1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
- --------------------------------------------------------------------------------
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at April 30, 2001:
USX-Marathon Group - 308,607,455 shares
USX-U. S. Steel Group - 88,800,321 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 2001
----------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 30
Financial Statistics 32
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 33
Marathon Group Balance Sheet 34
Marathon Group Statement of Cash Flows 35
Selected Notes to Financial Statements 36
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 43
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 53
Supplemental Statistics 55
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED March 31, 2001
----------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 57
U. S. Steel Group Balance Sheet 58
U. S. Steel Group Statement of Cash Flows 59
Selected Notes to Financial Statements 60
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 66
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 74
Supplemental Statistics 76
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 77
Item 5. Other Information 78
Item 6. Exhibits and Reports on Form 8-K 79
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- ---------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $10,116 $9,307
Dividend and investee income 80 4
Net gains on disposal of assets 20 107
Gain on ownership change in Marathon Ashland
Petroleum LLC 1 4
Other income 68 7
------ ------
Total revenues and other income 10,285 9,429
------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 7,769 7,213
Selling, general and administrative expenses 125 71
Depreciation, depletion and amortization 376 321
Taxes other than income taxes 1,181 1,163
Exploration expenses 23 45
------ ------
Total costs and expenses 9,474 8,813
------ ------
INCOME FROM OPERATIONS 811 616
Net interest and other financial costs 23 95
Minority interest in income of Marathon Ashland
Petroleum LLC 107 55
------ ------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 681 466
Provision for income taxes 164 169
------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 517 297
Cumulative effect of change in accounting principle (8) -
------ ------
NET INCOME 509 297
Dividends on preferred stock 2 2
------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $507 $295
====== ======
<FN>
Selected notes to financial statements appear on pages 9-19.
5
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 2001 2000
- -----------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Income before cumulative effect of change in
accounting principle $508 $254
- Per share - basic and diluted 1.65 .81
Cumulative effect of change in accounting principle (8) -
- Per share - basic and diluted (.03) -
Net income $500 $254
- Per share - basic and diluted 1.62 .81
Dividends paid per share .23 .21
Weighted average shares, in thousands
- Basic 308,753 312,128
- Diluted 309,073 312,285
APPLICABLE TO STEEL STOCK:
Net income $7 $41
- Per share - basic and diluted .08 .45
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Basic 88,806 88,422
- Diluted 88,806 88,430
<FN>
Selected notes to financial statements appear on pages 9-19.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
March 31 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $591 $559
Receivables, less allowance for doubtful
accounts of $133 and $60 2,770 2,888
Receivables subject to a security interest 350 350
Inventories 2,997 2,813
Deferred income tax benefits 230 261
Assets held for sale - 330
Other current assets 122 131
------ ------
Total current assets 7,060 7,332
Investments and long-term receivables,
less reserves of $26 and $28 1,034 801
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$16,484 and $16,222 12,967 12,114
Prepaid pensions 2,886 2,879
Other noncurrent assets 376 275
------ ------
Total assets $24,323 $23,401
====== ======
<FN>
Selected notes to financial statements appear on pages 9-19.
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31 December 31
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $400 $150
Accounts payable 3,620 3,774
Payroll and benefits payable 455 432
Accrued taxes 564 281
Accrued interest 74 108
Long-term debt due within one year 301 287
------ ------
Total current liabilities 5,414 5,032
Long-term debt, less unamortized discount 4,012 4,173
Deferred income taxes 2,057 2,020
Employee benefits 2,543 2,415
Deferred credits and other liabilities 715 724
Preferred stock of subsidiary 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 183 183
Minority interest in Marathon Ashland Petroleum LLC 1,938 1,840
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,404,487 shares
and 2,413,487 shares ($120 and $121 liquidation
preference, respectively) 2 2
Common stocks:
Marathon Stock issued - 312,165,978 shares and
312,165,978 shares 312 312
Steel Stock issued - 88,800,321 shares and
88,767,395 shares 89 89
Securities exchangeable solely into Marathon Stock
issued - 280,348 shares and 281,148 shares - -
Treasury common stock, at cost -
Marathon Stock - 3,576,723 shares and
3,899,714 shares (95) (104)
Additional paid-in capital 4,675 4,676
Deferred compensation (15) (8)
Retained earnings 2,261 1,847
Accumulated other comprehensive loss (18) (50)
------ ------
Total stockholders' equity 7,211 6,764
------ ------
Total liabilities and stockholders' equity $24,323 $23,401
====== ======
<FN>
Selected notes to financial statements appear on pages 9-19.
8
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $509 $297
Adjustments to reconcile to net cash provided
from operating activities:
Cumulative effect of change in accounting principle 8 -
Minority interest in income of Marathon Ashland
Petroleum LLC 107 55
Depreciation, depletion and amortization 376 321
Exploratory dry well costs 4 15
Pensions and other postretirement benefits (21) (77)
Deferred income taxes (179) 73
Net gains on disposal of assets (20) (107)
Changes in:
Current receivables 190 (36)
Inventories (154) (49)
Current accounts payable and accrued expenses (42) (104)
All other - net 36 (31)
------ ------
Net cash provided from operating activities 814 357
------ ------
INVESTING ACTIVITIES:
Capital expenditures (313) (382)
Acquisition of Pennaco Energy, Inc. (506) -
Disposal of assets 37 210
Restricted cash - withdrawals 19 127
- deposits (6) (186)
All other - net 1 (5)
------ ------
Net cash used in investing activities (768) (236)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements
- net 73 (21)
Other debt - borrowings 139 231
- repayments (125) (255)
Preferred stock repurchased - (11)
Dividends paid (95) (90)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (3) -
------ ------
Net cash used in financing activities (11) (146)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3) (1)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 32 (26)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 559 133
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $591 $107
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(127) $(136)
Income taxes refunded (paid) 47 (19)
<FN>
Selected notes to financial statements appear on pages 9-19.
9
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 2001 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 2000.
2. Effective January 1, 2001, USX 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 Standard 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 change in accounting
principle. The unfavorable cumulative effect on net income, net of a tax
benefit of $5 million, was $8 million. The unfavorable cumulative effect
on other comprehensive income (OCI), net of a tax benefit of $4 million,
was $8 million. The amounts reported as OCI will be reflected in net
income when the anticipated physical transactions are consummated.
The $8 million transition adjustment recorded in OCI at January 1,
2001, included $42 million of net losses that were reclassified into income
during the first quarter of 2001. In future periods, $34 million of net
gains will be reclassified into income relating to the OCI transition
adjustment when the related physical transactions are completed.
3. The Marathon Group's operations consist of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related
Businesses (OERB). OERB is an aggregation of two segments which fall below
the quantitative reporting thresholds: 1) Natural Gas and Crude Oil
Marketing and Transportation - markets and transports its own and third-
party natural gas and crude oil in the United States; and 2) Power
Generation - develops, constructs and operates independent electric power
projects worldwide.
The U. S. Steel Group consists of two reportable operating segments:
1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel
includes the United States operations of U. S. Steel while USSK includes
the U. S. Steel Kosice operations primarily located in the Slovak Republic.
Domestic Steel is engaged in the domestic production, sale and
transportation of steel mill products, coke, taconite pellets and coal; the
management of mineral resources; real estate development; and engineering
and consulting services. USSK is engaged in the production and sale of
steel mill products and coke and primarily serves central European markets.
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
The results of segment operations for USX are as follows:
Total
Marathon
(In millions) E&P RM&T OERB Segments
- -----------------------------------------------------------------------------
FIRST QUARTER 2001
- -------------------
Revenues and other income:
Customer $1,238 $6,742 $628 $8,608
Intersegment (a) 134 6 25 165
Intergroup (a) 10 - 2 12
Equity in earnings of
unconsolidated investees 20 6 4 30
Other 8 15 2 25
------ ------ ------ ------
Total revenues and other income $1,410 $6,769 $661 $8,840
====== ====== ====== ======
Segment income $600 $276 $8 $884
====== ====== ====== ======
FIRST QUARTER 2000
- ------------------
Revenues and other income:
Customer $952 $6,427 $350 $7,729
Intersegment (a) 69 20 19 108
Intergroup (a) 5 - 5 10
Equity in earnings (losses)
of unconsolidated investees (1) 4 4 7
Other 3 11 4 18
------ ------ ------ ------
Total revenues and other income $1,028 $6,462 $382 $7,872
====== ====== ====== ======
Segment income $309 $140 $13 $462
====== ====== ====== ======
<FN>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
Total Total
Domestic U.S.Steel Marathon
(In millions) Steel USSK Segments Segments Total
- ----------------------------------------------------------------------------
FIRST QUARTER 2001
- ------------------
Revenues and other income:
Customer $1,262 $246 $1,508 $8,608 $10,116
Intersegment (a) 1 - 1 165 166
Intergroup (a) 2 - 2 12 14
Equity in earnings of
unconsolidated investees 47 - 47 30 77
Other 6 1 7 25 32
------ ------ ------ ------ ------
Total revenues and other income $1,318 $247 $1,565 $8,840 $10,405
====== ====== ====== ====== ======
Segment income (loss) $(151) $41 $(110) $884 $774
====== ====== ====== ====== ======
FIRST QUARTER 2000
- ------------------
Revenues and other income:
Customer $1,578 $- $1,578 $7,729 $9,307
Intersegment (a) - - - 108 108
Intergroup (a) 4 - 4 10 14
Equity in earnings (losses) of
unconsolidated investees (7) - (7) 7 -
Other 13 - 13 18 31
------ ------ ------ ------ ------
Total revenues and other income $1,588 $- $1,588 $7,872 $9,460
====== ====== ====== ====== ======
Segment income $54 $- $54 $462 $516
====== ====== ====== ====== ======
<FN>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
The following schedule reconciles segment revenues and income to amounts
reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon Group U. S. Steel Group
First Quarter First Quarter
Ended Ended
March 31 March 31
(In millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------
Revenues and other income:
Revenues and other income
of reportable segments $8,840 $7,872 $1,565 $1,588
Items not allocated to segments:
Gain on ownership change in MAP 1 4 - -
Other (a) 59 87 - -
Elimination of intersegment revenues (165) (108) (1) -
------ ------ ----- -----
Total Group revenues and other income $8,735 $7,855 $1,564 $1,588
====== ====== ====== ======
Income:
Income (loss) for reportable segments $884 $462 $(110) $54
Items not allocated to segments:
Gain on ownership change in MAP 1 4 - -
Administrative expenses (32) (28) (8) (6)
Net pension credits - - 41 65
Costs related to former business activities - - (24) (22)
Other (a) 59 87 - -
------ ------ ------ ------
Total Group income (loss) from operations $912 $525 $(101) $91
====== ====== ====== ======
<FN>
(a) Represents in 2001 for the Marathon Group, gain on offshore lease
resolution with the U.S. Government and in 2000, gain on disposition of
Angus/Stellaria.
13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. In the first quarter 2001, Marathon Oil Company (Marathon) acquired
Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired
87% of the outstanding stock of Pennaco through a tender offer completed on
February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged
with a wholly owned subsidiary of Marathon. Under the terms of the merger,
each share not held by Marathon was converted into the right to receive $19
in cash. The total cash purchase price of Pennaco was $506 million. The
acquisition was accounted for under the purchase method of accounting. The
excess of the purchase price over the preliminary fair value of net assets
acquired (goodwill) approximates $64 million and will be amortized over 17
years. First quarter results of operations include the results of Pennaco
from February 7, 2001.
On March 1, 2001, USX completed the purchase of the tin mill products
business of LTV Corporation (LTV). In this noncash transaction, USX
assumed certain employee related obligations of LTV. The acquisition was
accounted for using the purchase method of accounting. First quarter 2001
results of operations include the operations of the LTV assets acquired
from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P.
As a result of this transaction, USX became sole owner of Transtar and
certain of its subsidiaries. Holdings became owner of the other
subsidiaries of Transtar. USX accounted for the change in its ownership
interest in Transtar using the purchase method of accounting. USX
recognized in the first quarter of 2001, a pretax gain of $70 million
(included in dividend and investee income) and a favorable deferred tax
adjustment of $33 million related to this transaction. USX previously
accounted for its investment in Transtar under the equity method of
accounting.
The following unaudited pro forma data for USX includes the results of
operations of the above acquisitions giving effect to them as if they had
been consummated at the beginning of the years presented. The pro forma
data is based on historical information and does not necessarily reflect
the actual results that would have occurred nor is it necessarily
indicative of future results of operations.
14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
First
Quarter Ended
March 31
(In millions, except per share amounts) 2001 2000
-----------------------------------------------------------------------
Revenues and other income $10,269 $9,508
Income before cumulative effect of change in
accounting principle 411 290
- Per common share:
Marathon Stock - basic and diluted 1.64 .78
Steel Stock - basic and diluted (1.09) .49
Net income 403 290
- Per common share:
Marathon Stock - basic and diluted 1.61 .78
Steel Stock - basic and diluted (1.09) .49
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. (USSK),
which is primarily located in the Slovak Republic. USSK was formed in June
2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a
diversified Slovak corporation. The acquisition was accounted for under
the purchase method of accounting. VSZ did not provide historical carve-
out financial information for its steel activities prepared in accordance
with generally accepted accounting principles in the United States. USX
was unable to fully determine the effects of transfer pricing, intercompany
eliminations and expense allocations in order to prepare such carve-out
information from Slovak statutory reports and VSZ internal records. USX
broadly estimates that the unaudited pro forma effect on its first quarter
2000 revenues, giving effect to the acquisition as if it had been
consummated at the beginning of this period, would have been to increase
revenues in the period by approximately $250 million. USX cannot determine
the unaudited pro forma effect on its first quarter 2000 net income.
