1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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 July 31, 2001 follows:
USX-Marathon Group - 308,913,392 shares
USX-U. S. Steel Group - 89,141,345 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 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 28
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 29
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 39
Financial Statistics 42
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 43
Marathon Group Balance Sheet 44
Marathon Group Statement of Cash Flows 45
Selected Notes to Financial Statements 46
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 59
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 70
Supplemental Statistics 73
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 2001
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 75
U. S. Steel Group Balance Sheet 76
U. S. Steel Group Statement of Cash Flows 77
Selected Notes to Financial Statements 78
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 89
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 99
Supplemental Statistics 102
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 103
Item 4. Submission of Matters to
a Vote of Security Holders 105
Item 5. Other Information 106
Item 6. Exhibits and Reports on Form 8-K 107
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
<caption>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2001 2000 2001 2000
- ----------------------------------------------------------------------
<s> <c> <c> <c> <c>
REVENUES AND OTHER INCOME:
Revenues $10,844 $10,293 $20,960 $19,600
Dividend and investee income 32 31 112 35
Net gains on disposal of assets 24 15 44 122
Gain (loss) on ownership change in
Marathon Ashland Petroleum LLC (7) 4 (6) 8
Other income 10 7 78 14
------ ------ ------ ------
Total revenues and other income 10,903 10,350 21,188 19,779
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues
(excludes items shown below) 7,791 7,710 15,560 14,923
Selling, general and
administrative expenses 204 67 329 138
Depreciation, depletion and amortization 385 318 761 639
Taxes other than income taxes 1,269 1,237 2,450 2,400
Exploration expenses 26 46 49 91
------ ------ ------ ------
Total costs and expenses 9,675 9,378 19,149 18,191
------ ------ ------ ------
INCOME FROM OPERATIONS 1,228 972 2,039 1,588
Net interest and other financial costs 86 92 109 187
Minority interest in income of
Marathon Ashland Petroleum LLC 320 203 427 258
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 822 677 1,503 1,143
Provision for income taxes 270 254 434 423
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 552 423 1,069 720
Cumulative effect of change in accounting
principle - - (8) -
------ ------ ------ ------
NET INCOME 552 423 1,061 720
Dividends on preferred stock 2 2 4 4
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $550 $421 $1,057 $716
====== ====== ====== ======
<fn>
Selected notes to financial statements appear on pages 9-27.
5
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
<table>
<caption>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except
per share amounts) 2001 2000 2001 2000
- ---------------------------------------------------------------------
<s> <c> <c> <c> <c>
APPLICABLE TO MARATHON STOCK:
Income before cumulative effect of change
in accounting principle $582 $367 $1,090 $621
- Per share - basic 1.88 1.18 3.53 1.99
- diluted 1.88 1.18 3.52 1.99
Cumulative effect of change
in accounting principle - - (8) -
- Per share - basic - - (.03) -
- diluted - - (.02) -
Net income $582 $367 $1,082 $621
- Per share - basic and diluted 1.88 1.18 3.50 1.99
Dividends paid per share .23 .21 .46 .42
Weighted average shares, in thousands
- Basic 309,101 312,233 308,928 312,180
- Diluted 309,627 312,431 309,338 312,359
APPLICABLE TO STEEL STOCK:
Net income (loss) $(32) $4 $(25) $95
- Per share - basic (.36) .62 (.28) 1.08
- diluted (.36) .62 (.28) 1.07
Dividends paid per share .10 .25 .35 .50
Weighted average shares, in thousands
- Basic 89,005 88,499 88,906 88,461
- Diluted 89,005 92,755 88,906 92,721
<fn>
Selected notes to financial statements appear on pages 9-27.
</table>
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
<table>
<caption>
ASSETS
June 30 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c>
ASSETS
Current assets:
Cash and cash equivalents $723 $559
Receivables, less allowance for doubtful
accounts of $131 and $60 2,836 2,888
Receivables subject to a security interest 350 350
Inventories 2,926 2,813
Deferred income tax benefits 234 261
Assets held for sale - 330
Other current assets 119 131
------ ------
Total current assets 7,188 7,332
Investments and long-term receivables,
less reserves of $39 and $38 1,041 801
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$16,810 and $16,222 12,977 12,114
Prepaid pensions 2,928 2,879
Other noncurrent assets 380 275
------ ------
Total assets $24,514 $23,401
====== ======
<fn>
Selected notes to financial statements appear on pages 9-27.
</table>
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
<table>
<caption>
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c>
LIABILITIES
Current liabilities:
Notes payable $250 $150
Accounts payable 3,547 3,774
Payroll and benefits payable 418 432
Accrued taxes 576 281
Accrued interest 114 108
Long-term debt due within one year 436 287
------ ------
Total current liabilities 5,341 5,032
Long-term debt, less unamortized discount 3,673 4,173
Deferred income taxes 2,070 2,020
Employee benefits 2,578 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 2,010 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 - 89,156,721 shares and
88,767,395 shares 89 89
Securities exchangeable solely into Marathon Stock
issued - 264,441 shares and 281,148 shares - -
Treasury common stock, at cost - Marathon Stock
- 3,256,789 shares and 3,899,714 shares (87) (104)
Additional paid-in capital 4,686 4,676
Deferred compensation (30) (8)
Retained earnings 2,731 1,847
Accumulated other comprehensive loss (9) (50)
------ ------
Total stockholders' equity 7,694 6,764
------ ------
Total liabilities and stockholders' equity $24,514 $23,401
====== ======
<fn>
Selected notes to financial statements appear on pages 9-27.
</table>
8
<table>
<caption>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
Six Months Ended
June 30
(Dollars in millions) 2001 2000
- ----------------------------------------------------------------------
<s> <c> <c>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $1,061 $720
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 427 258
Depreciation, depletion and amortization 761 639
Exploratory dry well costs 6 32
Pensions and other postretirement benefits (42) (157)
Deferred income taxes (179) 162
(Gain) loss on ownership change in Marathon Ashland
Petroleum LLC 6 (8)
Net gains on disposal of assets (44) (122)
Changes in:
Current receivables 150 (320)
Inventories (83) (265)
Current accounts payable and accrued expenses (99) 213
All other - net 51 (44)
------ ------
Net cash provided from operating activities 2,023 1,108
------ ------
INVESTING ACTIVITIES:
Capital expenditures (769) (673)
Acquisition of Pennaco Energy, Inc. (506) -
Disposal of assets 115 230
Restricted cash - withdrawals 26 161
- deposits (15) (194)
Investees - investments (2) (67)
- loans and advances (5) -
- returns and repayments 10 2
All other - net (19) 23
------ ------
Net cash used in investing activities (1,165) (518)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving
credit arrangements - net (277) (253)
Other debt - borrowings 139 273
- repayments (132) (309)
Common stock repurchased (1) -
Treasury stock reissued 3 -
Preferred stock repurchased - (12)
Dividends paid (177) (179)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (244) (73)
------ ------
Net cash used in financing activities (689) (553)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5) (3)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 164 34
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 559 133
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $723 $167
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(178) $(179)
Income taxes paid (218) (141)
<fn>
Selected notes to financial statements appear on pages 9-27.
</table>
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, as amended, requires
recognition of all derivatives at fair value as either assets or
liabilities. Changes in the fair value of all derivatives are
recognized immediately in earnings, unless the derivative
qualifies as a hedge of future cash flows or certain foreign
currency exposures. For derivatives qualifying as hedges of
future cash flows or certain foreign currency exposures, the
effective portion of any changes in fair value is recognized in a
component of stockholders' equity called other comprehensive
income ("OCI") and then reclassified to earnings when the
underlying anticipated transaction is consummated. Any
ineffective portion of such hedges is recognized in earnings as it
occurs. For derivatives designated as hedges of the fair value of
recognized assets, liabilities or firm commitments, changes in the
fair value of the hedged item are recognized immediately in
earnings. Since changes in fair value of the related derivative
are also recognized immediately in earnings, the net effect of
that accounting is to reflect in earnings the extent to which the
hedge is not effective in achieving offsetting changes in fair
value.
USX uses commodity-based and foreign currency derivative
instruments to manage its exposure to price risk. Management has
authorized the use of futures, forwards, swaps and options to
reduce the effects of fluctuations related to the purchase,
production or sale of crude oil, natural gas, refined products,
and nonferrous metals and also certain business transactions
denominated in foreign currencies.
In order to apply hedge accounting under SFAS No. 133, USX is
required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective
portion of the hedge. Generally, USX has not elected to designate
derivative instruments as qualifying for hedge accounting
treatment. As a result, the changes in fair value of most
derivatives are recognized immediately in earnings, while the
changes in the fair value of the underlying items generally are
not recognized until the transaction is consummated. At the date
of adoption, USX had one strategy that qualified as a hedge of the
fair value of a firm commitment. This strategy continues to
qualify for hedge accounting treatment. Additional strategies,
which are hedges of future cash flows, qualified as hedges on
June 1, 2001.
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
2. (Continued)
A portion of the cumulative effect adjustment relating to the
adoption of SFAS No. 133 was recognized in OCI. The cumulative
effect adjustment relates only to deferred gains or losses
existing as of the close of business on December 31, 2000, for
hedge transactions under prior accounting rules. A reconciliation
of the changes in OCI relating to derivative instruments is as
follows (amounts in millions):
<table>
<caption>
Second Six
Quarter Months
Ended Ended
June 30 June 30
Deferred gain (loss), net of tax 2001 2001
------------------------------------------------------------------
<s> <c> <c>
Beginning balance $34 $-
Cumulative effect adjustment - (8)
Reclassification of the cumulative effect
adjustment into earnings (7) 35
Changes in fair value 15 15
Reclassification to earnings - -
---- ----
Balance at June 30, 2001 $42 $42
==== ====
</table>
Of the $42 million recorded in OCI as of June 30, 2001, $18
million, net of income taxes, is expected to be reclassified to
earnings over the 12-month period ending June 30, 2002. The
actual amounts that will be reclassified to earnings over the next
twelve months will vary as a result of continual changes in fair
value.
The ineffective portion of changes in the fair value of
hedges of future cash flows recognized during the second quarter
and six months of 2001 was a favorable $4 million before income
taxes. This amount was included in revenues.
The futures contracts used in cash flow hedge strategies vary
in duration with certain contracts extending into 2002.
USX employs one strategy qualifying as a hedge of the fair
value of a firm commitment. There is no ineffectiveness
associated with this hedge. The hedging instrument and the
existing firm commitment contract are priced on the same
underlying index. The over-the-counter swap agreement extends
into 2008.
USX did not have any foreign currency contracts that
qualified for hedge accounting. The changes in fair value of the
forward currency contracts are recognized immediately in earnings.
These forward currency contracts have various maturities extending
into 2001.
11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
2. (Continued)
In June 2001, the Financial Accounting Standards Board
approved Statements of Financial Accounting Standards No. 141
"Business Combinations" (SFAS 141), No. 142 "Goodwill and Other
Intangible Assets" (SFAS 142) and No. 143 "Accounting for Asset
Retirement Obligations" (SFAS 143).
SFAS 141 requires all business combinations completed after
June 30, 2001, be accounted for under the purchase method. This
standard also establishes for all business combinations made after
June 30, 2001, specific criteria for the recognition of intangible
assets separately from goodwill. SFAS 141 also requires that the
excess of fair value of acquired assets over cost (negative
goodwill) be recognized immediately as an extraordinary gain,
rather than deferred and amortized. USX will account for all
future business combinations under SFAS 141.
SFAS 142 addresses the accounting for goodwill and other
intangible assets after an acquisition. The most significant
changes made by SFAS 142 are: 1) goodwill and intangible assets
with indefinite lives will no longer be amortized; 2) goodwill and
intangible assets with indefinite lives must be tested for
impairment at least annually; and 3) the amortization period for
the intangible assets with finite lives will no longer be limited
to forty years. USX will adopt SFAS 142 effective January 1,
2002, as required. At that time, amortization of existing
goodwill will cease on the unamortized portion associated with
previous acquisitions and certain investments accounted for under
the equity method. This will have a favorable impact on the
results of operations of approximately $5 million, net of tax,
annually beginning in 2002. Additionally, SFAS 142 requires that
unamortized negative goodwill associated with investments
accounted for under the equity method and acquired before July 1,
2001, be recognized in income as a cumulative effect of change in
accounting principle. USX expects to recognize a favorable
cumulative effect of a change in accounting principle of
approximately $35 million, net of tax, upon adoption. USX
continues to evaluate the financial effects of the provisions of
SFAS No. 142 pertaining to intangible assets other than goodwill.
SFAS 143 provides accounting requirements for retirement
obligations associated with tangible long-lived assets, including:
1) the timing of liability recognition; 2) initial measurement of
the liability; 3) allocation of asset retirement cost to expense;
4) subsequent measurement of the liability; and 5) financial
statement disclosures. SFAS 143 requires that an asset retirement
cost should be capitalized as part of the cost of the related long-
lived asset and subsequently allocated to expense using a
systematic and rational method. USX will adopt the Statement
effective January 1, 2003. The transition adjustment resulting
from the adoption of SFAS 143 will be reported as a cumulative
effect of a change in accounting principle. At this time, USX
cannot reasonably estimate the effect of the adoption of this
Statement on either its financial position or results of
operations.
12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
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.
13
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:
<table>
<caption>
Total
Marathon
(In millions) E&P RM&T OERB Segments
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
SECOND QUARTER 2001
- -------------------
Revenues and other income:
Customer $1,140 $7,536 $437 $9,113
Intersegment (a) 136 7 19 162
Intergroup (a) 5 - 3 8
Equity in earnings of
unconsolidated investees 16 8 7 31
Other 9 17 5 31
------ ------ ------ ------
Total revenues and other income $1,306 $7,568 $471 $9,345
====== ====== ====== ======
Segment income $459 $842 $10 $1,311
====== ====== ====== ======
SECOND QUARTER 2000
- -------------------
Revenues and other income:
Customer $957 $7,406 $305 $8,668
Intersegment (a) 119 35 13 167
Intergroup (a) 6 - 6 12
Equity in earnings (losses) of
unconsolidated investees (3) 6 4 7
Other 7 10 2 19
------ ------ ------ ------
Total revenues and other income $1,086 $7,457 $330 $8,873
====== ====== ====== ======
Segment income $356 $529 $- $885
====== ====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted
under terms comparable to those with unrelated parties.
</table>
14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
<table>
<caption>
Total Total
Domestic U.S.Steel Marathon
(In millions) Steel USSK Segments Segments Total
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
SECOND QUARTER 2001
- -------------------
Revenues and other income:
Customer $1,447 $284 $1,731 $9,113 $10,844
Intersegment (a) 2 - 2 162 164
Intergroup (a) 2 - 2 8 10
Equity in earnings (losses) of
unconsolidated investees (8) 1 (7) 31 24
Other 11 - 11 31 42
------ ------ ------ ------ ------
Total revenues and other income $1,454 $285 $1,739 $9,345 $11,084
====== ====== ====== ====== ======
Segment income (loss) $(69) $41 $(28) $1,311 $1,283
====== ====== ====== ====== ======
SECOND QUARTER 2000
- -------------------
Revenues and other income:
Customer $1,625 $- $1,625 $8,668 $10,293
Intersegment (a) - - - 167 167
Intergroup (a) 4 - 4 12 16
Equity in earnings of
unconsolidated investees 14 - 14 7 21
Other 13 - 13 19 32
------ ------ ------ ------ ------
Total revenues and other income $1,656 $- $1,656 $8,873 $10,529
====== ====== ====== ====== ======
Segment income $68 $- $68 $885 $953
====== ====== ====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted
under terms comparable to those with unrelated parties.
</table>
15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
<table>
<caption>
Total
Marathon
(In millions) E&P RM&T OERB Segments
- ----------------------------------------------------------------------
<s> <c> <c> <c> <c>
SIX MONTHS 2001
- ---------------
Revenues and other income:
Customer $2,378 $14,278 $1,065 $17,721
Intersegment (a) 270 13 44 327
Intergroup (a) 15 - 5 20
Equity in earnings of
unconsolidated investees 36 14 11 61
Other 17 32 7 56
------ ------ ------ ------
Total revenues and other income $2,716 $14,337 $1,132 $18,185
====== ====== ====== ======
Segment income $1,059 $1,118 $18 $2,195
====== ====== ====== ======
SIX MONTHS 2000
- ---------------
Revenues and other income:
Customer $1,909 $13,833 $655 $16,397
Intersegment (a) 188 55 32 275
Intergroup (a) 11 - 11 22
Equity in earnings (losses) of
unconsolidated investees (4) 10 8 14
Other 10 21 6 37
------ ------ ------ ------
Total revenues and other income $2,114 $13,919 $712 $16,745
====== ====== ====== ======
Segment income $665 $669 $13 $1,347
====== ====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted
under terms comparable to those with unrelated parties.
