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 September 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 October 31, 2001 follows:
USX-Marathon Group - 309,393,089 shares
USX-U. S. Steel Group - 89,196,007 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 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 41
Financial Statistics 44
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 45
Marathon Group Balance Sheet 46
Marathon Group Statement of Cash Flows 47
Selected Notes to Financial Statements 48
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 61
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 74
Supplemental Statistics 77
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 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 79
U. S. Steel Group Balance Sheet 80
U. S. Steel Group Statement of Cash Flows 81
Selected Notes to Financial Statements 82
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 93
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 106
Supplemental Statistics 109
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 110
Item 4. Submission of Matters to a Vote of Security Holders 113
Item 5. Other Information 114
Item 6. Exhibits and Reports on Form 8-K 115
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues (Note 11) $10,139 $10,607 $31,099 $30,207
Dividend and investee income 45 46 157 81
Net gains (losses) on disposal of assets (204) 7 (160) 129
Gain (loss) on ownership change in
Marathon Ashland Petroleum LLC 1 1 (5) 9
Other income 7 18 85 32
------ ------ ------ ------
Total revenues and other income 9,988 10,679 31,176 30,458
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items
shown below) 7,557 8,184 23,108 23,107
Selling, general and administrative
expenses 178 95 516 233
Depreciation, depletion and amortization 396 310 1,157 949
Taxes other than income taxes 1,282 1,250 3,732 3,650
Exploration expenses 20 51 69 142
------ ------ ------ ------
Total costs and expenses 9,433 9,890 28,582 28,081
------ ------ ------ ------
INCOME FROM OPERATIONS 555 789 2,594 2,377
Net interest and other financial costs 74 80 183 267
Minority interest in income of Marathon
Ashland Petroleum LLC 223 115 650 373
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 258 594 1,761 1,737
Provision for income taxes 88 454 522 877
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 170 140 1,239 860
Cumulative effect of change in accounting
principle - - (8) -
------ ------ ------ ------
NET INCOME 170 140 1,231 860
Dividends on preferred stock 2 2 6 6
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $168 $138 $1,225 $854
====== ====== ====== ======
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
------------------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per
share amounts) 2001 2000 2001 2000
- ------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Income before cumulative effect of change
in accounting principle $193 $121 $1,283 $742
- Per share - basic .63 .38 4.16 2.38
- diluted .62 .38 4.15 2.37
Cumulative effect of change in accounting
principle - - (8) -
- Per share - basic - - (.03) -
- diluted - - (.03) -
Net income $193 $121 $1,275 $742
- Per share - basic .63 .38 4.13 2.38
- diluted .62 .38 4.12 2.37
Dividends paid per share .23 .23 .69 .65
Weighted average shares, in thousands
- Basic 309,309311,847309,056312,068
- Diluted 309,923312,094309,452312,272
APPLICABLE TO STEEL STOCK:
Net income (loss) $(25) $17 $(50) $112
- Per share - basic (.28) .19 (.56) 1.27
- diluted (.28) .19 (.57) 1.27
Dividends paid per share .10 .25 .45 .75
Weighted average shares, in thousands
- Basic 89,193 88,738 89,003 88,554
- Diluted 89,193 88,738 89,003 88,556
Selected notes to financial statements appear on pages 9-27.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
September 30December 31
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $987 $559
Receivables, less allowance for doubtful
accounts of $134 and $60 2,788 2,888
Receivables subject to a security interest 350 350
Inventories 2,907 2,813
Deferred income tax benefits 220 261
Assets held for sale 51 330
Other current assets 116 131
------ ------
Total current assets 7,419 7,332
Investments and long-term receivables,
less reserves of $39 and $38 1,416 801
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$16,975 and $16,222 12,471 12,114
Prepaid pensions 2,963 2,879
Other noncurrent assets 408 275
------ ------
Total assets $24,677 $23,401
====== ======
Selected notes to financial statements appear on pages 9-27.
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30December 31
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $- $150
Accounts payable 3,473 3,774
Payroll and benefits payable 428 432
Accrued taxes 617 281
Accrued interest 74 108
Long-term debt due within one year 227 287
------ ------
Total current liabilities 4,819 5,032
Long-term debt, less unamortized discount 4,140 4,173
Deferred income taxes 2,110 2,020
Employee benefits 2,617 2,415
Deferred credits and other liabilities 724 724
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 2,029 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 - 89,196,332 shares and
88,767,395 shares 89 89
Securities exchangeable solely into Marathon Stock
issued - 0 shares and 281,148 shares - -
Treasury common stock, at cost -
Marathon Stock - 2,880,559 shares
and 3,899,714 shares (77) (104)
Additional paid-in capital 4,677 4,676
Deferred compensation (24) (8)
Retained earnings 2,819 1,847
Accumulated other comprehensive income (loss) 7 (50)
------ ------
Total stockholders' equity 7,805 6,764
------ ------
Total liabilities and stockholders' equity $24,677 $23,401
====== ======
Selected notes to financial statements appear on pages 9-27.
8
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
Nine Months Ended
September 30
(Dollars in millions) 2001 2000
- ------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $1,231 $860
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 650 373
Depreciation, depletion and amortization 1,157 949
Exploratory dry well costs 12 52
Pensions and other postretirement benefits (38) (217)
Deferred income taxes (136) 522
(Gain) loss on ownership change in Marathon Ashland
Petroleum LLC 5 (9)
Net (gains) losses on disposal of assets 160 (129)
Changes in:
Current receivables 142 (364)
Inventories (78) (259)
Current accounts payable and accrued expenses (264) 10
All other - net 43 (32)
------ ------
Net cash provided from operating activities 2,892 1,756
------ ------
INVESTING ACTIVITIES:
Capital expenditures (1,217) (1,011)
Acquisition of Pennaco Energy, Inc. (506) -
Disposal of assets 198 269
Restricted cash - withdrawals 71 219
- deposits (54) (207)
Investees - investments (9) (80)
- loans and advances (5) (13)
- returns and repayments 10 9
All other - net 14 20
------ ------
Net cash used in investing activities (1,498) (794)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit
arrangements - net (526) (329)
Other debt - borrowings 661 273
- repayments (397) (328)
Common stock repurchased (1) (37)
Treasury stock reissued 11 -
Preferred stock repurchased - (12)
Dividends paid (260) (275)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (450) (212)
------ ------
Net cash used in financing activities (962) (920)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) (4)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 428 38
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 559 133
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $987 $171
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(305) $(301)
Income taxes paid (266) (381)
Selected notes to financial statements appear on pages 9-27.
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, as
amended.
2. 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.
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.
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.
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 which 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. OCI is also impacted by
the changes in fair value associated with cash flow hedges. A
reconciliation of the changes in OCI relating to derivative instruments is
as follows (amounts in millions):
Third Nine
Quarter Months
Ended Ended
Sept. 30 Sept. 30
Deferred gain (loss), net of tax 2001 2001
---------------------------------------------------------------------------
Beginning balance $42 $-
Cumulative effect adjustment - (8)
Reclassification of the cumulative effect
adjustment into earnings (7) 28
Changes in fair value 20 35
Reclassification to earnings 2 2
---- ----
Balance at September 30, 2001 $57 $57
==== ====
Of the $57 million recorded in OCI as of September 30, 2001, $13
million, net of income taxes, is expected to be reclassified to earnings
over the 12-month period ending September 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, on a before tax
basis, for cash flow hedges recognized during the third quarter and nine
months of 2001 was a favorable $6 million and $10 million, respectively.
In addition, during the third quarter, $2 million was recognized in income
before tax as the result of a discontinuation of a portion of a cash flow
natural gas equity production hedge. These amounts were included in
revenues.
The futures contracts used in cash flow hedge strategies vary in
duration with certain contracts extending to December 2002.
There was no ineffectiveness associated with fair value hedges for the
third quarter or year-to-date because the hedging instrument and the
existing firm commitment contract are priced on the same underlying index.
Certain derivative instruments used in the fair value hedges extend 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)
3. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 "Business
Combinations" (SFAS No. 141), No. 142 "Goodwill and Other Intangible
Assets" (SFAS No. 142) and No. 143 "Accounting for Asset Retirement
Obligations" (SFAS No. 143).
SFAS No. 141 requires that 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 No. 141 also requires that the excess of fair value of
acquired assets over cost in a business combination (negative goodwill) be
recognized immediately as an extraordinary gain, rather than deferred and
amortized.
SFAS No. 142 addresses the accounting for goodwill and other
intangible assets after an acquisition. The most significant changes made
by SFAS No. 142 are: 1) goodwill and intangible assets with indefinite
lives will no longer be amortized; 2) goodwill and intangible assets with
indefinite lives must be tested for impairment at least annually; and 3)
the amortization period for intangible assets with finite lives will no
longer be limited to forty years. USX will adopt SFAS No. 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.
SFAS No. 143 establishes a new accounting model for the recognition
and measurement of retirement obligations associated with tangible long-
lived assets. SFAS No. 143 requires that an asset retirement cost 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 No. 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement
establishes a single accounting model for long-lived assets to be disposed
of by sale and provides additional implementation guidance for assets to be
held and used and assets to be disposed of other than by sale. There will
be no financial implication related to the adoption of SFAS No. 144, and
the guidance will be applied on a prospective basis. USX will adopt the
Statement effective January 1, 2002.
12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. 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)
4. (Continued)
The results of segment operations for USX are as follows:
Total
Marathon
(In millions) E&P RM&T OERB Segments
- ---------------------------------------------------------------------------
THIRD QUARTER 2001
- ------------------
Revenues and other income:
Customer $873 $7,212 $413 $8,498
Intersegment (a) 123 2 14 139
Intergroup (a) 4 - 2 6
Equity in earnings of unconsolidated
investees 16 14 - 30
Other (1) 20 3 22
------ ------ ------ ------
Total revenues and other income $1,015 $7,248 $432 $8,695
====== ====== ====== ======
Segment income $259 $575 $6 $840
====== ====== ====== ======
THIRD QUARTER 2000
- ------------------
Revenues and other income:
Customer (b) $1,140 $7,518 $492 $9,150
Intersegment (a) 74 7 20 101
Intergroup (a) 9 - 10 19
Equity in earnings of unconsolidated
investees 28 5 4 37
Other 5 13 3 21
------ ------ ------ ------
Total revenues and other income $1,256 $7,543 $529 $9,328
====== ====== ====== ======
Segment income (b) $464 $299 $13 $776
====== ====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
(b)Certain amounts have been reclassified from E&P to OERB to reflect 2001
classifications.
14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Total Total
Domestic U.S.Steel Marathon
(In millions) Steel USSK Segments Segments Total
- --------------------------------------------------------------------------
THIRD QUARTER 2001
- ------------------
Revenues and other income:
Customer $1,359 $285 $1,644 $8,498 $10,142
Intersegment (a) 2 - 2 139 141
Intergroup (a) 2 - 2 6 8
Equity in earnings of unconsolidated
investees 11 - 11 30 41
Other 2 1 3 22 25
------ ----- ------- ------ ------
Total revenues and other income $1,376 $286 $1,662 $8,695 $10,357
====== ===== ====== ====== ======
Segment income (loss) $(47) $39 $(8) $840 $832
====== ===== ====== ====== ======
THIRD QUARTER 2000
- ------------------
Revenues and other income:
Customer $1,457 $- $1,457 $9,150 $10,607
Intersegment (a) - - - 101 101
Intergroup (a) 5 - 5 19 24
Equity in earnings of unconsolidated
investees 6 - 6 37 43
Other 7 - 7 21 28
------ ----- ------ ------ ------
Total revenues and other income $1,475 $- $1,475 $9,328 $10,803
====== ===== ====== ====== ======
Segment income $23 $- $23 $776 $799
====== ===== ====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Total
Marathon
(In millions) E&P RM&T OERB Segments
- ------------------------------------------------------------------------------
NINE MONTHS 2001
- ----------------
Revenues and other income:
Customer $3,251 $21,490 $1,478 $26,219
Intersegment (a) 393 15 58 466
Intergroup (a) 19 - 7 26
Equity in earnings of unconsolidated
investees 52 28 11 91
Other 16 52 10 78
------ ------ ------ ------
Total revenues and other income $3,731 $21,585 $1,564 $26,880
====== ====== ====== ======
Segment income $1,304 $1,693 $38 $3,035
====== ====== ====== ======
NINE MONTHS 2000
- ----------------
Revenues and other income:
Customer (b) $3,046 $21,351 $1,150 $25,547
Intersegment (a) 262 62 52 376
Intergroup (a) 20 - 21 41
Equity in earnings of unconsolidated
investees 24 15 12 51
Other 15 34 9 58
------ ------ ------ ------
Total revenues and other income $3,367 $21,462 $1,244 $26,073
====== ====== ====== ======
Segment income (b) $1,128 $968 $27 $2,123
====== ====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
(b)Certain amounts have been reclassified from E&P to OERB to reflect 2001
classifications.
16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Total Total
Domestic U.S.Steel Marathon
(In millions) Steel USSK Segments Segments Total
- -----------------------------------------------------------------------------
NINE MONTHS 2001
- ----------------
Revenues and other income:
Customer $4,068 $815 $4,883 $26,219 $31,102
Intersegment (a) 5 - 5 466 471
Intergroup (a) 6 - 6 26 32
Equity in earnings of unconsolidated
investees 50 1 51 91 142
Other 19 2 21 78 99
------ ----- ------ ------ ------
Total revenues and other income $4,148 $818 $4,966 $26,880 $31,846
====== ===== ====== ====== ======
Segment income (loss) $(267) $121 $(146) $3,035 $2,889
====== ===== ====== ====== ======
NINE MONTHS 2000
- ----------------
Revenues and other income:
Customer $4,660 $- $4,660 $25,547 $30,207
Intersegment (a) - - - 376 376
Intergroup (a) 13 - 13 41 54
Equity in earnings of unconsolidated
investees 13 - 13 51 64
Other 33 - 33 58 91
------ ----- ------ ------ ------
Total revenues and other income $4,719 $- $4,719 $26,073 $30,792
====== ===== ====== ====== ======
Segment income $145 $- $145 $2,123 $2,268
====== ===== ====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
17
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
The following schedules reconcile segment amounts to amounts reported in
the Marathon and U. S. Steel Groups' financial statements:
Marathon Group U. S. Steel Group
Third Quarter Third Quarter
Ended Ended
September 30 September 30
(In millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of
reportable segments $8,695 $9,328 $1,662 $1,475
Items not allocated to segments:
Loss related to sale of certain
Canadian assets (221) - - -
Gain on ownership change in MAP 1 1 - -
Elimination of intersegment revenues (139) (101) (2) -
------ ------ ----- -----
Total Group revenues and other income $8,336 $9,228 $1,660 $1,475
====== ====== ====== ======
Income:
Income (loss) for reportable segments $840 $776 $(8) $23
Items not allocated to segments:
Gain on ownership change in MAP 1 1 - -
Administrative expenses (39) (48) (5) (7)
Net pension credits - - 38 67
Costs related to former
business activities - - (21) (23)
Loss related to sale of certain
Canadian assets (221) - - -
Costs related to Fairless
facility shutdowns - - (29) -
Costs related to Proposed Separation (1) - - -
------ ------ ------ ------
Total Group income (loss) from operations $580 $729 $(25) $60
====== ====== ====== ======
18
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Marathon Group U. S. Steel Group
Nine Months Nine Months
Ended Ended
September 30 September 30
(In millions) 2001 2000 2001 2000
- ----------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of
reportable segments $26,880 $26,073 $4,966 $4,719
Items not allocated to segments:
Loss related to sale of certain
Canadian assets (221) - - -
Gain (loss) on ownership change in MAP (5) 9 - -
Other (a) 59 87 - -
Elimination of intersegment revenues (466) (376) (5) -
------ ------ ----- -----
Total Group revenues and other income $26,247 $25,793 $4,961 $4,719
====== ====== ====== ======
Income:
Income (loss) for reportable segments $3,035 $2,123 $(146) $145
Items not allocated to segments:
Gain (loss) on ownership change in MAP (5) 9 - -
Administrative expenses (104) (105) (20) (18)
Net pension credits - - 110 199
Costs related to former
business activities - - (59) (63)
Loss related to sale of certain
Canadian assets (221) - - -
Costs related to Fairless
facility shutdowns - - (29) -
Costs related to Proposed Separation (17) - (9) -
Other (a) 59 87 - -
------ ------ ------ ------
Total Group income (loss) from
operations $2,747 $2,114 $(153) $263
====== ====== ====== ======
(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.
