SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_]Confidential, for Use of the
[_] Definitive Proxy Statement Commission Only
(as permitted by Rule 14a-
[_] Definitive Additional Materials 6(e)(2))
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
USX CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Persons Filing Proxy Statement if other than the Registrant)
Payment of filing fee (Check the appropriate box).
[_] No Fee Required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
USX--U. S. Steel Group Common Stock, par value $1.00 per share, of USX
Corporation ("USX--U. S. Steel Group Common Stock") and 6.50%
Cumulative Convertible Preferred Stock, no par value, of USX
Corporation ("6.50% Preferred").
(2) Aggregate number of securities to which transaction applies:
(a) 88,800,321 shares of issued and outstanding USX--U. S. Steel Group
Common Stock, each of which will be converted in the merger of USX
Corporation with a subsidiary of USX Corporation (the "Merger") into
one share of common stock, par value $1.00 per share, of United States
Steel Corporation ("New U. S. Steel Shares"), (b) 4,544,125 shares of
USX--U. S. Steel Group Common Stock issuable upon exercise of
outstanding stock options, which will be converted in the Merger into
options to purchase New U. S. Steel Shares, and (c) 2,404,487 shares of
issued and outstanding 6.50% Preferred, each of which will be converted
in the Merger into $50.00 in cash.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and how it was calculated):
The filing fee was determined based upon the sum of (a) the product of
93,344,446 (the total of number of issued and outstanding shares of
USX--U. S. Steel Group Common Stock and shares of USX--U. S. Steel
Group Common Stock issuable upon exercise of outstanding stock options)
and $20.34 (the average of the high and low sales prices per share of
USX--U. S. Steel Group Common Stock on June 14, 2001) and (b) the
product of 2,404,487 (the total of number of issued and outstanding
shares of 6.50% Preferred) and $50.00 (the amount of cash into which
each issued and outstanding share of 6.50% Preferred will be converted
in the Merger). In accordance with Rule 0-11 under the Securities
Exchange Act of 1934, as amended, the filing fee was determined by
multiplying the amount calculated pursuant to the preceding sentence by
1/50 of one percent.
(4) Proposed maximum aggregate value of transaction: $2,018,850,382
(5) Total fee paid: $403,770
[_]Fee paid previously with preliminary materials:
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Preliminary Proxy Materials
[LOGO OF USX]
USX Corporation Thomas J. Usher
600 Grant Street Chairman, Board of
Pittsburgh, PA 15219-4776 Directors &
Chief Executive Officer
, 2001
Dear USX Stockholder:
A special meeting of stockholders of USX Corporation will be held on ,
2001, at 10:00 a.m., local time, at [ ].
At this special meeting, you will be asked to approve the separation of the
Marathon Group and the U. S. Steel Group into two independent companies. If the
separation is completed, the business of the U. S. Steel Group will be owned
and operated by United States Steel Corporation, which will be a publicly
traded company, wholly owned by the holders of the then outstanding USX--U. S.
Steel Group Common Stock, and the business of the Marathon Group will be owned
and operated by Marathon Oil Corporation, which will be a separate publicly
traded company, wholly owned by the holders of the then outstanding USX--
Marathon Group Common Stock. At this special meeting, we will also be asking
you to approve the United States Steel Corporation 2002 Stock Plan and the
United States Steel Corporation Senior Executive Officer Annual Incentive
Compensation Plan. These plans, which would not go into effect unless and until
the separation is completed, are substantially the same as current USX plans.
The separation is intended to be tax-free to USX and our stockholders. We
have submitted a request to the Internal Revenue Service for a private letter
ruling as to the tax-free status of the separation, and completion of the
separation is conditioned upon receipt of a favorable private letter ruling.
Your board of directors has unanimously approved the separation and
recommends that you vote FOR approval of the separation and adoption of the
Agreement and Plan of Reorganization, which is the legal document governing the
separation. The board believes that the separation will create two strong,
independent companies prepared to grow and prosper in each of their rapidly
changing industries. In reaching this conclusion, the board considered many
factors, including the opinions of Credit Suisse First Boston Corporation and
Salomon Smith Barney that the financial effects, taken as a whole, of the
transactions contemplated by the Plan of Reorganization, are fair, from a
financial point of view, to the holders of USX--U. S. Steel Group Common Stock
and the holders of the USX--Marathon Group Common Stock.
Your vote is very important. We cannot complete the separation without the
affirmative vote of the holders of a majority of the outstanding USX--Marathon
Group Common Stock, voting as a separate class, the holders of a majority of
the outstanding USX--U. S. Steel Group Common Stock, voting as a separate
class, and the holders of a majority of the outstanding USX--Marathon Group
Common Stock and USX--U. S. Steel Group Common Stock, voting together as a
single class. Whether or not you plan to attend the special meeting in person,
please take the time to vote by signing and returning your proxy card in the
enclosed postage-paid envelope or you may take advantage of our telephone or
Internet voting procedures. If you do not return your proxy card or vote by
telephone or Internet or vote in person at the special meeting, it will have
the same effect as a vote against the separation.
This proxy statement/prospectus provides you with detailed information about
the separation. We encourage you to read the entire document carefully. In
particular, you should carefully consider the discussion in the section
entitled "Risk Factors" beginning on page .
Very truly yours,
Thomas J. Usher
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the shares of United States Steel
Corporation to be issued in the separation or passed upon the accuracy or
adequacy of this proxy statement/prospectus. Any representation to the contrary
is a criminal offense.
This proxy statement/prospectus is dated , 2001 and is first being
mailed to USX stockholders on or about , 2001.
[LOGO OF USX CORPORATION]
USX Corporation
600 Grant Street
Pittsburgh, PA 15219-4776
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2001
Notice is hereby given that a special meeting of the stockholders of USX
Corporation, a Delaware corporation, will be held on , 2001 at 10:00 a.m.
local time, at to consider and vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Reorganization,
dated as of , 2001, between USX Corporation and United States
Steel LLC, providing for the separation of the U. S. Steel Group
and the Marathon Group into two independent companies, pursuant to
which (1) a wholly owned subsidiary of USX will be merged with and
into USX, with USX continuing as the surviving corporation, (2)
each outstanding share of USX--U. S. Steel Group Common Stock will
be converted into the right to receive one share of common stock of
United States Steel Corporation, which will own and operate the
business of the U. S. Steel Group, and (3) the USX--Marathon Group
Common Stock will remain outstanding, unaffected by the separation
and will be the sole outstanding shares of common stock of USX,
which will change its name to Marathon Oil Corporation and will own
and operate the business of the Marathon Group.
2. To approve the United States Steel Corporation 2002 Stock Plan.
3. To approve the United States Steel Corporation Senior Executive
Officer Annual Incentive Compensation Plan.
4. To adjourn the special meeting, if necessary.
Only holders of USX--Marathon Group Common Stock and USX--U. S. Steel Group
Common Stock at the close of business on , 2001 are entitled to notice of,
and to vote at, the special meeting.
Your board of directors unanimously recommends that you vote FOR approval
and adoption of the Agreement and Plan of Reorganization, and FOR approval of
the other proposals listed above. Your vote is very important. Adoption of the
Plan of Reorganization requires the affirmative vote of the holders of a
majority of the outstanding USX--Marathon Group Common Stock, voting as a
separate class, the holders of a majority of the outstanding USX--U. S. Steel
Group Common Stock, voting as a separate class, and the holders of a majority
of the outstanding USX--Marathon Group Common Stock and USX--U. S. Steel Group
Common Stock, voting together as a single class.
The Agreement and Plan of Reorganization and the separation are explained in
the accompanying proxy statement/prospectus, which you are urged to read
carefully. A copy of the Agreement and Plan of Reorganization is attached as
Annex A to this proxy statement/prospectus.
By Order of the Board of Directors,
Dan D. Sandman
Secretary
Pittsburgh, Pennsylvania
, 2001
Whether or not you plan to attend the special meeting, please complete,
sign, date and return the accompanying proxy in the enclosed self-addressed
stamped envelope or vote by telephone or Internet.
Table of Contents
Questions and Answers About the Separation................................ 1
Summary................................................................... 3
Special Note Regarding Forward-Looking Statements......................... 7
Selected Historical Financial Information for USX Corporation ............ 8
Selected Historical Financial Information for the U. S. Steel Group....... 9
Selected Historical Financial Information for the Marathon Group.......... 10
Selected Unaudited Pro Forma Information for United States Steel
Corporation.............................................................. 11
Selected Unaudited Pro Forma Information for Marathon Oil Corporation..... 12
Market Price and Dividend Information of Marathon Group Shares and U. S.
Steel Group Shares....................................................... 13
Risk Factors.............................................................. 15
The Holding Company Reorganization........................................ 27
Proposal One: The Separation.............................................. 28
Structure of the Separation............................................. 28
Background of the Separation............................................ 29
Reasons for the Separation.............................................. 31
Factors Considered by the Board of Directors in Approving the
Separation............................................................. 31
Recommendation of the USX Board of Directors............................ 32
Opinions of Financial Advisors.......................................... 32
Financing Arrangements Relating to the Separation....................... 32
Treatment of Employee Stock Options in the Separation................... 36
Treatment of USX Corporate Employees in the Separation.................. 36
Assignment of Other USX Corporate Assets and Certain Liabilities in the
Separation............................................................. 37
Federal Securities Law Consequences..................................... 37
Accounting Treatment.................................................... 37
Material U.S. Federal Income Tax Consequences........................... 38
Stock Exchange Listing.................................................. 40
No Appraisal Rights..................................................... 40
Interests of Officers and Directors in the Separation................... 40
Relationship Between United States Steel Corporation and Marathon Oil
Corporation Following the Separation..................................... 42
Tax Sharing Agreement................................................... 42
Transition Services Agreement........................................... 43
Financial Matters Agreement............................................. 44
License Agreement....................................................... 44
Insurance Assistance Agreement.......................................... 44
Description of Capital Stock of Marathon Oil Corporation Following the
Separation............................................................... 45
Authorized Share Capital................................................ 45
Marathon Shares......................................................... 45
Marathon Oil Corporation Preferred Stock................................ 45
Marathon Oil Corporation Rights Agreement............................... 45
Description of Capital Stock of United States Steel Corporation Following
the Separation........................................................... 47
Authorized Share Capital................................................ 47
New U. S. Steel Shares.................................................. 47
United States Steel Corporation Preferred Stock.......................... 47
United States Steel Corporation Rights Agreement......................... 47
Comparison of the Rights of Stockholders................................... 49
Voting Rights............................................................ 49
Dividends................................................................ 49
Liquidation.............................................................. 49
Rights on Disposition.................................................... 50
Separation of Groups and Exchange of Stock............................... 50
Certain Antitakeover Considerations...................................... 50
The Special Meeting........................................................ 52
Date, Time and Place of the Special Meeting.............................. 52
Proposals to be Considered at the Special Meeting........................ 52
Record Date.............................................................. 52
Quorum................................................................... 53
Vote Required............................................................ 53
Voting Rights............................................................ 53
Voting and Revocation of Proxies......................................... 54
Revocation............................................................... 54
Solicitation of Proxies.................................................. 55
Adjournments............................................................. 55
The Plan of Reorganization................................................. 56
Transactions............................................................. 56
No Exchange of Marathon Group Stock Certificates......................... 58
Redemption of Shares of Trust Preferred in Connection with the
Separation.............................................................. 58
Listing of New U. S. Steel Shares and Marathon Shares.................... 58
Conditions to the Completion of the Separation........................... 58
Stockholders' Meeting and Board Recommendation........................... 59
Indemnification.......................................................... 59
Expenses................................................................. 60
Amendment................................................................ 60
Termination.............................................................. 60
Proposal Two: Approval of the United States Steel Corporation 2002 Stock
Plan...................................................................... 60
Recommendation of the USX Board of Directors............................. 61
Summary of the Plan...................................................... 61
Proposal Three: Approval of the United States Steel Corporation Senior
Executive Officer Annual Incentive Compensation Plan...................... 63
Recommendation of the USX Board of Directors............................. 64
Summary of the Plan...................................................... 64
Security Ownership of Certain Beneficial Owners............................ 65
Security Ownership of Directors and Executive Officers..................... 66
Other Matters.............................................................. 67
Legal Matters............................................................ 67
Experts.................................................................. 67
Where You Can Find More Information........................................ 67
ANNEX A: Agreement and Plan of Reorganization..............................
ANNEX B: Opinions of Financial Advisors.................................. B-1
Opinion of Credit Suisse First Boston Corporation......................
Opinion of Salomon Smith Barney........................................
ANNEX C: Unaudited Condensed Pro Forma Financial Statements.............. C-1
Unaudited Pro Forma Condensed Combined Financial Statements for United
States Steel Corporation.............................................. C-1
Unaudited Pro Forma Condensed Financial Statements for Marathon Oil
Corporation........................................................... C-8
ANNEX D: Information About United States Steel........................... D-1
Description of the Business of United States Steel..................... D-1
Properties of United States Steel...................................... D-11
United States Steel Legal Proceedings.................................. D-11
Management of United States Steel Corporation Following the
Separation............................................................ D-15
ANNEX E: Information About Marathon...................................... E-1
Management of Marathon Oil Corporation Following the Separation........ E-1
Liquidity of Marathon Oil Corporation Following the Separation......... E-2
ANNEX F: Historical Financial Information for United States Steel........ F-1
Report of Independent Accountants...................................... F-2
Audited Combined Financial Statements.................................. F-3
Unaudited Combined Financial Information............................... F-32
Unaudited Interim Combined Financial Information....................... F-34
Management's Discussion and Analysis................................... F-43
ANNEX G: Historical Financial Information for USX Corporation............ G-1
Management's Report.................................................... G-2
Report of Independent Accountants...................................... G-3
Audited Financial Statements........................................... G-4
Unaudited Financial Information........................................ G-41
Management's Discussion and Analysis................................... G-51
Unaudited Interim Financial Statements................................. G-77
Management's Discussion and Analysis................................... G-92
ANNEX H: United States Steel Corporation 2002 Stock Plan.................
ANNEX I: United States Steel Corporation Senior Executive Officer Annual
Incentive Compensation Plan.............................................
QUESTIONS AND ANSWERS ABOUT THE SEPARATION
Q: What is the proposed transaction?
A: USX is being separated into two independent companies, United States Steel
Corporation and Marathon Oil Corporation. The separation is being effected
by a merger of USX with a newly formed subsidiary of USX. As a result of the
separation, the business of the U. S. Steel Group will be owned and operated
by United States Steel Corporation, which will be wholly owned by the
holders of the then outstanding USX--U. S. Steel Group Common Stock, and the
business of the Marathon Group will be owned and operated by Marathon Oil
Corporation, which will be wholly owned by the holders of the then
outstanding USX--Marathon Group Common Stock.
Following the separation, USX--which will be renamed Marathon Oil
Corporation--will remain responsible for substantially all of our
indebtedness. In connection with the separation, a portion of the
indebtedness and other obligations of USX will be repaid or retired and
United States Steel Corporation will incur indebtedness and other obligations
and agree to repay a portion of the indebtedness and other obligations of
USX, such that the amount of indebtedness and other obligations for which
United States Steel Corporation is responsible is $900 million less than the
net amounts attributed to the U. S. Steel Group immediately prior to the
separation.
Q: What will I receive in the separation?
A: In the separation, each outstanding share of USX--U. S. Steel Group Common
Stock will be converted into one share of United States Steel Corporation
common stock ("New U. S. Steel Shares"), and the outstanding USX--Marathon
Group Common Stock will remain outstanding, unaffected by the separation and
will be the sole outstanding shares of common stock of USX ("Marathon
Shares"), and USX will change its name to Marathon Oil Corporation and will
own and operate the business of the Marathon Group.
Q: Will my shares of stock continue to be traded on the New York Stock
Exchange, Pacific Stock Exchange and Chicago Stock Exchange?
A. Yes. Following the separation, both the Marathon Shares and the New U. S.
Steel Shares will be traded on the NYSE, PSE and CSE under their current
symbols.
Q: What am I being asked to vote upon?
A: You are being asked to approve and adopt the Agreement and Plan of
Reorganization, which is the legal document governing the separation.
Q: What does our board of directors recommend?
A: Your board of directors unanimously recommends that you vote FOR approval
and adoption of the Agreement and Plan of Reorganization. To review the
background of and reasons for the separation, see "THE SEPARATION--
Background of the Separation", beginning on page , and "THE SEPARATION--
Reasons for the Separation", beginning on page .
Q: What vote is required to approve the separation?
A: The Agreement and Plan of Reorganization must be approved by both the
holders of a majority of the outstanding USX--Marathon Group Common Stock
and USX--U. S. Steel Group Common Stock, voting together as a single class,
and by the holders of a majority of the outstanding USX--Marathon Group
Common Stock and the holders of a majority of the outstanding USX--U. S.
Steel Group Common Stock, each voting as a separate class. In the combined
class vote, the holder of each share of USX--Marathon Group Common Stock
will be entitled to one vote and the holder of each share of USX--U. S.
Steel Group Common Stock will be entitled to votes. We calculated the
number of votes to which a share of USX--U. S. Steel Group Common Stock is
entitled pursuant to the formula required by the terms of USX's Restated
Certificate of Incorporation. It is based on the ratio of the market value
of one share of USX--U. S. Steel Group Common Stock to one share of USX--
Marathon Group Common Stock over the 20 business-day period ending on ,
2001. If you fail to vote, it will have the same effect as a vote against
the separation. Therefore, it is important that you return your signed proxy
card or vote by phone or Internet.
Q: Who is entitled to vote?
A: You are entitled to vote if you were a holder of either USX--Marathon Group
Common Stock or USX--U. S. Steel Group Common Stock at the close of business
on , 2001.
Q: How do I vote?
A: You may vote by telephone or over the Internet by following the instructions
on the enclosed proxy card (or, if you own your shares through a broker or
other intermediary, on the enclosed voting instruction card). You may also
vote by marking, signing and dating the enclosed proxy card or voting
instruction card, and returning it in the enclosed prepaid envelope. The
proxy committee will vote your shares in accordance with your directions. If
you return a proxy card but do not mark the boxes showing how you wish to
vote, the proxy committee will vote your shares FOR the adoption of the
Agreement and Plan of Reorganization; but only if you have signed and dated
the card. Unsigned proxy cards will not be voted at all and will have the
same effect as a vote against the separation. If you are a stockholder of
record (that is, if you are registered on our books), you may also vote in
person by attending the meeting.
Q: Can I change my vote?
A: Yes. If you are a stockholder of record, you may change your vote or revoke
your proxy at any time before your shares are voted at the special meeting
by:
. voting again by telephone or over the Internet;
. sending us a proxy card dated later than your last vote;
. notifying the Secretary of USX in writing; or
. voting at the special meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions to your
broker on how to vote. You should follow the directions provided by your
broker regarding how to instruct your broker to vote your shares. Without
instructions to your broker, your shares will not be voted on the separation
and will have the same effect as a vote against the separation.
Q: Is the separation taxable?
A: We expect the separation to be tax-free to both USX and our stockholders. We
have requested a private letter ruling from the IRS that the separation will
be tax-free, and completion of the separation is conditioned upon receipt of
such private letter ruling. The material U. S. federal income tax
consequences of the separation are described in more detail on page . The
tax consequences to you will depend on the facts of your own situation.
Please consult your tax advisor for a full understanding of the tax
consequences to you of the separation.
Q: Am I entitled to appraisal rights?
A: No. You will not be entitled to appraisal rights in connection with the
separation.
Q: When do you expect to complete the separation?
A: Completion of the separation is subject to a number of conditions, which are
described on page , including the receipt of a private letter ruling from
the IRS that the separation will be tax-free. Although we cannot predict the
timing of receipt of such private letter ruling or satisfaction of such
other conditions, we presently expect to complete the separation on or about
December 31, 2001.
Q: Should I send my stock certificates now?
A: No. After we complete the separation, we will send instructions explaining
how to exchange your certificates representing shares of USX--U. S. Steel
Group Common Stock. Certificates representing shares of USX--Marathon Group
Common Stock will not be exchanged in the separation and will represent
Marathon Shares after the separation.
Q: Whom can I call with questions?
A: If you have any questions about the separation or would like copies of any
of the documents we refer to in this proxy statement/prospectus, you should
call Innisfree M&A at ( ) .
2
SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. To better understand the separation, and for a more complete
description of the legal terms of these transactions, you should read this
entire document carefully, as well as those additional documents to which we
refer you. See "Where You Can Find More Information" on page [ ]. In this proxy
statement/prospectus, the term "United States Steel," refers to the U. S. Steel
Group for all periods prior to completion of the separation and to United
States Steel Corporation and its direct and indirect subsidiaries for all
periods following completion of the separation, in each case, unless the
context otherwise requires. In addition, in this proxy statement/prospectus,
the term "Marathon" refers to the Marathon Group for all periods prior to
completion of the separation and to Marathon Oil Corporation and its direct and
indirect subsidiaries for all periods following completion of the separation,
in each case, unless the context otherwise requires.
The Businesses
The U. S. Steel Group
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
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. For a description of the business of United States Steel, see
"INFORMATION ABOUT UNITED STATES STEEL" in Annex D.
The Marathon Group
The Marathon Group includes Marathon Oil Company and certain other
subsidiaries of USX, which are engaged in worldwide exploration and production
of crude oil and natural gas; domestic refining, marketing and transportation
of petroleum products primarily through Marathon Ashland Petroleum LLC, owned
62 percent by Marathon; and other energy-related businesses.
The Holding Company Reorganization
On [ , 2001], we completed a corporate reorganization to implement a new
holding company structure. As a result, 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 business of the Marathon
Group, and of United States Steel LLC, a Delaware limited liability company
which, directly and indirectly, owns and operates the business of the U. S.
Steel Group. This reorganization is referred to as the "HoldCo Merger."
No action is or was required to be taken by any stockholder in connection
with the HoldCo Merger. Your stock certificates continue to represent shares of
USX--Marathon Group Common Stock ("Marathon Group Shares") or USX--U. S. Steel
Group Common Stock ("U. S. Steel Group Shares"), as applicable. No changes were
made to the rights of any stockholder.
The Separation (see page )
USX will be separated into two independent, publicly traded companies:
United States Steel Corporation and Marathon Oil Corporation. This transaction
is called the "Separation." As a result of the Separation:
. the business of the U. S. Steel Group will be owned and operated by
United States Steel Corporation, which will be an independent, publicly
traded company, wholly owned by the holders of the then outstanding U.
S. Steel Group Shares; and
. the business of the Marathon Group will be owned and operated by
Marathon Oil Corporation, which will be an independent, publicly traded
company, wholly owned by the holders of the then outstanding Marathon
Group Shares.
Structure of the Separation (see page )
The Separation will be implemented by merging a newly formed corporate
subsidiary of USX with and into USX, with USX continuing as the surviving
corporation. USX will change its name to Marathon Oil Corporation, and will
continue to own its subsidiary, Marathon Oil Company, which, together with its
subsidiaries, presently owns and operates the business of the Marathon Group.
At the effective time of the Separation, United States Steel LLC, which,
together with its subsidiaries, presently
3
owns and operates the business of the U. S. Steel Group, will be converted into
a Delaware corporation named United States Steel Corporation.
Conversion of Securities in the Separation (see page )
At the effective time of the Separation:
. each issued and outstanding U. S. Steel Group Share will be converted
into one New U. S. Steel Share;
. Marathon Group Shares will remain outstanding and will be the sole
outstanding shares of common stock of USX, and USX will change its name
to Marathon Oil Corporation;
. each outstanding share of USX 6.50% Cumulative Convertible Preferred
Stock will be converted into $50.00 in cash;
. each outstanding option to purchase Marathon Group Shares or U. S. Steel
Group Shares will be converted into an option to purchase Marathon
Shares or New U. S. Steel Shares, respectively, subject to the same
terms and conditions;
. each outstanding stock appreciation right with respect to U. S. Steel
Group Shares or Marathon Group Shares will be converted into a stock
appreciation right of United States Steel Corporation with respect to
New U. S. Steel Shares or of Marathon Oil Corporation with respect to
Marathon Shares, respectively, subject to the same terms and conditions;
and
. each outstanding restricted U. S. Steel Group Share or restricted
Marathon Group Share will be converted into a restricted New U. S. Steel
Share or a restricted Marathon Share, respectively, subject to the same
terms and conditions as were applicable to such restricted shares prior
to the Separation.
The Value Transfer (see page )
Following the Separation, USX, which will be renamed Marathon Oil
Corporation, will remain responsible for substantially all of our indebtedness.
In connection with the Separation, a portion of the indebtedness and other
obligations of USX will be repaid or retired and United States Steel
Corporation will incur indebtedness and other obligations and agree to repay a
portion of the indebtedness and other obligations of USX, such that the amount
of indebtedness and other obligations for which United States Steel Corporation
is responsible is $900 million less than the net amounts attributed to the U.
S. Steel Group immediately prior to the Separation. We refer to this series of
transactions as the "Value Transfer."
Redemption of Shares in Connection With the Separation (see page )
In connection with the Separation, each outstanding share of 6.75%
Convertible Quarterly Income Preferred Security of USX Capital Trust I, a
subsidiary of USX, will be redeemed for $50.00 in cash.
Reasons for the Separation (see page )
The USX board of directors believes that the Separation will, among other
things, allow Marathon Oil Corporation and United States Steel Corporation to
focus on their core businesses and make critical acquisitions and investments
needed to grow their respective businesses and will enhance stockholder value
for all of our stockholders through the creation of two strong, independent
companies.
Recommendation of the Board (see page )
Your board has carefully reviewed the terms of the Separation, and has
received opinions of two independent financial advisors, that the financial
effects, taken as a whole, of the transactions contemplated by the Plan of
Reorganization, are fair, from a financial point of view, to the holders of
Marathon Group Shares and the holders of U. S. Steel Group Shares.
Your board has determined that the Separation is advisable and in the best
interests of USX and the holders of the Marathon Group Shares and the U. S.
Steel Group Shares. Your board has unanimously approved the Separation and
adopted the Agreement and Plan of Reorganization and recommends that holders of
Marathon Group Shares and U. S. Steel Group Shares vote FOR adoption of the
Agreement and Plan of Reorganization.
Your board also unanimously recommends that holders of Marathon Group Shares
and U. S. Steel
4
Group Shares vote FOR the proposal to approve the United States Steel
Corporation 2002 Stock Plan and the proposal to approve the United States Steel
Corporation Senior Executive Officer Annual Incentive Compensation Plan, which
plans are substantially similar to the current USX plans applicable to U. S.
Steel Group employees.
Opinions of Financial Advisors (see page )
[To Come]
Accounting Treatment (see page )
Marathon Oil Corporation, as successor to USX, will account for the
Separation as a discontinuance of the businesses comprising United States
Steel. If the historical carrying value of USX's investment in United States
Steel exceeds its fair value, a non-recurring non-cash charge on the Separation
will be recognized by Marathon Oil Corporation. Following the Separation,
United States Steel Corporation will account for its assets and liabilities
based on historical values at which they were carried by USX immediately prior
to the Separation.
Material U. S. Federal Income Tax Consequences (see page )
For U. S. federal income tax purposes, we expect the Separation to be tax-
free to USX and all of our stockholders. We have requested a private letter
ruling from the IRS that the Separation will qualify as a tax-free distribution
under Section 355 of the Internal Revenue Code. The receipt of a favorable IRS
private letter ruling is a condition to completion of the Separation. You
should consult your tax advisor as to the particular tax consequences of the
Separation to you.
Stock Exchange Listing (see page )
The Marathon Shares will continue to be listed and traded on the NYSE, the
PSE and the CSE after the Separation under the symbol "MRO." We have applied to
the NYSE, the PSE and the CSE for approval of the listing of the New U. S.
Steel Shares to be issued in the Separation under the symbol "X" on the NYSE,
the PSE and the CSE, and the closing of the Separation is conditioned upon the
approval of such listing.
Interest of Officers and Directors in the Separation (see page )
In considering the recommendation of the USX board of directors to vote in
favor of the Separation, you should be aware that some of our directors and
executive officers have interests in the Separation that are in addition to or
different from the interests of stockholders generally. These interests include
disproportionate ownership of Marathon Group Shares and U. S. Steel Group
Shares, ownership of options, stock appreciation rights and restricted shares,
and contractual rights to severance payments in connection with a change in
control. The USX board of directors was aware of these interests and considered
them, among other factors, in approving the Separation.
The Compensation Plans Being Voted Upon (see page ).
You are being asked to approve two compensation plans for United States
Steel Corporation:
. The United States Steel Corporation 2002 Stock Plan is an equity
compensation plan providing for stock options, restored options, stock
appreciation rights and restricted stock which may be granted to
executive officers and other persons in responsible positions with
United States Steel Corporation. This plan is substantially the same as
the portions of the USX Corporation 1990 Stock Plan currently applicable
to U. S. Steel Group employees and is described on page .
. The United States Steel Corporation Senior Executive Officer Annual
Incentive Compensation Plan provides for cash bonus awards to senior
executive officers of United States Steel Corporation based on pre-
established performance measures. This plan is substantially the same as
the portions of the USX Corporation Senior Executive Officer Annual
Incentive Compensation Plan currently applicable to U. S. Steel Group
employees and is described on page .
Even if our stockholders approve these plans, they will not be implemented
unless the Plan of Reorganization is adopted by our stockholders and the
Separation is completed.
Following the Separation, the USX compensation plans referred to above will
be amended to eliminate references to U. S. Steel Group Shares and will remain
in effect with respect to employees of Marathon.
The Special Meeting (see page )
The special meeting of USX stockholders will be held on , 2001 at
[10:00] a.m., local
5
time, at [INSERT ADDRESS]. At the special meeting, you will be asked to:
. adopt the Agreement and Plan of Reorganization providing for the
Separation;
. approve the United States Steel Corporation 2002 Stock Plan; and
. approve the United States Steel Corporation Senior Executive Officer
Annual Incentive Compensation Plan.
Record Date; Vote Required (see page )
Only holders of Marathon Group Shares and U. S. Steel Group Shares at the
close of business on , 2001 are entitled to vote at the special meeting.
Adoption of the Plan of Reorganization will require (i) the affirmative vote
of the holders of a majority of the outstanding Marathon Group Shares and U. S.
Steel Group Shares as of the record date, voting together as a single class,
(ii) the affirmative vote of the holders of a majority of the outstanding
Marathon Group Shares as of the record date, voting as a separate class, and
(iii) the affirmative vote of the holders of a majority of the outstanding
U. S. Steel Group Shares as of the record date, voting as a separate class.
The proposals to approve the United States Steel Corporation 2002 Stock Plan
and the United States Steel Corporation Senior Executive Officer Annual
Incentive Stock Plan will require (i) the affirmative vote of a majority of the
votes cast at the special meeting by holders of Marathon Group Shares and U. S.
Steel Group Shares, voting together as a single class, and (ii) the affirmative
vote of a majority of the votes cast at the special meeting by holders of U. S.
Steel Group Shares, voting as a separate class. Notwithstanding such approvals,
these plans will not be implemented unless the Plan of Reorganization is
adopted by our stockholders and the Separation is completed.
Voting Rights (see page )
In the separate class votes described above, each holder of Marathon Group
Shares or U. S. Steel Group Shares is entitled to one vote per share at the
special meeting. In the combined votes described above of Marathon Group Shares
and U. S. Steel Group Shares, voting together as a single class, holders of
Marathon Group Shares are entitled to one vote per share and holders of U. S.
Steel Group Shares are entitled to votes per share. We calculated the
number of votes to which each U. S. Steel Group Share is entitled by using the
formula required by USX's Restated Certificate of Incorporation. It is based on
the ratio of the market value of one U. S. Steel Group Share to one Marathon
Group Share over the 20 business-day period ending on , 2001.
Conditions to Completion of the Separation (see page )
USX will not complete the Separation unless conditions to completion of the
Separation are satisfied or waived, to the extent permitted by law, in the sole
discretion of the USX board of directors. These conditions include:
. Adoption of the Plan of Reorganization by the required votes of USX
stockholders;
. Receipt of a private letter ruling from the IRS, in form and substance
satisfactory to the USX board of directors, that the Separation will
qualify as a tax-free transaction;
. Receipt of financing by or for United States Steel Corporation in
amount, form and substance satisfactory to the USX board of directors,
and completion of the $900 million Value Transfer;
. Approval of the New U. S. Steel Shares to be issued in the Separation
for listing on the NYSE, the PSE and the CSE, subject to official notice
of issuance; and
. The absence of any injunction or legal restraint blocking the
Separation.
Termination (see page )
The Separation may be terminated and abandoned at any time prior to the
effective date of the Separation, whether prior to or following the special
meeting, by and in the sole discretion of the USX board of directors.
Effects of the Separation on the Rights of Stockholders (see page )
Because the Marathon Shares and the New U. S. Steel Shares will not be
"targeted" shares as are Marathon Group Shares and U. S. Steel Group Shares,
there will be differences in the rights of holders of the Marathon Shares and
New U. S. Steel Shares from their rights as holders of Marathon Group Shares
and U. S. Steel Group Shares, respectively.
6
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are identified by
the use of forward-looking words or phrases including, but not limited to,
"intended," "expects," "expected," "anticipates," and "anticipated." These
forward-looking statements are based on (1) a number of assumptions made by
management concerning future events and (2) information currently available to
management. Readers are cautioned not to put undue reliance on such forward-
looking statements, which are not a guarantee of performance and are subject to
a number of uncertainties and other facts, many of which are outside USX's
control, that could cause actual events to differ materially from such
statements. All statements other than statements of historical factors included
in this proxy statement/prospectus, including those regarding the financial
position, results of operations, cash flows, business strategy, projected
costs, growth opportunities, strategic and other benefits of the Separation,
and plans regarding financing in connection with the Separation, are forward-
looking statements. Although we believe that our expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from our expectations ("Cautionary
Statements") include prices of oil and natural gas; refined product margins;
prices and volumes of sale of steel products; levels of imports of steel
products into the United States; prevailing interest rates; and general
economic and financial market conditions, as well as those factors disclosed
under "RISK FACTORS" and elsewhere in this proxy statement/prospectus and in
our SEC filings listed under "WHERE YOU CAN FIND MORE INFORMATION" on page .
These forward-looking statements represent our judgment as of the date of this
proxy statement/prospectus. All subsequent written and oral forward-looking
statements are expressly qualified in their entirety by the Cautionary
Statements. We disclaim, however, any intent or obligation to update the
respective forward-looking statements.
7
SELECTED HISTORICAL FINANCIAL INFORMATION FOR USX CORPORATION
The following table sets forth selected historical financial information for
USX Corporation. This information should be read in conjunction with USX
Corporation's consolidated financial statements, including the notes thereto,
which are in Annex G. This information does not give effect to the transactions
contemplated by the Plan of Reorganization. For such information, see "MARATHON
OIL CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS" and
"MARATHON OIL CORPORATION UNAUDITED PRO FORMA CONDENSED BALANCE SHEET" in Annex
C.
Three Months
Ended
March 31
---------------
2001 2000 2000 1999 1998 1997 1996
------- ------ ------- ------- ------- ------- -------
Dollars in millions (except per share data)
Statement of Operations
Data:
Revenues and other
income(a)(b)........... $10,285 $9,429 $39,914 $29,119 $28,077 $22,824 $22,938
Income from
operations(b).......... 811 616 1,752 1,863 1,517 1,705 1,779
Includes:
Inventory market
valuation credits
(charges)............. -- -- -- 551 (267) (284) 209
Gain on ownership
change in MAP......... 1 4 12 17 245 -- --
Income from continuing
operations............. $ 517 $ 297 $ 411 $ 705 $ 674 $ 908 $ 946
Income from discontinued
operations............. -- -- -- -- -- 80 6
Extraordinary losses.... -- -- -- (7) -- -- (9)
Cumulative effect of
change in accounting
principle.............. (8) -- -- -- -- -- --
------- ------ ------- ------- ------- ------- -------
Net income.............. $ 509 $ 297 $ 411 $ 698 $ 674 $ 988 $ 943
Noncash credit from
exchange of preferred
stock.................. -- -- -- -- -- 10 --
Dividends on preferred
stock.................. (2) (2) (8) (9) (9) (13) (22)
------- ------ ------- ------- ------- ------- -------
Net income applicable to
common stocks.......... $ 507 $ 295 $ 403 $ 689 $ 665 $ 985 $ 921
======= ====== ======= ======= ======= ======= =======
Common Share Data:
Marathon Stock:
Income before
extraordinary losses
and cumulative effect
of change in accounting
principle.............. $ 508 $ 254 $ 432 $ 654 $ 310 $ 456 $ 671
Per share--basic....... 1.65 .81 1.39 2.11 1.06 1.59 2.33
--diluted........... 1.65 .81 1.39 2.11 1.05 1.58 2.31
Net income.............. 500 254 432 654 310 456 664
Per share--basic....... 1.62 .81 1.39 2.11 1.06 1.59 2.31
--diluted........... 1.62 .81 1.39 2.11 1.05 1.58 2.29
Dividends paid per
share.................. .23 .21 .88 .84 .84 .76 .70
Common Stockholders'
Equity per share....... 17.19 15.98 15.70 15.38 13.95 12.53 11.62
Steel Stock:
Income (loss) before
extraordinary losses... $ 7 $ 41 $ (29) $ 42 $ 355 $ 449 $ 253
Per share--basic....... .08 .45 (.33) .48 4.05 5.24 3.00
--diluted........... .08 .45 (.33) .48 3.92 4.88 2.97
Net income (loss)....... 7 41 (29) 35 355 449 251
Per share--basic....... .08 .45 (.33) .40 4.05 5.24 2.98
--diluted........... .08 .45 (.33) .40 3.92 4.88 2.95
Dividends paid per
share.................. .25 .25 1.00 1.00 1.00 1.00 1.00
Common Stockholders'
Equity per share....... 21.38 23.33 21.58 23.23 23.66 20.56 18.37
Balance Sheet Data--at
period end:
Capital expenditures.... $ 313 $ 1,669 $ 1,665 $ 1,580 $ 1,373 $ 1,168
Total assets............ 24,323 23,401 22,931 21,133 17,284 16,980
Capitalization:
Notes payable.......... $ 400 $ 150 $ -- $ 145 $ 121 $ 81
Total long-term debt... 4,313 4,460 4,283 3,991 3,403 4,212
Preferred stock of
subsidiary............ 250 250 250 250 250 250
Trust preferred
securities............ 183 183 183 182 182 --
Minority interest in
MAP................... 1,938 1,840 1,753 1,590 -- --
Redeemable Delhi
Stock(c).............. -- -- -- -- 195 --
Preferred stock........ 2 2 3 3 3 7
Common stockholders'
equity................ 7,209 6,762 6,853 6,402 5,397 5,015
------- ------- ------- ------- ------- -------
Total
capitalization...... $14,295 $13,647 $13,325 $12,563 $ 9,551 $ 9,565
======= ======= ======= ======= ======= =======
- -------
(a) Consists of revenues, dividend and investee income (loss), gain on
ownership change in Marathon Ashland Petroleum LLC ("MAP"), net
gains/(losses) on disposal of assets, gain on investee stock offering and
other income.
(b) Excludes amounts for the Delhi Group (sold in 1997), which have been
reclassified as discontinued operations.
(c) On January 26, 1998, USX redeemed all of the outstanding shares of USX--
Delhi Group Common Stock.
8
SELECTED HISTORICAL FINANCIAL INFORMATION FOR THE U. S. STEEL GROUP
The following table sets forth selected historical information for the U. S.
Steel Group. This information does not present the financial information for
United States Steel Corporation as if it were a separate entity for the periods
presented. For financial information for United States Steel Corporation which
gives effect to the transactions contemplated by the Plan of Reorganization,
see "UNITED STATES STEEL CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS" and "UNITED STATES STEEL CORPORATION UNAUDITED PRO
FORMA CONDENSED COMBINED BALANCE SHEET" in Annex C. This information should be
read in conjunction with USX Corporation's consolidated financial statements,
including the notes thereto, which are in Annex G.
Three Months
Ended March
31
--------------
2001 2000 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------ ------
Dollars in millions
Statement of Operations
Data:
Revenues and other
income(a).............. $1,564 $1,588 $6,132 $5,470 $6,477 $7,156 $6,872
Income (loss) from
operations............. (101) 91 104 150 579 773 483
Income (loss) before
extraordinary losses... 9 43 (21) 51 364 452 275
Net income (loss)....... 9 43 (21) 44 364 452 273
Noncash credit from
exchange of preferred
stock.................. -- -- -- -- -- 10 --
Dividends on preferred
stock.................. (2) (2) (8) (9) (9) (13) (22)
Net income (loss)
applicable to Steel
Stock.................. 7 41 (29) 35 355 449 251
Balance Sheet Data--at
period end:
Capital expenditures.... $ 37 $ 244 $ 287 $ 310 $ 261 $ 337
Total assets............ 8,626 8,711 7,525 6,749 6,694 6,580
Capitalization:
Notes payable......... $ 164 $ 70 $ -- $ 13 $ 13 $ 18
Total long-term debt.. 2,072 2,375 915 476 510 1,087
Preferred stock of
subsidiary........... 66 66 66 66 66 64
Trust Preferred
Securities........... 183 183 183 182 182 --
Preferred stock....... 2 2 3 3 3 7
Common stockholders'
equity............... 1,899 1,917 2,053 2,090 1,779 1,559
------ ------ ------ ------ ------ ------
Total
capitalization..... $4,386 $4,613 $3,220 $2,830 $2,553 $2,735
====== ====== ====== ====== ====== ======
- --------
(a) Consists of revenues, dividends and investee income (loss), net gains on
disposal of assets, gain on investee stock offering and other income
(loss).
9
SELECTED HISTORICAL FINANCIAL INFORMATION FOR THE MARATHON GROUP
The following table sets forth selected historical information for the
Marathon Group. This information does not present the financial information for
Marathon Oil Corporation as if it were a separate entity for the periods
presented. For financial information for Marathon Oil Corporation which gives
effect to the transactions contemplated by the Plan of Reorganization, see
"MARATHON OIL CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF
OPERATIONS" and "MARATHON OIL CORPORATION UNAUDITED PRO FORMA CONDENSED BALANCE
SHEET" in Annex C. This information should be read in conjunction with USX
Corporation's consolidated financial statements, including the notes thereto,
which are in Annex G.
Three Months
Ended March
31
-------------
2001 2000 2000 1999 1998 1997 1996
------ ------ ------- ------- ------- ------- -------
Dollars in millions
Statement of Operations
Data:
Revenues and other
income(a).............. $8,735 $7,855 $33,859 $23,707 $21,623 $15,775 $16,153
Income from operations.. 912 525 1,648 1,713 938 932 1,296
Includes:
Inventory market
valuation credits
(charges)............ -- -- -- 551 (267) (284) 209
Gain on ownership
change in MAP........ 1 4 12 17 245 -- --
Income before
extraordinary losses
and cumulative effect
of change in accounting
principle.............. 508 254 432 654 310 456 671
Net income.............. 500 254 432 654 310 456 664
Balance Sheet Data--at
period end:
Capital expenditures.... $ 276 $ 1,425 $ 1,378 $ 1,270 $ 1,038 $ 751
Total assets............ 15,932 15,232 15,674 14,544 10,565 10,151
Capitalization:
Notes payable......... $ 236 $ 80 $ -- $ 132 $ 108 $ 59
Total long-term debt.. 2,241 2,085 3,368 3,515 2,893 2,906
Preferred stock of
subsidiary........... 184 184 184 184 184 182
Minority interest in
MAP.................. 1,938 1,840 1,753 1,590 -- --
Common stockholders'
equity............... 5,310 4,845 4,800 4,312 3,618 3,340
------ ------- ------- ------- ------- -------
Total
capitalization..... $9,909 $ 9,034 $10,105 $ 9,733 $ 6,803 $ 6,487
====== ======= ======= ======= ======= =======
- --------
(a) Consists of revenues, dividends and investee income, gain on ownership
change in MAP, net gains/losses on disposal of assets and other income.
10
SELECTED UNAUDITED PRO FORMA INFORMATION FOR UNITED STATES STEEL CORPORATION
The following selected unaudited pro forma financial information of United
States Steel Corporation gives effect to the $900 million Value Transfer, new
financing arrangements, the assignment of certain USX corporate assets and
liabilities and the payment of certain costs and expenses in connection with
the Separation. The selected unaudited pro forma financial information has been
derived from, or prepared on a basis consistent with, the unaudited pro forma
condensed combined financial statements of United States Steel Corporation,
including the notes thereto, included in Annex C of this proxy
statement/prospectus. This information is presented for illustrative purposes
only and is not necessarily indicative of the results of operations or
financial position that would have occurred at the beginning of each period
presented or on the dates indicated, nor is it necessarily indicative of the
future operating results or financial position of United States Steel
Corporation. This information should also be read in conjunction with the
unaudited pro forma condensed combined financial statements of United States
Steel, including the notes thereto, included in Annex C of this proxy
statement/prospectus.
Three Months Ended Year Ended
or as of or as of
March 31, 2001 December 31, 2000
------------------ -----------------
(Dollars in millions except per
share amounts)
Statement of Operations Information:
Revenues and other income.................. $1,564 $6,132
Income (loss) from operations.............. (101) 104
Net income ................................ 16 23
Per Common Share Data:
Net income
--basic.................................. $ 0.18 $ 0.26
--diluted................................ 0.18 0.26
Balance Sheet Data:
Total Assets............................... $8,487
Capitalization:
Debt..................................... $1,607
Equity................................... 2,702
------
Total capitalization................... $4,309
======
11
SELECTED UNAUDITED PRO FORMA INFORMATION FOR MARATHON OIL CORPORATION
The following selected unaudited pro forma financial information of Marathon
Oil Corporation gives effect to the discontinuance of the businesses of United
States Steel, the $900 million Value Transfer, the assignment of certain USX
corporate assets and liabilities to United States Steel Corporation, the
payment of certain costs and expenses in connection with the Separation, and
the distribution of New U. S. Steel Shares to the holders of U. S. Steel Group
Shares. The selected unaudited pro forma financial information has been derived
from, or prepared on a basis consistent with, the unaudited pro forma condensed
financial statements of Marathon Oil Corporation, including the notes thereto,
included in Annex C of this proxy statement/prospectus. This information is
presented for illustrative purposes only and is not necessarily indicative of
the results of operations or financial position that would have occurred at the
beginning of each period presented or on the dates indicated, nor is it
necessarily indicative of the future operating results or financial position of
Marathon Oil Corporation. This information should also be read in conjunction
with the unaudited pro forma condensed financial statements of Marathon Oil
Corporation, including the notes thereto, included in Annex C of this proxy
statement/prospectus.
Three Months Ended Year Ended
or as of or as of
March 31, 2001 December 31, 2000
------------------ -----------------
(Dollars in millions except per
share amounts)
Statement of Operations Information:
Revenues and other income................. $8,735 $33,859
Income from operations.................... 912 1,648
Income before extraordinary losses and
cumulative effect of change in accounting
principle................................ 494 375
Per Common Share Data:
Income before extraordinary losses and
cumulative effect of change in accounting
principle
--basic................................. $1.60 $1.20
--diluted............................... 1.60 1.20
Balance Sheet Data:
Total Assets.............................. $16,638
Capitalization:
Debt.................................... $ 4,067
Preferred stock of subsidiary........... 250
Minority interest in MAP................ 1,938
Equity.................................. 4,345
-------
Total capitalization.................. $10,600
=======
12
MARKET PRICE AND DIVIDEND INFORMATION OF
MARATHON GROUP SHARES AND U. S. STEEL GROUP SHARES
The principal trading market for the Marathon Group Shares and the U. S.
Steel Group Shares is the NYSE. Marathon Group Shares and U. S. Steel Group
Shares are also listed on the Pacific Stock Exchange ("PSE") and the Chicago
Stock Exchange ("CSE"). The following tables set forth, for the periods
indicated, the high and low closing sale price per share on the NYSE, based on
published financial sources.
U. S. Steel
Marathon Group Shares Group Shares
--------------------- --------------
High Low High Low
--------------------- ------- ------
1999:
First Quarter........................... $ 31.38 $ 19.63 $ 29.13 $22.25
Second Quarter.......................... 32.75 25.81 34.25 23.50
Third Quarter........................... 33.88 28.50 30.06 24.56
Fourth Quarter.......................... 30.63 23.63 33.00 21.75
2000:
First Quarter........................... $ 27.50 $ 20.69 $ 32.94 $20.63
Second Quarter.......................... 29.19 22.81 26.88 18.25
Third Quarter........................... 29.63 23.50 19.69 14.88
Fourth Quarter.......................... 30.38 25.25 18.31 12.69
2001:
First Quarter........................... $ 29.99 $ 25.85 $ 18.00 $14.00
Second Quarter..........................
Third Quarter (through )............