</table>
16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
<table>
<caption>
Total Total
Domestic U.S.Steel Marathon
(In millions) Steel USSK Segments Segments Total
- ------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
SIX MONTHS 2001
- ----------------
Revenues and other income:
Customer $2,709 $530 $3,239 $17,721 $20,960
Intersegment (a) 3 - 3 327 330
Intergroup (a) 4 - 4 20 24
Equity in earnings of
unconsolidated investees 39 1 40 61 101
Other 17 1 18 56 74
------ ------ ------ ------ ------
Total revenues and other income $2,772 $532 $3,304 $18,185 $21,489
====== ====== ====== ====== ======
Segment income (loss) $(220) $82 $(138) $2,195 $2,057
====== ====== ====== ====== ======
SIX MONTHS 2000
- ---------------
Revenues and other income:
Customer $3,203 $- $3,203 $16,397 $19,600
Intersegment (a) - - - 275 275
Intergroup (a) 8 - 8 22 30
Equity in earnings of
unconsolidated investees 7 - 7 14 21
Other 26 - 26 37 63
------ ------ ------ ------ ------
Total revenues and other income $3,244 $- $3,244 $16,745 $19,989
====== ====== ====== ====== ======
Segment income $122 $- $122 $1,347 $1,469
====== ====== ====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted
under terms comparable to those with unrelated parties.
</table>
17
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
The following schedules reconcile segment amounts to amounts
reported in the Marathon and U. S. Steel Groups' financial
statements:
<table>
<caption>
Marathon Group U. S. Steel Group
Second Quarter Second Quarter
Ended Ended
June 30 June 30
(In millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenues and other income:
Revenues and other income
of reportable segments $9,345 $8,873 $1,739 $1,656
Items not allocated to segments -
Gain (loss) on ownership change in MAP (7) 4 - -
Elimination of intersegment revenues (162) (167) (2) -
------ ------ ----- -----
Total Group revenues and other income $9,176 $8,710 $1,737 $1,656
====== ====== ====== ======
Income:
Income (loss) for
reportable segments $1,311 $885 $(28) $68
Items not allocated to segments:
Gain (loss) on ownership
change in MAP (7) 4 - -
Administrative expenses (34) (29) (8) (5)
Net pension credits - - 31 67
Costs related to former
business activities - - (14) (18)
Costs related to Proposed Separation (15) - (8) -
------ ------ ------ ------
Total Group income (loss)
from operations $1,255 $860 $(27) $112
====== ====== ====== ======
</table>
18
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. (Continued)
<table>
<caption>
Marathon Group U. S. Steel Group
Six Months Six Months
Ended Ended
June 30 June 30
(In millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenues and other income:
Revenues and other income
of reportable segments $18,185 $16,745 $3,304 $3,244
Items not allocated to segments:
Gain (loss) on ownership
change in MAP (6) 8 - -
Other (a) 59 87 - -
Elimination of intersegment revenues (327) (275) (3) -
------ ------ ----- -----
Total Group revenues
and other income $17,911 $16,565 $3,301 $3,244
====== ====== ====== ======
Income:
Income (loss) for
reportable segments $2,195 $1,347 $(138) $122
Items not allocated to segments:
Gain (loss) on ownership
change in MAP (6) 8 - -
Administrative expenses (65) (57) (15) (11)
Net pension credits - - 72 132
Costs related to former
business activities - - (38) (40)
Costs related to Proposed Separation (16) - (9) -
Other (a) 59 87 - -
------ ------ ------ ------
Total Group income (loss)
from operations $2,167 $1,385 $(128) $203
====== ====== ====== ======
<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.
</table>
4. 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.
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) was $64 million and
was originally to be amortized over 17 years.
19
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
However, with the adoption of SFAS No. 142, effective
January 1, 2002, USX will cease the amortization of goodwill and
will test the unamortized balance for impairment on an annual
basis. Results of operations for the six months of 2001 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), which is now operated
as East Chicago Tin. In this noncash transaction, USX assumed
approximately $66 million of certain employee related obligations
from LTV. The acquisition was accounted for using the purchase
method of accounting. Results of operations for the six months of
2001 include the operations of East Chicago Tin 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 six months of 2001 a pretax gain of $68 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
periods presented. The six months 2001 pro forma results exclude
the $68 million gain and $33 million tax benefit recorded as a
result of the Transtar transaction. In addition, VSZ did not
historically provide carve-out financial information for its steel
activities prepared in accordance with generally accepted
accounting principles in the United States. Therefore, USX made
certain estimates and assumptions regarding revenues and costs in
the preparation of the unaudited pro forma data relating to USSK
for the six months of 2000.
The following 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.
20
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
<table>
<caption>
Six Months Ended
June 30
(In millions, except per share amounts) 2001 2000
- ----------------------------------------------------------------------
<s> <c> <c>
Revenues and other income $21,174 $20,402
Income before cumulative effect of change in
accounting principle 964 740
Net income 956 740
Applicable to Marathon Stock:
Income before cumulative effect of change in
accounting principle 1,087 603
- Per share - basic and diluted 3.52 1.93
Net income 1,079 603
- Per share - basic and diluted 3.49 1.93
Applicable to Steel Stock:
Net income (loss)(a) (127) 133
- Per share - basic (1.43) 1.51
- diluted (1.43) 1.48
<fn>
(a) Amounts are net of dividends on preferred stock of $4 million.
</table>
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.
21
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.
<table>
<caption>
(In millions)
----------------------
June 30 December 31
2001 2000
-------------------
<s> <c> <c>
Raw materials $933 $915
Semi-finished products 378 429
Finished products 1,411 1,279
Supplies and sundry items 204 190
------ ------
Total $2,926 $2,813
====== ======
</table>
7. Total comprehensive income was $562 million for the second
quarter of 2001, $420 million for the second quarter of 2000,
$1,103 million for the six months of 2001 and $716 million for the
six months of 2000.
8. The method of calculating net income (loss) 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 (loss) per share is calculated by adjusting
net income (loss) for dividend requirements of preferred stock and
is based on the weighted average number of common shares
outstanding.
Diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each case, the
effect is not antidilutive.
22
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. (Continued)
COMPUTATION OF INCOME PER SHARE
<table>
<caption>
Second Quarter Ended
June 30
2001 2000
Basic Diluted Basic Diluted
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
Marathon Group
- --------------
Net income (millions) $582 $582 $367 $367
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common
shares outstanding 309,101 309,101 312,233 312,233
Effect of dilutive securities
- stock options - 526 - 198
------ ------ ------ ------
Average common shares
and dilutive effect 309,101 309,627 312,233 312,431
====== ====== ====== ======
Net income per share $1.88 $1.88 $1.18 $1.18
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (loss) (millions):
Net income (loss) $(30) $(30) $56 $56
Dividends on preferred stock 2 2 2 2
------ ------ ------ ------
Net income (loss) applicable
to Steel Stock (32) (32) 54 54
Effect of dilutive convertible securities - - - 2
------ ------ ------ ------
Net income (loss) assuming conversions $(32) $(32) $54 $56
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of
common shares outstanding 89,005 89,005 88,499 88,499
Effect of dilutive securities
- trust preferred securities - - - 4,256
------ ------ ------ ------
Average common shares
and dilutive effect 89,005 89,005 88,499 92,755
====== ====== ====== ======
Net income (loss) per share $(.36) $(.36) $.62 $.62
====== ====== ====== ======
</table>
23
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. (Continued)
<table>
<caption>
COMPUTATION OF INCOME PER SHARE
Six Months Ended
June 30
2001 2000
Basic Diluted Basic Diluted
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
Marathon Group
- --------------
Net income (millions):
Income before cumulative effect of change
in accounting principle $1,090 $1,090 $621 $621
Cumulative effect of change in
accounting principle (8) (8) - -
------ ------ ------ ------
Net income $1,082 $1,082 $621 $621
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of
common shares outstanding 308,928 308,928 312,180 312,180
Effect of dilutive securities
- stock options - 410 - 179
------ ------ ------ ------
Average common shares
and dilutive effect 308,928 309,338 312,180 312,359
====== ====== ====== ======
Per share:
Income before cumulative effect of change
in accounting principle $3.53 $3.52 $1.99 $1.99
Cumulative effect of change in
accounting principle (.03) (.02) - -
------ ------ ------ ------
Net income $3.50 $3.50 $1.99 $1.99
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (loss) (millions):
Net income (loss) $(21) $(21) $99 $99
Dividends on preferred stock 4 4 4 4
------ ------ ------ ------
Net income (loss) applicable
to Steel Stock (25) (25) 95 95
Effect of dilutive convertible securities - - - 4
------ ------ ------ ------
Net income (loss) assuming conversions $(25) $(25) $95 $99
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of
common shares outstanding 88,906 88,906 88,461 88,461
Effect of dilutive securities:
Trust preferred securities - - - 4,256
Stock options - - - 4
------ ------ ------ ------
Average common shares
and dilutive effect 88,906 88,906 88,461 92,721
====== ====== ====== ======
Net income (loss) per share $(.28) $(.28) $1.08 $1.07
====== ====== ====== ======
</table>
24
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. Included in revenues and costs and expenses for the second
quarter of 2001 and 2000 were $1,132 million and $1,108 million,
respectively, representing excise taxes on petroleum products and
merchandise. Similar amounts for the six months of 2001 and 2000
were $2,170 million and $2,147 million, respectively.
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.
Interest and other financial costs in the six months of 2001
included a favorable adjustment of $76 million and provision for
income taxes included an unfavorable adjustment of $20 million,
both of which are related to certain prior years' taxes.
In the second quarter of 2001, the income tax provision
included a foreign deferred tax benefit of $9 million related to a
reduction in the statutory rate enacted in the Canadian province
of Alberta.
11. At June 30, 2001, USX had no 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 $115 million which require a .125% fee or maintenance of
compensating balances of 3%. At June 30, 2001, there were no
borrowings against these facilities.
At June 30, 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 June 30, 2001, USSK had no borrowings against its $50
million short-term credit facility.
At June 30, 2001, in the event of a change in control of USX,
debt obligations totaling $3,330 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
June 30, 2001, $250 million remained outstanding on 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 June 30, 2001, $29 million was outstanding under the
agreement.
25
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. 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.
14. 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.
15. 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 June 30, 2001, and December 31, 2000, accrued
liabilities for remediation totaled $216 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 $60 million at June 30, 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 six months of
2001 and for the years 2000 and 1999, such capital expenditures
totaled $23 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.
On May 11, 2001, MAP entered into a consent decree with the
U.S. Environmental Protection Agency which commits it to complete
certain agreed upon environmental capital projects over the next
eight years primarily aimed at reducing air emissions at its seven
refineries. The current estimated cost to
26
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
15. (Continued)
complete these projects is approximately $270 million. In
addition, MAP is required to complete certain agreed upon
supplemental environmental projects as part of an enforcement
action for alleged Clean Air Act violations, at a current
estimated cost of $8 million. The consent decree is currently
awaiting court approval.
At June 30, 2001, and December 31, 2000, accrued liabilities
for platform abandonment and dismantlement totaled $178 million
and $162 million, respectively.
Guarantees by USX of the liabilities of affiliated entities
totaled $80 million at June 30, 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 June 30, 2001, the largest
guarantee for a single affiliate was $48 million.
At June 30, 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 June 30, 2001, totaled $568 million
compared with $663 million at December 31, 2000.
16. On July 31, 2001, USX announced that its board of directors
approved the definitive plan of reorganization to separate the
energy and steel businesses of USX (Proposed Separation). The
Proposed Separation envisions a tax-free spin-off of the steel
business of USX into a freestanding, publicly traded company to be
known as United States Steel Corporation. Holders of current USX-
U. S. Steel Group Common Stock will become holders of United
States Steel Corporation Common Stock. Holders of current USX-
Marathon Group Common Stock will become holders of Marathon Oil
Corporation Common Stock. The Proposed Separation does not
contemplate a cash distribution to stockholders. Each new company
will carry approximately the same assets and liabilities now
associated with its existing business, except for a value transfer
of approximately $900 million from Marathon Oil Corporation to
United States Steel Corporation, intended to maintain United
States Steel Corporation as a strong, independent company. The
form of the value transfer will be a reattribution of USX
corporate debt between the USX-Marathon Group and the USX-U. S.
Steel Group. The Proposed Separation is subject to the approval
of the holders of a majority of the outstanding shares of each
class of current USX common stock, receipt of a favorable private
letter ruling from the Internal Revenue Service ("IRS") on the tax-
free nature of the transaction, completion of necessary financing
arrangements and receipt of necessary regulatory and third party
consents. The transaction is expected to occur on or about
December 31, 2001, 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. Costs related to the Proposed Separation include
professional fees and certain other
27
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
16. (Continued)
expenses and are included in selling, general
and administrative expenses. These costs in the second quarter
and six months of 2001 were $23 million and $25 million,
respectively.
17. On July 2, 2001, a corporate reorganization was implemented
to create a new holding company structure. USX became a holding
company that owns all of the outstanding equity of Marathon Oil
Company, an Ohio Corporation which, directly and indirectly, owns
and operates the businesses of the USX-Marathon Group, and United
States Steel LLC, a Delaware limited liability company which owns
and operates the businesses of the USX-U. S. Steel Group. The
reorganization will not have any impact on the results of
operations or financial position of USX Corporation, the Marathon
Group or the U. S. Steel Group.
This reorganization in corporate form is independent of the
Proposed Separation of the energy and steel businesses of USX
Corporation.
18. On July 27, 2001, United States Steel LLC and United States
Steel LLC's wholly owned subsidiary, United States Steel Financing
Corp., issued $385 million of Senior Notes due August 1, 2008
(Notes), at an interest rate of 10.75 percent. The Notes were
issued to meet, in part, the conditions of the Proposed Separation
related to the completion of necessary financing arrangements.
These notes are guaranteed by USX Corporation until completion of
the Proposed Separation, at which time they will be solely the
obligation of United States Steel Corporation. The notes allow
their redemption if the Proposed Separation does not occur.
The Notes contain certain restrictive covenants that became
effective on the date of issue. These convenants impose
restrictions on certain activities of United States Steel
Corporation after the Proposed Separation. Most of these
covenants apply only when the Notes are not rated investment
grade.
28
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
----------------------------------------------------------
<table>
<caption>
Six Months Ended
June 30 Year Ended December 31
- ------------------------------------------------------------------
<c> <c> <c> <c> <c> <c> <c>
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
11.18 6.58 3.79 4.20 3.45 3.63 3.41
==== ==== ==== ==== ==== ==== ====
</table>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
-------------------------------------------------
<table>
<caption>
Six Months Ended
June 30 Year Ended December 31
- ---------------------------------------------------------------------
<c> <c> <c> <c> <c> <c> <c>
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
11.56 6.74 3.89 4.32 3.56 3.79 3.65
==== ==== ==== ==== ==== ==== ====
</table>
29
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 second quarter 2001
USX Consolidated Financial Statements and Selected Notes to Financial
Statements. 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 July 31, 2001, USX announced that its board of directors
approved the definitive plan of reorganization to separate the energy
and steel businesses of USX ("Proposed Separation"). The Proposed
Separation envisions a tax-free spin-off of the steel business of USX
into a freestanding, publicly traded company to be known as United
States Steel Corporation. 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 Corporation
Common Stock. The Proposed Separation does not contemplate a cash
distribution to stockholders. Each new company will carry approximately
the same assets and liabilities now associated with its existing
business, except for a value transfer of approximately $900 million
from Marathon Oil Corporation to United States Steel Corporation,
intended to maintain United States Steel Corporation as a strong,
independent company. The form of the value transfer will be a
reattribution of USX corporate debt between the USX-Marathon Group and
the USX-U. S. Steel Group. The Proposed Separation is subject to the
approval of the holders of a majority of the outstanding shares of each
class of current USX common stock, receipt of a favorable private
letter ruling from the Internal Revenue Service ("IRS") on the tax-free
nature of the transaction, completion of necessary financing
arrangements, and receipt of necessary regulatory and third party
consents. The transaction is expected to occur on or about
December 31, 2001, 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.
On July 2, 2001, a corporate reorganization was implemented to
create a new holding company structure. USX became a holding company
that owns all of the outstanding equity of Marathon Oil Company, a Ohio
Corporation which, directly and indirectly, owns and operates the
businesses of the USX-Marathon Group, and United States Steel LLC, a
Delaware limited liability company which owns and operates the
businesses of the USX-U. S. Steel Group. The reorganization will not
have any impact on the results of operations or financial position of
USX Corporation, the Marathon Group or the U. S. Steel Group. This
reorganization in corporate form is independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
30
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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,
which 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 Annual Report on Form 10-K
for the year ended December 31, 2000 and subsequent filings.
Results of Operations
- ---------------------
Revenues and other income for the second quarter and the first six
months of 2001 and 2000 are set forth in the following table:
<table>
<caption>
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
Revenues and other income
Marathon Group $9,176 $8,710 $17,911 $16,565
U. S. Steel Group 1,737 1,656 3,301 3,244
Eliminations (10) (16) (24) (30)
------ ------ ------ ------
Total revenues and other income $10,903 $10,350 $21,188 $19,779
Less:
Excise taxes(a) 1,132 1,108 2,170 2,147
Matching buy/sell transactions(a) 1,031 1,322 2,130 2,295
------ ------ ------ ------
Revenues and other income
excluding above items $8,740 $7,920 $16,888 $15,337
====== ====== ====== ======
- ------
<fn>
(a) Consumer excise taxes on petroleum products and merchandise and
matching crude oil and refined products buy/sell transactions
settled in cash are included in both revenues and costs and
expenses for the Marathon Group and USX consolidated.
</table>
Revenues and other income (excluding excise taxes and matching
buy/sell transactions) increased by $820 million in the second quarter
of 2001 as compared with the second quarter of 2000, reflecting
increases of $733 million for the Marathon Group and $81 million for
the U. S. Steel Group. For the first six months of 2001, revenues
increased $1,551 million as compared with the same period of 2000,
reflecting increases of $1,488 million for the Marathon Group and $57
million for the U. S. Steel Group.