5. 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)
5. (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
nine 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 nine 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 nine 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 nine month
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 used in the preparation of the
unaudited pro forma data relating to USSK for the nine 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)
5. (Continued)
Nine Months Ended
September 30
(In millions, except per share amounts) 2001 2000
---------------------------------------------------------------------------
- -
Revenues and other income $31,162 $31,414
Income before cumulative effect of change in
accounting principle 1,134 892
Net income 1,126 892
Applicable to Marathon Stock:
Income before cumulative effect of change in
accounting principle 1,281 716
- Per share - basic 4.15 2.29
- diluted 4.14 2.29
Net income 1,273 716
- Per share - basic 4.12 2.29
- diluted 4.11 2.29
Applicable to Steel Stock:
Net income (loss)(a) (153) 170
- Per share - basic and diluted (1.72) 1.92
(a) Amounts are net of dividends on preferred stock of $6 million.
6. In the third quarter of 2001, MAP and Pilot Corporation formed a joint
venture combining their travel center operations. The joint venture
company named Pilot Travel Centers LLC, commenced operations on September
1, 2001 and is accounted for under the equity method of accounting.
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. The joint venture, named MKM
Partners L.P., commenced operations in January 2001 and is accounted for
under the equity method of accounting.
7. In the third quarter of 2001, the Marathon Group recorded a $221
million pretax loss primarily related to the complete sale of Marathon's
heavy oil assets in Canada, which is included in net gains (losses) on
disposal of assets.
On August 14, 2001, USX announced its intention to permanently close
the cold rolling and tin mill operations at U. S. Steel's Fairless Works.
In the third quarter of 2001, USX recorded a pretax charge of $29 million
related to the shutdown of these operations, of which $12 million is
included in depreciation, depletion and amortization and $17 million is
included in cost of revenues.
21
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
------------------------
September 30December 31
2001 2000
-----------------------
Raw materials $886 $915
Semi-finished products 419 429
Finished products 1,406 1,279
Supplies and sundry items 196 190
------ ------
Total $2,907 $2,813
====== ======
Cost of revenues was reduced by $13 million in the nine months of 2001
as a result of liquidations of LIFO inventories.
9. Total comprehensive income was $185 million for the third quarter of
2001, $138 million for the third quarter of 2000, $1,288 million for the
nine months of 2001 and $854 million for the nine months of 2000.
10. 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 for both groups assumes exercise
of stock options and for the U. S. Steel Group assumes exercise of common
stock warrants in an equity investee, provided the effects are not
antidilutive.
22
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
10. (Continued)
COMPUTATION OF INCOME PER SHARE
Third Quarter Ended
September 30
2001 2000
Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------
Marathon Group
- --------------
Net income (millions) $193 $193 $121 $121
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common
shares outstanding 309,309 309,309 311,847 311,847
Effect of dilutive securities
- stock options - 614 - 247
------ ------ ------ ------
Average common shares and
dilutive effect 309,309 309,923 311,847 312,094
====== ====== ====== ======
Net income per share $.63 $.62 $.38 $.38
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (loss) (millions):
Net income (loss) $(23) $(23) $19 $19
Dividends on preferred stock 2 2 2 2
------ ------ ------ ------
Net income (loss) applicable
to Steel Stock $(25) $(25) $17 $17
====== ====== ====== ======
Shares of common stock outstanding (thousands) -
Average number of common
shares outstanding 89,193 89,193 88,738 88,738
====== ====== ====== ======
Net income (loss) per share $(.28) $(.28) $.19 $.19
====== ====== ====== ======
23
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
10. (Continued)
COMPUTATION OF INCOME PER SHARE
Nine Months Ended
September 30
2001 2000
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------
Marathon Group
- --------------
Net income (millions):
Income before cumulative effect of change
in accounting principle $1,283 $1,283 $742 $742
Cumulative effect of change in
accounting principle (8) (8) - -
------ ------ ------ ------
Net income $1,275 $1,275 $742 $742
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common
shares outstanding 309,056 309,056 312,068 312,068
Effect of dilutive securities
- stock options - 396 - 204
------ ------ ------ ------
Average common shares and dilutive
effect 309,056 309,452 312,068 312,272
====== ====== ====== ======
Per share:
Income before cumulative effect of change
in accounting principle $4.16 $4.15 $2.38 $2.37
Cumulative effect of change in accounting
principle (.03) (.03) - -
------ ------ ------ ------
Net income $4.13 $4.12 $2.38 $2.37
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (loss) (millions):
Net income (loss) $(44) $(44) $118 $118
Dividends on preferred stock 6 6 6 6
------ ------ ------ ------
Net income (loss) applicable to
Steel Stock $(50) $(50) $112 $112
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common
shares outstanding 89,003 89,003 88,554 88,554
Effect of dilutive securities - - - 2
------ ------ ------ ------
Average common shares and
dilutive effect 89,003 89,003 88,554 88,556
====== ====== ====== ======
Net income (loss) per share $(.56) $(.57) $1.27 $1.27
====== ====== ====== ======
24
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
11. Included in revenues and costs and expenses for the third quarter of
2001 and 2000 were $1,152 million and $1,121 million, respectively,
representing excise taxes on petroleum products and merchandise. Similar
amounts for the nine months of 2001 and 2000 were $3,322 million and $3,268
million, respectively.
12. 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.
The provision for income taxes for the third quarter and nine months
of 2001 included deferred tax charges related to certain prior years' taxes
of $7 million and $27 million, respectively.
The income tax provision for the third quarter and nine months of 2000
included a one-time, noncash deferred tax charge of $235 million as a
result of the change in amount, timing and nature of expected future
foreign source income due to the exchange of the Marathon Group's interest
in Sakhalin Energy Investment Company, Ltd. for other oil and gas producing
interests.
Interest and other financial costs in the nine months of 2001 included
a favorable adjustment of $76 million related to certain prior years'
taxes.
13. At September 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
$75 million which require a .125% fee or maintenance of compensating
balances. At September 30, 2001, there were no borrowings against these
facilities.
At September 30, 2001, MAP had no borrowings against its $450 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 September 30, 2001, USSK had no borrowings against its $50 million
short-term credit facility.
At September 30, 2001, in the event of a change in control of USX,
debt obligations totaling $3,599 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.
14. 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 September
30, 2001, $27 million was outstanding under the agreement.
25
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
15. On August 13, 2001, Marathon Oil Canada Limited, an indirect
subsidiary of Marathon Oil Company, redeemed its outstanding securities
exchangeable solely into Marathon Stock through an exchange for shares of
Marathon Stock on a one-for-one basis.
16. 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.
17. 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.
18. 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 September 30, 2001, and
December 31, 2000, accrued liabilities for remediation totaled $219 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 $59
million at September 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 nine months of 2001 and for the years 2000 and
1999, such capital expenditures totaled $38 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.
26
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
18. (Continued)
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. This consent
decree was approved by the court on August 28, 2001. 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.
At September 30, 2001, and December 31, 2000, accrued liabilities for
platform abandonment and dismantlement totaled $184 million and $162
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$59 million at September 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 September 30, 2001, the largest guarantee for a single affiliate was
$26 million.
At September 30, 2001, USX's pro rata share of obligations of LOOP LLC
and various pipeline affiliates secured by throughput and deficiency
agreements totaled $112 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 at
September 30, 2001, totaled $445 million compared with $663 million at
December 31, 2000.
19. 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 would become holders
of United States Steel Corporation Common Stock. Holders of current USX-
Marathon Group Common Stock would remain holders of such stock which would
be renamed Marathon Oil Corporation Common Stock. The Proposed Separation
does not contemplate a cash distribution to stockholders. Each company
would 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 would be a
reattribution of USX corporate debt between the USX-Marathon Group and the
USX-U. S. Steel Group. The Proposed Separation was approved by
shareholders at an October 25, 2001 meeting and is subject to receipt of a
favorable private letter ruling from the Internal Revenue Service ("IRS")
27
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
19. (Continued)
on the tax-free nature of the transaction, completion of necessary
financing arrangements and receipt of necessary regulatory and third party
consents. The Proposed Separation 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
expenses and are included in selling, general and administrative expenses.
These costs in the third quarter and nine months of 2001 were $1 million
and $26 million, respectively.
20. 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, directly and indirectly, owns and operates the businesses of
the USX-U. S. Steel Group. The reorganization did 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 was independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
21. On July 27, 2001 and September 11, 2001, United States Steel LLC and
United States Steel LLC's wholly owned subsidiary, United States Steel
Financing Corp., issued in total, $535 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 indenture governing the Notes contains covenants that will impose
restrictions on certain activities of United States Steel Corporation after
the Proposed Separation. The majority of these covenants will not apply if
an investment grade rating is reached in the future.
28
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
----------------------------------------------------------
Nine Months Ended
September 30 Year Ended December 31
- ----------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
8.51 6.60 3.79 4.20 3.45 3.63 3.41
==== ==== ==== ==== ==== ==== ====
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
-------------------------------------------------
Nine Months Ended
September 30 Year Ended December 31
- ----------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
8.77 6.77 3.89 4.32 3.56 3.79 3.65
==== ==== ==== ==== ==== ==== ====
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 third 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 October 25, 2001, USX announced that the shareholders 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 remain holders of such stock which would be
renamed Marathon Oil Corporation Common Stock. The Proposed Separation does not
contemplate a cash distribution to stockholders. Each company would 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 would 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 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 Proposed Separation 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, directly
and indirectly, owns and operates the businesses of the USX-U. S. Steel Group.
The reorganization did 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 was 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, as amended, and in subsequent Forms 10-Q and 8-K.
Results of Operations
- ---------------------
Revenues and other income for the third quarter and the first nine months
of 2001 and 2000 are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------
Revenues and other income
Marathon Group $8,336 $9,228 $26,247 $25,793
U. S. Steel Group 1,660 1,475 4,961 4,719
Eliminations (8) (24) (32) (54)
------ ------ ------ ------
Total revenues and other income $9,988$10,679 $31,176 $30,458
Less:
Excise taxes(a) 1,152 1,121 3,322 3,268
Matching buy/sell transactions(a) 1,150 1,086 3,280 3,381
------ ------ ------ ------
Revenues and other income
excluding above items $7,686 $8,472 $24,574 $23,809
====== ====== ====== ======
- ------
(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.
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 third quarter and the first nine months of
2001 and 2000 are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------
Reportable segments
Marathon Group
Exploration & production (a) $259 $464 $1,304 $1,128
Refining, marketing & transportation 575 299 1,693 968
Other energy related businesses (a) 6 13 38 27
------ ------ ------ ------
Income for reportable segments
-Marathon Group $840 $776 $3,035 $2,123
U. S. Steel Group
Domestic Steel $(47) $23 $(267) $145
U. S. Steel Kosice 39 - 121 -
----- ----- ----- -----
Income (loss) for reportable segments
-U. S. Steel Group $(8) $23 $(146) $145
Income for reportable segments
- USX Corporation 832 799 2,889 2,268
Items not allocated to segments:
Marathon Group (260) (47) (288) (9)
U. S. Steel Group (17) 37 (7) 118
----- ----- ----- -----
Total income from operations
-USX Corporation $555 $789 $2,594 $2,377
- ---------
(a)Certain amounts have been reclassified from Exploration & production to
Other energy related businesses to reflect 2001 classifications.
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.
Net interest and other financial costs for the third quarter of 2001
decreased $6 million compared to the third quarter of 2000. The first nine
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 nine months of 2001 decreased $8 million compared to the same
period in 2000. The decreases for the third quarter and nine months of 2001
were primarily due to increased interest income as a result of higher invested
cash balances, partially offset by an increase in interest expense due to higher
average debt levels.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased $108 million and $277 million in the third
quarter and first nine 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.
32
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Provisions for income taxes decreased $366 million and $355 million for the
third quarter and first nine months of 2001, respectively. The provisions were
based on tax rates and amounts that recognize management's best estimate of
current and deferred tax assets and liabilities. The first nine months of 2001
included a $33 million tax benefit associated with the Transtar reorganization
and deferred tax charges of $27 million related to certain prior years' taxes.
The third quarter and first nine months of 2000 included a one-time, noncash
deferred tax charge of $235 million as a result of the change in amount, timing
and nature of expected future foreign source income due to the exchange of
Marathon's interest in Sakhalin Energy for other oil and gas producing
interests.
Cumulative effect of change in accounting principle of $8 million, net of a
tax benefit of $5 million, in the first nine 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 $170 million for the third quarter of 2001, an increase of
$30 million compared to the third quarter of 2000 reflecting an increase of
$72 million for the Marathon Group and a decrease of $42 million for the U. S.
Steel Group. Net income was $1,231 million for the first nine months of 2001,
an increase of $371 million compared with the first nine months of 2000,
reflecting an increase of $533 million for the Marathon Group and a $162 million
decrease for the U. S. Steel Group.
Dividends to Stockholders
- -------------------------
On October 30, 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 December 10, 2001, to stockholders of record at the close
of business on November 21, 2001. The Board also declared a dividend of $0.8125
per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable
December 31, 2001, to stockholders of record at the close of business on
December 3, 2001.
On August 13, 2001, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, redeemed its outstanding securities exchangeable solely
into Marathon Stock through an exchange for shares of Marathon Stock on a one-
for-one basis.
Balance Sheet
- -------------
Current assets at September 30, 2001 increased $87 million from year-end
2000 primarily due to an increase in cash and cash equivalents and inventories,
partially offset by a decrease in assets held for sale and receivables. The
increase in cash and cash equivalents resulted from an increase in domestic time
deposits primarily due to the issuance of the 10.75% Senior Notes. The increase
in inventories primarily resulted from an increase in refined products and crude
oil inventories. The decrease in assets held for sale primarily resulted from
the contribution of the Yates field assets to a joint venture, partially offset
by certain Canadian assets and Speedway SuperAmerica stores held for sale at
September 30, 2001. 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 for the Marathon
Group.
33
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Investments and long-term receivables increased $615 million from year-end
2000, primarily due to the contribution of assets to the MKM Partners L.P. and
Pilot Travel Centers LLC joint ventures.
Net property, plant and equipment at September 30, 2001 increased
$357 million from year-end 2000 primarily due to the acquisitions of Pennaco
Energy, Inc. ("Pennaco") and East Chicago Tin and the Transtar reorganization,
partially offset by the contribution of assets to Pilot Travel Centers LLC.
Current liabilities at September 30, 2001 decreased $213 million compared
to year-end 2000 primarily due to a decrease in accounts payable, debt due
within one year and notes payable, partially offset by an increase in accrued
taxes. The increase in accrued taxes was primarily related to the settlement of
prior years' taxes.
Total long-term debt and notes payable was $4,367 million at September 30,
2001, $243 million lower than year-end 2000. During the first nine months of
2001, USX repaid outstanding balances from year-end on notes payable, revolving
credit agreements and commercial paper. USX also repaid $250 million of 9.80%
notes when they matured in July of 2001. Partially offsetting the debt
repayments was the issuance of $535 million of 10.75% Senior Notes. Most of the
debt is a direct obligation of, or is guaranteed by, USX.
Employee benefits at September 30, 2001 increased $202 million compared to
year-end 2000 about half of which was due to the addition of employees and
retirees with the Transtar reorganization and the acquisition of the tin mill
products business of LTV Corporation. The remainder of the increase was
primarily due to ongoing accruals in excess of cash payments from company
assets. Following the elective $500 million Voluntary Employee Benefit
Association ("VEBA") funding in the fourth quarter of 2000, which decreased the
employee benefits liability, most union retiree medical claims are being paid
from the VEBA instead of company assets.
Minority interest in Marathon Ashland Petroleum LLC increased by
$189 million from year-end 2000 due to Ashland's share of recorded MAP income
exceeding cash distributions to Ashland.
Total stockholders' equity increased $1,041 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 $2,892 million in the
first nine months of 2001, a $1,136 million increase from the first nine months
of 2000, reflecting increases of $962 million for the Marathon Group and
$174 million for the U. S. Steel Group. The increases primarily reflect higher
net income for the Marathon Group 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 nine
months of 2001 were $1,217 million compared with $1,011 million for the first
nine 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 September 30, 2001, totaled $445 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 5 to the USX
Consolidated Financial Statements.
Cash from disposal of assets was $198 million in the first nine months of
2001, compared with $269 million in the first nine 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 $17 million in
the first nine months of 2001, compared with a net withdrawal of $12 million in
the first nine 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 $262 million in the first nine months of 2001
compared with a decrease of $384 million in the first nine 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 $450 million in the first
nine months of 2001, compared with $212 million in the first nine 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 Ba2 senior implied rating to
United States Steel Corporation with a negative outlook. Additionally, Standard
& Poor's and Moody's have assigned BB and Ba3 ratings, respectively, to United
States Steel LLC's $535 million Senior Notes due August 1, 2008.