However, historical pro forma information is not necessarily indicative of
future results of operations.
5. In December 2000, Marathon and Kinder Morgan Energy Partners, L.P.
signed a definitive agreement to form a joint venture combining certain of
their oil and gas producing activities in the U.S. Permian Basin, including
Marathon's interest in the Yates Field. This transaction has allowed
Marathon to expand its interests in the Permian Basin and improve access to
materials for use in enhanced recovery techniques in the Yates Field. The
joint venture, named MKM Partners L.P., commenced operations in January
2001 and is accounted for under the equity method of accounting.
15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
6. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
----------------------
March 31 December 31
2001 2000
-------- -----------
Raw materials $1,026 $915
Semi-finished products 434 429
Finished products 1,360 1,279
Supplies and sundry items 177 190
------ ------
Total $2,997 $2,813
====== ======
7. Total comprehensive income was $541 million for the first quarter of
2001 and $296 million for the first quarter of 2000.
8. The method of calculating net income per share for the Marathon Stock
and Steel Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Restated
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts. The financial statements of the Marathon
Group and the U. S. Steel Group, taken together, include all accounts which
comprise the corresponding consolidated financial statements of USX.
Basic net income 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 per share assumes exercise of stock options,
provided the effect is not antidilutive.
16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. (Continued)
COMPUTATION OF INCOME PER SHARE
First Quarter Ended
March 31
2001 2000
Basic Diluted Basic Diluted
- ---------------------------------------------------------------------------
Marathon Group
- ---------------
Net income (millions):
Income before cumulative effect of change
in accounting principle $508 $508 $254 $254
Cumulative effect of change in
accounting principle (8) (8) - -
------ ------ ------ ------
Net income $500 $500 $254 $254
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares
outstanding 308,753 308,753 312,128 312,128
Effect of dilutive securities
- stock options - 320 - 157
------ ------ ------ ------
Average common shares and dilutive effect 308,753 309,073 312,128 312,285
====== ====== ====== ======
Per share:
Income before cumulative effect of change
in accounting principle $1.65 $1.65 $.81 $.81
Cumulative effect of change in accounting
principle (.03) (.03) - -
------ ------ ------ ------
Net income $1.62 $1.62 $.81 $.81
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (millions):
Net income $9 $9 $43 $43
Dividends on preferred stock 2 2 2 2
------ ------ ------ ------
Net income applicable to Steel Stock $7 $7 $41 $41
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares
outstanding 88,806 88,806 88,422 88,422
Effect of dilutive securities
- stock options - - - 8
------ ------ ------ ------
Average common shares and dilutive effect 88,806 88,806 88,422 88,430
====== ====== ====== ======
Net income per share $.08 $.08 $.45 $.45
====== ====== ====== ======
17
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. Included in revenues and costs and expenses for the first quarter of
2001 and 2000 were $1,038 million and $1,039 million, respectively,
representing excise taxes on petroleum products and merchandise.
10. The provision for income taxes for the periods reported is based on
tax rates and amounts which recognize management's best estimate of current
and deferred tax assets and liabilities.
In the first quarter of 2001, interest and other financial costs
includes a favorable adjustment of $76 million and provision for income
taxes includes an unfavorable adjustment of $20 million, both of which are
related to prior years' taxes.
11. At March 31, 2001, USX had $200 million in borrowings against its
$1,354 million long-term revolving credit facility and no borrowings
against its $451 million short-term revolving credit facility.
Certain banks provide USX with short-term lines of credit totaling
$150 million which require a .125% fee or maintenance of compensating
balances of 3%. At March 31, 2001, there were no borrowings against these
facilities.
At March 31, 2001, MAP had no borrowings against its $500 million
revolving credit agreements with banks and had no amounts outstanding
against its $190 million revolving credit agreement with Ashland, which was
amended and extended for one year to March 15, 2002.
At March 31, 2001, USSK had no borrowings against its $50 million
short-term credit facility.
At March 31, 2001, in the event of a change in control of USX, debt
obligations totaling $3,531 million and operating lease obligations of
$101 million may be declared immediately due and payable. In such event,
USX may also be required to either repurchase the leased Fairfield slab
caster for $100 million or provide a letter of credit to secure the
remaining obligation.
12. On February 16, 2001, USX borrowed $250 million under a six-month term
loan facility agreement. The loan is unsecured and any borrowings bear
interest at defined short-term market rates. At March 31, 2001, $250
million had been borrowed against this facility.
On March 30, 2001, USX borrowed $30 million under a five-year
promissory note agreement. The amount borrowed is unsecured and requires
quarterly principal payments and interest at a rate of 6.57%. At March 31,
2001, $30 million was outstanding under the agreement.
18
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. In 1998, USX redeemed all shares of USX-Delhi Group Common Stock.
After the redemption, 50,000,000 shares of this stock remain authorized but
unissued.
14. USX 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 discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At March 31, 2001, and
December 31, 2000, accrued liabilities for remediation totaled $226 million
and $212 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were
$64 million at March 31, 2001, and $57 million at December 31, 2000.
For a number of years, USX has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the first quarter of 2001 and for the years 2000 and
1999, such capital expenditures totaled $9 million, $91 million and $78
million, respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such expenditures
are uncertain because of the continuing evolution of specific regulatory
requirements.
At March 31, 2001, and December 31, 2000, accrued liabilities for
platform abandonment and dismantlement totaled $170 million and $162
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$68 million at March 31, 2001. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of March 31, 2001, the largest guarantee for a single affiliate was $59
million.
19
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
14. (Continued)
At March 31, 2001, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $119 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and long-
term investments at March 31, 2001, totaled $778 million compared with $663
million at December 31, 2000.
15. USX has a 16% investment in Republic Technologies International LLC
(Republic) which was accounted for under the equity method of accounting.
During the first quarter of 2001, USX discontinued applying the equity
method since investments in and advances to Republic had been reduced to
zero. Also, USX has recognized certain debt obligations of $14 million
previously assumed by Republic. On April 2, 2001, Republic filed a
voluntary petition with the U.S. Bankruptcy Court to reorganize its
operations under Chapter 11 of the U.S. Bankruptcy Code. In the first
quarter of 2001, as a result of Republic's action, USX recorded a pretax
charge of $74 million for potentially uncollectible receivables from
Republic.
20
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
----------------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- -------------------- --------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
13.79 5.16 3.79 4.20 3.45 3.63 3.41
==== ==== ==== ==== ==== ==== ====
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
-------------------------------------------------
First Quarter Ended
March 31 Year Ended December 31
- -------------------- --------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
14.56 5.29 3.89 4.32 3.56 3.79 3.65
==== ==== ==== ==== ==== ==== ====
21
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company that is principally
engaged in the energy business through its Marathon Group and in the steel
business through its U. S. Steel Group. The following discussion should be read
in conjunction with the first quarter 2001 USX Consolidated Financial Statements
and selected notes. For income per common share amounts applicable to USX's two
classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and
USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement
of Operations - Income per Common Share. For individual Group results, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Marathon Group and the U. S. Steel Group. For operating
statistics, see Supplemental Statistics following Management's Discussion and
Analysis of Financial Condition and Results of Operations for each of the
respective Groups.
On April 24, 2001, USX announced that its Board of Directors authorized
management to proceed with the necessary steps to implement a plan of
reorganization of the corporation in order to separate the energy and steel
businesses. The plan envisions a tax-free spin-off of the steel and steel-
related businesses of USX Corporation into a freestanding, publicly traded
company to be known as United States Steel Corporation ("U. S. Steel"). Holders
of current Steel Stock would become holders of United States Steel Corporation
Common Stock. Holders of current Marathon Stock would become holders of
Marathon Oil Company Common Stock. The plan does not contemplate a cash
distribution to shareholders. Each new company would carry approximately the
same assets and liabilities now associated with its existing businesses, except
for a value transfer of approximately $900 million from Marathon Oil Company to
U. S. Steel, intended to maintain U. S. Steel as a strong, independent company.
The form of the value transfer would be a reallocation of USX corporate debt
between the current Marathon Group and the U. S. Steel Group. The plan of
reorganization is subject to the approval of a majority of the outstanding
shares of each class of the current USX common stock, receipt of a favorable tax
ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the
transaction, completion of necessary financing arrangements, receipt of
necessary regulatory and third party consents, and board approval of definitive
documentation for the transaction. The transaction is expected to occur at
year-end, subject to the absence of any materially adverse change in business
conditions for the energy and/or steel business, delay in obtaining the IRS
ruling or other unfavorable circumstances.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "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. For additional risk factors affecting the
businesses of USX, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX 2000 Form 10-K.
22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues and other income for the first quarter of 2001 and 2000 are set
forth in the following table:
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------------
Revenues and other income
Marathon Group $8,735 $7,855
U. S. Steel Group 1,564 1,588
Eliminations (14) (14)
------ ------
Total USX Corporation revenues and other income 10,285 9,429
Less:
Excise taxes(a) 1,038 1,039
------ ------
Revenues and other income - excluding above item $9,247 $8,390
====== ======
- ------
<FN>
(a) Consumer excise taxes on petroleum products and merchandise are included in
both revenues and costs and expenses for the Marathon Group and USX
Consolidated.
Revenues and other income (excluding excise taxes) increased $857 million
in the first quarter of 2001 compared with the first quarter of 2000, reflecting
an increase of 13 percent for the Marathon Group and a decrease of 2 percent for
the U. S. Steel Group.
For discussion of revenues by Group, see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group.
23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the first quarter of 2001 and 2000 are set forth
in the following table:
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------------
Reportable segments
Marathon Group
Exploration & production $600 $309
Refining, marketing & transportation 276 140
Other energy related businesses 8 13
----- -----
Income for reportable segments - Marathon Group 884 462
U. S. Steel Group
Domestic Steel (151) 54
U. S. Steel Kosice 41 -
----- -----
Income (loss) for reportable segments
- U. S. Steel Group (110) 54
Income for reportable segments - USX Corporation $774 $516
Items not allocated to reportable segments:
Marathon Group 28 63
U. S. Steel Group 9 37
----- -----
Total income from operations - USX Corporation $811 $616
Income for reportable segments increased $258 million in the first quarter
of 2001 as compared with the first quarter of 2000, reflecting increases of $422
million for the Marathon Group reportable segments and decreases of $164 million
for the U. S. Steel Group reportable segments.
For discussion of income from operations by segment, see Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
Marathon Group and the U. S. Steel Group.
24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the first quarters of 2001 and
2000 are set forth in the following table:
First Quarter
Ended
March 31
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------
Net interest and other financial costs $23 $95
Less:
Favorable adjustment to interest
related to prior years' taxes (76) -
----- -----
Net interest and other financial costs
adjusted to exclude above item $99 $95
===== =====
Adjusted net interest and other financial costs increased by $4 million in
the first quarter of 2001 as compared with the same period in 2000. This
increase was primarily due to a higher average debt level.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased $52 million in the first quarter of 2001
from the comparable 2000 period, due to higher RM&T segment income. For further
discussion, see Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Marathon Group.
Provision for income taxes of $164 million in the first quarter of 2001 and
$169 million for the first quarter of 2000, were based on tax rates and amounts
that recognize management's best estimate of current and deferred tax assets and
liabilities. In the first quarter of 2001, the provision included a $33 million
tax benefit associated with the Transtar reorganization and an unfavorable
adjustment of $20 million related to prior years' taxes.
Cumulative effect of change in accounting principle of $8 million, net of a
tax benefit of $5 million, in the first quarter of 2001 was an unfavorable
transition adjustment related to adopting SFAS No. 133. For further discussion,
see Note 2 to the USX Consolidated Financial Statements.
Net income in the first quarter of 2001 was $509 million, an increase of
$212 million from the first quarter of 2000, reflecting an increase of $246
million for the Marathon Group and a decrease of $34 million for the U. S. Steel
Group.
Dividends to Stockholders
- -------------------------
On April 24, 2001, the USX Board of Directors (the "Board") declared
dividends of 23 cents per share on Marathon Stock and 10 cents per share on
Steel Stock, a decrease of 15 cents per share on Steel Stock, both payable
June 9, 2001, to stockholders of record at the close of business on May 16,
2001. The Board also declared a dividend of $0.8125 per share on USX's
6.50% Cumulative Convertible Preferred Stock, payable June 29, 2001, to
stockholders of record at the close of business on May 31, 2001.
25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On April 24, 2001, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3561 per share on its non-
voting Exchangeable Shares, payable June 9, 2001, to stockholders of record at
the close of business on May 16, 2001. Previously, Marathon Oil Canada Limited
announced that the redemption of these Exchangeable Shares will be accelerated
to August 13, 2001. These shares will be exchanged for Marathon Stock on a one-
for-one basis.
Cash Flows
- ----------
Cash and cash equivalents totaled $591 million at March 31, 2001, compared
with $107 million at March 31, 2000, reflecting increases of $309 million for
the Marathon Group and $175 million for the U. S. Steel Group. These increases
primarily reflect an increase in cash held by certain foreign subsidiaries.
Net cash provided from operating activities totaled $814 million in the
first quarter of 2001, compared with $357 million in the first quarter of 2000.
The $457 million increase mainly reflected improved net income and working
capital changes.
Capital expenditures for property, plant and equipment in the first quarter
of 2001 were $313 million, compared with $382 million in the first quarter of
2000. For further details, see Management's Discussion and Analysis of Financial
Condition and Results of Operations for each of the respective Groups.
The acquisition of Pennaco Energy, Inc. ("Pennaco") included cash payments
of $506 million. For further discussion of Pennaco, see Note 4 to the USX
Consolidated Financial Statements.