On November 29, 2000, the last full trading day prior to the announcement
that our board of directors authorized an in-depth study of our targeted stock
structure, the last reported sales prices of U. S. Steel Group Shares and
Marathon Group Shares on the NYSE Composite Tape were $13.81 per share and
$27.50 per share, respectively. On April 23, 2001, the last full trading day
prior to the announcement that our board of directors authorized management to
take steps necessary to implement the Separation, the last reported sales
prices of U. S. Steel Group Shares and Marathon Group Shares on the NYSE
Composite Tape were $15.89 per share and $31.37 per share, respectively. On
, 2001, the last full trading day prior to the printing of this proxy
statement/prospectus, the last reported sales prices of U. S. Steel Group
Shares and Marathon Group Shares on the NYSE Composite Tape were $ per share
and $ per share, respectively. Stockholders are urged to obtain a current
market quotation for the U. S. Steel Group Shares and the Marathon Group
Shares.
In recent years, USX paid a quarterly dividend on the U. S. Steel Group
Shares of $0.25 per share. On April 24, 2001, the USX board of directors
declared a reduced dividend on U. S. Steel Group Shares of $0.10 per share.
For the periods indicated above through June 10, 2000, USX paid a quarterly
dividend on the Marathon Group Shares of $0.21 per share. Since September 9,
2000, USX has paid a quarterly dividend on the Marathon Group Shares of $0.23
per share.
Current Dividend Policy. The USX board of directors declares and pays
dividends on Marathon Group Shares and U. S. Steel Group Shares based on the
financial condition and results of operations of the Marathon Group and the U.
S. Steel Group, long-term earnings and cash flow capabilities of the Marathon
Group and the U. S. Steel Group as well as the dividend policies of similar
publicly traded oil and gas and steel companies. In determining its dividend
policy with respect to Marathon Group Shares and U. S. Steel Group Shares, the
USX board of directors has relied on the separate financial statements of the
Marathon Group and the U. S. Steel Group.
13
As set forth in the USX Restated Certificate of Incorporation, dividends on
Marathon Group Shares and U. S. Steel Group Shares are limited to legally
available funds of USX, which are determined on the basis of the entire
corporation. Dividends on U. S. Steel Group Shares are further limited to the
"Available Steel Dividend Amount," an amount similar to the amount that would
be legally available for the payment of dividends on the U. S. Steel Group
Shares under Delaware law if the U. S. Steel Group were a separate company.
Post-Separation Dividend Policy. Following the Separation, the declaration
of dividends on New U. S. Steel Shares and Marathon Shares will be at the
discretion of the boards of directors of United States Steel Corporation and
Marathon Oil Corporation, respectively, and will be determined after
consideration of various factors, including, without limitation, in each case
the earnings and financial condition of United States Steel Corporation and
Marathon Oil Corporation and their subsidiaries. The boards of directors of
United States Steel Corporation and Marathon Oil Corporation will have the
right to change the amount of dividends at any time. It is expected that the
terms of indebtedness to be entered into in connection with the Separation may
limit the ability of United States Steel Corporation to pay dividends following
the Separation. See "THE SEPARATION--Financing Arrangements Relating to the
Separation."
14
RISK FACTORS
In addition to the other information included and incorporated by reference
in this proxy statement/prospectus, you should consider the following matters
in deciding whether to vote in favor of the Separation.
Risks Related to Separation
United States Steel Corporation and Marathon Oil Corporation Will Be Subject to
Continuing Contingent Liabilities of the Other Company Following the Separation
Although the Separation should reduce the potential liability of United
States Steel Corporation and Marathon Oil Corporation for liabilities of the
other, there remain several significant areas where the liabilities of Marathon
or United States Steel may become an obligation of the other company following
the Separation. Following the Separation, under the terms of the governing
agreements and instruments, United States Steel Corporation will remain
contingently liable for debt and other obligations of Marathon Oil Corporation
reflected in its financial statements in the amount of approximately $1.4
billion as of March 31, 2001. Similarly, under the terms of the governing
agreements and instruments, Marathon Oil Corporation will remain contingently
liable for debt and certain guarantee and lease obligations of United States
Steel Corporation in the amount of approximately $703 million as of March 31,
2001.
Under the Internal Revenue Code of 1986, as amended, and the rules and
regulations promulgated thereunder (the "Code"), each corporation that was a
member of the USX consolidated group during any taxable period or portion
thereof ending on or before the effective time of the Separation is jointly and
severally liable for the federal income tax liability of the entire USX
consolidated group for such taxable period. See "RELATIONSHIP BETWEEN NEW
UNITED STATES STEEL CORPORATION AND MARATHON OIL CORPORATION FOLLOWING THE
SEPARATION--Tax Sharing Agreement." Other provisions of federal law establish
similar liability for other matters, including laws governing tax qualified
pension plans as well as other contingent liabilities.
The Separation May Be Challenged by Creditors as a Fraudulent Transfer or
Conveyance
If a court in a suit by an unpaid creditor or representative of creditors of
either United States Steel Corporation or Marathon Oil Corporation, such as a
trustee in bankruptcy, or United States Steel Corporation or Marathon Oil
Corporation, as debtor-in-possession, in a reorganization case under title 11
of the United States Code, were to find that:
. the Separation and the related transactions were undertaken for the
purpose of hindering, delaying or defrauding creditors, or
. Marathon Oil Corporation or United States Steel Corporation received
less than reasonably equivalent value or fair consideration in
connection with the Separation and the transactions related thereto and
(i) USX was insolvent immediately prior to, or Marathon Oil Corporation
or United States Steel Corporation was insolvent at the effective time
of the Separation and after giving effect thereto, (ii) USX immediately
prior to, or Marathon Oil Corporation or United States Steel Corporation
as of the effective time of the Separation and after giving effect
thereto, intended or believed that it would be unable to pay its debts
as they became due, or (iii) the capital of USX immediately prior to, or
Marathon Oil Corporation or United States Steel Corporation, at the
effective time of the Separation and after giving effect thereto, was
inadequate to conduct its business,
then such court could determine that the Separation and the related
transactions violated applicable provisions of the United States Bankruptcy
Code and/or applicable state fraudulent transfer or conveyance laws. Such a
determination would permit the bankruptcy trustee or debtor-in-possession or
unpaid creditors to rescind the Separation.
15
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied.
Generally, however, an entity would be considered insolvent if, either:
. the sum of its liabilities, including contingent liabilities, is greater
than its assets, at a fair valuation; or
. the present fair saleable value of its assets is less than the amount
required to pay the probable liability on its total existing debts and
liabilities, including contingent liabilities, as they become absolute
and matured.
United States Steel Corporation and Marathon Oil Corporation May Be Unable to
Achieve All of the Benefits Sought by the Separation
We believe that Marathon Oil Corporation and United States Steel Corporation
will realize strategic and financial benefits as a result of the Separation,
including permitting Marathon Oil Corporation and United States Steel
Corporation to focus on their core businesses and make critical business
investments needed to grow their respective businesses and removing impediments
to participation in industry consolidation. We discuss these and other expected
benefits of the Separation under "THE SEPARATION--Reasons for the Separation."
However, we cannot predict with certainty when these benefits will be achieved,
the extent to which they will be achieved, or whether they will occur at all.
The following are factors that may prevent Marathon Oil Corporation and United
States Steel Corporation from realizing these benefits:
. competitors in the steel industry and the oil and gas industry may have
greater financial resources to make such investments or participate in
such consolidation on more attractive terms;
. substantial indebtedness of Marathon Oil Corporation and United States
Steel Corporation may impede either Marathon Oil Corporation or United
States Steel Corporation or both of them from participating in certain
investment or consolidation transactions; and/or
. domestic and international economic conditions may make such investments
and consolidation more costly.
Additionally, many factors may affect future results of Marathon Oil
Corporation and United States Steel Corporation. See "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
Following the Separation, Marathon Oil Corporation and United States Steel
Corporation Will Not Be Consolidated for Tax Purposes and United States Steel
Corporation's Recognition of the Benefits of Its Tax Losses Will Be Delayed
Prior to the Separation, USX filed consolidated, combined and unitary tax
returns for federal and many states' income taxes, which included the results
of operations of the U. S. Steel Group and the Marathon Group. As a result of
the Separation, United States Steel Corporation will not be able to join with
Marathon Oil Corporation in any consolidated, combined, or unitary tax returns
for taxable periods ending after the effective time of the Separation.
Consequently, for federal and state income tax purposes, taxable income or
losses, and other tax attributes of United States Steel Corporation for taxable
periods ending after the effective time of the Separation generally cannot
offset, or be offset by, taxable income or losses and other tax attributes of
Marathon Oil Corporation.
Additionally, the present USX tax allocation policy requires the Marathon
Group and the U. S. Steel Group to pay the other for tax benefits resulting
from tax attributes which cannot be utilized currently by the group to which
such attributes are attributable on a stand-alone basis but which can be
utilized on a consolidated, combined, or unitary basis. The net amount of cash
payments paid by Marathon to United States Steel under the tax allocation
policy, subject to adjustment, was $21 million, $(2) million, $91 million and
$364 million during the years 1998, 1999, 2000 and the first quarter of 2001,
respectively. Such payments allow the group generating the tax attributes to
currently realize the tax benefits. After the Separation, if
16
Marathon Oil Corporation or United States Steel Corporation generates losses or
other tax attributes, generally, the company generating such losses or other
tax attributes would benefit from those losses or other tax attributes only if
and when it generated sufficient taxable income in future years to utilize
those losses or other tax attributes on a stand-alone basis. Such a delay may
require reduction or postponement of capital expenditures or acquisitions.
The Separation May Become Taxable Under Section 355(e) of the Code if 50% or
More of the Marathon Shares or New U. S. Steel Shares Are Acquired as Part of a
Plan
Although completion of the Separation is conditioned upon receipt of a
favorable IRS private letter ruling that the Separation will qualify as a tax-
free distribution under Section 355 of the Code, the Separation may become
taxable to USX pursuant to Section 355(e) of the Code if 50% or more of the
Marathon Shares or New U. S. Steel Shares are acquired, directly or indirectly,
as part of a plan or series of related transactions that include the
Separation. See "THE SEPARATION--Material U.S. Federal Income Tax
Consequences." If Section 355(e) applies, USX would be required to pay a
corporate tax based on the excess of the fair market value of the shares
distributed over USX's tax basis for such shares. The amount of such tax would
be materially greater if the Separation were deemed to be a distribution of
Marathon Shares. The party which would bear the burden of the corporate tax
would be determined under the tax sharing agreement to be entered into in
connection with the Separation. See the discussion in "RELATIONSHIP BETWEEN
UNITED STATES STEEL CORPORATION AND MARATHON OIL CORPORATION FOLLOWING THE
SEPARATION--Tax Sharing Agreement." Even if Section 355(e) were to apply to
cause the Separation to be taxable to USX, it would remain tax-free to USX
stockholders.
Provisions of the Certificates of Incorporation and By-laws of United States
Steel Corporation and Marathon Oil Corporation and of Delaware Law Could Deter
Takeover Attempts
The certificate of incorporation and by-laws of United States Steel
Corporation and of USX, which will be renamed Marathon Oil Corporation, contain
provisions that may have the impact of delaying or precluding an acquisition of
United States Steel Corporation or Marathon Oil Corporation without the
approval of the board of directors of such company. Such provisions include a
classified board of directors, a provision prohibiting stockholder action by
written consent, and a provision prohibiting stockholders from calling special
meetings. The foregoing provisions are identical to the provisions that are
currently included in the Restated Certificate of Incorporation of USX and the
By-Laws of USX. In addition, under the stockholder rights plan of each of
Marathon Oil Corporation and United States Steel Corporation, disinterested
stockholders may acquire additional Marathon Shares or New U. S. Steel Shares,
respectively, or of an acquiring company at a substantial discount in the event
of certain described changes of control. In addition, there are provisions of
Delaware law that may also have the effect of precluding an acquisition of
United States Steel Corporation or Marathon Oil Corporation without the
approval of the board of directors of such company. See "COMPARISON OF THE
RIGHTS OF STOCKHOLDERS--Certain Antitakeover Considerations."
Marathon Oil Corporation Will Continue to Have Financial Exposure to United
States Steel Corporation
Pursuant to the financial matters agreement to be entered into by Marathon
Oil Corporation and United States Steel Corporation in connection with the
Separation (the "Financial Matters Agreement"), United States Steel Corporation
will assume $703 million of financial obligations of Marathon in connection
with the Separation, including, as of March 31, 2001, $479 million of
industrial revenue bonds, an $86 million capitalized lease and $138 million of
certain guarantee and lease obligations. Although United States Steel
Corporation will assume such amounts under the Financial Matters Agreement,
Marathon (as the successor to USX) will remain contingently responsible for
repayment of these items. The Financial Matters Agreement does not contain any
financial covenants and United States Steel Corporation will remain free to
incur additional debt and grant mortgages or security interests. United States
Steel Corporation will be more highly leveraged than USX, will have a non-
investment grade credit rating and has or likely will be granting security
interests in
17
certain assets. If United States Steel Corporation were to default under these
assumed obligations, Marathon will be responsible for them. See "THE
SEPARATION--Description of Financing Arrangements Relating to the Separation."
Certain Obligations to Be Assumed by United States Steel Corporation in the
Separation May Be Accelerated in the Event of the Bankruptcy of Marathon Oil
Corporation
If the Separation had occurred on March 31, 2001, United States Steel
Corporation would have become responsible for certain industrial revenue bonds
(pursuant to the Financial Matters Agreement) and certain guarantee and lease
obligations totaling approximately $703 million. Additionally, United States
Steel Corporation is contingently liable for debt and other obligations of
Marathon Oil Corporation reflected in its financial statements in the amount of
approximately $1.4 billion as of March 31, 2001. Marathon Oil Corporation is
not limited by agreement with United States Steel as to the amount of
indebtedness that it may incur and, in the event of the bankruptcy of Marathon
Oil Corporation, the holders of the industrial revenue bonds, and such other
obligations, may declare them immediately due and payable. If such event
occurs, United States Steel Corporation may not be able to satisfy such
obligations. See "RISK FACTORS--Following the Separation, United States Steel
Corporation Will Not Have Access to the Financial and Other Resources of USX
Corporation.
Risks Related to the Business of United States Steel
Overcapacity in the Steel Industry May Negatively Affect United States Steel's
Results of Operations
On a global basis, there is an excess of steel-making capacity, including
sheet, plate and tubular products, over global consumption of steel products.
Under these conditions, shipment and production levels for United States
Steel's domestic operations have varied from year to year and quarter to
quarter, affecting United States Steel's results of operations and cash flows.
Many factors influence these results, including demand in the domestic market,
international currency conversion rates, and government actions, both domestic
and international. In addition, in many applications, steel competes with many
materials, including aluminum, cement, composites, glass, plastic and wood. The
emergence of additional substitutes for steel products could adversely affect
future market prices and demand for steel products. See "HISTORICAL FINANCIAL
INFORMATION FOR UNITED STATES STEEL--Management's Discussion & Analysis " in
Annex F.
Imports of Steel Could Negatively Affect United States Steel's Results of
Operations
Imports of steel into the United States constituted 23%, 27%, 26% and 30% of
the domestic steel market for the first three months of 2001, and the years
2000, 1999 and 1998, respectively. See "HISTORICAL FINANCIAL INFORMATION FOR
UNITED STATES STEEL --Management's Discussion & Analysis" in Annex F. We
believe that steel imports into the United States involve widespread dumping
and subsidy abuses, and that the remedies provided by United States law to
private litigants are insufficient to correct these problems. See "INFORMATION
ABOUT UNITED STATES STEEL--United States Steel Legal Proceedings" in Annex D.
Many of United States Steel's International Competitors Are Larger and Have
Stronger Credit Ratings.
Although it is the largest domestic integrated steel producer, based on
International Iron and Steel Institute statistics, United States Steel ranks as
the fourteenth largest steel producer in the world (United States Steel's rank
would have been eleventh if production volumes of USSK had been included for
the full year). Many of its larger competitors have investment grade credit
ratings and, due to their superior size and credit ratings, United States Steel
may be at a disadvantage in participating in international consolidations.
18
Competition From Mini-Mill Producers Could Result in Reduced Selling Prices and
Shipment Levels for United States Steel
Domestic integrated producers, such as United States Steel, have lost market
share in recent years to domestic mini-mill producers. Mini-mills generally
produce a narrower range of steel products than integrated producers, but
typically enjoy certain competitive advantages such as lower capital
expenditures for construction of facilities and non-unionized work forces with
lower employment costs and more flexible work rules. An increasing number of
mini-mills utilize thin slab casting technology to produce flat-rolled
products. Through the use of thin slab casting, mini-mill competitors are
increasingly able to compete directly with integrated producers of flat-rolled
products, especially hot-rolled product. Depending on market conditions, the
additional production generated by flat-rolled mini-mills could have an adverse
effect on United States Steel's selling prices and shipment levels. See
"INFORMATION ABOUT UNITED STATES STEEL CORPORATION FOLLOWING THE SEPARATION--
Description of the Business of United States Steel Corporation"in Annex D.
High Energy Costs Can Adversely Impact United States Steel's Results of
Operations
United States Steel's operations consume large amounts of energy, a
significant amount of which is natural gas. Domestic natural gas prices have
significantly increased from an average of $2.27 per million BTUs in 1999 to
$7.09 per million BTUs in the first quarter of 2001. A $1.00 change in natural
gas prices would result in an estimated $50 million change in United States
Steel's annual pretax operating costs.
Environmental Compliance and Remediation Could Result in Substantially
Increased Capital Requirements and Operating Costs
The domestic businesses of United States Steel are subject to numerous
federal, state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air Act
("CAA") with respect to air emissions; the Clean Water Act ("CWA") with respect
to water discharges; the Resource Conservation and Recovery Act ("RCRA") with
respect to solid and hazardous waste treatment, storage and disposal; and the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
with respect to releases and remediation of hazardous substances. In addition,
all states where United States Steel operates have similar laws dealing with
the same matters. These laws are constantly evolving and becoming increasingly
stringent. The ultimate impact of complying with existing laws and regulations
is not always clearly known or determinable due in part to the fact that
certain implementing regulations for laws such as RCRA and the CAA have not yet
been promulgated or in certain instances are undergoing revision. These
environmental laws and regulations, particularly the CAA, could result in
substantially increased capital, operating and compliance costs. See
"INFORMATION ABOUT UNITED STATES STEEL--Description of the Business of United
States Steel: Environmental Matters" in Annex D. In addition, United States
Steel is involved in a number of environmental remediation projects relating to
the remediation of former and present operating locations and is involved in a
number of other remedial actions under federal and state law. See "INFORMATION
ABOUT UNITED STATES STEEL--Description of the Business of United States Steel:
Environmental Matters" in Annex D. United States Steel's environmental
expenditures were $230 million in 2000, $253 million in 1999 and $266 million
in 1998.
U. S. Steel Kosice s.r.o. ("USSK") is subject to the national laws of the
Slovak Republic. The environmental laws of the Slovak Republic generally follow
the requirements of the European Union. In addition USSK has entered into
agreements with the government to undertake construction of new environmental
control technologies. See "INFORMATION ABOUT UNITED STATES STEEL--Description
of the Business of United States Steel" in Annex D.
We believe that all of our domestic steel competitors are subject to similar
environmental laws and regulations. However, the specific impact on each
competitor may vary depending upon a number of factors, including the age and
location of operating facilities, production processes (such as mini-mill or
integrated
19
producer) and the specific products and services it provides. To the extent
that competitors, particularly foreign steel producers and manufacturers of
competitive products, are not required to undertake equivalent costs, the
competitive position of United States Steel could be adversely impacted.
United States Steel's Retiree Employee Health Care and Retiree Life Insurance
Costs Are Higher Than Those of Many of its Competitors
United States Steel maintains defined benefit retiree health care and life
insurance plans covering most domestic employees upon their retirement. Health
care benefits are provided through comprehensive hospital, surgical and major
medical benefit provisions or through health maintenance organizations, both
subject to various cost sharing features. Life insurance benefits are provided
to nonunion retiree beneficiaries primarily based on employees' annual base
salary at retirement. For domestic union retirees, benefits are provided for
the most part based on fixed amounts negotiated in labor contracts with the
appropriate unions. As of December 31, 2000, United States Steel reported an
unfunded obligation for such matters in the amount of $1,307 million. Mini-
mills, foreign competitors and many producers of products that compete with
steel are obligated to provide lesser benefits to their employees and retirees
and this difference in costs could adversely impact United States Steel's
competitive position.
Bankruptcies of Domestic Competitors Have Resulted in Lowered Operating Costs
of Such Competitors
Since 1998, eighteen domestic steel companies have sought protection under
Chapter 11 of the United States Bankruptcy Code. Many of these companies have
continued to operate and have enjoyed significant cost advantages over United
States Steel. In many cases, they have even expanded and modernized while in
bankruptcy. Upon emergence from bankruptcy, these companies, or new entities
that purchase their facilities through the bankruptcy process, have been
relieved of certain environmental, retiree and other obligations. As a result,
they are able to operate with lower costs than United States Steel.
Many Lawsuits Have Been Filed Against United States Steel Involving Asbestos-
Related Injuries
United States Steel has been and is a defendant in a large number of cases
in which plaintiffs allege injury resulting from exposure to asbestos. Many of
these cases involve multiple plaintiffs and most have multiple defendants.
These cases fall into three major groups: (1) claims made under federal and
general maritime law by employees of the Great Lakes or Intercoastal Fleets,
former operations of United States Steel; (2) claims by persons who did work at
United States Steel facilities; and (3) claims made by industrial workers
allegedly exposed to an electrical cable product formerly manufactured by
United States Steel. It is not possible to predict with certainty the outcome
of these matters. If adversely determined, these lawsuits could have a material
adverse effect on United States Steel's financial position. See "INFORMATION
ABOUT UNITED STATES STEEL--United States Steel Legal Proceedings" in Annex D.
United States Steel's International Operations Expose United States Steel to
Uncertainties and Risks From Abroad Which Could Negatively Affect Its Results
of Operations
USSK, located in the Slovak Republic, constitutes 26% of United States
Steel's total raw steel capacity and also accounted for 16% of revenue for the
first quarter of 2001, the majority of which was derived from European sales.
Results of operations of USSK are subject to economic conditions in markets it
serves and to political factors, including taxation, nationalization,
inflation, currency fluctuations, increased regulation and approval
requirements and governmental regulation, in the Slovak Republic and Europe. In
addition, USSK is subject to foreign currency exchange risks in that its
revenues are denominated primarily in Euros and its costs are primarily in
Slovak crowns and United States dollars.
20
Following the Separation, United States Steel Corporation Will Have a
Substantial Amount of Indebtedness and Other Obligations, Which Could Limit Its
Operating Flexibility and Otherwise Adversely Affect Its Financial Condition
If the Separation had occurred on March 31, 2001, United States Steel
Corporation would be liable for indebtedness and other obligations in a total
amount equal to approximately $1.6 billion, after giving effect to the $900
million Value Transfer. Obligations will be incurred in order to refinance
existing USX indebtedness attributed to the U. S. Steel Group and for working
capital needs. In the Separation, United States Steel Corporation will agree to
be responsible for certain guarantee and lease obligations of Marathon Oil
Corporation not reflected in its financial statements. As of March 31, 2001,
these obligations were estimated to be $ million. See "THE SEPARATION--
Financing Arrangements Relating to the Separation." This substantial amount of
indebtedness could limit United States Steel's operating flexibility and could
otherwise adversely affect United States Steel's financial condition.
United States Steel's Business Requires Substantial Debt Service, Capital
Investment and Maintenance Requirements Which United States Steel May Be Unable
to Meet
United States Steel anticipates that its debt service (scheduled interest
and principal payments) for the five years immediately following the Separation
will be approximately $850 million in the aggregate. Additionally, United
States Steel's operations are capital intensive. For the five-year period
ending December 31, 2000, total capital expenditures were $1,439 million.
United States Steel's business also requires substantial expenditures for
routine maintenance. There can be no assurance that United States Steel will be
able to raise such amounts through internally generated cash or from external
sources. See "RISK FACTORS--Following the Separation, United States Steel
Corporation Will Not Have Access to the Financial and Other Resources of USX
Corporation" and "--Operating and Cash Losses and Fewer Sources of Cash."
Operating and Cash Losses and Fewer Sources of Cash
For the first quarter ended March 31, 2001 and the year ended December 31,
2000, the U. S. Steel Group had segment income (loss) from operations of ($110)
million and $25 million, respectively. Additionally, in the year 2000, the U.
S. Steel Group generated negative cash from operations after investing
activities and dividends (after excluding the $500 million elective VEBA
funding) of ($494) million. There can be no assurance that United States Steel
will realize positive operating income or cash flows from continuing operations
in the foreseeable future.
Historically, United States Steel provided for negative cash flow with cash
supplied by USX, a portion of which was reflected as a payment from Marathon
under the tax allocation policy and the remainder of which was represented by
increased amounts of debt attributed to the U. S. Steel Group. As a stand alone
company, United States Steel Corporation will need to provide for its negative
cash flow from external sources and there is no assurance that adequate sources
will be available or that the cost will not adversely impact United States
Steel.
Following the Separation, United States Steel Corporation Will Not Have Access
to the Financial and Other Resources of USX Corporation
Prior to the Separation, the U.S. Steel Group has been and will continue to
be operated under the control of USX. Following the Separation, United States
Steel Corporation will not be able to rely on USX for financial support or
benefit from a relationship with USX to obtain credit. Immediately following
the Separation, United States Steel Corporation's credit ratings will be lower
than USX's current ratings. See "THE SEPARATION--Background of the Separation."
This will result in higher interest rates and make obtaining necessary capital
more difficult. Following the Separation, the annual weighted average interest
rate of United States Steel Corporation's debt and other obligations is
estimated to be approximately 8.25%. Following the Separation, United States
Steel Corporation will be responsible for obtaining its own sources of
21
financing and for its own treasury, cash management, accounting, legal, risk
management and other administrative activities. See "THE SEPARATION--Financing
Arrangements Relating to the Separation."
The Terms of Credit Agreements and Other Evidences of Indebtedness to Be
Entered Into by United States Steel Corporation in Connection With the
Separation Will Contain Restrictive Covenants that May Limit United States
Steel Corporation's Operating Flexibility
If the Separation had occurred on March 31, 2001, the amount of financing
that United States Steel Corporation would have incurred in connection with the
Separation, not including assumption of existing obligations, is $711 million.
It is expected that this new indebtedness, along with credit available pursuant
to an anticipated asset-based revolving credit facility, will impose
significant restrictions on United States Steel Corporation compared to the
terms of the current financial obligations of USX. For example, it is possible
that a portion of the new financing will be secured by certain assets not
currently secured. In addition, there may be covenants that, among other
things:
. require United States Steel Corporation to maintain certain financial
ratios and net worth;
. impose restrictions on payment of dividends;
. limit borrowings under the revolving credit facilities to specified
percentages of value of inventories and receivables; and
. restrict the ability to make capital expenditures necessary or desirable
to improve its business.
If these covenants are breached, creditors would be able to declare their
obligations immediately due and payable and foreclose on any collateral.
See "THE SEPARATION--Financing Arrangements Relating to the Separation" and
"HISTORICAL FINANCIAL INFORMATION FOR UNITED STATES STEEL--Management's
Discussion & Analysis" in Annex F.
Unionized Workforce
Currently, substantially all domestic hourly employees of United States
Steel's steel and taconite pellet facilities are covered by a collective
bargaining agreement with the United Steelworkers of America which expires in
August 2004 and includes a no-strike provision. Other hourly employees (for
example, those engaged in coal mining and transportation activities) are
represented by the United Mine Workers of America, United Steelworkers of
America and other unions. In addition, hourly employees of USSK are represented
by a union under a collective bargaining agreement expiring February 2004,
which is subject to annual wage negotiations. Strikes or work stoppages and the
resultant adverse impact on its relationship with its customers could have a
material adverse effect on United States Steel's business, financial condition
or results of operations. In addition, mini-mill producers and certain foreign
competitors and producers of comparable products do not have unionized work
forces and, therefore, United States Steel may be at a competitive
disadvantage.
United States Steel's Business is Cyclical
Demand for most of United States Steel's products is cyclical in nature and
sensitive to general economic conditions. The financial condition and results
of operations of United States Steel are generally affected by fluctuations in
the U.S. and global economies. Because of the generally high fixed costs of
steel-making, reduced volumes will result in operating inefficiencies, such as
those experienced in the first quarter of 2001. Over the past five years,
United States Steel's net income has varied from a high of $452 million in 1997
to a loss of $21 million in 2000. Future economic downturns, a stagnant economy
or currency fluctuations may adversely affect United States Steel's business,
results of operations and financial condition.
22
Risks Related to the Business of Marathon
A Substantial or Extended Decline in Oil or Gas Prices Would Have a Material
Adverse Effect on Marathon
Prices for oil and gas fluctuate widely. Marathon's revenues, operating
results and future rate of growth are highly dependent on the prices it
receives for its oil, gas and refined products. Historically, the markets for
oil, gas and refined products have been volatile and may continue to be
volatile in the future. Many of the factors influencing prices of oil, gas and
refined products are beyond the control of Marathon. These factors include:
. worldwide and domestic supplies of oil and gas,
. weather conditions,
. the ability of the members of OPEC to agree to and maintain oil price
and production controls,
. political instability or armed conflict in oil-producing regions,
. the price and level of foreign imports,
. the level of consumer demand,
. the price and availability of alternative fuels,
. the availability of pipeline capacity, and
. domestic and foreign governmental regulations and taxes.
Marathon is unable to predict the long-term effects of these and other
conditions on the prices of oil and gas. For example, oil prices declined
significantly in 1998 and, for an extended period of time, remained
substantially below prices obtained in previous years. In late 1999, oil and
natural gas prices increased significantly and have remained at higher levels.
Lower oil and gas prices may reduce the amount of oil and gas that Marathon
produces, which may adversely affect its revenues and operating income.
Significant reductions in oil and gas prices may require Marathon to reduce its
capital expenditures.
Oil and Gas Reserve Data and Future Net Revenue Estimates of Marathon Are
Uncertain
Estimates of reserves by necessity are projections based on engineering
data, the projection of future rates of production and the timing of future
expenditures. Estimates of Marathon's proved oil and gas reserves and projected
future net revenues are based on reserve reports which it prepares and a
portion of which are reviewed by independent petroleum engineers. The process
of estimating oil and gas reserves requires substantial judgment on the part of
the petroleum engineers, resulting in imprecise determinations, particularly
with respect to new discoveries. Different reserve engineers may make different
estimates of reserve quantities and revenues attributable thereto based on the
same data. Future performance that deviates significantly from the reserve
reports could have a material adverse effect on the business and prospects of
Marathon.
Fluctuations in the price of oil and natural gas have the effect of
significantly altering reserve estimates as the economic projections inherent
in the estimates may reduce or increase the quantities of recoverable reserves.
There can be no assurance, however, that such prices will be realized or that
the estimated production volumes will be produced during the periods indicated.
Actual future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves most likely will vary from our estimates.
23
If Marathon Fails to Acquire or Find Additional Reserves, Its Reserves and
Production Will Decline Materially From Their Current Levels
The rate of production from oil and gas properties generally declines as
reserves are depleted. Except to the extent that Marathon acquires additional
properties containing proved reserves, conducts successful exploration and
development activities or, through engineering studies, identifies additional
behind-pipe zones or secondary recovery reserves, its proved reserves will
decline materially as reserves are produced. Future oil and gas production is,
therefore, highly dependent upon our level of success in acquiring or finding
additional reserves. Because Marathon is smaller than many of its competitors,
it has fewer reserves and will be at an even greater disadvantage to its
competitors if it fails to acquire or find additional reserves.
Marathon's Refined Product Margins Can Be Adversely Affected by Rising Crude
Oil Prices and Environmental Regulations
Marathon conducts domestic refining, marketing and transportation operations
primarily through its 62% owned consolidated subsidiary, Marathon Ashland
Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest,
Southeast, Ohio River Valley and the upper Great Plains. The profitability of
these operations depends largely on the margin between the cost of crude oil
and other feedstocks refined and the selling prices of refined products. MAP is
a purchaser of crude oil in order to satisfy its refinery throughput
requirements. As a result, its overall profitability could be adversely
affected by availability of supply and rising crude oil and other feedstock
prices which are not recovered in the marketplace. Refined product margins have
been historically volatile and vary with the level of economic activity in the
various marketing areas, the regulatory climate, logistical capabilities and
the available supply of refined products.
In addition, environmental regulations, particularly the 1990 Amendments to
the CAA, have imposed, and are expected to continue to impose, increasingly
stringent and costly requirements on refining and marketing operations which
may have an adverse effect on margins.
The Oil and Gas Exploration and Production Industry Is Very Competitive
There is strong competition relating to all aspects of the oil and natural
gas industry, and in particular in the exploration and development of new oil
and natural gas reserves. Marathon competes with major integrated and
independent oil and gas companies for the acquisition of oil and gas properties
and leases, for the equipment and labor required to develop and operate these
properties, and in the marketing of natural gas to end-users. Many of these
competitors have financial and other resources substantially greater than that
available to Marathon. In addition, many of Marathon's larger competitors may
be better able to respond to factors that affect the demand for oil and natural
gas production, such as changes in worldwide oil and natural gas prices and
levels of production, the cost and availability of alternative fuels and the
application of government regulations. Marathon also competes in attracting and
retaining personnel, including geologists, geophysicists and other specialists
and generalists. There can be no assurance Marathon will be able to attract or
retain technical personnel in the future.
Many of Marathon's Competitors in Exploration and Production Have Greater
Resources Than Marathon
The oil and gas industry is characterized by a large number of companies,
none of which is dominant within the industry, but a number of which have
greater resources than Marathon. As a consequence, Marathon may find itself at
a competitive disadvantage in bidding for drilling rights and in completing
projects.
Environmental Compliance and Remediation Could Result in Increased Capital
Requirements and Operating Costs
The businesses of Marathon are subject to numerous federal, state and local
laws and regulations relating to the protection of the environment. These
environmental laws and regulations include: the CAA, with respect
24
to air emissions; CWA, with respect to water discharges; RCRA, with respect to
solid and hazardous waste treatment, storage and disposal; CERCLA, with respect
to releases and remediation of hazardous substances; and the Oil Pollution Act
of 1990, with respect to oil pollution and response. In addition, many states
where Marathon operates have similar laws dealing with the same matters. These
laws and their associated regulations are constantly evolving and many of them
have become more stringent. The ultimate impact of complying with existing laws
and regulations is not always clearly known or determinable due in part to the
fact that certain implementing regulations for laws such as RCRA and the CAA
have not yet been finalized or in certain instances are undergoing revision.
These environmental laws and regulations, particularly the 1990 Amendments to
the CAA, new water quality standards and stricter fuel regulations could result
in increased capital, operating and compliance costs.
Marathon has incurred and will continue to incur substantial capital,
operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of Marathon's products
and services, operating results will be adversely affected. Marathon believes
that substantially all of its competitors are subject to similar environmental
laws and regulations. However, the specific impact on each competitor may vary
depending on a number of factors, including the age and location of its
operating facilities, marketing areas, production processes and whether or not
it is engaged in the petrochemical business or the marine transportation of
crude oil or refined products.
Of particular significance to MAP are the new Tier II Fuels regulations
proposed in late 1999. The gasoline rules, which were finalized by the U.S.
Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel
rule which was finalized in January 2001, require substantially reduced sulfur
levels. The combined capital cost to achieve compliance with the gasoline and
diesel regulations could amount to approximately $700 million between 2003 and
2005. This is a forward-looking statement and can be only 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 considerations, and unforeseen hazards such as weather
conditions. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of Marathon's products and services,
operating results will be adversely affected.
Marathon's Reliance on Foreign Production of Oil and Gas Exposes Marathon to
Risks From Abroad Which Could Negatively Affect Its Results of Operations
Marathon's oil and gas producing activities rely heavily upon production
outside of the United States. For the years 2000, 1999 and 1998, international
production accounted for 48%, 33% and 34%, respectively. Development of new
production properties in countries outside the United States may require
protracted negotiations with host governments, national oil companies and third
parties and are frequently subject to economic and political considerations,
such as taxation, nationalization, inflation, currency fluctuations, increased
regulation and approval requirements and governmental regulation, which could
adversely affect the economics of projects.
Marathon's Exploration and Production Operations Are Subject to Business
Interruptions and Casualty Losses
Exploration and production operations are subject to unplanned occurrences,
including, without limitation, blowouts, explosions, fires, loss of well
control and spills, adverse weather, labor disputes, and maritime accidents. To
the extent not covered by insurance, Marathon's costs and revenues could be
adversely impacted.
25
Marathon's Refining, Marketing and Transportation Operations Are Subject to
Business Interruptions and Casualty Losses
Refining, marketing and transportation operations are subject to business
interruptions due to unplanned events such as explosions, fires, pipeline
interruptions, crude oil or refined product spills, inclement weather or labor
disputes. They are also subject to the additional hazards of marine operations,
such as capsizing, collision and damage or loss from severe weather conditions.
To the extent not covered by insurance, Marathon's costs and revenues could be
adversely impacted.
Marathon Does Not Insure Against All Potential Losses and Could Be Seriously
Harmed by Unexpected Liabilities
As discussed above, both the exploration and production and the refining,
marketing and transportation operations of Marathon are subject to business
interruptions and casualty losses. Marathon maintains insurance against many,
but not all, potential losses or liabilities arising from its operations in
accordance with customary industry practices and in amounts that it believes to
be prudent. Losses and liabilities arising from such events could reduce
Marathon's revenues and increase its costs to the extent not covered by
insurance. The occurrence of any of the aforementioned events and any payments
made as a result of such events and the liabilities related thereto, would
reduce the funds available for exploration, drilling and production and could
have a material adverse effect on Marathon's financial position or results of
operations.
26
THE HOLDING COMPANY REORGANIZATION
On [ , 2001], we completed a corporate reorganization to implement a new
holding company structure. As a result, 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 business of the Marathon
Group, and of United States Steel LLC, a Delaware limited liability company
which, directly and indirectly, owns and operates the business of the U. S.
Steel Group.
No action is or was required to be taken by any stockholder in connection
with the HoldCo Merger. Your stock certificates continue to represent Marathon
Group Shares or U. S. Steel Group Shares, as applicable. No changes were made
to the rights of any stockholder. References in this proxy statement/prospectus
to "Old USX" refer to USX Corporation, as it existed prior to the HoldCo
Merger.
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PROPOSAL ONE: THE SEPARATION
Structure of the Separation
Under the Plan of Reorganization, the Separation will be implemented by
merging a newly formed corporate subsidiary of USX ("Merger Sub") with and into
USX, with USX continuing as the surviving corporation (the "Separation
Merger").
As a result of the Separation Merger:
. the business of the U. S. Steel Group will be owned and operated by
United States Steel Corporation, which will be an independent, publicly
traded company, wholly owned by the holders of the then outstanding U.
S. Steel Group Shares;
. the business of the Marathon Group will be owned and operated by
Marathon Oil Corporation, which will be an independent, publicly traded
company, wholly owned by the holders of the then outstanding Marathon
Group Shares;
. each issued and outstanding U. S. Steel Group Share will be converted
into the right to receive one share of common stock, par value $1.00 per
share, of United States Steel Corporation ("New U. S. Steel Shares");
. Marathon Group Shares will remain outstanding and will be the sole
outstanding shares of USX common stock ("Marathon Shares"), and USX will
change its name to Marathon Oil Corporation; and
. each outstanding share of 6.50% Cumulative Convertible Preferred Stock,
no par value, of USX ("6.50% Preferred Stock") will be converted into
$50.00 in cash.
In connection with the Separation, certain indebtedness and other
obligations of USX will be repaid or retired and United States Steel
Corporation will incur indebtedness and other obligations and agree to repay
certain indebtedness and other obligations of USX, such that the amount of
indebtedness and other obligations for which United States Steel Corporation is
responsible immediately following the Separation is $900 million less than the
net amounts attributed to the U. S. Steel Group immediately prior to the
Separation. For a more detailed description of the Value Transfer, see "THE
SEPARATION--Financing Arrangements Relating to the Separation."
In connection with the Separation, each outstanding share of the 6.75%
Convertible Quarterly Income Preferred Security of USX Capital Trust I, a
subsidiary of USX, will be redeemed for $50.00 in cash.
The Separation will become effective at such time after the satisfaction or
waiver, to the extent permitted by law, of all of the conditions to the
Separation set forth in the Plan of Reorganization, as determined by the USX
board of directors, upon the filing of a certificate of merger with the
Secretary of State of the State of Delaware or such later time as specified in
the certificate of merger (the "Separation Effective Time"). Completion of the
Separation is subject to a number of conditions including the receipt of a
private letter ruling from the IRS. For a description of such conditions, see
"THE PLAN OF REORGANIZATION--Conditions to the Completion of the Separation."
Although we cannot predict the timing of receipt of such ruling or satisfaction
of such other conditions, we presently expect to complete the Separation on or
about December 31, 2001. The date upon which the Separation actually occurs is
referred to in this proxy statement/prospectus as the "Separation Date."
Your board may terminate the Plan of Reorganization and determine not to
proceed with the Separation at any time prior to its completion, even if it is
approved by our stockholders and all of the other conditions to the Separation
are satisfied. In the event that any of the conditions to the Separation are
not satisfied, such as failure to receive the IRS private letter ruling,
inability to complete the financing in amount, form and substance satisfactory
to the board or failure to receive stockholder approval of the Separation, or
if the board decides not to proceed with the Separation, USX will continue to
exist in its present form with two classes of common stock outstanding
representing the Marathon Group and the U. S. Steel Group.
28
Background of the Separation
In May 1991, stockholders of Old USX approved an amendment to the
certificate of incorporation of Old USX to provide for the issuance of two
classes of common stock--sometimes referred to as targeted stock-- intended to
separately reflect the performance of our steel and energy businesses without
diminishing the benefits of remaining a single corporation or restricting our
future restructuring options. Our targeted stock structure was designed to give
stockholders an opportunity to separately evaluate and invest in our steel and
energy businesses while allowing Old USX to finance its extensive capital
requirements on a consolidated basis.
Since that time, Old USX enjoyed lower capital and operating costs than it
believes would have been incurred by the Marathon Group and the U. S. Steel
Group had they been held by two separate corporations. Although our board of
directors believes that the existing structure has benefitted both classes of
our common stockholders over the past ten years, the board has, from time to
time, reviewed our capital structure and the performance of our targeted stock
and has considered alternative structures to enhance stockholder value for all
of our stockholders. On November 30, 2000, we announced that our board of
directors authorized management to retain financial, tax and legal advisors to
perform an in-depth study of our targeted stock structure and all alternative
structures which may be in the best interest of all of our stockholders.
In December 2000, we engaged Credit Suisse First Boston Corporation ("CSFB")
and Salomon Smith Barney ("SSB") as our financial advisors in connection with
our review of the targeted stock structure and available alternative
structures. Immediately thereafter, CSFB and SSB began their due diligence
investigation of our business and capital structure and commenced their review
of available alternative structures.
On February 27, April 3, April 23, and May 29, 2001, our board of directors
met with its financial, legal and tax advisors to discuss the proposed
separation of the Marathon Group and the U. S. Steel Group. At these meetings,
the board and its advisors considered whether our current targeted stock
structure was the optimal structure or if there were strategic alternatives
available that would be superior. The board believes that the businesses of the
Marathon Group and the U. S. Steel Group will improve, and stockholder value
will therefore increase, if both businesses grow and are positioned to
participate in consolidation opportunities in their respective industries and
markets. Over the past two years, the Marathon Group and the U. S. Steel Group
have engaged in major growth transactions. Marathon acquired Pennaco Energy
Inc. and acquired interests in producing properties from Shell U.K. Limited in
exchange for its 37.5% interest in Sakhalin Energy Investment Company Ltd. MAP
is participating in Centennial Pipeline, has agreed to acquire Midwest
convenience stores from Welsh Inc. and is forming a joint venture with Pilot
Corporation to expand its nationwide participation in the travel center market.
The U. S. Steel Group acquired an integrated steel facility in Kosice,
Slovakia, tin mill operations of LTV Steel and the remaining 50% interest in
Lorain Tubular Company, LLC. Both the Marathon Group and the U. S. Steel Group
have found, however, that they are at a competitive disadvantage in
participating in certain opportunities because of our targeted stock structure.
Our financial advisors confirmed that, in their experience, in transactions
involving equity securities as a substantial part of the overall consideration,
many parties, particularly international persons and corporations, strongly
prefer a so-called "asset based" stock of an issuer that has a single class of
common stock, as compared to a targeted stock. Among the reasons expressed by
such parties are concerns about the impact of actual and contingent liabilities
of the other business, concerns over whether one business is favored or
disfavored by executive management and directors and the combination of
different credit profiles into a single borrower. The board strongly believes
that the businesses of both the Marathon Group and the U. S. Steel Group will
be benefitted if they each have a single class, asset-based common stock
available for future consolidation activities.
In considering the Separation, the board was aware that the capital
structure of each company and the availability and cost of borrowings would be
a key factor for both companies. USX manages most financial activity on a
centralized consolidated basis, including issuance, repayment and repurchase of
debt. The financial
29
impact of these centralized financial activities are then attributed to the two
groups based upon their respective cash flows. Both businesses, but
particularly the U. S. Steel Group, have benefitted from the borrowing power of
USX.
The board believes that it is imperative that both companies going forward
be strong and competitive in their respective industries. This, in turn,
requires that each have adequate access to the capital markets. The board and
management consulted with its financial advisors and credit rating agencies
concerning the likely credit ratings of the two companies going forward and
their ability to raise necessary capital on appropriate terms and rates. Based
upon these discussions, the board concluded that if the U. S. Steel Group were
separated into an independent company with the debt level currently attributed
to it, it may be unable to raise necessary capital at competitive rates to
allow it to accomplish its business objectives. The board also concluded that
if the Marathon Group were separated with more debt than is currently
attributed to it, it would not adversely impact its ability to raise necessary
capital at competitive rates to allow it to accomplish its business objectives.
The board concluded, therefore, to adjust the amount of debt that will be
assumed by each company from amounts attributed to the two groups immediately
prior to the Separation.
The board and its advisors considered a range of possible adjustments and
evaluated each in the context of impact on business plans, possible business
conditions and credit ratings, following consultations with Moody's and
Standard & Poor's. Based upon these factors, the board determined that a value
transfer of $900 million is appropriate. To accomplish this, certain
indebtedness and other obligations of USX will be repaid or retired and United
States Steel Corporation will incur indebtedness and other obligations and
agree to repay certain indebtedness and other obligations of USX, such that the
amount of indebtedness and other obligations for which United States Steel
Corporation is responsible immediately following the Separation is $900 million
less than the net amounts attributed to the U. S. Steel Group immediately prior
to the Separation. The board believes that the Value Transfer will help
establish United States Steel Corporation as a strong, independent entity.
After giving effect to this Value Transfer, United States Steel Corporation
will have less debt and more stockholders' equity than U. S. Steel Group's
current balance sheet.
Based upon our discussions with the two rating agencies, the anticipated
corporate credit ratings of Marathon Oil Corporation and United States Steel
Corporation following the Separation are expected to be as follows:
Moody's Standard & Poor's
------- -----------------
Current USX unsecured debt ratings Baa1 BBB
Marathon Oil Corporation corporate ratings Baa1 BBB+
United States Steel Corporation corporate ratings Ba1 BB+
At a meeting on April 23, 2001, our board of directors authorized management
to take steps necessary to implement the Separation. We issued a press release
on April 24, 2001 announcing that our board had authorized management to take
such steps.
On [July 31,] 2001, our board of directors met with its legal, tax and
financial advisors to review the terms of the Separation. Legal counsel
reviewed for the board the structure of the Separation and the terms of the
Plan of Reorganization. CSFB and SSB reviewed for the board their financial
analysis of the Separation and delivered their opinions to the board that the
financial effects, taken as a whole, of the transactions contemplated by the
Plan of Reorganization, are fair, from a financial point of view, to the
holders of Marathon Group Shares and the holders of U. S. Steel Group Shares.
After full discussion, the board of directors unanimously approved the
Separation, adopted the Plan of Reorganization and determined to recommend that
our stockholders vote to adopt the Plan of Reorganization and approve the
transactions contemplated thereby.
30
Reasons for the Separation
Our board of directors believes that the Separation is in the best interest
of all of USX's stockholders and will create two strong, independent companies.
We believe that the Separation will:
. allow Marathon Oil Corporation and United States Steel Corporation to
focus on their core businesses;
. allow Marathon Oil Corporation and United States Steel Corporation to
make critical acquisitions and investments needed to grow their
respective businesses;
. provide each of Marathon Oil Corporation and United States Steel
Corporation with an appropriate capital structure for its business and
independent access to financial markets;
. remove impediments to participation in industry consolidation by
providing Marathon Oil Corporation and United States Steel Corporation
more flexibility in making stock-based acquisitions;
. align the liabilities and risks of each business with the company that
owns such business; and
. facilitate broader equity research coverage of each company, thereby
expanding the range of prospective investors in both the Marathon Shares
and the New U. S. Steel Shares.
Factors Considered by the Board of Directors in Approving the Separation
In recommending that USX stockholders approve the Separation and adopt the
Plan of Reorganization, our board of directors considered a number of factors
which they believe support their recommendation, including:
. the information and presentations regarding the historical and projected
industry and business conditions facing each of Marathon and United
States Steel.