35
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity
- ---------
At September 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 $75 million at September 30,
2001. At September 30, 2001, there were no borrowings against the USSK short-
term credit facility. At September 30, 2001, MAP had no borrowings against its
revolving credit agreements with banks and no amounts outstanding against its
revolving credit agreement with Ashland. At September 30, 2001, USX had
$27 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. An additional $150 million of Notes were issued September 11,
2001. The Notes have been attributed to and are reflected in the financial
statements of both groups. 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 covenants
that impose 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 98.
On November 7, 2001, United States Steel LLC commenced offers to exchange,
up to an aggregate of $365 million:
- $50 principal amount of its 10% Senior Quarterly Income Debt Securities due
2031 ("SQUIDS") for each validly tendered and accepted share of 6.50%
Cumulative Convertible Preferred Stock of USX Corporation ("6.50% Preferred
Stock"), up to a maximum of $77 million;
- $50 principal amount of its SQUIDS for each validly tendered and accepted
6.75% Convertible Quarterly Income Preferred Security ("6.75% QUIPS") of
USX Capital Trust I, up to a maximum of $127 million, plus a cash payment
for accrued but unpaid distributions; and
- $25 principal amount of its SQUIDS for each validly tendered and accepted
8.75% Cumulative Monthly Income Preferred Share, Series A ("8.75% MIPS"),
of USX Capital LLC, up to a maximum of $161 million, plus a cash payment
for accrued but unpaid dividends.
Holders of shares of 6.50% Preferred Stock tendered and accepted in the exchange
offers will not be paid accrued dividends in the exchange offers. Rather, all
holders of 6.50% Preferred Stock as of December 3, 2001 will receive payment on
December 31, 2001 in the amount of the full quarterly dividend payable on the
6.50% Preferred Stock for the fourth quarter. The exchange offers are scheduled
to expire on December 7, 2001, unless extended or terminated. The SQUIDS are
being issued to meet, in part, the conditions of the Proposed Separation and
will be fully and unconditionally 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 SQUIDS provide for redemption if the
Proposed Separation does not
36
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
occur. The covenants included in the SQUIDS are similar to those currently in
USX indentures. All outstanding shares of 6.50% Preferred Stock at the effective
time of the Proposed Separation will be converted into the right to receive, in
cash, $50 plus accrued but unpaid dividends, and all outstanding 6.75% QUIPS at
the effective time of the Proposed Separation will be redeemed for a cash
payment of $50 plus accrued but unpaid distributions. All outstanding 8.75%
MIPS will be redeemed on December 31, 2001 for a cash payment of $25 plus
accrued but unpaid dividends.
United States Steel LLC is currently negotiating a $400 million Accounts
Receivable Facility that will provide a portion of the funding needed to
implement the Proposed Separation. United States Steel LLC is also negotiating
a $400 million Inventory Financing Facility to meet the financing needs of the
Proposed Separation. Both facilities are expected to close in November 2001.
Capital expenditures in the first nine months of 2001 were $1.2 billion 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 September 30, 2001 totaled $445 million.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of September 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 18 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.
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
37
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 September 30, 2001. In addition, there are 14
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 150 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, 13 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 2002 and 2006.
This is a forward-looking statement and can only be a broad-based estimate due
to the ongoing evolution of regulatory requirements. Some factors (among
others) that could potentially affect gasoline and diesel fuel compliance costs
include obtaining the necessary construction and environmental permits,
operating and logistical considerations, and unforeseen hazards such as weather
conditions.
In May 2001, Marathon and MAP settled in a consent decree EPA allegations
that the Robinson refinery did not qualify for an exemption under the National
Emission Standards for Benzene Waste Operations pursuant to the Clean Air Act
("CAA"). The government had alleged in a federal court lawsuit that the
refinery's Total Annual Benzene releases exceeded the limitation of 10 megagrams
per year, and as a result, the refinery was in violation of the benzene waste
emission control, recordkeeping, and reporting requirements. The consent
decree was approved by the court on July 26, 2001 and requires Marathon and MAP
to pay a combined $1.6 million civil penalty, perform $125,000 in supplemental
environmental projects, as part of an enforcement action for alleged CAA
violations, and install various controls and other improvements.
38
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and
Robinson refineries, covering compliance with the CAA, 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 number of
Notices of Violation ("NOV") and Findings of Violation as a result of these
inspections but these allegations were resolved as part of the New Source Review
("NSR") global consent decree which MAP agreed to on May 11, 2001. MAP's
settlement with the EPA includes all of MAP's refineries and commits MAP to
specific control technologies and implementation schedules for 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 CAA violations. MAP believes that this
settlement will provide MAP with increased permitting and operating flexibility
while achieving significant emission reductions. The court approved this
consent decree on August 28, 2001.
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 past response costs
up to $131,000. A final administrative order resolving this matter is expected
in the fourth 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.
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 $0.4 million for costs
associated with this site. The only remaining outstanding claim is the natural
resource damages claim filed by the Commonwealth of Pennsylvania.
39
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 in December 2000. Title to the site was
transferred to the remediation firm on January 31, 2001.
In 1987, USX and the PA Department of Environmental Resources ("PADER")
entered into a consent Order to resolve an incident in January 1985 involving
the alleged unauthorized discharge of benzene and other organic pollutants from
Clairton Works in Clairton, Pa. That consent Order required USX to pay a penalty
of $50,000 and a monthly payment of $2,500 for five years. In 1990, USX and the
PADER reached agreement to amend the consent Order. Under the amended Order, USX
agreed to remediate the Peters Creek Lagoon (a former coke plant waste disposal
site); to pay a penalty of $300,000; and to pay a monthly penalty of up to
$1,500 each month until the former disposal site is closed. Remediation costs
have amounted to $9.8 million with another $1.2 million presently projected to
complete the project.
In 1988, USX and three other PRPs agreed to the issuance of an
administrative order by the EPA to undertake emergency removal work at the
Municipal & Industrial Disposal Co. site in Elizabeth Township, Pa. The cost of
such removal, which has been completed, was approximately $4.2 million, of which
USX paid $3.4 million. The EPA indicated that further remediation of this site
would be required. In October 1991, the PADER placed the site on the
Pennsylvania State Superfund list and began a Remedial Investigation ("RI")
which was issued in 1997. USX's share of any final allocation formula for
cleanup of the entire site was never determined; however, based on presently
available information, USX may have been responsible for as much as 70% of the
waste material deposited at the site. PA Department of Environmental Protection
("PADEP"), formerly PADER, issued its Final Feasibility Study Report for the
entire site in August 2001. The report identifies and evaluates feasible
remedial alternatives and selects three preferred alternatives. These
alternatives are estimated to cost from $17 million to $20 million. Consultants
for United States Steel have concluded that a less costly alternative should be
employed at the site, which is estimated to cost $5.5 million. Based on the
allocation of liability that has been recognized for past site cleanup
activities, the United States Steel share of costs for this remedy would be
approximately $3.7 million.
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.
40
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In September 2001, USX agreed to an Administrative Order on Consent with
the State of North Carolina for the assessment and cleanup of a Greensboro, NC
fertilizer manufacturing site. The site was owned by Armour Agriculture
Chemical Company (now named Viad) from 1912 to 1968. USX owned the site from
1968 to 1986 and sold the site to LaRoche Industries in 1986. The agreed order
allocated responsibility for assessment and cleanup costs as follows: Viad -
48%, USX - 26% and LaRoche - 26%; and LaRoche was appointed to be the lead party
responsible for conducting the cleanup. In March 2001, USX was notified that
LaRoche had filed for protection under the Bankruptcy law. On August 23, 2001,
the allocation of responsibility for this site assessment and cleanup and the
cost allocation was approved by the bankruptcy court in the LaRoche Bankruptcy.
The estimated remediation costs are $4.4 million to $5.7 million. USX's
estimated share of these costs is $1.6 million.
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 18 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.
41
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for commodity-based
derivative instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- ----------------------------------------------------------------------------
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil(f)(g) $8.8 $20.7 (d)
Natural gas(f)(g) 8.2 21.2 (d)
Refined products(f)(g) 0.7 4.6 (d)
U. S. Steel Group
Natural Gas 1.3 3.2 (e)
Zinc 2.8 6.9 (e)
Tin 0.2 0.6 (e)
(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
September 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
September 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 third quarter
2001, from a low of 19,040 contracts at July 18, to a high of 39,868
contracts at September 26, and averaged 24,900 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.
42
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 September 30,
2001 interest rates on the fair value of USX's non-derivative financial
instrument is provided in the following table:
(Dollars in millions)
- -------------------------------------------------------------------------------
As of September 30, 2001
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
- -------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $272 $ -
- -------------------------------------------------------------------------------
Financial liabilities:
Long-term debt(c)(d) $4,642 $187
Preferred stock of
subsidiary 245 21
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 184 16
------ ------
Total liabilities $5,071 $224
- -------------------------------------------------------------------------------
(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 September 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 September 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.
43
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 September 30, 2001, USX had open Euro forward sale contracts for both
U.S. dollars (total carrying value of approximately $4.2 million) and Slovak
Koruna (total carrying value of approximately $7.3 million). A 10% increase in
the September 30, 2001 Euro forward rates would result in an immaterial charge
to income. The entire amount of these contracts is attributed to the U. S.
Steel Group.
At September 30, 2001, USX had open Canadian dollar forward purchase
contracts with a total carrying value of approximately $3 million. A 10%
increase in the Canadian dollar to U.S. dollar forward rate would result in an
immaterial charge to income. The entire amount of these contracts is attributed
to the Marathon Group.
Equity Price Risk
- -----------------
As of September 30, 2001, USX was subject to equity price risk and market
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.
44
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------
REVENUES AND OTHER INCOME
Marathon Group $8,336 $9,228 $26,247 $25,793
U. S. Steel Group 1,660 1,475 4,961 4,719
Eliminations (8) (24) (32) (54)
------- ------- ------- -------
Total $9,988 $10,679 $31,176 $30,458
INCOME (LOSS) FROM OPERATIONS
Marathon Group $580 $729 $2,747 $2,114
U. S. Steel Group (25) 60 (153) 263
------ ------ ------ ------
Total $555 $789 $2,594 $2,377
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group $392 $302 $1,020 $878
U. S. Steel Group 56 36 197 133
------ ------ ------ ------
Total $448 $338 $1,217 $1,011
45
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per
share amounts) 2001 2000 2001 2000
- ---------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues (Note 5) $8,502 $9,169 $26,243 $25,588
Dividend and investee income 34 40 106 68
Net gains (losses) on disposal of assets (208) 1 (180) 95
Gain (loss) on ownership change in
Marathon Ashland Petroleum LLC 1 1 (5) 9
Other income 7 17 83 33
------ ------ ------ ------
Total revenues and other income 8,336 9,228 26,247 25,793
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items
shown below) 6,046 6,864 18,482 18,927
Selling, general and
administrative expenses 171 151 497 409
Depreciation, depletion and amortization 302 241 911 727
Taxes other than income taxes 1,217 1,192 3,541 3,474
Exploration expenses 20 51 69 142
------ ------ ------ ------
Total costs and expenses 7,756 8,499 23,500 23,679
------ ------ ------ ------
INCOME FROM OPERATIONS 580 729 2,747 2,114
Net interest and other financial costs 36 53 109 192
Minority interest in income of Marathon
Ashland Petroleum LLC 223 115 650 373
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 321 561 1,988 1,549
Provision for income taxes 128 440 705 807
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 193 121 1,283 742
Cumulative effect of change in accounting
principle - - (8) -
------ ------ ------ ------
NET INCOME $193 $121 $1,275 $742
====== ====== ====== ======
MARATHON STOCK DATA:
Income before cumulative effect of change in
accounting principle $193 $121 $1,283 $742
- Per share - basic .63 .38 4.16 2.38
- diluted .62 .38 4.15 2.37
Cumulative effect of change in accounting
principle - - (8) -
- Per share - basic - - (.03) -
- diluted - - (.03) -
Net income $193 $121 $1,275 $742
- Per share - basic .63 .38 4.13 2.38
- diluted .62 .38 4.12 2.37
Dividends paid per share .23 .23 .69 .65
Weighted average shares, in thousands
- Basic 309,309 311,847 309,056 312,068
- Diluted 309,923 312,094 309,452 312,272
Selected notes to financial statements appear on pages 48-60.
46
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
September 30December 31
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $512 $340
Receivables, less allowance for doubtful
accounts of $3 and $3 2,132 2,267
Inventories 1,957 1,867
Deferred income tax benefits 35 60
Assets held for sale 51 330
Other current assets 110 121
------ ------
Total current assets 4,797 4,985
Investments and long-term receivables 1,067 362
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,200 and $9,691 9,382 9,375
Prepaid pensions 223 207
Other noncurrent assets 372 303
------ ------
Total assets $15,841 $15,232
====== ======
LIABILITIES
Current liabilities:
Notes payable $- $80
Accounts payable 2,672 3,021
Income taxes payable 379 364
Payroll and benefits payable 200 230
Accrued taxes 358 108
Accrued interest 33 61
Long-term debt due within one year 91 148
------ ------
Total current liabilities 3,733 4,012
Long-term debt, less unamortized discount 1,518 1,937
Deferred income taxes 1,357 1,354
Employee benefits 681 648
Deferred credits and other liabilities 363 412
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland
Petroleum LLC 2,029 1,840
COMMON STOCKHOLDERS' EQUITY 5,976 4,845
------ ------
Total liabilities and common stockholders' equity $15,841 $15,232
====== ======
Selected notes to financial statements appear on pages 48-60.
47
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Nine Months Ended
September 30
(Dollars in millions) 2001 2000
- --------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $1,275 $742
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 650 373
Depreciation, depletion and amortization 911 727
Exploratory dry well costs 12 52
Pensions and other postretirement benefits 21 17
Deferred income taxes (220) 314
(Gain) loss on ownership change in Marathon Ashland
Petroleum LLC 5 (9)
Net (gains) losses on disposal of assets 180 (95)
Changes in:
Current receivables 132 (364)
Inventories (101) (146)
Current accounts payable and accrued expenses (296) 179
All other - net 136 (39)
------ ------
Net cash provided from operating activities 2,713 1,751
------ ------
INVESTING ACTIVITIES:
Capital expenditures (1,020) (878)
Acquisition of Pennaco Energy, Inc. (506) -
Disposal of assets 181 252
Restricted cash - withdrawals 66 216
- deposits (52) (205)
Investees - investments (6) (62)
- loans and advances (5) (5)
- returns and repayments 10 9
All other - net 4 16
------ ------
Net cash used in investing activities (1,328) (657)
------ ------
FINANCING ACTIVITIES:
Decrease in Marathon Group's portion of USX
consolidated debt (556) (586)
Specifically attributed debt - borrowings 112 273
- repayments (112) (271)
Common stock repurchased (1) (37)
Treasury stock reissued 11 -
Dividends paid (214) (203)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (450) (212)
------ ------
Net cash used in financing activities (1,210) (1,036)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3) (4)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 172 54
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 340 111
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $512 $165
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(150) $(233)
Income taxes paid, including settlements with the
U. S. Steel Group (653) (466)
Selected notes to financial statements appear on pages 48-60.
48
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, as
amended.
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.
49
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for income taxes and related tax
payments or refunds have been reflected in the Marathon Group and the
U. S. Steel Group financial statements in accordance with USX's tax
allocation policy for such groups. In general, such policy provides that
the consolidated tax provision and related tax payments or refunds are
allocated between the Marathon Group and the U. S. Steel Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for income taxes for the Marathon Group is based on tax
rates and amounts which recognize management's best estimate of current and
deferred tax assets and liabilities. Differences between the combined
interim tax provisions of the Marathon and U. S. Steel Groups and USX
consolidated are allocated to each group based on the relationship of the
individual group provisions to the combined interim provisions.
3. The 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 and also certain business
transactions denominated in foreign currencies.
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.
50
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.
A portion of the cumulative effect adjustment relating to the adoption
of SFAS No. 133 was recognized in OCI which 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. OCI is also impacted by
the changes in fair value associated with cash flow hedges. A
reconciliation of the changes in OCI relating to derivative instruments is
as follows (amounts in millions):
Third Nine
Quarter Months
Ended Ended
Sept. 30 Sept. 30
Deferred gain (loss), net of tax 2001 2001
-------------------------------------------------------------------------
Beginning balance $42 $-
Cumulative effect adjustment - (8)
Reclassification of the cumulative effect
adjustment into earnings (7) 28
Changes in fair value 20 35
Reclassification to earnings 2 2
---- ----
Balance at September 30, 2001 $57 $57
==== ====
Of the $57 million recorded in OCI as of September 30, 2001, $13
million, net of income taxes, is expected to be reclassified to earnings
over the 12-month period ending September 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, on a before tax
basis, for cash flow hedges recognized during the third quarter and nine
months of 2001 was a favorable $6 million and $10 million, respectively.