Cash from disposal of assets in the first quarter of 2001 was $37 million,
compared with $210 million in the first quarter of 2000. Proceeds in 2000 were
mainly from the disposition of Marathon's 33.34 percent interest in the
Angus/Stellaria development in the Gulf of Mexico.
The net change in restricted cash was a net withdrawal of $13 million in
the first quarter of 2001 compared with a net deposit of $59 million in the
first quarter of 2000. Restricted cash in both periods primarily reflected the
net effects of cash deposited and withdrawn from domestic production property
dispositions and acquisitions.
Financial obligations (the net of commercial paper and revolving credit
arrangements, debt borrowings and repayments on the Consolidated Statement of
Cash Flows) increased $87 million in the first quarter of 2001 compared with a
decrease of $45 million in the first quarter of 2000. The increase in 2001
reflects cash used for capital expenditures, acquisition of Pennaco and dividend
payments that were greater than net cash provided from operating activities and
asset sales.
Contract commitments to acquire property, plant and equipment and long-term
investments at March 31, 2001, totaled $778 million compared with $663 million
at December 31, 2000.
26
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Debt and Preferred Stock Ratings
- --------------------------------
Standard & Poor's Corp. rates USX's and Marathon's senior debt BBB, USX's
subordinated debt BBB- and preferred stock BB+. Moody's Investor Services, Inc.
rates USX's and Marathon's senior debt Baa1, USX's subordinated debt Baa2 and
USX's preferred stock baa3. Fitch IBCA Duff & Phelps rates USX's senior notes
BBB and USX's subordinated debt as BBB-. All senior debt holds an investment
grade rating. On April 24, 2001, after USX announced the plan of
reorganization, Standard & Poor's maintained the current rating on USX debt and
the "Credit Watch Developing" status and Fitch IBCA Duff & Phelps advised that
they had raised the Rating Watch status on USX to "Positive".
Liquidity
- ---------
At March 31, 2001, USX had $200 million of borrowings against its $1,354
million long-term revolving credit agreement, no borrowings against its $451
million 364-day facility and no commercial paper borrowings. There were no
borrowings against USX's short-term lines of credit totaling $150 million at
March 31, 2001. At March 31, 2001, there were no borrowings against MAP or USSK
revolving credit agreements.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of March 31, 2001, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 2001 and years 2002 and 2003, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
14 to the USX Consolidated Financial Statements), are expected to be financed by
a combination of internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources. However, on April 24, 2001,
USX announced that the Board had authorized management to proceed with the
necessary steps to implement a plan of reorganization of the corporation in
order to separate the energy and steel businesses. Until the plan of
reorganization is implemented or abandoned, USX management believes that it will
be more difficult to access traditional debt and equity markets. Although USX
management believes that it will not be necessary to access financial markets
during this time frame, nontraditional sources should be available to provide
adequate liquidity, if necessary.
USX management's opinion concerning liquidity and USX'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 could affect the availability of
financing include the performance of each Group (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 overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of USX's outstanding debt and credit ratings by
rating agencies.
27
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX 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 USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group 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 the specific products and services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
36 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of March 31, 2001. In addition, there are 21 sites
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability. There are also 143 additional sites,
excluding retail gasoline stations, 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, 14
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, USX is one of a number of parties involved and the total cost of
remediation, as well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. USX accrues for environmental
remediation activities when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as additional
remediation obligations arise, charges in excess of those previously accrued may
be required.
New Tier II gasoline rules, which were finalized by the U.S. Environmental
Protection Agency ("EPA") in February 2000, and the diesel fuel rule which was
finalized in January 2001, require substantially reduced sulfur levels. The
combined capital cost to achieve compliance with the gasoline and diesel
regulations could amount to approximately $700 million between 2003 and 2005.
This is a forward-looking statement and can only be a broad-based estimate due
to the ongoing evolution of regulatory requirements. 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, and unforeseen hazards such as weather
conditions.
In October 1998, the National Enforcement Investigations Center and Region
V of the EPA conducted a multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a multi-media inspection of
MAP's Robinson refinery. These inspections covered compliance with the Clean
Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (Permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. MAP has been
served with two Notices of Violation ("NOV") and three Findings of Violation in
connection with the multi-media inspections at its Detroit refinery. The
Detroit notices allege violations of the Michigan State Air Pollution
Regulations, the EPA New Source Performance Standards
28
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
and National Emission Standards for Hazardous Air Pollutant for benzene. On
March 6, 2000, MAP received its first NOV arising out of the multi-media
inspection of the Robinson Refinery conducted in November 1998. The NOV is for
alleged Resource Conservation and Recovery Act (hazardous waste) violations.
MAP has recently settled with the EPA certain New Source Review ("NSR")
compliance issues as well as multi-media issues related to the EPA's 1998
multi-media inspections of the Detroit and Robinson refineries. MAP's
settlement with the EPA includes all of MAP's refineries and commits MAP to
specific control technologies and implementation schedules for approximately
$263 million in environmental capital expenditures and improvements to MAP's
refineries over approximately an 8 year period that are consistent with MAP's
current capital spending plans. It also commits MAP to payment of an aggregate
civil penalty in the amount of $3.8 million and the performance of $6.5 million
in supplemental environmental projects as a part of an enforcement action for
alleged Clean Air Act violations. MAP believes that the settlement will
provide MAP with increased permitting and operating flexibility while achieving
significant emission reductions.
In October 1996, USX was notified by the Indiana Department of
Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S.
Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to the releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The public trustees
completed a pre-assessment screen pursuant to federal regulations and have
determined to perform a Natural Resource Damages Assessment. USX was identified
as a PRP along with 15 other companies owning property along the river and
harbor canal. USX and eight other PRPs have formed a joint defense group. In
2000, the trustees concluded their assessment of sediment injuries, which
includes a technical review of environmental conditions. The PRP joint defense
group has proposed terms for the settlement of this claim which have been
endorsed by representatives of the trustees and the EPA to be included in a
consent decree that USX expects will resolve this claim. A reserve has been
established for the USX share of this anticipated settlement.
The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-
acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and
solvent reprocessing operations were conducted on the Berks Site between 1941
and 1986. In September 1997, USX signed a consent decree to conduct a
feasibility study at the site relating to the alternative remedy. In 1999, a
new Record of Decision was approved by the EPA and the U.S. Department of
Justice. On January 19, 2001, USX signed a consent decree with the EPA to
remediate this site. On April 6, 2001, USX paid $.4 million for costs
associated with this site. The only remaining outstanding claim is the natural
resource damages claim filed by the Commonwealth of Pennsylvania.
29
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX 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 14 to the
USX Consolidated Financial Statements for a discussion of certain of these
matters). The ultimate resolution of these contingencies could, individually or
in the aggregate, be material to the USX Consolidated Financial Statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably. See discussion of Liquidity herein.
Outlook
- -------
See Outlook in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group and the U. S. Steel Group.
30
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for commodity-based
derivative instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- ---------------------------------------------------------------------------
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil
Trading(f)(g) $3.9 $9.8 (e)
Other than trading(f)(g) 0.6 22.2 (e)
Natural gas
Other than trading(f)(g) 20.3 50.6 (d)
Refined products
Other than trading(f)(g) 1.0 2.6 (d)
U. S. Steel Group
Zinc
Other than trading 2.0 5.0 (e)
Tin
Other than trading 0.3 0.7 (e)
<FN>
(a) Gains and losses on commodity-based derivative instruments used for
other than trading activities are generally offset by price changes in
the underlying commodity. With the adoption of SFAS No. 133, the
definition of a derivative instrument has been expanded to include
certain fixed price physical commodity contracts. Such instruments are
included in the above table. Amounts reflect the estimated incremental
effect on pretax income of a hypothetical 10% and 25% change in closing
commodity prices at March 31, 2001. Management evaluates the portfolios
of commodity-based derivative instruments on an ongoing basis and adjusts
strategies to reflect anticipated market conditions, changes in risk
profiles and overall business objectives. Changes to the portfolios
subsequent to March 31, 2001, may cause future pretax income effects to
differ from those presented in the table.
(b) The number of net open contracts varied throughout first quarter
2001, from a low of 21,416 contracts at March 31, to a high of 35,646
contracts at February 8, and averaged 30,462 for the quarter. The type
of derivative instruments and number of positions entered into will vary
which changes the composition of the portfolio. Because of these
variations, 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) Price increase.
(e) Price decrease.
(f) 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.
(g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
31
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of March 31, 2001, the discussion of USX's interest rate risk has not
changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in USX's 2000 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
USX 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 U.S.
dollars. USX has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to manage
exposure to certain currency price fluctuations.
At March 31, 2001, USX had open Euro forward sale contracts for both
U.S. dollars and Slovak Koruna. A 10% increase in the March 31, 2001 Euro
forward rates would result in an immaterial charge to income. The entire amount
of these contracts is attributed to the U. S. Steel Group.
At March 31, 2001, the discussion of the Marathon Group's foreign currency
exchange rate risk has not changed materially from that presented in
Quantitative and Qualitative Disclosures About Market Risk included in USX's
2000 Form 10-K.
Safe Harbor
- -----------
USX's quantitative and qualitative disclosures about market risk include
forward-looking statements with respect to management's opinion about risks
associated with USX's use of derivative instruments. These statements are based
on certain assumptions with respect to market prices and industry supply and
demand for crude oil, natural gas, refined products, steel products and certain
raw materials. To the extent that these assumptions prove to be inaccurate,
future outcomes with respect to USX's hedging programs may differ materially
from those discussed in the forward-looking statements.
32
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
First Quarter
Ended
March 31
-----------------
(Dollars in Millions) 2001 2000
- ---------------------------------------------------------------------------------
REVENUES AND OTHER INCOME
Marathon Group $8,735 $7,855
U. S. Steel Group 1,564 1,588
Eliminations (14) (14)
------- -------
Total $10,285 $9,429
INCOME (LOSS) FROM OPERATIONS
Marathon Group $912 $525
U. S. Steel Group (101) 91
----- -----
Total $811 $616
CAPITAL EXPENDITURES
Marathon Group $276 $337
U. S. Steel Group 37 45
----- -----
Total $313 $382
33
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 2001 2000
- -------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $8,620 $7,739
Dividend and investee income 33 11
Net gains on disposal of assets 14 92
Gain on ownership change in Marathon Ashland
Petroleum LLC 1 4
Other income 67 9
------ ------
Total revenues and other income 8,735 7,855
------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 6,234 5,799
Selling, general and administrative expenses 141 134
Depreciation, depletion and amortization 303 246
Taxes other than income taxes 1,122 1,106
Exploration expenses 23 45
------ ------
Total costs and expenses 7,823 7,330
------ ------
INCOME FROM OPERATIONS 912 525
Net interest and other financial costs 35 71
Minority interest in income of Marathon Ashland
Petroleum LLC 107 55
------ ------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 770 399
Provision for income taxes 262 145
------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 508 254
Cumulative effect of change in accounting principle (8) -
------ ------
NET INCOME $500 $254
====== ======
MARATHON STOCK DATA:
Income before cumulative effect of change in
accounting principle $508 $254
- Per share - basic and diluted 1.65 .81
Cumulative effect of change in accounting principle (8) -
- Per share - basic and diluted (.03) -
Net income $500 $254
- Per share - basic and diluted 1.62 .81
Dividends paid per share .23 .21
Weighted average shares, in thousands
- Basic 308,753 312,128
- Diluted 309,073 312,285
<FN>
Selected notes to financial statements appear on pages 36-42.
34
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
March 31 December 31
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $411 $340
Receivables, less allowance for doubtful
accounts of $3 and $3 2,149 2,267
Inventories 2,040 1,867
Assets held for sale - 330
Deferred income tax benefits 60 60
Other current assets 99 121
------ ------
Total current assets 4,759 4,985
Investments and long-term receivables 695 362
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$9,914 and $9,691 9,900 9,375
Prepaid pensions 212 207
Other noncurrent assets 366 303
------ ------
Total assets $15,932 $15,232
====== ======
LIABILITIES
Current liabilities:
Notes payable $236 $80
Accounts payable 2,800 3,021
Income taxes payable 113 364
Payroll and benefits payable 221 230
Accrued taxes 418 108
Accrued interest 46 61
Long-term debt due within one year 168 148
------ ------
Total current liabilities 4,002 4,012
Long-term debt, less unamortized discount 2,073 1,937
Deferred income taxes 1,430 1,354
Employee benefits 646 648
Deferred credits and other liabilities 349 412
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,938 1,840
COMMON STOCKHOLDERS' EQUITY 5,310 4,845
------ ------
Total liabilities and
common stockholders' equity $15,932 $15,232
====== ======
<FN>
Selected notes to financial statements appear on pages 36-42.
35
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $500 $254
Adjustments to reconcile to net cash provided from
operating activities:
Cumulative effect of change in accounting principle 8 -
Minority interest in income of Marathon Ashland
Petroleum LLC 107 55
Depreciation, depletion and amortization 303 246
Exploratory dry well costs 4 15
Pensions and other postretirement benefits 6 (2)
Deferred income taxes (159) 4
Net gains on disposal of assets (14) (92)
Changes in:
Current receivables 146 11
Inventories (170) (34)
Current accounts payable and accrued expenses (272) (108)
All other - net 119 (28)
------ ------
Net cash provided from operating activities 578 321
------ ------
INVESTING ACTIVITIES:
Capital expenditures (276) (337)
Acquisition of Pennaco Energy, Inc. (506) -
Disposal of assets 34 197
Restricted cash - withdrawals 16 126
- deposits (6) (185)
All other - net (6) 5
------ ------
Net cash used in investing activities (744) (194)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in Marathon Group's portion of USX
consolidated debt 313 (78)
Specifically attributed debt - borrowings 112 231
- repayments (112) (222)
Dividends paid (71) (66)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (3) -
------ ------
Net cash provided from (used in)
financing activities 239 (135)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2) (1)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 71 (9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 340 111
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $411 $102
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(58) $(111)
Income taxes paid, including settlements with the
U. S. Steel Group (326) (113)
<FN>
Selected notes to financial statements appear on pages 36-42.