For discussion of revenues and other income 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.
31
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the second quarter and the first six
months of 2001 and 2000 are set forth in the following table:
<table>
<caption>
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
Reportable segments
Marathon Group
Exploration & production $459 $356 $1,059 $665
Refining, marketing & transportation 842 529 1,118 669
Other energy related businesses 10 - 18 13
------ ------ ------ ------
Income for reportable segments
- Marathon Group $1,311 $885 $2,195 $1,347
U. S. Steel Group
Domestic Steel $(69) $68 $(220) $122
U. S. Steel Kosice 41 - 82 -
----- ----- ----- -----
Income (loss) for reportable segments
- U. S. Steel Group $(28) $68 $(138) $122
Income for reportable segments
- USX Corporation 1,283 953 2,057 1,469
Items not allocated to segments:
Marathon Group (56) (25) (28) 38
U. S. Steel Group 1 44 10 81
----- ----- ----- -----
Total income from operations
- USX Corporation $1,228 $972 $2,039 $1,588
</table>
Income for reportable segments increased by $330 million in the
second quarter of 2001 as compared with the second quarter of 2000,
reflecting an increase of $426 million for the Marathon Group
reportable segments and a decrease of $96 million for U. S. Steel Group
reportable segments. Income for reportable segments in the first six
months of 2001 increased by $588 million compared with the first six
months of 2000, reflecting an increase of $848 million for the Marathon
Group reportable segments and a decrease of $260 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.
32
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 second quarter of
2001 decreased $6 million compared to the second quarter of 2000. The
first six months of 2001 included a favorable adjustment of $76 million
related to prior years' taxes. Excluding this adjustment, net interest
and other financial costs for the first six months of 2001 decreased $2
million compared to the same period in 2000.
The minority interest in income of MAP, which represents Ashland's
38 percent ownership interest, increased $117 million and $169 million
in the second quarter and first six months of 2001, respectively, due
to higher MAP income. For further discussion, see Management
Discussion and Analysis of Financial Condition and Results of
Operations for the Marathon Group.
Provisions for income taxes of $270 million and $434 million for
the second quarter and the first six months of 2001 were based on tax
rates and amounts that recognize management's best estimate of current
and deferred tax assets and liabilities. In the first six months of
2001, the provision included a $33 million tax benefit associated with
the Transtar reorganization, a foreign deferred tax benefit of $9
million related to a reduction in the statutory rate enacted in the
Canadian province of Alberta and an unfavorable adjustment of $20
million primarily related to the settlement of prior years' taxes.
Cumulative effect of change in accounting principle of $8 million,
net of a tax benefit of $5 million, in the first six months 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 was $552 million for the second quarter of 2001, an
increase of $129 million compared to the second quarter of 2000
reflecting an increase of $215 million for the Marathon Group and a
decrease of $86 million for the U. S. Steel Group. Net income was
$1,061 million for the first six months of 2001, an increase of $341
million compared with the first six months of 2000, reflecting an
increase of $461 million for the Marathon Group and a $120 million
decrease for the U. S. Steel Group.
Dividends to Stockholders
- -------------------------
On July 31, 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, payable September 10, 2001, to stockholders
of record at the close of business on August 16, 2001. The Board also
declared a dividend of $0.8125 per share on USX's 6.50% Cumulative
Convertible Preferred Stock, payable September 28, 2001, to
stockholders of record at the close of business on August 31, 2001.
On August 13, 2001, Marathon Oil Canada Limited, an indirect
subsidiary of Marathon Oil Company, will redeem its non-voting
Exchangeable Shares through an exchange for shares of Marathon Stock on
a one-for-one basis.
33
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Balance Sheet
- -------------
Current assets at June 30, 2001 decreased $144 million from year-
end 2000 primarily due to decreases in assets held for sale, accounts
receivable and deferred income tax benefits, partially offset by
increases in cash and cash equivalents and inventories. The decrease
in assets held for sale resulted from the reclassification of the Yates
field assets to investments and long-term receivables.
Investments and long-term receivables increased $240 million from
year-end 2000, primarily due to the reclassification of the Yates field
assets from assets held for sale to an investment in MKM Partners L.P.
Net property, plant and equipment at June 30, 2001 increased $863
million from year-end 2000 primarily due to the acquisitions of Pennaco
Energy, Inc. ("Pennaco") and East Chicago Tin and the consolidation of
Transtar.
Current liabilities at June 30, 2001 increased $309 million
compared to year-end 2000 primarily due to an increase in accrued
taxes, debt due within one year and notes payable, partially offset by
a decrease in accounts payable. The increase in accrued taxes was
primarily related to the settlement of prior years' taxes.
Total long-term debt and notes payable was $4,359 million at June
30, 2001, $251 million lower than year-end 2000. Debt decreased due to
increased cash available for debt reduction. As a result, revolving
credit agreements and outstanding commercial paper were reduced,
partially offset by increased borrowings from a six-month term loan
facility agreement and a new five-year promissory note agreement. Most
of the debt is a direct obligation of, or is guaranteed by, USX.
Employee benefits at June 30, 2001 increased $163 million compared
to year-end 2000 primarily due to the addition of employees with the
Transtar consolidation and the acquisition of the tin mill products
business of LTV Corporation.
Minority interest in Marathon Ashland Petroleum LLC increased by
$170 million from year-end 2000 due to Ashland's share of recorded MAP
income exceeding cash distributions to Ashland.
Total stockholders' equity increased $930 million from year-end
2000 primarily due to increased net income, partially offset by
dividends paid.
Cash Flows
- ----------
Net cash provided from operating activities totaled $2,023 million
in the first six months of 2001, a $915 million increase from the first
six months of 2000, reflecting increases of $789 million for the
Marathon Group and $126 million for the U. S. Steel Group. The
increases primarily reflect higher net income and lower use of working
capital. For details, see Management's Discussion and Analysis of
Financial Condition and Results of Operation for each Group.
34
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Capital expenditures for property, plant and equipment in the
first six months of 2001 were $769 million compared with $673 million
for the first six months of 2000. For further details, see
Management's Discussion and Analysis of Financial Condition and Results
of Operations for each of the respective Groups.
Contract commitments to acquire property, plant and equipment and
long-term investments at June 30, 2001, totaled $568 million compared
with $663 million at December 31, 2000. In addition, MAP has a
commitment to spend approximately $270 million over the next eight
years for future environmental projects.
The acquisition of Pennaco Energy, Inc. 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 was $115 million in the first six
months of 2001, compared with $230 million in the first six months of
2000. Proceeds in 2001 were for the disposition of various Canadian
oil fields, SSA stores, and various domestic production properties.
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 $11
million in the first six months of 2001, compared with a net deposit of
$33 million in the first six months 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 agreements and other debt borrowings and repayments on the
Consolidated Statement of Cash Flows) decreased $270 million in the
first six months of 2001 compared with a decrease of $289 million in
the first six months of 2000. The decrease in 2001 reflects net cash
provided from operating activities and asset sales in excess of cash
used for capital expenditures, acquisitions, dividend payments and
minority interest distributions.
Distributions to minority shareholder of MAP were $244 million in
the first six months of 2001, compared with $73 million in the first
six months of 2000. For further details, see Management's Discussion
and Analysis of Financial Condition and Results of Operations for the
Marathon Group.
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 preferred stock Baa3. Fitch IBCA Duff
& Phelps rates USX's senior notes BBB and USX's subordinated debt as
BBB-. All senior debt of USX holds an investment grade rating. In
connection with the Proposed Separation, Standard & Poor's reported
that they had assigned a corporate credit rating of BBB+ for Marathon
Oil Corporation with a stable outlook and a corporate credit rating of
BB to United States Steel Corporation with a negative outlook, assuming
the Proposed Separation is completed. Moody's has assigned a Ba1
senior implied rating to United States Steel Corporation with a stable
outlook. Additionally, Standard & Poor's and Moody's have assigned BB
and Ba2 ratings, respectively, to United States Steel LLC's $385
million senior unsecured note offering.
35
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity
- ---------
At June 30, 2001, USX had no 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 $115
million at June 30, 2001. At June 30, 2001, there were no borrowings
against the USSK short-term credit facility. At June 30, 2001, MAP had
no borrowings against its revolving credit agreements with banks and no
amounts outstanding against its revolving credit agreement with
Ashland, which was amended and extended for one year to March 15, 2002.
At June 30, 2001, USX had $250 million outstanding under a six-
month term loan facility expiring August 16, 2001 and $29 million
outstanding under a five-year promissory note agreement expiring in
2006.
On July 27, 2001, United States Steel LLC and United States Steel
LLC's wholly owned subsidiary, United States Steel Financing Corp.,
issued $385 million of Senior Notes due August 1, 2008 ("Notes"), at an
interest rate of 10.75 percent. The Notes were issued to meet, in
part, the conditions of the Proposed Separation related to the
completion of necessary financing arrangements. These Notes are
guaranteed by USX Corporation until completion of the Proposed
Separation, at which time they will be solely the obligation of United
States Steel Corporation. The Notes allow their redemption if the
Proposed Separation does not occur. In accordance with USX's policy of
managing most financial activity on a centralized, consolidated basis,
the proceeds from the issuance of these Notes will be attributed to and
reflected in the financial statements of both groups. The Notes
contain covenants that impose significant restrictions on certain
activities of United States Steel Corporation. For a description of
these covenants see Management's Discussion and Analysis of Financial
Condition and Results of Operation for the U. S. Steel Group,
"Liquidity", on page 93.
Capital expenditures in the first six months of 2001 were $769
million and are expected to be approximately $2.1 billion for the full
year, including expenditures by recently acquired businesses. Contract
commitments for capital expenditures at June 30, 2001 totaled $568
million.
USX management believes that its short-term and long-term
liquidity is adequate to satisfy its obligations as of June 30, 2001,
to complete currently authorized capital spending programs and to
complete the Proposed Separation. 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 15 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. Until the Proposed Separation is
implemented or abandoned, USX management believes that it will be more
difficult to access traditional debt and equity markets.
36
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
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 33 waste sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") as of June 30,
2001. In addition, there are 20 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 145 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
substantially 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 rules, which were 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.
37
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In October 1996, EPA Region V issued a Finding of Violation
against the Robinson refinery alleging that it does not qualify for an
exemption under the National Emission Standards for Benzene Waste
Operations pursuant to the CAA, because the refinery's Total Annual
Benzene releases exceed the limitation of 10 megagrams per year, and as
a result, the refinery is in violation of the emission control, record
keeping, and reports requirements. The Marathon Group contends that it
does qualify for the exemption. However, in February 1999, the U.S.
Department of Justice ("DOJ") in Chicago, Illinois, filed a civil
complaint in the U.S. District Court for the Southern District of
Illinois alleging six counts of violations of the CAA with respect to
the benzene releases. The case has been settled in concept with
Marathon and MAP agreeing to pay a combined $1.6 million civil penalty
and the performance of $125,000 in supplemental environmental projects
as part of an enforcement action for alleged Clean Air Act violations.
A negotiated consent decree was filed with the Court May 11, 2001 and
approval by the Court is anticipated in the third quarter 2001.
In 1998, the EPA conducted multi-media inspections of MAP's
Detroit and Robinson refineries covering compliance with the Clean Air
Act, the Clean Water Act, reporting obligations under the Emergency
Planning and Community Right to Know Act, and CERCLA and the handling
of process waste. The EPA served a total of six Notices of Violation
("NOV") and Findings of Violation as a result of these inspections. On
May 11, 2001, a consent decree was lodged with a federal court in
Detroit, Michigan, where MAP settled with the EPA certain New Source
Review ("NSR") and other air compliance issues as well as 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 $270 million in
environmental capital expenditures and improvements to MAP's refineries
over approximately an eight 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 about $8 million in supplemental environmental projects
as 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. Approval of the consent decree by the court is
expected in the third quarter of 2001.
In 2000, the Kentucky Natural Resources and Environmental Cabinet
sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty
associated with a pipeline spill earlier that year in Winchester,
Kentucky. MAP has settled this NOV in concept for a $170,000 penalty
and reimbursement of response costs up to $131,000. A final consent
decree is expected in the third quarter 2001.
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.
38
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
In 1987, the California Department of Health Services ("DHS")
issued a remedial action order for the GBF/Pittsburg landfill near
Pittsburg, California. DHS alleged that from 1972 through 1974,
Pittsburg Works arranged for the disposal of approximately 2.6 million
gallons of waste oil, sludge, caustic mud and acid, which were
eventually taken to this landfill for disposal. In 2000, the parties
reached a buyout arrangement with a third party remediation firm,
whereby the firm agreed to take title to and remediate the site and
also indemnify the PRPs. This commitment was backed by pollution
insurance. USX's share to participate in the buyout was approximately
$1.1 million. Payment of the USX buyout amount was made December 2000.
Title to the site was transferred to the remediation firm on
January 31, 2001.
In November 2000, a NOV was issued by the Jefferson County Health
Department ("JCHD") alleging violation of the Halogenated Solvent
National Emission Standards for Hazardous Air Pollutants and the JCHD
Volatile Organic Compound ("VOC") regulations at the sheet mill stretch
leveler at Fairfield Works. U. S. Steel Group proposed a civil penalty
of $100,000 and a VOC emission limit, which have been agreed to by
JCHD. A consent order was executed and approved by the court in May
2001. The penalty was paid by U. S. Steel Group in June 2001.
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 15 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.
39
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):
<table>
<caption>
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------
<s> <c> <c> <c>
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil(f)(g) $8.0 $22.6 (d)
Natural gas(f)(g) 10.4 25.3 (d)
Refined products(f)(g) 0.3 1.8 (d)
U. S. Steel Group
Natural Gas 0.9 2.2 (e)
Zinc 1.8 4.6 (e)
Tin 0.1 0.3 (e)
<fn>
(a) 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 effects on pretax income of hypothetical 10% and 25%
changes in closing commodity prices at June 30, 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 June 30, 2001, may cause future pretax
income effects to differ from those presented in the table.
(b) The number of net open contracts varied throughout second
quarter 2001, from a low of 19,657 contracts at June 30, to a
high of 30,633 contracts at May 30, and averaged 24,710 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.
</table>
40
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in June 30, 2001 interest rates on the fair value of USX's non-
derivative financial instrument is provided in the following table:
<table>
<caption>
(Dollars in millions)
- -----------------------------------------------------------------------
As of June 30, 2001
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
- -----------------------------------------------------------------------
<s> <c> <c>
Financial assets:
Investments and
long-term receivables $272 $ -
- -----------------------------------------------------------------------
Financial liabilities:
Long-term debt(c)(d) $4,396 $146
Preferred stock of
subsidiary 250 19
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 182 13
------ ------
Total liabilities $4,828 $178
- ----------------------------------------------------------------------
<fn>
(a) Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the instruments.
Accordingly, these instruments are excluded from the table.
(b) Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at June 30, 2001 on the fair value of USX's non-derivative
financial instruments. For financial liabilities, this assumes a
10% decrease in the weighted average yield to maturity of USX's
long-term debt at June 30, 2001.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or current
borrowing rates for financings with similar terms and maturities.
</table>
41
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
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 June 30, 2001, USX had open Euro forward sale contracts for
Slovak Koruna with a total carrying value of approximately $20 million.
A 10% increase in the June 30, 2001 Euro forward rates would result in
a $2 million charge to income. The entire amount of these contracts is
attributed to the U. S. Steel Group.
At June 30, 2001, USX had open Canadian dollar forward purchase
contracts with a total carrying value of approximately $9 million. A
10% increase in the Canadian dollar to U.S. dollar forward rate would
result in a charge to income of approximately $1 million. The entire
amount of these contracts is attributed to the Marathon Group.
Equity Price Risk
- -----------------
As of June 30, 2001, USX was subject to equity price risk and
liquidity risk related to its investment in VSZ a.s., the former parent
of U. S. Steel Kosice, s.r.o., which is attributed to the U. S. Steel
Group. These risks are not readily quantifiable.
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.
42
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
<table>
<caption>
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
REVENUES AND OTHER INCOME
Marathon Group $9,176 $8,710 $17,911 $16,565
U. S. Steel Group 1,737 1,656 3,301 3,244
Eliminations (10) (16) (24) (30)
------- ------- ------- -------
Total $10,903 $10,350 $21,188 $19,779
INCOME (LOSS) FROM OPERATIONS
Marathon Group $1,255 $860 $2,167 $1,385
U. S. Steel Group (27) 112 (128) 203
------ ------ ------ ------
Total $1,228 $972 $2,039 $1,588
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group $352 $239 $628 $576
U. S. Steel Group 104 52 141 97
------ ------ ------ ------
Total $456 $291 $769 $673
</table>
43
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
<table>
<caption>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions,
except per share amounts) 2001 2000 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
REVENUES AND OTHER INCOME:
Revenues $9,121 $8,680 $17,741 $16,419
Dividend and investee income 39 17 72 28
Net gains on disposal of assets 14 2 28 94
Gain (loss) on ownership change
in Marathon Ashland Petroleum LLC (7) 4 (6) 8
Other income 9 7 76 16
------ ------ ------ ------
Total revenues and other income 9,176 8,710 17,911 16,565
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues
(excludes items shown below) 6,202 6,264 12,436 12,063
Selling, general and
administrative expenses 185 124 326 258
Depreciation, depletion
and amortization 306 240 609 486
Taxes other than income taxes 1,202 1,176 2,324 2,282
Exploration expenses 26 46 49 91
------ ------ ------ ------
Total costs and expenses 7,921 7,850 15,744 15,180
------ ------ ------ ------
INCOME FROM OPERATIONS 1,255 860 2,167 1,385
Net interest and other financial costs 38 68 73 139
Minority interest in income
of Marathon Ashland Petroleum LLC 320 203 427 258
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 897 589 1,667 988
Provision for income taxes 315 222 577 367
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 582 367 1,090 621
Cumulative effect of change in accounting
principle - - (8) -
------ ------ ------ ------
NET INCOME $582 $367 $1,082 $621
====== ====== ====== ======
MARATHON STOCK DATA:
Income before cumulative effect of
change in accounting principle $582 $367 $1,090 $621
- Per share - basic 1.88 1.18 3.53 1.99
- diluted 1.88 1.18 3.52 1.99
Cumulative effect of
change in accounting principle - - (8) -
- Per share - basic - - (.03) -
- diluted - - (.02) -
Net income $582 $367 $1,082 $621
- Per share - basic and diluted 1.88 1.18 3.50 1.99
Dividends paid per share .23 .21 .46 .42
Weighted average shares, in thousands
- Basic 309,101 312,233 308,928 312,180
- Diluted 309,627 312,431 309,338 312,359
<fn>
Selected notes to financial statements appear on pages 46-58.