In addition, during the third quarter, $2 million was recognized in income
before tax as the result of a discontinuation of a portion of a cash flow
natural gas equity production hedge. These amounts were included in
revenues.
The futures contracts used in cash flow hedge strategies vary in
duration with certain contracts extending to December 2002.
51
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
There was no ineffectiveness associated with fair value hedges for the
third quarter or year-to-date because the hedging instrument and the
existing firm commitment contract are priced on the same underlying index.
Certain derivative instruments used in the fair value hedges extend 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.
4. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 "Business
Combinations" (SFAS No. 141), No. 142 "Goodwill and Other Intangible
Assets" (SFAS No. 142) and No. 143 "Accounting for Asset Retirement
Obligations" (SFAS No. 143).
SFAS No. 141 requires that 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 No. 141 also requires that the excess of fair value of
acquired assets over cost in a business combination (negative goodwill) be
recognized immediately as an extraordinary gain, rather than deferred and
amortized.
SFAS No. 142 addresses the accounting for goodwill and other
intangible assets after an acquisition. The most significant changes made
by SFAS No. 142 are: 1) goodwill and intangible assets with indefinite
lives will no longer be amortized; 2) goodwill and intangible assets with
indefinite lives must be tested for impairment at least annually; and 3)
the amortization period for intangible assets with finite lives will no
longer be limited to forty years. USX will adopt SFAS No. 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.
52
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
SFAS No. 143 establishes a new accounting model for the recognition
and measurement of retirement obligations associated with tangible long-
lived assets. SFAS No. 143 requires that an asset retirement cost 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 No. 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement
establishes a single accounting model for long-lived assets to be disposed
of by sale and provides additional implementation guidance for assets to be
held and used and assets to be disposed of other than by sale. There will
be no financial implication related to the adoption of SFAS No. 144, and
the guidance will be applied on a prospective basis. The Marathon Group
will adopt the Statement effective January 1, 2002.
5. Included in revenues and costs and expenses for the third quarter of
2001 and 2000 were $1,152 million and $1,121 million, respectively,
representing excise taxes on petroleum products and merchandise. Similar
amounts for the nine months of 2001 and 2000 were $3,322 million and $3,268
million, respectively.
6. The Marathon Group's total comprehensive income was $208 million for
the third quarter of 2001, $121 million for the third quarter of 2000,
$1,335 million for the nine months of 2001 and $739 million for the nine
months of 2000.
7. In the third quarter of 2001, the Marathon Group recorded a $221
million pretax loss primarily related to the complete sale of Marathon's
heavy oil assets in Canada, which is included in net gains (losses) on
disposal of assets.
8. 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 nine months of 2001 include
the results of Pennaco from February 7, 2001.
53
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (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.
Nine Months Ended
September 30
(In millions, except per share amounts) 2001 2000
------------------------------------------------------------------------
Revenues and other income $26,255 $25,825
Income before cumulative effect of change in
accounting principle 1,281 716
- Per common share - basic 4.15 2.29
- diluted 4.14 2.29
Net income 1,273 716
- Per common share - basic 4.12 2.29
- diluted 4.11 2.29
9. In the third quarter of 2001, MAP and Pilot Corporation formed a joint
venture combining their travel center operations. The joint venture
company named Pilot Travel Centers LLC, commenced operations on September
1, 2001 and is accounted for under the equity method of accounting.
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. The joint venture, named MKM
Partners L.P., commenced operations in January 2001 and is accounted for
under the equity method of accounting.
10. 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:
54
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------
THIRD QUARTER 2001
- ------------------
Revenues and other income:
Customer $873 $7,212 $413 $8,498
Intersegment (a) 123 2 14 139
Intergroup (a) 4 - 2 6
Equity in earnings of unconsolidated
investees 16 14 - 30
Other (1) 20 3 22
------ ------ ------ ------
Total revenues and other income $1,015 $7,248 $432 $8,695
====== ====== ====== ======
Segment income $259 $575 $6 $840
====== ====== ====== ======
THIRD QUARTER 2000
- ------------------
Revenues and other income:
Customer (b) $1,140 $7,518 $492 $9,150
Intersegment (a) 74 7 20 101
Intergroup (a) 9 - 10 19
Equity in earnings of unconsolidated
investees 28 5 4 37
Other 5 13 3 21
------ ------ ------ ------
Total revenues and other income $1,256 $7,543 $529 $9,328
====== ====== ====== ======
Segment income (b) $464 $299 $13 $776
====== ====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
(b)Certain amounts have been reclassified from E&P to OERB to reflect 2001
classifications.
55
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- ---------------------------------------------------------------------------
NINE MONTHS 2001
- ----------------
Revenues and other income:
Customer $3,251 $21,490 $1,478 $26,219
Intersegment (a) 393 15 58 466
Intergroup (a) 19 - 7 26
Equity in earnings of unconsolidated
investees 52 28 11 91
Other 16 52 10 78
------ ------ ------ ------
Total revenues and other income $3,731 $21,585 $1,564 $26,880
====== ====== ====== ======
Segment income $1,304 $1,693 $38 $3,035
====== ====== ====== ======
NINE MONTHS 2000
- ----------------
Revenues and other income:
Customer (b) $3,046 $21,351 $1,150 $25,547
Intersegment (a) 262 62 52 376
Intergroup (a) 20 - 21 41
Equity in earnings of unconsolidated
investees 24 15 12 51
Other 15 34 9 58
------ ------ ------ ------
Total revenues and other income $3,367 $21,462 $1,244 $26,073
====== ====== ====== ======
Segment income (b) $1,128 $968 $27 $2,123
====== ====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
(b)Certain amounts have been reclassified from E&P to OERB to reflect 2001
classifications.
56
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
The following schedules reconcile segment amounts to amounts reported in
the Marathon Group financial statements:
Third Quarter Ended
September 30
(In millions) 2001 2000
- -----------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of reportable segments $8,695 $9,328
Items not allocated to segments:
Loss related to sale of certain Canadian assets (221) -
Gain on ownership change in MAP 1 1
Elimination of intersegment revenues (139) (101)
------ ------
Total Group revenues and other income $8,336 $9,228
====== ======
Income:
Income for reportable segments $840 $776
Items not allocated to segments:
Gain on ownership change in MAP 1 1
Administrative expenses (39) (48)
Loss related to sale of certain Canadian assets (221) -
Costs related to Proposed Separation (1) -
------ -------
Total Group income from operations $580 $729
====== ======
PAGE> 57
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
Nine Months Ended
September 30
(In millions) 2001 2000
- -----------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of reportable segments $26,880 $26,073
Items not allocated to segments:
Loss related to sale of certain
Canadian assets (221) -
Gain (loss) on ownership change in MAP (5) 9
Other (a) 59 87
Elimination of intersegment revenues (466) (376)
------ ------
Total Group revenues and other income $26,247 $25,793
====== ======
Income:
Income for reportable segments $3,035 $2,123
Items not allocated to segments:
Gain (loss) on ownership change in MAP (5) 9
Administrative expenses (104) (105)
Loss related to sale of certain
Canadian assets (221) -
Costs related to Proposed Separation (17) -
Other (a) 59 87
------ ------
Total Group income from operations $2,747 $2,114
====== ======
(a)Represents in 2001, gain on offshore lease resolution with the U.S.
Government and in 2000, gain on disposition of Angus/Stellaria.
11. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
(In millions)
------------------------
September 30December 31
2001 2000
-----------------------
Crude oil and natural gas liquids $708 $701
Refined products and merchandise 1,159 1,069
Supplies and sundry items 90 97
------ ------
Total $1,957 $1,867
====== ======
58
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. At September 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 September
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.
13. The provision for income taxes for the third quarter and nine months
of 2001 included deferred tax charges related to certain prior years' taxes
of $7 million and $12 million, respectively.
The income tax provision for the third quarter and nine months of 2000
included a one-time, noncash deferred tax charge of $235 million as a
result of the change in amount, timing and nature of expected future
foreign source income due to the exchange of Marathon's interest in
Sakhalin Energy Investment Company, Ltd. for other oil and gas producing
interests.
Interest and other financial costs in the nine months of 2001 included
a favorable adjustment of $9 million related to certain prior years' taxes.
14. 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 10 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
15. 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.
59
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. (Continued)
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 September 30, 2001,
and December 31, 2000, accrued liabilities for remediation totaled $80
million and $75 million, respectively. It is not presently possible to
estimate the ultimate amount of all remediation costs that might be
incurred or the penalties that may be imposed. Receivables for recoverable
costs from certain states, under programs to assist companies in cleanup
efforts related to underground storage tanks at retail marketing outlets,
were $59 million at September 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 nine months of 2001 and for the years
2000 and 1999, such capital expenditures totaled $27 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. This consent
decree was approved by the court on August 28, 2001. 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.
At September 30, 2001, and December 31, 2000, accrued liabilities for
platform abandonment and dismantlement totaled $184 million and $162
million, respectively.
At September 30, 2001, a guarantee by USX of the liabilities of an
affiliated entity totaled $26 million.
At September 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 $112 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 at September 30, 2001, totaled $368 million compared with
$457 million at December 31, 2000.
60
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
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 would become holders
of United States Steel Corporation Common Stock. Holders of current USX-
Marathon Group Common Stock would remain holders of such stock which would
be renamed Marathon Oil Corporation Common Stock. The Proposed Separation
does not contemplate a cash distribution to stockholders. Each company
would 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 would be a
reattribution of USX corporate debt between the USX-Marathon Group and the
USX-U. S. Steel Group. The Proposed Separation was approved by
shareholders at an October 25, 2001 meeting and is subject to 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 Proposed Separation 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 third quarter and nine months of 2001 were $1 million and $17
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, directly and indirectly, owns and operates the businesses of
the USX-U. S. Steel Group. The reorganization did 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 was independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
61
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 77.
On October 25, 2001, the stockholders of USX Corporation approved the
separation of the Marathon Group and the U.S. Steel Group into two independent
companies ("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, as amended, and in subsequent Forms 10-Q and Forms 8-K.
62
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 third quarter and first nine months of
2001 and 2000 are summarized in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
----- ----- ----- -----
Exploration & production ("E&P") (a) $1,015 $1,256 $3,731 $3,367
Refining, marketing & transportation
("RM&T") 7,248 7,543 21,585 21,462
Other energy related businesses
("OERB") (a) (b) 432 529 1,564 1,244
------ ------ ------ ------
Revenues and other income of
reportable segments $8,695 $9,328$26,880$26,073
Revenues and other income not allocated to segments:
Gain/(loss) on ownership change in MAP 1 1 (5) 9
Other (c) - - 59 87
Loss related to sale of certain
Canadian assets (221) - (221) -
Elimination of intersegment revenues (139) (101) (466) (376)
------ ------ ------ ------
Total Group revenues and other income $8,336 $9,228$26,247$25,793
====== ====== ====== ======
Items included in both revenues and costs and expenses, resulting in no effect
on income:
Consumer excise taxes on petroleum
products and merchandise $1,152 $1,121 $3,322 $3,268
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P $126 $124 $359 $513
RM&T 1,024 962 2,921 2,868
----- ----- ----- -----
Total buy/sell transactions $1,150 $1,086 $3,280 $3,381
- ---------
(a)Certain amounts have been reclassified from E&P to OERB to reflect 2001
classifications.
(b)Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(c)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.
E&P segment revenues decreased by $241 million in the third quarter of 2001
from the comparable prior-year period. This decrease primarily reflected lower
worldwide liquid hydrocarbon and natural gas prices. For the first nine months
of 2001, revenues increased by $364 million from the prior-year period. This
increase primarily reflected higher worldwide natural gas prices, gains from
derivative activities, and higher international liquid hydrocarbon volumes,
partially offset by lower worldwide liquid hydrocarbon prices.
63
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RM&T segment revenues decreased by $295 million in the third quarter of
2001 from the comparable prior-year period. This decrease primarily reflected
lower refined product prices, partially offset by higher liquid hydrocarbon
sales volumes. For the first nine months of 2001, revenues increased by
$123 million from the prior-year period. This increase primarily reflected
higher liquid hydrocarbon sales volumes, partially offset by lower refined
product sales volumes and a decrease in refined product prices.
OERB segment revenues decreased by $97 million in the third quarter of 2001
from the comparable prior-year period. This decrease primarily reflected lower
natural gas and crude oil prices and decreased natural gas purchase and resale
activity. For the first nine months of 2001, revenues increased by $320 million
from the prior-year period. This increase primarily reflected higher natural
gas prices and increased crude oil purchase and resale activity, partially
offset by a decrease in natural gas purchase and resale activity and lower crude
oil prices.
Income from operations for the third quarter and first nine months of 2001
and 2000 is summarized in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
----- ----- ----- -----
E&P
Domestic (a) $210 $304 $1,012 $781
International 49 160 292 347
------ ------ ------ ------
Income for E&P reportable segment 259 464 1,304 1,128
RM&T 575 299 1,693 968
OERB (a) 6 13 38 27
------ ------ ------ ------
Income for reportable segments $840 $776 $3,035 $2,123
Items not allocated to segments:
Administrative expenses (b) $(39) $(48) $(104) $(105)
Gain on disposition of Angus/Stellaria (c) - - - 87
Gain on lease resolution with
U.S. Government - - 59 -
Gain/(loss) on ownership change in MAP 1 1 (5) 9
Loss related to sale of certain
Canadian assets (221) - (221) -
Costs related to proposed separation (d) (1) - (17) -
------ ------ ------ -----
Total Group income from operations $580 $729 $2,747$2,114
- --------
(a) Certain amounts have been reclassified from E&P to OERB to reflect
2001 classifications.
(b) 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.
(c) Resulted from the disposition of Marathon's 33.34 percent interest
in the Angus/Stellaria development located in the Gulf of Mexico.
(d) Includes professional fees and expenses, and certain other costs
related to the proposed separation.
64
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income for reportable segments in the third quarter of 2001 increased by
$64 million from last year's third quarter, due primarily to a higher refining
and wholesale marketing gross margin, partially offset by lower worldwide crude
oil and natural gas prices. Income for reportable segments in the first nine
months of 2001 increased by $912 million from the first nine months of 2000, due
primarily to a higher refining and wholesale marketing margin and higher
worldwide natural gas prices.
Worldwide E&P segment income in the third quarter of 2001 decreased by
$205 million from last year's third quarter. Results in the first nine months
of 2001 increased by $176 million from the same period in 2000.
Domestic E&P income in the third quarter of 2001 decreased by $94 million
from last year's third quarter. This decrease was mainly due to lower natural
gas and crude oil prices, partially offset by higher gas volumes resulting from
the acquisition of Pennaco Energy, Inc. ("Pennaco"), lower production taxes, and
reduced exploration expense primarily due to the timing of well expenditures and
lower geophysical contract expenditures. Results in the first nine months of
2001 increased by $231 million from the same period in 2000. This increase was
mainly due to higher natural gas prices and volumes, gains from derivative
activities primarily related to Pennaco production, and reduced exploration
expense, partially offset by decreased liquid hydrocarbon prices and increased
depreciation.
International E&P income in the third quarter of 2001 decreased by
$111 million from last year's third quarter. This decrease was mainly due to
lower crude oil and natural gas prices, lower natural gas volumes, lower
earnings from equity affiliates resulting from the trade of Marathon's interest
in Sakhalin Energy to Shell in late 2000, and increased depreciation, partially
offset by higher liquid hydrocarbon volumes from consolidated entities. Results
in the first nine months of 2001 decreased by $55 million from the same period
in 2000. The decrease was mainly due to lower liquid hydrocarbon prices and
natural gas volumes, increased depreciation and gas transportation charges,
partially offset by higher natural gas prices and liquid hydrocarbon volumes.
RM&T segment income in the third quarter of 2001 increased by $276 million
from last year's third quarter. Results in the first nine months of 2001
increased by $725 million from the same period in 2000. These increases were
mainly due to a higher refining and wholesale marketing gross margin, partially
offset by higher refining and wholesale marketing transportation expense and
lower Speedway SuperAmerica LLC ("SSA") gasoline and distillate sales volumes.
OERB segment income in the third quarter of 2001, decreased by $7 million
from last year's third quarter. This decrease was mainly due to the recognition
of an equity affiliate loss, lower margins on natural gas purchase and resale
activity, and unrealized net losses on derivative instruments, partially offset
by higher crude oil purchase and resale activity accompanied by higher margins.
Results in the first nine months of 2001 increased by $11 million from the same
period in 2000. This increase was primarily due to higher crude oil purchase
and resale activity accompanied by higher margins, higher power generation
income, and higher liquefied natural gas margins.
65
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 nine months of 2001
decreased by $83 million from the comparable 2000 period. The first nine months
of 2001 included a favorable adjustment of $9 million related to prior years'
taxes. Excluding this adjustment, the decrease of $74 million was primarily due
to lower average debt levels attributed to the Marathon Group and increased
capitalized interest on RM&T projects.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased by $277 million in the first nine months
of 2001 from the comparable 2000 period, due to higher MAP income.