36
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 2001 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 2000.
2. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and
a portion of the corporate assets and liabilities and related transactions
which are not separately identified with ongoing operating units of USX.
These financial statements are prepared using the amounts included in the
USX consolidated financial statements. Corporate amounts reflected in
these financial statements are determined based upon methods which
management believes to be reasonable. The accounting policies applicable
to the preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the Marathon Group and the U. S.
Steel Group separately report the assets, liabilities (including contingent
liabilities) and stockholders' equity of USX attributed to each such Group,
such attribution of assets, liabilities (including contingent liabilities)
and stockholders' equity between the Marathon Group and the U. S. Steel
Group for the purpose of preparing their respective financial statements
does not affect legal title to such assets and responsibility for such
liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock)
and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common
stock of USX and continue to be subject to all the risks associated with an
investment in USX and all of its businesses and liabilities. Financial
impacts arising from one Group that affect the overall cost of USX's
capital could affect the results of operations and financial condition of
the other Group. In addition, net losses of either Group, as well as
dividends or distributions on any class of USX Common Stock or series of
Preferred Stock and repurchases of any class of USX Common Stock or series
of Preferred Stock at prices in excess of par or stated value, will reduce
the funds of USX legally available for payment of dividends on both classes
of Common Stock. Accordingly, the USX consolidated financial information
should be read in connection with the Marathon Group financial information.
37
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for income taxes and related tax
payments or refunds have been reflected in the Marathon Group and the
U. S. Steel Group financial statements in accordance with USX's tax
allocation policy for such groups. In general, such policy provides that
the consolidated tax provision and related tax payments or refunds are
allocated between the Marathon Group and the U. S. Steel Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for income taxes for the Marathon Group is based on tax
rates and amounts which recognize management's best estimate of current and
deferred tax assets and liabilities. Differences between the combined
interim tax provisions of the Marathon and U. S. Steel Groups and USX
consolidated are allocated to each group based on the relationship of the
individual group provisions to the combined interim provisions.
3. The method of calculating net income per common share for the Marathon
Stock and Steel Stock reflects the Board's intent that the separately
reported earnings and surplus of the Marathon Group and the U. S. Steel
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is based on the weighted average number of
common shares outstanding.
Diluted net income per share assumes exercise of stock options,
provided the effect is not antidilutive.
See Note 8 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
4. Effective January 1, 2001, USX 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 Standard 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 change in accounting
principle. The unfavorable cumulative effect on net income, net of a tax
benefit of $5 million, was $8 million. The unfavorable cumulative effect
on other comprehensive income (OCI), net of a tax benefit of $4 million,
was $8 million. The amounts reported as OCI will be reflected in net
income when the anticipated physical transactions are consummated.
The $8 million transition adjustment recorded in OCI at January 1,
2001, included $42 million of net losses that were reclassified into income
during the first quarter of 2001. In future periods, $34 million of net
gains will
38
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
be reclassified into income relating to the OCI transition adjustment
when the related physical transactions are completed.
5. Included in revenues and costs and expenses for the first quarter of
2001 and 2000 were $1,038 million and $1,039 million, respectively,
representing excise taxes on petroleum products and merchandise.
6. The Marathon Group's total comprehensive income was $534 million for
the first quarter of 2001 and $252 million for the first quarter of 2000.
7. In the first quarter 2001, Marathon acquired Pennaco Energy, Inc.
(Pennaco), a natural gas producer. Marathon acquired 87% of the
outstanding stock of Pennaco through a tender offer completed on
February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged
with a wholly owned subsidiary of Marathon. Under the terms of the merger,
each share not held by Marathon was converted into the right to receive $19
in cash. The total cash purchase price of Pennaco was $506 million. The
acquisition was accounted for under the purchase method of accounting. The
excess of the purchase price over the preliminary fair value of net assets
acquired (goodwill) approximates $64 million and will be amortized over 17
years. First quarter results of operations include the results of Pennaco
from February 7, 2001.
The following unaudited pro forma data for the Marathon Group includes
the results of operations of Pennaco giving effect to the acquisition as if
it had been consummated at the beginning of the years presented. The pro
forma data is based on historical information and does not necessarily
reflect the actual results that would have occurred nor is it necessarily
indicative of future results of operations.
First
Quarter Ended
March 31
(In millions, except per share amounts) 2001 2000
---------------------------------------------------------------------
Revenues and other income $8,743 $7,861
Income before cumulative effect of change in
accounting principle 505 244
- Per common share - basic and diluted 1.64 .78
Net income 497 244
- Per common share - basic and diluted 1.61 .78
8. In December 2000, Marathon and Kinder Morgan Energy Partners, L.P.
signed a definitive agreement to form a joint venture combining certain of
their oil and gas producing activities in the U.S. Permian Basin, including
Marathon's interest in the Yates Field. This transaction has allowed
Marathon to expand its interests in the Permian Basin and improve access to
materials for use in enhanced recovery techniques in the Yates Field. The
joint venture, named MKM Partners L.P., commenced operations in January
2001 and is accounted for under the equity method of accounting.
39
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. The Marathon Group's operations consist of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related
Businesses (OERB). OERB is an aggregation of two segments which fall below
the quantitative reporting thresholds: 1) Natural Gas and Crude Oil
Marketing and Transportation - markets and transports its own and third-
party natural gas and crude oil in the United States; and 2) Power
Generation - develops, constructs and operates independent electric power
projects worldwide. The results of segment operations are as follows:
Total
(In millions) E&P RM&T OERB Segments
- -------------------------------------------------------------------------------
FIRST QUARTER 2001
- ------------------
Revenues and other income:
Customer $1,238 $6,742 $628 $8,608
Intersegment (a) 134 6 25 165
Intergroup (a) 10 - 2 12
Equity in earnings of unconsolidated investees 20 6 4 30
Other 8 15 2 25
------ ------ ------ ------
Total revenues and other income $1,410 $6,769 $661 $8,840
====== ====== ====== ======
Segment income $600 $276 $8 $884
====== ====== ====== ======
FIRST QUARTER 2000
- ------------------
Revenues and other income:
Customer $952 $6,427 $350 $7,729
Intersegment (a) 69 20 19 108
Intergroup (a) 5 - 5 10
Equity in earnings (losses) of
unconsolidated investees (1) 4 4 7
Other 3 11 4 18
------ ------ ------ ------
Total revenues and other income $1,028 $6,462 $382 $7,872
====== ====== ====== ======
Segment income $309 $140 $13 $462
====== ====== ====== ======
<FN>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
40
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
The following schedule reconciles segment revenues and income to amounts
reported in the Marathon Group financial statements:
First Quarter Ended
March 31
(In millions) 2001 2000
- --------------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of reportable segments $8,840 $7,872
Items not allocated to segments:
Gain on ownership change in MAP 1 4
Other (a) 59 87
Elimination of intersegment revenues (165) (108)
------ ------
Total Group revenues and other income $8,735 $7,855
====== ======
Income:
Income for reportable segments $884 $462
Items not allocated to segments:
Gain on ownership change in MAP 1 4
Administrative expenses (32) (28)
Other (a) 59 87
------ ------
Total Group income from operations $912 $525
====== ======
<FN>
(a)Represents in 2001, gain on offshore lease resolution with the U.S.
Government and in 2000, gain on disposition of Angus/Stellaria.
10. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
(In millions)
----------------------
March 31 December 31
2001 2000
--------------------
Crude oil and natural gas liquids $850 $701
Refined products and merchandise 1,092 1,069
Supplies and sundry items 98 97
------ ------
Total $2,040 $1,867
====== ======
41
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. At March 31, 2001, and December 31, 2000, income taxes payable
represents an estimated income tax payable to the U. S. Steel Group. In
addition, included in deferred credits and other liabilities at March 31,
2001, and December 31, 2000, respectively, are $43 million and $97 million
of income taxes payable to the U. S. Steel Group. These amounts have been
determined in accordance with the tax allocation policy discussed in
Note 2.
12. In the first quarter of 2001, interest and other financial costs
includes a favorable adjustment of $9 million and provision for income
taxes includes an unfavorable adjustment of $5 million, both of which are
related to prior years' taxes.
13. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At March 31, 2001, and
December 31, 2000, accrued liabilities for remediation totaled $85 million
and $75 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $64
million at March 31, 2001, and $57 million at December 31, 2000.
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first quarter of 2001 and for the
years 2000 and 1999, such capital expenditures totaled $8 million,
$73 million and $46 million, respectively. The Marathon Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At March 31, 2001, and December 31, 2000, accrued liabilities for
platform abandonment and dismantlement totaled $170 million and $162
million, respectively.
42
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
13. (Continued)
At March 31, 2001, the Marathon Group's pro rata share of obligations
of LOOP LLC and various pipeline affiliates secured by throughput and
deficiency agreements totaled $119 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at March 31, 2001, totaled
$585 million compared with $457 million at December 31, 2000.
43
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products primarily through Marathon
Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy
related businesses. The Management's Discussion and Analysis should be read in
conjunction with the Marathon Group's Financial Statements and Notes to
Financial Statements. The discussion of Results of Operations should be read in
conjunction with the Supplemental Statistics provided on page 55.
On April 24, 2001, USX announced that its Board of Directors authorized
management to proceed with the necessary steps to implement a plan of
reorganization of the corporation in order to separate the energy and steel
businesses. The plan envisions a tax-free spin-off of the steel and steel-
related businesses of USX Corporation into a freestanding, publicly traded
company to be known as United States Steel Corporation ("U. S. Steel"). Holders
of current USX-U. S. Steel Group Common Stock would become holders of United
States Steel Corporation Common Stock. Holders of current USX-Marathon Group
Common Stock would become holders of Marathon Oil Company Common Stock. The
plan does not contemplate a cash distribution to shareholders. Each new company
would carry approximately the same assets and liabilities now associated with
its existing businesses, except for a value transfer of approximately $900
million from Marathon Oil Company to U. S. Steel, intended to maintain U. S.
Steel as a strong, independent company. The form of the value transfer would be
a reallocation of USX corporate debt between the current Marathon Group and the
U. S. Steel Group. The plan of reorganization is subject to the approval of a
majority of the outstanding shares of each class of the current USX common
stock, receipt of a favorable tax ruling from the Internal Revenue Service
("IRS") on the tax-free nature of the transaction, completion of necessary
financing arrangements, receipt of necessary regulatory and third party
consents, and board approval of definitive documentation for the transaction.
The transaction is expected to occur at year-end, subject to the absence of any
materially adverse change in business conditions for the energy and/or steel
business, delay in obtaining the IRS ruling or other unfavorable circumstances.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "anticipates", "believes", "estimates", "expects", "targets", "scheduled" or
similar words indicating that future outcomes are uncertain. In accordance with
"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 forward-looking
statements. For additional risk factors affecting the businesses of the
Marathon Group, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX Annual Report on Form 10-K for the year ended December 31,
2000.
44
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues and other income for the first quarter of 2001 and 2000 are
summarized in the following table:
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------------
Exploration & production ("E&P") $1,410 $1,028
Refining, marketing & transportation ("RM&T") 6,769 6,462
Other energy related businesses(a) 661 382
------ ------
Revenues and other income of reportable segments $8,840 $7,872
Revenues and other income not allocated to segments:
Gain on ownership change in MAP 1 4
Other(b) 59 87
Elimination of intersegment revenues (165) (108)
------ ------
Total Group revenues and other income $8,735 $7,855
====== ======
Items included in both revenues and costs and expenses, resulting in no effect
on income:
Consumer excise taxes on petroleum
products and merchandise $1,038 $1,039
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P $106 $155
RM&T 993 812
------ -----
Total buy/sell transactions $1,099 $967
- --------
<FN>
(a) Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(b) Represents in 2001, a gain on an offshore lease resolution with the U.S.
Government and in 2000, a gain on the disposition of Angus/Stellaria.
E&P segment revenues increased by $382 million in the first quarter of 2001
from the comparable prior-year period. The increase primarily reflected higher
worldwide natural gas prices and higher international liquid hydrocarbon
volumes.
RM&T segment revenues increased by $307 million in the first quarter of
2001 from the comparable prior-year period. The increase primarily reflected
higher refined product prices and increased refined product sales volumes.
Other energy related businesses segment revenues increased by $279 million
in the first quarter of 2001 from the comparable prior-year period. The
increase primarily reflected higher natural gas and crude oil resale activity
accompanied by higher natural gas prices.
45
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the first quarter of 2001 and 2000 is summarized
in the following table:
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------------
E&P
Domestic $442 $201
International 158 108
---- ----
Income of E&P reportable segment 600 309
RM&T 276 140
Other energy related businesses 8 13
---- ----
Income for reportable segments $884 $462
Items not allocated to reportable segments:
Administrative expenses(a) (32) (28)
Gain on offshore lease resolution with U.S. Government 59 -
Gain on disposition of Angus/Stellaria(b) - 87
Gain on ownership change - MAP 1 4
---- ----
Total income from operations $912 $525
- --------
<FN>
(a) Includes the portion of the Marathon Group's administrative costs not
charged to the operating segments and the portion of USX corporate general
and administrative costs allocated to the Marathon Group.
(b) Resulted from the disposition of Marathon's 33.34 percent interest in the
Angus/Stellaria development located in the Gulf of Mexico.