. the historical results of operations, financial condition, assets,
liabilities, and cash flows of each of Marathon and United States Steel.
. the internally generated business plans for Marathon and United States
Steel prepared by our management, the assumptions underlying those
business plans and downside business condition scenarios for both groups
prepared by our management.
. the likelihood that the Separation will result in United States Steel
Corporation and Marathon Oil Corporation, as independent companies,
being more focused on their respective businesses.
. the impact of our targeted stock structure on the historical and
projected trading prices of Marathon Group Shares and U. S. Steel Group
Shares.
. the likelihood that the Separation would create stockholder value for
all of our stockholders and the opportunities to create similar value
for all of our stockholders under alternative structures.
. the likelihood that the Separation would enable Marathon and United
States Steel to participate in industry consolidation, thereby enhancing
stockholder value.
. the opinions of CSFB and SSB that the financial effects, taken as a
whole, of the transactions contemplated by the Plan of Reorganization,
are fair, from a financial point of view, to the holders of the Marathon
Group Shares and to the holders of the U. S. Steel Group Shares.
. the effect that the Value Transfer of $900 million would have on the
financial condition of United States Steel Corporation and Marathon Oil
Corporation.
. the opinion of American Appraisal Associates, Inc. (with respect to USX
prior to the Separation and with respect to each of Marathon Oil
Corporation and United States Steel Corporation after the Separation)
that the present fair saleable value of its assets would exceed its
probable liabilities; that
31
its cash flows would be adequate to pay its debts as they come due; and
that it has, and would have, adequate capital to conduct its business
operations.
. The terms of the Plan of Reorganization which provide that our board of
directors has the right to terminate the Plan of Reorganization at any
time prior to completion of the Separation, whether before or after
stockholder approval.
. The terms of the Plan of Reorganization which require the approval of
the holders of a majority of the outstanding Marathon Group Shares and
the holders of a majority of the outstanding U. S. Steel Group Shares,
each voting as a separate class.
The board of directors also considered many of the risks described under
the caption "RISK FACTORS", beginning on page , as potentially negative
factors in its evaluation of the proposed Separation. However, the board of
directors believes that such potentially negative factors are outweighed by
the potential advantages of the Separation.
The foregoing discussion of the information and factors considered by the
board of directors includes all of the material factors considered by the
board in reaching its conclusions and recommendations but is not meant to be
exhaustive. In view of the variety of factors considered in reaching its
determination, the board of directors did not find it practicable to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered in reaching its conclusions and recommendations. In addition,
individual members of the board of directors may have given different weights
to different factors.
Recommendation of the USX Board of Directors
The USX board of directors has determined that the Separation is advisable
and in the best interests of USX and the holders of Marathon Group Shares and
U. S. Steel Group Shares. Our board has unanimously approved the Separation
and approved and declared the advisability of the Plan of Reorganization, and
recommends that holders of Marathon Group Shares and U. S. Steel Group Shares
vote FOR adoption of the Plan of Reorganization.
Opinions of Financial Advisors
[TO COME]
Financing Arrangements Relating to the Separation
Current USX Financial Arrangements
USX manages most of its financial activities on a centralized, consolidated
basis. Such financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term debt; the
issuance, repurchase and redemption of preferred stock; and the issuance and
repurchase of common stock. Transactions that relate primarily to invested
cash, short-term and long-term debt (including convertible debt), related net
interest and other financial costs, and preferred stock and related dividends
are attributed to the Marathon Group and the U. S. Steel Group based upon the
cash flows of each group for the periods presented and the initial capital
structure of each group. However, transactions such as leases, certain
collaterized financings, certain indexed debt instruments, financial
activities of consolidated entities which are less than wholly owned by USX
and transactions related to securities convertible solely into the Marathon
Group or the U. S. Steel Group are specifically attributed to and reflected in
their entirety in the financial statements of the group to which they relate.
32
These are attributions for accounting purposes and do not reflect legal
ownership of cash or legal obligation to pay and discharge such obligations.
USX is the issuer of the 6.50% Preferred Stock, although it is attributed
solely to the U. S. Steel Group, and subsidiaries of USX are the issuers of
other Preferred Obligations. Subject to a limited number of exceptions, USX is
the legal obligor of long-term debt and other financial instruments, including
many--such as leases--that are not reflected as liabilities on the consolidated
or group balance sheets.
After the Separation, United States Steel Corporation will own and operate
the business of the U. S. Steel Group and United States Steel Corporation or
its subsidiaries will incur indebtedness and other obligations in an amount
approximately equal to all of the liabilities of or attributed to the U. S.
Steel Group immediately prior to the Separation, both absolute and contingent,
less the amount of the $900 million Value Transfer. Upon consummation of the
Separation, the name of USX Corporation will be changed to Marathon Oil
Corporation, and Marathon Oil Corporation and its subsidiary Marathon Oil
Company will own and operate the business of the Marathon Group and will remain
responsible for all of the liabilities of or attributed to the Marathon Group,
both absolute and contingent, plus $900 million. USX is presently the legal
obligor for most of the obligations attributed to both groups, and, therefore,
Marathon Oil Corporation will remain legally obligated for these obligations.
Accordingly, United States Steel Corporation will be required to incur new
indebtedness to repay or otherwise discharge a substantial amount of USX
obligations. Such repayment or discharge, after giving effect to the Value
Transfer, will be effected pursuant to the Financial Matters Agreement. The
indebtedness and other obligations to be incurred in connection with the
Separation are referred to herein as the "Financing."
After giving effect to the Financing required to complete the Separation,
and assuming the Separation had occurred on March 31, 2001, United States Steel
Corporation and its subsidiaries
. would be the direct obligor of $325 million of debt;
. would assume $565 million of debt of USX and $138 million of certain
guarantee and lease obligations (which guarantee and lease obligations
are not reflected in the financial statements of Marathon Oil
Corporation); and
. would incur new indebtedness in the amount of approximately $711 million
and pay $684 million of the net proceeds thereof to Marathon Oil
Corporation, to be used to repay or retire USX indebtedness and other
obligations.
Following the Separation, the annual weighted average interest rate of these
obligations is estimated to be approximately 8.25%. A one one-eighth ( 1/8)
percent change in that rate is expected to have an annual impact of about $2
million of interest expense. Completion of this Financing in amount, form and
substance satisfactory to our board of directors is a condition to completion
of the Separation.
USX Obligations to Be Direct Obligations of United States Steel Corporation
USSK Loan Facility. On November 24, 2000, USX acquired U. S. Steel Kosice
s.r.o ("USSK"). USSK has a loan facility with a group of financial institutions
aggregating $325 million. The facility, which is non-recourse to USX, bears
interest at a fixed rate of 8.5% per year. The loan is subject to annual
repayments of $20 million beginning in 2003, with the balance due in 2010.
Mandatory prepayments of the loan may be required based upon a cash flow
formula or a change in control of USX.
Operating Lease Obligations. United States Steel is the lessee under several
equipment leases, charters and an office building lease which, for accounting
purposes, are treated as operating leases. Total future lease payments under
these leases as of March 31, 2001 were approximately $250 million, with varying
maturities.
USX Obligations to Be Assumed by United States Steel Corporation
Industrial Revenue Bonds. As of March 31, 2001, USX had outstanding $479
million of obligations under industrial revenue bonds related to environmental
projects for current and former U. S. Steel Group facilities. Pursuant to the
Financial Matters Agreement, United States Steel Corporation will assume all
obligations under these instruments.
33
Fairfield Caster Lease. United States Steel Corporation is the lessee of a
slab caster at the Fairfield Works facility in Alabama with a term through
2012. This lease is treated as a capitalized lease and, as of March 31, 2001,
the amount of such obligation was $86 million. Pursuant to the terms of the
lease USX was obligated to assume, and did assume, the obligations under this
lease at the time of the HoldCo Merger. Under the Financial Matters Agreement,
United States Steel will assume and discharge all obligations under this lease.
Operating Lease Obligations and Guarantees. United States Steel will assume
$138 million of certain guarantees and lease obligations (not reflected in the
financial statements of Marathon Oil Corporation). Pursuant to the terms of
these guarantees and leases, USX was obligated to assume, and did assume the
obligations under these guarantees and leases at the time of the HoldCo Merger.
Under the Financial Matters Agreement, United States Steel Corporation will
assume and discharge all obligations under these guarantees and leases
following the Separation.
New Financing Arrangements of United States Steel Corporation
Assuming the Separation occurred on March 31, 2001, United States Steel
Corporation would have to incur new indebtedness in the amount of $711 million.
This indebtedness may include a combination of unsecured senior notes, lease
financings, a secured accounts receivable financing, and new preferred or other
security offerings with terms and conditions consistent with United States
Steel Corporation's expected BB+ corporate credit rating (as assigned by
Standard & Poor's on April 24, 2001) (see table in "THE SEPARATION--Background
of the Separation"). Approximately $684 million of the proceeds from this
financing would have been paid to Marathon Oil Corporation upon the Separation,
assuming the Separation had occurred on March 31, 2001. Also, approximately $27
million would have been used to pay United States Steel's portion of the
Separation Costs. In addition, a new asset-based revolving credit facility is
expected to be arranged to provide at least $400 million of liquidity. Our
financial advisors have indicated that they believe that sufficient capital
will be available to United States Steel Corporation through a combination of
the securities to meet its capitalization needs as well as to provide adequate
liquidity going forward. The Separation is conditioned upon the successful
implementation of this financing.
USX Obligations to Be Repaid or Retired
6.50% Preferred Stock Obligations. USX is the issuer of 2,404,487 shares of
the 6.50% Preferred Stock, which is presently convertible into U. S. Steel
Group Shares at a price of $46.125 per share and is attributed entirely to the
U. S. Steel Group. At the Separation Effective Time, each issued and
outstanding share of 6.50% Preferred Stock will be converted in the Separation
Merger into the right to receive $50.00 in cash, or an aggregate of
$120,224,350.
Redeemable Convertible Stock of a Subsidiary Trust. USX Capital Trust I, a
Delaware business trust and a subsidiary of USX, has outstanding 3,937,163
shares of 6.75% Convertible Quarterly Income Preferred Securities(TM) (the
"Trust Preferred"). The Trust Preferred has an initial liquidation amount of
$50.00 per share and is convertible into U. S. Steel Group Shares at a price of
$46.25 per share. In connection with the Separation, each issued and
outstanding share of Trust Preferred will be redeemed for $50.00 in cash, or an
aggregate of $196,858,150.
General Terms of the Financial Matters Agreement
The Financial Matters Agreement governs the assumption by United States
Steel Corporation of the industrial revenue bonds and other financial
obligations of USX specified above. The agreement provides that United States
Steel Corporation will assume and discharge all principal, interest and other
duties of USX under these assumed obligations, including any amounts due upon
any defaults or accelerations of any of the obligations, other than defaults or
accelerations caused by any action of Marathon Oil Corporation. The agreement
also provides that on or before the anniversary of the Separation, United
States Steel Corporation shall provide for the discharge of Marathon Oil
Corporation from any remaining liability under any of the assumed industrial
revenue Bonds. Such discharge may be accomplished by refinancing,
34
paying to Marathon Oil Corporation the then remaining principal amount of the
obligations or a combination of the foregoing.
The Financial Matters Agreement prohibits Marathon Oil Corporation from
taking any action that would create a default under the assumed obligations or
otherwise accelerate the payment obligations thereunder. The agreement also
obligates Marathon Oil Corporation to provide any letters of credit required
under any of these obligations provided that United States Steel Corporation
shall reimburse Marathon Oil Corporation in advance for the costs of such
letters of credit and shall indemnify and hold Marathon Oil Corporation
harmless against any draws under the letters of credit.
The Financial Matters Agreement provides for a general unsecured obligation
of United States Steel Corporation to Marathon Oil Corporation and ranks equal
to accounts payable and other obligations. The Financial Matters Agreement does
not contain any financial covenants and United States Steel Corporation and
Marathon Oil Corporation will remain free to incur additional debt, grant
mortgages or security interests in its property and sell or transfer assets
without the consent of Marathon Oil Corporation. The Financial Matters
Agreement also provides that Marathon Oil Corporation will indemnify United
States Steel Corporation against any claims arising out of USX financings not
assumed by United States Steel Corporation.
The Financial Matters Agreement is a contract between United States Steel
Corporation and Marathon Oil Corporation. It does not grant any rights to the
holders of the industrial revenue bonds or of any other obligation. Among other
things, United States Steel Corporation and Marathon Oil Corporation may amend
or modify the Financial Matters Agreement upon mutual agreement, and payments
by United States Steel Corporation to Marathon Oil Corporation do not create an
obligation on the part of Marathon Oil Corporation to redeem or repurchase any
of these instruments.
Financing Arrangements of USX to Be Continued by Marathon Oil Corporation
Revolving Credit Facility. In November 2000, USX entered into a $1,354
million 5-year revolving credit agreement, expiring in November 2005 with a
group of financial institutions. Interest on the facility is based on defined
short-term market rates. During the term of the credit agreement, USX is
obligated to pay a variable facility fee on total commitments, which at March
2001 was .125%. On March 31, 2001, $200 million had been borrowed under this
facility. This facility will remain outstanding as an obligation of Marathon
Oil Corporation following the Separation. USX also has a similar short-term
credit facility expiring on December , 2001 with the same financial
institutions as the 5-year revolving credit agreement. On March 31, 2001, there
were no borrowings under this facility. We expect that we will renew this
facility in 2001.
USX has from time to time issued commercial paper which it has classified as
long-term debt because it is supported by the unused and available credit on
the $1,354 million facility. On March 31, 2001, no commercial paper was
outstanding. We anticipate that Marathon Oil Corporation may issue commercial
paper in the future under similar circumstances.
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Other Existing USX Obligations to Be Continued. Marathon Oil Corporation
will continue to be the obligor on the obligations of USX. The principal
components of these obligations are:
Amount
Interest Rates Maturity (in millions) as of
Obligations % Range March 31, 2001
- ----------- -------------- --------- -------------------
Notes Payable................... 6.65 to 9.80% 2001-2023 $2,505
Obligations relating to
Industrial Revenue Bonds (1)... 3.30 to 6.875% 2009-2033 $ 508
Sale and Leasebacks (2)......... 8.04% 2012 $ 86
Bank Term Loan.................. 6.57% 2006 $ 30
Guaranteed Notes and Loans of
Subsidiaries................... 7.00 to 9.05% 2002-2006 $ 320
Preferred Obligations of a
Subsidiary..................... 6.75% 2037 $ 250
Operating Leases and
Guarantees..................... 5.00 to 11.75% 2002-2017 $ 609
- --------
(1) The rights and obligations pertaining to $479 million of the industrial
revenue bonds are being assigned to and assumed by United States Steel
Corporation pursuant to the Financial Matters Agreement.
(2) Fairfield Caster will be subleased to United States Steel Corporation under
the Financial Matters Agreement.
Treatment of Employee Stock Options in the Separation
In the Separation, all outstanding and unexercised options to purchase U. S.
Steel Group Shares or Marathon Group Shares will be converted into options to
purchase New U. S. Steel Shares or Marathon Shares, respectively, subject to
the same terms and conditions as the options being converted. The new options
have the same expiration dates and are subject to the same vesting requirements
as the options being converted, and will cover the same number of shares and
have the same exercise prices as the options being converted, provided that the
number of shares and/or the exercise prices will be adjusted, if necessary, so
that (i) the aggregate intrinsic value of the new options immediately after the
Separation Effective Time is not greater than the aggregate intrinsic value of
the options being converted immediately before the Separation Effective Time,
and (ii) the ratio of the exercise prices per share to the market values per
share is not reduced. Any such adjustments will be based on the closing price
per share of U. S. Steel Group Shares or Marathon Group Shares on the last
trading day before the Separation Date relative to the opening price per share
of New U. S. Steel Shares or Marathon Shares, respectively, on the first
trading day after the Separation Date.
Treatment of USX Corporate Employees in the Separation
Currently, USX personnel employed at the Pittsburgh corporate headquarters
provide accounting, audit, corporate finance, government affairs, investor
relations, public affairs, strategic planning, legal, stock transfer and tax
services that primarily relate to corporate-wide matters and for which the
costs are allocated between the Marathon Group and the U. S. Steel Group based
upon USX's present allocation policy, which takes into account employment,
investments and revenues. Effective upon the Separation, Marathon Oil
Corporation and United States Steel Corporation will be responsible for their
own needs in these areas, and USX corporate personnel will be assigned to, and
will be employed by, either Marathon Oil Corporation or United States Steel
Corporation. All such USX employees, and USX retirees, currently participate in
the Steel Pension Plan as well as health and other insurance benefit programs.
Following the Separation Effective Time, such active USX corporate employees
will participate in the pension plans, health and other insurance benefit
programs of the corporation by which they are employed.
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Assignment of Other USX Corporate Assets and Certain Liabilities in the
Separation
There are certain assets and liabilities of USX (which include such items as
headquarters property, plant, and equipment; pension, health and life insurance
and other employee benefit matters relating to employees of USX headquarters)
which were used to support the businesses of both groups, as well as assets and
liabilities relating to pension insurance and other employee benefit matters
for employees and retirees of one group who have prior service under plans
that, after the Separation, will be maintained by the other company. The amount
of such assets and liabilities as of March 31, 2001, was $ million and $
million, respectively. However, for administrative and operational reasons, it
is impractical to divide many of these assets and liabilities. Therefore,
certain of these assets and liabilities as well as the ongoing requirement to
maintain such assets have been designated by our board of directors for
assignment to United States Steel Corporation and the remainder of which will
be retained by Marathon Oil Corporation. The board has determined that this
division of these assets and liabilities is fair in the aggregate to both
groups of stockholders. The impact of this assignment is reflected in the
Unaudited Condensed Pro Forma Financial Statements for Marathon Oil Corporation
and United States Steel Corporation, included in Annex C.
Federal Securities Law Consequences
The issuance of the New U. S. Steel Shares in the Separation Merger to
holders of U. S. Steel Group Shares has been registered under the Securities
Act of 1933, as amended. Upon issuance, these New U. S. Steel Shares may be
traded freely and without restriction, except that New U. S. Steel Shares
received by persons who are deemed to be "affiliates" (as such term is defined
under the Securities Act) of USX prior to the Separation may be resold by them
only in transactions permitted by the resale provisions of Rule 145 promulgated
under the Securities Act (or Rule 144, in the case of such persons who become
affiliates of United States Steel Corporation) or as otherwise permitted under
the Securities Act. Persons who may be deemed to be affiliates of USX or United
States Steel Corporation are generally defined as individuals or entities that
control, are controlled by, or are under common control with, USX or United
States Steel Corporation and may include certain executive officers and
directors of USX or United States Steel Corporation.
Accounting Treatment
Marathon Oil Corporation will account for the Separation as a discontinuance
of the businesses comprising United States Steel. The measurement date for
discontinued operations accounting purposes will be on or about the Separation
Effective Time. If the historical carrying value of USX's investment in United
States Steel exceeds its fair value, as measured by the aggregate market value
of the U. S. Steel Group Shares at the Separation Effective Time, a non-
recurring, non-cash charge on the Separation will be recognized by Marathon Oil
Corporation. Total costs relating to the Separation, including financing costs,
lease termination costs, severance costs and fees and other expenses
(collectively, "Separation Costs") are estimated at $78 million, of which $51
million will be paid by Marathon Oil Corporation and $27 million will be paid
by United States Steel Corporation.
Annex C of this proxy statement/prospectus includes unaudited pro forma
condensed financial information for Marathon Oil Corporation which gives effect
to the discontinuance of the businesses of United States Steel, the $900
million Value Transfer, the assignment of certain USX corporate assets and
liabilities to United States Steel Corporation, the payment of Separation
Costs, and the distribution of New U. S. Steel Shares to the holders of U. S.
Steel Group Shares.
Following the Separation, United States Steel Corporation will account for
its assets and liabilities based on the historical values at which they were
carried by USX immediately prior to the Separation. Annex F of this proxy
statement/prospectus includes historical combined financial information for
United States Steel which presents its financial position, results of
operations and cash flows as if it were a separate entity for all periods
presented.
37
In addition, the unaudited pro forma condensed combined financial
information for United States Steel Corporation included in Annex C of this
proxy statement/prospectus gives effect to the $900 million Value Transfer, new
financing arrangements, the assignment of certain USX corporate assets and
liabilities, and the payment of Separation Costs.
Material U.S. Federal Income Tax Consequences
The following discussion summarizes the material U.S. federal income tax
consequences of the Separation. This discussion is for general information only
and should not be construed to be, nor is it intended as, legal or tax advice
to any particular stockholder. It does not purport to cover all income tax
consequences to USX and its stockholders and may not apply to stockholders who
acquired their Marathon Group Shares or U. S. Steel Group Shares in connection
with a grant of such shares as compensation, who are not citizens or residents
of the United States, or who are otherwise subject to special treatment under
the Code. In addition, this discussion does not address the tax consequences to
stockholders who do not hold their Marathon Group Shares or U. S. Steel Group
Shares as a capital asset. This discussion is based on provisions of the Code
and the regulations promulgated thereunder, and on current administrative
rulings and court decisions, in effect as of the date of this proxy
statement/prospectus, all of which are subject to change.
Each USX stockholder should consult his or her own tax advisor as to the
particular tax consequences of the Separation to such stockholder, including
the application of state, local, and foreign tax laws, and the effect of
possible changes in the tax law that may affect the tax consequences described
below.
USX has requested a private letter ruling from the IRS that the exchange of
U. S. Steel Group Shares for New U. S. Steel Shares in the Separation will
qualify as a tax-free distribution of the New U. S. Steel Shares under Section
355 of the Code. The receipt of a private letter ruling to that effect, or the
receipt of a private letter ruling and an opinion of outside tax counsel which
together indicate that the exchange is treated for tax purposes as a tax-free
distribution of New U. S. Steel Shares, with both ruling and opinion in form
and substance satisfactory to the board, is a condition to completion of the
Separation.
It is expected that the private letter ruling, if issued, will provide, in
part, that for U.S. federal income tax purposes:
. No gain or loss will be recognized by (and no amount will be included in
the income of) a holder of U. S. Steel Group Shares as a result of the
Separation;
. The basis of New U. S. Steel Shares in the hands of a holder of U. S.
Steel Group Shares will equal the basis of the holder's U. S. Steel
Group Shares immediately before the Separation;
. The holding period of the New U. S. Steel Shares in the hands of a
holder of U. S. Steel Group Shares will include the holding period of
the U. S. Steel Group Shares that are exchanged in the Separation;
. Holders of Marathon Group Shares will have no tax consequences resulting
from the Separation with respect to the Marathon Shares; and
. No gain or loss will be recognized by USX on the distribution of New U.
S. Steel Shares to the holders of U. S. Steel Group Shares.
Holders of U. S. Steel Group Shares who have blocks of U. S. Steel Group
Shares with different per share tax bases should consult their tax advisors
regarding the possible tax basis consequences of the Separation to them.
The IRS private letter ruling, if issued, will be based on the facts
presented and representations made by USX in the ruling request. Generally, an
IRS private letter ruling will not be revoked or modified retroactively unless
there has been an omission or misstatement of a material fact or a breach of a
material representation.
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USX intends to present all relevant facts and is not aware of any facts or
circumstances that would cause those representations to be incorrect or
incomplete in a material respect. In addition, Marathon Oil Corporation and
United States Steel Corporation will agree in the Tax Sharing Agreement not to
take actions, or to fail to take actions, that are inconsistent with the
representations upon which the IRS private letter ruling is based. If, however,
those facts or representations are found to be incorrect or incomplete in a
material respect or if the facts at the time of the Separation are materially
different from the facts upon which the IRS private letter ruling was based,
USX could not rely on the IRS private letter ruling and the Separation might
not qualify as a tax-free distribution under Section 355 of the Code.
If the IRS private letter ruling were determined to be inapplicable and the
Separation were found to be a taxable distribution of New U. S. Steel Shares or
Marathon Shares, the tax consequences to the USX stockholders would depend on
which shares were deemed to be distributed for federal income tax purposes. The
stockholders deemed to receive the distribution, either the holders of U. S.
Steel Group Shares or the holders of Marathon Group Shares, as the case may be,
would be treated as receiving a taxable distribution in an amount equal to the
fair market value of the shares deemed to be received. The difference between
the amount of the distribution and the stockholder's basis in the shares deemed
to be exchanged would be treated as a capital gain or loss to such stockholder.
The tax consequences to stockholders who hold both U. S. Steel Group Shares and
Marathon Group Shares, however, may differ from those described above. Such
stockholders may have dividend, return of capital, or capital gain/loss
treatment and should consult their tax advisors. Neither Marathon nor United
States Steel Corporation will indemnify any USX stockholders with respect to
taxes that may be incurred as a result of the Separation.
If the IRS private letter ruling were determined to be inapplicable and the
Separation were found to be a taxable distribution of New U. S. Steel Shares or
Marathon Shares, a corporate-level tax would be payable by USX. Such tax would
be based on the excess, if any, of the fair market value of the shares deemed
to be distributed over USX's tax basis for such shares. The amount of USX's tax
liability would be materially greater if the Separation were deemed to be a
distribution of Marathon Shares. The party which would bear the burden of the
corporate tax would be determined under the Tax Sharing Agreement. See the
discussion below in "RELATIONSHIP BETWEEN UNITED STATES STEEL CORPORATION AND
MARATHON OIL CORPORATION FOLLOWING THE SEPARATION--Tax Sharing Agreement."
Even if the Separation otherwise qualifies for tax-free treatment under
Section 355 of the Code, the Separation may become taxable to USX pursuant to
Section 355(e) of the Code if 50% or more of the Marathon Shares or New U. S.
Steel Shares are acquired, directly or indirectly, as part of a plan or series
of related transactions that include the Separation. For this purpose,
acquisitions (including acquisitions which are neither planned nor accepted or
recommended by the management of the company whose stock is acquired) of
Marathon Shares or New U. S. Steel Shares within the two years before or after
the Separation are presumed to be part of such a plan. Marathon Oil Corporation
or United States Steel Corporation may be able to rebut that presumption,
however, by establishing that the Separation and any preceding or subsequent
acquisition were not part of a plan or series of related transactions. If an
acquisition occurs pursuant to a plan or series of related transactions that
includes the Separation, USX would have to pay a corporate tax based on the
excess of the fair market value of the shares deemed to be distributed, either
New U. S. Steel Shares or Marathon Shares, over USX's tax basis for such
shares. The amount of such tax would be materially greater if the Separation
were deemed to be a distribution of Marathon Shares. The party who would bear
the burden of the corporate tax would be determined under the Tax Sharing
Agreement. See the discussion below in "RELATIONSHIP BETWEEN UNITED STATES
STEEL CORPORATION AND MARATHON OIL CORPORATION FOLLOWING THE SEPARATION--Tax
Sharing Agreement." Even if Section 355(e) were to apply to cause the
Separation to be taxable to USX, it would remain tax-free to the USX
stockholders.
United States Treasury regulations require each holder of U. S. Steel Group
Shares that receives New U. S. Steel Shares in the Separation to attach to the
stockholder's U.S. federal income tax return for the year in which such stock
is received a detailed statement setting forth such data as may be appropriate
to show the applicability of Section 355 of the Code to the Separation.
Subsequent to the Separation, United States Steel
39
Corporation will provide its stockholders who received New U. S. Steel Shares
pursuant to the Separation with the information necessary to comply with such
requirement.
Stock Exchange Listing
We have applied to the NYSE, the PSE and the CSE for approval of the listing
of the New U. S. Steel Shares to be issued in the Separation under the symbol
"X" on the NYSE, the PSE and the CSE, and completion of the Separation is
conditioned upon the approval of such listing. The Marathon Shares will
continue to be listed and traded on the NYSE, the PSE and the CSE after the
Separation under the symbol "MRO."
No Appraisal Rights
Stockholders of USX will not be entitled to exercise dissenter's or
appraisal rights under Delaware law or to demand payment for their shares in
connection with the Separation.
Interests of Officers and Directors in the Separation
In considering the recommendation of the USX board to vote in favor of the
Separation, stockholders of USX should be aware that directors and executive
officers of USX have interests in the Separation that are in addition to or
different from the interests of stockholders generally. The USX board of
directors was aware of these interests and considered them, among other
factors, in approving the Separation.
Stock Ownership
All of our directors and executive officers currently own U. S. Steel Group
Shares and/or Marathon Group Shares and will receive New U. S. Steel Shares
and/or Marathon Shares in the Separation. Some of these individuals currently
own a greater number of U. S. Steel Group Shares or Marathon Group Shares, as
the case may be. Accordingly, these directors and executive officers will have
a larger proportionate interest in United States Steel Corporation or Marathon
Oil Corporation, as the case may be, after the Separation. See "SECURITY
OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS."
Treatment of Options, Stock Appreciation Rights and Restricted Shares
Some of our officers and directors hold options to purchase Marathon Group
Shares and/or U. S. Steel Group Shares and/or own restricted Marathon Group
Shares and/or U. S. Steel Group Shares issued under the USX Corporation 1990
Stock Plan. As of , 2001, executive officers and directors of
beneficially owned an aggregate of Marathon Group Shares and U. S.
Steel Group Shares, including options to purchase Marathon Group Shares or U.
S. Steel Group Shares. Under the Plan of Reorganization, each unexercised and
unexpired option to purchase Marathon Group Shares or U. S. Steel Group Shares
will be converted into an option to acquire Marathon Shares or New U. S. Steel
Shares, respectively, subject to the same terms and conditions (including
vesting) as the option being converted.
In addition, some of our directors and executive officers hold stock
appreciation rights ("SARs") with respect to Marathon Group Shares and U. S.
Steel Group Shares. Such SARs will become SARs with respect to Marathon Shares
and New U. S. Steel Shares, respectively, on the same terms and conditions as
were applicable to the SARs immediately prior to the Separation.
In the Separation, each restricted Marathon Group Share and U. S. Steel
Group Share issued under the USX Corporation 1990 Stock Plan will be converted
into a restricted Marathon Share and a restricted New U. S. Steel Share,
respectively. After the Separation Effective Time, such restricted shares will
be subject to the same terms and conditions (including with respect to vesting)
as were applicable to the restricted shares immediately prior to the
Separation.
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Change in Control Agreements
In connection with the Separation, United States Steel Corporation will be
entering into new change in control agreements with certain of its executive
officers who were employed by USX prior to the Separation. These agreements
will be on substantially the same terms, and subject to the same benefits and
obligations, as those currently in place between USX and such executive
officers. For a description of such arrangements, see "INFORMATION ABOUT UNITED
STATES STEEL--Management of United States Steel Corporation Following the
Separation: Change in Control Agreements" in Annex D.
Dual Directorships
Upon completion of the Separation, some of our directors will become
directors of both United States Steel Corporation and Marathon Oil Corporation.
As such, they will be entitled to receive directors' allowances and attendance
fees from both United States Steel Corporation and Marathon Oil Corporation in
the amount that each company provides to its other non-employee directors. For
a description of such amounts to be paid by United States Steel, see
"INFORMATION ABOUT UNITED STATES STEEL--Management of United States Steel
Corporation Following the Separation" in Annex D.
Also, upon completion of the Separation, Thomas J. Usher, the present
Chairman of the Board of Directors and Chief Executive Officer of USX, will be
Chairman of the Board of Directors and Chief Executive Officer of United States
Steel Corporation and will also serve as Chairman of the Board of Directors of
Marathon Oil Corporation.
41
RELATIONSHIP BETWEEN UNITED STATES STEEL CORPORATION AND MARATHON OIL
CORPORATION AFTER THE SEPARATION
Following consummation of the Separation, United States Steel Corporation
and Marathon Oil Corporation will be independent companies and neither will
have any ownership interest in the other. In connection with the Separation and
pursuant to the Plan of Reorganization, United States Steel Corporation and
Marathon Oil Corporation and their respective subsidiaries will enter into a
series of agreements ("Separation Documents") governing their relationship
subsequent to the Separation and providing for the allocation of tax and
certain other liabilities and obligations arising from periods prior to the
Separation. Copies of the forms of such Separation Documents are filed as
exhibits to this proxy statement/prospectus. Set forth below is a description
of the material terms of such Separation Agreements.
Tax Sharing Agreement
United States Steel Corporation and Marathon Oil Corporation will enter into
a Tax Sharing Agreement on behalf of themselves and their respective
consolidated groups, that reflects each party's rights and obligations relating
to payments and refunds of income, sales, transfer, and other taxes that are
attributable to periods beginning prior to and including the Separation Date
and taxes resulting from transactions effected in connection with the
Separation.
The Tax Sharing Agreement will incorporate the general tax sharing
principles of USX's current tax allocation policy. In general, United States
Steel Corporation and Marathon Oil Corporation, will make payments between them
such that, with respect to any USX consolidated, combined, or unitary tax
returns for any taxable period or portion thereof ending on or before the
Separation Date, the amount of taxes to be paid by each of United States Steel
Corporation and Marathon Oil Corporation will be determined, subject to certain
adjustments, as if the U. S. Steel Group and the Marathon Group each filed its
own consolidated, combined, or unitary tax return. The Tax Sharing Agreement
also will provide for payments between United States Steel Corporation and
Marathon Oil Corporation for certain tax adjustments which may be made after
the Separation. Other provisions will address, but not be limited to, the
handling of tax audits, settlements, and return filing in cases where both
United States Steel Corporation and Marathon Oil Corporation have an interest
in the results of these activities.
Additionally, pursuant to the Tax Sharing Agreement, United States Steel
Corporation and Marathon Oil Corporation will agree to protect the tax-free
status of the Separation. United States Steel Corporation and Marathon Oil
Corporation each will covenant that during the two-year period following the
Separation, it will not cease to be engaged in an active trade or business.
Each party also will represent that there is no plan or intention to liquidate
such party, take any other actions inconsistent with the information and
representations set forth in the ruling request filed with the IRS or sell or
otherwise dispose of its assets (other than in the ordinary course or business)
and will covenant that during the two-year period following the Separation, it
will not do so. To the extent that a breach of a representation or covenant
results in corporate tax being imposed on USX, the breaching party, either
United States Steel Corporation or Marathon Oil Corporation, will be
responsible for the payment of the corporate tax. In the event that the
Separation fails to qualify as a tax-free transaction through no fault of
either United States Steel Corporation or Marathon Oil Corporation, the Tax
Sharing Agreement will provide that the resulting corporate tax liability will
be allocated to the party whose shares were deemed to be distributed for
federal income tax purposes.
The provisions of the Tax Sharing Agreement will only benefit Marathon Oil
Corporation and United States Steel Corporation and will not confer any rights
on USX stockholders or any other parties. The Tax Sharing Agreement may be
amended or modified by Marathon Oil Corporation and United States Steel
Corporation without the consent of any stockholder.
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Even if the Separation otherwise qualifies for tax-free treatment under
Section 355 of the Code, the Separation may become taxable to USX pursuant to
Section 355(e) of the Code if 50% or more of the Marathon Shares or New U. S.
Steel Shares are acquired, directly or indirectly, as part of a plan or series
of related transactions that include the Separation. See "THE SEPARATION--
Material U.S. Federal Income Tax Consequences" discussion above. To minimize
this risk, both United States Steel Corporation and Marathon Oil Corporation
will covenant in the Tax Sharing Agreement that they will not enter into any
transactions or make any change in their equity structures that could cause the
Separation to be treated as part of a plan or series of related transactions to
which Section 355(e) may apply. If an acquisition occurs which results in the
Separation being taxable under Section 355(e), the Tax Sharing Agreement
provides that the resulting corporate tax liability will be borne by the
entity, either United States Steel Corporation or Marathon Oil Corporation,
with respect to which the acquisition has occurred.
As discussed above in the section, "RISK FACTORS--Risks Related to
Separation--United States Steel Corporation and Marathon Oil Corporation Will
Be Subject to Continuing Contingent Liabilities of the Other Company Following
the Separation", although the Tax Sharing Agreement will allocate tax
liabilities relating to taxable periods ending on or prior to the Separation
Date, as between United States Steel Corporation and Marathon Oil Corporation,
each corporation that was a member of the USX consolidated group during any
portion of a taxable period ending on or prior to the Separation Date is
jointly and severally liable under the Code for the federal income tax
liability of the entire USX consolidated group for that year. Thus, even though
the Tax Sharing Agreement will provide that one party (United States Steel
Corporation or Marathon Oil Corporation) will be responsible for the payment of
a tax, the taxing authorities may seek to collect the tax from the other party
and consequently, that other party would be entitled to seek indemnification
under the Tax Sharing Agreement. There can be no assurance that, in such
circumstance, Marathon Oil Corporation or United States Steel Corporation would
be able to satisfy its indemnification obligations under the Tax Sharing
Agreement.
Transition Services Agreement
Currently, USX personnel at our Pittsburgh corporate headquarters provide
accounting, audit, corporate finance, government affairs, investor relations,
legal, stock transfer, strategic planning, public affairs and tax services that
primarily relate to corporate-wide matters and for which the costs are
allocated between the Marathon Group and the U. S. Steel Group. Effective upon
the Separation, Marathon Oil Corporation and United States Steel Corporation
will be responsible for their own needs in these areas, and USX corporate
personnel will be assigned to, and will be employed by, either Marathon Oil
Corporation or United States Steel Corporation. To the extent that one company
or the other is not able to immediately service its own needs, United States
Steel Corporation and Marathon Oil Corporation will enter into a transition
services agreement whereby one company will provide such services to the other
(to the extent requested) if the providing company is able to do so. Such
agreement will be for a term of up to twelve months and will be on a cost-
reimbursement basis. In addition, the company receiving such service shall
release the other from any and all claims that may arise concerning the
adequacy, timeliness or quality of the service provided.
Although both the Marathon Group and U. S. Steel Group maintain independent
information technology and computer systems, USX headquarters relies on the two
groups for many of its computer applications. The Transition Services Agreement
provides that, to the extent that either group has been supplying computer or
information services to USX headquarters or the other group, for a period of up
to twelve months, Marathon Oil Corporation or United States Steel Corporation
will continue to provide services to the other (to the extent requested) on the
same basis that it is currently provided on a cost-reimbursement basis. In
addition, the company receiving services shall release the other from any and
all claims that may arise concerning the adequacy, timeliness or other quality
of the services provided.
The Transition Services Agreement also provides that Marathon Oil
Corporation, as successor to USX, will grant to United States Steel Corporation
a fully paid, worldwide, nonexclusive license, without right to sublicense or
assign, in all computer programs, software, source code, and know-how (whether
patented, trademarked, copyrighted or not) used by USX in providing services
used by USX on a corporate basis or
43
provided by USX to the U. S. Steel Group. Such license will be granted without
any representation or warranty whatsoever, including suitability, usefulness,
non-infringement or existence.
The Transition Services Agreement further provides that if, at any time in
the future, either Marathon Oil Corporation or United States Steel Corporation
requires any records, documents or other information in the possession of the
other relating to activities prior to the Separation, the party having
possession of such records, documents or other information shall make it or
copies available to the other party without charge.
Financial Matters Agreement
United States Steel Corporation and Marathon Oil Corporation will enter into
the Financial Matters Agreement whereby United States Steel Corporation or its
subsidiaries will agree to incur or assume indebtedness and other obligations
of USX in connection with the Separation. The terms of the Financial Matters
Agreement are described in "THE SEPARATION--Financing Arrangements Relating to
the Separation."
License Agreement
Prior to the time of the HoldCo Merger, Old USX was the owner and holder of
(1) various patents, copyrights, trademarks, trade names, trade secrets, know
how and other intellectual property rights used exclusively by the U.S. Steel
Group (the "U.S. Steel Group IP"), (2) various registered trademarks, service
marks using USX or variants thereof (the "USX Name Rights") and (3) various
trade secrets, know how and other intellectual property rights used by USX in
connection with both the Marathon Group and the U.S. Steel Group (the
"Headquarters IP"). The U. S. Steel Group IP was transferred to United States
Steel LLC as a result of the HoldCo Merger. Prior to the HoldCo Merger, Old USX
transferred the USX Name Rights and the Headquarters IP to USX. Upon
consummation of the Separation, the License Agreement provides that Marathon
Oil Corporation will grant to United States Steel Corporation a fully paid,
worldwide, non-exclusive license to use the USX Name Rights and the
Headquarters IP with the right to sublicense the same.
Insurance Assistance Agreement
Prior to the time of the HoldCo Merger, the Marathon Group and the U. S.
Steel Group maintained independent property and business interruption insurance
policies. Other types of insurance, such as general liability, employer's
liability, automobile liability, workers' compensation and executive risk, were
purchased and held by Old USX, for the benefit of Old USX and all of its
subsidiaries.
At the Separation Effective Time, the insurance policies held for the
benefit of USX and its subsidiaries will be truncated and separate policies of
insurance will be purchased for Marathon Oil Corporation and its subsidiaries
and for United States Steel Corporation and its subsidiaries. Marathon Oil
Corporation and United States Steel Corporation will also enter into the
Insurance Assistance Agreement. This agreement will provide for the division of
responsibility for joint insurance arrangements and the associated payment of
insurance claims and deductibles following the Separation for claims associated
with pre-Separation periods. Under this agreement, Marathon Oil Corporation
will be solely liable for pre-Separation claims associated with the business of
the Marathon Group, and United States Steel Corporation will be solely liable
for pre-Separation claims associated with the business of the U. S. Steel
Group. Liability for pre-Separation claims associated with USX assets,
directors and employees will be allocated 65% to Marathon Oil Corporation and
35% to United States Steel Corporation. The cost of extended reporting
insurance for these pre-Separation periods will also be split between Marathon
Oil Corporation and United States Steel Corporation on a 65%-35% basis,
respectively. Finally, the agreement will address the sharing of policy limits
for extended reporting insurances maintained jointly by Marathon and United
States Steel prior to the Separation.
44
DESCRIPTION OF CAPITAL STOCK OF MARATHON OIL
CORPORATION FOLLOWING THE SEPARATION
The following is a summary of the material terms of the capital stock of
Marathon Oil Corporation upon the Separation. This summary does not purport to
be complete and is qualified in its entirety by reference to the complete text
of such capital stock set forth in the Marathon Oil Corporation Restated
Certificate of Incorporation (the "Marathon Certificate"). A copy of the form
of the Marathon Certificate has been filed as an exhibit to this proxy
statement/prospectus.
Authorized Share Capital
Marathon Oil Corporation will be authorized by the Marathon Certificate to
issue (i) five hundred and fifty million (550,000,000) shares of Marathon Oil
Corporation Common Stock, par value $1.00 per share, and (ii) twenty six
million (26,000,000) shares of preferred stock, no par value, issuable in
series. If the Separation had occurred as of April 30, 2001, there would be
308,607,455 Marathon Shares issued and outstanding (based on the number of
Marathon Group Shares issued and outstanding as of such date) and no shares of
preferred stock issued and outstanding.
Marathon Shares
The holders of Marathon Shares will be entitled to receive dividends when,
as and if declared by the Marathon Oil Corporation board of directors out of
funds legally available therefor, subject to the rights of any shares of
Marathon Oil Corporation preferred stock at the time outstanding. The holders
of Marathon Shares will be entitled to one vote for each share on all matters
voted on generally by stockholders under the Marathon Certificate, including
the election of directors. The holders of Marathon Shares will not have any
cumulative voting, conversion, redemption or preemptive rights. In the event of
dissolution, liquidation or winding up of Marathon Oil Corporation, holders of
Marathon Shares will be entitled to share ratably in any assets remaining after
the satisfaction in full of the prior rights of creditors, including holders of
Marathon Oil Corporation's then outstanding indebtedness, and subject to the
aggregate liquidation preference and participation rights of any Marathon Oil
Corporation preferred stock then outstanding. The additional shares of
authorized stock available for issuance by Marathon Oil Corporation may be
issued at such times and under such circumstances as to have a dilutive effect
on earnings per share and on the equity ownership of the holders of Marathon
Shares.
Marathon Oil Corporation Preferred Stock
The Marathon Oil Corporation board of directors will be authorized to issue
shares of Marathon Oil Corporation preferred stock, in one or more series, and
to fix for each such series voting powers, preferences and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof as are permitted by the Delaware General
Corporation Law ("DGCL"). Although the Marathon Oil Corporation board of
directors has no current plans to issue Marathon Oil Corporation preferred
stock, the issuance of such shares could be used to discourage an unsolicited
acquisition proposal. See "COMPARISON OF THE RIGHTS OF STOCKHOLDERS--Certain
Antitakeover Considerations."
Marathon Oil Corporation Rights Agreement
USX is a party to a Rights Agreement, dated as of September 28, 1999 (the
"USX Rights Agreement"), with ChaseMellon Shareholder Services, L.L.C, as
Rights Agent. Pursuant to the USX Rights Agreement, a U. S. Steel Group Right
is attached to each outstanding U. S. Steel Group Share and a Marathon Group
Right is attached to each outstanding Marathon Group Share. In connection with
the Separation, the USX Rights Agreement will be amended and restated (as so
amended and restated, the "Marathon Oil Corporation Rights
45
Agreement") to provide (i) that the U. S. Steel Group Rights and the Marathon
Group Rights will not become exercisable, distributed or unredeemable as a
result of the consummation of the Separation, and (ii) that the U. S. Steel
Group Rights will expire at the Separation Effective Time. Following the
Separation, the Marathon Group Rights will be referred to as a Marathon Right.
The following description of the terms of the Marathon Oil Corporation Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Marathon Oil Corporation Rights Agreement, the form of which
is filed as an exhibit to this proxy statement/prospectus, and is incorporated
herein by reference.
Each Marathon Right becomes exercisable, at a price of $110, after any
person or group has acquired, obtained the right to acquire or made a tender or
exchange offer for 15% or more of the outstanding voting power represented by
the outstanding Marathon Shares, except pursuant to a qualifying all-cash
tender offer for all outstanding Marathon Shares which results in the offeror
owning Marathon Shares, representing a majority of the voting power (other than
Marathon Shares beneficially owned by the offeror immediately prior to the
offer). Each Marathon Right entitles the holder, other than the acquiring
person or group, to purchase one one- hundredth of a share of Series A Junior
Preferred Stock or, upon the acquisition by any person of 15% or more of the
outstanding voting power represented by the outstanding Marathon Shares (or, in
certain circumstances, other property) having a market value of twice the
exercise price. After a person or group acquires 15% or more of the outstanding
voting power, if Marathon Oil Corporation engages in a merger or other business
combination where it is not the surviving corporation or where it is the
surviving corporation and the Marathon Shares are changed or exchanged, or if
50% or more of Marathon Oil Corporation's assets, earnings power or cash flow
are sold or transferred, each Marathon Right entitles the holder to purchase
common stock of the acquiring entity having a market value of twice the
exercise price. The Marathon Rights and the exercise price are subject to
adjustment. The Marathon Rights will expire on October 9, 2009, unless such
date is extended or the Marathon Rights are earlier redeemed by Marathon Oil
Corporation for one cent per Marathon Right at any time prior to the point they
become exercisable. Under certain circumstances, the Board of Directors of
Marathon Oil Corporation has the option to exchange one Marathon Share for each
exercisable Marathon Right.
46
DESCRIPTION OF CAPITAL STOCK OF UNITED STATES STEEL
CORPORATION FOLLOWING THE SEPARATION
The following is a summary of the material terms of the capital stock of
United States Steel Corporation upon the Separation. This summary does not
purport to be complete and is qualified in its entirety by reference to the
complete text of such capital stock set forth in the United States Steel
Corporation Certificate of Incorporation (the "United States Steel Corporation
Certificate"). A copy of the full text of the United States Steel Corporation
Certificate is included as an exhibit to this proxy statement/prospectus.
Authorized Share Capital
United States Steel Corporation is authorized by the United States Steel
Corporation Certificate to issue (i) two hundred million (200,000,000) shares
of United States Steel Corporation Common Stock, par value $1.00 per share, and
(ii) fourteen million (14,000,000) shares of preferred stock, no par value,
issuable in series. If the Separation had occurred as of April 30, 2001, there
would be 88,800,321 New U. S. Steel Shares outstanding (based on the number of
U. S. Steel Group Shares issued and outstanding as of such date) and no shares
of preferred stock issued and outstanding.
New U. S. Steel Shares
The holders of New U. S. Steel Shares will be entitled to receive dividends
when, as and if declared by the United States Steel Corporation board of
directors out of funds legally available therefor, subject to the rights of any
shares of United States Steel Corporation preferred stock at the time
outstanding. The holders of New U. S. Steel Shares will be entitled to one vote
for each share on all matters voted on generally by stockholders under the
United States Steel Corporation Certificate, including the election of
directors. The holders of New U. S. Steel Shares do not have any cumulative
voting, conversion, redemption or preemptive rights. In the event of
dissolution, liquidation or winding up of United States Steel Corporation,
holders of the New U. S. Steel Shares will be entitled to share ratably in any
assets remaining after the satisfaction in full of the prior rights of
creditors, including holders of United States Steel Corporation's then
outstanding indebtedness, and subject to the aggregate liquidation preference
and participation rights of any United States Steel Corporation preferred stock
then outstanding. The additional shares of authorized stock available for
issuance by United States Steel Corporation may be issued at such times and
under such circumstances as to have a dilutive effect on earnings per share and
on the equity ownership of the holders of New U. S. Steel Shares.