The provision for estimated income taxes in the first nine months of 2001
decreased by $102 million from the comparable 2000 period. The first nine
months of 2001 included deferred tax charges of $12 million related to certain
prior years' taxes. The first nine months of 2000 included a one-time, noncash
deferred tax charge of $235 million as a result of the change in amount, timing
and nature of expected future foreign source income due to the exchange of
Marathon's interest in Sakhalin Energy for other oil and gas producing
interests. Excluding these items, the increase of $144 million was primarily
due to an increase in income before taxes.
The cumulative effect of change in accounting principle of $8 million, net
of a tax benefit of $5 million, in the first nine months of 2001 was an
unfavorable transition adjustment related to adopting SFAS No. 133. For further
discussion, see Notes 3 and 4 to the Marathon Group Financial Statements.
Net income for the third quarter and first nine months increased by
$72 million and $533 million, respectively, in 2001 from 2000, primarily
reflecting the factors discussed above.
Balance Sheet
- -------------
Current assets decreased $188 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 primarily resulted from the contribution of the Yates field assets
to the MKM Partners L.P. joint venture, partially offset by certain Canadian
assets and SSA stores held for sale at September 30, 2001. 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 cash and cash equivalents primarily
reflects increased cash provided from operating activities. The increase in
inventories primarily resulted from an increase in refined products and crude
oil inventories.
Current liabilities decreased $279 million from year-end 2000, primarily
due to a decrease in accounts payable due to lower commodity prices, partially
offset by an increase in accrued taxes because of higher income.
66
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Investments and long-term receivables increased $705 million from year-end
2000 primarily due to the contribution of assets to the MKM Partners L.P. and
Pilot Travel Centers LLC ("PTC") joint ventures.
Total long-term debt and notes payable at September 30, 2001 was $1,609, a
decrease of $556 million from year-end 2000. This decrease in debt attributed
to the Marathon Group was mainly due to cash flow provided from operating
activities in excess of cash used for capital expenditures, the acquisition of
Pennaco, dividend payments and distributions to the minority shareholder in MAP.
Most of the debt is a direct obligation of, or is guaranteed by, USX.
Minority interest in Marathon Ashland Petroleum LLC increased by
$189 million from year-end 2000 due to Ashland's share of recorded MAP income
exceeding cash distributions to Ashland.
Stockholders' equity increased $1,131 million from year-end 2000, mainly
reflecting increased net income, partially offset by dividends declared.
Cash Flows
- ----------
Net cash provided from operating activities was $2,713 million in the first
nine months of 2001, compared with $1,751 million in the first nine months of
2000. The $962 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 nine months of 2001 compared to $97 million in the first nine
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 nine months of 2001 totaled
$1,020 million, compared with $878 million in the comparable 2000 period. For
additional information regarding capital expenditures, refer to the Supplemental
Statistics on page 77.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at September 30, 2001 totaled $368 million compared with
$457 million at December 31, 2000. In addition, MAP has entered into a New
Source Review global consent decree with the U.S. Environmental Protection
Agency ("EPA") which commits it 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 8 to the Marathon
Group Financial Statements.
Cash from disposal of assets was $181 million in the first nine months of
2001, compared with $252 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 and other domestic production properties.
67
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The net change in restricted cash was a net withdrawal of $14 million in
the first nine months of 2001, compared to a net withdrawal of $11 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.
Net investments in affiliates was $1 million in the first nine months of
2001, compared with $58 million in the comparable 2000 period. Cash outflows in
2000 mainly reflected funding provided to equity affiliates for capital
projects, primarily the Sakhalin II project in Russia.
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 $556 million in
the first nine 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 $450 million in the first
nine months of 2001, compared with $212 million in the comparable 2000 period.
Derivative Instruments
- ----------------------
See Quantitative and Qualitative Disclosure About Market Risk for
discussion of derivative instruments and associated market risk for the Marathon
Group.
Liquidity
- ---------
On November 2, 2001, Marathon announced the signing of a Purchase and Sale
Agreement with CMS Energy to acquire all of its upstream and downstream
interests in Equatorial Guinea, West Africa for a total cash consideration of
approximately $993 million. The transaction is expected to be completed in
January 2002 and is expected to be initally funded using a combination of
available cash, revolving credit facilities, and other short-term liquidity
facilities.
On November 7, 2001, United States Steel LLC commenced offers to exchange
its 10% Senior Quarterly Income Debt Securities due 2031 ("SQUIDS"), up to an
aggregate of $365 million, for three securities, including the 8.75% Cumulative
Monthly Income Preferred Shares, Series A which are partially attributed to the
Marathon Group.
For additional discussion of USX's liquidity and capital resources and
details of the exchange offer, 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
68
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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
13 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 30, 2001. In addition, there are 3 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 115 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, 13 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 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 2002 and 2006. This is a forward-looking
statement and can only be a broad-based estimate due to the ongoing evolution of
regulatory requirements. Some factors (among others) that could potentially
affect gasoline and diesel fuel compliance costs include obtaining the necessary
construction and environmental permits, operating and logistical considerations,
and unforeseen hazards such as weather conditions.
In May 2001, Marathon and MAP settled in a consent decree EPA allegations
that the Robinson refinery did not qualify for an exemption under the National
Emission Standards for Benzene Waste Operations pursuant to the Clean Air Act
("CAA"). The government had alleged in a federal court lawsuit that the
refinery's Total Annual Benzene releases exceeded the limitation of 10 megagrams
per year, and as a result, the refinery was in violation of the benzene waste
emission control, record keeping, and reporting requirements. The consent
decree was approved by the court on July 26, 2001 and requires Marathon and MAP
to pay a combined $1.6 million civil penalty, perform $125,000 in supplemental
environmental projects, as part of an enforcement action for alleged CAA
violations, and install various controls and other improvements.
69
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and
Robinson refineries, covering compliance with the CAA, 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 number of
Notices of Violation ("NOV") and Findings of Violation as a result of these
inspections, but these allegations were resolved as part of the New Source
Review global consent decree which MAP agreed to on May 11, 2001. MAP's
settlement with the EPA includes all of MAP's refineries and commits MAP to
specific control technologies and implementation schedules for 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 CAA violations. MAP believes that this
settlement will provide MAP with increased permitting and operating flexibility
while achieving significant emission reductions. The court approved this
consent decree on August 28, 2001.
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 past response costs
up to $131,000. A final administrative order resolving this matter is expected
in fourth 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 15 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.
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.
70
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Marathon's Gulf of Mexico exploration drilling program was delayed due to
the cancellation of the contract for the Cajun Express rig. The two wells
expected to be drilled with the Cajun Express rig have been delayed until
December 2001 and January 2002. However, Marathon has been able to participate
in or accelerate the drilling of other prospects. On October 31, 2001, Marathon
announced an oil discovery on its Ozona Deep prospect. Located in 3,280 feet of
water in Garden Banks Block 515, the well was drilled to a total measured depth
of 26,352 feet. Approximately 345 feet of net pay was encountered in two
primary intervals. Marathon is the operator and holds a 68 percent working
interest in this discovery. The Timber Wolf (Mississippi Canyon 555) prospect
is currently drilling and is expected to reach total depth in fourth quarter
2001. The Paris Carver (Green Canyon 601) prospect is expected to spud late in
fourth quarter 2001 with drilling continuing into 2002. Marathon's
international drilling program is proceeding on schedule with a shallow-water
Nova Scotia well currently drilling, and with Angola and Nova Scotia deepwater
wells expected to spud in fourth quarter 2001.
Marathon's fourth quarter production is expected to be approximately 415 to
420 thousand barrels of oil equivalent per day. Full year 2001 production is
expected to be approximately 420 thousand barrels of oil equivalent per day.
For 2002, Marathon's production is expected to average between 430 and 435
thousand barrels of oil equivalent per day.
On August 23, 2001, Marathon announced plans to develop a strategic
alliance with Yukos Oil Company, the second largest Russian oil company. As
part of the alliance, a joint business development group will be formed to
evaluate international investment opportunities.
On August 29, 2001, Marathon announced agreements with Statoil, Norsk Hydro
and TotalFinaElf to acquire varied interests in five licenses in the Norwegian
Sector of the North Sea. The portfolio additions include several undeveloped
discoveries close to Marathon's existing infrastructure positions in the Heimdal
and Brae areas of the North Sea. The transactions are subject to necessary
approvals from the Norwegian authorities.
On November 2, 2001, Marathon announced it signed a Purchase and Sale
Agreement with CMS Energy to acquire all of its upstream and downstream
interests in Equatorial Guinea, West Africa. For a total cash consideration of
$993 million, Marathon will acquire:
- a 52.4 percent interest in, and operatorship of, the offshore Alba Block,
which contains the currently producing Alba gas field as well as
undeveloped oil and gas discoveries, and several undrilled exploration
prospects;
- a 37.6 percent interest in adjacent offshore Block D;
- a 52.4 percent interest in an onshore condensate separation facility;
- a 45 percent interest in a joint venture onshore methanol production
plant;
- a 43.2 percent interest in an onshore liquefied petroleum gas processing
plant.
This transaction is subject to appropriate government approvals and is
expected to close in early January 2002.
71
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 exploration drilling program, timing and levels of Marathon's worldwide
liquid hydrocarbon and natural gas production, the planned alliance with Yukos
Oil Company, the plan to acquire interests in licenses in the Norwegian sector
of the North Sea, and the plans to acquire CMS Energy interests in Equatorial
Guinea, West Africa. Some factors that could potentially affect the exploration
drilling program and worldwide liquid hydrocarbon and natural gas production
include acts of war or terrorist acts and the governmental or military response
thereto, pricing, supply and demand for petroleum products, amount of capital
available for exploration and development, occurrence of
acquisitions/dispositions of oil and gas properties, regulatory constraints,
timing of commencing production from new wells, drilling rig availability and
other geological, operating and economic considerations. Some factors that
affect the planned alliance with Yukos Oil Company include the execution and
closing of definitive agreements, and the receipt of government approvals. The
realization of anticipated benefits is dependent upon the effectiveness of the
mutual alliance and future economic conditions. Some factors that could affect
the plan to acquire interests in licenses in the Norwegian sector of the North
Sea include the execution and closing of definitive agreements, and the receipt
of necessary approvals from the Norwegian authorities. Some factors that could
affect the plans to acquire CMS Energy interests include the execution and
closing of definitive agreements, and the receipt of necessary approvals from
the Equatorial Guinea government.
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.
On September 1, 2001, PTC, a joint venture owned 50 percent each by MAP and
Pilot Corporation, began operations. MAP, through its wholly owned retail unit
SSA, contributed 94 travel centers and other assets in the formation of PTC.
PTC is now the largest travel center network in the United States with more than
235 locations. The new venture, based in Knoxville, Tennessee, has
approximately 11,000 employees.
72
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In early October 2001, the Garyville, Louisiana refinery coker achieved
mechanical completion and is currently operating at more than 80 percent of
capacity. The coker is anticipated to be at full production during fourth
quarter 2001. This new unit will allow the Garyville refinery to use heavier,
lower cost crude and eliminate the production of heavy fuel oil. The total cost
of this major improvement program is approximately $280 million.
During third quarter 2001, SSA entered into an agreement to sell all 32 of
its retail locations in Tennessee. A majority of these locations are expected
to be branded as Marathon retail outlets by the purchaser. This sales
transaction is expected to close in the fourth quarter of 2001.
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 the first quarter of 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 Products Pipe Line and is expected to
initially move about 50,000 barrels per day of refined petroleum into the
central Ohio region. ORPL has secured over 99 percent of the rights-of-way
required to build the pipeline and expects to conclude remaining rights-of-way
negotiations in the fourth quarter of 2001. Applications for the remaining
construction permits have been filed. Construction is currently planned for
summer 2002 pending receipt of permits, with start-up of the pipeline to follow
in late fourth quarter 2002.
On October 25, 2001, the stockholders of USX Corporation approved the
separation of the Marathon Group and the U.S. Steel Group into two independent
companies. The Proposed Separation is expected to occur on or about
December 31, 2001 and is subject to certain conditions including
receipt of a favorable ruling from the Internal Revenue Service as to the tax-
free status of the Proposed Separation. For further discussion, see
Management's Discussion and Analysis for USX Corporation on page 29.
73
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 full operation of the Garyville coker, SSA store disposition, Centennial and
Cardinal Products Pipe Line systems and the Proposed Separation. Some factors
which could impact the Garyville coker project include unanticipated operational
issues. Some factors which could impact the disposition of stores in Tennessee
include government approvals, regulatory constraints, consent of third parties
and satisfaction of customary closing conditions. 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 Products Pipe Line
include obtaining the necessary permits and remaining rights-of-way, and
completion of construction. Some factors that could affect the Proposed
Separation include 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.
74
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 September 30, 2001, are provided in the
following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- -----------------------------------------------------------------------------
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil (f)(g) $8.8 $20.7 (d)
Natural gas (f)(g) 8.2 21.2 (d)
Refined products (f)(g) 0.7 4.6 (d)
(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 September 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 September 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 third quarter
2001, from a low of 19,040 contracts at July 18, to a high of 39,868
contracts at September 26, and averaged 24,900 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout third 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.
75
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 September 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:
(Dollars in millions)
- ------------------------------------------------------------------------------
As of September 30, 2001
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
- ------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $181 $-
- ------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $1,754 $76
Preferred stock of
subsidiary 180 15
------ ------
Total liabilities $1,934 $91
- ------------------------------------------------------------------------------
(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 September 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 September 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.
76
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 September 30, 2001, USX had
open Canadian dollar forward purchase contracts with a total carrying value of
approximately $3 million. A 10% increase in the Canadian dollar to U.S. dollar
forward rate would result in an immaterial charge to income. The entire amount
of these contracts is attributed to the Marathon Group.
Equity Price Risk
- -----------------
As of September 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.
77
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
----------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic (a) $210 $304 $1,012 $781
International 49 160 292 347
----- ----- ----- -----
Income For E&P Reportable Segment 259 464 1,304 1,128
Refining, Marketing & Transportation 575 299 1,693 968
Other Energy Related Businesses (a) (b) 6 13 38 27
----- ----- ----- -----
Income For Reportable Segments $840 $776 $3,035 $2,123
Items Not Allocated To Segments:
Administrative Expenses $(39) $(48) $(104) $(105)
Gain on disposition of Angus/Stellaria - - - 87
Gain on lease resolution with
U.S. Government - - 59 -
Gain/(loss) on ownership change - MAP 1 1 (5) 9
Loss related to sale of certain
Canadian assets (221) - (221) -
Costs related to proposed separation (c) (1) - (17) -
------ ------ ------ ------
Marathon Group Income From Operations $580 $729 $2,747 $2,114
CAPITAL EXPENDITURES
Exploration & Production $219 $153 $593 $553
Refining, Marketing & Transportation 153 149 365 315
Other(d) 20 - 62 10
----- ----- ----- -----
Total $392 $302 $1,020 $878
EXPLORATION EXPENSE
Domestic $9 $33 $34 $84
International 11 18 35 58
----- ----- ----- -----
Total $20 $51 $69 $142
OPERATING STATISTICS
Net Liquid Hydrocarbon Production(e):
United States 124.1 129.4 124.9 131.7
Europe 52.3 26.3 47.0 28.2
Other International 23.8 42.8 30.0 37.3
------ ------ ------ ------
Total Consolidated 200.2 198.5 201.9 197.2
Domestic Equity Investee
(MKM Partners L.P.) 9.0 - 9.5 -
International Equity Investees (CLAM &
Sakhalin Energy)(f) 0.1 24.4 0.1 9.1
------ ------ ------ ------
Worldwide 209.3 222.9 211.5 206.3
Net Natural Gas Production(g):
United States 751.8 715.5 771.4 726.1
Europe(h) 301.4 306.2 322.0 333.1
Other International 119.1 144.8 125.4 144.8
------ ------ ------ -----
Total Consolidated 1,172.31,166.5 1,218.81,204.0
International Equity Investee (CLAM) 26.4 21.4 31.6 28.0
------- ---------------------
Worldwide 1,198.71,187.9 1,250.41,232.0
Average Equity Sales Prices(i)(j):
Liquid Hydrocarbons (per Bbl)
Domestic $21.33 $26.58 $21.80 $24.85
International 24.19 28.84 24.95 26.87
Natural Gas (per Mcf)
Domestic $2.49 $3.61 $3.98 $2.90
International 2.30 2.59 3.07 2.47
78
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
----------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
2001 2000 2001 2000
--------------------------------
OPERATING STATISTICS (continued)
MAP:
Crude Oil Refined(e) 961.1 928.4 930.0 915.0
Consolidated Refined Products Sold(e)(n) 1343.8 1350.0 1300.3 1304.6
Matching buy/sell volumes included in refined
products sold(e) 43.0 43.5 43.8 55.3
Refining and Wholesale Marketing
Margin(k)(l) $0.1314 $0.0670$0.1347$0.0753
Number of SSA retail outlets(o) 2,145 2,288 - -
SSA Gasoline and Distillate Sales(m)(o) 916 965 2,657 2,802
SSA Gasoline and Distillate
Gross Margin(k)(o) $0.1331 $0.1289$0.1230$0.1287
SSA Merchandise Sales(o) $607 $588 $1,669 $1,643
SSA Merchandise Gross Margin(o) $137 $136 $387 $387
- --------------
(a) Certain amounts have been reclassified from E&P to OERB to reflect
2001 classifications.