Income for reportable segments in the first quarter of 2001 increased by
$422 million from last year's first quarter, due primarily to higher worldwide
natural gas prices, higher worldwide liquid hydrocarbon volumes and higher
refined product margins, partially offset by lower worldwide liquid hydrocarbon
prices.
Worldwide E&P segment income in the first quarter of 2001 increased by $291
million from last year's first quarter, primarily due to the factors discussed
below.
Domestic E&P income in the first quarter of 2001 increased by $241 million
from last year's first quarter. This increase was mainly due to higher natural
gas prices and liquid hydrocarbon volumes, partially offset by decreased liquid
hydrocarbon prices.
International E&P income in the first quarter of 2001 increased by $50
million from last year's first quarter. This increase was mainly due to higher
natural gas prices and higher liquid hydrocarbon volumes resulting from
increased production from properties received in the Sakhalin Energy exchange,
partially offset by a decrease in natural gas volumes resulting from lower
production in Ireland and Canada.
46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RM&T segment income in the first quarter of 2001 increased by $136 million
from last year's first quarter. The increase in downstream segment income was
primarily due to a higher refining and wholesale marketing refined product
margin, partially offset by a decrease in the retail gasoline and distillate
gross margin and higher operating and administrative expenses including costs
related to MAP's variable pay plan.
Other energy related businesses segment income in the first quarter of 2001
decreased by $5 million from last year's first quarter. This decrease was
primarily due to derivative instrument valuation.
Net interest and other financial costs were $35 million in the first
quarter of 2001, compared with $71 million in the first quarter of 2000. In
the first quarter of 2001, interest and other financial costs includes a
favorable adjustment of $9 million related to prior year taxes. Excluding this
adjustment, the decrease of $27 million was primarily due to lower average debt
levels.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased by $52 million in the first quarter of
2001 from the comparable 2000 period, due to higher RM&T segment income as
discussed above.
The provision for income taxes in the first quarter of 2001 increased by
$117 million from last year's first quarter primarily due to an increase in
income before income taxes. In the first quarter of 2001, the provision for
income taxes includes an unfavorable adjustment of $5 million related to prior
years' taxes.
The cumulative effect of change in accounting principle of $8 million, net
of a tax benefit of $5 million, in the first quarter of 2001 was an unfavorable
transition adjustment related to adopting SFAS No. 133. For further discussion,
see Note 4 to the Marathon Group Financial Statements.
Net income for the first quarter increased by $246 million in 2001 from
2000, primarily reflecting the factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $578 million in the first
quarter of 2001, compared with $321 million in the first quarter of 2000. The
$257 million increase mainly reflected the favorable effects of improved net
income (excluding noncash items) and net favorable working capital changes,
excluding the intergroup tax payment to the U. S. Steel Group made in accordance
with the group tax allocation policy. This payment was $364 million in the
first quarter of 2001 compared to $97 million in the first quarter of 2000. For
additional information on the group tax allocation policy, see Note 2 to the
Marathon Group Financial Statements.
Capital expenditures in the first quarter of 2001 totaled $276 million,
compared with $337 million in the first quarter of 2000. The $61 million
decrease mainly reflected reduced spending in the first quarter of 2001 on
domestic production property acquisitions. For additional information
regarding capital expenditures, refer to the Supplemental Statistics on
page 55.
47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The acquisition of Pennaco Energy, Inc. ("Pennaco") included cash payments
of $506 million. For further discussion of Pennaco, see Note 7 to the Marathon
Group Financial Statements.
Cash from disposal of assets was $34 million in the first quarter of 2001,
compared with $197 million in the first quarter of 2000. Proceeds in 2001 were
mainly from the sale of various Canadian oil fields, various domestic producing
properties and Speedway SuperAmerica LLC ("SSA") stores. Proceeds in 2000 were
mainly from the disposition of Marathon's 33.34 percent interest in the
Angus/Stellaria development in the Gulf of Mexico.
The net change in restricted cash was a net withdrawal of $10 million in
the first quarter of 2001, compared to a net deposit of $59 million in the first
quarter of 2000. Restricted cash in both periods primarily reflected the net
effects of cash deposited and withdrawn from domestic production property
dispositions and acquisitions.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at March 31, 2001, totaled $585 million compared with $457
million at December 31, 2000.
Financial obligations, which consist of the Marathon Group's portion of USX
debt and preferred stock of a subsidiary attributed to both groups, as well as
debt specifically attributed to the Marathon Group, increased by $313 million in
the first quarter of 2001. Financial obligations increased primarily because
the acquisition of Pennaco, capital expenditures and dividends paid exceeded
cash from operating activities and asset sales. For further details, see
Management's Discussion and Analysis of USX Consolidated Financial Condition,
Cash Flows and Liquidity.
Derivative Instruments
- ----------------------
See Quantitative and Qualitative Disclosure About Market Risk for
discussion of derivative instruments and associated market risk for the Marathon
Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
48
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group 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 the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group 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.
USX has been notified that it is a potentially responsible party ("PRP") at
11 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
March 31, 2001. In addition, there are 5 sites related to the Marathon Group
where USX has received information requests or other indications that USX may
be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability.
There are also 114 additional sites, excluding retail marketing outlets,
related to the Marathon Group 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, 14 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, USX is one of a number of parties involved and the
total cost of remediation, as well as USX's share thereof, is frequently
dependent upon the outcome of investigations and remedial studies. The Marathon
Group accrues for environmental remediation activities when the responsibility
to remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required.
New Tier II gasoline rules, which were finalized by the U.S. Environmental
Protection Agency ("EPA") in February 2000, and the diesel fuel rule which was
finalized in January 2001, require substantially reduced sulfur levels. The
combined capital cost to achieve compliance with the gasoline and diesel
regulations could amount to approximately $700 million between 2003 and 2005.
This is a forward-looking statement and can only be a broad-based estimate due
to the ongoing evolution of regulatory requirements. 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, and unforeseen hazards such as weather
conditions.
49
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In October 1998, the National Enforcement Investigations Center and Region
V of the EPA conducted a multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a multi-media inspection of
MAP's Robinson refinery. These inspections covered compliance with the Clean
Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. MAP has been
served with two Notices of Violation ("NOV") and three Findings of Violation in
connection with the multi-media inspections at its Detroit refinery. The
Detroit notices allege violations of the Michigan State Air Pollution
Regulations, the EPA New Source Performance Standards and National Emission
Standards for Hazardous Air Pollutants for Benzene. On March 6, 2000, MAP
received its first NOV arising out of the multi-media inspection of the Robinson
Refinery conducted in November 1998. The NOV is for alleged Resource
Conservation and Recovery Act (hazardous waste) violations.
MAP has recently settled with the EPA certain New Source Review ("NSR")
compliance issues as well as multi-media issues related to the EPA's 1998
multi-media inspections of the Detroit and Robinson refineries. MAP's
settlement with the EPA includes all of MAP's refineries and commits MAP to
specific control technologies and implementation schedules for approximately
$263 million in environmental capital expenditures and improvements to MAP's
refineries over approximately an 8 year period that are consistent with MAP's
current capital spending plans. It also commits MAP to payment of an aggregate
civil penalty in the amount of $3.8 million and the performance of $6.5 million
in supplemental environmental projects as a part of an enforcement action for
alleged Clean Air Act violations. MAP believes that the settlement will
provide MAP with increased permitting and operating flexibility while achieving
significant emission reductions.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment. See Note 13 to the Marathon Group Financial Statements for a
discussion of certain of these matters. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group Financial Statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
Management's Discussion and Analysis of USX Consolidated Financial Condition,
Cash Flows and Liquidity.
50
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
The outlook regarding the Marathon Group'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's major oil and gas producing and consuming areas. Any significant
decline in prices could have a material adverse effect on the Marathon Group'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 second quarter 2001, worldwide production is expected to be
approximately 400 to 405 thousand barrels of oil equivalent ("BOE") per day.
For the year, worldwide production is expected to average between 425 and 430
thousand BOE per day, split evenly between liquid hydrocarbons and natural gas,
including production from Marathon's share of investees and future acquisitions.
On February 7, 2001, Marathon acquired 87% of the outstanding stock of
Pennaco through a tender offer. The merger was completed on March 26, 2001,
after approval by Pennaco shareholders. Results of operations for the first
quarter include the results of Pennaco from February 7, 2001. Pennaco's current
net production is over 45 million cubic feet of natural gas per day.
Marathon plans to drill three deepwater Gulf of Mexico exploratory wells in
2001. To support this increased drilling activity, Marathon has contracted two
new deepwater rigs, capable of drilling in water depths beyond 6,500 feet. In
addition, Marathon will drill a well on its Southhampton prospect in the
Atlantic Ocean off the Nova Scotian coast in the fourth quarter and will
participate in a well on Block 31 offshore Angola.
On May 1, 2001, the cash related to the recorded gain on the offshore lease
resolution with the U.S. Government was received in the amount of $78 million.
The above discussion includes forward-looking statements with respect to
the expected levels of Marathon's worldwide liquid hydrocarbon and natural gas
production and the drilling program. Some factors that could potentially affect
worldwide liquid hydrocarbon and natural gas production include pricing, supply
and demand for petroleum products, amount of capital available for exploration
and development, regulatory constraints, timing of commencing production from
new wells, and other geological, operating and economic considerations. Some
factors that affect the drilling program include the timing and results of
future development drilling and drilling rig availability.
51
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Downstream income of the Marathon Group is largely dependent upon the
refining and wholesale marketing margin for refined products and the retail
gross margin for gasoline and distillates. 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. Retail gasoline and
distillate margins have also been historically volatile, but tend to be counter
cyclical 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 which impact driving conditions.
In 2000, MAP, Panhandle Eastern Pipe Line Company, a subsidiary of CMS
Energy Corporation, and TE Products Pipe Line Company, Limited Partnership
("TEPPCO"), formed a limited liability company with equal ownership called
Centennial Pipeline LLC to operate an interstate refined petroleum products
pipeline extending from the U.S. Gulf of Mexico to the Midwest. The new company
plans to build a 74-mile, 24-inch diameter pipeline connecting TEPPCO's facility
in Beaumont, Texas, with an existing 720-mile, 26-inch diameter pipeline
extending from Longville, Louisiana to Bourbon, Illinois. A significant
milestone in the project was reached on March 29, 2001, when the Federal Energy
Regulatory Commission ("FERC") approved the abandonment of the 720-mile pipeline
from natural gas service thus allowing conversion to refined products
transportation. As part of the project, a two million barrel terminal storage
facility will be constructed. The Centennial Pipeline system will connect with
existing MAP transportation assets and other common carrier lines and is
expected to be operational in first quarter 2002.
MAP and Pilot Corporation announced in March 2001 that they have signed a
letter of intent to pursue a combination of the travel center operations of
MAP's wholly owned subsidiary, SSA, and Pilot. Under its terms, MAP and Pilot
would each have a 50 percent interest in the new company that would comprise a
nationwide chain of about 250 Travel Centers, consisting of 110 SSA Travel
Centers in 18 states and 140 Pilot Travel Centers in 39 states. This
combination represents a step forward in MAP's plans to expand to a national
truck stop network. The companies anticipate closing the transaction this
summer, pending completion of due diligence and the execution of definitive
agreements.
MAP also announced in March 2001 an agreement with Welsh Inc. to purchase
all of its convenience stores located in Indiana and Michigan. Welsh is
recognized as a leader in developing convenience store formats with car washes
and quick-service restaurants. The transaction is expected to close in the
second quarter 2001.
In connection with the plan of reorganization described on page 43,
Standard & Poor's reported that they had assigned a BBB+ corporate credit rating
to Marathon Oil Company with a stable outlook assuming the reorganization plan
is completed.
52
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The above discussion includes forward-looking statements with respect to
the expected completion of construction and commencement of operation of
Centennial Pipeline, the expected successful completion and timing of the two
proposed retail marketing transactions, and the plan of reorganization. Some
factors which impact the Centennial Pipeline project include obtaining the
necessary construction and environmental permits, unforeseen hazards such as
weather conditions, obtaining the necessary rights-of-way, and regulatory
approval constraints. Some factors which affect the successful completion of
the two proposed retail marketing transactions are the execution and closing of
definitive agreements, and the receipt of government and third party approvals.
Some factors which will affect the plan of reorganization include approval of a
majority of the outstanding shares of each class of the current USX common
stock, receipt of a favorable tax ruling from the IRS on the tax-free nature of
the transaction, completion of necessary financing arrangements, receipt of
necessary regulatory and third party consents, any materially adverse changes in
business conditions for the energy and/or steel businesses, board approval of
definitive documentation of the transaction or other unfavorable circumstances.
These factors (among others) could cause actual results to differ materially
from those set forth in the forward-looking statements.
53
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for commodity-based
derivative instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- ---------------------------------------------------------------------------
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil
Trading(f)(g) $3.9 $9.8 (e)
Other than trading(f)(g) 0.6 22.2 (e)
Natural gas
Other than trading(f)(g) 20.3 50.6 (d)
Refined products
Other than trading(f)(g) 1.0 2.6 (d)
<FN>
(a) Gains and losses on commodity-based derivative instruments used for
other than trading activities are generally offset by price changes in
the underlying commodity. With the adoption of SFAS No. 133, the
definition of a derivative instrument has been expanded to include
certain fixed price physical commodity contracts. Such instruments are
included in the above table. Amounts reflect the estimated incremental
effect on pretax income of a hypothetical 10% and 25% change in closing
commodity prices at March 31, 2001. Management evaluates its portfolio
of commodity-based derivative instruments on an ongoing basis and adjusts
strategies to reflect anticipated market conditions, changes in risk
profiles and overall business objectives. Changes to the portfolios
subsequent to March 31, 2001, may cause future pretax income effects to
differ from those presented in the table.