United States Steel Corporation Preferred Stock
The United States Steel Corporation board of directors will be authorized to
issue shares of United States Steel Corporation preferred stock, in one or more
series, and to fix for each such series voting powers, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof as are permitted by the
DGCL. The issuance of shares of United States Steel Corporation preferred stock
could be used to discourage an unsolicited acquisition proposal. See
"COMPARISON OF THE RIGHTS OF STOCKHOLDERS--Certain Antitakeover
Considerations".
United States Steel Corporation Rights Agreement
Upon the Separation Effective Time, United States Steel Corporation will
enter into a Rights Agreement (the "United States Steel Corporation Rights
Agreement") with as Rights Agent. The following is a description of the
terms of the United States Steel Corporation Rights Agreement. A copy of the
United States Steel Corporation Rights Agreement has been filed as an exhibit
to this proxy statement/prospectus. The following description of the terms of
the United States Steel Corporation Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the United States
Steel Corporation Rights Agreement, the form of which is filed as an exhibit to
this proxy statement/prospectus and is incorporated in this summary description
herein by reference.
47
Pursuant to the United States Steel Corporation Rights Agreement, one
preferred stock purchase right (a "United States Steel Corporation Right") will
be distributed with each New U. S. Steel Share issued in connection with the
Separation. Each United States Steel Corporation Right becomes exercisable, at
a price of $ , after any person or group has acquired, obtained the right to
acquire or made a tender or exchange offer for 15% or more of the outstanding
voting power represented by the outstanding New U. S. Steel Shares, except
pursuant to a qualifying all-cash tender offer for all outstanding New U. S.
Steel Shares which results in the offeror owning New U. S. Steel Shares,
representing a majority of the voting power (other than New U. S. Steel Shares
beneficially owned by the offeror immediately prior to the offer). Each United
States Steel Corporation Right entitles the holder, other than the acquiring
person or group, to purchase one one-hundredth of a share of Series A Junior
Preferred Stock or, upon the acquisition by any person of 15% or more of the
outstanding voting power represented by the outstanding New U. S. Steel Shares
(or, in certain circumstances, other property) having a market value of twice
the exercise price. After a person or group acquires 15% or more of the
outstanding voting power, if United States Steel Corporation engages in a
merger or other business combination where it is not the surviving corporation
or where it is the surviving corporation and the New U. S. Steel Shares are
changed or exchanged, or if 50% or more of U. S. Steel's assets, earnings power
or cash flow are sold or transferred, each United States Steel Corporation
Right entitles the holder to purchase common stock of the acquiring entity
having a market value of twice the exercise price. The United States Steel
Corporation Rights and the exercise price are subject to adjustment. The United
States Steel Corporation Rights will expire on , unless such date is
extended or the United States Steel Corporation Rights are earlier redeemed by
United States Steel Corporation for one cent per United States Steel
Corporation Right at any time prior to the point they become exercisable. Under
certain circumstances, the Board of Directors of United States Steel
Corporation has the option to exchange one New U. S. Steel Share for each
exercisable U. S. Steel Right.
48
COMPARISON OF THE RIGHTS OF STOCKHOLDERS
USX is a Delaware corporation and, following consummation of the Separation,
Marathon Oil Corporation and United States Steel Corporation will be Delaware
corporations. The rights of holders of Marathon Group Shares and U. S. Steel
Group Shares are currently governed by the DGCL, the USX Restated Certificate
and USX By-laws. Following consummation of the Separation, the rights of
holders of Marathon Shares will be governed by the DGCL, the Marathon
Certificate and the Marathon Oil Corporation By-laws, and the rights of holders
of New U. S. Steel Shares will be governed by the DGCL, the United States Steel
Corporation Certificate and the United States Steel Corporation By-laws. The
terms of the Marathon Certificate and the United States Steel Corporation
Certificate will be identical to the terms of the USX Restated Certificate
(other than with respect to capitalization, since the Marathon Certificate and
the United States Steel Corporation Certificate will each provide for only one
class of common stock, and will not have the provisions contained in the USX
Restated Certificate relating to the USX targeted stocks). The terms of the
Marathon Oil Corporation By-laws and the United States Steel Corporation By-
laws will be identical to the terms of the USX By-laws, except for the matters
described below.
Voting Rights
Under the USX Restated Certificate, with respect to matters to be voted upon
by both the holders of Marathon Group Shares and U. S. Steel Group Shares as a
single class, the holder of each Marathon Group Share is entitled to one vote
per share and the holder of each U. S. Steel Group Share is entitled to a
number of votes per share (which may be greater than or less than one), as
determined pursuant to the terms of the USX Restated Certificate, based on the
ratio of the market value of one U. S. Steel Group Share to the market value of
one Marathon Group Share, calculated over the 20-business day period ending on
the record date for determination of stockholders entitled to notice of, and to
vote at, any meeting of stockholders. Under the Marathon Certificate, each
Marathon Share will be entitled to one vote on all matters. Under the United
States Steel Corporation Certificate, each New U. S. Steel Share will be
entitled to one vote on all matters.
Dividends
Under the USX Restated Certificate, (i) dividends on the Marathon Group
Shares are payable out of the funds of USX legally available for the payment of
dividends and (ii) dividends on the U. S. Steel Group Shares are payable out of
the lesser of (a) the funds of USX legally available for the payment of
dividends and (b) the "Available Group Dividend Amount" (an amount similar to
the amount that would be legally available for the payment of dividends on the
U. S. Steel Group Shares under Delaware law if the U. S. Steel Group were a
separate company). Holders of Marathon Shares and New U. S. Steel Shares will
be entitled to receive dividends when, as and if declared by the respective
boards of directors of Marathon Oil Corporation and United States Steel
Corporation out of funds legally available therefor, subject to the terms of
any preferred stock then outstanding and the terms of any covenants in
indentures or other evidences of indebtedness.
Liquidation
Pursuant to the USX Restated Certificate, in the event of the liquidation of
USX, holders of Marathon Group Shares and U. S. Steel Group Shares will be
entitled to a portion of the assets remaining for distribution based on the
average of their proportionate market values, using the market prices for the
five business days prior to the date the liquidation is announced and the five
business days after the liquidation is announced. Pursuant to the Marathon
Certificate, in the event of a liquidation of Marathon Oil Corporation, holders
of Marathon Shares will be entitled to share ratably in the assets of Marathon
Oil Corporation remaining for distribution to holders of Marathon Shares.
Pursuant to the United States Steel Corporation Restated Certificate, in the
event of a liquidation of United States Steel Corporation, holders of New U. S.
Steel Shares will be entitled to share ratably in the assets of United States
Steel Corporation remaining for distribution to holders of New U. S.
Steel Shares.
49
Rights on Disposition
Pursuant to the USX Restated Certificate, subject to certain exceptions, if
USX disposes of all or substantially all of the properties and assets
attributed to the U. S. Steel Group, USX is required to either (i) distribute
to holders of U. S. Steel Group Shares an amount in cash and/or securities or
other property equal to the fair value of the net proceeds of such disposition
by special dividend, (ii) redeem a number of whole U. S. Steel Group Shares
with an average value equal to the proceeds of the disposition, calculated over
the ten-trading day period beginning on the first trading day after
consummation of the disposition transaction, (iii) convert each U. S. Steel
Group Share into a number of Marathon Group Shares equal to 110% of the ratio
of the average market value of one U. S. Steel Group Share to the average
market value of one Marathon Group Share, calculated over the ten-trading day
period beginning on the first trading day after consummation of the disposition
transaction. As a result of the Separation, the United States Steel Corporation
Certificate will not provide for such rights upon the disposition of assets.
Separation of Groups and Exchange of Stock
Pursuant to the USX Restated Certificate, if USX were to transfer all of the
assets and liabilities of the Marathon Group (and only such assets and
liabilities) to a wholly owned subsidiary of USX, the USX board of directors
has discretion, without the vote of any of the USX stockholders, to exchange
the outstanding Marathon Group Shares for shares of the new subsidiary holding
the Marathon Group assets and liabilities. The result of such an exchange would
be the spinoff of the Marathon Group to the holders of Marathon Group Shares.
Following the Separation, the Marathon Certificate will not provide the
directors of Marathon Oil Corporation with such discretion, as Marathon Oil
Corporation generally will hold only the assets and liabilities currently held
by the Marathon Group.
Pursuant to the USX Restated Certificate, if USX were to transfer all of the
assets and liabilities of the U. S. Steel Group (and only such assets and
liabilities) to a wholly owned subsidiary of USX, the USX board of directors
has discretion, without the vote of any of the USX stockholders, to exchange
the outstanding U. S. Steel Group Shares for shares of the new subsidiary
holding the U. S. Steel Group assets and liabilities. The result of such an
exchange would be the spinoff of the U. S. Steel Group to the holders of U. S.
Steel Group Shares. Following the Separation, the United States Steel
Certificate will not provide the directors of United States Steel Corporation
with such discretion, as United States Steel Corporation generally will hold
only the assets and liabilities currently held by the U. S. Steel Group.
Certain Antitakeover Considerations
The DGCL, the Marathon Certificate and the Marathon Oil Corporation By-laws,
and the United States Steel Corporation Certificate and the United States Steel
Corporation By-laws, contain provisions that could serve to discourage or make
more difficult a change in control of Marathon Oil Corporation or United States
Steel Corporation without the support of the Marathon Oil Corporation board of
directors or the United States Steel Corporation board of directors, as the
case may be, or without meeting various other conditions. All of these
provisions are currently in effect with respect to USX, pursuant to the USX
Restated Certificate, USX By-Laws and the DGCL. A summary of these provisions
is set forth below.
The Marathon Certificate and the United States Steel Corporation Certificate
each will provide for the issuance of preferred stock, at the discretion of the
Marathon Oil Corporation board of directors or the United States Steel
Corporation board of directors, as the case may be, from time to time, in one
or more series, without further action by the stockholders of Marathon Oil
Corporation or United States Steel Corporation, unless approval of the
stockholders is deemed advisable by the Marathon Oil Corporation board of
directors or the United States Steel Corporation board of directors or required
by applicable law, regulation or stock exchange listing requirements. In
addition, the authorized but unissued Marathon Shares will be available for
issuance from time to time at the discretion of the Marathon Oil Corporation
board of directors without the
50
approval of the stockholders of Marathon Oil Corporation, and the authorized
but unissued New U. S. Steel Shares will be available for issuance from time to
time at the discretion of the United States Steel Corporation board of
directors without the approval of the stockholders of United States Steel
Corporation, in each case, unless such approval is deemed advisable by the
Marathon Oil Corporation board of directors or United States Steel Corporation
board of directors, as the case may be, or required by applicable law,
regulation or stock exchange listing requirements. One of the effects of the
existence of authorized, unissued and unreserved Marathon Shares and New U. S.
Steel Shares and preferred stock could be to enable the Marathon Oil
Corporation board of directors or the United States Steel Corporation board of
directors to issue shares to persons friendly to current management that could
render more difficult or discourage an attempt to obtain control of Marathon
Oil Corporation or United States Steel Corporation by means of a merger, tender
offer, proxy contest or otherwise, and thereby protect the continuity of
Marathon Oil Corporation's or United States Steel Corporation's management.
Such additional shares also could be used to dilute the stock ownership of
persons seeking to obtain control of Marathon Oil Corporation or United States
Steel Corporation.
The Marathon Oil Corporation Certificate and the United States Steel
Corporation Certificate each provide for a classified board of directors under
which one-third of the total number of directors are elected each year and will
prohibit the removal of directors, unless such removal is for cause. Pursuant
to the Marathon Oil Corporation Certificate and the United States Steel
Corporation Certificate, stockholders will not be permitted to act by written
consent. In addition, pursuant to the Marathon Oil Corporation Certificate and
the United States Steel Corporation Certificate, only the board of directors,
and not the stockholders, will be permitted to call a special meeting of
stockholders.
The Marathon Oil Corporation By-laws and United States Steel Corporation By-
laws each establish an advance notice procedure for stockholders to bring
business before an annual or special meeting of stockholders. The Marathon Oil
Corporation By-laws and United States Steel Corporation By-laws each will
provide that a stockholder may present a proposal for action at an annual
meeting of stockholders only if such stockholder delivers a written notice of
the proposal, together with certain specified information relating to such
stockholder's stock ownership and identity, to the Secretary of Marathon Oil
Corporation or United States Steel Corporation, as applicable, at least 45
days, and, in certain situations, 90 days, before the meeting or within 10 days
following the announcement of the date of the special meeting. In addition, the
Marathon Oil Corporation By-laws and United States Steel Corporation By-laws
each will provide that a stockholder may nominate individuals for election to
the board of directors at any annual meeting or special meeting of stockholders
at which directors are to be elected only if such stockholder delivers written
notice, containing certain specified information with respect to the nominee
and nominating stockholder, to the Secretary of Marathon Oil Corporation or
United States Steel Corporation, as applicable, at least 45 days, and, in
certain situations, 90 days, before the annual meeting or within 10 days
following the announcement of the date of the special meeting.
The Marathon Oil Corporation Rights and the United States Steel Corporation
Rights will permit disinterested stockholders to acquire additional shares of
Marathon Oil Corporation or United States Steel Corporation, respectively, or
of an acquiring company, at a substantial discount in the event of certain
described changes in control. See "DESCRIPTION OF CAPITAL STOCK OF MARATHON OIL
CORPORATION FOLLOWING THE SEPARATION--Marathon Oil Corporation Rights
Agreement" and "DESCRIPTION OF CAPITAL STOCK OF UNITED STATES STEEL CORPORATION
FOLLOWING THE SEPARATION--United States Steel Corporation Rights Agreement."
Certain provisions described above may have the effect of delaying
stockholder actions with respect to certain business combinations. As such, the
provisions could have the effect of discouraging open market purchases of the
Marathon Shares or the New U. S. Steel Shares because such provisions may be
considered disadvantageous by a stockholder who desires to participate in a
business combination.
51
THE SPECIAL MEETING
This proxy statement/prospectus is being furnished in connection with the
solicitation of proxies by our board of directors for use at a special meeting
of USX stockholders in connection with the proposed Separation. This proxy
statement/prospectus is first being mailed to USX stockholders on or about
, 2001.
Date, Time and Place of the Special Meeting
The special meeting of USX stockholders will be held on , 2001 at
[10:00] a.m., local time, at [INSERT ADDRESS].
Proposals to be Considered at the Special Meeting
At the special meeting, USX stockholders will be asked to consider and vote
upon the following proposals:
. A proposal to adopt the Agreement and Plan of Reorganization, which
provides for the Separation of the U. S. Steel Group and the Marathon
Group into two independent companies. The Separation will be effected by
the merger of a wholly owned subsidiary of USX with and into USX, with
USX continuing as the surviving corporation. Upon the effective time of
the Separation:
- the business of the U. S. Steel Group will be owned and operated by
United States Steel Corporation, which will be wholly owned by the
holders of the then outstanding U. S. Steel Group Shares;
- the business of the Marathon Group will be owned and operated by
USX, which will change its name to Marathon Oil Corporation and will
be wholly owned by the holders of the then outstanding Marathon
Group Shares;
- each outstanding U. S. Steel Group Share will be converted into the
right to receive one New U. S. Steel Share;
- the Marathon Group Shares will remain outstanding, unaffected by the
Separation, and will be the sole outstanding shares of common stock
of USX, which will change its name to Marathon Oil Corporation; and
. each outstanding share of 6.50% Preferred Stock will be converted
into the right to receive $50.00 in cash.
. A proposal to approve the United States Steel Corporation 2002 Stock
Plan.
. A proposal to approve the United States Steel Corporation Senior
Executive Officer Annual Incentive Compensation Plan.
. A proposal to adjourn the special meeting, if necessary.
The proposals to approve the United States Steel Corporation 2002 Stock Plan
and the United States Steel Corporation Senior Executive Officer Annual
Incentive Compensation Plan are conditioned upon the adoption of the Plan of
Reorganization by USX stockholders and the consummation of the Separation. If
the Separation is not approved and consummated, the proposals to approve the
United States Steel 2002 Stock Plan and the United States Steel Senior
Executive Officer Annual Incentive Compensation Plan will not be implemented.
Record Date
Our board of directors has established the close of business on , 2001
as the record date for determination of USX stockholders entitled to notice of
and to vote at the special meeting. As of the record date, there were
Marathon Group Shares outstanding, held by approximately holders of record,
and U. S. Steel Group Shares outstanding, held by approximately holders
of record.
52
Quorum
One-third of the voting power of the outstanding Marathon Group Shares and
U. S. Steel Group Shares entitled to vote at the special meeting must be
represented, either in person or by proxy, to constitute a quorum at the
special meeting. Abstentions and "broker non-votes" will be counted for
purposes of determining whether a quorum is present. Broker non-votes are
shares held by brokers or nominees in "street name" that are represented at the
meeting, but with respect to which the broker or nominee has not been
instructed how to vote.
Vote Required
Adoption of the Plan of Reorganization will require:
. the affirmative vote of the holders of a majority of the outstanding
Marathon Group Shares and U. S. Steel Group Shares as of the record
date, voting together as a single class,
. the affirmative vote of the holders of a majority of the outstanding
Marathon Group Shares as of the record date, voting as a separate class,
and
. the affirmative vote of the holders of a majority of the outstanding U.
S. Steel Group Shares as of the record date, voting as a separate class.
The proposals to approve the United States Steel Corporation 2002 Stock Plan
and the United States Steel Corporation Senior Executive Officer Annual
Incentive Compensation Plan will each require the affirmative vote of a
majority of votes cast at the special meeting by holders of Marathon Group
Shares and U. S. Steel Group Shares, voting together as a single class, and the
affirmative vote of a majority of the votes cast at the special meeting by
holders of U. S. Steel Group Shares, voting as a separate class.
The proposal to approve an adjournment of the special meeting will require
the affirmative vote of a majority of the votes cast by holders of Marathon
Group Shares and U. S. Steel Group Shares at the special meeting, voting
together as a single class.
Voting Rights
Only holders of Marathon Group Shares and U. S. Steel Group Shares at the
close of business on , 2001 are entitled to vote at the special meeting.
In the separate class votes described above, each holder of Marathon Group
Shares or U. S. Steel Group Shares is entitled to one vote per share at the
special meeting. In the combined votes described above of Marathon Group Shares
and U. S. Steel Group Shares, voting together as a single class, holders of
Marathon Group Shares are entitled to one vote per share and holders of U. S.
Steel Group Shares are entitled to votes per share. We calculated the
number of votes to which each U. S. Steel Group Share is entitled by using the
formula required by the USX Restated Certificate. It is based on the ratio of
the market value of one U. S. Steel Group Share to one Marathon Group Share
over the 20 business-day period ending on , 2001.
Under the rules of the NYSE, brokers who hold shares in "street name" for
customers are precluded from exercising their voting discretion with respect to
the approval of non-routine matters, such as the Separation, and, therefore,
absent specific instructions from the beneficial owner of such shares, brokers
may not vote such shares at the special meeting. Your broker will vote your
shares only if you provide instructions on how to vote by following the
instructions provided to you by your broker.
Because the required vote for the adoption of the Plan of Reorganization is
based on a percentage of the shares outstanding, abstentions and broker non-
votes will have the same effect as a vote against the proposal to adopt the
Plan of Reorganization.
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Voting and Revocation of Proxies
There are three ways to vote your proxy:
. Vote by telephone--toll free--1-888- -
Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days
a week. You will be prompted to enter your control number, which
appears on the enclosed proxy card. Follow the simple instructions the
voice provides you.
. Vote by Internet--https://www. .com/usx
Access the above Internet site to vote your proxy 24 hours a day, 7
days a week. You will be prompted to enter your control number, which
appears on the enclosed proxy card, and your complete address, exactly
as it appears on the enclosed proxy card, to create an electronic
ballot.
. Vote by mail
Mark, sign and date your proxy card and return it in the enclosed
postage-paid envelope. If you vote by telephone or Internet, please do
not return your proxy card.
Your telephone or Internet vote authorizes the proxies to vote your shares in
the same manner as if you had marked, signed and returned your proxy card.
All shares represented by properly executed proxies received before or at
the special meeting will, unless the proxies are revoked, be voted in
accordance with the instructions indicated thereon. If no instructions are
indicated on a properly executed proxy card, the shares will be voted FOR
adoption of the Plan of Reorganization, approval of the United States Steel
Corporation 2002 Stock Plan, approval of the United States Steel Corporation
Senior Executive Officer Annual Incentive Compensation Plan and approval of the
proposal to adjourn the special meeting. You are urged to mark the box on the
proxy to indicate how to vote your shares.
If your shares are held in "street name" by your broker, do not follow the
above instructions. Rather, follow the separate instructions provided by your
broker.
Revocation
If you are a stockholder of record, you may revoke your proxy or change your
vote at any time before it is voted at the special meeting by:
. voting again by telephone or the Internet;
. completing and mailing us a proxy card dated later than your last vote;
. submitting a written revocation to the Secretary of USX at 600 Grant
Street, Pittsburgh, Pennsylvania 15219-4776; or
. appearing in person and voting at the special meeting.
If your shares are held in "street name" by your broker, you may only revoke
your proxy or change your vote by following the separate instructions provided
by your broker.
In order to vote in person at the special meeting, stockholders of record
must attend the meeting and cast their votes in accordance with the voting
provisions established for the special meeting. Attendance at the special
meeting without voting in accordance with the voting procedures will not in and
of itself revoke a proxy.
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Solicitation of Proxies
All expenses incurred in connection with solicitation of the enclosed proxy
will be paid by USX. Officers and employees of USX may solicit proxies by
telephone or in person, but they will not be paid for soliciting proxies. We
also will request that brokerage houses and other nominees holding shares in
their names or in the names of their nominees that are beneficially owned by
others send proxy materials to and obtain proxies from those beneficial owners,
and we will reimburse those brokerage houses and nominees for their reasonable
expenses in performing those services. We have retained Innisfree M&A to assist
us in the solicitation of proxies, at an anticipated cost of $ , plus
reimbursement of out-of-pocket expenses.
Adjournments
Although it is not expected, the special meeting may be adjourned for the
purpose of soliciting additional proxies. Any adjournment of the special
meeting may be made without notice, other than by an announcement made at the
special meeting, by approval of the holders of a majority of the votes cast by
holders of Marathon Group Shares and U. S. Steel Group Shares at the special
meeting (voting together as a single class). Any proxies received by USX will
be voted in favor of an adjournment of the special meeting if the purpose of
the adjournment is to provide additional time to solicit votes to approve the
Plan of Reorganization, unless the stockholder directs otherwise by voting
against or abstaining from voting on the adjournment proposal included in the
enclosed proxy card or by voting against the adoption of the Plan of
Reorganization. Any adjournment or postponement of the special meeting for the
purpose of soliciting additional proxies will allow USX stockholders who have
already sent in their proxies to revoke them at any time prior to their use.
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THE PLAN OF REORGANIZATION
The following summary describes the material terms of the Plan of
Reorganization, but does not purport to describe all terms of the Plan of
Reorganization. Because the Plan of Reorganization is the legal document that
governs the Separation, we recommend that you read carefully the complete text
of the Plan of Reorganization for its precise legal terms and other information
that may be important to you. The Plan of Reorganization is included as Annex A
to this proxy statement/prospectus and is incorporated by reference in this
document.
Transactions
The Plan of Reorganization provides for the conversion of United States
Steel LLC from a Delaware limited liability company into a Delaware corporation
and provides for the Separation. The conversion of United States Steel LLC into
a Delaware corporation does not require stockholder approval.
Conversion of United States Steel LLC into United States Steel Corporation
Pursuant to the Plan of Reorganization, at the Separation Effective Time,
United States Steel LLC will convert from a Delaware limited liability company
into a Delaware corporation named "United States Steel Corporation."
The United States Steel Corporation Certificate and the United States Steel
Corporation By-Laws, which will be the certificate of incorporation and by-laws
of United States Steel Corporation from and after the Separation Effective
Time, are substantially the same as the USX Restated Certificate and the USX
By-Laws. The only differences between the United States Steel Corporation
Certificate and the USX Restated Certificate are that the United States Steel
Corporation Certificate provides for the authorization of two hundred million
shares of common stock and fourteen million shares of preferred stock and does
not provide for classes of targeted common stock, as currently provided for in
the USX Restated Certificate. The directors and officers of United States Steel
Corporation immediately following the Separation Effective Time will include
the individuals named under "INFORMATION ABOUT UNITED STATES STEEL--Management
of United States Steel Corporation Following the Separation" in Annex D.
The Separation Merger
Subject to the terms and conditions of the Plan of Reorganization, Merger
Sub will merge with and into USX at the Separation Effective Time. The separate
corporate existence of Merger Sub will cease. USX will be the surviving
corporation in the Separation Merger and will change its name to "Marathon Oil
Corporation" and continue to be governed by the laws of the State of Delaware.
Effective Time. Merger Sub and USX will complete the Separation Merger by
filing a certificate of merger with the Secretary of State of the State of
Delaware at such time as is determined by the USX board of directors following
the satisfaction or waiver of the conditions to the Separation Merger. The
Separation Merger will become effective on the date and time the certificate of
merger is filed or such later time as specified in the certificate of merger.
Certificate of Incorporation and By-Laws. At the Separation Effective Time,
the USX Restated Certificate will continue to be the restated certificate of
incorporation of the surviving corporation, but will be amended to change the
name of USX to Marathon Oil Corporation, to provide for the authorization of
five hundred and fifty million shares of common stock and twenty-six million
shares of preferred stock, and to delete the references to the classes of
targeted common stock, currently provided for in the USX Restated Certificate.
The by-laws of USX will be the by-laws of the surviving corporation.
Directors and Officers. The directors of USX immediately prior to the
Separation Effective Time (who will consist of the individuals listed in Annex
E) will be the initial directors of the surviving corporation, and the officers
of Merger Sub immediately prior to the Separation Effective Time will be the
initial officers of the surviving corporation.
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Conversion of Securities. The Plan of Reorganization provides that, at the
Separation Effective Time, and without any action on the part of any holders of
any of the securities listed below:
. Each U. S. Steel Group Share issued and outstanding or held in the
treasury of USX or by any subsidiary of USX immediately prior to the
Separation Effective Time will be converted into one duly issued, fully
paid and nonassessable New U. S. Steel Share;
. Each Marathon Group Share issued and outstanding or held in the treasury
of USX or by any subsidiary of USX immediately prior to the Separation
Effective Time will remain outstanding, unaffected by the Separation
Merger and will be the sole outstanding shares of common stock of USX,
which will change its name to Marathon Oil Corporation;
. Each outstanding share of 6.50% Preferred Stock will be converted into
the right to receive $50.00 in cash;
. Each share of common stock, par value $1.00 per share, of Merger Sub
issued and outstanding immediately prior to the Separation Effective
Time will automatically be cancelled and retired and shall cease to
exist, without payment of any consideration therefor;
. Each option to purchase Marathon Group Shares or U. S. Steel Group
Shares which has been granted and is outstanding and unexercised
immediately prior to the Separation Effective Time will be converted as
of the Separation Effective Time into an option to purchase Marathon
Shares or New U. S. Steel Shares, respectively, subject to the same
terms and conditions applicable to the relevant option being converted.
Each new option will have the same expiration date and be subject to the
same vesting requirements as the option being converted, and will cover
the same number of shares and have the same exercise price as the option
being converted, provided that the number of shares and/or the exercise
price will be adjusted, if necessary, so that (i) the aggregate
intrinsic value of the new option immediately after the Separation
Effective Time is not greater than the aggregate intrinsic value of the
option being converted immediately before the Separation Effective Time,
and (ii) the ratio of the exercise price per share to the market value
per share is not reduced. Any such adjustments will be based on the
closing price per share of U. S. Steel Group Shares or Marathon Group
Shares on the last trading day before the Separation Date relative to
the opening price per share of New U. S. Steel Shares or Marathon
Shares, respectively, on the first trading day after the Separation
Date.
. Each stock appreciation right with respect to Marathon Group Shares or
U. S. Steel Group Shares which has been granted and is outstanding
immediately prior to the Separation Effective Time will be converted as
of the Separation Effective Time into a stock appreciation right of
Marathon Oil Corporation with respect to Marathon Shares or of United
States Steel Corporation with respect to New U. S. Steel Shares,
respectively, subject to the same terms and conditions applicable to the
stock appreciation right being converted; and
. Each restricted U. S. Steel Group Share and restricted Marathon Group
Share which has been granted and is issued and outstanding immediately
prior to the Separation Effective Time will be converted into a
restricted New U. S. Steel Share and restricted Marathon Share,
respectively. After the Separation Effective Time, such restricted
shares will be subject to the same terms and conditions as were
applicable to such restricted shares prior to the Separation Merger.
Exchange of U. S. Steel Group Stock Certificates. USX will appoint an
exchange agent in connection with the Plan of Reorganization. Promptly after
the Separation Effective Time, the exchange agent will mail a letter of
transmittal and instructions for use in effecting the surrender of certificates
and exchange of stock certificates to each registered holder of physical stock
certificates representing U. S. Steel Group Shares. Only holders of U. S. Steel
Group Shares holding physical stock certificates will receive such letter of
transmittal from the exchange agent and be required to surrender their stock
certificates in exchange for New U. S. Steel Shares. We request that you not
surrender your certificates for exchange until you receive the letter of
transmittal and instructions. No dividends or other distributions declared or
made after the Separation
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Effective Time with respect to New U. S. Steel Shares will be paid to the
holder of any unsurrendered certificates. However, the holder will be paid,
without interest, upon surrender of such certificate, any dividends or
distributions with a record date after the Separation Effective Time but a
payment date between the Separation Effective Time and the time of surrender.
No transfers of U. S. Steel Group Shares will be made after the Separation
Effective Time.
No Exchange of Marathon Group Stock Certificates
Certificates representing shares of Marathon Group Shares will not be
exchanged in connection with the Separation and will represent Marathon Shares
for all corporate purposes following the Separation.
Redemption of Shares of Trust Preferred in Connection with the Separation
In connection with the Separation, each outstanding share of Trust Preferred
will be redeemed for $50.00 in cash.
Listing of New U. S. Steel Shares and Marathon Shares
United States Steel LLC and USX have agreed to use their reasonable efforts
to cause the New U. S. Steel Shares to be issued in the Separation Merger to be
approved for listing, under the symbol "X", on the NYSE, PSE and CSE, subject
to official notice of issuance. The listing of the New U. S. Steel Shares on
the NYSE, PSE and CSE is a condition to the consummation of the Separation
Merger.
Marathon Shares will continue to be listed on the NYSE, PSE and CSE under
the symbol "MRO", and USX has agreed to amend its listing applications with the
NYSE, PSE and CSE to provide for its name change to Marathon Oil Corporation.
Conditions to the Completion of the Separation
The consummation of the Separation is subject to the satisfaction or waiver
(to the extent permitted by law) of each of the following conditions:
. Adoption of the Plan of Reorganization by the required votes of USX
stockholders;
. Receipt of a private letter ruling from the IRS that the Separation will
qualify as a tax-free transaction within the meaning of Section 355 of
the Code, in a form and substance satisfactory to the USX board of
directors;
. United States Steel LLC and USX having completed the Financing (in
amount, form and substance satisfactory to the USX board) and the Value
Transfer;
. Approval of the New U. S. Steel Shares to be issued in the Separation
for listing on the NYSE, the PSE and the CSE, subject to official notice
of issuance;
. This document having been declared effective by the SEC and not being
the subject of any stop order or proceedings seeking a stop order;
. USX and United States Steel LLC having entered into the Separation
Documents, including the Tax Sharing Agreement, Financial Matters
Agreement, and Transition Services Agreement (in form and substance
satisfactory to the USX board of directors);
. All of the actions and transactions required by the Plan of
Reorganization to be performed or consummated prior to the Separation
Effective Time having been performed or consummated (in form and
substance satisfactory to the USX board of directors);
. Receipt of all material consents, authorizations and approvals required
in connection with the Separation (in form and substance satisfactory to
the USX board of directors);
58
. No order, injunction or decree having been issued and remaining in
effect which prohibits or prevents the consummation of the Separation;
and
. No event, occurrence or circumstance having a material adverse effect on
the business, assets, liabilities, condition (financial or otherwise) or
results of operations of the U. S. Steel Group or the Marathon Group.
All determinations as to satisfaction or waiver of the conditions to
consummation of the Separation are to be made by the USX board, in its sole and
absolute discretion.
Stockholders' Meeting and Board Recommendation
USX has agreed to take all actions necessary to call, give notice of,
convene and hold a special meeting of its stockholders (the "Stockholders'
Meeting") as promptly as practicable to:
. obtain the approval and adoption of this Plan of Reorganization by the
stockholders of USX;
. obtain the approval of the United States Steel Corporation 2002 Stock
Plan by the stockholders of USX;
. obtain the approval of the United States Steel Corporation Senior
Executive Officer Annual Incentive Compensation Plan by the stockholders
of USX; and
. vote to adjourn the Stockholders' Meeting, if necessary.
USX has agreed to include in the proxy statement/prospectus the
recommendation of the USX board of directors that stockholders of USX vote in
favor of the adoption of the Plan of Reorganization.
USX has agreed to use its reasonable efforts to solicit from USX
stockholders proxies in favor of the adoption of the Plan of Reorganization and
to take all other actions necessary or advisable to secure, at the
Stockholders' Meeting, the vote required to approve and adopt the Plan of
Reorganization.
Indemnification
Marathon Oil Corporation has agreed to indemnify, defend and hold harmless
United States Steel Corporation, and its directors, officers, employees,
representatives, advisors, agents and Affiliates from, against and in respect
of any and all losses arising out of, relating to or resulting from, directly
or indirectly:
. except as otherwise provided in the Tax Sharing Agreement or the
Financial Matters Agreement (or any other Separation Document), any and
all liabilities to the extent arising out of or relating to the
business, assets or liabilities of the Marathon Group;
. Marathon Oil Corporation's failure to observe its obligations under the
Plan of Reorganization or any of the Separation Documents; and
. except as otherwise provided in the Tax Sharing Agreement or the
Financial Matters Agreement (or any other Separation Document), sixty-
five percent (65%) of any and all (i) joint liabilities relating to USX
corporate assets, liabilities or businesses not related to the
businesses of the Marathon Group or the U. S. Steel Group and
(ii) liabilities arising from or related to the Separation or the
related transactions or agreements, including, but not limited to, the
filing of this proxy statement/prospectus with the SEC (together, (i)
and (ii) are referred to as "Joint Liabilities").
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United States Steel Corporation has agreed to indemnify, defend and hold
harmless Marathon Oil Corporation, and its directors, officers, employees,
representatives, advisors, agents and Affiliates, from, against and in respect
of any and all losses arising out of, relating to or resulting from, directly
or indirectly:
. except as otherwise provided in the Tax Sharing Agreement or the
Financial Matters Agreement (or any other Separation Document), any and
all liabilities to the extent arising out of or relating to the
business, assets or liabilities of the U. S. Steel Group, which includes
any businesses owned or previously owned by USX that do not fall within
the definition of the Marathon Group (as determined pursuant to the USX
Restated Certificate);
. United States Steel Corporation's failure to observe its obligations
under the Plan of Reorganization or any of the Separation Documents; and
. except as otherwise provided in the Tax Sharing Agreement or the
Financial Matters Agreement (or any other Separation Document), thirty-
five percent (35%) of any and all Joint Liabilities.
Expenses
Except to the extent otherwise provided in the Separation Documents, all
Separation Costs incurred in connection with the transactions contemplated by
the Plan of Reorganization, including, without limitation the Financing, (i)
incurred prior to the Separation Effective Time are to be borne thirty-five
percent (35%) by United States Steel Corporation and sixty-five percent (65%)
by Marathon Oil Corporation and (ii) incurred following the Separation
Effective Time shall be borne by the party incurring such expenses.
Amendment
The terms of the Separation may be amended, modified or supplemented at any
time as determined by the USX board of directors, and will be evidenced by a
written agreement signed by all of the parties to the Plan of Reorganization.
Termination
The Separation may be terminated and abandoned at any time prior to the
Separation, whether prior to or following the Stockholders' Meeting, by and in
the sole discretion of the USX board of directors. In the event of such
termination, none of the parties to the Separation shall have any liability by
reason of the Plan of Reorganization.
PROPOSAL TWO: APPROVAL OF THE UNITED STATES STEEL CORPORATION 2002 STOCK PLAN
Subject to the approval of stockholders, the USX board of directors has
adopted the United States Steel Corporation 2002 Stock Plan (the "Steel Stock
Plan") effective as of the Separation Effective Time. The material terms of the
Steel Stock Plan are substantially the same as the material terms of the USX
Corporation 1990 Stock Plan (the "USX Stock Plan") applicable to employees of
the U.S. Steel Group. The USX Stock Plan was approved by USX stockholders on
May 7, 1990, and, with stockholder approval, was amended and restated on April
28, 1998. As of the Separation Effective Time, the USX Stock Plan will be
renamed the Marathon Oil Corporation 2002 Stock Plan, and, at that time, United
States Steel employees will no longer be eligible to participate.
The Steel Stock Plan has the same objectives as the USX Stock Plan. The
Steel Stock Plan is designed (a) to promote the long-term financial interests
and growth of the United States Steel Corporation and its subsidiaries by
attracting and retaining management personnel with the training, experience and
ability to enable them to make a substantial contribution to the success of
Unites States Steel Corporation's business, (b) to motivate management
personnel by means of growth-related incentives to achieve long-range growth
goals, and (c) to further the identity of interests of participants with those
of the stockholders of United States Steel Corporation through opportunities
for increased stock ownership.
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Recommendation of the USX Board of Directors
The USX board of directors unanimously recommends that holders of Marathon
Group Shares and U. S. Steel Group Shares vote FOR the approval of the Steel
Stock Plan.
Summary of the Plan
Following is a summary of the material features of the Steel Stock Plan, the
full text of which is set forth as Annex H to this proxy statement/prospectus.
General
The Steel Stock Plan would permit the grant of any or all of the following
types of awards in any combination or sequence: (a) stock options, (b) restored
options, (c) stock appreciation rights and (d) restricted stock, in each case,
in relation to New U. S. Steel Shares ("Grants"). Up to % of the outstanding
New U. S. Steel Shares on December 31 of the preceding year will be available
for Grants during each calendar year the Steel Stock Plan is in effect. Any
unused shares in any year are available for Grants in subsequent years and
shares related to Grants that are forfeited, terminated, cancelled, expired,
unexercised, settled in cash in lieu of shares or in such manner that all or
some of the shares covered by the Grant are not issued to a participant, shall
immediately become available under the Steel Stock Plan.
The employees of United States Steel Corporation who are eligible for
participation under the Steel Stock Plan are all executive officers and others
in responsible positions whose performance in the judgment of the Compensation
and Organization Committee affects United States Steel Corporation's success.
It is expected that approximately employees will be eligible for
participation under the Steel Stock Plan in 2002. Over the term of the Steel
Stock Plan, it is anticipated that other employees will become eligible for
participation in the Steel Stock Plan.
The Compensation and Organization Committee of the United States Steel
Corporation board of directors shall administer the Steel Stock Plan. It shall
determine the type or types of Grants to be made under the Steel Stock Plan and
shall set forth in each such Grant the terms, conditions and limitations
applicable to it. The Compensation and Organization Committee shall have full
and exclusive power to interpret the Steel Stock Plan, to adopt rules,
regulations and guidelines relating to the Steel Stock Plan and to make all of
the determinations necessary for its administration.
Types of Grants
Options. The Compensation and Organization Committee may grant options to
purchase a specified number of New U. S. Steel Shares at not less than the fair
market value on the date of the Grant. All options will be non-qualified
options. Payment of the purchase price shall be made in cash or in such other
form as approved by the Compensation and Organization Committee, including New
U. S. Steel Shares valued at their fair market value on the date of the option
exercise. No option will have a term exceeding ten years from the date of grant
or be exercisable prior to the expiration of one year from the date of grant,
and no option will be repriced except in the event of any change in the
outstanding common stock of United States Steel Corporation by reason of a
stock split, stock dividend, stock combination or reclassification,
recapitalization or merger, or similar event. In the case of a change in
control of United States Steel Corporation, all restrictions will terminate.
An employee receiving an option does not realize income under the Code upon
the grant of the option. The employee will generally realize income at the time
of exercise of the option in the amount of the difference between the option
price and the fair market value of the New U. S. Steel Shares on the date of
exercise. United States Steel Corporation will then be entitled to a tax
deduction in an amount equal to the amount of income realized by the employee.
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Restored Options. An employee may exercise an option by paying the purchase
price in previously owned New U. S. Steel Shares. Upon such an exercise, a
restored option will be granted equal to the number of shares presented plus
any shares withheld for the payment of taxes. A restored option will have an
exercise price equal to the fair market value of the New U. S. Steel Shares on
the date of exercise, as well as the same expiration date as the original
exercised option. No restored option will be exercisable prior to the
expiration of one year from the date of grant.
Stock Appreciation Rights. The Compensation and Organization Committee may
grant a participant the right to receive a payment in cash and/or New U. S.
Steel Shares equal to the excess of the fair market value of a New U. S. Steel
Share on the date the right is exercised over the fair market value of such
share on the date the right is granted for a specified number of shares. No
stock appreciation right will be exercisable prior to the expiration of one
year from the date of grant.
An employee receiving a stock appreciation right does not realize income
under the Code at the time of receipt of the right. The employee will realize
income upon the exercise of the right in the amount of the cash received and
the fair market value on the date of exercise of the New U. S. Steel Shares
received. United States Steel Corporation will then be entitled to a tax
deduction in the amount of such income realized by the employee.
Restricted Stock. The Compensation and Organization Committee may award New
U. S. Steel Shares for no cash consideration or for such other consideration as
may be determined by the Compensation and Organization Committee. Each award
shall be subject to conditions including, but not limited to, continuous
service with United States Steel Corporation of at least one year following the
date of such award and vesting restrictions based on achievement of target
levels under specified performance measures, and also subject to provisions for
forfeiture and non-transfer. No shares of restricted stock will be vested prior
to one year from the date of grant. In the case of a change in control of
United States Steel Corporation, all restrictions will terminate. During the
period from January 1, 2002 through December 31, 2011, the number of shares of
restricted stock granted will not exceed .
Each award of restricted stock will remain unvested for a minimum of one
year and until the Compensation and Organization Committee vests the shares.
The Compensation and Organization Committee will base its vesting decisions on
the achievement of target levels under the following performance measures:
Performance Measures for the Vesting of Restricted Stock
--------------------------------------------------------
. Income from operations as a percent of capital employed
. Income from operations per ton shipped
. Operating cash flow as a percent of capital employed
. Safety performance
An employee normally will not realize income under the Code upon the grant
of restricted stock. Upon the termination of the restrictions applicable to
such stock, the employee will realize taxable income equal to the fair market
value of the shares of common stock at that time. United States Steel
Corporation will be entitled to a deduction in the same amount and at the same
time as the employee realizes income. Dividends paid to the employee with
respect to restricted stock constitute compensation and are taxable to the
employee and deductible by United States Steel Corporation.
Conversion of Options, Restored Options, Stock Appreciation Rights and
Restricted Stock
Options and restored options to purchase U. S. Steel Group Shares, and stock
appreciation rights with respect to U. S. Steel Group Shares that were granted
under the USX Stock Plan and that remain unexercised on December 31, 2001,
shall, effective January 1, 2002 (subject to completion of the Separation on or
prior to such date) represent options and restored options to purchase, and
stock appreciation rights with respect to New U. S. Steel Shares, and,
effective that date (subject to completion of the Separation on or prior to
such date), all restricted U. S. Steel Group Shares awarded under the USX Stock
Plan shall be
62
converted into an equal number of New U. S. Steel Shares. These options,
restored options, and stock appreciation rights relating to New U. S. Steel
Shares, and the restricted New U. S. Steel Shares shall be subject to the same
terms and conditions, including vesting requirements, as the options, restored
options, stock appreciation rights and restricted stock being converted. With
regard to options and restored options, each option or restored option to
purchase New U. S. Steel Shares will cover the same number of shares and have
the same exercise price as the option or restored option being converted,
provided that the number of shares and/or the exercise price will be adjusted,
if necessary, so that (i) the aggregate intrinsic value of the option to
purchase New U. S. Steel Shares immediately after the Separation Effective
Time is not greater than the aggregate intrinsic value of the option being
converted immediately before the Separation Effective Time, and (ii) the ratio
of the exercise price per share to the market value per share is not reduced.
Any such adjustments will be based on the closing price per share of U. S.
Steel Group Shares on the last trading day before January 1, 2002 (subject to
completion of the Separation on or prior to such date) relative to the opening
price per share of New U. S. Steel Shares on the first trading day following
that date.
During any calendar year, no participant will be awarded Grants with
respect to more than New U. S. Steel Shares.
It is not practical to predict the number of shares that will be awarded
under Grants made to participants in the future because such numbers are, and
will continue to be, within the discretion of the Compensation and
Organization Committee under the terms of the United States Steel 2002 Stock
Plan.
The Steel Stock Plan will terminate on December 31, 2011, subject to
earlier termination by the Board.
Amendments
The board of directors of United States Steel Corporation may amend,
suspend or terminate the Steel Stock Plan provided that no such action may,
without stockholder approval, increase the aggregate number of shares
available for Grants under the Steel Stock Plan, decrease the price of
options, restored options or stock appreciation rights, change the
requirements relating to the Compensation and Organization Committee or extend
the term of the Steel Stock Plan. The Compensation and Organization Committee
may amend the terms and conditions applicable to outstanding Grants consistent
with the Steel Stock Plan, provided that no such action may modify the Grant
in a manner adverse to the participant without the participant's consent.
This summary is qualified in its entirety by reference to the copy of the
Steel Stock Plan attached as Annex H.
The USX board of directors unanimously recommends that you vote FOR
approval of Proposal Two.
PROPOSAL THREE: APPROVAL OF THE UNITED STATES STEEL CORPORATION
SENIOR EXECUTIVE OFFICER ANNUAL INCENTIVE COMPENSATION PLAN
Subject to the approval of stockholders, the USX board of directors has
adopted the United States Steel Corporation Senior Executive Officer Annual
Incentive Compensation Plan (the "Steel Incentive Plan") effective as of the
Separation Effective Time. The material terms of the Steel Incentive Plan are
substantially the same as the material terms of the USX Corporation Senior
Executive Officer Annual Incentive Compensation Plan (the "USX Incentive
Plan") applicable to employees of the U. S. Steel Group. The USX Incentive
Plan was approved by USX stockholders on May 2, 1994, and, with stockholder
approval, was amended and restated on April 28, 1998. The USX Incentive Plan
will be renamed the Marathon Oil Corporation Senior Executive Officer Annual
Incentive Compensation Plan effective as of the Separation Effective Time,
and, at that time, United States Steel employees will no longer be eligible to
participate.
Like the USX Incentive Plan, the Steel Incentive Plan provides for the
payment of cash bonus awards to senior executive officers of United States
Steel Corporation based on pre-established performance measures. The Steel
Incentive Plan's objectives are to advance the interests of the United States
Steel Corporation by providing participants with annual incentive
opportunities linked directly to specific business results. It is
63
intended to (a) reinforce United States Steel Corporation's goal-setting and
strategic planning process, (b) recognize the efforts of senior executive
officers in achieving designated objectives, and (c) aid in attracting and
retaining competent senior executive officers, thus ensuring the long-range
success of United States Steel Corporation. The Steel Incentive Plan is
designed to preserve the tax deductibility, under Section 162(m) of the Code,
of the annual incentive compensation paid to senior executive officers.
Recommendation of the USX Board of Directors
The USX board of directors unanimously recommends that holders of Marathon
Group Shares and U. S. Steel Group Shares, vote FOR the approval of the Steel
Incentive Plan.
Summary of the Plan
Following is a summary of the material features of the Steel Incentive
Plan. The full text of the Steel Incentive Plan is set forth as Annex I to
this proxy statement/prospectus.
The Steel Incentive Plan would authorize the Compensation and Organization
Committee of the United States Steel Corporation board of directors to adopt,
in accordance with regulations promulgated under the Code, applicable target
levels under the performance measures described below, and the amounts to be
awarded for attaining such target levels. The Committee will have the right to
reduce the amount of an award or eliminate an award that would otherwise be
payable to a participant, i.e. exercise "negative discretion". In no event
will the amount of an award payable to a participant for a given year exceed
$3,000,000.
Awards may be paid only after the Compensation and Organization Committee
certifies that the applicable performance measures have been satisfied. It is
impossible to determine the amounts that will be paid under the Steel
Incentive Plan in the future since awards, and payment with respect thereto,
are, and will continue to be, within the discretion of the Compensation and
Organization Committee under the terms of the plan.
Individuals serving in one of the positions listed below for at least a
portion of a calendar year will be eligible to participate in the Steel
Incentive Plan:
United States Steel Corporation Chairman
United States Steel Corporation Chief Executive Officer
United States Steel Corporation President
United States Steel Corporation Vice Chairmen
United States Steel Corporation Chief Operating Officer
United States Steel Corporation Chief Financial Officer
United States Steel Corporation General Counsel
United States Steel Corporation Executive Vice Presidents
United States Steel Corporation Senior Vice Presidents
Set forth below are the performance measures under the Steel Incentive
Plan:
Income from Operations
Steel Shipments
Worker Safety
Toxic Emissions Improvements
Work Force Diversity
Common Stock Performance
This summary is qualified in its entirety by reference to the copy of the
Steel Incentive Plan attached as Annex I.