(b) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(c) Includes professional fees and expenses, and certain other costs
related to the proposed separation.
(d) Includes other energy related businesses and corporate capital
expenditures.
(e) Thousands of barrels per day
(f) In 2001, equity investee is CLAM and in 2000, equity investees are
CLAM and Sakhalin Energy.
(g) Millions of cubic feet per day
(h) Includes gas acquired for injection and subsequent resale of 6.8,
9.3, 8.3 and 11.7 mmcfd in the third quarter and nine month year-to-date
2001 and 2000, respectively.
(i) Prices exclude gains and losses from hedging activities.
(j) Prices exclude equity affiliates and purchase/resale gas.
(k) Per gallon
(l) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(m) Millions of gallons
(n) Total average daily volume of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(o) Excludes travel centers contributed to Pilot Travel Center LLC.
Periods prior to September 1, 2001, have been restated.
79
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per
share amounts) 2001 2000 2001 2000
- ----------------------------------------------------------------------------
REVENUES AND OTHER INCOME:
Revenues $1,645 $1,462 $4,888 $4,673
Income from investees 11 6 51 13
Net gains on disposal of assets 4 6 20 34
Other income (loss) - 1 2 (1)
------ ------ ------ ------
Total revenues and other income 1,660 1,475 4,961 4,719
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of revenues (excludes items
shown below) 1,519 1,344 4,658 4,234
Selling, general and administrative
expenses (credits) 7 (56) 19 (176)
Depreciation, depletion and amortization 94 69 246 222
Taxes other than income taxes 65 58 191 176
------ ------ ------ ------
Total costs and expenses 1,685 1,415 5,114 4,456
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS (25) 60 (153) 263
Net interest and other financial costs 38 27 74 75
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (63) 33 (227) 188
Provision (credit) for income taxes (40) 14 (183) 70
------ ------ ------ ------
NET INCOME (LOSS) (23) 19 (44) 118
Dividends on preferred stock 2 2 6 6
------ ------ ------ ------
NET INCOME (LOSS) APPLICABLE TO
STEEL STOCK $(25) $17 $(50) $112
====== ====== ====== ======
STEEL STOCK DATA:
Net income (loss) $(25) $17 $(50) $112
- Per share - basic (.28) .19 (.56) 1.27
- diluted (.28) .19 (.57) 1.27
Dividends paid per share .10 .25 .45 .75
Weighted average shares, in thousands
- Basic 89,193 88,738 89,003 88,554
- Diluted 89,193 88,738 89,003 88,556
Selected notes to financial statements appear on pages 82-92.
80
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
September 30December 31
(Dollars in millions) 2001 2000
- -----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $475 $219
Receivables, less allowance for doubtful
accounts of $131 and $57 656 627
Receivables subject to a security interest 350 350
Income taxes receivable 379 364
Inventories 950 946
Deferred income tax benefits 185 201
Other current assets 6 10
------ ------
Total current assets 3,001 2,717
Investments and long-term receivables,
less reserves of $39 and $38 392 536
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,775 and $6,531 3,089 2,739
Prepaid pensions 2,740 2,672
Other noncurrent assets 115 47
------ ------
Total assets $9,337 $8,711
====== ======
LIABILITIES
Current liabilities:
Notes payable $- $70
Accounts payable 801 760
Payroll and benefits payable 228 202
Accrued taxes 259 173
Accrued interest 41 47
Long-term debt due within one year 136 139
------ ------
Total current liabilities 1,465 1,391
Long-term debt, less unamortized discount 2,622 2,236
Deferred income taxes 753 666
Employee benefits 1,936 1,767
Deferred credits and other liabilities 483 483
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 1,827 1,917
------ ------
Total stockholders' equity 1,829 1,919
------ ------
Total liabilities and stockholders' equity $9,337 $8,711
====== ======
Selected notes to financial statements appear on pages 82-92.
81
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Nine Months Ended
September 30
(Dollars in millions) 2001 2000
- ---------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income (loss) $(44) $118
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 246 222
Pensions and other postretirement benefits (59) (234)
Deferred income taxes 84 208
Net gains on disposal of assets (20) (34)
Changes in:
Current receivables - (33)
Inventories 23 (113)
Current accounts payable and accrued expenses 41 (138)
All other - net (92) 9
------ ------
Net cash provided from operating activities 179 5
------ ------
INVESTING ACTIVITIES:
Capital expenditures (197) (133)
Disposal of assets 17 17
Restricted cash - withdrawals 5 3
- deposits (2) (2)
Investees - investments (3) (18)
- loans and advances - (8)
All other - net 10 4
------ ------
Net cash used in investing activities (170) (137)
------ ------
FINANCING ACTIVITIES:
Increase in U. S. Steel Group's portion of USX
consolidated debt 300 206
Specifically attributed debt repayments (6) (6)
Preferred stock repurchased - (12)
Dividends paid (46) (72)
------ ------
Net cash provided from financing activities 248 116
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 256 (16)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 219 22
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $475 $6
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(155) $(68)
Income taxes refunded, including settlements
with the Marathon Group 387 85
Selected notes to financial statements appear on pages 82-92.
82
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, as
amended.
2. The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all businesses
of USX other than the businesses, assets and liabilities included in the
Marathon Group and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with ongoing
operating units of USX. These financial statements are prepared using the
amounts included in the USX consolidated financial statements. Corporate
amounts reflected in these financial statements are determined based upon
methods which management believes to be reasonable. The accounting
policies applicable to the preparation of the financial statements of the
U. S. Steel Group may be modified or rescinded in the sole discretion of
the Board of Directors of USX (Board), although the Board has no present
intention to do so. The Board may also adopt additional policies depending
on the circumstances.
Although the financial statements of the U. S. Steel Group and the
Marathon Group separately report the assets, liabilities (including
contingent liabilities) and stockholders' equity of USX attributed to each
such Group, such attribution of assets, liabilities (including contingent
liabilities) and stockholders' equity between the U. S. Steel Group and the
Marathon Group for purposes of preparing their respective financial
statements does not affect legal title to such assets and responsibility
for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel
Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of
common stock of USX and continue to be subject to all the risks associated
with an investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the overall cost of
USX's capital could affect the results of operations and financial
condition of the other Group. In addition, net losses of either Group, as
well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
both classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
83
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for income taxes and related tax
payments or refunds have been reflected in the U. S. Steel Group and the
Marathon Group financial statements in accordance with USX's tax allocation
policy for such groups. In general, such policy provides that the
consolidated tax provision and related tax payments or refunds are
allocated between the U. S. Steel Group and the Marathon Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for income taxes for the U. S. Steel Group is based on
tax rates and amounts which recognize management's best estimate of current
and deferred tax assets and liabilities. Differences between the combined
interim tax provisions of the U. S. Steel and Marathon Groups and USX
consolidated are allocated to each group based on the relationship of the
individual group provisions to the combined interim provisions.
3. 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.
4. In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 "Business
Combinations" (SFAS No. 141), No. 142 "Goodwill and Other Intangible
Assets" (SFAS No. 142) and No. 143 "Accounting for Asset Retirement
Obligations" (SFAS No. 143).
SFAS No. 141 requires that 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 No. 141 also requires that the excess of fair value of
acquired assets over cost in a business combination (negative goodwill) be
recognized immediately as an extraordinary gain, rather than deferred and
amortized.
84
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
SFAS No. 142 addresses the accounting for goodwill and other
intangible assets after an acquisition. The most significant changes made
by SFAS No. 142 are: 1) goodwill and intangible assets with indefinite
lives will no longer be amortized; 2) goodwill and intangible assets with
indefinite lives must be tested for impairment at least annually; and 3)
the amortization period for the intangible assets with indefinite lives
will no longer be limited to forty years. USX will adopt SFAS No. 142
effective January 1, 2002, as required. The adoption of SFAS No. 142 is not
expected to have a material impact on the results of operations or
financial position for the U. S. Steel Group.
SFAS No. 143 establishes a new accounting model for the recognition
and measurement of retirement obligations associated with tangible long-
lived assets. SFAS No. 143 requires that an asset retirement cost 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 No. 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement
establishes a single accounting model for long-lived assets to be disposed
of by sale and provides additional implementation guidance for assets to be
held and used and assets to be disposed of other than by sale. There will
be no financial implication related to the adoption of SFAS No. 144, and
the guidance will be applied on a prospective basis. The U. S. Steel Group
will adopt the Statement effective January 1, 2002.
5. 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.
85
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (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 nine 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 nine months of 2001 a pretax gain of $68
million (included in income 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 nine month 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
used in the preparation of the unaudited pro forma data relating to USSK
for the nine 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.
Nine Months Ended
September 30
(In millions, except per share amounts) 2001 2000
------------------------------------------------------------------------
Revenues and other income $4,939 $5,643
Net income (loss) (147) 176
Per share - basic and diluted (1.72) 1.92
86
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. The U. S. Steel Group consists of two reportable operating segments:
1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel
includes the United States operations of U. S. Steel while USSK includes
the U. S. Steel Kosice operations primarily located in the Slovak Republic.
Domestic Steel is engaged in the domestic production, sale and
transportation of steel mill products, coke, taconite pellets and coal; the
management of mineral resources; real estate development; and engineering
and consulting services. USSK is engaged in the production and sale of
steel mill products and coke and primarily serves central European markets.
The results of segment operations are as follows:
Domestic Total
(In millions) Steel USSK Segments
- -----------------------------------------------------------------------------
THIRD QUARTER 2001
- ------------------
Revenues and other income:
Customer $1,359 $285 $1,644
Intersegment (a) 2 - 2
Intergroup (a) 2 - 2
Equity in earnings of unconsolidated
investees 11 - 11
Other 2 1 3
------ ------ ------
Total revenues and other income $1,376 $286 $1,662
====== ====== ======
Segment income (loss) $(47) $39 $(8)
====== ====== ======
THIRD QUARTER 2000
- ------------------
Revenues and other income:
Customer $1,457 $- $1,457
Intergroup (a) 5 - 5
Equity in earnings of unconsolidated
investees 6 - 6
Other 7 - 7
------ ------ ------
Total revenues and other income $1,475 $- $1,475
====== ====== ======
Segment income $23 $- $23
====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
87
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
Domestic Total
(In millions) Steel USSK Segments
- -----------------------------------------------------------------------------
NINE MONTHS 2001
- ----------------
Revenues and other income:
Customer $4,068 $815 $4,883
Intersegment (a) 5 - 5
Intergroup (a) 6 - 6
Equity in earnings of unconsolidated
investees 50 1 51
Other 19 2 21
------ ------ ------
Total revenues and other income $4,148 $818 $4,966
====== ====== ======
Segment income (loss) $(267) $121 $(146)
====== ====== ======
NINE MONTHS 2000
- ----------------
Revenues and other income:
Customer $4,660 $- $4,660
Intergroup (a) 13 - 13
Equity in earnings of unconsolidated
investees 13 - 13
Other 33 - 33
------ ------ ------
Total revenues and other income $4,719 $- $4,719
====== ====== ======
Segment income $145 $- $145
====== ====== ======
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
88
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
The following schedules reconcile segment amounts to amounts reported
in the U. S. Steel Group's financial statements:
Third Quarter Ended
September 30
(In millions) 2001 2000
----------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of reportable segments $1,662 $1,475
Elimination of intersegment revenues (2) -
------ ------
Total Group revenues and other income $1,660 $1,475
====== ======
Income:
Income (loss) for reportable segments $(8) $23
Items not allocated to segments:
Administrative expenses (5) (7)
Net pension credits 38 67
Costs related to:
Former business activities (21) (23)
Fairless facility shutdowns (29) -
------ ------
Total Group income (loss) from operations $(25) $60
====== ======
Nine Months Ended
September 30
(In millions) 2001 2000
----------------------------------------------------------------------------
Revenues and other income:
Revenues and other income of reportable segments $4,966 $4,719
Elimination of intersegment revenues (5) -
------ ------
Total Group revenues and other income $4,961 $4,719
====== ======
Income:
Income (loss) for reportable segments $(146) $145
Items not allocated to segments:
Administrative expenses (20) (18)
Net pension credits 110 199
Costs related to:
Former business activities (59) (63)
Fairless facility shutdowns (29) -
Proposed Separation (9) -
------ ------
Total Group income (loss) from operations $(153) $263
====== ======
89
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. On August 14, 2001, USX announced its intention to permanently close
the cold rolling and tin mill operations at U. S. Steel's Fairless Works.
In the third quarter of 2001, USX recorded a pretax charge of $29 million
related to the shutdown of these operations, of which $12 million is
included in depreciation, depletion and amortization and $17 million is
included in cost of revenues.
8.The U. S. Steel Group's total comprehensive income (loss) was $(23)
million for the third quarter of 2001, $17 million for the third quarter of
2000, $(47) million for the nine months of 2001 and $115 million for the
nine months of 2000.
9. 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.
10. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
------------------------
September 30December 31
2001 2000
-----------------------
Raw materials $178 $214
Semi-finished products 419 429
Finished products 247 210
Supplies and sundry items 106 93
---- ----
Total $950 $946
==== ====
Cost of revenues were reduced by $13 million in the nine months of
2001 as a result of liquidations of LIFO inventories.
90
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. 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 (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 exercise of stock options
and also assumes exercise of common stock warrants in an equity investee,
provided the effects are not antidilutive.
See Note 10 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
12. At September 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 September
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.
13. Interest and other financial costs in the nine 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.
14. 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.
91
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
14. (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 September 30, 2001,
and December 31, 2000, accrued liabilities for remediation totaled $139
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 nine months of 2001
and for the years 2000 and 1999, such capital expenditures totaled $11
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 $33 million at September 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 September 30, 2001, the largest
guarantee for a single affiliate was $24 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at September 30, 2001, totaled $77 million compared
with $206 million at December 31, 2000.
15. 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 would become holders
of United States Steel Corporation Common Stock. Holders of current USX-
Marathon Group Common Stock would remain holders of such stock which would
be renamed Marathon Oil Corporation Common Stock. The Proposed Separation
does not contemplate a cash distribution to stockholders. Each company
would carry approximately the same assets and liabilities now associated
with its existing business, except
92
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
15. (Continued)
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 would be a reattribution of USX corporate debt between the
USX-Marathon Group and the USX-U. S. Steel Group. The Proposed Separation
was approved by the shareholders at an October 25, 2001 meeting and is
subject to 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 Proposed Separation 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 nine months of
2001 were $9 million.
16. 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, directly and indirectly, owns and operates the businesses of
the USX-U. S. Steel Group. The reorganization did 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 was independent of the Proposed
Separation of the energy and steel businesses of USX Corporation.
93
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 Selected Notes to Financial Statements. The
discussion of Results of Operations should be read in conjunction with the
Supplemental Statistics provided on page 109.
On October 25, 2001, USX announced that the shareholders 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, 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, directly
and indirectly, owns and operates the businesses of the USX-U. S. Steel Group.
The reorganization did 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 was 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, as amended, and in subsequent Forms 10-Q and 8-K.
94
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 $185 million and $242 million in the
third quarter and first nine 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 3,000 tons and 844,000 tons in the third quarter and first nine months
of 2001, respectively) and lower average domestic steel product prices (average
prices decreased $34/ton and $19/ton for the third quarter and first nine months
of 2001, respectively).