</table>
44
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
<table>
<caption>
June 30 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c>
ASSETS
Current assets:
Cash and cash equivalents $469 $340
Receivables, less allowance for doubtful
accounts of $3 and $3 2,187 2,267
Inventories 2,010 1,867
Deferred income tax benefits 63 60
Assets held for sale - 330
Other current assets 106 121
------ ------
Total current assets 4,835 4,985
Investments and long-term receivables 709 362
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,102 and $9,691 9,879 9,375
Prepaid pensions 217 207
Other noncurrent assets 364 303
------ ------
Total assets $16,004 $15,232
====== ======
LIABILITIES
Current liabilities:
Notes payable $127 $80
Accounts payable 2,774 3,021
Income taxes payable 320 364
Payroll and benefits payable 175 230
Accrued taxes 334 108
Accrued interest 63 61
Long-term debt due within one year 212 148
------ ------
Total current liabilities 4,005 4,012
Long-term debt, less unamortized discount 1,588 1,937
Deferred income taxes 1,361 1,354
Employee benefits 662 648
Deferred credits and other liabilities 360 412
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 2,010 1,840
COMMON STOCKHOLDERS' EQUITY 5,834 4,845
------ ------
Total liabilities and common
stockholders' equity $16,004 $15,232
====== ======
<fn>
Selected notes to financial statements appear on pages 46-58.
</table>
45
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
<table>
<caption>
Six Months Ended
June 30
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $1,082 $621
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 427 258
Depreciation, depletion and amortization 609 486
Exploratory dry well costs 6 32
Pensions and other postretirement benefits 9 6
Deferred income taxes (235) 16
(Gain) loss on ownership change in Marathon Ashland
Petroleum LLC 6 (8)
Net gains on disposal of assets (28) (94)
Changes in:
Current receivables 132 (311)
Inventories (140) (236)
Current accounts payable and accrued expenses (206) 281
All other - net 128 (42)
------ ------
Net cash provided from operating activities 1,798 1,009
------ ------
INVESTING ACTIVITIES:
Capital expenditures (628) (576)
Acquisition of Pennaco Energy, Inc. (506) -
Disposal of assets 106 214
Restricted cash - withdrawals 23 158
- deposits (13) (193)
Investees - investments (1) (56)
- loans and advances (5) -
- returns and repayments 10 2
All other - net (29) 20
------ ------
Net cash used in investing activities (1,043) (431)
------ ------
FINANCING ACTIVITIES:
Decrease in Marathon Group's portion of USX
consolidated debt (238) (322)
Specifically attributed debt - borrowings 112 273
- repayments (112) (271)
Common stock repurchased (1) -
Treasury stock reissued 3 -
Dividends paid (142) (131)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (244) (73)
------ ------
Net cash used in financing activities (622) (524)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) (3)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 129 51
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 340 111
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $469 $162
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(85) $(138)
Income taxes paid, including settlements with the
U. S. Steel Group (605) (226)
<fn>
Selected notes to financial statements appear on pages 46-58.
</table>
46
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.
47
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. 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, as amended, requires
recognition of all derivatives at fair value as either assets or
liabilities. Changes in the fair value of all derivatives are
recognized immediately in earnings, unless the derivative
qualifies as a hedge of future cash flows or certain foreign
currency exposures. For derivatives qualifying as hedges of
future cash flows or certain foreign currency exposures, the
effective portion of any changes in fair value is recognized in a
component of stockholders' equity called other comprehensive
income ("OCI") and then reclassified to earnings when the
underlying anticipated transaction is consummated. Any
ineffective portion of such hedges is recognized in earnings as it
occurs. For derivatives designated as hedges of the fair value of
recognized assets, liabilities or firm commitments, changes in the
fair value of the hedged item are recognized immediately in
earnings. Since changes in fair value of the related derivative
are also recognized immediately in earnings, the net effect of
that accounting is to reflect in earnings the extent to which the
hedge is not effective in achieving offsetting changes in fair
value.
The Marathon Group uses commodity-based and foreign currency
derivative instruments to manage its exposure to price risk.
Management has authorized the use of futures, forwards, swaps and
options to reduce the effects of fluctuations related to the
purchase, production or sale of crude oil, natural gas and refined
products.
48
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
In order to apply hedge accounting under SFAS No. 133, the
Marathon Group is required to establish at the inception of the
hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for
determining the ineffective portion of the hedge. Generally, the
Marathon Group has not elected to designate derivative instruments
as qualifying for hedge accounting treatment. As a result, the
changes in fair value of most derivatives are recognized
immediately in earnings, while the changes in the fair value of
the underlying items generally are not recognized until the
transaction is consummated. At the date of adoption, the Marathon
Group had one strategy that qualified as a hedge of the fair value
of a firm commitment. This strategy continues to qualify for
hedge accounting treatment. Additional strategies, which are
hedges of future cash flows, qualified as hedges on June 1, 2001.
A portion of the cumulative effect adjustment relating to the
adoption of SFAS No. 133 was recognized in OCI. The cumulative
effect adjustment relates only to deferred gains or losses
existing as of the close of business on December 31, 2000, for
hedge transactions under prior accounting rules. A reconciliation
of the changes in OCI relating to derivative instruments is as
follows (amounts in millions):
<table>
<caption>
Second Six
Quarter Months
Ended Ended
June 30 June 30
Deferred gain (loss), net of tax 2001 2001
- ----------------------------------------------------------------------
<s> <c> <c>
Beginning balance $34 $-
Cumulative effect adjustment - (8)
Reclassification of the cumulative effect
adjustment into earnings (7) 35
Changes in fair value 15 15
Reclassification to earnings - -
---- ----
Balance at June 30, 2001 $42 $42
==== ====
</table>
Of the $42 million recorded in OCI as of June 30, 2001, $18
million, net of income taxes, is expected to be reclassified to
earnings over the 12-month period ending June 30, 2002. The
actual amounts that will be reclassified to earnings over the next
twelve months will vary as a result of continual changes in fair
value.
The ineffective portion of changes in the fair value of
hedges of future cash flows recognized during the second quarter
and six months of 2001 was a favorable $4 million before income
taxes. This amount was included in revenues.
The futures contracts used in cash flow hedge strategies vary
in duration with certain contracts extending into 2002.
49
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
The Marathon Group employs one strategy qualifying as a hedge
of the fair value of a firm commitment. There is no
ineffectiveness associated with this hedge. The hedging
instrument and the existing firm commitment contract are priced on
the same underlying index. The over-the-counter swap agreement
extends into 2008.
The Marathon Group did not have any foreign currency
contracts that qualified for hedge accounting. The changes in
fair value of the forward currency contracts are recognized
immediately in earnings. These forward currency contracts have
various maturities extending into 2001.
In June 2001, the Financial Accounting Standards Board
approved Statements of Financial Accounting Standards No. 141
"Business Combinations" (SFAS 141), No. 142 "Goodwill and Other
Intangible Assets" (SFAS 142) and No. 143 "Accounting for Asset
Retirement Obligations" (SFAS 143).
SFAS 141 requires all business combinations completed after
June 30, 2001, be accounted for under the purchase method. This
standard also establishes for all business combinations made after
June 30, 2001, specific criteria for the recognition of intangible
assets separately from goodwill. SFAS 141 also requires that the
excess of fair value of acquired assets over cost (negative
goodwill) be recognized immediately as an extraordinary gain,
rather than deferred and amortized. The Marathon Group will
account for all future business combinations under SFAS 141.
SFAS 142 addresses the accounting for goodwill and other
intangible assets after an acquisition. The most significant
changes made by SFAS 142 are: 1) goodwill and intangible assets
with indefinite lives will no longer be amortized; 2) goodwill and
intangible assets with indefinite lives must be tested for
impairment at least annually; and 3) the amortization period for
the intangible assets with finite lives will no longer be limited
to forty years. USX will adopt SFAS 142 effective January 1,
2002, as required. At that time, amortization of existing
goodwill will cease on the unamortized portion associated with
previous acquisitions and certain investments accounted for under
the equity method. This will have a favorable impact on the
results of operations of the Marathon Group of approximately $5
million, net of tax, annually beginning in 2002. Additionally,
SFAS 142 requires that unamortized negative goodwill associated
with investments accounted for under the equity method and
acquired before July 1, 2001, be recognized in income as a
cumulative effect of change in accounting principle. The Marathon
Group expects to recognize a favorable cumulative effect of a
change in accounting principle of approximately $15 million, net
of tax, upon adoption. USX continues to evaluate the financial
effects of the provisions of SFAS No. 142 pertaining to intangible
assets other than goodwill.
50
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
SFAS 143 provides accounting requirements for retirement
obligations associated with tangible long-lived assets, including:
1) the timing of liability recognition; 2) initial measurement of
the liability; 3) allocation of asset retirement cost to expense;
4) subsequent measurement of the liability; and 5) financial
statement disclosures. SFAS 143 requires that an asset retirement
cost should be capitalized as part of the cost of the related long-
lived asset and subsequently allocated to expense using a
systematic and rational method. USX will adopt the Statement
effective January 1, 2003. The transition adjustment resulting
from the adoption of SFAS 143 will be reported as a cumulative
effect of a change in accounting principle. At this time, the
Marathon Group cannot reasonably estimate the effect of the
adoption of this Statement on either its financial position or
results of operations.
4. Included in revenues and costs and expenses for the second
quarter of 2001 and 2000 were $1,132 million and $1,108 million,
respectively, representing excise taxes on petroleum products and
merchandise. Similar amounts for the six months of 2001 and 2000
were $2,170 million and $2,147 million, respectively.
5. The Marathon Group's total comprehensive income was $593
million for the second quarter of 2001, $366 million for the
second quarter of 2000, $1,127 million for the six months of 2001
and $618 million for the six months of 2000.
6. 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) was $64 million and was originally to be
amortized over 17 years. However, as a result of USX's adoption
of SFAS No. 142, effective January 1, 2002, the Marathon Group
will cease the amortization of goodwill and will test the
unamortized balance for impairment on an annual basis. Results of
operations for the six months of 2001 include the results of
Pennaco from February 7, 2001.
51
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
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.
<table>
<caption>
Six Months Ended
June 30
(In millions, except per share amounts) 2001 2000
------------------------------------------------------------------
<s> <c> <c>
Revenues and other income $17,919 $16,582
Income before cumulative effect of change in
accounting principle 1,087 603
- Per common share - basic and diluted 3.52 1.93
Net income 1,079 603
- Per common share - basic and diluted 3.49 1.93
</table>
7. 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.
8. 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:
52
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
<table>
<caption>
Total
(In millions) E&P RM&T OERB Segments
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
SECOND QUARTER 2001
- -------------------
Revenues and other income:
Customer $1,140 $7,536 $437 $9,113
Intersegment (a) 136 7 19 162
Intergroup (a) 5 - 3 8
Equity in earnings of
unconsolidated investees 16 8 7 31
Other 9 17 5 31
------ ------ ------ ------
Total revenues and other income $1,306 $7,568 $471 $9,345
====== ====== ====== ======
Segment income $459 $842 $10 $1,311
====== ====== ====== ======
SECOND QUARTER 2000
- -------------------
Revenues and other income:
Customer $957 $7,406 $305 $8,668
Intersegment (a) 119 35 13 167
Intergroup (a) 6 - 6 12
Equity in earnings (losses) of
unconsolidated investees (3) 6 4 7
Other 7 10 2 19
------ ------ ------ ------
Total revenues and other income $1,086 $7,457 $330 $8,873
====== ====== ====== ======
Segment income $356 $529 $- $885
====== ====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted
under terms comparable to those with unrelated parties.
</table>
53
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
<table>
<caption>
Total
(In millions) E&P RM&T OERB Segments
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
SIX MONTHS 2001
- ---------------
Revenues and other income:
Customer $2,378 $14,278 $1,065 $17,721
Intersegment (a) 270 13 44 327
Intergroup (a) 15 - 5 20
Equity in earnings of
unconsolidated investees 36 14 11 61
Other 17 32 7 56
------ ------ ------ ------
Total revenues and other income $2,716 $14,337 $1,132 $18,185
====== ====== ====== ======
Segment income $1,059 $1,118 $18 $2,195
====== ====== ====== ======
SIX MONTHS 2000
- ---------------
Revenues and other income:
Customer $1,909 $13,833 $655 $16,397
Intersegment (a) 188 55 32 275
Intergroup (a) 11 - 11 22
Equity in earnings (losses) of
unconsolidated investees (4) 10 8 14
Other 10 21 6 37
------ ------ ------ ------
Total revenues and other income $2,114 $13,919 $712 $16,745
====== ====== ====== ======
Segment income $665 $669 $13 $1,347
====== ====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted
under terms comparable to those with unrelated parties.
</table>
54
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
The following schedules reconcile segment amounts to amounts
reported in the Marathon Group financial statements:
Second
Quarter
Ended
June 30
(In millions) 2001 2000
- -----------------------------------------------------------------------
Revenues and other income:
Revenues and other income of reportable segments $9,345 $8,873
Items not allocated to segments -
Gain (loss) on ownership change in MAP (7) 4
Elimination of intersegment revenues (162) (167)
------ ------
Total Group revenues and other income $9,176 $8,710
====== ======
Income:
Income for reportable segments $1,311 $885
Items not allocated to segments:
Gain (loss) on ownership change in MAP (7) 4
Administrative expenses (34) (29)
Costs related to Proposed Separation (15) -
------ ------
Total Group income from operations $1,255 $860
====== ======
PAGE> 55
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
<table>
<caption>
Six Months
Ended
June 30
(In millions) 2001 2000
- ----------------------------------------------------------------------
<s> <c> <c>
Revenues and other income:
Revenues and other income of reportable segments $18,185 $16,745
Items not allocated to segments:
Gain (loss) on ownership change in MAP (6) 8
Other (a) 59 87
Elimination of intersegment revenues (327) (275)
------ ------
Total Group revenues and other income $17,911 $16,565
====== ======
Income:
Income for reportable segments $2,195 $1,347
Items not allocated to segments:
Gain (loss) on ownership change in MAP (6) 8
Administrative expenses (65) (57)
Costs related to Proposed Separation (16) -
Other (a) 59 87
------ ------
Total Group income from operations $2,167 $1,385
====== ======
<fn>
(a)Represents in 2001, gain on offshore lease resolution with the U.S.
Government and in 2000, gain on disposition of Angus/Stellaria.
</table>
9. 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.
<table>
<caption>
(In millions)
----------------------
June 30 December 31
2001 2000
--------------------
<s> <c> <c>
Crude oil and natural gas liquids $763 $701
Refined products and merchandise 1,152 1,069
Supplies and sundry items 95 97
------ ------
Total $2,010 $1,867
====== ======
</table>
56
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. At June 30, 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 June 30, 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.
11. Interest and other financial costs in the six months of 2001
included a favorable adjustment of $9 million and provision for
income taxes included an unfavorable adjustment of $5 million
related to certain prior years' taxes.
In the second quarter of 2001, the income tax provision
included a foreign deferred tax benefit of $9 million related to a
reduction in the statutory rate enacted in the Canadian province
of Alberta.
12. The method of calculating net income (loss) 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.
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 June 30, 2001, and December 31,
2000, accrued liabilities for remediation totaled $78 million and
$75 million, respectively. It is not presently possible to
estimate the ultimate amount of
57
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
13. (Continued)
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 $60 million at June 30, 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
six months of 2001 and for the years 2000 and 1999, such capital
expenditures totaled $17 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.
On May 11, 2001, MAP entered into a consent decree with the
U.S. Environmental Protection Agency which commits it to complete
certain agreed upon environmental capital projects over the next
eight years primarily aimed at reducing air emissions at its seven
refineries. The current estimated cost to complete these projects
is approximately $270 million. In addition, MAP is required to
complete certain agreed upon supplemental environmental projects
as part of an enforcement action for alleged Clean Air Act
violations, at a current estimated cost of $8 million. The
consent decree is currently awaiting court approval.
At June 30, 2001, and December 31, 2000, accrued liabilities
for platform abandonment and dismantlement totaled $178 million and
$162 million, respectively.