The USX board of directors unanimously recommends that you vote FOR
approval of Proposal Three.
64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table furnishes information concerning all persons known to
USX to beneficially own five percent or more of any class of the voting stock
of USX:
Name and Address of Beneficial Amount and Nature of Percent of
Class Owner Beneficial Ownership Class
----- ------------------------------ -------------------- ----------
Marathon
Group
Shares Wellington Management Company, LLP 15,562,200(1) 5.05(1)
75 State Street
Boston, MA 02109
- --------
(1) Based on Schedule 13G dated February 14, 2001 which indicates that
Wellington Management Company, LLP had sole voting power over no shares,
shared voting power over 762,600 shares, sole dispositive power over no
shares and shared dispositive power over 15,562,200 shares.
65
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of each class of USX
common stock beneficially owned as of January 31, 2001 by each director, by
each executive officer and by all directors and executive officers as a group.
No director or executive officer beneficially owned, as of January 31, 2001,
any equity securities of USX other than those shown.
U. S.
Marathon Steel
Group Group
Name Shares Shares
- ---- --------- ---------
Neil A. Armstrong(1)...................................... 13,925 4,723
Clarence P. Cazalot, Jr.(2)(3)............................ 440,000 35,000
J. Gary Cooper(1)(2)...................................... 3,367 1,791
Charles A. Corry(1)(2)(3)................................. 63,864 81,350
Robert M. Hernandez(2)(3)(4).............................. 581,492 262,940
Shirley Ann Jackson(1)(2)................................. 2,771 1,746
Charles R. Lee(1)......................................... 13,606 5,307
Paul E. Lego(1)(2)........................................ 10,933 3,659
John F. McGillicuddy(1)................................... 13,180 4,402
Dan D. Sandman(2)(3)...................................... 211,900 134,696
Seth E. Schofield(1)(2)................................... 8,686 3,717
John W. Snow(1)........................................... 6,918 2,971
Thomas J. Usher(2)(3)..................................... 1,073,976 709,406
Douglas C. Yearley(1)..................................... 8,161 3,545
All Directors and Executive Officers as a group (36
persons)(1)(2)(3)(5)..................................... 5,329,909 3,531,278
- --------
(1) Includes Common Stock Units credited under the USX Corporation Deferred
Compensation Plan for Non-Employee Directors as follows:
Marathon Group U. S. Steel Group
Common Stock Units Common Stock Units
------------------ ------------------
Neil A. Armstrong...................... 12,425 4,424
J. Gary Cooper......................... 2,344 756
Charles A. Corry....................... 3,865 1,351
Shirley Ann Jackson.................... 1,763 732
Charles R. Lee......................... 11,606 4,107
Paul E. Lego........................... 9,340 3,336
John F. McGillicuddy................... 11,180 4,003
Seth E. Schofield...................... 7,576 2,585
John W. Snow........................... 5,918 1,972
Douglas C. Yearley..................... 7,161 2,546
(2) Includes shares held under the USX Savings Fund Plan, the Marathon Thrift
Plan, the USX Dividend Reinvestment and Direct Stock Purchase Plans and
the 1990 Stock Plan.
(3) Includes shares which may be acquired upon exercise of outstanding
options as follows (all options other than those granted on March 3, May
30, September 25 and December 20, 2000 are currently exercisable): Mr.
Usher: Marathon Group Shares 892,600, U. S. Steel Group Shares 606,400;
Mr. Corry: Marathon Group Shares 60,000, U. S. Steel Group Shares 80,000;
Mr. Cazalot: Marathon Group Shares 380,000, the U. S. Steel Group Shares
20,000; Mr. Hernandez: Marathon Group Shares 497,950, U. S. Steel Group
Shares 217,000; Mr. Sandman: Marathon Group Shares 153,400, U. S. Steel
Group Shares 107,325; and all directors and executive officers as a
group: Marathon Group Shares 2,877,130, U. S. Steel Group Shares
2,276,025.
(4) As of January 31, 2001 the United States Steel and Carnegie Pension Fund,
trustee of the United States Steel Corporation Plan for Employee Pension
Benefits and the United States Steel Corporation Plan for Non-Union
Employee Pension Benefits, owned 587,680 shares of the Marathon Group
Shares. This stock
66
was received in exchange for common stock of Texas Oil & Gas Corp. Mr.
Hernandez is chairman and one of seven members of the Investment Committee
of the trustee. The board of directors of the trustee has by formal
resolution delegated sole power to vote and dispose of such stock to a
subcommittee of the Investment Committee which is composed of members who
are not officers or employees of USX. Mr. Hernandez disclaims beneficial
ownership of such stock.
(5) Total shares beneficially owned in each case constitute less than one
percent of the outstanding shares of each class except that all directors
and executive officers as a group own 1.77 percent of the Marathon Group
Shares and 4.45 percent of the U. S. Steel Group Shares.
OTHER MATTERS
Legal Matters
The validity of the United States Steel Corporation common stock to be
issued in connection with the Separation will be passed upon by Skadden, Arps,
Slate, Meagher & Flom LLP.
Experts
The combined financial statements of United States Steel as of December 31,
2000 and December 31, 1999 and for each of the three years in the period ended
December 31, 2000 included in this proxy statement/prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of USX Corporation as of December 31,
2000 and December 31, 1999 and for each of the three years in the period ended
December 31, 2000 included in this proxy statement/prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus incorporates documents by reference which
are not presented in or delivered with this proxy statement/prospectus.
The following documents, which were filed by USX with the Securities and
Exchange Commission, are incorporated by reference:
SEC Filings Period
----------- ------
Annual Report on Year ended December 31, 2000, as filed on March
Form 10-K................. 12, 2001
Quarterly Report on Quarter ended March 31, 2001, as filed on May
Form 10-Q................. 11, 2001
Current Report on Form 8- Dated February 27, 2001 and April 24, 2001
K.........................
Proxy Statement on Schedule Filed on March 12, 2001
14A.......................
USX incorporates by reference additional documents that it may file with the
Securities and Exchange Commission between the date of this proxy
statement/prospectus and the date of the special meeting of stockholders of
USX. These documents include periodic reports, such as Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well
as proxy statements.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this proxy statement/prospectus will be deemed
to be modified or superseded for purposes of this proxy statement/prospectus to
the extent that a statement contained in this proxy statement/prospectus or any
other subsequently filed document that is deemed to be incorporated by
reference into this proxy statement/prospectus modifies or supersedes the
statement. Any statement so modified or superseded will not be deemed, except
as so modified or superseded, to constitute a part of this proxy
statement/prospectus.
67
The documents incorporated by reference into this proxy statement/prospectus
are available from us upon request. We will provide a copy of any and all of
the information that is incorporated by reference in this proxy
statement/prospectus to any person, without charge, upon written or oral
request. Any request for documents should be made by [ ], [ ] to ensure
timely delivery of the documents.
Requests for documents should be directed to:
USX Corporation
600 Grant Street
Pittsburgh, Pennsylvania 15219-4776
Attention: Vice President -- Investor Relations
[ ]
USX Corporation files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. You may read and copy this
information at the following locations of the Securities and Exchange
Commission:
Public Reference Room North East Regional OfficeMidwest Regional Office
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048
Chicago, Illinois 60661-2511
You may obtain information on the operation of the public reference rooms by
calling the SEC at 1-800-SEC-0330.
You can also inspect reports, proxy statements and other information about
USX Corporation at the offices of the National Association of Securities
Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850.
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference Section of the Securities and Exchange Commission,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
The Securities and Exchange Commission also maintains an Internet worldwide
web site that contains reports, proxy statements and other information about
issuers, like USX Corporation, who file electronically with the Securities and
Exchange Commission. The address of that site is http://www.sec.gov.
United States Steel LLC has filed a registration statement on Form S-4 under
the Securities Act with the Securities and Exchange Commission with respect to
New U. S. Steel Shares to be issued to holders of U. S. Steel Group Shares in
the Separation. This proxy statement/prospectus constitutes the prospectus of
United States Steel Corporation filed as part of that registration statement.
This proxy statement/prospectus does not contain all of the information set
forth in the registration statement because certain parts of the registration
statement are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. The registration statement and its exhibits
are available for inspection and copying as set forth above.
If you have any questions about the merger, please call Innisfree M&A at
[ ].
You should rely only on the information contained in this document or that
we have referred you to. We have not authorized anyone to provide you with
information that is different.
This proxy statement/prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this proxy
statement/prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither
the delivery of this proxy statement/ prospectus nor any distribution of
securities pursuant to this proxy statement/prospectus shall, under any
circumstances, create any implication that there has been no change in the
information set forth or incorporated into this proxy statement/prospectus by
reference or in our affairs since the date of this proxy statement/prospectus.
68
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
FOR UNITED STATES STEEL CORPORATION
The following unaudited pro forma condensed combined balance sheet as of
March 31, 2001 gives effect to the $900 million Value Transfer, new financing
arrangements, the assignment of certain USX corporate assets and liabilities
and the payment of Separation Costs as if such transactions had been
consummated as of March 31, 2001. The following unaudited pro forma condensed
combined statements of operations for the three months ended March 31, 2001 and
the year ended December 31, 2000 give effect to changes in net interest and
other financial costs as a result of the Value Transfer and new financing
arrangements as if such transactions had been consummated at the beginning of
the periods presented.
No pro forma adjustments were made for changes in the future level of
corporate administrative costs to be incurred by United States Steel
Corporation as compared with the historical level of such costs allocated to
United States Steel. These costs are expected to continue at approximately the
same level as previously allocated, except for insurance costs which are
estimated to be higher by $9 million annually.
No pro forma adjustments have been made in the unaudited pro forma condensed
combined statements of operations for nonrecurring charges associated with the
Separation. Such adjustments are reflected in the unaudited pro forma condensed
combined balance sheet.
Following the Separation, United States Steel Corporation will account for
its assets and liabilities based on the historical values at which they were
carried by USX immediately prior to the Separation.
The pro forma adjustments included herein are based on available information
and certain assumptions that management believes are reasonable and are
described in the accompanying notes. The unaudited pro forma condensed combined
financial statements do not necessarily represent United States Steel
Corporation's financial position or results of operations had the transactions
occurred at such dates or project United States Steel Corporation's financial
position or results of operations for any future date or period. A number of
factors may affect United States Steel Corporation's results. See "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS". In the opinion of management, all
adjustments necessary to present fairly the unaudited pro forma condensed
combined financial statements have been made. The unaudited pro forma condensed
combined financial statements should be read in conjunction with the historical
combined financial statements of United States Steel, including the notes
thereto, included in Annex F.
C-1
UNITED STATES STEEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
March 31, 2001
Dollars in millions
United United States
States Steel
Steel Separation Value Corporation
Historical Adjustments Transfer Pro Forma
---------- ----------- -------- -------------
ASSETS
Current assets.............. $2,419 $(144)(C) $ $2,275
Property, plant and
equipment--net............. 3,067 20 (A) 3,087
Prepaid pensions............ 2,674 2,674
Other assets................ 466 7 (A) 451
(43)(B)
21 (C)
------ ----- ----- ------
Total assets................ $8,626 $(139) $ $8,487
====== ===== ===== ======
LIABILITIES AND EQUITY
Current liabilities other
than debt.................. $1,230 $ (1)(A) $ $1,173
(43)(B)
(13)(C)
Notes payable and long-term
debt due within one year... 297 (280)(C) 17
Long-term debt.............. 1,939 551 (C) (900)(D) 1,590
Other long-term
liabilities................ 3,010 (5)(A) 3,005
Preferred securities of
subsidiaries............... 249 (249)(C) --
Equity...................... 1,901 33 (A) 900 (D) 2,702
(132)(C)
------ ----- ----- ------
Total liabilities and
equity..................... $8,626 $(139) $ -- $8,487
====== ===== ===== ======
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
C-2
UNITED STATES STEEL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(A) Reflects the assignment of certain USX corporate assets and liabilities to
United States Steel Corporation. For a more detailed description, see "THE
SEPARATION--Assignment of Other USX Corporate Assets and Certain
Liabilities in the Separation." The effects can be summarized as follows:
Dollars in millions
---------------------------------------------------
Property,
Plant and Other Current Other
Equipment Assets Liabilities Liabilities Total
--------- ------- ----------- ----------- -------
Property, plant and
equipment.............. $20 $ -- $ -- $ -- $ 20
Assets and liabilities
associated with
employee benefits...... -- 7 1 49 57
Income tax assets and
liabilities, including
tax effect of above
adjustments............ -- -- -- (44) (44)
--- ------- ------- ------- -------
Increase in equity...... $20 $ 7 $ 1 $ 5 $ 33
=== ======= ======= ======= =======
(B) Reflects the reclassification of a $43 million long-term tax receivable
from Marathon and United States Steel's portion of USX's accrued liability
for potential tax deficiencies to an estimated tax indemnification
liability to Marathon Oil Corporation.
(C) Reflects the effects of the following:
(1) Reversal of the attribution to United States Steel of the financial
activities of USX, including invested cash, deferred financing costs,
accrued interest payable, debt and preferred securities of
subsidiaries.
(2) Recognition of existing USX debt for which United States Steel
Corporation will be responsible under the Financial Matters Agreement.
(3) New financing arrangements of United States Steel Corporation, the
proceeds of which will be used to pay Marathon Oil Corporation in
connection with the Separation and to pay United States Steel
Corporation's portion of the Separation Costs.
For a more detailed description, see "THE SEPARATION--Financing
Arrangements Relating to the Separation."
The decrease in current assets of $144 million reflects the reversal of the
portion of USX invested cash historically attributed to United States Steel
which will be included in the accounts of Marathon Oil Corporation.
The increase in other assets of $21 million primarily reflects estimated
deferred financing costs to be incurred related to the new financing
arrangements.
The decrease in current liabilities other than debt of $13 million reflects
the expected tax benefits of the Separation Costs and the reversal of the
portion of USX accrued interest payable historically attributed to United
States Steel which will be included in the accounts of Marathon Oil
Corporation.
The net increase in debt of $271 million (the sum of a decrease in notes
payable and long-term debt due within one year of $280 million and an
increase in long-term debt of $551 million) primarily represents the
refinancing of other obligations not classified as debt (Preferred
securities of subsidiaries and 6.50% Preferred Stock), net of invested
cash, and Separation Costs. The following table reconciles the amount of
debt attributed to United States Steel to the pro forma balance of United
States Steel Corporation debt.
C-3
Dollars
in millions
-----------
Debt attributed to United States Steel................. $2,236
Other obligations, net of invested cash, attributed to
United States Steel which will be refinanced as debt:
Preferred securities of subsidiaries................. $249
6.50% Preferred Stock................................ 121
Invested cash........................................ (144)
Other financial activities........................... 4
Excess of redemption value over carrying value of
Trust Preferred..................................... 14
Separation Costs..................................... 27
----
Net refinancing of other obligations................... 271
------
Debt before the Value Transfer......................... 2,507
Value Transfer......................................... (900)
------
Pro forma balance of United States Steel Corporation
debt.................................................. $1,607
======
The net decrease in equity of $132 million consists of the following:
Dollars in millions
-------------------
6.50% Preferred Stock, which will be repaid by
Marathon Oil Corporation........................... $121
Excess of redemption value of the Trust Preferred
over carrying value................................ 14
Other adjustments, net.............................. (3)
----
Net decrease in equity.............................. $132
====
The following illustrates the pro forma balance of United States Steel
Corporation's debt at March 31, 2001:
Dollars
in millions
-----------
USX debt that will be the responsibility of United
States Steel Corporation:
USSK Loan Facility.................................. $ 325
Industrial revenue bonds (for which Marathon Oil
Corporation remains obligated)..................... 479
Fairfield caster sublease........................... 86
Capital lease obligations and other................. 6
New financing arrangements:
To pay Marathon Oil Corporation..................... $684
To pay Separation Costs............................. 27
-----
Total new financing arrangements.................. 711
------
Total debt............................................ 1,607
Less notes payable and long-term debt within one
year............................................... 17
------
Total long-term debt.................................. $1,590
======
(D) Reflects adjustments related to the $900 million Value Transfer. In
connection with the Separation, a portion of USX indebtedness and other
obligations will be repaid or retired and United States Steel Corporation
will incur indebtedness and other obligations and agree to repay a portion
of the indebtedness and other obligations of USX, such that the amount of
indebtedness and other obligations for which United States Steel
Corporation is responsible is $900 million less than the net amounts
attributed to United States Steel immediately prior to the Separation. For
a more detailed description of the Value Transfer, see "THE SEPARATION--
Financing Arrangements Relating to the Separation."
C-4
UNITED STATES STEEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2001
Dollars in millions (except per share amounts)
United States
United States Steel
Steel Separation Corporation
Historical Adjustments Pro forma
------------- ----------- -------------
Revenues and other income.............. $1,564 $ $1,564
Costs and expenses:
Cost of revenues (excludes items
shown below)........................ 1,549 1,549
Selling, general and administrative
expenses (credits).................. (16) (16)
Depreciation, depletion and
amortization........................ 73 73
Taxes other than income taxes........ 59 59
------ ---- ------
Total costs and expenses........... 1,665 1,665
------ ---- ------
Income (loss) from operations.......... (101) (101)
Net interest and other financial costs
(income).............................. (12) (11)(A) (23)
------ ---- ------
Income (loss) before income taxes...... (89) 11 (78)
Provision (credit) for income taxes.... (98) 4 (B) (94)
------ ---- ------
Net income............................. 9 7 16
Dividends on preferred stock........... 2 (2)(C) --
------ ---- ------
Net income applicable to common stock.. $ 7 $ 9 $ 16
====== ==== ======
Net income per common share: (D)
Basic and diluted.................... $ 0.18
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
C-5
UNITED STATES STEEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
Dollars in millions (except per share amounts)
United States
United Steel
States Steel Separation Corporation
Historical Adjustments Pro forma
------------- ----------- -------------
Revenues and other income.............. $6,132 $ $6,132
Costs and expenses:
Cost of revenues (excludes items
shown below)........................ 5,656 5,656
Selling, general and administrative
expenses (credits).................. (223) (223)
Depreciation, depletion and
amortization........................ 360 360
Taxes other than income taxes........ 235 235
------ ---- ------
Total costs and expenses........... 6,028 6,028
------ ---- ------
Income from operations................. 104 104
Net interest and other financial
costs................................. 105 (68)(A) 37
------ ---- ------
Income (loss) before income taxes...... (1) 68 67
Provision for income taxes............. 20 24 (B) 44
------ ---- ------
Net income (loss)...................... (21) 44 23
Dividends on preferred stock........... 8 (8)(C) --
------ ---- ------
Net income (loss) applicable to common
stock................................. $ (29) $ 52 $ 23
====== ==== ======
Net income (loss) per common share: (D)
Basic and diluted.................... $ 0.26
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
C-6
UNITED STATES STEEL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(A) Reflects a decrease in net interest and other financial costs as a result
of a decrease in the amount of indebtedness of United States Steel
Corporation following the Separation, as compared to the amount of USX debt
attributed to United States Steel. The decrease primarily reflects the $900
million Value Transfer. Pro forma interest costs have been calculated based
on pro forma average levels of debt for the three months ended March 31,
2001, and for the year ended December 31, 2000. Pro forma debt reflects new
financing arrangements, the proceeds of which will be used to pay Marathon
Oil Corporation in connection with the Separation and to pay United States
Steel Corporation's portion of the Separation Costs.
The assumed rate for new financing arrangements was 9% based upon expected
market conditions and the expected credit rating of United States Steel
Corporation. The first quarter 2001 pro forma average interest rate for
existing USX debt and other obligations for which United States Steel
Corporation will be responsible was approximately 6 3/4%. The first quarter
2001 weighted average interest rate for all United States Steel Corporation
pro forma debt and other obligations was approximately 8%. A 1/8 percentage
point change in the assumed interest rate for new financing arrangements
would have changed annual interest costs by approximately $1 million.
(B) Reflects the income tax effects of adjustment (A).
(C) Reflects the elimination of preferred stock dividends on the 6.50%
Preferred Stock, which will be repaid by Marathon Oil Corporation.
(D) Weighted average shares of common stock outstanding (basic and diluted) for
United States Steel Corporation, on a pro forma basis, were 88,806,000 for
the three months ended March 31, 2001, and 88,613,000 for the year ended
December 31, 2000.
C-7
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
FOR MARATHON OIL CORPORATION
The following unaudited pro forma condensed balance sheet as of March 31,
2001 gives effect to the discontinuance of the businesses of United States
Steel Corporation, the $900 million Value Transfer, the assignment of certain
USX corporate assets and liabilities to United States Steel Corporation, the
payment of Separation Costs and the distribution of New U. S. Steel Shares to
the holders of U. S. Steel Group Shares as if such transactions had been
consummated as of March 31, 2001. The following unaudited pro forma condensed
statements of operations for the three months ended March 31, 2001 and the year
ended December 31, 2000 give effect to the discontinuance of the businesses of
United States Steel Corporation and interest changes as a result of the Value
Transfer and the repayment of the 6.5% Preferred Stock as if such transactions
had been consummated at the beginning of the periods presented. The unaudited
pro forma condensed statements of operations of Marathon Oil Corporation for
the years ended December 31, 1999 and 1998 give effect to the discontinuance of
the businesses of United States Steel Corporation but do not give effect to any
adjustments associated with the Separation.
No pro forma adjustments were made for changes in the future level of
corporate administrative costs to be incurred by Marathon Oil Corporation as
compared with the historical level of such costs allocated to Marathon. These
costs are expected to continue at approximately the same level as previously
allocated, except for insurance costs which are estimated to be higher by $2
million annually.
No pro forma adjustments have been made in the unaudited pro forma condensed
statements of operations for nonrecurring charges including the Separation
Costs and the loss on the Separation. Such adjustments are reflected in the
unaudited pro forma condensed balance sheet.
The pro forma adjustments included herein are based on available information
and certain assumptions that management believes are reasonable and are
described in the accompanying notes. The unaudited pro forma condensed
financial statements do not necessarily represent Marathon Oil Corporation's
financial position or results of operations had the transactions occurred at
such dates or project Marathon Oil Corporation's financial position or results
of operations for any future date or period. A number of factors may affect
Marathon Oil Corporation's results. See "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS. In the opinion of management, all adjustments necessary to present
fairly the unaudited pro forma condensed financial statements have been made.
The unaudited pro forma condensed financial statements should be read in
conjunction with the historical financial statements of USX Corporation,
including the notes thereto, included in Annex G.
C-8
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
March 31, 2001
Dollars in millions
Marathon
Oil
Corporation
Pro Forma Marathon
Discontinued Before Oil
USX Operations Separation Separation Value Corporation
Historical Adjustments (A) Adjustments Adjustments Transfer Pro Forma
---------- --------------- ----------- ----------- -------- -----------
ASSETS
Current assets.......... $ 7,060 $(2,301) $ 4,759 $ 91 (C) $ $ 5,003
153 (D)
Net investment in
discontinued
operations............. 1,901 1,901 33 (B) 900 (F) --
(132) (D)
(2,702) (E)
Property, plant and
equipment--net......... 12,967 (3,067) 9,900 (20) (B) 9,880
Prepaid pensions........ 2,886 (2,674) 212 212
Other assets............ 1,410 (349) 1,061 (86) (B) 1,543
568 (D)
------- ------- ------- ------- ---- -------
Total assets............ $24,323 $(6,490) $17,833 $(2,095) $900 $16,638
======= ======= ======= ======= ==== =======
LIABILITIES AND EQUITY
Current liabilities
other than debt........ $ 4,713 $(1,115) $ 3,598 $ 1 (B) $ $ 3,730
134 (C)
(3) (D)
Notes payable and long-
term debt due within
one year............... 701 (297) 404 289 (D) 693
Long-term debt.......... 4,012 (1,939) 2,073 401 (D) 900 (F) 3,374
Other long-term
liabilities............ 5,315 (2,890) 2,425 (74) (B) 2,308
(43) (C)
Preferred securities of
subsidiaries........... 433 (249) 184 66 (D) 250
Minority interest in
Marathon Ashland
Petroleum LLC.......... 1,938 1,938 1,938
Equity.................. 7,211 7,211 (152) (D) 4,345
(12) (D)
(1,304) (E)
(1,398) (E)
------- ------- ------- ------- ---- -------
Total liabilities and
equity................. $24,323 $(6,490) $17,833 $(2,095) $900 $16,638
======= ======= ======= ======= ==== =======
See Notes to Unaudited Pro Forma Condensed Balance Sheet
C-9
MARATHON OIL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(A) This column reflects the reclassification of all assets and liabilities of
the businesses of United States Steel Corporation to discontinued
operations. All receivable and payable balances between Marathon Oil
Corporation and United States Steel Corporation are reflected in both
continuing and discontinued operations. The measurement date for
discontinued operations purposes will be on or about the Separation
Effective Time.
(B) Reflects the assignment of certain USX corporate assets and liabilities to
United States Steel Corporation. For a more detailed description, see "THE
SEPARATION--Assignment of Other USX Corporate Assets and Certain
Liabilities in the Separation." The effects can be summarized as follows:
Dollars in millions
---------------------------------------------------
Property,
Plant and Other Current Other
Equipment Assets Liabilities Liabilities Total
--------- ------- ----------- ----------- -------
Property, plant and
equipment.............. $(20) $ -- $ -- $ -- $ (20)
Assets and liabilities
associated with
employee benefits...... -- (86) (1) 30 (57)
Income tax assets and
liabilities, including
the tax effect of above
adjustments............ -- -- -- 44 44
---- ------- ------- ------- -------
Net effect on net
investment in
discontinued
operations............. $(20) $ (86) $ (1) $ 74 $ (33)
==== ======= ======= ======= =======
(C) Reflects reclassification of a $43 million long-term tax payable to United
States Steel and establishment of an estimated tax indemnification
receivable from United States Steel Corporation of $91 million. Current
liabilities other than debt has been increased by the sum of these amounts.
(D) Reflects the effects of the following:
(1) Recognition of the financial activities of USX formerly attributed to
United States Steel, including invested cash, deferred financing costs,
accrued interest payable, debt, and preferred securities of
subsidiaries.
(2) Reversal of existing USX debt for which United States Steel Corporation
will be responsible under the Financial Matters Agreement.
(3) Establishment of receivables from United States Steel Corporation under
the Financial Matters Agreement for obligations relating to industrial
revenue bonds and a sublease of the Fairfield caster.
(4) Payment from United States Steel Corporation, the proceeds of which
will be used to redeem the Trust Preferred, to repay the 6.5% Preferred
Stock, to repay the Receivables Facility and to fund a portion of the
Separation Costs.
(5) New financing arrangements of Marathon Oil Corporation, the proceeds of
which will be used to fund the remaining portion of the Separation
Costs.
For a more detailed description, see "THE SEPARATION--Financing
Arrangements Relating to the Separation."
C-10
The increase in current assets of $153 million reflects $144 million for
the recognition of the portion of USX invested cash historically attributed
to United States Steel which will be included in the accounts of Marathon
Oil Corporation and $9 million related to industrial revenue bonds of which
Marathon Oil Corporation remains obligated but United States Steel
Corporation assumes responsibility for repayment.
The increase in other assets of $568 million primarily reflects receivables
from United States Steel Corporation of $470 million related to industrial
revenue bonds of which Marathon Oil Corporation remains obligated but
United States Steel Corporation assumes responsibility for repayment and
$86 million related to a sublease of the Fairfield caster to United States
Steel Corporation.
The decrease in current liabilities other than debt of $3 million reflects
the expected tax benefits of the Separation Costs and the recognition of
the portion of USX accrued interest payable historically attributed to
United States Steel which will be included in the accounts of Marathon Oil
Corporation.
The net increase in debt of $690 million (the sum of an increase in notes
payable and long-term debt due within one year of $289 million and an
increase in long-term debt of $401 million) primarily represents the
refinancing of other obligations not classified as debt (Preferred
securities of subsidiaries and 6.50% Preferred Stock), net of invested
cash, by United States Steel Corporation, the refinancing of other
obligations (Trust Preferred and 6.50% Preferred Stock) and Separation
Costs by Marathon Oil Corporation, and certain obligations assumed by
United States Steel Corporation but reflected as both an asset and
liability by Marathon Oil Corporation. The following table reconciles the
amount of total USX debt to the pro forma balance of Marathon Oil
Corporation debt.
Dollars
in millions
-----------
Total USX debt........................................ $4,713
Less debt attributed to discontinued operations....... 2,236
------
Debt of Marathon Oil Corporation before separation
adjustments.......................................... 2,477
Other obligations, net of invested cash, which will be
refinanced by United States Steel Corporation:
Preferred securities of subsidiaries................ $(249)
6.50% Preferred Stock............................... (121)
Invested cash....................................... 144
Other financial activities.......................... (4)
Excess of redemption value over carrying value of
Trust Preferred.................................... (14)
Other obligations which will be refinanced by Marathon
Oil Corporation:
Separation Costs.................................... 51
Redemption of the Trust Preferred................... 197
Repayment of 6.50% Preferred Stock.................. 121
Obligations assumed by United States Steel
Corporation, reflected as both an asset and liability
by Marathon Oil Corporation:
Industrial revenue bonds............................ 479
Fairfield caster lease.............................. 86
-----
Net refinancing of other obligations and obligations
assumed by United States Steel Corporation........... 690
------
Debt before the Value Transfer........................ 3,167
Value Transfer........................................ 900
------
Pro forma balance of Marathon Oil Corporation debt.... $4,067
======
C-11
The increase in preferred securities of subsidiaries of $66 million
reflects the recognition of the portion of such obligations historically
attributed to United States Steel which will be included in the accounts of
Marathon Oil Corporation.
The decrease in equity of $152 million consists of the following:
Dollars
in millions
-----------
Repayment of 6.50% Preferred Stock............................. $121
Adjustments related to Separation Costs........................ 31
----
Net decrease in equity......................................... $152
====
The extraordinary loss of $12 million on the redemption of the Trust
Preferred, net of the income tax benefit, included in pro forma equity is
calculated below:
Dollars
in millions
-----------
Redemption cost (3,937,163 shares redeemed at $50 per
share)..................................................... $ 197
Carrying value.............................................. (183)
Writeoff of deferred financing costs........................ 4
-----
Extraordinary loss before income tax benefit................ 18
Income tax benefit.......................................... (6)
-----
Extraordinary loss, net of income tax benefit............... $ 12
=====
The extraordinary loss is reflected on the unaudited pro forma condensed
balance sheet but not in the unaudited pro forma condensed statements of
operations.
The decrease in net investment in discontinued operations of $132 million
reflects the offsetting impact of these adjustments on United States Steel
Corporation. For a detailed description, see "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS FOR UNITED STATES STEEL CORPORATION."
The pro forma sources and uses of funds received from United States Steel
Corporation and from new financing arrangements were as follows:
Dollars
in millions
-----------
Payment from United States Steel Corporation................... $684
New financing arrangements..................................... 35
----
Total........................................................ $719
====
Repayment of the Receivables Facility.......................... $350
Redemption of the Trust Preferred.............................. 197
Repayment of the 6.50% Preferred Stock......................... 121
Payment of the Separation Costs................................ 51
----
Total........................................................ $719
====
C-12
(E) Reflects the removal of the net investment in discontinued operations. Also
reflects the distribution of New U. S. Steel Shares to the holders of
U. S. Steel Group Shares as a dividend. Because the net investment in
discontinued operations exceeded the fair value, as measured by the
aggregate market value of the U. S. Steel Group Shares at March 31, 2001, a
nonrecurring non-cash charge would have been recognized as follows:
Dollars
in millions
-----------
Market value of the U. S. Steel Group Shares (88,800,321
shares of stock at $14.69 per share)....................... $ 1,304
Net investment in discontinued operations................... 2,702
-------
Loss on separation.......................................... $(1,398)
=======
(F) Reflects adjustments related to the $900 million Value Transfer. In
connection with the Separation, a portion of USX indebtedness will be
repaid or retired and United States Steel Corporation will incur
indebtedness and agree to repay a portion of the indebtedness and other
obligations of USX, such that the amount of indebtedness and other
obligations for which United States Steel Corporation is responsible is
$900 million less than the net amounts attributed to United States Steel
immediately prior to the Separation. For a more detailed description of the
Value Transfer, see "THE SEPARATION--Financing Arrangements Relating to the
Separation."
C-13
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Three Months Ended March 31, 2001
Dollars in millions (except per share amounts)
Marathon Oil
Corporation
Pro Forma
Discontinued Before Marathon Oil
USX Operations Separation Separation Corporation
Historical Adjustments (A) Adjustments Adjustments Pro Forma
---------- --------------- ------------ ----------- ------------
Revenues and other
income................. $10,285 $(1,550) $8,735 $ $8,735
Costs and expenses:
Cost of revenues
(excludes items shown
below)............... 7,769 (1,529) 6,240 6,240
Selling, general and
administrative
expenses............. 125 16 141 (6)(D) 135
Depreciation,
depletion and
amortization......... 376 (73) 303 303
Taxes other than
income taxes......... 1,181 (59) 1,122 1,122
Exploration expenses.. 23 23 23
------- ------- ------ ---- ------
Total costs and
expenses........... 9,474 (1,645) 7,829 (6) 7,823
------- ------- ------ ---- ------
Income from operations.. 811 95 906 6 912
Net interest and other
financial costs........ 23 18 41 21 (B) 56
(6)(D)
Minority interest in
Marathon Ashland
Petroleum LLC.......... 107 107 107
------- ------- ------ ---- ------
Income before income
taxes.................. 681 77 758 (9) 749
Provision for income
taxes.................. 164 94 258 (3)(C) 255
------- ------- ------ ---- ------
Income from continuing
operations............. 517 (17) 500 (6) 494
Discontinued operations:
Results of operations,
net of tax............ 17 17 (17)(D) --
------- ------- ------ ---- ------
Income before
extraordinary losses
and cumulative effect
of change in accounting
principle.............. $ 517 $ -- $ 517 $(23) $ 494
======= ======= ====== ==== ======
Applicable to Marathon
Stock: (E)
Per share--basic and
diluted
Income before
extraordinary losses
and cumulative effect
of change in
accounting
principle............ $ 1.65
Applicable to Steel
Stock: (E)
Income before
extraordinary losses
and cumulative effect
of change in
accounting
principle............ $ 0.08
Applicable to Marathon
Oil Corporation
Stock: (E)
Income before
extraordinary losses
and cumulative effect
of change in
accounting
principle............ $ 1.60
See Notes to Unaudited Pro Forma Condensed Statement of Operations.
C-14
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
Dollars in millions (except per share amounts)
Marathon Oil
Corporation
Pro Forma
Discontinued Before Marathon Oil
USX Operations Separation Separation Corporation
Historical Adjustments (A) Adjustments Adjustments Pro Forma
---------- --------------- ------------ ----------- ------------
Revenues and other
income................. $39,914 $(6,055) $33,859 $ $33,859
Costs and expenses:
Cost of revenues
(excludes items shown
below)............... 31,056 (5,561) 25,495 25,495
Selling, general and
administrative
expenses............. 402 223 625 (18)(D) 607
Depreciation,
depletion and
amortization......... 1,605 (360) 1,245 1,245
Taxes other than
income............... 4,861 (235) 4,626 4,626
Exploration expenses.. 238 238 238
------- ------- ------- ---- -------
Total costs and
expenses........... 38,162 (5,933) 32,229 (18) 32,211
------- ------- ------- ---- -------
Income from operations.. 1,752 (122) 1,630 18 1,648
Net interest and other
financial costs........ 341 (105) 236 89 (B) 325
Minority interest in
Marathon Ashland
Petroleum LLC.......... 498 498 498
------- ------- ------- ---- -------
Income before income
taxes.................. 913 (17) 896 (71) 825
Provision for income
taxes.................. 502 (26) 476 (26)(C) 450
------- ------- ------- ---- -------
Income from continuing
operations............. 411 9 420 (45) 375
Discontinued operations:
Results of operations,
net of tax............ (9) (9) 9 (D) --
------- ------- ------- ---- -------
Income before
extraordinary loss..... $ 411 $ -- $ 411 $(36) $ 375
======= ======= ======= ==== =======
Applicable to Marathon
Stock: (E)
Per share--basic and
diluted
Income before
extraordinary
losses............... $ 1.39
Applicable to Steel
Stock: (E)
Per share--basic and
diluted
Income before
extraordinary
losses............... $ (0.33)
Applicable to Marathon
Oil Corporation Stock:
(E)
Per share--basic and
diluted
Income before
extraordinary
losses............... $ 1.20
See Notes to Unaudited Pro Forma Condensed Statement of Operations
C-15
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
Dollars in millions
Marathon
Oil Corporation
Pro Forma
Discontinued Before
USX Operations Separation
Historical Adjustments(A) Adjustments
---------- -------------- ---------------
Revenues and other income........... $29,119 $(5,412) $23,707
Costs and expenses:
Cost of revenues (excludes items
shown below)..................... 21,679 (5,014) 16,665
Selling, general and
administrative expenses.......... 203 283 486
Depreciation, depletion and
amortization..................... 1,254 (304) 950
Taxes other than income taxes..... 4,433 (215) 4,218
Exploration expenses.............. 238 238
Inventory market valuation
credits.......................... (551) (551)
------- ------- -------
Total costs and expenses........ 27,256 (5,250) 22,006
------- ------- -------
Income from operations.............. 1,863 (162) 1,701
Net interest and other financial
costs.............................. 362 (74) 288
Minority interest in Marathon
Ashland Petroleum LLC.............. 447 447
------- ------- -------
Income before income taxes.......... 1,054 (88) 966
Provision for income taxes.......... 349 (29) 320
------- ------- -------
Income from continuing operations... 705 (59) 646
Discontinued operations:
Results of operations, net of tax.. 59 59
Extraordinary losses................ 7 7
------- ------- -------
Net income.......................... $ 698 $ -- $ 698
======= ======= =======
See Notes to Unaudited Pro Forma Condensed Statement of Operations
C-16
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
Dollars in millions
Marathon
Oil Corporation
Pro Forma
Discontinued Before
USX Operations Separation
Historical Adjustments (A) Adjustments
---------- --------------- ---------------
Revenues and other income.......... $28,077 $(6,454) $21,623
Costs and expenses:
Cost of revenues (excludes items
shown below).................... 20,211 (5,572) 14,639
Selling, general and
administrative expenses......... 304 201 505
Depreciation, depletion and
amortization.................... 1,224 (283) 941
Taxes other than income taxes.... 4,241 (212) 4,029
Exploration expenses............. 313 313
Inventory market valuation
charges......................... 267 267
------- ------- -------
Total costs and expenses....... 26,560 (5,866) 20,694
------- ------- -------
Income from operations............. 1,517 (588) 929
Net interest and other financial
costs............................. 279 (42) 237
Minority interest in Marathon
Ashland Petroleum LLC............. 249 249
------- ------- -------
Income before income taxes......... 989 (546) 443
Provision for income taxes......... 315 (176) 139
------- ------- -------
Income from continuing operations.. 674 (370) 304
Discontinued operations:
Results of operations, net of
tax............................. 370 370
------- ------- -------
Net income......................... $ 674 $ -- $ 674
======= ======= =======
See Notes to Unaudited Pro Forma Condensed Statement of Operations
C-17
MARATHON OIL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(A) This column reflects the reclassification of all revenues and expenses of
the businesses of United States Steel to discontinued operations. All
transactions between Marathon Oil Corporation and United States Steel
Corporation are reflected in both continuing and discontinued operations.
The measurement date for discontinued operations purposes will be on or
about the Separation Effective Time. The following is a reconciliation of
income from discontinued operations to the net income of United States
Steel:
Dollars in millions
---------------------------------------------------
Three Months
Ended Year Ended Year Ended Year Ended
March 31, December 31, December 31, December 31,
2001 2000 1999 1998
------------ ------------ ------------ ------------
Income (loss) from
discontinued operations... $ 17 $ (9) $ 59 $370
General corporate overhead
expenses not classified in
discontinued operations... 6 18 12 9
Interest expense not
classified in discontinued
operations................ 6 -- -- --
Related income tax
benefit................... (4) (6) (4) (3)
Extraordinary loss, net of
tax....................... -- -- 7 --
---- ---- ---- ----
United States Steel net
income (loss)............. $ 9 $(21) $ 44 $364
==== ==== ==== ====
(B) Reflects an increase in net interest and other financial costs as a result
of an increase in the amount of indebtedness of Marathon Oil Corporation
following the Separation, as compared to the amount of USX debt attributed
to Marathon. The increase primarily reflects the $900 million Value
Transfer and the repayment of the 6.50% Preferred Stock. Pro forma interest
costs have been calculated based on pro forma average levels of debt for
the three months ended March 31, 2001, and for the year ended December 31,
2000. Pro forma debt reflects redemption of the Trust Preferred Securities,
repayment of the 6.50% Preferred Stock, repayment of the Receivables
Facility, payment of Marathon Oil Corporation's portion of the Separation
Costs and payments from United States Steel Corporation for debt attributed
to United States Steel prior to the Separation but which will remain with
Marathon Oil Corporation. For most of 2000, the amount of debt that would
have remained with Marathon Oil Corporation was less than the net debt
levels of USX attributed to Marathon, adjusted for the $900 million Value
Transfer. As a result, debt levels for only 2000 include new financing
arrangements.
The assumed interest rate for new financing arrangements was 8% based upon
the average rate of USX debt attributed to both groups for 2000. A 1/8
percentage point change in the assumed financing rate for new financing
arrangements would have changed annual 2000 interest costs by approximately
$1 million. For 2001, amounts received from United States Steel in excess
of amounts needed to redeem or repay obligations or to pay Separation Costs
were assumed to be used to repay Marathon Oil Corporation's revolving
credit facility.
(C) Reflects the income tax effects of adjustments (A) and (B).
(D) Reflects the elimination of discontinued operations as a result of the
Separation. Also includes amounts related to corporate administrative costs
and interest costs allocated to United States Steel but not classified as
discontinued operations.
(E) Weighted average shares of common stock outstanding were 308,753,000
(basic) and 309,073,000 (diluted) for both Marathon Group and, on a pro
forma basis, Marathon Oil Corporation for the three month period ended
March 31, 2001. Weighted average shares of common stock outstanding were
311,531,000 (basic) and 311,761,000 (diluted) for both Marathon Group and,
on a pro forma basis, Marathon Oil Corporation for year ended December 31,
2000. Weighted average shares of common stock outstanding (basic and
diluted) for the U. S. Steel Group were 88,806,000 for the three months
ended March 31, 2001, and 88,613,000 for the year ended December 31, 2000.
Preferred stock dividends of $2 million and $8 million reduced net income
applicable to U. S. Steel Group Shares for the three months ended March 31,
2001, and for the year ended December 31, 2000, respectively.
C-18
INFORMATION ABOUT UNITED STATES STEEL
DESCRIPTION OF THE BUSINESS OF UNITED STATES STEEL
United States Steel, 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
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.
A three-year summary of financial highlights for United States Steel is
provided below.
Assets
Revenues and Income from Net at Capital
Other Income(a) Operations(b) Income (Loss) Year-End Expenditures
--------------- ------------- ------------- -------- ------------
(Millions)
United States Steel
2000.................. $6,132 $104 $(21) $8,711 $244
1999.................. 5,470 150 44 7,525 287
1998.................. 6,477 579 364 6,749 310
The following table sets forth the total revenues of United States Steel for
each of the last three years.
Revenues and Other Income
2000 1999 1998
------ ------ ------
(Millions)
Revenues by product:
Sheet and semi-finished steel products................ $3,288 $3,433 $3,598
Tubular, plate, and tin mill products................. 1,731 1,140 1,546
Raw materials (coal, coke and iron ore)............... 626 549 744
Other(a).............................................. 445 414 490
Income (loss) from affiliates........................... (8) (89) 46
Gain on disposal of assets.............................. 46 21 54
Other income (loss)..................................... 4 2 (1)
------ ------ ------
Total revenues and other income......................... $6,132 $5,470 $6,477
====== ====== ======
- --------
(a) Includes revenue from the sale of steel production by-products, real estate
development, resource management, and engineering and consulting services.
Steel Industry Background and Competition
The steel industry is cyclical and highly competitive and is affected by
excess world capacity, which has restricted price increases during periods of
economic growth and led to price decreases during economic contraction. In
addition, the domestic and international steel industries face competition from
producers of materials such as aluminum, cement, composites, glass, plastics
and wood in many markets.
United States Steel is the largest integrated steel producer in the United
States and, through its subsidiary USSK, the largest integrated flat-rolled
producer in Central Europe, and competes with many domestic and foreign steel
producers. Competitors include integrated producers which, like United States
Steel, use iron ore and coke as primary raw materials for steel production, and
mini-mills which primarily use steel scrap and,
D-1
increasingly, iron bearing feedstocks as raw materials. Mini-mills generally
produce a narrower range of steel products than integrated producers, but
typically enjoy certain competitive advantages such as lower capital
expenditures for construction of facilities and non-unionized work forces with
lower employment costs and more flexible work rules. An increasing number of
mini-mills utilize thin slab casting technology to produce flat-rolled
products. Through the use of thin slab casting, mini-mill competitors are
increasingly able to compete directly with integrated producers of flat-rolled
products. Depending on market conditions, the additional production generated
by flat-rolled mini-mills could have an adverse effect on United States Steel's
selling prices and shipment levels.
Steel imports to the United States accounted for an estimated 27%, 26% and
30% of the domestic steel market for 2000, 1999 and 1998, respectively. Steel
imports of pipe increased 37% and of hot rolled steel increased 19% in 2000,
compared to 1999. Foreign competitors typically have lower labor costs and are
often owned, controlled or subsidized by their governments, allowing their
production and pricing decisions to be influenced by political and economic
policy considerations as well as prevailing market conditions. High levels of
imported steel are expected to continue to have an adverse effect on future
market prices and demand levels for domestic steel.
On November 13, 2000, United States Steel 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. On December 28, 2000, the U.S.
International Trade Commission ("ITC") made a preliminary determination that
there is a reasonable indication that the domestic industry is materially
injured by the imports in question. As a result, both the ITC and the U.S.
Department of Commerce ("Commerce") will continue their investigations in these
cases.
United States Steel believes that the remedies provided by U.S. law to
private litigants are insufficient to correct the widespread dumping and
subsidy abuses that currently characterize steel imports into our country.
United States Steel, nevertheless, intends to file additional AD and CVD
petitions against unfairly traded imports that adversely impact, or threaten to
adversely impact, the results of United States Steel and is urging the U.S.
government to take additional steps.
On July 3, 2000, Commerce and the ITC initiated the mandatory five-year
"sunset" reviews of AD orders issued in 1995 against seamless pipe from
Argentina, Brazil, Germany and Italy and oil country tubular goods ("OCTG")
from Argentina, Italy, Japan, Mexico and South Korea. The reviews also
encompass the 1995 CVD orders against the same two products from Italy. The
"sunset" review procedures require that an order must be revoked after five
years unless Commerce and the ITC determine that, if the orders would be
discontinued, dumping or a countervailable subsidy would be likely to continue
or recur and that material injury to the domestic industry would be likely to
continue or recur. Of the 11 orders, 8 are the subject of expedited review at
Commerce because there was no response, inadequate response, or waiver of
participation by the respondent parties. Therefore, at Commerce, only three of
the orders (AD: OCTG from Mexico; and CVD: OCTG and seamless pipe from Italy)
are the subject of a full review. The ITC is conducting full reviews of all the
cases, despite the fact that responses by some of the respondent countries were
inadequate.
United States Steel's domestic businesses are subject to numerous federal,
state and local laws and regulations relating to the storage, handling,
emission and discharge of environmentally sensitive materials. United States
Steel believes that its major domestic integrated steel competitors are
confronted by substantially similar conditions and thus does not believe that
its relative position with regard to such other competitors is materially
affected by the impact of environmental laws and regulations. However, the
costs and operating restrictions necessary for compliance with environmental
laws and regulations may have an adverse effect on United States Steel's
competitive position with regard to domestic mini-mills and some foreign steel
producers and producers of materials which compete with steel, which may not be
required to undertake equivalent costs
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in their operations. For further information, see "United States Steel Legal
Proceedings", and "HISTORICAL FINANCIAL INFORMATION FOR UNITED STATES STEEL--
Management's Discussion and Analysis" in Annex F.
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 United States in such
quantities as to be a substantial cause of serious injury to the United States
steel industry. The products that will be included in the section 201
investigation remain to be determined.
USSK does business primarily in Central Europe and is subject to market
conditions in this area which are similar to domestic factors, including excess
world supply, and also can be influenced by matters peculiar to international
marketing such as tariffs.
Business Overview
United States Steel produces raw steel at Gary Works in Indiana, Mon Valley
Works in Pennsylvania, Fairfield Works in Alabama, and, through USSK, in
Kosice, Slovak Republic.