Income from operations for the U. S. Steel Group for the third quarter and
first nine months of 2001 and 2000 is set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
------ ------ ---------------
Segment income (loss) for
Domestic Steel(a)(b) $(47) $23 $(267) $145
Segment income for U. S. Steel Kosice(c) 39 - 121 -
----- ----- ----- -----
Income (loss) for reportable segments (8) 23 (146) 145
Items not allocated to segment:
Net pension credits(d) 38 67 110 199
Administrative expenses (5) (7) (20) (18)
Costs related to former business
activities(e) (21) (23) (59) (63)
Costs related to proposed separation(f) - - (9) -
Costs related to Fairless facility
shutdown(g) (29) - (29) -
----- ----- ----- -----
Total income (loss) from operations $(25) $60 $(153) $263
===== ===== ===== =====
- ------
(a) Results in the third quarter of 2001 include a net favorable
$21 million from insurance recoveries and related costs for fire damages to
the cold rolling mill at USS-POSCO. Results in the first nine months of
2001 include a net favorable $19 million from insurance recoveries and
related costs for fire damages to the cold rolling mill at USS-POSCO, 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. Results in the third quarter and first
nine months of 2000 include $10 million for U. S. Steel Group's share of
Republic's special charges. Results in the first nine months of 2000 also
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 production and sale of steel products and coke from
facilities primarily located in the Slovak Republic.
(d) Excludes termination benefit costs of $11 million included in
Fairless facility shutdown costs. See note g.
(e) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the
U. S. Steel Group.
(f) Includes professional fees and expenses, and certain other costs
related to the proposed separation.
(g) Includes costs related to shutdown of the cold rolling and tin
mill facilities at Fairless Works.
95
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 $70 million and $412 million in
the third quarter and first nine months of 2001, respectively, compared with the
same periods in 2000. The decrease in segment income in third quarter 2001
compared to third quarter 2000 was primarily due to lower average steel prices,
partially offset by lower costs per ton from improved operating efficiencies and
lower energy costs. The decrease in segment income in the first nine months of
2001 compared to the same period last year was primarily due to lower average
steel prices, lower shipment volumes and higher costs per ton from operating
inefficiencies related to reduced throughput levels. The third quarter of 2001
includes a net favorable $21 million from insurance recoveries and related costs
for fire damages to the cold rolling mill at USS-POSCO. The first nine months
of 2001 include a net favorable $19 million from insurance recoveries and
related costs for fire damages to the cold rolling mill at USS-POSCO, 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 first nine 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 $39 million in the third quarter of 2001 and
$121 million for the first nine months of 2001. USSK was acquired in the fourth
quarter of 2000.
Items 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 $38 million and
$110 million in the third quarter and first nine months of 2001, respectively,
compared to $67 million and $199 million in the same periods in 2000. The
$29 million and $89 million decrease in net pension credits for the third
quarter and first nine months of 2001, respectively, from the same periods in
2000 was primarily due to the transition asset being fully amortized at the end
of 2000 and the addition of employees and retirees with the Transtar
reorganization and the acquisition of the tin mill products business of LTV
Corporation. Currently, the net pension credit for 2001 is expected to be
approximately $138 million, net of $11 million for the Fairless termination
expense and 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 expected 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.
Costs related to Fairless facility shutdown primarily include accelerated
depreciation or impairment of fixed assets and employee benefit costs associated
with the shutdown of the cold rolling and tin mill facilities at Fairless Works.
96
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Net interest and other financial costs increased $11 million in the third
quarter of 2001 and, excluding a favorable adjustment of $67 million related to
prior years' taxes, increased $66 million in the first nine months of 2001 as
compared with the same period in 2000. These increases were primarily due to
higher average debt levels attributed to the U. S. Steel Group, including debt
incurred in the fourth quarter of 2000 related to the acquisition of USSK and
for the $500 million elective Voluntary Employee Benefit Association ("VEBA")
funding. These increases were partially offset by an increase in interest
income due to higher levels of centrally managed cash attributed to the U. S.
Steel Group and foreign exchange gains related to USSK.
The credit for income taxes in the third quarter and first nine 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
nine months of 2001 included 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 $42 million and $162 million in the third quarter and
first nine 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, third quarter and first nine months of 2001
shipments of 3.6 million tons and 10.4 million tons increased 39% and 23%,
respectively, from the same periods in 2000, with the increase resulting from
the inclusion of USSK shipments. Domestic Steel shipments of 2.6 million tons
for the third quarter of 2001 remained about the same as third quarter 2000.
Domestic Steel shipments of 7.6 million tons for the first nine months of 2001
decreased 10% from the same period in 2000. Domestic Steel raw steel production
in the third quarter of 2001 of 2.7 million tons was down 2% compared to the
same period in 2000. Domestic Steel raw steel production in the first nine
months of 2001 of 7.9 million tons decreased 11% from the same period in 2000.
Domestic Steel raw steel capability utilization in the third quarter of 2001
averaged 83.3%, compared to 85.5% in the same period in 2000. Domestic Steel
raw steel capability utilization in the first nine months of 2001 averaged
82.9%, compared to 93.3% in the same period in 2000. Domestic Steel shipments,
raw steel production and raw steel capability utilization in the third quarter
and first nine months of 2000 were negatively impacted by the blast furnace
outage at Fairfield Works. At USSK, third quarter and first nine month 2001
shipments were 1.0 million tons and 2.8 million tons, respectively.
Balance Sheet
- -------------
Current assets at September 30, 2001 increased $284 million from year-end
2000 primarily due to an increase in cash and cash equivalents, resulting from
an increase in domestic time deposits related to the issuance of the 10.75%
Senior Notes and centrally managed cash held by certain foreign subsidiaries.
97
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Net property, plant and equipment at September 30, 2001 increased
$350 million from year-end 2000 primarily due to the Transtar reorganization and
the acquisition of East Chicago Tin.
Current liabilities at September 30, 2001 increased $74 million compared to
year-end 2000 primarily due to increases in accounts payable and accrued taxes.
The increase in accounts payable was primarily due to an increase in trade
payables. The increase in accrued taxes was primarily due to the settlement of
prior years' taxes.
Total long-term debt and notes payable at September 30, 2001 increased
$313 million compared to year-end 2000 due to an increase in the portion of USX
consolidated debt attributed to the U. S. Steel Group. The increase in
attributed debt resulted from financing activities in preparation for the
Proposed Separation and cash used for capital expenditures and dividends in
excess of cash provided from operations.
Employee benefits at September 30, 2001 increased $169 million compared to
year-end 2000 about half of which was due to the addition of employees and
retirees with the Transtar reorganization and the acquisition of the tin mill
products business of LTV Corporation. The remainder of the increase was
primarily due to ongoing accruals in excess of cash payments from company
assets. Following the elective $500 million VEBA funding in the fourth quarter
of 2000, which decreased the employee benefits liability, most union retiree
medical claims are being paid from the VEBA instead of company assets.
Cash Flow
- ---------
Net cash provided from operating activities increased $174 million in the
first nine months of 2001, compared with the first nine months of 2000. The
increase was due primarily to improved working capital changes, which included a
favorable intergroup income tax settlement of $379 million in the 2001 period
compared to a favorable intergroup settlement of $97 million in the 2000 period.
In addition, adjustments for pensions and other postretirement benefits
(excluding the noncash pension credit) improved because VEBA funds were used to
pay medical benefits for union retirees. These improvements were partially
offset by decreased net income (excluding depreciation, depletion and
amortization).
Capital expenditures in the first nine months of 2001 were $197 million,
compared with $133 million in the same period in 2000. The increase was
primarily due to exercising a buyout option under the lease for the Gary Works
No. 2 Slab Caster, repairs to the No. 3 Blast Furnace at the Mon Valley Works,
and inclusion of spending for USSK.
Contract commitments for capital expenditures at September 30, 2001,
totaled $77 million, compared with $206 million at December 31, 2000.
98
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Financial obligations increased by $294 million in the first nine months of
2001. The increase in financial obligations resulted from capital expenditures
and dividend payments exceeding cash provided from operations. 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 $26 million in the first nine 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 effective with the June 2001 payment.
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
- ---------
On July 27, 2001, 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. On September 11, 2001, an additional $150 million
of Notes were issued under the same terms. These Notes were issued in order to
provide a portion of the funding that will be needed to implement the Proposed
Separation and 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 indenture governing these Notes includes
financial covenants that significantly 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 Ba3 ratings, respectively, to these Notes, post-separation.
Among other things these covenants may:
- 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.
On November 7, 2001, United States Steel LLC commenced offers to exchange
its 10% Senior Quarterly Income Debt Securities due 2031 ("SQUIDS"), up to an
aggregate of $365 million, for three securities which are totally or partially
attributed to the U. S. Steel Group.
99
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
United States Steel LLC is currently negotiating a $400 million Accounts
Receivable Facility that will provide a portion of the funding needed to
implement the Proposed Separation. United States Steel LLC is also negotiating
a $400 million Inventory Financing Facility to meet the financing needs of the
Proposed Separation. Both facilities are expected to close in November 2001.
For additional discussion of USX's liquidity and capital resources and
details of the exchange offer, see Management's Discussion and Analysis of USX
Consolidated Financial Condition, Cash Flows and Liquidity.
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 potentially responsible party ("PRP") at
20 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 30, 2001. In addition, there are 11 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 35 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.
100
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 $0.4 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 1987, USX and the PA Department of Environmental Resources ("PADER")
entered into a consent Order to resolve an incident in January 1985 involving
the alleged unauthorized discharge of benzene and other organic pollutants from
Clairton Works in Clairton, Pa. That consent Order required USX to pay a penalty
of $50,000 and a monthly payment of $2,500 for five years. In 1990, USX and the
PADER reached agreement to amend the consent Order. Under the amended Order, USX
agreed to remediate the Peters Creek Lagoon (a former coke plant waste disposal
site); to pay a penalty of $300,000; and to pay a monthly penalty of up to
$1,500 each month until the former disposal site is closed. Remediation costs
have amounted to $9.8 million with another $1.2 million presently projected to
complete the project.
101
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
In 1988, USX and three other PRPs agreed to the issuance of an
administrative order by the EPA to undertake emergency removal work at the
Municipal & Industrial Disposal Co. site in Elizabeth Township, Pa. The cost of
such removal, which has been completed, was approximately $4.2 million, of which
USX paid $3.4 million. The EPA indicated that further remediation of this site
would be required. In October 1991, the PADER placed the site on the
Pennsylvania State Superfund list and began a Remedial Investigation ("RI")
which was issued in 1997. USX's share of any final allocation formula for
cleanup of the entire site was never determined; however, based on presently
available information, USX may have been responsible for as much as 70% of the
waste material deposited at the site. The PA Department of Environmental
Protection ("PADEP"), formerly PADER, issued its Final Feasibility Study Report
for the entire site in August 2001. The report identifies and evaluates
feasible remedial alternatives and selects three preferred alternatives. These
alternatives are estimated to cost from $17 million to $20 million. Consultants
for United States Steel have concluded that a less costly alternative should be
employed at the site, which is estimated to cost $5.5 million. Based on the
allocation of liability that has been recognized for past site cleanup
activities, the United States Steel share of costs for this remedy would be
approximately $3.7 million.
In November 2000, a Notice Of Violation ("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.
In September 2001, USX agreed to an Administrative Order on Consent with
the State of North Carolina for the assessment and cleanup of a Greensboro, NC
fertilizer manufacturing site. The site was owned by Armour Agriculture
Chemical Company (now named Viad) from 1912 to 1968. USX owned the site from
1968 to 1986 and sold the site to LaRoche Industries in 1986. The agreed order
allocated responsibility for assessment and cleanup costs as follows: Viad -
48%, USX - 26% and LaRoche - 26%; and LaRoche was appointed to be the lead party
responsible for conducting the cleanup. In March 2001, USX was notified that
LaRoche had filed for protection under the Bankruptcy law. On August 23, 2001,
the allocation of responsibility for this site assessment and cleanup and the
cost allocation was approved by the bankruptcy court in the LaRoche Bankruptcy.
The estimated remediation costs are $4.4 million to $5.7 million. USX's
estimated share of these costs is $1.6 million.
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 14 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.
102
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Outlook
- -------
Our order rate for the fourth quarter is currently running well below our
third quarter rate. In the third quarter, Domestic Steel shipments totaled
2.6 million net tons and average realized prices were lower than the second
quarter primarily due to changes in mix, including decreased sales of tubular
and plate products. In the fourth quarter, we expect Domestic Steel shipments
to be approximately 2.2 million net tons and average realized prices to be about
flat compared to the third quarter. In light of expected slow market conditions
in the fourth quarter, we have advanced the schedule for a maintenance outage on
the Gary Works No. 6 blast furnace.
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. Claims for reimbursement for higher costs and lost volumes under
USS-POSCO's business interruption insurance coverage are pending and will be
reflected in income as received in future periods. 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 fourth quarter shipments to be approximately
0.8 million tons and fourth quarter average realized prices to be somewhat lower
than the third quarter. Also, USSK has scheduled several outages in the fourth
quarter which will increase repair and maintenance expenses, and expects to
temporarily idle most operations between December 22, 2001 and January 7, 2002
due to low order levels and seasonal operation curtailments by customers.
For the full year 2001, total shipments are expected to be approximately
13.3 to 13.5 million net tons with Domestic Steel shipments of approximately
9.8 million net tons and USSK shipments of approximately 3.6 million net tons.
For the longer term, domestic shipment levels and realized prices will be
influenced by the strength and timing of a recovery in the manufacturing sector
of the domestic economy, levels of imported steel and production capability
changes by domestic competitors. Many factors, including developments from the
events of September 11, will determine the strength and timing of such recovery
and the other factors. For USSK, economic and political developments in Europe
and elsewhere will impact USSK's results of operations in 2002 and thereafter.
Capital expenditures are expected to be approximately $300 million for the
full year, including expenditures related to the recently acquired facilities of
USSK, Transtar, and East Chicago Tin.
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. Republic 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
103
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
bankruptcy and no supply interruptions are anticipated. At September 30, 2001,
U. S. Steel Group's remaining pre-petition financial exposure to Republic, after
recording various losses and reserves, totaled approximately $30 million.
On August 14, 2001, U. S. Steel Group announced its intention to
permanently close the cold rolling and tin mill operations at Fairless Works on
or around November 12, 2001. These facilities' combined annual finishing
capacity is 1.5 million tons. U. S. Steel Group intends to continue operating
Fairless Works' hot dip galvanizing line, subject to market conditions. A
pretax charge of $29 million was recorded in the third quarter and an additional
$6 million to $11 million is expected to be recorded in the fourth quarter, when
the closure plan should be completed.
On October 18, 2001, a voluntary early retirement program was offered to
USX employees and certain designated groups of U. S. Steel Group employees whose
work is functionally related to USX headquarters groups. The financial impact
of this program will be classified as a cost related to the Proposed Separation
and will be allocated to Marathon and U. S. Steel.
While the U. S. Steel pension plans' liability is expected to increase
because of falling interest rates and other factors, the plans' investment
performance has been substantially better than the overall markets, and the
plans continue to be well funded.
On October 30, 2001, United States Steel LLC announced the launch of
Straightline Source, the first steel distribution business created to serve
customers of all sizes who do not typically buy directly from steel producers.
Straightline's fully integrated order input system, advanced inventory
management and progressive logistics technology are networked to create a direct
buying option for processed steel products. While managing the customer
relationship, Straightline makes use of the processing capacity of a network of
qualified partners. Straightline will begin offering processed steel products
in North Carolina, South Carolina and eastern Tennessee in October. Additional
regional launches will continue throughout 2001 and 2002.
The above discussion includes forward-looking statements concerning
shipments, pricing, equity investee performance and the expansion of
Straightline. These statements are based on assumptions as to future product
demand, prices and mix, and production. Steel shipments and prices can be
affected by imports and actions of the U.S. Government and its agencies
pertaining to trade, domestic and international economies, domestic production
capacity, and customer demand. Factors 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. Factors that could affect the expansion of
Straightline include economic conditions and the customers' acceptance of this
technology-based buying approach. 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 timing of completion of repairs.
104
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Steel imports to the United States accounted for an estimated 24%, 27% and
26% of the domestic steel market in the first eight 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. Department of Commerce
("Commerce") has found margins in all of the cases. The U.S. International
Trade Commission ("ITC") previously found material injury to the domestic
industry in the cases against Argentina and South Africa, and, on November 2,
2001, the ITC found material injury to the domestic industry in the cases
against the remaining countries.
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.
U. S. Steel Group believes that the remedies provided by AD and CVD 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 in the President's program. U. S.
Steel Group, nevertheless, intends to file additional AD and CVD petitions
against unfairly traded imports that adversely impact, or threaten to adversely
impact, the results of the U. S. Steel Group and is urging the U.S. government
to take additional steps.
105
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
In furtherance of the President's program, on June 22, 2001, the U.S. Trade
Representative requested that the ITC initiate investigations under Section 201
of the Trade Act of 1974. Products included in the request were in the
following categories:
(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.