At June 30, 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
June 30, 2001, totaled $459 million compared with $457 million
at December 31, 2000.
14. On July 31, 2001, USX announced that its board of directors
approved the definitive plan of reorganization to separate the
energy and steel businesses of USX (Proposed Separation). The
Proposed Separation envisions a tax-free spin-off of the steel
business of USX into a freestanding, publicly traded company to be
known as United States Steel Corporation. Holders of current USX-
U. S. Steel Group Common Stock will become holders of United
States Steel Corporation Common Stock. Holders of current USX-
Marathon Group Common Stock will become holders of Marathon Oil
Corporation Common Stock. The Proposed Separation does not
contemplate a cash distribution to stockholders. Each new
58
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
14. (Continued)
company will carry approximately the same assets and
liabilities now associated with its existing business, except for
a value transfer of approximately $900 million from Marathon Oil
Corporation to United States Steel Corporation, intended to
maintain United States Steel Corporation as a strong, independent
company. The form of the value transfer will be a reattribution
of USX corporate debt between the USX-Marathon Group and the USX-
U. S. Steel Group. The Proposed Separation is subject to the
approval of the holders of a majority of the outstanding shares of
each class of current USX common stock, receipt of a favorable
private letter ruling from the Internal Revenue Service ("IRS") on
the tax-free nature of the transaction, completion of necessary
financing arrangements and receipt of necessary regulatory and
third party consents. The transaction is expected to occur on or
about December 31, 2001, 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. Costs related to the Proposed Separation include
professional fees and other expenses and are included in selling,
general and administrative expenses. These costs in the second
quarter and six months of 2001 were $15 million and $16 million,
respectively.
15. On July 2, 2001, a corporate reorganization was implemented
to create a new holding company structure. USX became a holding
company that owns all of the outstanding equity of Marathon Oil
Company, an Ohio Corporation which, directly and indirectly, owns
and operates the businesses of the USX-Marathon Group, and United
States Steel LLC, a Delaware limited liability company which owns
and operates the businesses of the USX-U. S. Steel Group. The
reorganization will not have any impact on the results of
operations or financial position of USX Corporation, the Marathon
Group or the U. S. Steel Group.
This reorganization in corporate form is independent of the
Proposed Separation of the energy and steel businesses of USX
Corporation.
59
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
("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 Selected
Notes to Financial Statements. The discussion of Results of Operations
should be read in conjunction with the Supplemental Statistics provided
on page 73.
On July 31, 2001, USX announced that its board of directors
approved the definitive plan of reorganization to separate the energy
and steel businesses of USX ("Proposed Separation"). The Proposed
Separation envisions a tax-free spin-off of the steel business of USX
into a freestanding, publicly traded company to be known as United
States Steel Corporation. The Proposed Separation is subject to
certain conditions and is expected to occur on or about December 31,
2001. For further discussion, see Management's Discussion and Analysis
for USX Corporation on page 29.
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 and subsequent filings.
60
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 second quarter and first six
months of 2001 and 2000 are summarized in the following table:
<table>
<caption>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2001 2000 2001 2000
----- ----- ----- -----
<s> <c> <c> <c> <c>
Exploration & production ("E&P") $1,306 $1,086 $2,716 $2,114
Refining, marketing &
transportation ("RM&T") 7,568 7,457 14,337 13,919
Other energy related businesses (a) 471 330 1,132 712
------ ------ ------ ------
Revenues and other income
of reportable segments $9,345 $8,873 $18,185 $16,745
Revenues and other income not allocated to segments:
Gain/(loss) on ownership change in MAP (7) 4 (6) 8
Other (b) - - 59 87
Elimination of intersegment revenues (162) (167) (327) (275)
------ ------ ------ ------
Total Group revenues and other income $9,176 $8,710 $17,911 $16,565
====== ====== ====== ======
Items included in both revenues and costs and expenses, resulting in no
effect on income:
Consumer excise taxes on petroleum
products and merchandise $1,132 $1,108 $2,170 $2,147
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P $127 $228 $233 $389
RM&T 904 1,094 1,897 1,906
----- ----- ----- -----
Total buy/sell transactions $1,031 $1,322 $2,130 $2,295
- ---------
<fn>
(a)Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(b)Represents a gain on the offshore lease resolution with the U.S.
Government in 2001 and a gain on the disposition of Angus/Stellaria
in 2000.
</table>
E&P segment revenues increased by $220 million in the second
quarter of 2001 from the comparable prior-year period. For the first
six months of 2001, revenues increased by $602 million from the prior-
year period. The increase in both periods primarily reflected higher
worldwide natural gas prices, higher international liquid hydrocarbon
volumes and gains from derivative activities, partially offset by lower
domestic liquid hydrocarbon prices.
RM&T segment revenues increased by $111 million in the second
quarter of 2001 from the comparable prior-year period. For the first
six months of 2001, revenues increased by $418 million from the prior-
year period. The increase in both periods primarily reflected higher
refined product prices, partially offset by a decrease in refined
product sales volumes.
61
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Other energy related businesses segment revenues increased by $141
million in the second quarter of 2001 from the comparable prior-year
period. For the first six months of 2001, revenues increased by $420
million from the prior-year period. The increase in both periods
primarily reflected higher natural gas and crude oil purchase and
resale activity accompanied by higher natural gas prices.
Income from operations for the second quarter and first six months
of 2001 and 2000 is summarized in the following table:
<table>
<caption>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2001 2000 2001 2000
----- ----- ----- -----
<s> <c> <c> <c> <c>
E&P
Domestic $374 $277 $816 $478
International 85 79 243 187
------ ------ ------ ------
Income for E&P reportable segment 459 356 1,059 665
RM&T 842 529 1,118 669
Other energy related businesses 10 - 18 13
------ ------ ------ ------
Income for reportable segments $1,311 $885 $2,195 $1,347
Items not allocated to segments:
Administrative expenses (a) $(34) $(29) $(65) $(57)
Gain on disposition of
Angus/Stellaria (b) - - - 87
Gain on lease resolution
with U.S. Government - - 59 -
Gain/(loss) on ownership change in MAP (7) 4 (6) 8
Costs related to proposed separation (c) (15) - (16) -
------ ------ ------ ------
Total Group income from operations $1,255 $860 $2,167 $1,385
- --------
<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.
(c) Includes professional fees and expenses, and certain other costs
related to the proposed separation.
</table>
62
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income for reportable segments in the second quarter of 2001
increased by $426 million from last year's second quarter. Income for
reportable segments in the first six months of 2001 increased by $848
million from the first six months of 2000. The increase in both
periods was primarily due to higher worldwide natural gas prices and
higher refining and wholesale marketing margins.
Worldwide E&P segment income in the second quarter of 2001
increased by $103 million from last year's second quarter. Results in
the first six months of 2001 increased by $394 million from the same
period in 2000.
Domestic E&P income in the second quarter of 2001 increased by $97
million from last year's second quarter. Results in the first six
months of 2001 increased by $338 million from the same period in 2000.
These increases were mainly due to higher natural gas prices and
volumes, and gains from derivative activities primarily related to
Pennaco Energy, Inc. ("Pennaco") production, partially offset by
increased depreciation and decreased liquid hydrocarbon prices.
International E&P income in the second quarter of 2001 increased
by $6 million from last year's second quarter. Results in the first
six months of 2001 increased by $56 million from the same period in
2000. The increase in both periods was mainly due to higher natural
gas prices and liquid hydrocarbon volumes, partially offset by a
decrease in natural gas volumes, and increased depreciation and gas
transportation charges.
RM&T segment income in the second quarter of 2001 increased by
$313 million from last year's second quarter. Results in the first six
months of 2001 increased by $449 million from the same period in 2000.
These increases were mainly due to higher refining and wholesale
marketing margins, partially offset by lower Speedway SuperAmerica LLC
("SSA") gasoline and distillate gross margins.
Other energy related businesses segment income in the second
quarter of 2001 increased by $10 million from last year's second
quarter. Results in the first six months of 2001 increased by $5
million from the same period in 2000. The increases were primarily due
to higher liquefied natural gas prices, higher margins on natural gas
and crude oil purchase and resale activity, higher equity earnings as a
result of increased pipeline throughput and prices, and higher gas
plant income, partially offset by losses on derivative activities.
63
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs in the first six months of
2001 decreased by $66 million from the comparable 2000 period. The
first six months of 2001 included a favorable adjustment of $9 million
related to prior years' taxes. Excluding this adjustment, the decrease
of $57 million was primarily due to lower average debt levels and
increased capitalized interest on E&P projects.
The minority interest in income of MAP, which represents Ashland's
38 percent ownership interest, increased by $169 million in the first
six months of 2001 from the comparable 2000 period, due to higher MAP
income.
The provision for estimated income taxes in the first six months
of 2001 increased by $210 million from the comparable 2000 period
primarily due to an increase in income before taxes. In the first six
months of 2001, the provision for income taxes included a foreign
deferred tax benefit of $9 million related to a reduction in the
statutory rate enacted in the Canadian province of Alberta and an
unfavorable adjustment of $5 million primarily related to the
settlement of 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 six months of
2001 was an unfavorable transition adjustment related to adopting SFAS
No. 133. For further discussion, see Note 3 to the Marathon Group
Financial Statements.
Net income for the second quarter and first six months increased
by $215 million and $461 million, respectively, in 2001 from 2000,
primarily reflecting the factors discussed above.
Balance Sheet
- -------------
Current assets decreased $150 million from year-end 2000,
primarily due to a decrease in assets held for sale and receivables,
partially offset by an increase in cash and cash equivalents, and
inventories. The decrease in assets held for sale resulted from the
reclassification of the Yates field assets to investments and long-term
receivables. The decrease in receivables was mainly due to a decrease
in accounts receivable related to lower commodity prices, partially
offset by an increase in other receivables related to derivative
activity. The increase in inventories primarily resulted from an
increase in refined products and crude oil inventories.
Investments and long-term receivables increased $347 million from
year-end 2000, primarily due to the reclassification of the Yates field
assets from assets held for sale to an investment in MKM Partners L.P.
Net property, plant and equipment increased $504 million from year-
end 2000, primarily due to the acquisition of Pennaco.
Total long-term debt and notes payable at June 30, 2001 were
$1,927, a decrease of $238 million from year-end 2000. This decrease
in debt is mainly due to higher cash flow provided from operating
activities, partially offset by the acquisition of Pennaco. Most of
the debt is a direct obligation of, or is guaranteed by, USX.
Minority interest in Marathon Ashland Petroleum LLC increased by
$170 million from year-end 2000 due to Ashland's share of recorded MAP
income exceeding cash distributions to Ashland.
64
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Stockholders' equity increased $989 million from year-end 2000,
mainly reflecting increased net income, partially offset by dividends
declared.
Cash Flows
- ----------
Net cash provided from operating activities was $1,798 million in
the first six months of 2001, compared with $1,009 million in the first
six months of 2000. The $789 million increase mainly reflected the
favorable effects of improved net income (excluding noncash items) and
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 $379 million in the first six
months of 2001 compared to $97 million in the first six months 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 six months of 2001 totaled $628
million, compared with $576 million in the comparable 2000 period. For
additional information regarding capital expenditures, refer to the
Supplemental Statistics on page 73.
Contract commitments for property, plant and equipment
acquisitions and long-term investments at June 30, 2001 totaled $459
million compared with $457 million at December 31, 2000. In addition,
MAP has a commitment to spend approximately $270 million over the next
eight years for future environmental projects.
The acquisition of Pennaco Energy, Inc. included net cash payments
of $506 million. For further discussion of Pennaco, see Note 6 to the
Marathon Group Financial Statements.
Cash from disposal of assets was $106 million in the first six
months of 2001, compared with $214 million in the comparable 2000
period. Proceeds in 2001 were mainly from the sale of various Canadian
oil fields, SSA stores, and various domestic producing properties.
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 six months of 2001, compared to a net deposit of
$35 million in the comparable 2000 period. Restricted cash in both
periods primarily reflected the net effects of cash deposited and
withdrawn from domestic production property dispositions and
acquisitions.
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, decreased by $238 million in the first six months of 2001.
Financial obligations decreased primarily because cash from operating
activities and asset sales exceeded capital expenditures, acquisitions
and dividend payments. For further details, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash
Flows and Liquidity.
Distributions to minority shareholder of MAP were $244 million in
the first six months of 2001, compared with $73 million in the
comparable 2000 period.
65
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
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 June 30, 2001. In addition, there are 4 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 116 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 substantially 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 rules, which were 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.
66
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In October 1996, EPA Region V issued a Finding of Violation
against the Robinson refinery alleging that it does not qualify for an
exemption under the National Emission Standards for Benzene Waste
Operations pursuant to the CAA, because the refinery's Total Annual
Benzene releases exceed the limitation of 10 megagrams per year, and as
a result, the refinery is in violation of the emission control, record
keeping, and reports requirements. The Marathon Group contends that it
does qualify for the exemption. However, in February 1999, the U.S.
Department of Justice ("DOJ") in Chicago, Illinois, filed a civil
complaint in the U.S. District Court for the Southern District of
Illinois alleging six counts of violations of the CAA with respect to
the benzene releases. The case has been settled in concept with
Marathon and MAP agreeing to pay a combined $1.6 million civil penalty
and the performance of $125,000 in supplemental environmental projects
as part of an enforcement action for alleged Clean Air Act violations.
A negotiated consent decree was filed with the Court May 11, 2001 and
approval by the Court is anticipated in the third quarter 2001.
In 1998, the EPA conducted multi-media inspections of MAP's
Detroit and Robinson refineries covering compliance with the Clean Air
Act, the Clean Water Act, reporting obligations under the Emergency
Planning and Community Right to Know Act, CERCLA and the handling of
process waste. The EPA served a total of six Notices of Violation
("NOV") and Findings of Violation as a result of these inspections. On
May 11, 2001, a consent decree was lodged with a federal court in
Detroit, Michigan, settling with the EPA certain New Source Review
("NSR") and other air compliance issues as well as 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 $270 million in
environmental capital expenditures and improvements to MAP's refineries
over approximately an eight 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 about $8 million in supplemental environmental projects
as 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. Approval of the consent decree by the court is
expected in the third quarter of 2001.
In 2000, the Kentucky Natural Resources and Environmental Cabinet
sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty
associated with a pipeline spill earlier that year in Winchester,
Kentucky. MAP has settled this NOV in concept for a $170,000 penalty
and reimbursement of response costs up to $131,000. A final consent
decree is expected in the third quarter 2001.
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.
67
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.
Marathon's third quarter and full year 2001 production is expected
to be approximately 392 and 420 thousand barrels of oil equivalent per
day, respectively. The full year estimate reflects reduced heavy oil
investment in Canada, a higher than expected level of asset sales and
delays in new project start-ups.
Marathon's high impact drilling program in the Gulf of Mexico will
be delayed due to the cancellation of the contract for the Cajun
Express rig. With the Cajun Express rig, Marathon expected to drill
two deepwater Gulf of Mexico wells before year-end 2001. Marathon has
contracted the Max Smith rig, which is on location, to drill the Deep
Ozona prospect with the Paris Carver prospect expected to follow in the
fourth quarter of 2001.
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.
68
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 June 2001, MAP acquired an interest in approximately 50
convenience stores located in Indiana and Michigan from Welsh, Inc.
The acquisition of these retail outlets increases MAP's presence in
these markets and should provide more than 80 million gallons of new
annual gasoline sales.
MAP is targeting a third quarter closing on a combination to
create the largest nationwide travel center network, which includes the
travel center operations of SSA, MAP's wholly owned subsidiary, and
those of Pilot Corporation. MAP will have a 50 percent interest in the
new company, Pilot Travel Centers LLC.
MAP is also working to improve its logistics network and has been
designated operator of the Centennial Pipeline, owned jointly by
Panhandle Eastern Pipe Line Company, a subsidiary of CMS Energy
Corporation, MAP, and TE Products Pipe Line Company, Limited
Partnership. All of the permits and rights-of-way have been obtained
for the new pipeline, which will connect the Gulf Coast refiners with
the Midwest market. The Centennial Pipeline system is expected to be
operational in first quarter 2002.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to
build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is
a common carrier pipeline company and the pipeline will be an
interstate common carrier pipeline. The pipeline will be named
Cardinal Pipeline and is expected to initially move about 50,000
barrels per day of refined petroleum into the central Ohio region. MAP
has secured over 95 percent of the rights-of-way required to build the
pipeline and negotiations are continuing with most of the remaining
landowners. Eminent domain proceedings are in progress in several
cases as well. Permitting issues have been encountered which could
delay the start-up of this pipeline until the first quarter of 2003.
MAP continues to vigorously pursue the permits and remaining rights-of-
way required to complete this project.
The Garyville, Louisiana coker project is nearing completion and
is anticipated to be at full production during the fourth quarter of
this year. The total cost of this major improvement program is
approximately $280 million.
In connection with the Proposed Separation described on page 59,
Standard & Poor's reported that they had assigned a BBB+ corporate
credit rating to Marathon Oil Corporation with a stable outlook
assuming the Proposed Separation is completed.