United States Steel has responded to competition resulting from excess steel
industry capability by eliminating less efficient facilities, modernizing those
that remain and entering into joint ventures, all with the objective of
focusing production on higher value-added products, where superior quality and
special characteristics are of critical importance. These products include bake
hardenable steels and coated sheets for the automobile and appliance
industries, laminated sheets for the manufacture of motors and electrical
equipment, higher strength plate products, improved tin mill products for the
container industry and oil country tubular goods. Several recent modernization
projects further support United States Steel's objectives of providing value-
added products and services to customers. These projects include, for the
automotive industry--the degasser facility at Mon Valley Works, the second hot-
dip galvanized sheet at PRO-TEC, the Fairless Works galvanizing line upgrade
and the cold reduction mill upgrades at Gary Works and Mon Valley Works; for
the construction industry--the dual coating lines at Fairfield Works and Mon
Valley Works; for the tubular market--the Fairfield Works pipemill upgrade and
acquiring full ownership of Lorain Tubular Company LLC's tubular facilities and
for the plate market--the heat treat facility at the Gary Works plate mill.
Also, a new pickle line was built at the Mon Valley Works which replaced three
older and less efficient facilities located at Fairless Works and Mon Valley
Works.
Through its purchase in 2000 of USSK, which held the steel producing
operations and related assets of VSZ a.s. in the Slovak Republic, United States
Steel took a major strategic step by expanding offshore and following many of
its customers into the European market. The objective is to advance USSK to
become a leader among European steel producers and the prime supplier of flat-
rolled steel to the growing central European market. This globalization
strategy is also being pursued through our Acero Prime joint venture in Mexico.
The location of this joint venture allows for easy servicing and just-in-time
delivery to customers throughout Mexico.
Effective March 1, 2001, United States Steel acquired LTV Corporation's
("LTV") tin mill products business, including its Indiana Harbor, Indiana tin
operations. United States Steel is leasing the land and acquired title to the
buildings, facilities and inventory of LTV's Indiana Harbor tin operations.
United States Steel intends to operate these facilities as an ongoing business
and tin mill employees at Indiana Harbor became United States Steel employees.
United States Steel and LTV also entered into 5-year agreements for
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LTV to supply United States Steel with pickled hot bands and for United States
Steel to provide LTV with
processing of cold rolled steel. United States Steel will not lease the land or
take title to the buildings of LTV's Aliquippa, Pennsylvania tin operations.
However, United States Steel has the right to transfer certain tin line
equipment from Aliquippa to Indiana Harbor and other United States Steel tin
operations to upgrade those facilities.
In addition to the modernization of its production facilities, United States
Steel has entered into a number of joint ventures with domestic and foreign
partners to take advantage of market or manufacturing opportunities in the
sheet, tin mill, tubular, bar and plate consuming industries.
United States Steel continues to pursue lower manufacturing cost objectives
through continuing cost improvement programs. These initiatives include, but
are not limited to, reduced production cycle time, improved yields, increased
customer orientation and improved process control. In January 2001, U. S. Steel
domestic operations requested from current suppliers an immediate, temporary
eight percent price reduction from existing levels.
The following table lists products and services by facility or business
unit:
Domestic Steel
Gary.................... Sheets; Tin Mill; Plates; Coke
Fairfield............... Sheets; Tubular
Mon Valley/Fairless..... Sheets; Tin Mill
USS-POSCO(a)............ Sheets; Tin Mill
East Chicago............ Tin Mill
Lorain Tubular Company
LLC.................... Tubular
Republic Technologies
International, LLC(a).. Bar
PRO-TEC(a).............. Galvanized Sheet
Clairton................ Coke
Clairton 1314B
Partnership(a)......... Coke
Transtar................ Transportation
Minntac................. Taconite Pellets
U. S. Steel Mining...... Coal
Resource Management..... Administration of Mineral, Coal and
Timber Properties
Realty Development...... Real estate sales, leasing and management
Engineers and
Consultants............ Engineering and Consulting Services
USSK
U. S. Steel Kosice
s.r.o.................. Sheets; Tin Mill; Plates; Coke
Walzwerke Finow GmbH.... Precision steel tubes; specialty shaped sections
Rannila Kosice, s.r.o... Color coated profile and appliance products
- --------
(a) Equity investee
Domestic Operations
United States Steel domestic operations includes plants which produce steel
products in a variety of forms and grades. Raw steel production was 11.4
million tons in 2000, compared with 12.0 million tons in 1999 and 11.2 million
tons in 1998. Raw steel produced was nearly 100% continuous cast in 2000, 1999
and 1998. Raw steel production averaged 89% of capability in 2000, compared
with 94% of capability in 1999 and 88% of capability in 1998. United States
Steel's stated annual domestic raw steel production capability was 12.8
millions tons for 2000 (7.5 million at Gary Works, 2.9 million at Mon Valley
Works, and 2.4 million at Fairfield Works).
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Steel shipments were 10.8 million tons in 2000, 10.6 million tons in 1999
and 10.7 million tons in 1998. United States Steel shipments comprised
approximately 9.8% of domestic steel shipments in 2000. Exports accounted for
approximately 5% of United States Steel shipments in 2000, 3% in 1999 and 4% in
1998.
The following tables set forth significant United States Steel domestic
operations shipment data by major markets and products for each of the last
three years. Such data does not include shipments by joint ventures and other
affiliates of USX accounted for by the equity method.
Steel Shipments By Market and Product (United States Production Only)
Sheets & Tubular,
Semi-finished Plate & Tin
Steel Mill Products Total
------------- ------------- ------
(Thousands of Net Tons)
Major Market--2000
Steel Service Centers....................... 1,636 679 2,315
Further Conversion:
Trade Customers........................... 742 432 1,174
Joint Ventures............................ 1,771 -- 1,771
Transportation (Including Automotive)....... 1,206 260 1,466
Containers.................................. 182 520 702
Construction and Construction Products...... 778 158 936
Oil, Gas and Petrochemicals................. -- 973 973
Export...................................... 346 198 544
All Other................................... 748 127 875
----- ----- ------
Total................................... 7,409 3,347 10,756
===== ===== ======
(Thousands of Net Tons)
Major Market--1999
Steel Service Centers....................... 1,867 589 2,456
Further Conversion:
Trade Customers........................... 1,257 376 1,633
Joint Ventures............................ 1,818 -- 1,818
Transportation (Including Automotive)....... 1,280 225 1,505
Containers.................................. 167 571 738
Construction and Construction Products...... 660 184 844
Oil, Gas and Petrochemicals................. -- 363 363
Export...................................... 246 75 321
All Other................................... 819 132 951
----- ----- ------
Total................................... 8,114 2,515 10,629
===== ===== ======
(Thousands of Net Tons)
Major Market--1998
Steel Service Centers....................... 1,867 696 2,563
Further Conversion:
Trade Customers........................... 706 434 1,140
Joint Ventures............................ 1,473 -- 1,473
Transportation (Including Automotive)....... 1,438 347 1,785
Containers.................................. 222 572 794
Construction and Construction Products...... 809 178 987
Oil, Gas and Petrochemicals................. -- 509 509
Export...................................... 226 156 382
All Other................................... 867 186 1,053
----- ----- ------
Total................................... 7,608 3,078 10,686
===== ===== ======
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United States Steel and its wholly owned entity, U. S. Steel Mining LLC,
have domestic coal properties with demonstrated bituminous coal reserves of
approximately 787 million net tons at year-end 2000 and at year-end 1999. The
reserves are of metallurgical and steam quality in approximately equal
proportions. They are located in Alabama, Illinois, Indiana, Pennsylvania,
Tennessee and West Virginia. Approximately 93% of the reserves are owned, and
the rest are leased. The leased properties are covered by leases which expire
in 2005 and 2012. During 2000, United States Steel recorded $71 million of
impairments relating to coal assets located in West Virginia and Alabama. The
impairment was recorded as a result of a reassessment of long-term prospects
after geological conditions were encountered. U. S. Steel Mining's coal
production was 6.2 million tons in 2000, compared with 6.6 million tons in 1999
and 8.2 million tons in 1998. Coal shipments were 6.8 million tons in 2000,
compared with 6.9 million tons in 1999 and 7.7 million tons in 1998.
United States Steel controls domestic iron ore properties having
demonstrated iron ore reserves in grades subject to beneficiation processes in
commercial use by United States Steel domestic operations of approximately 710
million tons at year-end 2000, substantially all of which are iron ore
concentrate equivalents available from low-grade iron-bearing materials. All
demonstrated reserves are located in Minnesota. Approximately 32% of these
reserves are owned and the remaining 68% are leased. Most of the leased
reserves are covered by a lease expiring in 2058 and the remaining leases have
expiration dates ranging from 2021 to 2026. United States Steel's iron ore
operations at Mt. Iron, Minnesota ("Minntac") produced 16.3 million net tons of
taconite pellets in 2000, 14.3 million net tons in 1999 and 15.8 million net
tons in 1998. Taconite pellet shipments were 15.0 million tons in 2000,
compared with 15.0 million tons in 1999 and 15.4 million tons in 1998.
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, United States Steel became the sole owner of
Transtar and certain of its subsidiaries, namely, the Birmingham Southern
Railroad Company; the Elgin, Joliet and Eastern Railway Company; the Lake
Terminal Railroad Company; the McKeesport Connecting Railroad Company; the
Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior &
Gulf Navigation Company; and Tracks Traffic Management Services, Inc. and their
subsidiaries. Holdings became the owner of the other subsidiaries.
A subsidiary of United States Steel sells technical services worldwide to
the steel, mining, chemical and related industries. Together with its
subsidiary companies, it provides engineering and consulting services for
facility expansions and modernizations, operating improvement projects,
integrated computer systems, coal and lubrication testing and environmental
projects.
United States Steel develops real estate for sale or lease and manages
retail and office space, business and industrial parks and residential and
recreational properties. United States Steel also administers the remaining
mineral lands and timber lands of United States Steel domestic operations and
is responsible for the lease or sale of these lands and their associated
resources, which encompass approximately 270,000 acres of surface rights and
1,500,000 acres of mineral rights in 13 states.
United States Steel participates directly and through subsidiaries in a
number of joint ventures included in the Domestic Steel segment. All of the
joint ventures are accounted for under the equity method. Certain of the joint
ventures and other investments are described below, all of which are at least
50% owned except Republic, Acero Prime and the Clairton 1314B Partnership.
United States Steel and Pohang Iron & Steel Co., Ltd. ("POSCO") of South
Korea participate in a joint venture, USS-POSCO, which owns and operates the
former U. S. Steel Pittsburg, California plant. The joint venture markets high
quality sheet and tin products, principally in the western United States. USS-
POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free
steel, with hot bands principally provided by United States Steel and POSCO.
Total shipments by USS-POSCO were approximately 1.5 million tons in 2000. On
May 31, 2001, a fire damaged USS-POSCO's cold rolling mill. The full extent of
damage and the cause of the fire remain under investigation.
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United States Steel 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, United States Steel discontinued
applying the equity method since investments in and advances to Republic had
been reduced to zero. Also, United States Steel 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 actions, United States Steel
recorded a pretax charge of $74 million for the potentially uncollectible
receivables from Republic.
United States Steel and Kobe Steel, Ltd. ("Kobe") participate in a joint
venture, PRO-TEC, which owns and operates two hot-dip galvanizing lines in
Leipsic, Ohio. The first galvanizing line commenced operations in early 1993.
In November 1998, operations commenced on a second hot-dip galvanized sheet
line which expanded PRO-TEC's capacity nearly 400,000 tons a year to 1.0
million tons annually. Total shipments by PRO-TEC were approximately 1.0
million tons in 2000.
United States Steel and Worthington Industries Inc. participate in a joint
venture known as Worthington Specialty Processing which operates a steel
processing facility in Jackson, Michigan. The plant is operated by Worthington
Industries, Inc. The facility contains state-of-the-art technology capable of
processing master steel coils into both slit coils and sheared first operation
blanks including rectangles, trapezoids, parallelograms and chevrons. It is
designed to meet specifications for the automotive, appliance, furniture and
metal door industries. In 2000, Worthington Specialty Processing shipments were
approximately 299 thousand tons.
United States Steel and Rouge Steel Company participate in Double Eagle
Steel Coating Company ("DESCO"), a joint venture which operates an
electrogalvanizing facility located in Dearborn, Michigan. This facility
enables United States Steel to supply the automotive demand for steel with
corrosion resistant properties. The facility can coat both sides of sheet steel
with zinc or alloy coatings and has the capability to coat one side with zinc
and the other side with alloy. Availability of the facility is shared equally
by the partners. In 2000, DESCO produced approximately 799 thousand tons of
electrogalvanized steel.
United States Steel and Olympic Steel, Inc. participate in a 50-50 joint
venture to process laser welded sheet steel blanks at a facility in Van Buren,
Michigan. The joint venture conducts business as Olympic Laser Processing.
Startup began in 1998. In February 2000 an expansion project was announced
adding two manually operated welding lines. The expansion will create the
needed flexibility and capacity to service current and growing requirements for
automotive laser weld applications. Laser welded blanks are used in the
automotive industry for an increasing number of body fabrication applications.
United States Steel is the venture's primary customer and is responsible for
marketing the laser-welded blanks. In 2000, Olympic Laser Processing shipments
were approximately 676 thousand parts.
United States Steel , through its subsidiary, United States Steel Export
Company de Mexico, along with Feralloy Mexico, S.R.L. de C.V., and Intacero de
Mexico, S.A. de C.V., participate in a joint venture, Acero Prime, for a
slitting and warehousing facility in San Luis Potosi, Mexico. In May 2000, an
expansion project was announced for the joint venture. The expansion project
involves the construction of a 60,000 square-foot addition that will double the
current facility's size and total warehousing capacity. A second slitting line
and an automatic packaging system will also be installed as part of the
project. Also, a new 70,000 square-foot, in-bond warehouse facility will be
built in Coahuilla state in Ramos Arizpe. The warehouse will store and manage
coil inventories. Startup began in the first quarter of 2001. In 2000, the
joint venture processed approximately 95 thousand tons.
U. S. Steel Kosice
On November 24, 2000, USX completed the acquisition of the steelmaking
operations and related assets of VSZ located in Kosice in the Slovak Republic.
These operations are now operating as USSK. The commercial strategy is to serve
existing United States Steel customers in Central Europe and to grow our
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customer base in this region. For more information on this transaction, see
"Financial Statements and Supplementary Data--Notes to Financial Statements--5.
Business Combination".
USSK produces steel products in a variety of forms and grades. For the 38
days of United States Steel's ownership in 2000, USSK raw steel production was
382 thousand tons or 82% of capability, based on annual capability of 4.5
million tons. USSK has three blast furnaces, two steel shops with two vessels
each, a dual strand caster attached to each steel shop, a hot strip mill, cold
rolling mill, pickling lines, galvanizing line, tin coating line and two coke
batteries. Raw steel produced in 2000 was 100% continuous cast.
USSK shipped 317 thousand tons for the 38 days of United States Steel's
ownership in 2000. These shipments included sheet products, galvanized sheet
products, tin mill products and plate products. In addition, USSK includes
Walzwerke Finow GmbH, located in eastern Germany, which produces about 90,000
tons per year of welded precision steel tubes from both cold rolled and hot
rolled product as well as cold rolled specialty shaped sections. USSK also has
facilities for manufacturing heating radiators and spiral weld pipe.
A majority of product sales by USSK are denominated in Euros while only a
small percent of expenditures are in Euros. In addition, most interest and debt
payments are in U.S. dollars and the majority of other spending is in U.S.
dollars and the Slovak koruna. This results in exposure to currency
fluctuations.
Property, Plant and Equipment Additions
For property, plant and equipment additions, including capital leases, see
"HISTORICAL FINANCIAL INFORMATION FOR UNITED STATES STEEL--Management's
Discussion and Analysis" in Annex F.
Employees
The total number of active United States Steel domestic employees at year-
end 2000 was 18,784. The total number of active USSK employees was 16,244. Most
hourly and certain salaried employees in the United States are represented by
the United Steelworkers of America ("USWA"). Most USSK employees are
represented by OZ Metalurg which on February 16, 2001 signed a Collective Labor
Agreement with USSK which, for nonwage issues, covers the years 2001 to 2004
and covers all 2001 wage issues. Wage issues for the remainder of the term of
the Collective Labor Agreement are expected to be renegotiated annually.
Environmental Matters
United States Steel maintains a comprehensive environmental policy overseen
by the Public Policy Committee of the USX Board of Directors. The Environmental
Affairs organization has the responsibility to ensure that United States
Steel's operating organizations maintain environmental compliance systems that
are in accordance with applicable laws and regulations. The Executive
Environmental Committee, which is comprised of officers of United States Steel,
is charged with reviewing its overall performance with various environmental
compliance programs. Also, United States Steel, largely through the American
Iron and Steel Institute, continues its involvement in the negotiation of
various air, water, and waste regulations with federal, state and local
governments concerning the implementation of cost effective pollution reduction
strategies.
The businesses of United States Steel are subject to numerous federal, state
and local laws and regulations relating to the protection of the environment.
These environmental laws and regulations include the Clean Air Act ("CAA") with
respect to air emissions; the Clean Water Act ("CWA") with respect to water
discharges; the Resource Conservation and Recovery Act ("RCRA") with respect to
solid and hazardous waste treatment, storage and disposal; and the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
with respect to releases and remediation of hazardous substances. In addition,
all states where United States Steel operates have similar laws dealing with
the same matters. These laws are constantly evolving and becoming increasingly
stringent. The ultimate impact of complying with existing laws and
D-8
regulations is not always clearly known or determinable due in part to the fact
that certain implementing regulations for laws such as RCRA and the CAA have
not yet been promulgated or in certain instances are undergoing revision. These
environmental laws and regulations, particularly the CAA, could result in
substantially increased capital, operating and compliance costs.
For a discussion of environmental capital expenditures and the cost of
compliance for air, water, solid waste and remediation, see "HISTORICAL
FINANCIAL INFORMATION FOR UNITED STATES STEEL--Management's Discussion and
Analysis" in Annex F and "--United States Steel Legal Proceedings".
United States Steel 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 CAA 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
United States Steel's products and services, operating results will be
adversely affected. United States Steel believes that its major domestic
integrated steel competitors are confronted by substantially similar conditions
and thus does not believe that its relative position with regard to such
competitors is materially affected by the impact of environmental laws and
regulations. However, the costs and operating restrictions necessary for
compliance with environmental laws and regulations may have an adverse effect
on United States Steel's competitive position with regard to domestic mini-
mills and some foreign steel producers and producers of materials which compete
with steel, which may not be required to undertake equivalent costs in their
operations. In addition, the specific impact on each competitor may vary
depending on a number of factors, including the age and location of its
operating facilities and its production methods. For further information, see
"--United States Steel Legal Proceedings", and "HISTORICAL FINANCIAL
INFORMATION FOR UNITED STATES STEEL--Management's Discussion and Analysis" in
Annex F.
The 1997 Kyoto Global Climate Change Agreement ("Kyoto Protocol") produced
by the United Nations convention on climate change, if ratified by the U. S.
Senate, would require restrictions on greenhouse gas emissions in the United
States. Options that could be considered by federal regulators to force the
reductions necessary to meet these restrictions could escalate energy costs and
thereby increase steel production costs. Until action is taken by the U. S.
Senate to ratify or reject the Kyoto Protocol, it is not possible to estimate
the effect of regulations that may be considered for implementation of
emissions restrictions in the United States.
Air
The CAA imposed more stringent limits on air emissions, established a
federally mandated operating permit program and allowed for enhanced civil and
criminal enforcement sanctions. The principal impact of the CAA on United
States Steel is on the coke-making and primary steel-making operations of
United States Steel, as described in this section. The coal mining operations
and sales of U. S. Steel Mining may also be affected.
The CAA requires the regulation of hazardous air pollutants and development
and promulgation of Maximum Achievable Control Technology ("MACT") Standards.
The amendment to the Chrome Electroplating MACT to include the chrome processes
at Gary and Fairless is expected sometime in the next couple years. The EPA is
also promulgating MACT standards for integrated iron and steel plants and
taconite iron ore processing which are expected to be finalized in 2002. The
impact of these new standards could be significant to United States Steel, but
the cost cannot be reasonably estimated until the rules are finalized.
The CAA specifically addressed the regulation and control of coke oven
batteries. The National Emission Standard for Hazardous Air Pollutants for coke
oven batteries was finalized in October 1993, setting forth the MACT standard
and, as an alternative, a Lowest Achievable Emission Rate ("LAER") standard.
Effective January 1998, United States Steel elected to comply with the LAER
standards. United States Steel believes it will be able to meet the current
LAER standards. The LAER standards will be further revised in 2010 and
additional health risk-based standards are expected to be adopted in 2020. EPA
is in the process of developing the Phase II Coke MACT for pushing, quenching
and battery stacks which is scheduled to be finalized in 2002. This MACT will
impact United States Steel, but the cost cannot be reasonably estimated at this
time.
D-9
The CAA also mandates the nationwide reduction of emissions of acid rain
precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired
electrical utility plants. United States Steel, like all other electricity
consumers, will be impacted by increased electrical energy costs that are
expected as electric utilities seek rate increases to comply with the acid rain
requirements.
In September 1997, the EPA adopted revisions to the National Ambient Air
Quality Standards for ozone and particulate matter which are significantly more
stringent than prior standards. EPA has issued a Nitrogen Oxide ("NOx") State
Implementation Plan ("SIP") call to require certain states to develop plans to
reduce NOx emissions focusing on large utility and industrial boilers. The
impact of these revised standards could be significant to United States Steel,
but the cost cannot be reasonably estimated until the final revised standards
and the NOx SIP call are issued and, more importantly, the states implement
their SIPs covering their standards.
In 2000, all of the coal production of U. S. Steel Mining was metallurgical
coal, which is primarily used in coke production. While USX believes that the
new environmental requirements for coke ovens will not have an immediate effect
on U. S. Steel Mining, the requirements may encourage development of
steelmaking processes that reduce the usage of coke. The new ozone and
particulate matter standards could be significant to U. S. Steel Mining, but
the cost is not capable of being reasonably estimated until rules are proposed
or finalized.
Water
United States Steel maintains the necessary discharge permits as required
under the National Pollutant Discharge Elimination System ("NPDES") program of
the CWA, and it is in compliance with such permits. In 1998, USX entered into a
consent decree with the Environmental Protection Agency ("EPA") which resolved
alleged violations of the Clean Water Act NPDES permit at Gary Works and
provides for a sediment remediation project for a section of the Grand Calumet
River that runs through Gary Works. Contemporaneously, USX entered into a
consent decree with the public trustees which resolves potential liability for
natural resource damages on the same section of the Grand Calumet River. In
1999, USX paid civil penalties of $2.9 million for the alleged water act
violations and $0.5 million in natural resource damages assessment costs. In
addition, United States Steel will pay the public trustees $1 million at the
end of the remediation project for future monitoring costs and United States
Steel is obligated to purchase and restore several parcels of property that
have been or will be conveyed to the trustees. During the negotiations leading
up to the settlement with EPA, capital improvements were made to upgrade plant
systems to comply with the NPDES requirements. The sediment remediation project
is an approved final interim measure under the corrective action program for
Gary Works and is expected to cost approximately $36.4 million over the next
five years. Estimated remediation and monitoring costs for this project have
been accrued.
Solid Waste
United States Steel continues to seek methods to minimize the generation of
hazardous wastes in its operations. RCRA establishes standards for the
management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
storage tanks. Corrective action under RCRA related to past waste disposal
activities is discussed below under "Remediation."
Remediation
A significant portion of United States Steel's currently identified
environmental remediation projects relate to the remediation of former and
present operating locations. These projects include the remediation of the
Grand Calumet River (discussed above), and the closure and remediation of
permitted hazardous and non-hazardous waste landfills.
United States Steel is also involved in a number of remedial actions under
CERCLA, RCRA and other federal and state statutes, and it is possible that
additional matters may come to its attention which may require remediation. For
a discussion of remedial actions related to United States Steel, see "--United
States Steel Legal Proceedings".
D-10
PROPERTIES OF UNITED STATES STEEL
The location and general character of the properties of United States Steel
are described in the preceding section. United States Steel or its predecessor
USX has owned the vast majority of the domestic properties in excess of thirty
years with no material adverse claim asserted. In the case of the real property
and buildings of USSK, certified copies of the property registrations were
obtained and examined by local counsel prior to the acquisition.
Several steel production facilities are leased. The caster facility at
Fairfield Alabama is subject to a lease expiring in 2012 with an option to
purchase; a coke battery at Clairton, PA which is owned by the Clairton 1314B
Partnership are subject to a lease through 2004 with an option to purchase; and
a one-half interest in the #2 Caster at Gary, IN is leased subject to a
purchase option pursuant to which USX will purchase this one-half interest
facility in June 2001. The office space in Pittsburgh, PA used by USX and
United States Steel is leased through 2007.
UNITED STATES STEEL LEGAL PROCEEDINGS
After the Separation, United States Steel will be a party to the following
litigation:
Inland Steel Patent Litigation. In July 1991, Inland Steel Company
("Inland") filed an action against United States Steel and another domestic
steel producer in the U.S. District Court for the Northern District of
Illinois, Eastern Division, alleging defendants had infringed two of Inland's
steel-related patents. Inland seeks monetary damages of up to approximately $50
million and an injunction against future infringement. United States Steel, in
its answer and counterclaim, alleges the patents are invalid and not infringed
and seeks a declaratory judgment to such effect. In May 1993, a jury found
United States Steel to have infringed the patents. The District Court has yet
to rule on the validity of the patents. In July 1993, the U.S. Patent Office
rejected the claims of the two Inland patents upon a reexamination at the
request of United States Steel and the other steel producer. A further request
was submitted by United States Steel to the Patent Office in October 1993,
presenting additional questions as to patentability which was granted and
consolidated for consideration with the original request. In 1994, the Patent
Office issued a decision rejecting all claims of the Inland patents. On
September 21, 1999, the Patent Office Board of Appeals affirmed the decision of
the Patent Office. Inland filed a notice of appeal with the Court of Appeals
for the Federal Circuit on November 17, 1999. A hearing was held before the
court on January 10, 2001, and the decision is pending.
Asbestos Litigation. United States Steel has been and is a defendant in a
large number of cases in which plaintiffs allege injury resulting from exposure
to asbestos. Many of these cases involve multiple plaintiffs and most have
multiple defendants. These claims fall into three major groups: (1) claims made
under certain federal and general maritime law by employees of the Great Lakes
or Intercoastal Fleets, former operations of United States Steel; (2) claims
made by persons who did work at United States Steel facilities; and (3) claims
made by industrial workers allegedly exposed to an electrical cable product
formerly manufactured by United States Steel. To date, all actions resolved
have been either dismissed or settled for immaterial amounts. It is not
possible to predict with certainty the outcome of these matters; however, based
upon present knowledge, management believes that the remaining actions will be
similarly resolved. This statement of belief is a forward-looking statement.
Predictions as to the outcome of pending litigation are subject to substantial
uncertainties with respect to (among other things) factual and judicial
determinations, and actual results could differ materially from those expressed
in the forward-looking statements.
Environmental Proceedings. The following is a summary of the proceedings of
United States Steel that were pending or contemplated as of March 31, 2001,
under federal and state environmental laws. Except as described herein, it is
not possible to accurately predict the ultimate outcome of these matters.
Claims under CERCLA and related state acts have been raised with respect to the
cleanup of various waste disposal and other sites. CERCLA is intended to
expedite the cleanup of hazardous substances without regard to fault. Primary
Responsible Parties ("PRPs") for each site include present and former owners
and operators of,
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transporters to and generators of the substances at the site. Liability is
strict and can be joint and several. Because of various factors including the
ambiguity of the regulations, the difficulty of identifying the responsible
parties for any particular site, the complexity of determining the relative
liability among them, the uncertainty as to the most desirable remediation
techniques and the amount of damages and cleanup costs and the time period
during which such costs may be incurred, it is impossible to reasonably
estimate its ultimate cost of compliance with CERCLA.
Projections, provided in the following paragraphs, of spending for and/or
timing of completion of specific projects are forward-looking statements.
These forward-looking statements are based on certain assumptions, including,
but not limited to, the factors provided in the preceding paragraph. To the
extent that these assumptions prove to be inaccurate, future spending for, or
timing of completion of, environmental projects may differ materially from
those stated in forward-looking statements.
At March 31, 2001, United States Steel had been identified as a PRP at a
total of 24 CERCLA sites. Based on currently available information, which is
in many cases preliminary and incomplete, management believes that United
States Steel liability for cleanup and remediation costs in connection with 10
of these sites will be between $100,000 and $1 million per site and 8 will be
under $100,000.
At the remaining 6 sites, management expects that United States Steel share
in the remaining cleanup costs at any single site will not exceed $5 million,
although it is not possible to accurately predict the amount of sharing in any
final allocation of such costs. The following is a summary of the status of
these sites:
. At the former Duluth, Minn. Works, United States Steel spent a total of
approximately $11.2 million through 2000. The Duluth Works was listed by
the Minnesota Pollution Control Agency under the Minnesota Environmental
Response and Liability Act on its Permanent List of Priorities. The
Environmental Protection Agency ("EPA") has consolidated and included
the Duluth Works site with the St. Louis River and Interlake sites on
the EPA's National Priorities List. The Duluth Works cleanup has
proceeded since 1989. United States Steel is conducting an engineering
study of the estuary sediments and the construction of a breakwater in
the estuary. Depending upon the method and extent of remediation at this
site, future costs are presently unknown and indeterminable.
. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been
used at various times as a disposal site for coal mine refuse and
municipal and industrial waste. United States Steel was one of 15 PRPs
that have entered into an agreed order with the EPA to perform a
remediation of the site. Implementation of the remedial design plan,
resulting in a long-term cleanup of the site, is estimated to cost
approximately $28.5 million.
One of the PRPs filed suit against the EPA, the Ohio Environmental
Protection Agency, and 13 PRPs including United States Steel. The EPA,
in turn, filed suit against the PRPs to recover $1.5 million in
oversight costs. In May 1996, United States Steel entered into a final
settlement agreement to resolve this litigation and the overall
allocation. United States Steel agreed to pay 4.8% of the estimated
costs which would result in United States Steel paying an additional
amount of approximately $1.1 million over a two- to three-year period.
To date, United States Steel has spent $900,000 at the site. Remediation
commenced in 1999 and should be substantially completed in 2001.
. The D'Imperio and Ewan sites in New Jersey are waste disposal sites
where a former subsidiary allegedly disposed of used paint and solvent
wastes. USX has entered into a settlement agreement with the major PRPs
at the sites which fixes USX's share of liability at approximately $1.2
million, $598,000 of which United States Steel has already paid. The
balance, which is expected to be paid over the next several years, has
been accrued.
. 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, United States Steel signed a
consent decree to conduct a feasibility study at the site relating to
the alternative remedy. In 1999, a new
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Record of Decision was approved by EPA and the DOJ. On January 19, 2001,
United States Steel signed a consent decree with the EPA to remediate
this site. On April 6, 2001, United States Steel paid $376,726 as its
entire share of the consent decree obligation. The only remaining issue
is a natural resource damage 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,
Calif. 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. The parties are attempting to negotiate a buyout
arrangement with a third-party remediation firm, whereby the firm would
agree to take title to and remediate the site and also indemnify the
PRPs. This commitment would be backed by pollution insurance. United
States Steel's share to participate in the buyout has been estimated at
approximately $1.05 million.
. In 1988, United States Steel 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, Pa.
The cost of such removal, which has been completed, was approximately
$4.2 million, of which United States Steel paid $3.4 million. The EPA
has indicated that further remediation of this site may be required in
the future, but it has not conducted any assessment or investigation to
support what remediation 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. It is not
possible to estimate accurately the cost of any remediation or the
shares in any final allocation formula; however, based on presently
available information, USX may have been responsible for as much as 70%
of the waste material deposited at the site. On October 10, 1995, the
DOJ filed a complaint in the U.S. District Court for Western
Pennsylvania against United States Steel and other Municipal &
Industrial Disposal Co. defendants to recover alleged costs incurred at
the site. In June 1996, United States Steel agreed to pay $245,000 to
settle the government's claims for costs against it, American Recovery,
and Carnegie Natural Gas. In 1996, United States Steel filed a cost
recovery action against parties who did not contribute to the cost of
the removal activity at the site. United States Steel reached a
settlement in principle with all of the parties except the site owner.
The PRPs are awaiting issuance of the State's Feasibility Study ("FS").
In addition, there are 16 sites related to United States Steel where
information requests have been received or there are other indications that
United States Steel may be a PRP under CERCLA but where sufficient information
is not presently available to confirm the existence of liability.
There are also 29 additional sites related to United States Steel where
remediation is being sought under other environmental statutes, both federal
and state, or where private parties are seeking remediation through
discussions or litigation. Based on currently available information, which is
in many cases preliminary and incomplete, management believes that liability
for cleanup and remediation costs in connection with 4 of these sites will be
under $100,000 per site, another 3 sites have potential costs between $100,000
and $1 million per site, and 7 sites may involve remediation costs between $1
million and $5 million. Another 3 sites, including the Grand Calumet River
remediation at Gary Works, the Peters Creek Lagoon remediation at Clairton,
and the potential claim for investigation, restoration and compensation of
injuries to sediments in the East Branch of the Grand Calumet River near Gary
Works, have or are expected to have costs for remediation, investigation,
restoration or compensation in excess of $5 million. Potential costs
associated with remediation at the remaining 12 sites are not presently
determinable.
The following is a discussion of remediation activities at the major
domestic United States Steel facilities:
Gary Works. In 1990, a consent decree was signed by USX which, among other
things, required USX to study and implement a program to remediate the
sediment in a portion of the Grand Calumet River. United States Steel has
developed a sediment remediation plan for the section of the Grand Calumet
River that runs
D-13
through Gary Works. As proposed, this project would require five to six years
to complete after approval and would be followed by an environmental recovery
validation. The estimated program cost, which has been accrued, is
approximately $36.4 million.
In 1998, United States Steel entered into a consent decree with the EPA
which provides for the expanded sediment remediation program and resolves
alleged violations of the prior consent decree and National Pollutant Discharge
Elimination System permit since 1990. In 1999, United States Steel paid civil
penalties of $2.9 million for alleged violations of the Clean Water Act at Gary
Works. In addition, United States Steel has entered into a consent decree with
the public trustees to settle natural resource damage claims for the portion of
the Grand Calumet River that runs through Gary Works. This settlement obligates
United States Steel to purchase and restore several parcels of property and pay
$1.5 million in past and future assessment and monitoring costs. In 1999,
United States Steel reimbursed past assessment costs of $570,000 and purchased
properties which were conveyed to trustees.
In October 1996, United States Steel 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 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 preassessment screen pursuant to federal regulations and have
determined to perform a NRD Assessment. United States Steel was identified as a
PRP along with 15 other companies owning property along the river and harbor
canal. United States Steel 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 a settlement which has been endorsed by the Trustees
and EPA for inclusion in a consent decree to resolve this liability. A reserve
has been established for United States Steel share of the anticipated
settlement.
On October 23, 1998, a final Administrative Order on Consent was issued by
EPA addressing Corrective Action for Solid Waste Management Units throughout
Gary Works. This order requires United States Steel to perform a RCRA Facility
Investigation ("RFI") and a Corrective Measure Study ("CMS") at Gary Works. The
Current Conditions Report, United States Steel's first deliverable, was
submitted to EPA in January 1997 and was approved by EPA in 1998. The Phase I
RFI work plan was submitted to the EPA in July 1999.
IDEM issued NOVs relating to Gary Works in 1994 alleging various violations
of air pollution requirements. In early 1996, United States Steel paid a $6
million penalty and agreed to install additional pollution control equipment
and programs and implement programs costing over $100 million over a period of
several years. In 1999, United States Steel entered into an Agreed Order with
IDEM to resolve outstanding air issues. United States Steel paid a penalty of
$207,400 and installed equipment at the No. 8 Blast Furnace and the No. 1 BOP
to reduce air emissions. In November 1999, IDEM issued a NOV alleging various
air violations at Gary Works. An agreed order is being negotiated.
In February 1999, the DOJ and EPA issued a letter demanding a cash payment
of approximately $4 million to resolve a Finding of Violation issued in 1997
alleging improper sampling of benzene waste streams at Gary Coke. On September
18, 2000, a Consent Decree was entered which required United States Steel to
pay a civil penalty of $587,000 and to replace PCB transformers as a
Supplemental Environmental Program ("SEP") at a cost of approximately $2.2
million. Payment of the civil penalty was made on October 13, 2000.
Clairton. In 1987, USX and the 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 $8.8 million
with another $634,000 presently projected to complete the project.
D-14
Fairless Works. In January 1992, United States Steel commenced negotiations
with the EPA regarding the terms of an Administrative Order on consent,
pursuant to the RCRA, under which United States Steel would perform a RFI and a
CMS at Fairless Works. A Phase I RFI report was submitted during the third
quarter of 1997. A Phase II/III RFI will be submitted following EPA approval.
The RFI/CMS will determine whether there is a need for, and the scope of, any
remedial activities at Fairless Works. Management is working with the
Commonwealth of Pennsylvania to use PA Act 2 to facilitate the site cleanup.
Fairfield Works. In December 1995, United States Steel reached an agreement
in principle with the EPA and the DOJ with respect to alleged RCRA violations
at Fairfield Works. A consent decree was signed by United States Steel and the
United States and filed with the court on December 11, 1997, under which United
States Steel will pay a civil penalty of $1 million, implement two SEPs costing
a total of $1.75 million and implement a RCRA corrective action at the
facility. One SEP was completed during 1998 at a cost of $250,000. The second
SEP is under way. The first RFI work plan for the site will be submitted for
agency approval in the first quarter of 2001.
Mon Valley Works/Edgar Thomson Plant. In September 1997, USX received a
draft consent decree addressing issues raised in a NOV issued by the EPA in
January 1997. The NOV alleged air quality violations at U. S. Steel's Edgar
Thomson Plant, which is part of Mon Valley Works. The draft consent decree
addressed these issues, including various operational requirements, which EPA
believed were necessary to bring the plant into compliance. USX has completed
implementing the compliance requirements identified by EPA. USX has paid a cash
penalty of $550,000 and implemented five SEPs valued at approximately $1.5
million in settlement of the government's allegations. On February 1, 2000, the
U.S. District Court for Western Pennsylvania entered the consent decree.
In November 2000, a NOV was issued by the Jefferson County Health Department
("JCHD") alleging violation of the Halogenated Solvent NESHAP and the JCHD VOC
regulation at the Sheet Mill Stretch Leveler at Fairfield Works. United States
Steel proposed a civil penalty of $100,000 and a VOC emission limit which have
been agreed to by JHCD. A consent order has been submitted to JHCD for
execution.
MANAGEMENT OF UNITED STATES STEEL CORPORATION FOLLOWING THE SEPARATION
Directors of United States Steel Corporation Following the Separation
Under Delaware law, the business and affairs of United States Steel will be
managed under the direction of its board of directors. The certificate of
incorporation and by-laws of United States Steel provide that the number of
directors may be fixed by the board from time to time provided that there are
always at least three directors. Upon the Separation, the board of directors of
United States Steel will consist of the individuals listed below. The name,
age, present principal occupation or employment and five-year employment
history of each individual is set forth below. Unless otherwise indicated, the
business address of each of the individuals listed below is 600 Grant Street,
Pittsburgh, Pennsylvania 15219-4776. Each of the individuals listed below is a
citizen of the United States.
Name Age Class Position
---- --- ----- --------
Thomas J. Usher(1)(2)......... 58 Chairman of the Board & Chief Executive
Officer of USX since 1995
- --------
(1) Current Director of USX
(2) Will also be a director of Marathon Oil Corporation following the
Separation
Under the certificate of incorporation of United States Steel, directors are
divided into three classes, each class serving a staggered three-year term.
Members of Class I will serve until the 2002 stockholders meeting, members of
Class II until the 2003 stockholders meeting and members of Class III until the
2004 stockholders meeting.
D-15
The by-laws of United States Steel require that each non-employee director
be paid allowances and attendance fees as the board may from time to time
determine. Directors who are employees of United States Steel receive no
compensation for their service on the board. We pay our non-employee directors
as follows:
Annual Retainer........................................................ $
Committee Membership Fee............................................... $
Meeting Fee (for each board or committee meeting)...................... $
Committees of United States Steel Corporation's Board of Directors Following
the Separation
United States Steel is expected to have four standing committees: an Audit
Committee, a Compensation and Organization Committee, a Financial Policy
Committee and a Corporate Governance and Public Policy Committee. Each of these
committees will consist of three or more directors who meet all requirements
imposed by SEC rules and regulations or rules and regulations of any exchange
or trading system on which United States Steel Corporation securities are
listed.
The Audit Committee
All the members of the Audit Committee will be independent (as independence
is defined in Sections 303.01(B)(2)(a) and (3) of the NYSE's listing standards,
as may be modified or supplemented).
The Audit Committee is, among other things, responsible for:
. ensuring the integrity of United States Steel Corporation's financial
reports,
. recommending to the board the independent accountants to be nominated
for election by the stockholders,
. reviewing the independence of the independent accountants,
. reviewing the scope of the audit activities of the independent
accountants and our internal auditors,
. providing direction to the internal audit staff and the independent
accountants,
. approving the independent accountants' fees,
. reviewing audit results,
. reviewing and approving the annual financial statements, the annual
report to stockholders, and the Annual Report on Form 10-K to be filed
with the Securities and Exchange Commission,
. determining that appropriate controls are in place to ensure that United
States Steel operates in accordance with its procedures and codes of
conduct,
. reviewing compliance with business conduct policies,
. reviewing significant accounting, auditing and SEC pronouncements,
. reviewing, on an annual basis, a report outlining the activities
undertaken by the committee over the past year to meet the requirements
of the committee's charter, and
. assessing, and reporting annually to the United States Steel board on,
the activities of the committee and on the adequacy of the committee's
charter.
The Compensation and Organization Committee
The Compensation and Organization Committee will be composed solely of
directors who satisfy all criteria for independence under applicable law and
who, in the opinion of the United States Steel board, are free of any
relationship that would interfere with their exercise of independent judgment
as members of the committee.
D-16
The Compensation and Organization Committee will be responsible for:
. making recommendations to the United States Steel board and to the
boards of subsidiaries on all matters of policy and procedures relating
to executive compensation,
. approving the salaries of officers (other than the officer-directors,
whose salaries are approved by the United States Steel board),
. administering the Annual Incentive Compensation Plan and the Senior
Executive Officer Annual Incentive Compensation Plan,
. administering the plans under which long-term incentives are granted and
approving grants of options, stock appreciation rights, restricted stock
and other incentives under those plans,
. the timely certification as to the meeting of applicable performance
levels under the foregoing plans,
. approving the annual report on executive compensation for the proxy
statement, and
. such other duties and responsibilities as may be assigned to the
committee by the United States Steel board or as designated in plans
approved by the shareholders.
The Compensation and Organization Committee will also be authorized to:
. adopt and amend employee benefit plans,
. review the activities of the United States Steel Pension Fund as
administrator of certain benefit plans,
. make recommendations to the United States Steel board concerning policy
matters relating to employee benefits,
. make recommendations to the United States Steel board concerning the
appropriate size and composition of the United States Steel board,
including
--candidates for election as directors,
--the composition and functions of United States Steel board
committees,
--the compensation of non-employee directors, and
--all matters relating to the development and effective functioning of
the United States Steel board,
. confer with management concerning plans for succession to executive
management positions, and
. consider nominees recommended by stockholders for election as directors.
In recommending candidates for election as directors, the committee, among
other considerations, will study the composition of the United States Steel
board and try to identify candidates with broad knowledge and experience in
business and society in general. Recommendations of candidates by stockholders
of record must be sent, together with the nominee's qualifications and consent
to be considered as a nominee, to the Secretary of United States Steel
Corporation for presentation to the committee.
The Financial Policy Committee
The Financial Policy Committee will provide oversight with respect to the
appropriate capital structure and financial policies of United States Steel.
Its key responsibility in that role will be to make recommendations to the
board concerning dividends. The board will also delegate to the committee the
authority to:
. approve financings by United States Steel (except financings which
involve the issuance of common stock), including the recommendation of
action to subsidiaries, partnerships and joint ventures,
. authorize loans to outside entities, guarantees by United States Steel
of the credit of others, and other uses of United States Steel credit,
and
D-17
. approve United States Steel's funding policy for its pension and other
post-employment benefit plans.
In addition, the committee is responsible for reviewing the performance of
the United States Steel Pension Fund as investment manager and/or trustee of
our employee benefit plans. It also receives reports and makes recommendations
to the board on various financial matters.
The Corporate Governance and Public Policy Committee
The Corporate Governance and Public Policy Committee will concentrate on the
following areas of emphasis: ownership of United States Steel, stockholder
attitudes toward United States Steel, political-legislative developments
affecting United States Steel, United States Steel policies on major public
issues and corporate governance matters.
The committee will review the following matters and report to the board such
observations and information thereon as the committee deems appropriate:
. matters bearing on the relationship between management and present or
potential stockholders with emphasis on policy and major programs
affecting ownership of United States Steel,
. communications to and from the investment community, particularly United
States Steel's stockholders,
. legislative and regulatory issues affecting United States Steel's
businesses and operations,
. public issues identified by United States Steel as likely to generate
expectations of United States Steel by its constituencies, including
stockholders, employees, customers, vendors, governments and the public,
and United States Steel's position regarding identified public issues
including, but not limited to, employee health and safety,
environmental, energy and trade matters,
. United States Steel's efforts to affect identified public issues through
research, analysis, lobbying efforts and participation in business and
government programs, and
. codes of conduct applicable to employees of United States Steel and its
principal operating units.
The committee also will assess and make recommendations concerning overall
corporate governance to the extent specific matters are not the assigned
responsibility of other board committees.
The board may establish other committees from time to time to facilitate the
management of the business and affairs of United States Steel.
Executive Officers of United States Steel Corporation Following the Separation
Upon the Separation, the individuals listed below will be executive officers
of United States Steel Corporation. All of the executive officers listed below
have held responsible management or professional positions with USX or its
subsidiaries for more than five years. The name, age, and position of each
individual is set forth below. Unless otherwise indicated, the business address
of each of the individuals listed below is: 600 Grant Street, Pittsburgh,
Pennsylvania 15219-4776. Each of the individuals listed below is a citizen of
the United States.
Name Age Position
---- --- --------
Charles G. Carson, III........... 58 Vice President--Environmental Affairs
Roy G. Dorrance.................. 55 Executive Vice President
Charles C. Gedeon................ 60 Executive Vice President--Raw Materials &
Diversified Business
Gretchen R. Haggerty............. 45 Vice President--Accounting & Finance
Bruce A. Haines.................. 56 Vice President--Technology & Management
Services
J. Paul Kadlic................... 59 Executive Vice President--Sheet Products
James D. Garraux................. 48 Vice President--Employee Relations
Stephan K. Todd.................. 55 General Counsel
Thomas J. Usher.................. 58 Chairman of the Board & Chief Executive
Officer
D-18
Change in Control Agreements
United States Steel Corporation expects to enter into agreements with its
executive officers that provide certain benefits if such officer's employment
is terminated following a change in control. These agreements are substantially
the same as those currently in effect with USX. These agreements will provide
that, if an officer's employment is terminated under certain circumstances
following a change in control, the officer will be entitled to the following
severance benefits:
. a cash payment of up to three times the sum of the officer's current
salary plus the highest bonus in the three years before the date of
termination,
. a cash payment in settlement of outstanding options,
. life, disability, accident and health insurance benefits for 24 months
after termination,
. a cash payment equal to the actuarial equivalent of the difference
between amounts receivable by the officer under our pension and welfare
benefit plans and those which would be payable if (a) the officer had
retired as of the termination date under conditions entitling a retiree
under similar circumstances to the highest benefits available under
those plans and (b) the officer had been absent due to layoff for a year
before termination,
. a cash payment equal to the difference between amounts receivable under
our savings or thrift plans and amounts which would have been received
if the officer's savings had been fully vested, and
. a cash payment of the amount necessary to ensure that the payments
listed above are not subject to net reduction due to the imposition of
federal excise taxes.
Each agreement is automatically extended each year unless the officer is
notified that United States Steel Corporation does not wish it extended. In any
event, however, each agreement continues for two years after a change in
control. The severance benefits are payable if, any time after a change in
control, the officer's employment is terminated for good reason or is
terminated for other than cause or disability. The severance benefits are not
payable if termination is due to the officer's death or disability or occurs
after the officer reaches age 65.
The definition of a change in control for purposes of these agreements is
complex but is summarized as follows. It includes any change in control
required to be reported in response to Item 6 (e) of Schedule 14A under the
Securities Exchange Act of 1934 and provides that a change in control will have
occurred if:
. any person not affiliated with United States Steel Corporation acquires
20 percent or more of the voting power of its outstanding securities,
. the United States Steel Corporation board of directors no longer has a
majority made up of (1) individuals who were directors on the date of
the agreements and (2) new directors (other than directors who join the
board in connection with an election contest) approved by two-thirds of
the directors then in office who (a) were directors on the date of the
agreements or (b) were themselves previously approved by the board in
this manner,
. United States Steel Corporation merges with another company and United
States Steel Corporation's stockholders end up with less than 50 percent
of the voting power of the new entity,
. stockholders approve a plan of complete liquidation of United States
Steel Corporation, or
. there is a sale of all or substantially all of United States Steel
Corporation's assets.