(b) The number of net open contracts varied throughout first quarter
2001, from a low of 21,416 contracts at March 31, to a high of 35,646
contracts at February 8, and averaged 30,462 for the quarter. The type
of derivative instruments and number of positions entered into will vary
which changes the composition of the portfolio. Because of these
variations, 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) Price increase.
(e) Price decrease.
(f) 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.
(g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
54
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
---------------------------------
Interest Rate Risk
- ------------------
As of March 31, 2001, the discussion of the Marathon Group's interest rate
risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 2000 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of March 31, 2001, the discussion of the Marathon Group's foreign
currency exchange rate risk has not changed materially from that presented in
Quantitative and Qualitative Disclosures About Market Risk included in USX's
2000 Form 10-K.
Safe Harbor
- -----------
The Marathon Group's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to management's opinion
about risks associated with the Marathon Group's use of derivative instruments.
These statements are based on certain assumptions with respect to market prices
and industry supply and demand for crude oil, natural gas, and refined products.
To the extent that these assumptions prove to be inaccurate, future outcomes
with respect to the Marathon Group's hedging programs may differ materially from
those discussed in the forward-looking statements.
55
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
First Quarter
Ended March 31
(Dollars in millions) 2001 2000
- ---------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $442 $201
International 158 108
----- -----
Income For E&P Reportable Segment 600 309
Refining, Marketing & Transportation 276 140
Other Energy Related Businesses(a) 8 13
----- -----
Income For Reportable Segments $884 $462
Items Not Allocated To Reportable Segments:
Administrative Expenses (32) (28)
Gain on disposition of Angus/Stellaria - 87
Gain on lease resolution with U.S. Government 59 -
Gain on Ownership Change - MAP 1 4
----- -----
Marathon Group Income From Operations $912 $525
CAPITAL EXPENDITURES
Exploration & Production $157 $271
Refining, Marketing & Transportation 97 60
Other(b) 22 6
----- -----
Total $276 $337
EXPLORATION EXPENSE
Domestic $13 $31
International 10 14
----- -----
Total $23 $45
OPERATING STATISTICS
Net Liquid Hydrocarbon Production(c):
United States 124.4 128.7
Europe 53.9 29.4
Other International 34.3 36.2
----- -----
Total Consolidated 212.6 194.3
Equity Investee (MKM Partners L.P.) 10.3 -
----- -----
Worldwide 222.9 194.3
Net Natural Gas Production(d):
United States 789.0 751.4
Europe(e) 345.6 361.5
Other International 130.0 135.0
------- -------
Total Consolidated 1,264.6 1,247.9
Equity Investee (CLAM) 34.6 36.8
------- -------
Worldwide 1,299.2 1,284.7
Average Sales Prices(f)(g):
Liquid Hydrocarbons (per Bbl)
Domestic $23.38 $24.12
International 24.73 25.85
Natural Gas (per Mcf)
Domestic $5.50 $2.18
International 3.83 2.42
56
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
First Quarter
Ended March 31
2001 2000
--------------------
OPERATING STATISTICS (continued)
MAP:
Crude Oil Refined (c) 869.9 851.4
Consolidated Refined Products Sold (c)(k) 1,253.0 1,218.6
Matching buy/sell volumes included in refined
products sold (c) 53.4 49.0
Refining and Wholesale Marketing Margin (h)(i) $0.0865 $0.0438
Number of SSA retail outlets 2,183 2,420
SSA Gasoline and Distillate Sales (j) 1,054 1,113
SSA Gasoline and Distillate Gross Margin(h) $0.0958 $0.1079
SSA Merchandise Sales $528 $533
SSA Merchandise Gross Margin $129 $129
- ------------
<FN>
(a) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(b) Includes other energy related businesses and corporate capital
expenditures.
(c) Thousands of barrels per day
(d) Millions of cubic feet per day
(e) Includes gas acquired for injection and subsequent resale of 9.1 and
13.9 mmcfd in the first quarters of 2001 and 2000, respectively.
(f) Prices exclude gains and losses from hedging activities.
(g) Prices exclude equity investees and purchase/resale gas.
(h) Per gallon
(i) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(j) Millions of gallons
(k) Total volume of all refined product sales to MAP's wholesale,
branded and retail (SSA) customers.
57
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions, except per share amounts) 2001 2000
- ------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $1,510 $1,582
Income (loss) from investees 47 (7)
Net gains on disposal of assets 6 15
Other income (loss) 1 (2)
------ ------
Total revenues and other income 1,564 1,588
------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items shown below) 1,549 1,428
Selling, general and administrative expenses
(credits) (16) (63)
Depreciation, depletion and amortization 73 75
Taxes other than income taxes 59 57
------ ------
Total costs and expenses 1,665 1,497
------ ------
INCOME (LOSS) FROM OPERATIONS (101) 91
Net interest and other financial costs (income) (12) 24
------ ------
INCOME (LOSS) BEFORE INCOME TAXES (89) 67
Provision (credit) for income taxes (98) 24
------ ------
NET INCOME 9 43
Dividends on preferred stock 2 2
------ ------
NET INCOME APPLICABLE TO STEEL STOCK $7 $41
====== ======
STEEL STOCK DATA:
Net income $7 $41
- Per share - basic and diluted .08 .45
Dividends paid per share .25 .25
Weighted average shares, in thousands
- Basic 88,806 88,422
- Diluted 88,806 88,430
<FN>
Selected notes to financial statements appear on pages 60-65.
58
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
March 31 December 31
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $180 $219
Receivables, less allowance for doubtful
accounts of $130 and $57 626 627
Receivables subject to a security interest 350 350
Income taxes receivable 113 364
Inventories 957 946
Deferred income tax benefits 170 201
Other current assets 23 10
------ ------
Total current assets 2,419 2,717
Investments and long-term receivables,
less reserves of $26 and $28 382 536
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,570 and $6,531 3,067 2,739
Prepaid pensions 2,674 2,672
Other noncurrent assets 84 47
------ ------
Total assets $8,626 $8,711
====== ======
LIABILITIES
Current liabilities:
Notes payable $164 $70
Accounts payable 822 760
Payroll and benefits payable 234 202
Accrued taxes 146 173
Accrued interest 28 47
Long-term debt due within one year 133 139
------ ------
Total current liabilities 1,527 1,391
Long-term debt, less unamortized discount 1,939 2,236
Deferred income taxes 627 666
Employee benefits 1,897 1,767
Deferred credits and other liabilities 486 483
Preferred stock of subsidiary 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 183 183
STOCKHOLDERS' EQUITY
Preferred stock 2 2
Common stockholders' equity 1,899 1,917
------ ------
Total stockholders' equity 1,901 1,919
------ ------
Total liabilities and stockholders' equity $8,626 $8,711
====== ======
<FN>
Selected notes to financial statements appear on pages 60-65.
59
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $9 $43
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 73 75
Pensions and other postretirement benefits (27) (75)
Deferred income taxes (20) 69
Net gains on disposal of assets (6) (15)
Changes in:
Current receivables 296 13
Inventories 16 (15)
Current accounts payable and accrued expenses (25) (56)
All other - net (80) (3)
------ ------
Net cash provided from operating activities 236 36
------ ------
INVESTING ACTIVITIES:
Capital expenditures (37) (45)
Disposal of assets 3 13
Restricted cash - withdrawals 3 1
- deposits - (1)
All other - net 7 (10)
------ ------
Net cash used in investing activities (24) (42)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in U. S. Steel Group's portion of USX
consolidated debt (225) 26
Specifically attributed debt repayments (1) (2)
Preferred stock repurchased - (11)
Dividends paid (24) (24)
------ ------
Net cash used in financing activities (250) (11)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (39) (17)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 219 22
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $180 $5
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(69) $(25)
Income taxes refunded, including settlements
with the Marathon Group 373 94
<FN>
Selected notes to financial statements appear on pages 60-65.
60
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 2001 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 2000.
Effective January 1, 2001, USX 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 Standard requires recognition of all derivatives as either assets or
liabilities at fair value. The transition adjustment for the U. S. Steel
Group related to adopting SFAS No. 133 on January 1, 2001, was immaterial.
2. The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all businesses
of USX other than the businesses, assets and liabilities included in the
Marathon Group and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with ongoing
operating units of USX. These financial statements are prepared using the
amounts included in the USX consolidated financial statements. Corporate
amounts reflected in these financial statements are determined based upon
methods which management believes to be reasonable. The accounting
policies applicable to the preparation of the financial statements of the
U. S. Steel Group may be modified or rescinded in the sole discretion of
the Board of Directors of USX (Board), although the Board has no present
intention to do so. The Board may also adopt additional policies depending
on the circumstances.
Although the financial statements of the U. S. Steel Group and the
Marathon Group separately report the assets, liabilities (including
contingent liabilities) and stockholders' equity of USX attributed to each
such Group, such attribution of assets, liabilities (including contingent
liabilities) and stockholders' equity between the U. S. Steel Group and the
Marathon Group for purposes of preparing their respective financial
statements does not affect legal title to such assets and responsibility
for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel
Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of
common stock of USX and continue to be subject to all the risks associated
with an investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the overall cost of
USX's capital could affect the results of operations and financial
condition of the other Group. In addition, net losses of either Group, as
well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
both classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
61
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for income taxes and related tax
payments or refunds have been reflected in the U. S. Steel Group and the
Marathon Group financial statements in accordance with USX's tax allocation
policy for such groups. In general, such policy provides that the
consolidated tax provision and related tax payments or refunds are
allocated between the U. S. Steel Group and the Marathon Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for income taxes for the U. S. Steel Group is based on
tax rates and amounts which recognize management's best estimate of current
and deferred tax assets and liabilities. Differences between the combined
interim tax provisions of the U. S. Steel and Marathon Groups and USX
consolidated are allocated to each group based on the relationship of the
individual group provisions to the combined interim provisions.
3. On March 1, 2001, USX completed the purchase of the tin mill products
business of LTV Corporation (LTV). In this noncash transaction, USX
assumed certain employee related obligations of LTV. The acquisition was
accounted for using the purchase method of accounting. First quarter 2001
results of operations include the operations of the LTV assets acquired
from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P.
As a result of this transaction, USX became sole owner of Transtar and
certain of its subsidiaries. Holdings became owner of the other
subsidiaries of Transtar. USX accounted for the change in its ownership
interest in Transtar using the purchase method of accounting. The U. S.
Steel Group recognized in the first quarter of 2001, a pretax gain of
$70 million (included in income (loss) from investees) and a favorable
deferred tax adjustment of $33 million related to this transaction. USX
previously accounted for its investment in Transtar under the equity method
of accounting.
The following unaudited pro forma data for the U. S. Steel Group
includes the results of operations of the above acquisitions giving effect
to them as if they had been consummated at the beginning of the years
presented. The first quarter 2001 pro forma results exclude the $70
million gain and $33 million tax benefit recorded as a result of the
Transtar transaction. The pro forma data is based on historical
information and does not necessarily reflect the actual results that would
have occurred nor is it necessarily indicative of future results of
operations.
First
Quarter Ended
March 31
(In millions, except per share amounts) 2001 2000
---------------------------------------------------------------------
Revenues and other income $1,540 $1,661
Net income (loss) (94) 46
Net income (loss) per common share (basic and diluted) (1.09) .49
62
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. The U. S. Steel Group's total comprehensive income was $7 million for
the first quarter of 2001 and $44 million for the first quarter of 2000.
5. The U. S. Steel Group consists of two reportable operating segments:
1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel
includes the United States operations of U. S. Steel while USSK includes
the U. S. Steel Kosice operations primarily located in the Slovak Republic.
Domestic Steel is engaged in the domestic production, sale and
transportation of steel mill products, coke, taconite pellets and coal; the
management of mineral resources; real estate development; and engineering
and consulting services. USSK is engaged in the production and sale of
steel mill products and coke and primarily serves central European markets.
The results of segment operations are as follows:
Domestic Total
(In millions) Steel USSK Segments
- -----------------------------------------------------------------------------
FIRST QUARTER 2001
- ------------------
Revenues and other income:
Customer $1,262 $246 $1,508
Intersegment (a) 1 - 1
Intergroup (a) 2 - 2
Equity in earnings of unconsolidated investees 47 - 47
Other 6 1 7
------ ------ ------
Total revenues and other income $1,318 $247 $1,565
====== ====== ======
Segment income (loss) $(151) $41 $(110)
====== ====== ======
FIRST QUARTER 2000
- ------------------
Revenues and other income:
Customer $1,578 $- $1,578
Intergroup (a) 4 - 4
Equity in losses of unconsolidated investees (7) - (7)
Other 13 - 13
------ ------ ------
Total revenues and other income $1,588 $- $1,588
====== ====== ======
Segment income $54 $- $54
====== ====== ======
<FN>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
63
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The following schedule reconciles segment revenues and income to
amounts reported in the U. S. Steel Group's financial statements:
First Quarter Ended
March 31
(In millions) 2001 2000
---------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of reportable segments $1,565 $1,588
Elimination of intersegment revenues (1) -
------ ------
Total Group revenues and other income $1,564 $1,588
====== ======
Income:
Income (loss) for reportable segments $(110) $54
Items not allocated to segments:
Administrative expenses (8) (6)
Net pension credits 41 65
Costs related to former business activities (24) (22)
------ ------
Total Group income (loss) from operations $(101) $91
====== ======
6. On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. (USSK),
which is primarily located in the Slovak Republic. USSK was formed in June
2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a
diversified Slovak corporation. The acquisition was accounted for under
the purchase method of accounting. VSZ did not provide historical carve-
out financial information for its steel activities prepared in accordance
with generally accepted accounting principles in the United States. USX
was unable to fully determine the effects of transfer pricing, intercompany
eliminations and expense allocations in order to prepare such carve-out
information from Slovak statutory reports and VSZ internal records. USX
broadly estimates that the unaudited pro forma effect on its first quarter
2000 revenues, giving effect to the acquisition as if it had been
consummated at the beginning of this period, would have been to increase
revenues in the period by approximately $250 million. USX cannot determine
the unaudited pro forma effect on its first quarter 2000 net income.