69
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 successful completion and timing of the Pilot
Travel Center transaction, the expected completion of the Centennial
Pipeline system, the expected completion of the Cardinal Pipeline, the
coker project and the Proposed Separation. Some factors which could
affect the successful completion of the Pilot Travel Center transaction
are the closing of definitive agreements, obtaining the necessary
financing and the receipt of third party approvals. Some factors which
could impact the Centennial Pipeline system include delivery of
equipment and materials, contractor performance and unforeseen hazards
such as weather conditions. Some factors which could impact the
Cardinal Pipeline include obtaining the necessary permits and remaining
rights-of-way, and completion of construction. Some factors which
could impact the coker project include unforeseen hazards such as
weather conditions, and unanticipated commissioning and start-up
issues. Some factors that could affect the Proposed Separation 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 or other unfavorable circumstances.
These factors (among others) could cause actual results to differ
materially from those set forth in the forward-looking statements.
70
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 income before
income taxes of hypothetical 10% and 25% changes in commodity prices
for open derivative commodity instruments as of June 30, 2001, are
provided in the following table(a):
<table>
<caption>
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- ---------------------------------------------------------------------
<s> <c> <c> <c>
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil (f)(g) $8.0 $22.6 (d)
Natural gas (f)(g) 10.4 25.3 (d)
Refined products (f)(g) 0.3 1.8 (d)
<fn>
(a) 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 decrease in income before income taxes of
hypothetical 10% and 25% changes in closing commodity prices for
each open contract position at June 30, 2001. Management
evaluates the portfolios of derivative commodity 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 June 30,
2001, may cause future income before income tax effects to differ
from those presented in the table.
(b) The number of net open contracts varied throughout second
quarter 2001, from a low of 19,657 contracts at June 30, to a
high of 30,633 contracts at May 30, and averaged 24,710 for the
quarter. The derivative commodity instruments used and hedging
positions taken also varied throughout second quarter 2001, and
will continue to vary in the future. Because of these variations
in the composition of the portfolio over time, the number of open
contracts, by itself, cannot be used to predict 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 income before
income taxes when applied to the derivative commodity instruments
used to hedge that commodity.
(g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
</table>
71
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
---------------------------------
Interest Rate Risk
- ------------------
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in June 30, 2001, interest rates on the fair value of the
Marathon Group's specifically attributed non-derivative financial
instruments and the Marathon Group's portion of USX's non-derivative
financial instruments attributed to both groups, is provided in the
following table:
<table>
<caption>
(Dollars in millions)
- ------------------------------------------------------------------------
As of June 30, 2001
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
- ------------------------------------------------------------------------
<s> <c> <c>
Financial assets:
Investments and
long-term receivables $186 $-
- ------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $1,981 $71
Preferred stock of
subsidiary 184 14
------ ------
Total liabilities $2,165 $85
- ------------------------------------------------------------------------
<fn>
(a)Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest approximate carrying
value and are relatively insensitive to changes in interest rates
due to the short-term maturity of the instruments. Accordingly,
these instruments are excluded from the table.
(b)Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest rates
at June 30, 2001, on the fair value of USX's non-derivative
financial instruments. For financial liabilities, this assumes a
10% decrease in the weighted average yield to maturity of USX's
long-term debt at June 30, 2001.
(c)Includes amounts due within one year.
(d)Fair value was based on market prices where available, or current
borrowing rates for financings with similar terms and maturities.
</table>
72
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
----------------------------------
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 June 30, 2001, USX had open Canadian
dollar forward purchase contracts with a total carrying value of
approximately $9 million. A 10% increase in the Canadian dollar to
U.S. dollar forward rate would result in a charge to income of
approximately $1 million. The entire amount of these contracts is
attributed to the Marathon Group.
Equity Price Risk
- -----------------
As of June 30, 2001, the Marathon Group had no material exposure
to equity price risk.
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 derivative usage may differ materially
from those discussed in the forward-looking statements.
73
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-------------------------------------
<table>
<caption>
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c> <c> <c>
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $374 $277 $816 $478
International 85 79 243 187
----- ----- ----- -----
Income For E&P Reportable Segment 459 356 1,059 665
Refining, Marketing & Transportation 842 529 1,118 669
Other Energy Related Businesses(a) 10 - 18 13
----- ----- ----- -----
Income For Reportable Segments $1,311 $885 $2,195 $1,347
Items Not Allocated To Segments:
Administrative Expenses $(34) $(29) $(65) $(57)
Gain on disposition of Angus/Stellaria - - - 87
Gain on lease resolution with
U.S. Government - - 59 -
Gain/(loss) on ownership change - MAP (7) 4 (6) 8
Costs related to proposed separation(b) (15) - (16) -
------ ------ ------ ------
Marathon Group Income From Operations $1,255 $860 $2,167 $1,385
CAPITAL EXPENDITURES
Exploration & Production $217 $129 $374 $400
Refining, Marketing & Transportation 115 106 212 166
Other(c) 20 4 42 10
----- ----- ----- -----
Total $352 $239 $628 $576
EXPLORATION EXPENSE
Domestic $12 $20 $25 $51
International 14 26 24 40
----- ----- ----- -----
Total $26 $46 $49 $91
OPERATING STATISTICS
Net Liquid Hydrocarbon Production(d):
United States 126.3 137.1 125.4 132.9
Europe 34.7 28.9 44.2 29.1
Other International 32.2 32.8 33.2 34.6
------ ------ ------ ------
Total Consolidated 193.2 198.8 202.8 196.6
Domestic Equity Investee
(MKM Partners L.P.) 9.4 - 9.8 -
International Equity Investees
(CLAM & Sakhalin Energy)(e) 0.1 2.6 0.1 1.3
------ ------ ------ ------
Worldwide 202.7 201.4 212.7 197.9
Net Natural Gas Production(f):
United States 773.7 711.6 781.3 731.5
Europe(g) 319.6 331.8 332.5 346.6
Other International 127.2 154.6 128.6 144.8
------ ------ ------ ------
Total Consolidated 1,220.5 1,198.0 1,242.4 1,222.9
International Equity Investee (CLAM) 33.8 25.9 34.3 31.4
------ ------ ------ -------
Worldwide 1,254.3 1,223.9 1,276.7 1,254.3
Average Equity Sales Prices(h)(i):
Liquid Hydrocarbons (per Bbl)
Domestic $21.11 $23.88 $22.23 $24.00
International 26.12 25.74 25.33 25.80
Natural Gas (per Mcf)
Domestic $3.90 $2.95 $4.71 $2.55
International 3.00 2.41 3.43 2.41
</table>
74
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------------------
<table>
<caption>
Second Quarter Six Months
Ended June 30 Ended June 30
2001 2000 2001 2000
--------------------------------
OPERATING STATISTICS (continued)
<s> <c> <c> <c> <c>
MAP:
Crude Oil Refined(d) 958.2 965.0 914.3 908.2
Consolidated Refined
Products Sold(d)(m) 1,303.1 1,344.7 1,278.2 1,281.7
Matching buy/sell volumes included in refined
products sold(d) 35.3 73.5 44.3 61.3
Refining and Wholesale
Marketing Margin(j)(k) $0.1839 $0.1122 $0.1364 $0.0797
Number of SSA retail outlets 2,272 2,416 - -
SSA Gasoline and Distillate Sales(l) 1,102 1,145 2,156 2,258
SSA Gasoline and Distillate
Gross Margin(j) $0.1168 $0.1239 $0.1066 $0.1160
SSA Merchandise Sales $620 $600 $1,149 $1,133
SSA Merchandise Gross Margin $154 $152 $283 $281
- --------------
<fn>
(a) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(b) Includes professional fees and expenses, and certain other costs
related to the proposed separation.
(c) Includes other energy related businesses and corporate capital
expenditures.
(d) Thousands of barrels per day
(e) In 2001, equity investee is CLAM and in 2000, equity investees are
CLAM and Sakhalin Energy.
(f) Millions of cubic feet per day
(g) Includes gas acquired for injection and subsequent resale of 9.0,
11.9, 9.1 and 12.9 mmcfd in the second quarter and six month year-to-date
2001 and 2000, respectively.
(h) Prices exclude gains and losses from hedging activities.
(i) Prices exclude equity affiliates and purchase/resale gas.
(j) Per gallon
(k) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(l) Millions of gallons
(m) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
</table>
75
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
<table>
<caption>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions,
except per share amounts) 2001 2000 2001 2000
- ---------------------------------------------------------------------------
<s> <c> <c> <c> <c>
REVENUES AND OTHER INCOME:
Revenues $1,733 $1,629 $3,243 $3,211
Income (loss) from investees (7) 14 40 7
Net gains on disposal of assets 10 13 16 28
Other income (loss) 1 - 2 (2)
------ ------ ------ ------
Total revenues and other income 1,737 1,656 3,301 3,244
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues
(excludes items shown below) 1,599 1,462 3,148 2,890
Selling, general and administrative
expenses (credits) 19 (57) 3 (120)
Depreciation, depletion and amortization 79 78 152 153
Taxes other than income taxes 67 61 126 118
------ ------ ------ ------
Total costs and expenses 1,764 1,544 3,429 3,041
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS (27) 112 (128) 203
Net interest and other financial costs 48 24 36 48
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (75) 88 (164) 155
Provision (credit) for income taxes (45) 32 (143) 56
------ ------ ------ ------
NET INCOME (LOSS) (30) 56 (21) 99
Dividends on preferred stock 2 2 4 4
------ ------ ------ ------
NET INCOME (LOSS)
APPLICABLE TO STEEL STOCK $(32) $54 $(25) $95
====== ====== ====== ======
STEEL STOCK DATA:
Net income (loss) $(32) $54 $(25) $95
- Per share - basic (.36) .62 (.28) 1.08
- diluted (.36) .62 (.28) 1.07
Dividends paid per share .10 .25 .35 .50
Weighted average shares, in thousands
- Basic 89,005 88,499 88,906 88,461
- Diluted 89,005 92,755 88,906 92,721
<fn>
Selected notes to financial statements appear on pages 78-88.
</table>
76
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
<table>
<caption>
June 30 December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------
<s> <c> <c>
ASSETS
Current assets:
Cash and cash equivalents $254 $219
Receivables, less allowance for doubtful
accounts of $128 and $57 652 627
Receivables subject to a security interest 350 350
Income taxes receivable 320 364
Inventories 916 946
Deferred income tax benefits 171 201
Other current assets 13 10
------ ------
Total current assets 2,676 2,717
Investments and long-term receivables,
less reserves of $39 and $38 375 536
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,708 and $6,531 3,098 2,739
Prepaid pensions 2,711 2,672
Other noncurrent assets 94 47
------ ------
Total assets $8,954 $8,711
====== ======
LIABILITIES
Current liabilities:
Notes payable $123 $70
Accounts payable 778 760
Payroll and benefits payable 242 202
Accrued taxes 242 173
Accrued interest 51 47
Long-term debt due within one year 224 139
------ ------
Total current liabilities 1,660 1,391
Long-term debt, less unamortized discount 2,085 2,236
Deferred income taxes 709 666
Employee benefits 1,916 1,767
Deferred credits and other liabilities 475 483
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 1,858 1,917
------ ------
Total stockholders' equity 1,860 1,919
------ ------
Total liabilities and stockholders' equity $8,954 $8,711
====== ======
<fn>
Selected notes to financial statements appear on pages 78-88.
</table>
77
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
<table>
<caption>
Six Months Ended
June 30
(Dollars in millions) 2001 2000
- ---------------------------------------------------------------------
<s> <c> <c>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $(21) $99
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 152 153
Pensions and other postretirement benefits (51) (163)
Deferred income taxes 56 146
Net gains on disposal of assets (16) (28)
Changes in:
Current receivables 64 13
Inventories 57 (29)
Current accounts payable and accrued expenses 61 (90)
All other - net (77) (2)
------ ------
Net cash provided from operating activities 225 99
------ ------
INVESTING ACTIVITIES:
Capital expenditures (141) (97)
Disposal of assets 9 16
Restricted cash - withdrawals 3 3
- deposits (2) (1)
Investees - investments (1) (11)
All other - net 10 3
------ ------
Net cash used in investing activities (122) (87)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in U. S. Steel Group's portion of USX
consolidated debt (26) 37
Specifically attributed debt repayments (6) (6)
Preferred stock repurchased - (12)
Dividends paid (35) (48)
------ ------
Net cash used in financing activities (67) (29)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35 (17)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 219 22
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $254 $5
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(93) $(41)
Income taxes refunded, including settlements
with the Marathon Group 387 85
<fn>
Selected notes to financial statements appear on pages 78-88.
</table>
78
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, as amended, requires recognition of all derivatives at fair
value as either assets or liabilities.
The U. S. Steel Group uses commodity-based and foreign currency
derivative instruments to manage its exposure to price risk. Management
has authorized the use of futures, forwards, swaps and options to reduce
the effects of fluctuations related to the purchase of natural gas and
nonferrous metals and also certain business transactions denominated in
foreign currencies. The U. S. Steel Group has not elected to designate
derivative instruments as qualifying for hedge accounting treatment.
As a result, the changes in fair value of all derivatives are recognized
immediately in earnings.
The cumulative effect adjustment relating to the adoption of SFAS No.
133 was recognized in other comprehensive income. The cumulative effect
adjustment relates only to deferred gains or losses existing as of the
close of business on December 31, 2000, for hedge transactions under prior
accounting rules. The effect of adoption of SFAS No. 133 was less than $1
million, net of tax.
In June 2001, the Financial Accounting Standards Board approved
Statements of Financial Accounting Standards No. 141 "Business
Combinations" (SFAS 141), No. 142 "Goodwill and Other Intangible Assets"
(SFAS 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS
143).
SFAS 141 requires all business combinations completed after June 30,
2001, be accounted for under the purchase method. This standard also
establishes for all business combinations made after June 30, 2001,
specific criteria for the recognition of intangible assets separately from
goodwill. SFAS 141 also requires that the excess of fair value of acquired
assets over cost (negative goodwill) be recognized immediately as an
extraordinary gain, rather than deferred and amortized. The U. S. Steel
Group will account for all future business combinations under SFAS 141.
79
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
1. (Continued)
SFAS 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS 142
are: 1) goodwill and intangible assets with indefinite lives will no longer
be amortized; 2) goodwill and intangible assets with indefinite lives must
be tested for impairment at least annually; and 3) the amortization period
for the intangible assets with finite lives will no longer be limited to
forty years. USX will adopt SFAS 142 effective January 1, 2002, as
required. At that time, amortization of existing goodwill will cease on
the unamortized portion associated with previous acquisitions and certain
investments accounted for under the equity method. This provision of SFAS
142 is not expected to have a material impact on the results of operations
for the U. S. Steel Group. Additionally, SFAS 142 requires that
unamortized negative goodwill associated with investments accounted for
under the equity method and acquired before July 1, 2001, be recognized in
income as a cumulative effect of change in accounting principle. The U. S.
Steel Group expects to recognize a favorable cumulative effect of a change
in accounting principle of approximately $20 million, net of tax, upon
adoption. USX continues to evaluate the financial effects of the
provisions of SFAS No. 142 pertaining to intangible assets other than
goodwill.
SFAS 143 provides accounting requirements for retirement obligations
associated with tangible long-lived assets, including: 1) the timing of
liability recognition; 2) initial measurement of the liability; 3)
allocation of asset retirement cost to expense; 4) subsequent measurement
of the liability; and 5) financial statement disclosures. SFAS 143
requires that an asset retirement cost should be capitalized as part of the
cost of the related long-lived asset and subsequently allocated to expense
using a systematic and rational method. USX will adopt the Statement
effective January 1, 2003. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. At this time, the U. S. Steel Group cannot
reasonably estimate the effect of the adoption of this Statement on either
its financial position or results of operations.
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.
80
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
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.
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 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.
81
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
On March 1, 2001, USX completed the purchase of the tin mill products
business of LTV Corporation (LTV), which is now operated as East Chicago
Tin. In this noncash transaction, USX assumed approximately $66 million of
certain employee related obligations from LTV. The acquisition was
accounted for using the purchase method of accounting. Results of
operations for the six months of 2001 include the operations of East
Chicago Tin 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 six months of 2001 a pretax gain of $68
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 periods
presented. The six months 2001 pro forma results exclude the $68 million
gain and $33 million tax benefit recorded as a result of the Transtar
transaction. In addition, VSZ did not historically provide carve-out
financial information for its steel activities prepared in accordance with
generally accepted accounting principles in the United States. Therefore,
USX made certain estimates and assumptions regarding revenues and costs in
the preparation of the unaudited pro forma data relating to USSK for the
six months of 2000.
The following 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.