Neither the approval and adoption of the Agreement and Plan of
Reorganization, nor the completion of the Separation will constitute a change
in control for purposes of these agreements.
D-19
Compensation of United States Steel Corporation Directors and Executive
Officers
The following table sets forth certain information concerning the
compensation awarded to, earned by or paid to the chief executive officer and
the other four most highly compensated executive officers of United States
Steel for services rendered to USX or its subsidiaries in all capacities during
2000.
Summary Compensation Table
Incentive Restricted Options/ All Other
Name & Position Salary Compensation Stock(1) SAR(2) Compensation(3)
- --------------- ------ ------------ ---------- -------- ---------------
..............
..............
..............
..............
- --------
(1) Grants of restricted stock under the USX Corporation 1990 Stock Plan.
Grants are subject to conditions including continued employment and
achievement of business performance standards. Dividends are paid on
restricted stock. Shown below is the vesting schedule for restricted stock
scheduled to vest less than three years from the date of grant, together
with the number and value, as of December 31, 2000, of the aggregate
holdings of restricted stock for each of the executive officers named in
the Summary Compensation Table. Vesting shown assumes achievement of
business performance at peer-group standard.
(2) All option shares listed were granted with tandem stock appreciation rights
("SARs").
(3) This column includes amounts contributed by USX under the USX Savings Fund
Plan and the related supplemental savings plans. Such amounts for 2000 were
$ , $ , $ , $ and $ for , , , , and ,
respectively. Also included are amounts attributable to split-dollar life
insurance provided by USX. For 2000, these amounts were $ , $ , $ ,
$ and $ for , , , , and , respectively. Also included
are amounts attributable to a mandatory tax compliance program of USX. For
2000, these amounts were $2,000 for the individuals listed.
D-20
Options/SARs and Restricted Stock Granted in 2000
Restricted
Class of Stock and Options/ SARs Expiration Assumed Assumed
Name USX Stock % of Total and % of Total Price Date 5% gain 10% gain
---- -------------- ---------- -------------- ----- ---------- ------- --------
Marathon Steel
Marathon Steel
Marathon Steel
Marathon Steel
Marathon Steel
Marathon Steel
Options/SARs Exercised in 2000
Value of
Shares Value # of Shares Unexercised
Name Acquired Realized Unexercised Options
---- -------- -------- ------------- -----------
Exercisable
Unexercisable
Exercisable
Unexercisable
Exercisable
Unexercisable
Exercisable
Unexercisable
Exercisable
Unexercisable
Vesting Schedule for Restricted Stock
United States Steel Corporation Director Stock Plan
Under the United States Steel Corporation Non-Employee Director Stock Plan,
each non-employee director may receive a grant of up to 500 shares of common
stock. In order to qualify, a director must first purchase an equivalent number
of shares in the open market during the 60 days following his or her initial
election to the United States Steel Corporation board of directors. The shares
granted under this plan may not be sold until the director leaves the United
States Steel Corporation board of directors.
D-21
Pension Benefits
The United States Steel Plan for Non-Union Employee Pension Benefits ("Steel
Pension Plan") is comprised of two defined benefits. One is based on final
earnings and the other on career earnings. Directors who have not been
employees of United States Steel do not receive any benefits under the plan.
The following table shows the annual final earnings pension benefits for
retirement at age 65 (or earlier under certain circumstances) for various
levels of eligible earnings which would be payable to employees retiring with
the years of service shown. The benefits are based on a formula of a specified
percentage (dependent on years of service) of average annual eligible earnings
in the five consecutive years of the ten years prior to retirement in which
such earnings were highest. As of the date of this proxy statement/prospectus
, , , and have , , , and years of service,
respectively.
15 20 25 30 35 40
Final Earnings Years Years Years Years Years Years
-------------- ------- ------- ------- ------- ------- -------
$ 100,000 17,325 23,100 28,875 34,650 40,950 47,250
$ 300,000 51,975 69,300 86,625 103,950 122,850 141,750
$ 500,000 86,625 115,500 144,375 173,250 204,750 236,250
$ 700,000 121,275 161,700 202,125 242,550 286,650 330,750
$ 900,000 155,925 207,900 259,875 311,850 368,550 425,250
$1,100,000 190,575 254,100 317,625 381,150 450,450 519,750
Annual career earning benefits are equal to 1% of total career earnings plus
a 30 percent supplement. The estimated annual career earnings benefits payable
at normal retirement age 65, assuming no increase in annual earnings, will be
$ for , $ for , $ for and $ for . Earnings for the
purpose of calculating both the final earnings and career earnings pensions are
limited to base salary as reflected in the Summary Compensation table. They do
not include any awards under any bonus programs.
In addition to the pension benefit described above, , , and
participate in the United States Steel Corporation Executive Management
Supplemental Pension Plan and are entitled, upon retirement after age 60, or
before age 60 with United States Steel's consent, to the benefits shown in the
table below based on bonuses paid under applicable United States Steel plans.
These bonuses are reported in the bonus column of the Summary Compensation
Table.
Annual
Bonus 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years
------ -------- -------- -------- -------- -------- --------
$ 100,000 $ 30,800 $ 38,500 $ 46,200 $ 53,900 $ 61,600 $ 69,300
300,000 92,400 115,500 138,600 161,700 184,800 207,900
500,000 154,000 192,500 231,000 269,500 308,000 346,500
700,000 215,600 269,500 323,400 377,300 431,200 485,100
900,000 277,200 346,500 415,800 485,100 554,400 623,700
1,100,000 338,800 423,500 508,200 592,900 677,600 762,300
1,300,000 400,400 500,500 600,600 700,700 800,800 900,900
D-22
INFORMATION ABOUT MARATHON
MANAGEMENT OF MARATHON OIL CORPORATION FOLLOWING THE SEPARATION
Directors of USX Who Will Become Directors of Marathon Oil Corporation
Following the Separation
Under Delaware law, the business and affairs of Marathon Oil Corporation
will be managed under the direction of its board of directors. The Marathon
Oil Corporation certificate of incorporation and by-laws provide that the
number of directors may be fixed by the board from time to time, provided that
there are always at least three directors. Upon the Separation, the board of
directors of Marathon Oil Corporation will consist of the individuals listed
below. The name, age, present principal occupation or employment and five-year
employment history of each individual is set forth below. Unless otherwise
indicated, the business address of each of the individuals listed below is:
600 Grant Street, Pittsburgh, Pennsylvania 15219-4776. Each of the individuals
listed below is a citizen of the United States.
Name Age Position
- ---- --- --------
Thomas J. Usher........... 58 Chairman of the Board
Clarence P. Cazalot, 50 Director, President and Chief Executive Officer
Jr.(1)...................
- --------
(1) Joined Marathon in March, 2000. Vice President and President--Production
Operations, Texaco Inc., 1999-2000. President-- International Production,
Texaco Inc. and Chairman, Texaco Ltd., 1998-2000. President--International
Marketing and Manufacturing, Texaco Inc., 1997-1998. President, Texaco
Exploration and Production Inc., 1994-1997.
Executive Officers of Marathon Oil Corporation Following the Separation
Upon the Separation, the individuals listed below will be executive
officers of Marathon Oil Corporation.
The name, age and position of each individual is set forth below. Unless
otherwise indicated, each of the executive officers listed below has held
responsible management or professional positions with USX or its subsidiaries
for more than five years. The business address of each of the individuals
listed below is 5555 San Felipe Road, Houston, Texas 77056-2723. Except as
indicated below, each of the individuals listed below is a citizen of the
United States.
Name Age Position
- ---- --- --------
Philip G. Behrman(1)...... 50 Senior Vice President--Worldwide Exploration
Clarence P. Cazalot, 50 President
Jr.(2)...................
G. David Golder(3)........ 53 Senior Vice President--Commercialization &
Development
Steven B. Hinchman........ 52 Senior Vice President--Production Operations
Steven J. Lowden(4)....... 41 Senior Vice President--Business Development
John T. Mills............. 53 Senior Vice President--Finance & Administration
William F. Schwind, Jr.... 56 General Counsel & Secretary
- --------
(1) Joined Marathon in 2000. Exploration Manager and Acting Vice President,
Exploration and Land, Vastar Resources Inc., 1996-2000.
(2) Joined Marathon in March, 2000. Vice President and President--Production
Operations, Texaco Inc., 1999-2000. President--International Production,
Texaco Inc. and Chairman, Texaco Ltd. 1998-2000. President--International
Marketing and Manufacturing, Texaco Inc., 1997-1998. President, Texaco
Exploration and Production Inc., 1994-1997.
(3) Vice President, Marathon Oil Company since January 1999. Executive Vice
President--Upstream, Sakhalin Energy, 30% owned by Marathon, 1996-1999.
(4) Joined Marathon December 1, 2000. Commercial and Business Development
director and member of the Board of Directors of Premier Oil PLC 1987-
2000. Citizen of United Kingdom.
E-1
LIQUIDITY OF MARATHON OIL CORPORATION FOLLOWING THE SEPARATION
Prior to Separation
As a matter of policy, USX has managed most financial activities on a
centralized, consolidated basis, and will continue to do so until the
separation. Such financial activities include the investment of surplus cash;
the issuance, repayment and repurchase of short-term and long-term debt; the
issuance, repurchase and redemption of preferred stock; and the issuance and
repurchase of common stock. Transactions related primarily to invested cash,
short-term and long-term debt (including convertible debt), related net
interest and other financial costs and preferred stock and related dividends
are attributed to Marathon based upon its cash flows for the periods presented
and its initial capital structure. However, a portion of most financing
transactions are attributed to and reflected in the financial statements of
Marathon. Transactions such as leases, certain collateralized financings,
financial activities of consolidated entities that are less than wholly owned
by USX and transactions related to securities convertible solely into USX-
Marathon Group Common Stock are or will be specifically attributed to and
reflected in their entirety in the financial statements of Marathon.
In December 2000, USX entered into a $1,354 million five-year revolving
credit agreement, terminating in November 2005, and a $451 million 364-day
facility, which together replaced the prior $2,350 million facility. At March
31, 2001, USX had $200 million of borrowings against its $1,354 million long-
term revolving credit agreement, no borrowings against its $451 million 364-day
facility and no commercial paper borrowings. There were no borrowings against
USX's short-term lines of credit totaling $150 million at March 31, 2001. At
March 31, 2001, there were no borrowings against MAP's revolving credit
agreement.
On April 24, 2001, USX announced that the Board had authorized management to
proceed with the necessary steps to implement a plan of reorganization of the
corporation in order to separate the energy and steel businesses. Until the
plan of reorganization is implemented or abandoned, USX management believes
that it will be more difficult to access traditional debt and equity markets.
Although USX management believes that it will not be necessary to access
financial markets during this time frame, nontraditional sources should be
available to provide adequate liquidity, if necessary.
After Separation
Upon Separation, Marathon will assume the financial resources of USX
Corporation. Marathon will have access to a $1,354 million 5-year revolving
credit agreement, expiring in November 2005. At March 31, 2001, $200 million
had been borrowed under this facility. Marathon also will have a short-term
credit facility against which there were no borrowings as of March 31, 2001. In
addition, Marathon will have the ability to issue commercial paper supported by
the unused and available credit line on the $1,354 million facility. At
March 31, 2001, no commercial paper was outstanding. Also, at March 31, 2001,
there were no borrowings against MAP revolving credit agreements.
Capital expenditures for 2001 are expected to be $1.5 billion, which is
consistent with 2000 levels.
Marathon management believes that its short-term and long-term liquidity
will be adequate to satisfy its obligations after Separation, and to complete
currently authorized capital spending programs. Future requirements for
Marathon's business needs, including the funding of capital expenditures, debt
service for the balance of 2001 and years 2002 and 2003, and any amounts that
may ultimately be paid in connection with contingencies, are expected to be
financed by a combination of internally generated funds, proceeds from the sale
of stock, borrowings and other external financing sources.
Marathon management's opinion concerning liquidity and Marathon'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
E-2
adversely affected. Factors that could affect the availability of financing
include the performance of Marathon (as measured by various factors including
cash provided from operating activities), the state of worldwide debt and
equity markets, investor perceptions and expectations of past and future
performance, the overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of Marathon's outstanding debt and credit
ratings by rating agencies.
Debt Rating
Standard and Poor's has assigned a BBB+ corporate credit rating to Marathon
Oil Corporation with a stable outlook, assuming the Plan of Reorganization is
completed.
E-3
Index For Annex F
Historical Financial Information for United States Steel
Page
----
Report of Independent Accountants......................................... F-2
Audited Combined Financial Statements:
Combined Statement of Operations--Years Ended December 31, 2000, 1999
and 1998............................................................... F-3
Combined Balance Sheet--at December 31, 2000 and 1999................... F-4
Combined Statement of Cash Flows--Years Ended December 31, 2000, 1999
and 1998............................................................... F-5
Notes to Combined Financial Statements.................................. F-6
Unaudited Combined Financial Information:
Selected Quarterly Financial Data....................................... F-32
Supplementary Information on Mineral Reserves........................... F-32
Principal Unconsolidated Investees...................................... F-33
Unaudited Interim Combined Financial Information:
Combined Statement of Operations--First Quarter Ended March 31, 2001 and
2000................................................................... F-34
Combined Balance Sheet--at March 31, 2001 and December 31, 2000......... F-35
Combined Statement of Cash Flows--First Quarter Ended March 31, 2001 and
2000................................................................... F-36
Selected Notes to Combined Financial Statements......................... F-37
Management's Discussion and Analysis...................................... F-43
F-1
Report of Independent Accountants
To the Stockholders of USX Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations and of cash flows present fairly, in all
material respects, the financial position of United States Steel at December
31, 2000 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of USX Corporation's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 7, 2001
F-2
UNITED STATES STEEL
COMBINED STATEMENT OF OPERATIONS
2000 1999 1998
------ ------ ------
(Dollars in
millions)
Revenues and other income:
Revenues............................................. $6,090 $5,536 $6,378
Income (loss) from investees......................... (8) (89) 46
Net gains on disposal of assets...................... 46 21 54
Other income (loss).................................. 4 2 (1)
------ ------ ------
Total revenues and other income.................... 6,132 5,470 6,477
------ ------ ------
Costs and expenses:
Cost of revenues (excludes items shown below)........ 5,656 5,084 5,604
Selling, general and administrative expenses
(credits) (Note 12)................................. (223) (283) (201)
Depreciation, depletion and amortization............. 360 304 283
Taxes other than income taxes........................ 235 215 212
------ ------ ------
Total costs and expenses........................... 6,028 5,320 5,898
------ ------ ------
Income from operations................................. 104 150 579
Net interest and other financial costs (Note 7)........ 105 74 42
------ ------ ------
Income (loss) before income taxes and extraordinary
losses................................................ (1) 76 537
Provision for income taxes (Note 15)................... 20 25 173
------ ------ ------
Income (loss) before extraordinary losses.............. (21) 51 364
Extraordinary losses (Note 6).......................... -- 7 --
------ ------ ------
Net income (loss)...................................... (21) 44 364
Dividends on preferred stock........................... 8 9 9
------ ------ ------
Net income (loss) available to USX's net investment.... $ (29) $ 35 $ 355
====== ====== ======
The accompanying notes are an integral part of these combined financial
statements.
F-3
UNITED STATES STEEL
COMBINED BALANCE SHEET
December 31
----------------------
2000 1999
---------- ----------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 219 $ 22
Receivables, less allowance for doubtful accounts of
$57 and $10......................................... 625 486
Receivables subject to a security interest (Note
11)................................................. 350 350
Receivables from related parties (Note 13)........... 366 99
Inventories (Note 14)................................ 946 743
Deferred income tax benefits (Note 15)............... 201 281
Other current assets................................. 10 --
---------- ----------
Total current assets............................... 2,717 1,981
Investments and long-term receivables, less reserves of
$28 and $3 (Note 16).................................. 439 475
Long-term receivables from related parties (Note 13)... 97 97
Property, plant and equipment--net (Note 21)........... 2,739 2,516
Prepaid pensions (Note 12)............................. 2,672 2,404
Other noncurrent assets................................ 47 52
---------- ----------
Total assets....................................... $ 8,711 $ 7,525
========== ==========
LIABILITIES
Current liabilities:
Notes payable........................................ $ 70 $ --
Accounts payable..................................... 755 751
Accounts payable to related parties (Note 13)........ 5 6
Payroll and benefits payable......................... 202 322
Accrued taxes........................................ 173 177
Accrued interest..................................... 47 15
Long-term debt due within one year (Note 11)......... 139 13
---------- ----------
Total current liabilities.......................... 1,391 1,284
Long-term debt (Note 11)............................... 2,236 902
Deferred income taxes (Note 15)........................ 666 348
Employee benefits (Note 12)............................ 1,767 2,245
Deferred credits and other liabilities................. 483 441
Preferred stock of subsidiary (Note 10)................ 66 66
Mandatorily redeemable convertible preferred securities
of a subsidiary trust holding solely junior
subordinated convertible debentures of USX (Note 18).. 183 183
EQUITY (Note 19)
Preferred stock........................................ 2 3
USX's net investment................................... 1,950 2,073
Deferred compensation.................................. (3) --
Accumulated other comprehensive income (loss).......... (30) (20)
---------- ----------
Total equity....................................... 1,919 2,056
---------- ----------
Total liabilities and equity....................... $ 8,711 $ 7,525
========== ==========
The accompanying notes are an integral part of these combined financial
statements.
F-4
UNITED STATES STEEL
COMBINED STATEMENT OF CASH FLOWS
2000 1999 1998
------ ----- -----
(Dollars in
millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income (loss)....................................... $ (21) $ 44 $ 364
Adjustments to reconcile to net cash provided from (used
in) operating activities:
Extraordinary losses.................................. -- 7 --
Depreciation, depletion and amortization.............. 360 304 283
Pensions and other postretirement benefits............ (847) (256) (215)
Deferred income taxes................................. 389 107 158
Net gains on disposal of assets....................... (46) (21) (54)
Changes in:
Current receivables--sold........................... -- (320) (30)
- --operating turnover.................................... (263) (242) 232
Inventories......................................... (63) (14) 7
Current accounts payable and accrued expenses....... (262) 239 (285)
All other--net........................................ 126 72 (80)
------ ----- -----
Net cash provided from (used in) operating
activities......................................... (627) (80) 380
------ ----- -----
Investing activities:
Capital expenditures.................................. (244) (287) (310)
Acquisition of U. S. Steel Kosice s.r.o., net of cash
acquired of $59...................................... (10) -- --
Disposal of assets.................................... 21 10 21
Restricted cash--withdrawals.......................... 2 15 35
--deposits............................................ (2) (17) (35)
Investees--investments................................ (35) (15) (73)
--loans and advances.................................. (10) -- (1)
All other--net........................................ 8 -- 14
------ ----- -----
Net cash used in investing activities............... (270) (294) (349)
------ ----- -----
Financing activities (Note 10):
Increase in attributed portion of USX consolidated
debt................................................. 1,208 147 13
Specifically attributed debt:
Borrowings.......................................... -- 350 --
Repayments.......................................... (6) (11) (4)
Steel Stock issued.................................... -- -- 55
Preferred stock repurchased........................... (12) (2) (8)
Dividends paid........................................ (97) (97) (96)
------ ----- -----
Net cash provided from (used in) financing
activities......................................... 1,093 387 (40)
------ ----- -----
Effect of exchange rate changes on cash................. 1 -- --
------ ----- -----
Net increase (decrease) in cash and cash equivalents.... 197 13 (9)
Cash and cash equivalents at beginning of year.......... 22 9 18
------ ----- -----
Cash and cash equivalents at end of year................ $ 219 $ 22 $ 9
====== ===== =====
See Note 9, for supplemental cash flow information.
The accompanying notes are an integral part of these combined financial
statements.
F-5
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying combined financial statements represent a carve-out
financial statement presentation of the businesses comprising United States
Steel, and are not intended to be a complete presentation of the financial
position, the results of operations and cash flows of United States Steel on a
stand-alone basis. These combined financial statements are presented as if
United States Steel existed as an entity separate from the remaining businesses
of USX Corporation (USX) during the periods presented. The allocations and
estimates included in these combined financial statements are determined using
the methodologies described in Note 4.
United States Steel 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;
engineering and consulting services and, through its U.S. Steel Kosice segment,
primarily located in the Slovak Republic, in the production and sale of steel
mill products and coke for the central European market. Most businesses within
the Domestic Steel segment are divisions of USX. Certain business activities
are conducted through joint ventures and partially owned companies, such as
USS-POSCO Industries, PRO-TEC Coating Company, Clairton 1314B Partnership,
Republic Technologies International LLC and Rannila Kosice s.r.o.
The accompanying combined financial statements include the historical
operations of certain divisions of USX and certain subsidiaries of USX. In this
context, no direct ownership existed among all the various units comprising
United States Steel; accordingly, USX's net investment in United States Steel
(USX's net investment) is shown in lieu of Common Stockholder's Equity in the
combined financial statements. The combined financial statements included
herein have been prepared from USX's historical accounting records.
2. Summary of Principal Accounting Policies
Principles applied in consolidation--Investments in entities over which
United States Steel has significant influence are accounted for using the
equity method of accounting and are carried at United States Steel's share of
net assets plus loans and advances.
Investments in companies whose stock is publicly traded are carried
generally at market value. The difference between the cost of these investments
and market value is recorded in other comprehensive income (net of tax).
Investments in companies whose stock has no readily determinable fair value are
carried at cost.
Income from investees includes United States Steel's proportionate share of
income from equity method investments. Also, gains or losses from a change in
ownership of an unconsolidated investee are recognized in the period of change.
Use of estimates--Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at year-end and the reported amounts of revenues and expenses during the year.
Significant items subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; environmental liabilities;
liabilities for potential tax deficiencies and potential litigation claims and
settlements; and assets and obligations related to employee benefits.
Additionally, certain estimated liabilities are recorded when management
commits to a plan to close an operating facility or to exit a business
activity. Actual results could differ from the estimates and assumptions used.
Revenue recognition--Revenues are recognized generally when products are
shipped or services are provided to customers, the sales price is fixed and
determinable, and collectibility is reasonably assured. Costs associated with
revenues, including shipping and other transportation costs, are recorded in
cost of revenues.
F-6
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents--Cash and cash equivalents include cash on hand
and on deposit and investments in highly liquid debt instruments with
maturities generally of three months or less.
Inventories--Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO) method.
Derivative instruments--United States Steel uses commodity-based derivative
instruments to manage its exposure to price risk. Management is authorized to
use futures, forwards, swaps and options related to the purchase of natural
gas, refined products and nonferrous metals used in steel operations. Recorded
deferred gains or losses are reflected within other current and noncurrent
assets or accounts payable and deferred credits and other liabilities, as
appropriate.
Long-lived assets--Depreciation is generally computed using a modified
straight-line method based upon estimated lives of assets and production
levels. The modification factors for domestic steel producing assets range from
a minimum of 85% at a production level below 81% of capability, to a maximum of
105% for a 100% production level. No modification is made at the 95% production
level, considered the normal long-range level.
Depletion of mineral properties is based on rates which are expected to
amortize cost over the estimated tonnage of minerals to be removed.
United States Steel evaluates impairment of its long-lived assets on an
individual asset basis or by logical groupings of assets. Assets deemed to be
impaired are written down to their fair value, including any related goodwill,
using discounted future cash flows and, if available, comparable market values.
When long-lived assets depreciated on an individual basis are sold or
otherwise disposed of, any gains or losses are reflected in income. Gains on
disposal of long-lived assets are recognized when earned, which is generally at
the time of closing. If a loss on disposal is expected, such losses are
recognized when long-lived assets are reclassified as assets held for sale.
Proceeds from disposal of long-lived assets depreciated on a group basis are
credited to accumulated depreciation, depletion and amortization with no
immediate effect on income.
Major maintenance activities--United States Steel incurs planned major
maintenance costs primarily for blast furnace relines. Such costs are
separately capitalized in property, plant and equipment and are amortized over
their estimated useful life, which is generally the period until the next
scheduled reline.
Environmental remediation--United States Steel provides for remediation
costs and penalties when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. Generally, the timing of
remediation accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are accrued
based on estimates of known environmental exposure and are discounted in
certain instances.
Postemployment benefits--United States Steel recognizes an obligation to
provide postemployment benefits, primarily for disability-related claims
covering indemnity and medical payments to certain employees. The obligation
for these claims and the related periodic costs are measured using actuarial
techniques and assumptions, including an appropriate discount rate, analogous
to the required methodology for measuring pension and other postretirement
benefit obligations. Actuarial gains and losses are deferred and amortized over
future periods.
Insurance--United States Steel is insured for catastrophic casualty and
certain property and business interruption exposures, as well as those risks
required to be insured by law or contract. Costs resulting from noninsured
losses are charged against income upon occurrence.
F-7
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. New Accounting Standards
In the fourth quarter of 2000, United States Steel adopted the following
accounting pronouncements primarily related to the classification of items in
the financial statements. The adoption of these new pronouncements had no net
effect on the financial position or results of operations of United States
Steel, although they required reclassifications of certain amounts in the
financial statements, including all prior periods presented.
. In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in
Financial Statements," which summarizes the SEC staff's interpretations
of generally accepted accounting principles related to revenue
recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," which addresses
whether certain items should be reported as a reduction of revenue or as
a component of both revenues and cost of revenues, and EITF Consensus
No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping goods to
customers.
. In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 140). SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. United States Steel adopted
certain recognition and reclassification provisions of SFAS 140, which
were effective for fiscal years ending after December 15, 2000. The
remaining provisions of SFAS 140 are effective after March 31, 2001.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), which later was amended by SFAS Nos.
137 and 138. This Standard requires recognition of all derivatives as either
assets or liabilities at fair value. Changes in fair value will be reflected in
either current period net income or other comprehensive income, depending on
the designation of the derivative instrument. United States Steel may elect not
to designate a derivative instrument as a hedge even if the strategy would be
expected to qualify for hedge accounting treatment. The adoption of SFAS No.
133 will change the timing of recognition for derivative gains and losses as
compared to previous accounting standards.
United States Steel will adopt the Standard effective January 1, 2001. The
transition adjustment resulting from the adoption of SFAS No. 133 will be
reported as a cumulative effect of a change in accounting principle. The
transition adjustment for United States Steel is expected to be immaterial. The
amounts reported as other comprehensive income will be reflected in net income
when the anticipated physical transactions are consummated. It is not possible
to estimate the effect that this Standard will have on future results of
operations.
F-8
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
4. Corporate Activities
Financial activities--As a matter of policy, USX manages most financial
activities on a centralized, consolidated basis. Such financial activities
include the investment of surplus cash; the issuance, repayment and repurchase
of short-term and long-term debt; the issuance, repurchase and redemption of
preferred stock; and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt (including
convertible debt), related net interest and other financial costs, and
preferred stock and related dividends are attributed to United States Steel
based upon its cash flows for the periods presented and its initial capital
structure. Most financing transactions are not specifically attributed to
United States Steel but represent attributed amounts of USX's financial
activities. See Note 10, for United States Steel's attributed portion of USX's
financial activities. However, transactions such as leases, certain
collateralized financings, certain indexed debt instruments, financial
activities of consolidated entities which are less than wholly owned by USX and
transactions related to securities convertible solely into USX-U. S. Steel
Group Common Stock are or will be specifically attributed to and reflected in
their entirety in the financial statements of United States Steel.
Corporate general and administrative costs--Corporate general and
administrative costs are allocated to United States Steel by USX based upon
utilization or other methods management believes to be reasonable and which
consider certain measures of business activities, such as employment,
investments and revenues. The costs allocated to United States Steel were $25
million in 2000, $17 million in 1999 and $24 million in 1998, and primarily
consist of employment costs including pension effects, professional services,
facilities and other related costs associated with corporate activities.
Income taxes--All members of the USX affiliated group are included in the
consolidated United States federal income tax return filed by USX. Accordingly,
the provision for federal income taxes and the related payments or refunds of
tax are determined on a consolidated basis. The consolidated provision and the
related tax payments or refunds have been reflected in the United States Steel
financial statements in accordance with USX's tax allocation policy. In
general, such policy provides that the consolidated tax provision and related
tax payments or refunds are allocated to United States Steel for financial
statement purposes, based upon its financial income, taxable income, credits,
preferences, and other directly related amounts.
For tax provision and settlement purposes, tax benefits resulting from
attributes (principally net operating losses and various tax credits), which
cannot be utilized by United States Steel on a separate return basis but which
can be utilized on a consolidated basis in that year or in a carryback year,
are allocated to United States Steel if it generated the attributes. To the
extent that United States Steel is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately utilized on
the consolidated tax return, the prior years' allocation of such attribute is
adjusted such that the effect of the expiration is borne by United States Steel
if it generated the attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback year, the prior
years' allocation of such consolidated tax effects is adjusted in a subsequent
year to the extent necessary to allocate the tax benefits to United States
Steel if it would have realized the tax benefits on a separate return basis. As
a result, the allocated amounts of taxes payable or refundable are not
necessarily comparable to those that would have resulted if United States Steel
had filed its own separate tax returns.
F-9
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
5. Business Combination
On November 24, 2000, United States Steel acquired U. S. Steel Kosice s.r.o.
(USSK), which is 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 cash purchase price was $69 million.
Additional payments to VSZ of not less than $25 million and up to $75 million
are contingent upon the future performance of USSK. Additionally, $325 million
of debt was included with the acquisition. The acquisition was accounted for
under the purchase method of accounting. The 2000 results of operations include
the operations of USSK from the date of acquisition.
Prior to this transaction, United States Steel and VSZ were equal partners
in VSZ U. S. Steel s.r.o. (VSZUSS), a tin mill products manufacturer. The
assets of USSK included VSZ's interest in VSZUSS. The acquisition of the
remaining interest in VSZUSS was accounted for under the purchase method of
accounting. Previously, United States Steel had accounted for its investment in
VSZUSS under the equity method of accounting.
VSZ did not provide historical carve-out financial information for its steel
activities prepared in accordance with generally accepted accounting principles
in the United States. United States Steel was unable to fully determine the
effects of transfer pricing, intercompany eliminations and expense allocations
in order to prepare such carve-out information from Slovak statutory reports
and VSZ internal records. United States Steel broadly estimates that the
unaudited pro forma effect on its 2000 and 1999 revenues, giving effect to the
acquisition as if it had been consummated at the beginning of those periods,
would have been to increase revenues in each period by approximately $1
billion. United States Steel cannot determine the unaudited pro forma effect on
its 2000 and 1999 net income. In any event, historical pro forma information is
not necessarily indicative of future results of operations.
6. Extraordinary Losses
In 1999, United States Steel irrevocably deposited with a trustee the entire
5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The
deposit of the shares resulted in the satisfaction of United States Steel's
obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1,
2000. Under the terms of the indenture, the trustee exchanged one RTI share for
each note at maturity. All shares were required for satisfaction of the indexed
debt; therefore, none reverted back to United States Steel.
As a result of the above transaction, United States Steel recorded in 1999
an extraordinary loss of $5 million, net of a $3 million income tax benefit,
representing prepaid interest expense and the write-off of unamortized debt
issue costs, and a pretax charge of $22 million, representing the difference
between the carrying value of the investment in RTI and the carrying value of
the indexed debt, which is included in net gains on disposal of assets.
In 1999, Republic Technologies International, LLC, an equity investee of
United States Steel, recorded an extraordinary loss related to the early
extinguishment of debt. As a result, United States Steel recorded an
extraordinary loss of $2 million, net of a $1 million income tax benefit,
representing its share of the extraordinary loss.
F-10
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
7. Other Items
2000 1999 1998
---- ---- ----
(In millions)
Net interest and other financial costs
Interest and other financial income:
Interest income.............................................. $ 3 $ 1 $ 5
Other........................................................ 7 -- --
---- ---- ----
Total...................................................... 10 1 5
---- ---- ----
Interest and other financial costs:
Interest incurred............................................ 88 45 40
Less interest capitalized.................................... 3 6 6
---- ---- ----
Net interest............................................... 85 39 34
Interest on tax issues....................................... 11 15 16
Financial costs on trust preferred securities................ 13 13 13
Financial costs on preferred stock of subsidiary............. 5 5 5
Amortization of discounts.................................... 1 1 2
Expenses on sales of accounts receivable..................... -- 15 21
Adjustment to settlement value of indexed debt............... -- (13) (44)
---- ---- ----
Total...................................................... 115 75 47
---- ---- ----
Net interest and other financial costs......................... $105 $ 74 $ 42
==== ==== ====
Foreign currency transactions
For 2000, the aggregate foreign currency transaction gain included in
determining net income was $7 million. There were no foreign currency
transaction gains or losses in 1999 and 1998.
8. Segment Information
United States Steel consists of two reportable operating segments: 1)
Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the
United States operations of United States Steel, while USSK includes the United
States Steel operations in the Slovak Republic. Domestic Steel is engaged in
the domestic production and sale of steel mill products, coke and taconite
pellets; the management of mineral resources; coal mining; engineering and
consulting services; and real estate development and management. USSK is
engaged in the production and sale of steel mill products and coke and
primarily serves European markets.
Segment income represents income from operations allocable to both operating
segments and does not include net interest and other financial costs and
provisions for income taxes. Additionally, the following items are not
allocated to operating segments:
. Net pension credits associated with pension plan assets and liabilities
. Certain costs related to former United States Steel business activities
. Allocated USX corporate general and administrative costs. These costs
primarily consist of employment costs including pension effects,
professional services, facilities and other related costs associated
with corporate activities.
. Certain other items not allocated to operating segments for business
performance reporting purposes (see reconcilement schedule on page F-13)
Information on assets by segment is not provided as it is not reviewed by
the chief operating decision maker.
F-11
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following represents the operations of United States Steel:
Domestic
Steel USSK Total
-------- ---- ------
(In millions)
2000
Revenues and other income:
Customer.............................................. $5,981 $ 92 $6,073
Other subsidiaries of USX(a).......................... 17 -- 17
Equity in losses of unconsolidated investees.......... (8) -- (8)
Other................................................. 50 -- 50
------ ---- ------
Total revenues and other income..................... $6,040 $ 92 $6,132
====== ==== ======
Segment income.......................................... $ 23 $ 2 $ 25
Significant noncash items included in segment income -
depreciation, depletion and amortization(b)............ 285 4 289
Capital expenditures.................................... 239 5 244
1999
Revenues and other income:
Customer.............................................. $5,519 $-- $5,519
Other subsidiaries of USX(a).......................... 17 -- 17
Equity in losses of unconsolidated investees.......... (43) -- (43)
Other................................................. 46 -- 46
------ ---- ------
Total revenues and other income..................... $5,539 $-- $5,539
====== ==== ======
Segment income.......................................... $ 91 $-- $ 91
Significant noncash items included in segment income -
depreciation, depletion and amortization............... 304 -- 304
Capital expenditures(c)................................. 286 -- 286
1998
Revenues and other income:
Customer.............................................. $6,374 $-- $6,374
Other subsidiaries of USX(a).......................... 2 -- 2
Equity in earnings of unconsolidated investees........ 46 -- 46
Other................................................. 55 -- 55
------ ---- ------
Total revenues and other income..................... $6,477 $-- $6,477
====== ==== ======
Segment income.......................................... $ 517 $-- $ 517
Significant noncash items included in segment income -
depreciation, depletion and amortization............... 283 -- 283
Capital expenditures(c)................................. 305 -- 305
- --------
(a) Revenues and transfers with other subsidiaries of USX were conducted under
terms comparable to those with unrelated parties.
(b) Difference between segment total and United States Steel total represents
amounts for impairment of coal assets.
(c) Differences between segment total and United States Steel total represent
amounts related to corporate administrative activities.
F-12
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following schedules reconcile segment amounts to amounts reported in
United States Steel's combined financial statements:
2000 1999 1998
------ ------ ------
(In millions)
Revenues and Other Income:
Revenues and other income of reportable segments..... $6,132 $5,539 $6,477
Items not allocated to segments:
Impairment and other costs related to an investment
in an equity investee............................. -- (47) --
Loss on investment in RTI stock used to satisfy
indexed debt obligations.......................... -- (22) --
------ ------ ------
Total revenues and other income.................. $6,132 $5,470 $6,477
====== ====== ======
Income:
Income for reportable segments....................... $ 25 $ 91 $ 517
Items not allocated to segments:
Impairment of coal assets.......................... (71) -- --
Impairment and other costs related to an investment
in an equity investee............................. -- (47) --
Loss on investment in RTI stock used to satisfy
indexed debt obligations.......................... -- (22) --
Administrative expenses............................ (25) (17) (24)
Net pension credits................................ 266 228 186
Costs related to former businesses activities...... (91) (83) (100)
------ ------ ------
Total income from operations..................... $ 104 $ 150 $ 579
====== ====== ======
Revenues by Product:
2000 1999 1998
------ ------ ------
(In millions)
Sheet and semi-finished steel products................. $3,288 $3,433 $3,598
Tubular, plate and tin mill products................... 1,731 1,140 1,546
Raw materials (coal, coke and iron ore)................ 626 549 744
Other(a)............................................... 445 414 490
- --------
(a) Includes revenue from the sale of steel production by-products,
engineering and consulting services, real estate development and resource
management.
F-13
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Geographic Area:
The information below summarizes the operations in different geographic
areas.
Revenues and Other Income
----------------------------
Within Between
Geographic Geographic
Year Areas Areas Total Assets(a)
---- ---------- ---------- ------ ---------
(In millions)
United States....................... 2000 $6,027 $-- $6,027 $2,745
1999 5,452 -- 5,452 2,889
1998 6,460 -- 6,460 3,043
Slovak Republic..................... 2000 95 -- 95 376
1999 3 -- 3 60
1998 6 -- 6 66
Other Foreign Countries............. 2000 10 -- 10 10
1999 15 -- 15 3
1998 11 -- 11 3
Total............................. 2000 $6,132 $-- $6,132 $3,131
1999 5,470 -- 5,470 2,952
1998 6,477 -- 6,477 3,112
- --------
(a) Includes property, plant and equipment and investments.
F-14
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
9. Supplemental Cash Flow Information
2000 1999 1998
------- ------- --------
(In millions)
Cash provided from (used in) operating activities
included:
Interest and other financial costs paid (net of
amount capitalized)............................. $ (71) $ (77) $ (76)
Income taxes refunded (paid), including
settlements with USX under the tax allocation
policy.......................................... 81 3 (29)
Consolidated USX debt:
Commercial paper:
Issued......................................... $ 3,362 $ 6,282 $ --
Repayments..................................... (3,450) (6,117) --
Credit agreements:
Borrowings..................................... 437 5,529 17,486
Repayments..................................... (437) (5,980) (16,817)
Other credit arrangements--net................... 150 (95) 55
Other debt:
Borrowings..................................... -- 319 671
Repayments..................................... (54) (87) (1,053)
------- ------- --------
Total...................................... $ 8 $ (149) $ 342
======= ======= ========
Activity attributed to United States Steel....... $ 1,208 $ 147 $ 13
Activity attributed to other subsidiaries of
USX............................................. (1,200) (296) 329
------- ------- --------
Total...................................... $ 8 $ (149) $ 342
======= ======= ========
Noncash investing and financing activities:
Stock issued for dividend reinvestment and
employee stock plans............................ $ 5 $ 2 $ 2
Disposal of assets:
Deposit of RTI common shares in satisfaction of
indexed debt.................................. -- 56 --
Interest in USS/Kobe contributed to Republic... -- 40 --
Other disposals of assets--notes or common
stock received................................ 14 1 2
Business combinations:
Acquisition of USSK:
Liabilities assumed.......................... 568 -- --
Contingent consideration payable at present
value....................................... 21 -- --
Investee liabilities consolidated in step
acquisition................................. 3 -- --
Other acquisitions:
Liabilities assumed.......................... -- 26 --
Investee liabilities consolidated in step
acquisition................................. -- 26 --
F-15
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. Financial Activities Attributed to United States Steel
The following is the portion of USX financial activities attributed to
United States Steel. These amounts exclude amounts specifically attributed to
United States Steel.
United
States Consolidated
Steel USX
----------- -------------
December 31
-------------------------
2000 1999 2000 1999
------ ---- ------ ------
(In millions)
Cash and cash equivalents............................ $ 171 $ 1 $ 364 $ 9
Other noncurrent assets.............................. 3 1 7 8
------ ---- ------ ------
Total assets....................................... $ 174 $ 2 $ 371 $ 17
====== ==== ====== ======
Notes payable........................................ $ 70 $-- $ 150 $ --
Accrued interest..................................... 45 13 95 95
Long-term debt due within one year (Note 11)......... 130 7 277 54
Long-term debt (Note 11)............................. 1,804 466 3,734 3,771
Preferred stock of subsidiary........................ 66 66 250 250
------ ---- ------ ------
Total liabilities.................................. $2,115 $552 $4,506 $4,170
====== ==== ====== ======
United States Consolidated
Steel(a) USX
-------------- --------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
(In millions)
Net interest and other financial costs (Note
7)............................................. $59 $39 $29 $309 $334 $324
- --------
(a) United States Steel's net interest and other financial costs reflect
weighted average effects of all financial activities attributed by USX.
F-16
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
11. Long-Term Debt
United States Steel's portion of USX's consolidated long-term debt is as
follows:
United
States Consolidated
Steel USX
----------- -------------
December 31
-------------------------
2000 1999 2000 1999
------ ---- ------ ------
(In millions)
Specifically attributed debt(a):
Receivables facility............................... $ 350 $350 $ 350 $ 350
Sale-leaseback financing and capital leases........ 88 92 95 107
Other.............................................. 3 -- 4 1
------ ---- ------ ------
Total............................................ 441 442 449 458
Less amount due within one year.................... 9 6 10 7
------ ---- ------ ------
Total specifically attributed long-term debt..... $ 432 $436 $ 439 $ 451
====== ==== ====== ======
USX debt attributed to United States Steel(b)........ $1,946 $477 $4,036 $3,852
Less unamortized discount.......................... 12 4 25 27
Less amount due within one year.................... 130 7 277 54
------ ---- ------ ------
Total long-term debt not specifically
attributed...................................... $1,804 $466 $3,734 $3,771
====== ==== ====== ======
Total long-term debt due within one year............. $ 139 $ 13 $ 287 $ 61
Total long-term debt due after one year.............. 2,236 902 4,173 4,222
- --------
(a) As described in Note 4, certain financial activities are specifically
attributed to and reflected in their entirety in the financial statements
of United States Steel.
(b) Long-term debt activities of USX Corporation, not specifically attributed,
are attributed to United States Steel based on its cash flows.
12. Pensions and Other Postretirement Benefits
United States Steel has noncontributory defined benefit pension plans
covering substantially all U.S. employees. Benefits under these plans are based
upon years of service and final average pensionable earnings, or a minimum
benefit based upon years of service, whichever is greater. In addition, pension
benefits are also provided to most U.S. salaried employees based upon a percent
of total career pensionable earnings. United States Steel also participates in
multiemployer plans, most of which are defined benefit plans associated with
coal operations.
United States Steel also has defined benefit retiree health care and life
insurance plans (other benefits) covering most U.S. employees upon their
retirement. Health care benefits are provided through comprehensive hospital,
surgical and major medical benefit provisions or through health maintenance
organizations, both subject to various cost sharing features. Life insurance
benefits are provided to nonunion retiree beneficiaries primarily based on
employees' annual base salary at retirement. For U.S. union retirees, benefits
are provided for the most part based on fixed amounts negotiated in labor
contracts with the appropriate unions.
F-17
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Pension
Benefits Other Benefits
----------------- ------------------
2000 1999 2000 1999
------ ------- ------- -------
(In millions)
Change in benefit obligations
Benefit obligations at January 1..... $6,716 $ 7,549 $ 1,896 $ 2,113
Service cost......................... 76 87 12 15
Interest cost........................ 505 473 147 133
Plan amendments...................... -- 381(a) -- 14
Actuarial (gains) losses............. 430 (822) 260 (225)
Plan merger and acquisition.......... -- 42 -- 7
Settlements, curtailments and
termination benefits................ -- (207) -- --
Benefits paid........................ (806) (787) (166) (161)
------ ------- ------- -------
Benefit obligations at December 31... $6,921 $ 6,716 $ 2,149 $ 1,896
====== ======= ======= =======
Change in plan assets
Fair value of plan assets at January
1................................... $9,995 $10,243 $ 281 $ 265
Actual return on plan assets......... 139 729 26 20
Acquisition.......................... (1) 26 -- 1
Employer contributions............... -- -- 576(b) 34
Trustee distributions(c)............. (16) (14) -- --
Settlements paid..................... -- (207) -- --
Benefits paid from plan assets....... (805) (782) (41) (39)
------ ------- ------- -------
Fair value of plan assets at December
31.................................. $9,312 $ 9,995 $ 842 $ 281
====== ======= ======= =======
Funded status of plans at December
31.................................. $2,391(d) $ 3,279(d) $(1,307) $(1,615)
Unrecognized net gain from
transition.......................... (2) (69) -- --
Unrecognized prior service cost...... 719 817 12 19
Unrecognized actuarial gains......... (462) (1,639) (241) (526)
Additional minimum liability......... (19) (16) -- --
------ ------- ------- -------
Prepaid (accrued) benefit cost....... $2,627 $ 2,372 $(1,536) $(2,122)
====== ======= ======= =======
- --------
(a) Results primarily from a five-year labor contract with the United
Steelworkers of America ratified in August 1999.
(b) Includes contributions of $530 million to a Voluntary Employee Benefit
Association trust, comprised of $30 million in contractual requirements
and an elective contribution of $500 million. Also includes a $30 million
elective contribution to the non-union retiree life insurance trust.
(c) Represents transfers of excess pension assets to fund retiree health care
benefits accounts under Section 420 of the Internal Revenue Code.
(d) Includes a plan that has accumulated benefit obligations in excess of plan
assets:
2000 1999
---- ----
Aggregate accumulated benefit
obligations.............................. $(40) $(29)
Aggregate projected benefit obligations... (49) (39)
Aggregate plan assets..................... -- --
F-18
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Pension Benefits Other Benefits
---------------------- --------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
(In millions)
Components of net periodic
benefit cost (credit)
Service cost................ $ 76 $ 87 $ 71 $ 12 $ 15 $ 15
Interest cost............... 505 473 487 147 133 141
Expected return on plan
assets..................... (841) (781) (769) (24) (21) (21)
Amortization--net transition
gain....................... (67) (67) (69) -- -- --
- --prior service costs....... 98 83 72 4 4 4
- --actuarial (gains) losses.. (44) 6 6 (29) (12) (16)
Multiemployer and other
plans...................... -- -- 1 9(a) 7(a) 13(a)
Settlement and termination
(gains) losses............. -- (35)(b) 10(b) -- -- --
----- ----- ----- ---- ---- ----
Net periodic benefit cost
(credit)................... $(273) $(234) $(191) $119 $126 $136
===== ===== ===== ==== ==== ====
- --------
(a) Represents payments to a multiemployer health care benefit plan created by
the Coal Industry Retiree Health Benefit Act of 1992 based on assigned
beneficiaries receiving benefits. The present value of this unrecognized
obligation is broadly estimated to be $84 million, including the effects
of future medical inflation, and this amount could increase if additional
beneficiaries are assigned.
(b) Relates primarily to the 1998 voluntary early retirement program.
Pension Other
Benefits Benefits
---------- ----------
2000 1999 2000 1999
---- ---- ---- ----
Weighted average actuarial assumptions at December 31
Discount rate.......................................... 7.5% 8.0% 7.5% 8.0%
Expected annual return on plan assets.................. 8.9% 8.5% 8.5% 8.5%
Increase in compensation rate.......................... 4.0% 4.0% 4.0% 4.0%
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2001. The rate was assumed
to decrease gradually to 5% for 2006 and remain at that level thereafter.
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
(In millions)
Effect on total of service and interest cost
components..................................... $ 16 $ (14)
Effect on other postretirement benefit
obligations.................................... 177 (151)
13. Transactions with Related Parties
Revenues and purchases--United States Steel revenues for sales to other
subsidiaries of USX totaled $17 million in both 2000 and 1999 and $2 million in
1998. United States Steel purchases from other subsidiaries of USX totaled $60
million, $41 million and $21 million in 2000, 1999 and 1998, respectively. At
December 31, 2000 and 1999, United States Steel receivables from related
parties totaled $366 million and $99 million, respectively, related to
transactions with other subsidiaries of USX. At December 31, 2000 and 1999,
United States Steel accounts payable to related parties totaled $5 million and
$6 million, respectively, related to transactions with other subsidiaries of
USX. These transactions were conducted under terms comparable to those with
unrelated parties.