However, historical pro forma information is not necessarily indicative of
future results of operations.
64
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
----------------------
March 31 December 31
2001 2000
--------------------
Raw materials $176 $214
Semi-finished products 434 429
Finished products 268 210
Supplies and sundry items 79 93
---- ----
Total $957 $946
==== ====
8. The method of calculating net income per common share for the Steel
Stock and Marathon Stock reflects the Board's intent that the separately
reported earnings and surplus of the U. S. Steel Group and the Marathon
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income 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 per share assumes exercise of stock options,
provided the effect is not antidilutive.
See Note 8 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
9. At March 31, 2001, and December 31, 2000, income taxes receivable
represents an estimated income tax receivable from the Marathon Group. In
addition, included in investments and long-term receivables at March 31,
2001, and December 31, 2000, respectively, are $43 million and $97 million
of income taxes receivable from the Marathon Group. These amounts have
been determined in accordance with the tax allocation policy discussed in
Note 2.
10. In the first quarter of 2001, interest and other financial costs
includes a favorable adjustment of $67 million and provision for income
taxes includes an unfavorable adjustment of $15 million, both of which are
related to prior years' taxes.
65
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
U. S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At March 31, 2001, and
December 31, 2000, accrued liabilities for remediation totaled $141 million
and $137 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In the first quarter of 2001 and
for the years 2000 and 1999, such capital expenditures totaled $1 million,
$18 million and $32 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the U. S.
Steel Group totaled $68 million at March 31, 2001. In the event that
any defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the affiliates to reduce U. S. Steel Group losses
resulting from these guarantees. As of March 31, 2001, the largest
guarantee for a single affiliate was $59 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at March 31, 2001, totaled $193 million compared with
$206 million at December 31, 2000.
12. USX has a 16% investment in Republic Technologies International LLC
(Republic) which was accounted for under the equity method of accounting.
During the first quarter of 2001, USX discontinued applying the equity
method since investments in and advances to Republic had been reduced to
zero. Also, USX has recognized certain debt obligations of $14 million
previously assumed by Republic. On April 2, 2001, Republic filed a
voluntary petition with the U.S. Bankruptcy Court to reorganize its
operations under Chapter 11 of the U.S. Bankruptcy Code. In the first
quarter of 2001, as a result of Republic's action, the U. S. Steel Group
recorded a pretax charge of $74 million for potentially uncollectible
receivables from Republic.
66
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The U. S. Steel Group, through its Domestic Steel segment, is engaged in
the production, sale and transportation of steel mill products, coke, taconite
pellets and coal; the management of mineral resources; real estate development;
and engineering and consulting services and, through its U. S. Steel Kosice
("USSK") segment, primarily located in the Slovak Republic, in the production
and sale of steel mill products and coke for the central European market.
Certain business activities in Domestic Steel are conducted through joint
ventures and partially owned companies, such as USS-POSCO Industries ("USS-
POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Clairton 1314B Partnership, and
Republic Technologies International, LLC ("Republic"). Management's Discussion
and Analysis should be read in conjunction with the U. S. Steel Group's
Financial Statements and Notes to Financial Statements. The discussion of
Results of Operations should be read in conjunction with the Supplemental
Statistics provided on page 76.
On April 24, 2001, USX announced that its Board of Directors authorized
management to proceed with the necessary steps to implement a plan of
reorganization of the corporation in order to separate the energy and steel
businesses. The plan envisions a tax-free spin-off of the steel and steel-
related businesses of USX Corporation into a freestanding, publicly traded
company to be known as United States Steel Corporation ("U. S. Steel"). Holders
of current USX-U. S. Steel Group Common Stock would become holders of United
States Steel Corporation Common Stock. Holders of current USX-Marathon Group
Common Stock would become holders of Marathon Oil Company Common Stock. The
plan does not contemplate a cash distribution to shareholders. Each new company
would carry approximately the same assets and liabilities now associated with
its existing businesses, except for a value transfer of approximately $900
million from Marathon Oil Company to U. S. Steel, intended to maintain U. S.
Steel as a strong, independent company. The form of the value transfer would be
a reallocation of USX corporate debt between the current Marathon Group and the
U. S. Steel Group. The plan of reorganization is subject to the approval of a
majority of the outstanding shares of each class of the current USX common
stock, receipt of a favorable tax ruling from the Internal Revenue Service
("IRS") on the tax-free nature of the transaction, completion of necessary
financing arrangements, receipt of necessary regulatory and third party
consents, and board approval of definitive documentation for the transaction.
The transaction is expected to occur at year-end, subject to the absence of any
materially adverse change in business conditions for the energy and/or steel
business, delay in obtaining the IRS ruling or other unfavorable circumstances.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates", "believes", "estimates", "expects", "intends" or similar
words indicating that future outcomes are not known with certainty and subject
to risk factors that could cause these outcomes to differ significantly from
those projected. In accordance with "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 forward-looking statements. For additional risk factors affecting
the businesses of the U. S. Steel Group, see Supplementary Data -- Disclosures
About Forward-Looking Information in USX 2000 Form 10-K.
67
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Results of Operations
- ---------------------
Revenues and other income decreased by $24 million in the first quarter of
2001 compared with the first quarter of 2000. The decrease was primarily due to
significantly lower domestic sheet product shipment volumes (domestic steel
shipments decreased almost 550,000 tons) and prices, partially offset by
additional revenues resulting from the acquisition of USSK, in the fourth
quarter of 2000, and LTV's tin operations, in the first quarter of 2001.
Income (loss) from operations for the U. S. Steel Group for the first
quarter of 2001 and 2000 are set forth in the following table:
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------
Segment income (loss) for Domestic Steel(a)(b) $(151) $54
Segment income for U. S. Steel Kosice(c) 41 -
----- -----
Income (loss) for reportable segments (110) 54
Items not allocated to segment:
Net pension credits 41 65
Administrative expenses (8) (6)
Costs related to former business activities(d) (24) (22)
----- -----
Total income (loss) from operations $(101) $91
===== =====
- ------
<FN>
(a) The first quarter of 2001 includes a favorable $70 million for USX's
share of gain on the Transtar reorganization and a $74 million charge for
a substantial portion of accounts receivable from Republic.
(b) Includes the sale, domestic production and transportation of steel
products, coke, taconite pellets and coal; the management of mineral
resources; real estate development; engineering and consulting services;
and equity income from joint ventures and partially owned companies.
(c) Includes the sale and production of steel products and coke from
facilities primarily located in the Slovak Republic.
(d) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the
U. S. Steel Group.
Segment income for Domestic Steel
Segment income for Domestic Steel operations decreased $205 million in the
first quarter of 2001, compared with the first quarter of 2000, primarily due to
higher energy costs, lower shipment volumes, higher costs from operating
inefficiencies primarily due to lower throughput for sheet products and lower
income from raw materials operations.
Segment income for U. S. Steel Kosice
Segment income for USSK, which was acquired in the fourth quarter of 2000,
was $41 million for the first quarter of 2001.
68
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Item not allocated to segment
Net pension credits associated with all of U. S. Steel Group's domestic
pension plans are not included in segment income for domestic operations. These
net pension credits, which are primarily noncash, totaled $41 million in first
quarter of 2001, compared to $65 million in first quarter of 2000. The $24
million decrease in net pension credits is primarily due to the transition asset
being fully amortized at the end of 2000. Future net pension credits can vary
depending upon the market performance of plan assets, changes in actuarial
assumptions regarding such factors as a selection of a discount rate and rate of
return on assets, changes in the amortization levels of transition amounts or
prior period service costs, plan amendments affecting benefit payout levels and
profile changes in the beneficiary populations being valued. To the extent net
pension credits decline in the future, income from operations would be adversely
affected.
Net interest and other financial costs for the first quarters of 2001 and
2000 are set forth in the following table:
First Quarter
Ended
March 31
(Dollars in millions) 2001 2000
- ----------------------------------------------------------------------------
Net interest and other financial costs (income) $(12) $24
Less:
Favorable adjustment to interest
related to prior years' taxes (67) -
----- -----
Net interest and other financial costs
adjusted to exclude above item $55 $24
===== =====
Adjusted net interest and other financial costs increased by $31 million in
the first quarter of 2001 as compared with the same period in 2000. This
increase was largely due to a higher average debt level, which primarily
resulted from the elective funding for employee benefits and the acquisition of
USSK, both of which occurred in the fourth quarter of 2000.
The credit for income taxes in the first quarter of 2001 was $98 million.
The credit contained a $33 million tax benefit associated with the Transtar
reorganization and an unfavorable adjustment of $15 million related to prior
years' taxes. In addition, as a result of tax credit provisions of laws of the
Slovak Republic and certain tax planning strategies, virtually no income tax
provision is recorded for income related to USSK.
Net income in the first quarter of 2001 was $9 million, compared with net
income of $43 million in the first quarter of 2000. Net income decreased $34
million in the first quarter of 2001 compared to the same period in 2000,
primarily reflecting the factors discussed above.
69
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Operating Statistics
- --------------------
First quarter 2001 U. S. Steel Group shipments were 3.2 million net tons.
Domestic Steel shipments of 2.4 million tons and raw steel production of 2.6
million tons decreased 18% and 17%, respectively, from the same period in 2000.
Domestic raw steel capability utilization in the first quarter of 2001 averaged
83%, compared to 99% in the same period in 2000. At USSK, first quarter 2001
shipments were 749 thousand net tons, raw steel production was 952 thousand net
tons and raw steel capability utilization was 86%.
Cash Flows
- ----------
Net cash provided from operating activities increased $200 million in the
first quarter of 2001, compared with the first quarter of 2000. The increase
was due primarily to favorable working capital changes, which included a
favorable intergroup income tax settlement of $364 million in the first quarter
of 2001 compared to a favorable intergroup settlement of $97 million in the
first quarter of 2000, partially offset by decreased net income (excluding
noncash items).
Capital expenditures in the first quarter of 2001 were $37 million,
compared with $45 million in the same period in 2000. The decrease of $8
million is due to a reduction in budgeted projects.
Financial obligations decreased by $226 million in the first quarter of
2001, reflecting favorable cash from operations, partially offset by capital
expenditures and dividend payments. Financial obligations consist of the
U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary
attributed to both groups, as well as debt and financing agreements specifically
attributed to the U. S. Steel Group.
Contract commitments at March 31, 2001, totaled $193 million, compared with
$206 million at December 31, 2000.
Derivative Instruments
- ----------------------
See Quantitative and Qualitative Disclosures About Market Risk for
discussion of derivative instruments and associated market risk for U. S. Steel
Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
70
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Environmental Matters, Litigation and Contingencies
- ---------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely affected. The U. S. Steel Group believes that all of its domestic
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 the specific products and services it provides.
To the extent that competitors are not required to undertake equivalent costs in
their operations, the competitive position of the U. S. Steel Group could be
adversely affected.
In addition, the U. S. Steel Group expects to incur capital expenditures
for its USSK operation to meet environmental standards under the Slovak
Republic's environmental laws.
USX has been notified that it is a potential responsible party ("PRP") at
25 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of March
31, 2001. In addition, there are 16 sites related to the U. S. Steel Group
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability or to make any judgment as to the amount
thereof. There are also 29 additional sites related to the U. S. Steel Group
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group accrues for environmental remediation activities
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. As environmental remediation matters proceed
toward ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required.
In October 1996, USX was notified by the Indiana Department of
Environmental Management ("IDEM"), acting as lead trustee, that IDEM and the
U.S. Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to the releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The public trustees
completed a pre-assessment screen pursuant to federal regulations and have
determined to perform a Natural Resource Damages Assessment. USX was identified
as a PRP along with 15 other companies owning property along the river and
harbor canal. USX and eight other PRPs have formed a joint defense group. In
2000, the trustees concluded their assessment of sediment injuries, which
includes a technical review of environmental conditions. The PRP joint defense
group has proposed terms for the settlement of this claim which have been
endorsed by representatives of the trustees and the U.S. Environmental
Protection Agency ("EPA") to be included in a consent decree that USX expects
will resolve this claim. A reserve has been established for the USX share of
this anticipated settlement.
71
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-
acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and
solvent reprocessing operations were conducted on the Berks Site between 1941
and 1986. In September 1997, USX signed a consent decree to conduct a
feasibility study at the site relating to the alternative remedy. In 1999, a
new Record of Decision was approved by the EPA and the U.S. Department of
Justice. On January 19, 2001, USX signed a consent decree with the EPA to
remediate this site. On April 6, 2001, USX paid $.4 million for costs
associated with this site. The only remaining outstanding claim is the natural
resource damages claim filed by the Commonwealth of Pennsylvania.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 11 to the U. S. Steel Group
Financial Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will remain a viable and
competitive enterprise even though it is possible that these contingencies could
be resolved unfavorably to the U. S. Steel Group.
Outlook
- -------
Domestic Steel continues to experience mills that are running at less-than-
efficient utilization rates, depressed prices for most products and high natural
gas prices. While the domestic order book is improving, primarily for hot-
rolled sheet products, U. S. Steel Group will continue to be negatively impacted
by less-than-efficient utilization rates if the improved order rate is not
maintained. For Domestic Steel, U. S. Steel Group expects second quarter
shipments to be approximately 10 percent higher than first quarter and second
quarter average realized prices to be somewhat lower than the first quarter,
largely due to a less favorable product mix. Late in the second quarter, work
will begin on the refurbishment of the Mon Valley No. 3 blast furnace, which
will require an outage, into the third quarter, of approximately 60 days.