<table>
<caption>
Six Months Ended
June 30
(In millions, except per share amounts) 2001 2000
----------------------------------------------------------------
<s> <c> <c>
Revenues and other income $3,279 $3,850
Net income (loss) (123) 137
Per share - basic (1.43) 1.51
- diluted (1.43) 1.48
</table>
82
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. 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:
<table>
<caption>
Domestic Total
(In millions) Steel USSK Segments
- -----------------------------------------------------------------------------
<s> <c> <c> <c>
SECOND QUARTER 2001
- -------------------
Revenues and other income:
Customer $1,447 $284 $1,731
Intersegment (a) 2 - 2
Intergroup (a) 2 - 2
Equity in earnings (losses) of
unconsolidated investees (8) 1 (7)
Other 11 - 11
------ ------ ------
Total revenues and other income $1,454 $285 $1,739
====== ====== ======
Segment income (loss) $(69) $41 $(28)
====== ====== ======
SECOND QUARTER 2000
- -------------------
Revenues and other income:
Customer $1,625 $- $1,625
Intergroup (a) 4 - 4
Equity in earnings of
unconsolidated investees 14 - 14
Other 13 - 13
------ ------ ------
Total revenues and other income $1,656 $- $1,656
====== ====== ======
Segment income $68 $- $68
====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
</table>
83
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
<table>
<caption>
Domestic Total
(In millions) Steel USSK Segments
- -----------------------------------------------------------------
<s> <c> <c> <c>
SIX MONTHS 2001
- ---------------
Revenues and other income:
Customer $2,709 $530 $3,239
Intersegment (a) 3 - 3
Intergroup (a) 4 - 4
Equity in earnings of
unconsolidated investees 39 1 40
Other 17 1 18
------ ------ ------
Total revenues and other income $2,772 $532 $3,304
====== ====== ======
Segment income (loss) $(220) $82 $(138)
====== ====== ======
SIX MONTHS 2000
- ---------------
Revenues and other income:
Customer $3,203 $- $3,203
Intergroup (a) 8 - 8
Equity in earnings of
unconsolidated investees 7 - 7
Other 26 - 26
------ ------ ------
Total revenues and other income $3,244 $- $3,244
====== ====== ======
Segment income $122 $- $122
====== ====== ======
<fn>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
</table>
84
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
The following schedules reconcile segment amounts to amounts reported
in the U. S. Steel Group's financial statements:
<table>
<caption>
Second Quarter Ended
June 30
(In millions) 2001 2000
-------------------------------------------------------------------------
<s> <c> <c>
Revenues and other income:
Revenues and other income of
reportable segments $1,739 $1,656
Elimination of intersegment revenues (2) -
------ ------
Total Group revenues and other income $1,737 $1,656
====== ======
Income:
Income (loss) for reportable segments $(28) $68
Items not allocated to segments:
Administrative expenses (8) (5)
Net pension credits 31 67
Costs related to former business activities (14) (18)
Costs related to Proposed Separation (8) -
------ ------
Total Group income (loss) from operations $(27) $112
====== ======
</table>
<table>
<caption>
Six Months Ended
June 30
(In millions) 2001 2000
---------------------------------------------------------------------
<s> <c> <c>
Revenues and other income:
Revenues and other income of
reportable segments $3,304 $3,244
Elimination of intersegment revenues (3) -
------ ------
Total Group revenues and other income $3,301 $3,244
====== ======
Income:
Income (loss) for reportable segments $(138) $122
Items not allocated to segments:
Administrative expenses (15) (11)
Net pension credits 72 132
Costs related to former business activities (38) (40)
Costs related to Proposed Separation (9) -
------ ------
Total Group income (loss) from operations $(128) $203
====== ======
</table>
85
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. The U. S. Steel Group's total comprehensive income (loss) was $(31)
million for the second quarter of 2001, $54 million for the second quarter
of 2000, $(24) million for the six months of 2001 and $98 million for the
six months of 2000.
6. 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.
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.
<table>
<caption>
(In millions)
----------------------
June 30 December 31
2001 2000
--------------------
<s> <c> <c>
Raw materials $170 $214
Semi-finished products 378 429
Finished products 259 210
Supplies and sundry items 109 93
---- ----
Total $916 $946
==== ====
</table>
86
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. The method of calculating net income (loss) 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 (loss) per share is calculated by adjusting net
income for dividend requirements of preferred stock and is based on the
weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, 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 June 30, 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 June 30,
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. Interest and other financial costs in the six months of 2001 included
a favorable adjustment of $67 million and provision for income taxes
included an unfavorable adjustment of $15 million, both of which are
related to prior years' taxes.
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.
87
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
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 June 30, 2001, and
December 31, 2000, accrued liabilities for remediation totaled $138 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 six months of 2001
and for the years 2000 and 1999, such capital expenditures totaled $6
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 $58 million at June 30, 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 June 30, 2001, the largest guarantee for a
single affiliate was $48 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at June 30, 2001, totaled $109 million compared with
$206 million at December 31, 2000.
12. On July 31, 2001, USX announced that its board of directors approved
the definitive plan of reorganization to separate the energy and steel
businesses of USX (Proposed Separation). The Proposed Separation envisions
a tax-free spin-off of the steel business of USX into a freestanding,
publicly traded company to be known as United States Steel Corporation.
Holders of current USX-U. S. Steel Group Common Stock will become holders
of United States Steel Corporation Common Stock. Holders of current USX-
Marathon Group Common Stock will become holders of Marathon Oil Corporation
Common Stock. The Proposed Separation does not contemplate a cash
distribution to stockholders. Each new company will carry approximately
the same assets and liabilities now associated with its existing business,
except for a value transfer of approximately $900 million from Marathon Oil
Corporation to United States Steel Corporation, intended to maintain United
States Steel Corporation as a
88
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. (Continued)
strong, independent company. The form of the value transfer will be a
reattribution of USX corporate debt between the USX-Marathon Group and the
USX-U. S. Steel Group. The Proposed Separation of reorganization is
subject to the approval of the holders of a majority of the outstanding
shares of each class of current USX common stock, receipt of a favorable
private letter ruling from the Internal Revenue Service ("IRS") on the tax-
free nature of the transaction, completion of necessary financing
arrangements and receipt of necessary regulatory and third party consents.
The transaction is expected to occur on or about December 31, 2001, 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. Costs related to the Proposed Separation
include professional fees and other expenses and are included in selling,
general and administrative expenses (credits). These costs in the second
quarter and six months of 2001 were $8 million and $9 million,
respectively.
13. On July 2, 2001, a corporate reorganization was implemented to create
a new holding company structure. USX became a holding company that owns
all of the outstanding equity of Marathon Oil Company, an Ohio Corporation
which, directly and indirectly, owns and operates the businesses of the USX-
Marathon Group, and United States Steel LLC, a Delaware limited liability
company which owns and operates the businesses of the USX-U. S. Steel
Group. The reorganization will not have any impact on the results of
operations or financial position of USX Corporation, the Marathon Group or
the U. S. Steel Group.
This reorganization in corporate form is independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
89
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 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, Republic Technologies
International, LLC ("Republic") and Rannila Kosice, s.r.o. 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 102.
On July 31, 2001, USX announced that its board of directors approved the
definitive plan of reorganization to separate the energy and steel businesses of
USX ("Proposed Separation"). The Proposed Separation envisions a tax-free spin-
off of the steel business of USX into a freestanding, publicly traded company to
be known as United States Steel Corporation. The Proposed Separation is subject
to certain conditions and is expected to occur on or about December 31, 2001.
For further discussion, see Management's Discussion and Analysis for USX
Corporation on page 29.
On July 2, 2001, a corporate reorganization was implemented to create a new
holding company structure. USX became a holding company that owns all of the
outstanding equity of Marathon Oil Company, a Ohio Corporation which, directly
and indirectly, owns and operates the businesses of the USX-Marathon Group, and
United States Steel LLC, a Delaware limited liability company which owns and
operates the businesses of the USX-U. S. Steel Group. The reorganization will
not have any impact on the results of operations or financial position of USX
Corporation, the Marathon Group or the U. S. Steel Group. This reorganization
in corporate form is independent of the Proposed Separation of the energy and
steel businesses of USX Corporation.
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 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 U. S.
Steel Group, see Supplementary Data -- Disclosures About Forward-Looking
Information in the USX Annual Report on Form 10-K for the year ended
December 31, 2000 and subsequent filings.
90
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 increased by $81 million and $57 million in the
second quarter and first six months of 2001, respectively, compared with the
same periods in 2000. The increases primarily reflected the inclusion of USSK
revenues, partially offset by lower domestic shipment volumes (shipments
decreased 293,000 tons and 841,000 tons in the second quarter and first six
months of 2001, respectively) and lower average domestic steel product prices
(average prices decreased $22/ton and $11/ton for the second quarter and first
six months of 2001, respectively).
Income from operations for the U. S. Steel Group for the second quarter and
first six months of 2001 and 2000 is set forth in the following table:
<table>
<caption>
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Segment income (loss) for
Domestic Steel(a)(b) $(69) $68 $(220) $122
Segment income for U. S. Steel Kosice(c) 41 - 82 -
----- ----- ----- -----
Income (loss) for
reportable segments (28) 68 (138) 122
Items not allocated to segment:
Net pension credits 31 67 72 132
Administrative expenses (8) (5) (15) (11)
Costs related to former
business activities(d) (14) (18) (38) (40)
Costs related to proposed separation(e) (8) - (9) -
----- ----- ----- -----
Total income (loss) from operations $(27) $112 $(128) $203
===== ===== ===== =====
- -----
<fn>
(a) The first six months of 2001 include a favorable $68 million for U. S.
Steel Group's share of gain on the Transtar reorganization and a $74 million
charge for a substantial portion of accounts receivable from Republic. The
second quarter and first six months of 2000 include charges totaling $15 million
for certain environmental and legal accruals.
(b) Includes income from the sale and 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.
(e) Includes professional fees and expenses, and certain other costs related to
the proposed separation.
</table>
91
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
SEGMENT INCOME FOR DOMESTIC STEEL
Segment income for Domestic Steel decreased $137 million and $342 million
in the second quarter and first six months of 2001, respectively, compared with
the same periods in 2000. The decrease in segment income in second quarter 2001
compared to second quarter 2000 was primarily due to lower average steel prices,
higher costs per ton from operating inefficiencies due to lower throughput for
sheet products, and lower shipment volumes, partially offset by a better product
mix. The decrease in segment income in the first six months of 2001 compared to
the same period last year was primarily due to lower average steel prices,
higher costs per ton from operating inefficiencies due to lower throughput for
sheet products, higher energy costs, lower shipment volumes and lower results at
iron ore and coal operations. The first six months of 2001 also include a
favorable $68 million for U. S. Steel Group's share of gain on the Transtar
reorganization and a $74 million charge for a substantial portion of accounts
receivable from Republic. In addition, the second quarter and first six months
of 2000 included charges totaling $15 million for certain environmental and
legal contingencies and were unfavorably impacted by a two-week unplanned blast
furnace outage at Fairfield Works.
SEGMENT INCOME FOR U. S. STEEL KOSICE
Segment income for USSK was $41 million in the second quarter of 2001 and
$82 million for the first six months of 2001.
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 $31 million and $72
million in the second quarter and first six months of 2001, respectively,
compared to $67 million and $132 million in the same periods in 2000. The $36
million and $60 million decrease in net pension credits for the second quarter
and first six months 2001, respectively, from the same periods in 2000 was
primarily due to the transition asset being fully amortized at the end of 2000.
Currently, the net pension credit for 2001 is expected to be approximately $145
million, excluding any potential impacts from the Proposed Separation. Future
net pension credits will no longer benefit from the now fully amortized
transition asset and 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 prior period service costs, plan amendments affecting benefit payout
levels, business combinations 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 second quarter and first six
months of 2001 increased $24 million in the second quarter and, excluding a
favorable adjustment of $67 million related to prior years' taxes, increased
$55 million in the first six months of 2001 as compared with the same period in
2000. These increases were primarily due to higher average debt levels.
92
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
The credit for income taxes in the second quarter and first six months of
2001 increased compared to the provision for income taxes in the same periods in
2000 due to a decrease in income before income taxes. The credit for the first
six months of 2001 contained a $33 million tax benefit associated with the
Transtar reorganization and an unfavorable adjustment of $15 million primarily
related to the settlement of 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 decreased $86 million and $120 million in the second quarter and
first six months of 2001, respectively, compared to the same periods in 2000,
primarily reflecting the factors discussed above.
Operating Statistics
- --------------------
For the U. S. Steel Group, second quarter and first six months 2001
shipments of 3.7 million tons and 6.9 million tons increased 27% and 17%,
respectively, from the same periods in 2000. Domestic Steel shipments of 2.6
million tons and 5.0 million tons for the second quarter and first six months of
2001 decreased 10% and 14% from the same periods in 2000. Domestic Steel raw
steel production in the second quarter of 2001 of 2.6 million tons was down 14%
compared to the same period in 2000. Domestic Steel raw steel production in the
first six months of 2001 of 5.2 million tons decreased 15% from the same period
in 2000. Domestic Steel raw steel capability utilization in the second quarter
of 2001 averaged 82.1%, compared to 95.4% in the same period in 2000. Domestic
Steel raw steel capability utilization in the first six months of 2001 averaged
82.6%, compared to 97.2% in the same period in 2000. Domestic Steel shipments,
raw steel production and raw steel capability utilization in the second quarter
and first six months of 2000 were negatively impacted by the blast furnace
outage at Fairfield Works. At USSK, second quarter and first six month 2001
shipments were 1.1 million net tons and 1.8 million net tons, respectively.
Balance Sheet
- -------------
Current assets at June 30, 2001 decreased $41 million from year-end 2000
primarily due to decreases in inventories, deferred income tax benefits and
income taxes receivable, partially offset by increases in cash and cash
equivalents and accounts receivable.
Net property, plant and equipment at June 30, 2001 increased $359 million
from year-end 2000 primarily due to the consolidation of Transtar and the
acquisition of East Chicago Tin.
Current liabilities at June 30, 2001 increased $269 million compared to
year-end 2000 primarily due to increases in notes payable, debt due within one
year and accrued taxes. The increase in debt due within one year was due to a
reclassification from long-term debt.
Employee benefits at June 30, 2001 increased $149 million compared to year-
end 2000 primarily due to the addition of employees with the Transtar
consolidation and the acquisition of the tin mill products business of LTV
Corporation.
93
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Cash Flow
- ---------
Net cash provided from operating activities increased $126 million in the
first six months of 2001, compared with the first six months of 2000. The
increase was due primarily to favorable working capital changes, which included
a favorable intergroup income tax settlement of $379 million compared to a
favorable intergroup settlement of $97 million in the same period in 2000,
partially offset by decreased net income (excluding noncash items).
Capital expenditures in the first six months of 2001 were $141 million,
compared with $97 million in the same period in 2000. The increase was
primarily due to exercising a buyout option of a lease for the balance of the
Gary Works No. 2 Slab Caster.
Contract commitments for capital expenditures at June 30, 2001, totaled
$109 million, compared with $206 million at December 31, 2000.
Financial obligations were reduced by $32 million in the first six months
of 2001. The decrease in financial obligations resulted from cash from
operating activities exceeding 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.
Dividends paid decreased $13 million in the first six months of 2001 from
the same period in 2000, due to a decrease in the dividend rate paid to U. S.
Steel Group common stockholders.
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.
In addition, on July 27, 2001, in order to provide a portion of the funding
that will be needed to implement the Proposed Separation, United States Steel
LLC issued $385 million of seven-year Senior Notes ("Notes") at an interest rate
of 10.75 percent per annum and maturing on August 1, 2008. These Notes are
guaranteed by USX Corporation until completion of the Proposed Separation, at
which time they will be solely the obligation of United States Steel
Corporation. These Notes include financial covenants that substantially limit
the rights of United States Steel Corporation after the Proposed Separation.
Most of these covenants apply only when the Notes are not rated investment
grade. Standard & Poor's and Moody's have assigned BB and Ba2 ratings,
respectively, to these Notes, post-separation. Among other things these
covenants may:
94
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
- impose restrictions on payment of dividends;
- limit additional borrowings by United States Steel Corporation,
including limiting the amount of borrowings secured by inventories
or accounts receivable;
- limit asset sales and sale of the stock of subsidiaries; and
- restrict the ability to make capital expenditures or certain acquisitions.
The Notes also contain covenants that require, immediately following the
Proposed Separation and after giving pro forma effect to any subsequent payments
to be made as part of the Proposed Separation, United States Steel Corporation
and its subsidiaries to have an aggregate of at least $400 million in undrawn
financings and cash, of which at least $300 million shall be available under
facilities with terms extending at least three years after the date such
facilities are put in place, and that the United States Steel Corporation shall
not be in default under any of the covenants under the Notes. The Notes also
carry registration rights requiring the filing of a registration statement by
March 31, 2002.
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
22 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30,
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 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.
95
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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.
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.
In 1987, the California Department of Health Services ("DHS") issued a
remedial action order for the GBF/Pittsburg landfill near Pittsburg, California.
DHS alleged that from 1972 through 1974, Pittsburg Works arranged for the
disposal of approximately 2.6 million gallons of waste oil, sludge, caustic mud
and acid, which were eventually taken to this landfill for disposal. In 2000,
the parties reached a buyout arrangement with a third party remediation firm,
whereby the firm agreed to take title to and remediate the site and also
indemnify the PRPs. This commitment was backed by pollution insurance. USX's
share to participate in the buyout was approximately $1.1 million. Payment of
the USX buyout amount was made December 2000. Title to the site was transferred
to the remediation firm on January 31, 2001.
In November 2000, a NOV was issued by the Jefferson County Health
Department ("JCHD") alleging violation of the Halogenated Solvent National
Emission Standards for Hazardous Air Pollutants and the JCHD Volatile Organic
Compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield
Works. U. S. Steel Group proposed a civil penalty of $100,000 and a VOC
emission limit, which have been agreed to by JCHD. A consent order was executed
and approved by the court in May 2001. The penalty was paid by U. S. Steel
Group in June 2001.
96
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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
- -------
Over the last few months, domestic orders for steel have strengthened and
prices have stabilized. In the third quarter, we expect Domestic Steel
shipments to be somewhat higher and realized prices to be flat or modestly
higher. On the cost side, there has been a declining trend in domestic natural
gas prices compared to the same period last year. Continuation of this trend
could provide a significant positive impact on our costs over the balance of the
year. Late in the second quarter, work began on the refurbishment of the Mon
Valley No. 3 blast furnace, which is expected to be available to resume
production in September, business conditions permitting.
