retirement obligation over time. The depreciation will generally be determined on a units-of-production basis, while the accretion to be recognized will escalate over the life of the producing assets, typically as production declines. Because of the long lives of the underlying producing assets, the impact on net income in the near term is not expected to be material.
In the second quarter of 2002, the FASB issued Statement of Financial Accounting Standards No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS No. 145) and Statement of Financial Accounting Standards No. 146 “Accounting for Exit or Disposal Activities” (SFAS No. 146). SFAS No. 145 has a dual effective date. The provisions relating to the early extinguishment of debt will be adopted by Marathon on January 1, 2003. As a result, losses from the early extinguishment of debt in 2002, which are currently reported as extraordinary items, will be reported in income from continuing operations in comparative financial statements subsequent to the adoption of SFAS No. 145. SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002.
SFAS No. 148 provides alternative methods for the transition of the accounting for stock-based compensation from the intrinsic value method to the fair value method. Effective January 1, 2003, Marathon plans to apply the fair value method to future grants and any modified grants of stock-based compensation. Based upon this change, and assuming the number of stock options granted in 2003 approximates the number of those granted in 2002, the estimated impact on Marathon’s 2003 earnings would not be materially different than under previous accounting standards.
Effective for any guarantees issued or modified January 1, 2003 or after, FIN 45 requires the fair-value measurement and recognition of a liability for the issuance of certain guarantees. Enhanced disclosure requirements will continue to apply to both new and existing guarantees subject to FIN 45.
FIN 46 identifies certain off-balance sheet arrangements that meet the definition of a variable interest entity (VIE). The primary beneficiary of a VIE is the party that is exposed to the majority of the risks and/or returns of the VIE. In future accounting periods, the primary beneficiary will be required to consolidate the VIE. In addition, more extensive disclosure requirements apply to the primary beneficiary, as well as other significant investors. Although Marathon participates in an arrangement that is subject to the disclosure requirements of FIN 46, Marathon would not be deemed to be a primary beneficiary under the new rules.
3. Information about United States Steel
The Separation – On December 31, 2001, in a tax-free distribution to holders of Steel Stock, Marathon exchanged the common stock of United States Steel for all outstanding shares of Steel Stock on a one-for-one basis. The net assets of United States Steel at Separation were approximately the same as the net assets attributable to Steel Stock immediately prior to the Separation, except for a value transfer of $900 million in the form of additional net debt and other financings retained by Marathon. During the last six months of 2001, United States Steel completed a number of financings so that, upon Separation, the net debt and other financings of United States Steel as a separate legal entity would approximate the net debt and other financings attributable to Steel Stock. At December 31, 2001, the net debt and other financings of United States Steel was $54 million less than the net debt and other
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