For USSK, second quarter shipments are expected to be more than 30 percent
higher than the first quarter and second quarter average realized prices are
expected to be somewhat lower than the first quarter, largely due to a less
favorable product mix.
For the full year 2001, total shipments are expected to be approximately
14.5 million net tons with Domestic Steel shipments of approximately 11 million
net tons, including shipments from the recent acquisition of LTV's tin products
business, and USSK shipments of approximately 3.5 million net tons.
72
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
USX owns a 16 percent equity method investment in Republic (through USX's
ownership in Republic Technologies International Holdings, LLC, which is the
sole owner of Republic), which is a major purchaser of raw materials from U. S.
Steel Group and the primary supplier of rounds for the tubular facility in
Lorain, Ohio. On April 2, 2001, Republic filed to reorganize under Chapter 11
of the U.S. Bankruptcy Code. Republic has continued to supply the Lorain mill
since filing for bankruptcy and no supply interruptions are anticipated. The
U. S. Steel Group's carrying value of this investment in Republic has been
reduced to zero. Upon Republic's filing for bankruptcy, U. S. Steel Group
accrued a charge for a substantial portion of the receivables due from Republic.
At March 31, 2001, U. S. Steel Group's remaining financial exposure to Republic,
after recording various losses and reserves, totaled approximately $30 million.
In connection with the plan of reorganization described on page 66,
Standard & Poor's reported that they had assigned a BB+ corporate credit rating
to the new U. S. Steel with a stable outlook, assuming the reorganization is
completed.
The above discussion includes forward-looking statements concerning
shipments, pricing, equity investee performance and the plan of reorganization.
These statements are based on assumptions as to future product demand, prices
and mix, and production. Steel shipments and prices can be affected by imports
and actions of the U.S. Government and its agencies pertaining to trade,
domestic and international economies, domestic production capacity, and customer
demand. Factors which may affect USSK results are similar to domestic factors,
including excess world supply, and also can be influenced by matters peculiar to
international marketing such as tariffs. USSK results may also be affected by
foreign currency fluctuations. Some factors which will affect the plan of
reorganization include approval of a majority of the outstanding shares of each
class of the current USX common stock, receipt of a favorable ruling from the
IRS on the tax-free nature of the transaction, completion of necessary financing
arrangements, receipt of necessary regulatory and third-party consents, any
materially adverse changes in the business conditions for the energy and/or
steel businesses, board approval of definitive documentation of the transaction
or other unfavorable circumstances. In the event these assumptions prove to be
inaccurate, actual results may differ significantly from those presently
anticipated.
Steel imports to the United States accounted for an estimated 22%, 27% and
26% of the domestic steel market in the first two months of 2001, and for the
years 2000 and 1999, respectively.
On November 13, 2000, U. S. Steel Group joined with eight other producers
and the Independent Steelworkers Union to file trade cases against hot-rolled
carbon steel flat products from 11 countries (Argentina, India, Indonesia,
Kazakhstan, the Netherlands, the People's Republic of China, Romania, South
Africa, Taiwan, Thailand and Ukraine). Three days later, the USWA also entered
the cases as a petitioner. Antidumping ("AD") cases were filed against all the
countries and countervailing duty ("CVD") cases were filed against Argentina,
India, Indonesia, South Africa, and Thailand. The U.S. International Trade
Commission ("ITC") made a preliminary determination that there is a reasonable
indication that the domestic industry is being materially injured by the imports
in question and the U.S. Department of Commerce ("Commerce") has made
preliminary findings of margins in all of the cases. As a result, both the ITC
and Commerce will continue their investigations.
73
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
U. S. Steel Group believes that the remedies provided by U.S. law to
private litigants are insufficient to correct the widespread dumping and subsidy
abuses that currently characterize steel imports into our country. U. S. Steel
Group, nevertheless, intends to file additional AD and CVD petitions against
unfairly traded imports that adversely impact, or threaten to adversely impact,
the results of the U. S. Steel Group and is urging the U.S. government to take
additional steps.
On July 3, 2000, Commerce and the ITC initiated mandatory five-year
"sunset" reviews of AD orders issued in 1995 against seamless pipe from
Argentina, Brazil, Germany and Italy and oil country tubular goods ("OCTG") from
Argentina, Italy, Japan, Mexico and South Korea. The reviews also encompass the
1995 CVD orders against the same two products from Italy. The "sunset" review
procedures require that an order must be revoked after five years unless
Commerce and the ITC determine that, if the orders would be discontinued,
dumping or a countervailable subsidy would be likely to continue or recur. In
all of the cases, Commerce has concluded its review and has determined that
dumping or countervailable subsidies would be likely to continue or recur if the
orders are discontinued. The ITC is conducting full reviews in all the cases,
despite the fact that responses by some of the respondent countries were
inadequate.
74
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for commodity-based
derivative instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- ---------------------------------------------------------------------------
Commodity-Based Derivative Instruments
U. S. Steel Group
Zinc
Other than trading 2.0 5.0 (b)
Tin
Other than trading 0.3 0.7 (b)
<FN>
(a) Gains and losses on commodity-based derivative instruments used for
other than trading activities are generally offset by price changes in
the underlying commodity. With the adoption of SFAS No. 133, the
definition of a derivative instrument has been expanded to include
certain fixed price physical commodity contracts. Such instruments are
included in the above table. Amounts reflect the estimated incremental
effect on pretax income of a hypothetical 10% and 25% changes in closing
commodity prices at March 31, 2001. Management evaluates the portfolios
of commodity-based derivative instruments on an ongoing basis and adjusts
strategies to reflect anticipated market conditions, changes in risk
profiles and overall business objectives. Changes to the portfolios
subsequent to March 31, 2001, may cause future pretax income effects to
differ from those presented in the table.
(b) Price decrease.
Interest Rate Risk
- ------------------
As of March 31, 2001, the discussion of the U. S. Steel Group's interest
rate risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 2000 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
USX 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 U.S.
dollars. USX has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to manage
exposure to certain currency price fluctuations. At March 31, 2001, the U. S.
Steel Group had open Euro forward sale contracts for both U.S. dollars and
Slovak Koruna. A 10% increase in the March 31, 2001 Euro forward rates would
result in an immaterial charge to income. The entire amount of these contracts
is attributed to the U. S. Steel Group.
75
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
------------------------------------
Equity Price Risk
- -----------------
As of March 31, 2001, the discussion of the U. S. Steel Group's equity
price risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 2000 Form 10-K.
Safe Harbor
- -----------
The U. S. Steel Group's quantitative and qualitative disclosures about
market risk include forward-looking statements with respect to management's
opinion about risks associated with the U. S. Steel Group's use of derivative
instruments. These statements are based on certain assumptions with respect to
market prices and industry supply and demand for steel products and certain raw
materials. To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to the U. S. Steel Group's hedging programs may differ
materially from those discussed in the forward-looking statements.
76
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-------------------------------------
First Quarter Ended
March 31
(Dollars in millions) 2001 2000
- -------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Domestic Steel(a)(b) $(151) $54
U. S. Steel Kosice(c) 41 -
----- -----
Income (loss) from Reportable Segments $(110) $54
Items not allocated to segment:
Net Pension Credits 41 65
Administrative Expenses (8) (6)
Costs related to former business activities(d) (24) (22)
----- -----
Total U. S. Steel Group $(101) $91
CAPITAL EXPENDITURES
Domestic Steel $32 $45
U. S. Steel Kosice 5 -
----- -----
Total U. S. Steel Group $37 $45
OPERATING STATISTICS
Average steel price per ton: ($/net ton)
Domestic Steel $439 $438
U. S. Steel Kosice 293 -
Steel Shipments:(e)
Domestic Steel 2,432 2,980
U. S. Steel Kosice 749 -
----- -----
Total Steel Shipments 3,181 2,980
Raw Steel-Production:(e)
Domestic Steel 2,623 3,152
U. S. Steel Kosice 952 -
----- -----
Total Raw Steel-Production 3,575 3,152
Raw Steel-Capability Utilization:(f)
Domestic Steel 83.1% 99.0%
U. S. Steel Kosice 85.8% -
Iron ore shipments - Domestic Steel(e) 1,911 2,029
- -----------
<FN>
(a) The first quarter of 2001 includes a favorable $70 million for USX's
share of gain on the Transtar reorganization and a $74 million charge for
a substantial portion of accounts receivable from Republic.
(b) Includes the sale, domestic production and transportation of steel
products, coke, taconite pellets and coal; the management of mineral
resources; real estate development; engineering and consulting services;
and equity income from joint ventures and partially owned companies.
(c) Includes the production and sale of steel products and coke from
facilities primarily located in the Slovak Republic.
(d) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(e) Thousands of net tons.
(f) Based on annual raw steel production capability of 12.8 million tons
for Domestic Steel and 4.5 million tons for U. S. Steel Kosice.
77
Part II - Other Information:
- ---------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Environmental Proceedings
In October 1998, the National Enforcement Investigations Center and Region
V of the U.S. Environmental Protection Agency ("EPA") conducted a multi-media
inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V
conducted a multi-media inspection of MAP's Robinson refinery. These
inspections covered compliance with the Clean Air Act (New Source Performance
Standards, Prevention of Significant Deterioration, and the National Emission
Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (Permit
exceedances for the Waste Water Treatment Plant), reporting obligations under
the Emergency Planning and Community Right to Know Act and the handling of
process waste. MAP has been served with two Notices of Violation ("NOV") and
three Findings of Violation in connection with the multi-media inspections at
its Detroit refinery. The Detroit notices allege violations of the Michigan
State Air Pollution Regulations, the EPA New Source Performance Standards and
National Emission Standards for Hazardous Air Pollutants for benzene. On
March 6, 2000, MAP received its first NOV arising out of the multi-media
inspection of the Robinson Refinery conducted in November 1998. The NOV is for
alleged Resource Conservation and Recovery Act (hazardous waste) violations.
MAP has recently settled with the EPA certain New Source Review ("NSR")
compliance issues as well as multi-media issues related to the EPA's 1998
multi-media inspections of the Detroit and Robinson refineries. MAP's
settlement with the EPA includes all of MAP's refineries and commits MAP to
specific control technologies and implementation schedules for approximately
$263 million in environmental capital expenditures and improvements to MAP's
refineries over approximately an 8 year period that are consistent with MAP's
current capital spending plans. It also commits MAP to payment of an aggregate
civil penalty in the amount of $3.8 million and the performance of $6.5 million
in supplemental environmental projects as a part of an enforcement action for
alleged Clean Air Act violations. MAP believes that the settlement will
provide MAP with increased permitting and operating flexibility while achieving
significant emission reductions.
U. S. Steel Group
Environmental Proceedings
The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-
acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and
solvent reprocessing operations were conducted on the Berks Site between 1941
and 1986. In September 1997, USX signed a consent decree to conduct a
feasibility study at the site relating to the alternative remedy. In 1999, a
new Record of Decision was approved by the EPA and the U.S. Department of
Justice. On January 19, 2001, USX signed a consent decree with the EPA to
remediate this site. On April 6, 2001, USX paid $.4 million for costs
associated with this site. The only remaining outstanding claim is the natural
resource damages claim filed by the Commonwealth of Pennsylvania.
78
Part II - Other Information (Continued):
- ----------------------------------------
Item 5. OTHER INFORMATION
Marathon Group
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
(In millions)
-------------------
First Quarter Ended
March 31
2001 2000
---- ----
INCOME DATA:
Revenues and other income $8,735 $7,855
Income from operations 924 533
Net income 513 262
(In millions)
------------------------
March 31 December 31
2001 2000
-------- -----------
BALANCE SHEET DATA:
Assets:
Current assets $7,052 $7,397
Noncurrent assets 11,061 10,135
------ ------
Total assets $18,113 $17,532
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $4,011 $3,951
Noncurrent liabilities 7,986 8,110
Preferred stock of subsidiary 9 9
Minority interest in income of
Marathon Ashland Petroleum LLC 1,938 1,840
Stockholder's equity 4,169 3,622
------ ------
Total liabilities and stockholder's equity $18,113 $17,532
====== ======
79
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
12.1 Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to
Fixed Charges
(b) REPORTS ON FORM 8-K
Form 8-K dated January 24, 2001, reporting under Item 9.
Regulation FD disclosure, the USX-Marathon Group and USX-U. S. Steel Group
Earnings Releases.
Form 8-K dated February 27, 2001, reporting under Item 5. Other
Events, the filing of the audited Financial Statements and Supplementary Data
for the fiscal year ended December 31, 2000, reports of independent accountants.
Form 8-K dated April 24, 2001, reporting under Item 9. Regulation
FD Disclosure, that USX Corporation is furnishing information under Regulation
FD for the April 24, 2001 press releases titled "USX Announces Plan of
Reorganization" and "USX Corporation Declares First Quarter Marathon Dividend
and Reduced U. S. Steel Group Dividend."
Form 8-K dated April 24, 2001, reporting under Item 5. Other
Events, that USX Corporation is filing information for the April 24, 2001 press
releases titled "USX Announces Plan of Reorganization" and "USX Corporation
Declares First Quarter Marathon Dividend and Reduced U. S. Steel Group
Dividend."
Form 8-K dated May 8, 2001, reporting under Item 9. Regulation FD
Disclosure, the statement concerning the impact of the plan of reorganization on
preferred securities and industrial revenue bonds.
80
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Larry G. Schultz
------------------------
Larry G. Schultz
Vice President -
Accounting
May 11, 2001