On May 31, 2001, a major fire damaged the cold-rolling mill at USS-POSCO,
which is fifty percent owned by U. S. Steel Group. Damage was predominantly
limited to the cold-rolling mill area of the plant. USS-POSCO maintains
insurance coverage against such losses, including coverage for business
interruption. The mill is expected to resume production in the first quarter of
2002, although full-production may not be achieved until mid-2002. Until such
time, the plant will continue customer shipments using cold-rolled coils from
U. S. Steel Group and POSCO as substitute feedstock.
For USSK, we expect third quarter shipments to be slightly lower than the
second quarter and third quarter average realized price to be flat compared to
the second quarter. Based on continued improvement in production performance
since acquisition, USSK raw steel production capability for the second half of
2001 will be increased to 2.5 million net tons, for an annualized rate of 5.0
million net tons.
For the full year 2001, total shipments are expected to be approximately 14
to 14.5 million net tons with Domestic Steel shipments of approximately 10.5 to
11 million net tons and USSK shipments of approximately 3.5 million net tons.
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. At
June 30, 2001, U. S. Steel Group's remaining pre-petition financial exposure to
Republic, after recording various losses and reserves, totaled approximately $30
million.
97
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The above discussion includes forward-looking statements concerning
shipments, pricing, and production resumption at the Mon Valley No. 3 blast
furnace and at USS-POSCO. These statements are based on assumptions as to
future product demand, prices and mix, production, completion of refurbishment
of the Mon Valley No. 3 blast furnace and completion of repairs at USS-POSCO.
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 that may
affect USSK results are similar to domestic factors, including excess world
supply and foreign currency fluctuations, and also can be influenced by matters
peculiar to international marketing such as tariffs. In the event these
assumptions prove to be inaccurate, actual results may differ significantly from
those presently anticipated. One factor that could potentially affect the
completion or timing of the resumption of operations at the USS-POSCO cold-
rolling mill, among others, is the complexity of repairs.
Steel imports to the United States accounted for an estimated 23%, 27% and
26% of the domestic steel market in the first five 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. The U.S. Department of Commerce ("Commerce") made preliminary
findings of margins in all of the cases. Commerce has also found final margins
in the AD cases against Argentina and South Africa and in the CVD cases against
Argentina, while final determinations in the other cases will be made at a later
date. Both the ITC and Commerce are continuing their investigations in all the
cases in which their final determinations have not yet been made.
On June 5, 2001, President Bush announced a three-part program to address
the excessive imports of steel that have been depressing markets in the United
States. The program involves (1) negotiations with foreign governments seeking
near-term elimination of inefficient excess steel production capacity throughout
the world, (2) negotiations with foreign governments to establish rules that
will govern steel trade in the future and eliminate subsidies, and (3) an
investigation by the ITC under section 201 of the Trade Act of 1974 to determine
whether steel is being imported into the U.S. in such quantities as to be a
substantial cause of serious injury to the U.S. steel industry.
98
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
On June 22, 2001, the Bush Administration requested that the ITC initiate
investigations under section 201 of the Trade Act of 1974. Products included in
the request are in the following categories, subject to exclusion of certain
products:
(1) Carbon and alloy flat products;
(2) Carbon and alloy long products;
(3) Carbon and alloy pipe and tube; and
(4) Stainless steel and alloy tool steel products.
U. S. Steel Group believes that the remedies provided by AD and CVD
litigation are insufficient to correct the widespread dumping and subsidy abuses
that currently characterize steel imports into our country and has, therefore,
urged the U.S. government to take actions such as those described above. 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.
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. In the seamless pipe cases, the ITC voted on June 7,
2001 to continue the orders as to Argentina, Brazil and Germany and to
discontinue the orders pertaining to Italy. The ITC voted on June 15, 2001 to
continue the orders against all five countries pertaining to OCTG other than
drill pipe. The ITC's votes on drill pipe will continue the order in effect
against Japan and discontinue the orders against Argentina and Mexico.
On June 29, 2001, various domestic producers of coke and the United
Steelworkers of America filed antidumping cases against blast furnace coke from
China and Japan. The U. S. Steel Group produces coke and also imports coke from
both China and Japan. The U. S. Steel Group is not a petitioner in these cases.
99
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):
<table>
<caption>
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- ------------------------------------------------------------------------
<s> <c> <c> <c>
Commodity-Based Derivative Instruments
U. S. Steel Group
Natural Gas 0.9 2.2 (b)
Zinc 1.8 4.6 (b)
Tin 0.1 0.3 (b)
<fn>
(a) 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 effects on pretax income of
hypothetical 10% and 25% changes in closing commodity prices at June 30,
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 June 30,
2001, may cause future pretax income effects to differ from those
presented in the table.
(b) Price decrease.
</table>
100
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-------------------------------------
Interest Rate Risk
- ------------------
USX is subject to the effects of interest rate fluctuations on certain of
its non-derivative financial instruments. A sensitivity analysis of the
projected incremental effect of a hypothetical 10% decrease in June 30, 2001,
interest rates on the fair value of the U. S. Steel Group's specifically
attributed non-derivative financial instruments and the U. S. Steel Group's
portion of USX's non-derivative financial instruments attributed to both groups,
is provided in the following table:
<table>
<caption>
(Dollars in millions)
- ----------------------------------------------------------------------------
As of June 30, 2001
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
- ----------------------------------------------------------------------------
<s> <c> <c>
Financial assets:
Investments and
long-term receivables $86 $-
- ---------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $2,415 $75
Preferred stock of
subsidiary 66 5
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 182 13
------ ------
Total liabilities $2,663 $93
- ---------------------------------------------------------------------------
<fn>
(a) Fair values of cash and cash equivalents, receivables, notes payable,
accounts payable and accrued interest approximate carrying value and are
relatively insensitive to changes in interest rates due to the short-term
maturity of the instruments. Accordingly, these instruments are excluded
from the table.
(b) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at June 30, 2001,
on the fair value of USX's non-derivative financial instruments. For
financial liabilities, this assumes a 10% decrease in the weighted average
yield to maturity of USX's long-term debt at June 30, 2001.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or current borrowing
rates for financings with similar terms and maturities.
</table>
101
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
------------------------------------
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 June 30, 2001, the U. S.
Steel Group had open Euro forward sale contracts for Slovak Koruna with a total
carrying value of approximately $20 million. A 10% increase in the June 30,
2001 Euro forward rates would result in a $2 million charge to income. The
entire amount of these contracts is attributed to the U. S. Steel Group.
Equity Price Risk
- -----------------
As of June 30, 2001, USX was subject to equity price risk and liquidity
risk related to its investment in VSZ a.s., the former parent of U. S. Steel
Kosice, s.r.o., which is attributed to the U. S. Steel Group. These risks are
not readily quantifiable.
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.
<Page> 102
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-------------------------------------
<table>
<caption>
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2001 2000 2001 2000
- -------------------------------------------------------------------------
<s> <c> <c> <c> <c>
INCOME (LOSS) FROM OPERATIONS
Domestic Steel(a)(b) $(69) $68 $(220) $122
U. S. Steel Kosice(c) 41 - 82 -
----- ----- ----- -----
Income (loss) from Reportable Segments $(28) $68 $(138) $122
Items not allocated to segment:
Net Pension Credits 31 67 72 132
Administrative Expenses (8) (5) (15) (11)
Costs related to former business
activities(d) (14) (18) (38) (40)
Costs related to proposed separation(e) (8) - (9) -
----- ----- ----- -----
Total U. S. Steel Group $(27) $112 $(128) $203
CAPITAL EXPENDITURES
Domestic Steel $95 $52 $127 $97
U. S. Steel Kosice 9 - 14 -
----- ----- ----- -----
Total U. S. Steel Group $104 $52 $141 $97
OPERATING STATISTICS
Average steel price per ton: ($/net ton)
Domestic Steel $429 $451 $434 $445
U. S. Steel Kosice 249 - 267 -
Steel Shipments:(f)
Domestic Steel 2,611 2,904 5,043 5,884
U. S. Steel Kosice 1,069 - 1,818 -
----- ----- ----- -----
Total Steel Shipments 3,680 2,904 6,861 5,884
Raw Steel-Production:(f)
Domestic Steel 2,621 3,034 5,244 6,186
U. S. Steel Kosice 1,131 - 2,083 -
----- ----- ----- -----
Total Raw Steel-Production 3,752 3,034 7,327 6,186
Raw Steel-Capability Utilization:(g)
Domestic Steel 82.1% 95.4% 82.6% 97.2%
U. S. Steel Kosice 100.8% - 93.4% -
Iron ore shipments - Domestic Steel(f) 5,189 4,656 7,100 6,685
- -----------
<fn>
(a) The first six months of 2001 include a favorable $68 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.
Results in the second quarter and first six months of 2000 include
charges totaling $15 million for certain environmental and legal
accruals.
(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) Includes professional fees and expenses and certain other costs
related to the proposed separation.
(f) Thousands of net tons.
(g) 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.
</table>
103
Part II - Other Information:
- ---------------------------
Item 1. LEGAL PROCEEDINGS
MARATHON GROUP
Environmental Proceedings
In October 1996, EPA Region V issued a Finding of Violation against the
Robinson refinery alleging that it does not qualify for an exemption under the
National Emission Standards for Benzene Waste Operations pursuant to the CAA,
because the refinery's Total Annual Benzene releases exceed the limitation of 10
megagrams per year, and as a result, the refinery is in violation of the
emission control, record keeping, and reports requirements. The Marathon Group
contends that it does qualify for the exemption. However, in February 1999, the
U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint
in the U.S. District Court for the Southern District of Illinois alleging six
counts of violations of the CAA with respect to the benzene releases. The case
has been settled in concept with Marathon and MAP agreeing to pay a combined
$1.6 million civil penalty and the performance of $125,000 in supplemental
environmental projects as part of an enforcement action for alleged Clean Air
Act violations. A negotiated consent decree was filed with the Court May 11,
2001 and approval by the Court is anticipated in the third quarter 2001.
In 1998, the U.S. Environmental Protection Agency ("EPA") conducted multi-
media inspections of MAP's Detroit and Robinson refineries covering compliance
with the Clean Air Act, the Clean Water Act, reporting obligations under the
Emergency Planning and Community Right to Know Act, and CERCLA and the
handling of process waste. The EPA served a total of six Notices of
Violation ("NOV") and Findings of Violation as a result of these inspections.
On May 11, 2001, a consent decree was lodged with a federal court in Detroit,
Michigan, where MAP settled with the EPA certain New Source Review ("NSR")
and other air compliance issues as well as 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
$270 million in environmental capital expenditures and improvements to MAP's
refineries over approximately an eight 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
about $8 million in supplemental environmental projects as 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. Approval of the
consent decree by the court is expected in the third quarter of 2001.
In 2000, the Kentucky Natural Resources and Environmental Cabinet sent
Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with
a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled
this NOV in concept for a $170,000 penalty and reimbursement of response
costs up to $131,000. A final consent decree is expected in the third
quarter 2001.
104
Part II - Other Information (Continued):
- ----------------------------------------
Item 1. LEGAL PROCEEDINGS (Continued)
U. S. STEEL GROUP
Environmental Proceedings
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.
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.
In 1987, the California Department of Health Services ("DHS") issued a
remedial action order for the GBF/Pittsburg landfill near Pittsburg, California.
DHS alleged that from 1972 through 1974, Pittsburg Works arranged for the
disposal of approximately 2.6 million gallons of waste oil, sludge, caustic mud
and acid, which were eventually taken to this landfill for disposal. In 2000,
the parties reached a buyout arrangement with a third party remediation firm,
whereby the firm agreed to take title to and remediate the site and also
indemnify the PRPs. This commitment was backed by pollution insurance. USX's
share to participate in the buyout was approximately $1.1 million. Payment of
the USX buyout amount was made December 2000. Title to the site was transferred
to the remediation firm on January 31, 2001.
In November 2000, a NOV was issued by the Jefferson County Health
Department ("JCHD") alleging violation of the Halogenated Solvent National
Emission Standards for Hazardous Air Pollutants and the JCHD Volatile Organic
Compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield
Works. U. S. Steel Group proposed a civil penalty of $100,000 and a VOC
emission limit, which have been agreed to by JCHD. A consent order was executed
and approved by the court in May 2001. The penalty was paid by U. S. Steel
Group in June 2001.
105
Part II - Other Information (Continued):
- ----------------------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held April 24, 2001. In connection
with the meeting, proxies were solicited pursuant to the Securities
Exchange Act. The following are the voting results on proposals considered
and voted upon at the meeting, all of which were described in the proxy
statement.
1. All nominees for director listed in the proxy statement were elected.
2. PricewaterhouseCoopers LLC was elected as the independent
accountants for 2001. (For, 314,783,844; against, 2,333,137;
abstained, 1,801,884).
106
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.
<table>
<caption>
(In millions)
-----------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
2001 2000 2001 2000
---- ---- ---- ----
<s> <c> <c> <c> <c>
INCOME DATA:
Revenues $9,176 $8,893 $17,911 $16,564
Income from operations 1,278 866 2,202 1,399
Net income 613 355 1,126 617
</table>
<table>
<caption>
(In millions)
--------------------
June 30 December 31
2001 2000
-------------------
<s> <c> <c>
BALANCE SHEET DATA:
Assets:
Current assets $7,318 $7,397
Noncurrent assets 11,063 10,135
------ ------
Total assets $18,381 $17,532
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $4,376 $3,951
Noncurrent liabilities 7,197 8,110
Preferred stock of subsidiary 9 9
Minority interest in income of
Marathon Ashland Petroleum LLC 2,010 1,840
Stockholder's equity 4,789 3,622
------ ------
Total liabilities and stockholder's equity $18,381 $17,532
====== ======
</table>
107
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Holding Company Reorganization Agreement,
dated as of July 1, 2001, by and among
USX Corporation, USX HoldCo,
Inc. and United States Steel LLC Incorporated by reference to
Exhibit 2.1 to USX's Form 8-K
filed on July 2, 2001.
4.1 USX Certificate of Incorporation
effective on July 2, 2001 Incorporated by reference to
Exhibit 3.1 to USX's Form 8-K
filed on July 2, 2001.
3.2 USX By-Laws dated May 30, 2001 Incorporated by reference to
Exhibit 3.2 to USX's form 8-K
filed on July 2, 2001.
4.1 Amendment to Rights Agreement, dated
July 2, 2001, among USX Corporation,
USX HoldCo., Inc. and ChaseMellon
Shareholder Services, L.L.C. Incorporated by reference to
Exhibit 4.1 to USX's Form 8-K
filed on July 2, 2001.
4.2 Indenture dated as of July 27, 2001,
among United States Steel LLC and United
States Steel Financing Corp., Issuers, USX
Corporation, Guarantor, and The Bank of
New York, Trustee
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 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."
108
Part II - Other Information (Continued):
- ----------------------------------------
(b) REPORTS ON FORM 8-K (Continued):
Form 8-K dated May 8, 2001, reporting under Item 9. Regulation FD Disclosure,
that USX Corporation is furnishing information under Regulation FD for the
May 8, 2001 statement concerning the impact of the plan of reorganization on
preferred securities and industrial revenue bonds.
Form 8-K dated May 29, 2001, reporting under Item 9. Regulation FD
Disclosure, that USX Corporation is furnishing information under Regulation
FD for the May 29, 2001 press release titled "Thomas J. Usher Named President
of U. S. Steel Group".
Form 8-K/A dated May 29, 2001, reporting under Item 9. Regulation FD
Disclosure, that USX Corporation furnished information under Regulation FD
for the press release titled "Thomas J. Usher Named Acting President of
U. S. Steel Group". The filing of this announcement supercedes USX
Corporation's earlier filing of such announcement.
Form 8-K dated June 15, 2001, reporting under Item 5. Other Events, that USX
Corporation is furnishing information for the June 15, 2001 press release
titled "USX Corporation Files Preliminary Proxy with SEC relating to
Separation of Energy and Steel Businesses".
Form 8-K dated July 2, 2001, reporting under Item 5. Other Events, that on
July 2, 2001, USX Corporation completed a corporate reorganization to
implement a new holding company structure.
Form 8-K dated July 13, 2001, reporting under Item 9. Regulation FD
Disclosure, that USX Corporation is furnishing information under Regulation
FD for the July 13, 2001 press release titled "U. S. Steel Group Sees Results
Improved Over First Quarter".
Form 8-K dated July 31, 2001, reporting under Item 5. Other Events, that USX
Corporation is furnishing information for the July 31, 2001 press release
titled "USX Announces Board Approval of Plan of Reorganization and
Identification of Directors for Marathon Oil Corporation and United States
Steel Corporation Effective January 1, 2002".
Form 8-K dated August 1, 2001, reporting under Item 5. Other Events, that USX
Corporation is furnishing information for the August 1, 2001 press releases
titled "Surma Named Assistant to Chairman of USX" and "New Executive
Positions Named for United States Steel".
Form 8-K dated August 2, 2001, reporting under Item 5. Other Events, that USX
Corporation is furnishing information for the August 2, 2001 press release
titled "Marathon Names Five New Officers in Preparation for USX
Reorganization".
Form 8-K dated August 6, 2001, reporting under Item 5. Other Events, that USX
Corporation is furnishing information for the August 6, 2001 press release
titled "Four Financial Posts Identified for United States Steel".
109
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
August 6, 2001