On October 22, 2001, the ITC made its determinations as to injury. It
determined that the requisite injury had been demonstrated as to the following
products that are produced by the U. S. Steel Group: carbon and alloy slabs,
plate, hot-rolled, cold-rolled, and coated products and carbon and alloy welded
pipe other than oil country tubular goods. The vote regarding tin mill products
was a tie. These determinations pertain to imports from all countries except
that (i) imports from Canada were found not to have been a substantial cause of
serious injury as to any of the flat products, (ii) the vote was tied as to the
impact of Canadian imports on welded pipe, and (iii) imports from Mexico were
found not to have been a substantial cause of serious injury as to tin mill
products and welded pipe. Products produced by the U. S. Steel Group that were
within the scope of the investigations but as to which the ITC made negative
findings of injury as to all countries are seamless tubular products and welded
oil country tubular goods. The ITC will continue its investigations with
consideration of what relief would be appropriate as to those products that
received affirmative or tie injury determinations. The ITC will make
recommendations for relief to the President, who will then act within his
discretion in granting or withholding relief and in fashioning the type and
extent of relief. The ITC's recommendations to the President are due by statute
December 19, 2001, following which the President will have 60 days, or until
February 17, 2002, to make his decision (unless extended for up to 15 days).
The U. S. Steel Group has requested, however, that the ITC and the President
expedite their decisions.
On September 28, 2001, U. S. Steel Group joined with seven other producers
to file trade cases against cold-rolled carbon steel flat products from 20
countries (Argentina, Australia, Belgium, Brazil, China, France, Germany, India,
Japan, Korea, Netherlands, New Zealand, Russia, South Africa, Spain, Sweden,
Taiwan, Thailand, Turkey, and Venezuela). AD cases were filed against all the
countries and CVD cases were filed against Argentina, Brazil, France, and Korea.
106
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for commodity-based
derivative instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- -----------------------------------------------------------------------------
Commodity-Based Derivative Instruments
U. S. Steel Group
Natural Gas 1.3 3.2 (b)
Zinc 2.8 6.9 (b)
Tin 0.2 0.6 (b)
(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
September 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
September 30, 2001, may cause future pretax income effects to differ from
those presented in the table.
(b) Price decrease.
107
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 September 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:
(Dollars in millions)
- -------------------------------------------------------------------------------
As of September 30, 2001
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
- -------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $91 $-
- -------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $2,888 $111
Preferred stock of
subsidiary 65 6
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 184 16
------ ------
Total liabilities $3,137 $133
- -------------------------------------------------------------------------------
(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 September 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 September 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.
108
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 September 30, 2001, the U.
S. Steel Group had open Euro forward sale contracts for both U.S. dollars (total
carrying value of approximately $4.2 million) and Slovak Koruna (total carrying
value of approximately $7.3 million). A 10% increase in the September 30, 2001
Euro forward rates would result in an immaterial charge to income. The entire
amount of these contracts is attributed to the U. S. Steel Group.
Equity Price Risk
- -----------------
As of September 30, 2001, USX was subject to equity price risk and market
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, industry supply and demand for steel products and certain raw
materials, and foreign exchange rates. 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.
109
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2001 2000 2001 2000
- -----------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Domestic Steel(a)(b) $(47) $23 $(267) $145
U. S. Steel Kosice(c) 39 - 121 -
----- ----- ----- -----
Income (loss) from Reportable Segments $(8) $23 $(146) $145
Items not allocated to segment:
Net Pension Credits(d) 38 67 110 199
Administrative Expenses (5) (7) (20) (18)
Costs related to former business (21) (23) (59) (63)
activities(e)
Costs related to proposed separation(f) - - (9) -
Costs related to Fairless facility (29) - (29) -
shutdown(g)
----- ----- ----- -----
Total U. S. Steel Group $(25) $60 $(153) $263
CAPITAL EXPENDITURES
Domestic Steel $39 $36 $166 $133
U. S. Steel Kosice 17 - 31 -
----- ----- ----- -----
Total U. S. Steel Group $56 $36 $197 $133
OPERATING STATISTICS
Average steel price: ($/net ton)
Domestic Steel $420 $454 $429 $448
U. S. Steel Kosice 256 - 263 -
Steel Shipments:(h)
Domestic Steel 2,554 2,557 7,597 8,441
U. S. Steel Kosice 1,008 - 2,826 -
----- ----- ----- -----
Total Steel Shipments 3,562 2,557 10,423 8,441
Raw Steel-Production:(h)
Domestic Steel 2,689 2,752 7,933 8,938
U. S. Steel Kosice 1,131 - 3,214 -
----- ----- ----- -----
Total Raw Steel-Production 3,820 2,752 11,147 8,938
Raw Steel-Capability Utilization:(i)
Domestic Steel 83.3% 85.5% 82.9% 93.3%
U. S. Steel Kosice 89.7% - 85.9% -
Iron ore shipments - Domestic Steel(h) 4,494 4,770 11,594 11,455
- -----------
(a) Results in the third quarter of 2001 include a net favorable
$21 million from insurance recoveries for fire damages to the cold
rolling mill at USS-POSCO. Results in the first nine months of 2001
include a net favorable $19 million from insurance recoveries and related
costs for fire damages to the cold rolling mill at USS-POSCO, 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 third quarter and first nine months of 2000
included $10 million for USX's share of Republic's special charges.
Results in the first nine months of 2000 also 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) Excludes termination costs of $11 million related to Fairless
facility shutdown.
(e) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(f) Includes professional fees and expenses and certain other costs
related to the proposed separation.
(g) Includes costs related to the shutdown of the cold rolling and tin
mill facilities at Fairless Works.
(h) Thousands of net tons.
(i) Based on annual raw steel production capability of 12.8 million tons
for Domestic Steel and 5.0 million tons for U. S. Steel Kosice.
110
Part II - Other Information:
- ---------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Environmental Proceedings
In May 2001, Marathon and MAP settled in a consent decree U.S.
Environmental Protection Agency ("EPA") allegations that the Robinson refinery
did not qualify for an exemption under the National Emission Standards for
Benzene Waste Operations pursuant to the Clean Air Act ("CAA"). The government
had alleged in a federal court lawsuit that the refinery's Total Annual Benzene
releases exceeded the limitation of 10 megagrams per year, and as a result, the
refinery was in violation of the benzene waste emission control, record keeping,
and reporting requirements. The consent decree was approved by the court on
July 26, 2001 and requires Marathon and MAP to pay a combined $1.6 million civil
penalty, perform $125,000 in supplemental environmental projects, as part of an
enforcement action for alleged CAA violations, and install various controls and
other improvements.
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and
Robinson refineries, covering compliance with the CAA, 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 number of
Notices of Violation ("NOV") and Findings of Violation as a result of these
inspections but these allegations were resolved as part of the New Source Review
("NSR") global consent decree which MAP agreed to on May 11, 2001. MAP's
settlement with the EPA includes all of MAP's refineries and commits MAP to
specific control technologies and implementation schedules for 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 CAA violations. MAP believes that this
settlement will provide MAP with increased permitting and operating flexibility
while achieving significant emission reductions. The court approved this
consent decree on August 28, 2001.
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 past response costs
up to $131,000. A final administrative order resolving this matter is expected
in the fourth quarter 2001.
111
Part II - Other Information (Continued):
- ----------------------------------------
Item 1. LEGAL PROCEEDINGS (Continued)
U. S. Steel Group
Environmental Proceedings
The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-
acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and
solvent reprocessing operations were conducted on the Berks Site between 1941
and 1986. In September 1997, USX signed a consent decree to conduct a
feasibility study at the site relating to the alternative remedy. In 1999, a
new Record of Decision was approved by the EPA and the U.S. Department of
Justice ("DOJ"). On January 19, 2001, USX signed a consent decree with the EPA
to remediate this site. On April 6, 2001, USX paid $0.4 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 1987, USX and the PA Department of Environmental Resources ("PADER")
entered into a consent Order to resolve an incident in January 1985 involving
the alleged unauthorized discharge of benzene and other organic pollutants from
Clairton Works in Clairton, Pa. That consent Order required USX to pay a penalty
of $50,000 and a monthly payment of $2,500 for five years. In 1990, USX and the
PADER reached agreement to amend the consent Order. Under the amended Order, USX
agreed to remediate the Peters Creek Lagoon (a former coke plant waste disposal
site); to pay a penalty of $300,000; and to pay a monthly penalty of up to
$1,500 each month until the former disposal site is closed. Remediation costs
have amounted to $9.8 million with another $1.2 million presently projected to
complete the project.
In 1988, USX and three other potential responsible parties agreed to the
issuance of an administrative order by the EPA to undertake emergency removal
work at the Municipal & Industrial Disposal Co. site in Elizabeth Township, Pa.
The cost of such removal, which has been completed, was approximately
$4.2 million, of which USX paid $3.4 million. The EPA indicated that further
remediation of this site would be required. In October 1991, the PADER placed
the site on the Pennsylvania State Superfund list and began a Remedial
Investigation ("RI") which was issued in 1997. USX's share of any final
allocation formula for cleanup of the entire site was never determined; however,
based on presently available information, USX may have been responsible for as
much as 70% of the waste material deposited at the site.
112
Part II - Other Information (Continued):
- ----------------------------------------
Item 1. LEGAL PROCEEDINGS (Continued)
U. S. Steel Group (Continued)
Environmental Proceedings (Continued)
The PA Department of Environmental Protection ("PADEP"), formerly PADER, issued
its Final Feasibility Study Report for the entire site in August 2001. The
report identifies and evaluates feasible remedial alternatives and selects three
preferred alternatives. These alternatives are estimated to cost from
$17 million to $20 million. Consultants for United States Steel have concluded
that a less costly alternative should be employed at the site, which is
estimated to cost $5.5 million. Based on the allocation of liability that has
been recognized for past site cleanup activities, the United States Steel share
of costs for this remedy would be approximately $3.7 million.
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.
In September 2001, USX agreed to an Administrative Order on Consent with
the State of North Carolina for the assessment and cleanup of a Greensboro, NC
fertilizer manufacturing site. The site was owned by Armour Agriculture
Chemical Company (now named Viad) from 1912 to 1968. USX owned the site from
1968 to 1986 and sold the site to LaRoche Industries in 1986. The agreed order
allocated responsibility for assessment and cleanup costs as follows: Viad -
48%, USX - 26% and LaRoche - 26%; and LaRoche was appointed to be the lead party
responsible for conducting the cleanup. In March 2001 USX was notified that
LaRoche had filed for protection under the Bankruptcy law. On August 23, 2001,
the allocation of responsibility for this site assessment and cleanup and the
cost allocation was approved by the bankruptcy court in the LaRoche Bankruptcy.
The estimated remediation costs are $4.4 million to $5.7 million. USX's
estimated share of these costs is $1.6 million.
113
Part II - Other Information (Continued):
- ----------------------------------------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held October 25, 2001. In connection
with the meeting, a proxy/prospectus was 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/prospectus:
Marathon Group
Shares and Marathon Group U. S. Steel Group
U. S. Steel Group Shares Shares
Shares Voting as a Voting as a
Voting as a Single Separate Class Separate Class
Class
% of % of % of
Votes Votes Votes
Votes Outstand Votes Outstand Votes Outstand
ing ing ing
Proposal #1
For 279,391,003 76.0% 238,030,651 77.0% 63,338,977 71.0%
Against-
Cast 5,224,311 1.4% 2,242,773 0.7% 4,565,908 5.1%
Against-
Not Cast 81,324,323 22.1% 67,723,442 21.9% 20,828,302 23.4%
Abstain 1,572,969 0.5% 1,270,551 0.4% 463,121 0.5%
367,512,606100.0% 309,267,417 100.0% 89,196,308 100.0%
% of % of
Votes Votes Votes Votes
Cast Cast Cast Cast
Proposal #2
For 232,852,846 82.7% 55,474,812 82.2%
Against 48,865,261 17.3% Not Applicable 12,034,885 17.8%
Abstain Not Applicable Not Applicable
281,718,107 100.0% 67,509,697 100.0%
Proposal #3
For 262,091,927 93.2% 61,613,805 91.3%
Against 19,218,154 6.8% Not Applicable 5,888,805 8.7%
Abstain Not Applicable Not Applicable
281,310,081 100.0% 67,502,610 100.0%
Proposal #4
For 148,417,296 56.5%
Against 114,451,196 43.5% Not Applicable Not Applicable
Abstain Not Applicable
262,868,492 100.0%
Votes Votes Votes
Outstanding Outstanding Outstanding
Marathon
Group 309,267,417 309,267,417 -
U. S. Steel
Group 58,245,189 (A) - 89,196,308 (B)
Total Votes
Outstanding 367,512,606 100.0% 309,267,417 100.0% 89,196,308 100.0%
Total Votes
Received 286,188,283 77.9% 241,543,975 78.1% 68,368,006 76.6%
Proposal #1 Approval and adoption of the Agreement and Plan of
Reorganization.
Proposal #2 Approval of the United States Steel Corporation 2002 Stock Plan.
Proposal #3 Approval of the United States Steel Corporation Senior Executive
Officer Incentive Compensation Plan.
Proposal #4 Adjournment of the Special Meeting.
(A) 89,196,308 U. S. Steel Group shares at 0.653 votes per share.
(B) 89,196,308 U. S. Steel Group shares at 1.000 votes per share.
114
Part II - Other Information (Continued):
- ----------------------------------------
Item 5. OTHER INFORMATION
Marathon Group
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
(In millions)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
INCOME DATA:
Revenues and other income $8,335 $9,229$26,246$25,793
Income from operations 583 741 2,785 2,140
Net income 171 107 1,297 724
(In millions)
--------------------
September 30December 31
2001 2000
-----------------------
BALANCE SHEET DATA:
Assets:
Current assets $7,256 $7,397
Noncurrent assets 10,927 10,135
------ ------
Total assets $18,183 $17,532
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $4,264 $3,951
Noncurrent liabilities 6,914 8,110
Preferred stock of subsidiary - 9
Minority interest in income of Marathon
Ashland Petroleum LLC 2,029 1,840
Stockholder's equity 4,976 3,622
------ ------
Total liabilities and stockholder's equity $18,183 $17,532
====== ======
115
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
2.1 Agreement and Plan of Reorganization,
dated as of July 31, 2001, by and between
USX Corporation (to be renamed
Marathon Oil Corporation) and United
States Steel LLC (to be converted into
United States Steel Corporation) Incorporated by reference to
Annex A of United States Steel
LLC's Registration Statement
on Form S-4 filed on
September 7, 2001.
3.1 Amended and Restated Limited Liability
Company Operating Agreement of United States
Steel LLC Incorporated by reference to
Exhibit 3.1 of United States
Steel LLC's Registration
Statement on Form S-4 filed
September 7, 2001.
10.1 Completion and Retention Agreement, dated
as of August 8, 2001, between USX
Corporation, United States Steel LLC and
Thomas J. Usher Incorporated by reference to
Exhibit 10.10 of United States
Steel LLC's Registration
Statement on Form S-4/A filed
September 20, 2001.
10.2Retention Agreement, dated as of September
14, 2001, between United States Steel LLC
and Dan D. Sandman Incorporated by reference to
Exhibit 10.11 of United States
Steel LLC's Registration
Statement on Form S-4/A filed
September 20, 2001.
10.3Form of Change of Control Agreement
between USX Corporation and Various
Officers Incorporated by reference to
Exhibit 10.12 of United States
Steel LLC's Registration
Statement on Form S-4/A filed
September 20, 2001.
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
116
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(b) REPORTS ON FORM 8-K
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 release titled "Surma Named Assistant to Chairman of USX".
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".
Form 8-K dated August 14, 2001, reporting under Item 9., Regulation FD
Disclosure, that USX Corporation is furnishing information under
Regulation FD for the August 14, 2001 press release titled "U. S. Steel
Permanently Closing Most Fairless Facilities".
Form 8-K dated August 23, 2001, reporting under Item 9., Regulation FD
Disclosure, that USX Corporation is furnishing information under
Regulation FD for the August 23, 2001 press release titled "Marathon and
YUKOS to form a strategic alliance for international growth".
Form 8-K dated October 12, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the October 12, 2001
press release titled "United States Steel Announces Filing for Exchange
Offer".
Form 8-K dated October 22, 2001, as amended, reporting under Item 5.
Other Events, that USX Corporation is furnishing information for the
October 22, 2001 USX-Marathon Group and USX-U. S. Steel Group Earnings
Releases.
117
Part II - Other Information (Continued):
- ----------------------------------------
(b) REPORTS ON FORM 8-K
Form 8-K dated October 25, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the October 25, 2001
press release titled "USX Shareholders Approve Plan of Reorganization".
Form 8-K dated November 2, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the November 2, 2001
press release titled "Marathon continues international growth strategy;
announces plans to acquire interests in Equatorial Guinea, West Africa".
Form 8-K dated November 5, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the November 5, 2001
press release titled "USX Capital LLC Calls Its MIPS".
Form 8-K dated November 7, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the November 7, 2001
press release titled "United States Steel To Commence Exchange Offers".
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
November 9, 2001