F-19
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Income taxes receivable from/payable to USX--At December 31, 2000 and 1999,
amounts receivable or payable for income taxes were included in the balance
sheet as follows:
December
31
---------
2000 1999
---- ----
(In
millions)
Current:
Receivables........................................................ $364 $ 97
Accounts payable................................................... 4 1
Noncurrent:
Receivables........................................................ 97 97
These amounts have been determined in accordance with the tax allocation
policy described in Note 4. Amounts classified as current are settled in cash
in the year succeeding that in which such amounts are accrued. Noncurrent
amounts represent estimates of tax effects of certain issues for years that are
still under various stages of audit and administrative review. Such tax effects
are not settled until the audit of those respective tax years is closed. The
amounts ultimately settled for open tax years will be different than recorded
noncurrent amounts based on the final resolution of all of the audit issues for
those years.
14. Inventories
December
31
---------
2000 1999
---- ----
(In
millions)
Raw materials........................................................ $214 $101
Semi-finished products............................................... 429 392
Finished products.................................................... 210 193
Supplies and sundry items............................................ 93 57
---- ----
Total.............................................................. $946 $743
==== ====
At December 31, 2000 and 1999, respectively, the LIFO method accounted for
91% and 93% of total inventory value. Current acquisition costs were estimated
to exceed the above inventory values at December 31 by approximately $380
million and $370 million in 2000 and 1999, respectively. Cost of revenues was
reduced and income from operations was increased by $3 million in 2000 as a
result of liquidations of LIFO inventories.
15. Income Taxes
Income tax provisions and related assets and liabilities attributed to
United States Steel are determined in accordance with the USX tax allocation
policy (Note 4).
Provisions (credits) for income taxes were:
2000 1999 1998
---------------------- ---------------------- ----------------------
(In millions)
Current Deferred Total Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- ----- ------- -------- -----
Federal................. $(357) $340 $(17) $(84) $ 99 $15 $19 $149 $168
State and local......... (12) 49 37 1 8 9 3 9 12
Foreign................. -- -- -- 1 -- 1 (7) -- (7)
----- ---- ---- ---- ---- --- --- ---- ----
Total................. $(369) $389 $ 20 $(82) $107 $25 $15 $158 $173
===== ==== ==== ==== ==== === === ==== ====
F-20
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
2000 1999 1998
---- ---- ----
(In millions)
Statutory rate applied to income before income taxes........ $-- $27 $188
Excess percentage depletion................................. (3) (7) (11)
Effects of foreign operations, including foreign tax
credits.................................................... (5) (2) (11)
State and local income taxes after federal income tax
effects.................................................... 24 6 8
Credits other than foreign tax credits...................... (3) (3) (3)
Adjustments of prior years' federal income taxes............ 5 -- --
Other....................................................... 2 4 2
---- --- ----
Total provisions........................................ $ 20 $25 $173
==== === ====
Deferred tax assets and liabilities resulted from the following:
December 31
--------------
2000 1999
------ ------
(In millions)
Deferred tax assets:
Minimum tax credit carryforwards............................. $ 39 $ 131
State tax loss carryforwards (expiring in 2001 through
2020)....................................................... 55 65
Employee benefits............................................ 782 998
Receivables, payables and debt............................... 52 68
Expected federal benefit for deducting state deferred income
taxes....................................................... 16 --
Contingency and other accruals............................... 71 52
Other........................................................ 2 11
Valuation allowances--state.................................. (34) (41)
------ ------
Total deferred tax assets(a)............................... 983 1,284
------ ------
Deferred tax liabilities:
Property, plant and equipment................................ 248 274
Prepaid pensions............................................. 1,046 921
Inventory.................................................... 15 16
Investments in subsidiaries and equity investees............. 82 96
Other........................................................ 61 44
------ ------
Total deferred tax liabilities............................. 1,452 1,351
------ ------
Net deferred tax liabilities............................. $ 469 $ 67
====== ======
- --------
(a) USX expects to generate sufficient future taxable income to realize the
benefit of United States Steel's deferred tax assets.
The consolidated tax returns of USX for the years 1990 through 1997 are
under various stages of audit and administrative review by the IRS. United
States Steel believes it has made adequate provision for income taxes and
interest which may become payable for years not yet settled.
Pretax income in 2000 included $8 million attributable to foreign sources.
Undistributed earnings of certain consolidated foreign subsidiaries at
December 31, 2000, amounted to $18 million. No provision for deferred U.S.
income taxes has been made for these subsidiaries because United States Steel
intends to permanently reinvest such earnings in those foreign operations. If
such earnings were not permanently reinvested, a deferred tax liability of $6
million would have been required.
F-21
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
16. Investments and Long-Term Receivables
December 31
-----------
2000 1999
----- -----
(In
millions)
Equity method investments.......................................... $ 325 $ 397
Other investments.................................................. 67 39
Receivables due after one year..................................... 5 11
Deposits of restricted cash........................................ 3 2
Other.............................................................. 39 26
----- -----
Total............................................................ $ 439 $ 475
===== =====
Summarized financial information of investees accounted for by the equity
method of accounting follows:
2000 1999 1998
------ ------ ------
(In millions)
Income data--year:
Revenues and other income............................. $3,484 $3,027 $3,163
Operating income (loss)............................... 112 (57) 193
Net income (loss)..................................... (166) (193) 97
Balance sheet data--December 31:
Current assets........................................ $ 911 $ 995
Noncurrent assets..................................... 2,196 2,402
Current liabilities................................... 1,171 1,181
Noncurrent liabilities................................ 1,307 1,251
United States Steel acquired a 25% interest in VSZ during 2000. VSZ does
not provide its shareholders with financial statements prepared in accordance
with generally accepted accounting principles in the United States (USGAAP).
Although shares of VSZ are traded on the Bratislava Stock Exchange, those
securities do not have a readily determinable fair value as defined under
USGAAP. Accordingly, United States Steel accounts for its investment in VSZ
under the cost method of accounting.
In 1999, United States Steel and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing assets of USS/Kobe
Steel Company (USS/Kobe) with companies controlled by Blackstone Capital
Partners II. The combined entity was named Republic Technologies
International, LLC and is a wholly owned subsidiary of Republic Technologies
International Holdings, LLC (Republic). As a result of this transaction,
United States Steel recorded $47 million in charges related to the impairment
of the carrying value of its investment in USS/Kobe and costs related to the
formation of Republic. These charges were included in income (loss) from
investees in 1999. In addition, United States Steel made a $15 million equity
investment in Republic. United States Steel owned 50% of USS/Kobe and now owns
16% of Republic. United States Steel accounts for its investment in Republic
under the equity method of accounting. The seamless pipe business of USS/Kobe
was excluded from this transaction. That business, now known as Lorain Tubular
Company, LLC, became a wholly owned subsidiary of United States Steel at the
close of business on December 31, 1999.
Dividends and partnership distributions received from equity investees were
$10 million in 2000, $2 million in 1999 and $19 million in 1998.
F-22
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
United States Steel's purchases of transportation services and semi-finished
steel from equity investees totaled $566 million, $361 million and $331 million
in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, U. S.
Steel's payables to these investees totaled $66 million and $60 million,
respectively. United States Steel's revenues for steel and raw material sales
to equity investees totaled $958 million, $831 million and $725 million in
2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, United States
Steel's receivables from these investees were $177 million. Generally, these
transactions were conducted under long-term, market-based contractual
arrangements.
17. Leases
Future minimum commitments for capital leases (including sale-leasebacks
accounted for as financings) and for operating leases having remaining
noncancelable lease terms in excess of one year are as follows:
Capital Operating
Leases Leases
------- ---------
(In millions)
2001......................................................... $ 11 $ 79
2002......................................................... 11 56
2003......................................................... 11 40
2004......................................................... 11 37
2005......................................................... 11 29
Later years.................................................. 84 64
Sublease rentals............................................. -- (62)
---- ----
Total minimum lease payments............................... 139 $243
====
Less imputed interest costs.................................. 51
----
Present value of net minimum lease payments included in
long-term debt............................................ $ 88
====
Operating lease rental expense:
2000 1999 1998
---- ---- ----
(In millions)
Minimum rental................................................ $132 $124 $131
Contingent rental............................................. 17 18 19
Sublease rentals.............................................. (6) (6) (7)
---- ---- ----
Net rental expense.......................................... $143 $136 $143
==== ==== ====
United States Steel leases a wide variety of facilities and equipment under
operating leases, including land and building space, office equipment,
production facilities and transportation equipment. Most long-term leases
include renewal options and, in certain leases, purchase options.
18. Trust Preferred Securities
In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly
Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust
I, a Delaware statutory business trust (Trust), for an equivalent number of
shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred
Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred
Securities at a fair value of $182 million.
F-23
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
USX owns all of the common securities of the Trust, which was formed for the
purpose of the Exchange. (The Trust Common Securities and the Trust Preferred
Securities are together referred to as the Trust Securities.) The Trust
Securities represent undivided beneficial ownership interests in the assets of
the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated
Debentures maturing March 31, 2037 (Debentures), having an aggregate principal
amount equal to the aggregate initial liquidation amount ($50.00 per security
and $203 million in total) of the Trust Securities issued by the Trust.
Interest and principal payments on the Debentures will be used to make
quarterly distributions and to pay redemption and liquidation amounts on the
Trust Preferred Securities. The quarterly distributions, which accumulate at
the rate of 6.75% per annum on the Trust Preferred Securities and the accretion
from fair value to the initial liquidation amount, are charged to income and
included in net interest and other financial costs.
Under the terms of the Debentures, USX has the right to defer payment of
interest for up to 20 consecutive quarters and, as a consequence, monthly
distributions on the Trust Preferred Securities will be deferred during such
period. If USX exercises this right, then, subject to limited exceptions, it
may not pay any dividend or make any distribution with respect to any shares of
its capital stock.
The Trust Preferred Securities are convertible at any time prior to the
close of business on March 31, 2037 (unless such right is terminated earlier
under certain circumstances) at the option of the holder, into shares of USX-
U.S. Steel Group Common Stock at a conversion price of $46.25 per share
(equivalent to a conversion ratio of 1.081 shares for each Trust Preferred
Security), subject to adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time at the option of
USX, at a premium of 101.95% of the initial liquidation amount through March
31, 2001, and thereafter, declining annually to the initial liquidation amount
on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31,
2037, or earlier under certain circumstances.
Payments related to quarterly distributions and to the payment of redemption
and liquidation amounts on the Trust Preferred Securities by the Trust are
guaranteed by USX on a subordinated basis. In addition, USX unconditionally
guarantees the Trust's Debentures. The obligations of USX under the Debentures,
and the related indenture, trust agreement and guarantee constitute a full and
unconditional guarantee by USX of the Trust's obligations under the Trust
Preferred Securities.
F-24
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
19. Equity
2000 1999 1998
------ ------ ------
(In millions,
except per share
data)
Preferred stock:
Balance at beginning of year......................... $ 3 $ 3 $ 3
Repurchased.......................................... (1) -- --
------ ------ ------
Balance at end of year............................... 2 3 3
------ ------ ------
USX's net investment:
Balance at beginning of year......................... 2,073 2,126 1,808
Net income (loss).................................... (21) 44 364
Repurchase of 6.50% preferred stock.................. (11) (2) (8)
Common stock issued.................................. 6 2 59
Dividends on preferred stock......................... (8) (9) (9)
Dividends on common stock (per share $1.00).......... (89) (88) (88)
------ ------ ------
Balance at end of year............................... 1,950 2,073 2,126
------ ------ ------
Deferred compensation:
Balance at beginning of year......................... -- (1) (1)
Changes during year, net of taxes.................... (3) 1 --
------ ------ ------
Balance at end of year............................... (3) -- (1)
------ ------ ------
Accumulated other comprehensive income (loss):
Minimum pension liability adjustments (Note 12):
Balance at beginning of year....................... (7) (27) (25)
Changes during year, net of taxes (b).............. 3 20 (2)
------ ------ ------
Balance at end of year............................. (4) (7) (27)
------ ------ ------
Foreign currency translation adjustment:
Balance at beginning of year....................... (13) (8) (3)
Changes during year, net of taxes (b).............. (13) (5) (5)
------ ------ ------
Balance at end of year............................. (26) (13) (8)
------ ------ ------
Total accumulated other comprehensive income
(loss)(a)........................................... (30) (20) (35)
------ ------ ------
Total equity........................................... $1,919 $2,056 $2,093
====== ====== ======
- --------
(a) Total comprehensive income (loss) for United States Steel for the years
2000, 1999 and 1998 was $(31) million, $59 million and $357 million,
respectively.
(b) Related income tax provision (credit):
Minimum pension liability adjustment......................... $(1) $(11) $ 1
Foreign currency translation adjustments..................... (5) 3 2
20. Stock-Based Compensation Plans
The 1990 Stock Plan of USX, as amended and restated, authorizes the
Compensation Committee of the board of directors of USX to grant restricted
stock, stock options and stock appreciation rights of USX-U. S. Steel Group
Common Stock to key management employees. Up to 0.8 percent of the outstanding
stock, as determined on December 31 of the preceding year, are available for
grants during each calendar year the 1990 Plan is in effect. In addition,
awarded shares that do not result in shares being issued are available for
subsequent grant, and any ungranted shares from prior years' annual allocations
are available for subsequent grant during the years the 1990 Plan is in effect.
As of December 31, 2000, 2,108,128 stock shares were available for grants in
2001.
F-25
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Restricted stock represents stock granted for such consideration, if any, as
determined by the Compensation Committee, subject to provisions for forfeiture
and restricting transfer. Those restrictions may be removed as conditions such
as performance, continuous service and other criteria are met. Restricted stock
is issued at the market price per share at the date of grant and vests over
service periods that range from one to five years.
Deferred compensation is charged to equity when the restricted stock is
granted and subsequently adjusted for changes in the market value of the
underlying stock. The deferred compensation is expensed over the balance of the
vesting period and adjusted if conditions of the restricted stock grant are not
met.
The following table presents information on restricted stock grants:
2000 1999 1998
------- ------ ------
Number of shares granted................................. 305,725 18,272 17,742
Weighted-average grant-date fair value per share......... $ 23.00 $28.22 $37.28
Stock options represent the right to purchase shares of stock at the market
value of the stock at date of grant. Certain options contain the right to
receive cash and/or common stock equal to the excess of the fair market value
of shares of common stock, as determined in accordance with the plan, over the
option price of shares. Most stock options vest after one-year service period
and all expire 10 years from the date they are granted.
The following is a summary of stock option activity:
Shares Price(a)
--------- --------
Balance December 31, 1997................................... 1,633,100 $34.35
Granted................................................... 611,515 37.28
Exercised................................................. (230,805) 32.00
Canceled.................................................. (21,240) 35.89
---------
Balance December 31, 1998................................... 1,992,570 35.50
Granted................................................... 656,400 28.22
Exercised................................................. (2,580) 24.92
Canceled.................................................. (20,005) 38.51
---------
Balance December 31, 1999................................... 2,626,385 33.67
Granted................................................... 915,470 23.00
Exercised................................................. (400) 24.30
Canceled.................................................. (62,955) 38.19
---------
Balance December 31, 2000................................... 3,478,500 30.78
=========
- --------
(a) Weighted-average exercise price
The weighted-average grant-date fair value per option was $6.63 in 2000,
$6.95 in 1999 and $8.29 in 1998.
F-26
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following table represents stock options at December 31, 2000:
Outstanding Exercisable
-------------------------------------- ------------------------
Weighted-
Average Weight- Weight-
Range of Number Remaining Average Number Average
Exercise of Shares Contractual Exercise of Shares Exercise
Prices Under Option Life Price Under Option Price
-------- ------------ ----------- -------- ------------ --------
$23.00-28.22 1,592,305 8.8 years $25.17 678,135 $28.10
31.69-34.44 1,050,920 5.2 32.53 1,050,920 32.53
37.28-44.19 835,275 6.0 39.26 835,275 39.26
--------- ---------
Total 3,478,500 2,564,330
========= =========
Actual stock-based compensation expense was $1 million in 2000 and 1999 and
there was no amount in 1998. Incremental compensation expense, as determined
under a fair value model, was not material. Therefore, pro forma net income has
been omitted.
USX has a deferred compensation plan for non-employee directors of its Board
of Directors. The plan permits participants to defer some or all of their
annual retainers in the form of common stock units or cash and it requires new
directors to defer at least half of their annual retainer in the form of common
stock units. Common stock units are book entry units equal in value to a share
of stock. Deferred stock benefits are distributed in shares of common stock
within five business days after a participant leaves the Board of Directors.
During 2000, 4,872 shares of stock were issued and during 1999, 3,798 shares of
stock were issued. During 1998, no shares of common stock were issued.
21. Property, Plant and Equipment
December 31
-------------
2000 1999
------ ------
(In millions)
Land and depletable property..................................... $ 161 $ 152
Buildings........................................................ 602 484
Machinery and equipment.......................................... 8,409 8,007
Leased assets.................................................... 98 105
------ ------
Total.......................................................... 9,270 8,748
Less accumulated depreciation, depletion and amortization........ 6,531 6,232
------ ------
Net............................................................ $2,739 $2,516
====== ======
Amounts in accumulated depreciation, depletion and amortization for assets
acquired under capital leases (including sale-leasebacks accounted for as
financings) were $79 million and $81 million at December 31, 2000 and 1999,
respectively.
During 2000, United States Steel recorded $71 million of impairments
relating to coal assets located in West Virginia and Alabama. The impairment
was recorded as a result of a reassessment of long-term prospects after adverse
geological conditions were encountered. The charge is included in depreciation,
depletion and amortization.
22. Derivative Instruments
United States Steel remains at risk for possible changes in the market value
of derivative instruments; however, such risk should be mitigated by price
changes in the underlying hedged item. United States Steel is
F-27
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
also exposed to credit risk in the event of nonperformance by counterparties.
The credit-worthiness of counterparties is subject to continuing review,
including the use of master netting agreements to the extent practical, and
full performance is anticipated.
The following table sets forth quantitative information by class of
derivative instrument:
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(Liabilities)(a) (Liabilities) (Loss) Values(b)
---------------- ------------- -------- ---------
(In millions)
December 31, 2000:
OTC commodity swaps--other
than trading(c)........... $-- $-- $-- $18
==== ==== ==== ===
December 31, 1999:
OTC commodity swaps--other
than trading.............. $ 3 $ 3 $ 3 $37
==== ==== ==== ===
- --------
(a) The fair value amounts are based on exchange-traded index prices and
dealer quotes.
(b) Contract or notional amounts do not quantify risk exposure, but are used
in the calculation of cash settlements under the contracts.
(c) The OTC swap arrangements vary in duration with certain contracts
extending into 2001.
23. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
The following table summarizes financial instruments, excluding derivative
financial instruments disclosed in Note 22, by individual balance sheet
account. As described in Note 4, United States Steel's specifically attributed
financial instruments and the portion of USX's financial instruments attributed
to United States Steel are as follows:
December 31
-------------------------------
2000 1999
--------------- ---------------
Fair Carrying Fair Carrying
Value Amount Value Amount
------ -------- ------ --------
(In millions)
Financial assets:
Cash and cash equivalents.................... $ 219 $ 219 $ 22 $ 22
Receivables (including related parties'
receivables)................................ 1,341 1,341 935 935
Investments and long-term receivables........ 137 137 122 122
------ ------ ------ ------
Total financial assets..................... $1,697 $1,697 $1,079 $1,079
====== ====== ====== ======
Financial liabilities:
Notes payable................................ $ 70 $ 70 $ -- $ --
Accounts payable............................. 760 760 739 739
Accrued interest............................. 47 47 15 15
Long-term debt (including amounts due within
one year)................................... 2,375 2,287 835 823
Preferred stock of subsidiary and trust
preferred securities........................ 182 249 232 249
------ ------ ------ ------
Total financial liabilities................ $3,434 $3,413 $1,821 $1,826
====== ====== ====== ======
F-28
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments classified as current assets or
liabilities approximates carrying value due to the short-term maturity of the
instruments. Fair value of investments and long-term receivables was based on
discounted cash flows or other specific instrument analysis. Certain foreign
cost method investments are excluded from investments and long-term receivables
because the fair value is not readily determinable. United States Steel is
subject to market risk and liquidity risk related to its investments; however,
these risks are not readily quantifiable. Fair value of preferred stock of
subsidiary and trust preferred securities was based on market prices. Fair
value of long-term debt instruments was based on market prices where available
or current borrowing rates available for financings with similar terms and
maturities.
Financial guarantees are United States Steel's only unrecognized financial
instrument. It is not practicable to estimate the fair value of this form of
financial instrument obligation because there are no quoted market prices for
transactions which are similar in nature. For details relating to financial
guarantees, see Note 24.
24. Contingencies and Commitments
United States Steel is the subject of, or 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 United
States Steel's combined financial statements.
Environmental matters--
United States Steel 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. Accrued liabilities for remediation totaled
$137 million and $101 million at December 31, 2000 and 1999, 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, United States Steel has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In 2000 and 1999, such capital expenditures
totaled $18 million and $32 million, respectively. United States Steel
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--
Guarantees of the liabilities of unconsolidated entities of United States
Steel totaled $82 million at December 31, 2000, and $88 million at December 31,
1999. In the event that any defaults of guaranteed liabilities occur, United
States Steel has access to its interest in the assets of the investees to
reduce potential losses resulting from these guarantees. As of December 31,
2000, the largest guarantee for a single such entity was $59 million.
Commitments--
At December 31, 2000 and 1999, United States Steel's contract commitments to
acquire property, plant and equipment totaled $206 million and $83 million,
respectively.
USSK has a commitment to the Slovak government for a capital improvements
program of $700 million, subject to certain conditions, over a period
commencing with the acquisition date and ending on
F-29
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
December 31, 2010. USSK is required to report periodically to the Slovak
government on its status toward meeting this commitment. The first reporting
period ends on December 31, 2003.
United States Steel entered into a 15-year take-or-pay arrangement in 1993,
which requires United States Steel to accept pulverized coal each month or pay
a minimum monthly charge of approximately $1 million. Charges for deliveries of
pulverized coal totaled $23 million in 2000, 1999 and 1998. If United States
Steel elects to terminate the contract early, a maximum termination payment of
$96 million, which declines over the duration of the agreement, may be
required.
25. Events Occurring After the Opinion Date (Unaudited)
On March 1, 2001, United States Steel completed the purchase of the tin mill
products business of LTV Corporation (LTV). In this noncash transaction, United
States Steel assumed certain employee related obligations of LTV. The
acquisition was accounted for using the purchase method of accounting. First
quarter 2001 results of operations include the operations of the LTV assets
acquired from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L. P. As
a result of this transaction, United States Steel became the sole owner of
Transtar and certain of its subsidiaries. Holdings became owner of the other
subsidiaries of Transtar. United States Steel accounted for this change in its
ownership interest using the purchase method of accounting. United States Steel
recognized in the first quarter of 2001, a pretax gain of $70 million (included
in income (loss) from investees) and a favorable deferred tax adjustment of $33
million related to this transaction. United States Steel previously accounted
for its investment in Transtar under the equity method of accounting.
During the first quarter of 2001, USX reached an agreement with the IRS
regarding its review of USX's consolidated tax returns for the years 1990 and
1991. In the first quarter of 2001, United States Steel recorded a favorable
adjustment of $67 million to net interest and financial costs and an
unfavorable adjustment of $15 million to provision for income taxes, both of
which were related to prior years' taxes.
United States Steel 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, United States Steel discontinued
applying the equity method since investments in and advances to Republic had
been reduced to zero. Also, United States Steel 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, United States Steel
recorded a pretax charge of $74 million for the potentially uncollectible
receivables from Republic.
On April 24, 2001, USX announced that its board of directors authorized
management to proceed with the necessary steps to implement a plan of
reorganization to separate the energy and steel businesses of USX. The plan
envisions a tax-free spin-off of the steel and steel-related businesses of USX
into a freestanding, publicly traded company to be known as United States Steel
Corporation. Holders of current USX-U. S. Steel Group Common Stock will become
holders of United States Steel Corporation Common Stock. Holders of current
USX-Marathon Group Common Stock will become holders of Marathon Oil Corporation
Common Stock. The plan of reorganization does not contemplate a cash
distribution to stockholders. Each new company will carry approximately the
same assets and liabilities now associated with its existing businesses, except
for a value transfer of approximately $900 million from Marathon Oil
Corporation to United States Steel Corporation, intended to maintain United
States Steel Corporation as a strong independent company. The form of the value
F-30
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
transfer will be a reattribution of USX corporate debt between the USX-Marathon
Group and the USX-U. S. Steel Group. The plan of reorganization is subject to
the approval of the holders of a majority of the outstanding shares of each
class of the current USX common stock, receipt of a favorable private letter
ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the
transaction, completion of necessary regulatory and third party consents, and
board approval of definitive documentation for the transaction. The transaction
is supposed 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.
Prior to separation, a corporate reorganization will be implemented to
create a new holding company structure. USX will become 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 business of the USX-
Marathon Group, and United States Steel LLC, a Delaware limited liability
company which will own and operate the businesses of the USX-U. S. Steel Group.
Upon separation, United States Steel LLC will convert from a Delaware limited
liability company into a Delaware corporation named United States Steel
Corporation.
On May 31, 2001, a major fire damaged the cold rolling mill at USS-POSCO
Industries (USS-POSCO), which is fifty percent owned by United States Steel.
Damage was limited to the cold rolling mill area of the plant. USS-POSCO
maintains insurance coverage against such losses, including coverage for
business interruption. At this time, the financial impact and the duration of
the outage have not been determined.
F-31
UNITED STATES STEEL
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 1999
---------------------------- ----------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------ ------ ------ ------ ------ ------ ------
(In millions, except per share data)
Revenues and other
income:
Revenues(a)........... $1,417 $1,462 $1,629 $1,582 $1,492 $1,415 $1,344 $1,285
Other income (loss)... (4) 13 27 6 8 (40) 1 (35)
------ ------ ------ ------ ------ ------ ------ ------
Total............... 1,413 1,475 1,656 1,588 1,500 1,375 1,345 1,250
Income (loss) from
operations............. (159) 60 112 91 75 (26) 103 (2)
Income (loss) before
extraordinary losses... (139) 19 56 43 34 (29) 55 (9)
Net income (loss)....... (139) 19 56 43 34 (31) 55 (14)
- --------
(a) Certain items have been reclassified between revenues and cost of
revenues, primarily to give effect to new accounting standards as
disclosed in Note 3 of the Notes to Combined Financial Statements. Amounts
reclassified in the first, second and third quarters of 2000 were $41
million, $45 million and $45 million, respectively, and for the first,
second, third and fourth quarters of 1999 were $39 million, $41 million,
$38 million and $38 million, respectively.
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)
Mineral Reserves (other than oil and gas)
Reserves at December 31(a) Production
----------------------------- ------------------------
2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
----- ----- ----- ----- ----- ---- ---- ---- ---- ----
(Million tons)
Iron(b).................. 709.8 726.1 738.6 754.8 716.3 16.3 14.3 15.8 16.8 15.1
Coal(c).................. 786.6 787.4 789.7 798.8 859.5 5.5 6.2 7.3 7.5 7.1
- --------
(a) Commercially recoverable reserves include demonstrated (measured and
indicated) quantities which are expressed in recoverable net product tons.
(b) Iron ore reserves decreased in 2000, 1999 and 1998 due to production,
lease activity and engineering revisions. The increase in 1997 resulted
from lease exchanges of 55.3 million tons.
(c) Coal reserves decreased due to production, lease activity and engineering
revisions, and additionally in 1997 due to a 53.2 million ton lease
termination.
F-32
UNITED STATES STEEL
PRINCIPAL UNCONSOLIDATED INVESTEES (UNAUDITED)
December 31, 2000
-----------------
Company Country Ownership Activity
- ------- ------------- --------- -----------------------
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
Double Eagle Steel Coating Company United States 50% Steel Processing
PRO-TEC Coating Company United States 50% Steel Processing
Republic Technologies International,
LLC United States 16% Steel Products
Transtar, Inc. United States 46% Transportation
USS-POSCO Industries United States 50% Steel Processing
Worthington Specialty Processing United States 50% Steel Processing
F-33
UNITED STATES STEEL
COMBINED STATEMENT OF OPERATIONS (Unaudited)
First Quarter Ended
March 31
--------------------
2001 2000
--------- ---------
(Dollars in
millions)
Revenues and other income:
Revenues.................. $ 1,510 $ 1,582
Income (loss) from
investees................ 47 (7)
Net gains on disposal of
assets................... 6 15
Other income (loss)....... 1 (2)
--------- ---------
Total revenues and other
income................. 1,564 1,588
--------- ---------
Costs and expenses:
Cost of revenues (excludes
items shown below)....... 1,549 1,428
Selling, general and
administrative expenses
(credits)................ (16) (63)
Depreciation, depletion
and amortization......... 73 75
Taxes other than income
taxes.................... 59 57
--------- ---------
Total costs and
expenses............... 1,665 1,497
--------- ---------
Income (loss) from
operations................. (101) 91
Net interest and other
financial costs (income)... (12) 24
--------- ---------
Income (loss) before income
taxes...................... (89) 67
Provision (credit) for
income taxes............... (98) 24
--------- ---------
Net income.................. 9 43
Dividends on preferred
stock...................... 2 2
--------- ---------
Net income available to
USX's net investment....... $ 7 $ 41
========= =========
Selected notes to combined financial statements appear on pages F-37 to F-42.
F-34
UNITED STATES STEEL
COMBINED BALANCE SHEET (Unaudited)
March 31 December 31
2001 2000
-------- -----------
(Dollars in
millions)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 180 $ 219
Receivables, less allowance for doubtful accounts of
$130 and $57........................................... 624 625
Receivables subject to a security interest.............. 350 350
Receivables from related parties........................ 115 366
Inventories............................................. 957 946
Deferred income tax benefits............................ 170 201
Other current assets.................................... 23 10
------ ------
Total current assets.................................. 2,419 2,717
Investments and long-term receivables, less reserves of
$26 and $28.............................................. 339 439
Long-term receivable from related parties................. 43 97
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of $6,570 and
$6,531................................................... 3,067 2,739
Prepaid pensions.......................................... 2,674 2,672
Other noncurrent assets................................... 84 47
------ ------
Total assets.......................................... $8,626 $8,711
====== ======
LIABILITIES
Current liabilities:
Notes payable........................................... $ 164 $ 70
Accounts payable........................................ 819 755
Accounts payable to related parties..................... 3 5
Payroll and benefits payable............................ 234 202
Accrued taxes........................................... 146 173
Accrued interest........................................ 28 47
Long-term debt due within one year...................... 133 139
------ ------
Total current liabilities............................. 1,527 1,391
Long-term debt, less unamortized discount................. 1,939 2,236
Deferred income taxes..................................... 627 666
Employee benefits......................................... 1,897 1,767
Deferred credits and other liabilities.................... 486 483
Preferred stock of subsidiary............................. 66 66
Mandatorily redeemable convertible preferred securities of
a subsidiary trust holding solely junior subordinated
convertible debentures of USX............................ 183 183
EQUITY
Preferred stock........................................... 2 2
USX's net investment...................................... 1,933 1,950
Deferred compensation..................................... (2) (3)
Accumulated other comprehensive income (loss)............. (32) (30)
------ ------
Total equity.......................................... 1,901 1,919
------ ------
Total liabilities and equity.......................... $8,626 $8,711
====== ======
Selected notes to combined financial statements appear on pages F-37 to F-42.
F-35
UNITED STATES STEEL
COMBINED STATEMENT OF CASH FLOWS (Unaudited)
First Quarter Ended
March 31
---------------------
2001 2000
---------- ---------
(Dollars in
millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income............................................. $ 9 $ 43
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization............. 73 75
Pensions and other postretirement benefits........... (27) (75)
Deferred income taxes................................ (20) 69
Net gains on disposal of assets...................... (6) (15)
Changes in:
Current receivables................................ 296 13
Inventories........................................ 16 (15)
Current accounts payable and accrued expenses...... (25) (56)
All other -- net..................................... (80) (3)
---------- ---------
Net cash provided from operating activities........ 236 36
---------- ---------
Investing activities:
Capital expenditures................................. (37) (45)
Disposal of assets................................... 3 13
Restricted cash--withdrawals......................... 3 1
--deposits................................. -- (1)
All other--net....................................... 7 (10)
---------- ---------
Net cash used in investing activities.............. (24) (42)
---------- ---------
Financing activities:
Increase (decrease) in attributed portion of USX
consolidated debt................................... (225) 26
Specifically attributed debt repayments.............. (1) (2)
Preferred stock repurchased.......................... -- (11)
Dividends paid....................................... (24) (24)
---------- ---------
Net cash used in financing activities.............. (250) (11)
---------- ---------
Effect of exchange rate changes on cash................ (1) --
---------- ---------
Net decrease in cash and cash equivalents.............. (39) (17)
Cash and cash equivalents at beginning of year......... 219 22
---------- ---------
Cash and cash equivalents at end of period............. $ 180 $ 5
========== =========
Cash provided from (used in) operating activities
included:
Interest and other financial costs paid (net of
amount capitalized)................................. $ (69) $ (25)
Income taxes refunded, including settlements with
USX................................................. 373 94
Selected notes to combined financial statements appear on pages F-37 to F-42.
F-36
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying combined financial statements represent a carve-out
financial statement presentation of the businesses comprising United States
Steel, as described in Note 2, and are not intended to be a complete
presentation of the financial position, the results of operations and cash
flows of United States Steel on a stand-alone basis. These combined financial
statements are presented as if United States Steel existed as an entity
separate from the remaining businesses of USX Corporation (USX) during the
periods presented.
The accompanying combined financial statements include the historical
operations of certain divisions of USX and certain subsidiaries of USX. In this
context, no direct ownership existed among all the various units comprising
United States Steel; accordingly, USX's net investment in United States Steel
(USX's net investment) is shown in lieu of Common Stockholder's Equity in the
combined financial statements. The combined financial statements included
herein have been prepared from USX's historical accounting records.
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 combined
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.
Effective January 1, 2001, United States Steel adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138.
This Standard requires recognition of all derivatives as either assets or
liabilities at fair value. The transition adjustment for the United States
Steel related to adopting SFAS No. 133 on January 1, 2001, was immaterial.
2. The financial statement provision for income taxes and related tax
payments or refunds have been reflected in United States Steel's financial
statements in accordance with USX's tax allocation policy. In general, such
policy provides that the consolidated tax provision and related tax payments or
refunds are allocated to United States Steel principally upon its financial
income, taxable income, credits, preferences and other directly related
amounts.
The provision for income taxes for United States Steel is based on tax rates
and amounts which recognize management's best estimate of current and deferred
tax assets and liabilities.
3. On March 1, 2001, United States Steel completed the purchase of the tin
mill products business of LTV Corporation (LTV). In this noncash transaction,
United States Steel assumed certain employee related obligations of LTV. The
acquisition was accounted for using the purchase method of accounting. First
quarter 2001 results of operations include the operations of the LTV assets
acquired from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As
a result of this transaction, United States Steel became sole owner of Transtar
and certain of its subsidiaries. Holdings became owner of the other
subsidiaries of Transtar. United States Steel accounted for the change in its
ownership interest in Transtar using the purchase method of accounting. United
States Steel recognized in the first quarter of 2001, a pretax gain of $70
million (included in income (loss) from investees) and a favorable deferred tax
adjustment of $33 million related to this transaction. United States Steel
previously accounted for its investment in Transtar under the equity method of
accounting.
F-37
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following unaudited pro forma data for United States Steel includes the
results of operations of the above acquisitions giving effect to them as if
they had been consummated at the beginning of the years presented. The first
quarter 2001 pro forma results exclude the $70 million gain and $33 million tax
benefit recorded as a result of the Transtar transaction. The pro forma data is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations.
First
Quarter Ended
March 31
--------------
2001 2000
------ ------
(In millions)
Revenues and other income....................................... $1,540 $1,661
Net income (loss)............................................... (94) 46
4. United States Steel's total comprehensive income was $7 million for the
first quarter of 2001 and $44 million for the first quarter of 2000.
5. United States Steel consists of two reportable operating segments: 1)
Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the
United States operations of United States Steel while USSK includes the United
States Steel 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
Steel USSK Segments
-------- ---- --------
(In millions)
First Quarter 2001
Revenues and other income:
Customer............................................... $1,262 $246 $1,508
Intersegment(a)........................................ 1 -- 1
Other subsidiaries of USX(a)........................... 2 -- 2
Equity in earnings of unconsolidated investees......... 47 -- 47
Other.................................................. 6 1 7
------ ---- ------
Total revenues and other income...................... $1,318 $247 $1,565
====== ==== ======
Segment income (loss).................................... $ (151) $ 41 $ (110)
====== ==== ======
First Quarter 2000
Revenues and other income:
Customer............................................... $1,578 $-- $1,578
Other subsidiaries of USX(a)........................... 4 -- 4
Equity in losses of unconsolidated investees........... (7) -- (7)
Other.................................................. 13 -- 13
------ ---- ------
Total revenues and other income...................... $1,588 $-- $1,588
====== ==== ======
Segment income........................................... $ 54 $-- $ 54
====== ==== ======
- --------
(a) Revenues and transfers between segments and with other subsidiaries of USX
were conducted under terms comparable to those with unrelated parties.
F-38
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following schedule reconciles segment revenues and income to amounts
reported in United States Steel's combined financial statements:
First Quarter Ended
March 31
--------------------
2001 2000
--------- ---------
(In millions)
Revenues and other income:
Revenues and other income of reportable segments........ $ 1,565 $ 1,588
Elimination of intersegment revenues.................... (1) --
--------- ---------
Total revenues and other income..................... $ 1,564 $ 1,588
========= =========
Income:
Income (loss) for reportable segments................... $ (110) $ 54
Items not allocated to segments:
Administrative expenses............................... (8) (6)
Net pension credits................................... 41 65
Costs related to former business activities........... (24) (22)
--------- ---------
Total income (loss) from operations................. $ (101) $ 91
========= =========
6. On November 24, 2000, United States Steel acquired U. S. Steel Kosice
s.r.o. (USSK), which is primarily located in the Slovak Republic. USSK was
formed in June 2000 to hold the steel operations and
related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The
acquisition was accounted for under the purchase method of accounting. VSZ did
not provide historical carve-out financial information for its steel activities
prepared in accordance with generally accepted accounting principles in the
United States. United States Steel was unable to fully determine the effects of
transfer pricing, intercompany eliminations and expense allocations in order to
prepare such carve-out information from Slovak statutory reports and VSZ
internal records. United States Steel broadly estimates that the unaudited pro
forma effect on its first quarter 2000 revenues, giving effect to the
acquisition as if it had been consummated at the beginning of this period,
would have been to increase revenues in the period by approximately $250
million. United States Steel cannot determine the unaudited pro forma effect on
its first quarter 2000 net income. However, historical pro forma information is
not necessarily indicative of future results of operations.
7. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO) method.
March 31 December 31
2001 2000
-------- -----------
(In millions)
Raw materials.............................................. $176 $214
Semi-finished products..................................... 434 429
Finished products.......................................... 268 210
Supplies and sundry items.................................. 79 93
---- ----
Total.................................................... $957 $946
==== ====
8. At March 31, 2001, and December 31, 2000, estimated income tax
receivables from USX included in receivables from related parties were $113
million and $364 million, respectively. In addition, long-term receivables from
related parties at March 31, 2001, and December 31, 2000, were $43 million and
$97 million, respectively, of income taxes receivable from USX. These amounts
have been determined in accordance with the tax allocation policy discussed in
Note 2.
F-39
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
9. In the first quarter of 2001, interest and other financial costs includes
a favorable adjustment of $67 million and provision for income taxes includes
an unfavorable adjustment of $15 million, both of which are related to prior
years' taxes.
10. United States Steel is the subject of, or a party to, a number of
pending or threatened legal actions, contingencies and commitments relating to
United States Steel 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 United States Steel combined financial
statements.
United States Steel is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites. Penalties
may be imposed for noncompliance. At March 31, 2001, and December 31, 2000,
accrued liabilities for remediation totaled $141 million and $137 million,
respectively. It is not presently possible to estimate the ultimate amount of
all remediation costs that might be incurred or the penalties that may be
imposed.
For a number of years, United States Steel has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first quarter of 2001 and for the years
2000 and 1999, such capital expenditures totaled $1 million, $18 million and
$32 million, respectively. United States Steel 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 United States Steel of the liabilities of affiliated entities
of United States Steel totaled $68 million at March 31, 2001. In the event that
any defaults of guaranteed liabilities occur, United States Steel has access to
its interest in the assets of the affiliates to reduce losses resulting from
these guarantees. As of March 31, 2001, the largest guarantee for a single
affiliate was $59 million.
United States Steel's contract commitments to acquire property, plant and
equipment at March 31, 2001, totaled $193 million compared with $206 million at
December 31, 2000.
11. United States Steel 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, United States Steel discontinued
applying the equity method since investments in and advances to Republic had
been reduced to zero. Also, United States Steel 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, United States Steel
recorded a pretax charge of $74 million for potentially uncollectible
receivables from Republic.
On April 24, 2001, USX announced that its board of directors authorized
management to proceed with the necessary steps to implement a plan of
reorganization to separate the energy and steel businesses of USX. The plan
envisions a tax-free spin-off of the steel and steel-related businesses of USX
into a freestanding, publicly traded company to be known as United States Steel
Corporation. Holders of current USX-U. S. Steel Group Common Stock will become
holders of United States Steel Corporation Common Stock. Holders of current
USX-Marathon Group Common Stock will become holders of Marathon Oil Corporation
Common Stock. The plan of reorganization does not contemplate a cash
distribution to stockholders. Each new company will carry
F-40
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
approximately the same assets and liabilities now associated with its existing
businesses, except for a value transfer of approximately $900 million from
Marathon Oil Corporation to United States Steel Corporation, intended to
maintain United States Steel Corporation as a strong independent company. The
form of the value transfer will be a reattribution of USX corporate debt
between the USX-Marathon Group and the USX-U. S. Steel Group. The plan of
reorganization is subject to the approval of the holders of a majority of the
outstanding shares of each class of current USX common stock, receipt of a
favorable private letter ruling from the Internal Revenue Service ("IRS") on
the tax-free nature of the transaction, completion of necessary regulatory and
third party consents, and board approval of definitive documentation for the
transaction. The transaction is supposed 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.
Prior to separation, a corporate reorganization will be implemented to
create a new holding company structure. USX will become 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 will own and operate the businesses of the USX-U. S. Steel Group.
Upon separation, United States Steel LLC will convert from a Delaware limited
liability company into a Delaware corporation named United States Steel
Corporation.
On May 31, 2001, a major fire damaged the cold rolling mill at USS-POSCO
Industries (USS-POSCO), which is fifty percent owned by United States Steel.
Damage was limited to the cold rolling mill area of the plant. USS-POSCO
maintains insurance coverage against such losses, including coverage for
business interruption. At this time, the financial impact and the duration of
the outage have not been determined.
F-41
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
United States Steel, 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 United States
Steel's Combined Financial Statements and Notes to Combined Financial
Statements.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of United States Steel. These statements typically contain words
such as "anticipates", "believes", "estimates", "expects", "intends" or similar
words indicating that future outcomes are not known with certainty and subject
to risk factors that could cause these outcomes to differ significantly from
those projected. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors that could cause future outcomes to differ materially from those
set forth in forward-looking statements. For additional risk factors affecting
the businesses of United States Steel, see Supplementary Data--Disclosures
About Forward-Looking Information in USX 2000 Form 10-K.
Results of Operations
Revenues and other income for the first quarters of 2001 and 2000 and the years
2000, 1999 and 1998 are set forth in the following table:
First Quarter
Ended March 31
---------------
2001 2000 2000 1999 1998
------- ------- ------ ------ ------
(Dollars in Millions)
Revenues by product:
Sheet and semi-finished steel
products........................... $ 793 $ 906 $3,288 $3,433 $3,598
Tubular, plate, and tin mill
products........................... 492 354 1,731 1,140 1,546
Raw materials (coal, coke and iron
ore)............................... 81 147 626 549 744
Other(a)............................ 144 175 445 414 490
Income (loss) from affiliates......... 47 (7) (8) (89) 46
Gain on disposal of assets............ 6 15 46 21 54
Other income (loss)................... 1 (2) 4 2 (1)
------- ------- ------ ------ ------
Total revenues and other income....... $ 1,564 $ 1,588 $6,132 $5,470 $6,477
======= ======= ====== ====== ======
- --------
(a) Includes revenue from the sale of steel production by-products, real estate
development, resource management, and engineering and consulting services.
Revenues and other income decreased by $24 million in the first quarter of
2001 compared with the first quarter of 2000. The decrease was primarily due to
significantly lower domestic sheet product shipment volumes (domestic steel
shipments decreased almost 550,000 tons) and prices, partially offset by
additional revenues resulting from the acquisition of USSK, in the fourth
quarter of 2000, and LTV's tin operations, in the first quarter of 2001.
Revenues and other income increased by $662 million in 2000 from 1999
primarily due to the consolidation of Lorain Tubular Company, LLC, ("Lorain
Tubular") effective January 1, 2000, higher average
F-42
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
realized prices, particularly tubular product prices, and lower losses from
investees, which, in 1999, included a $47 million charge for the impairment of
United States Steel's investment in USS/Kobe Steel Company and costs related to
the formation of Republic. Total revenues and other income in 1999 decreased by
$1,007 million from 1998 primarily due to lower average realized prices and
lower income from investees.
Income (loss) from operations for the first quarters of 2001 and 2000 and
the years 2000, 1999 and 1998 are set forth in the following table:
First Quarter
Ended March 31
----------------
2001 2000 2000 1999 1998
------- ------- ---- ---- -----
(Dollars in millions)
Segment income (loss) for Domestic
Steel(a)(b)............................... $ (151) $ 54 $ 23 $ 91 $ 517
Segment income for U. S. Steel Kosice(c)... 41 -- 2 -- --
------- ------ ---- ---- -----
Income (loss) for reportable segments.. $(110) $ 54 $ 25 $ 91 $ 517
Items not allocated to segments:
Net pension credits...................... 41 65 266 228 186
Administrative expenses.................. (8) (6) (25) (17) (24)
Costs related to former business
activities(d)........................... (24) (22) (91) (83) (100)
Asset impairments--Coal.................. -- -- (71) -- --
Impairment of United States Steel's
investment in USS/Kobe and costs related
to formation of Republic................ -- -- -- (47) --
Loss on investment in RTI stock used to
satisfy indexed debt obligation......... -- -- -- (22) --
------- ------ ---- ---- -----
Total income (loss) from operations.... $ (101) $ 91 $104 $150 $ 579
======= ====== ==== ==== =====
- --------
(a) The first quarter of 2001 includes a favorable $70 million for United
States Steel's share of gain on the Transtar reorganization and a $74
million charge for a substantial portion of accounts receivable from
Republic.
(b) Includes income from the sale, domestic production and transportation of
steel products, coke, taconite pellets and coal; the management of mineral
resources; real estate development; engineering and consulting services;
and equity income from joint ventures and partially owned companies.
(c) Includes the sale and production of steel products and coke from facilities
primarily located in the Slovak Republic.
(d) Includes other postretirement benefit costs and certain other expenses
principally attributable to former business units of United States Steel.
Segment income for Domestic Steel
Segment income for Domestic Steel operations decreased $205 million in the
first quarter of 2001, compared with the first quarter of 2000, primarily due
to higher energy costs, lower shipment volumes, higher costs from operating
inefficiencies primarily due to lower throughput for sheet products and lower
income from raw materials operations.
Domestic Steel operations recorded segment income of $23 million in 2000
versus segment income of $91 million in 1999, a decrease of $68 million. The
2000 segment income included $36 million for certain environmental and legal
accruals, a $34 million charge to establish reserves against notes and
receivables from financially distressed steel companies and a $10 million
charge for United States Steel's share of Republic
F-43
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
special charges. Results in 1999 included $17 million in charges for certain
environmental and legal accruals and $7 million in various non-recurring
investee charges. Excluding these items, the decrease in segment income for
Domestic Steel was primarily due to higher costs related to energy and
inefficient operating levels due to lower throughput, lower income from raw
materials operations, particularly coal operations, and lower sheet shipments
resulting from high levels of imports that continued in 2000.
Segment income for Domestic Steel operations in 1999 decreased $426 million
from 1998. Results in 1998 included a net favorable $30 million for an
insurance litigation settlement and charges of $10 million related to a
voluntary workforce reduction plan. Excluding these items, the decrease in
segment income for Domestic Steel was primarily due to lower average steel
prices, lower income from raw materials operations, a less favorable product
mix and lower income from investees.
Segment income for U. S. Steel Kosice
Segment income for USSK was $41 million for the first quarter of 2001 and $2
million for the period following the November 24, 2000 acquisition through
year-end 2000.
Items not allocated to segments
Net pension credits associated with all of United States Steel's domestic
pension plans are not included in segment income for domestic operations. These
net pension credits, which are primarily noncash, totaled $41 million in first
quarter of 2001, compared to $65 million in first quarter of 2000. The $24
million decrease in net pension credits in the first quarter 2001 is primarily
due to the transition asset being fully amortized at the end of 2000. In
addition, these net pension credits totaled $266 million in 2000, $228 million
in 1999 and $186 million in 1998. Net pension credits in 1999 included $35
million for a one-time favorable pension settlement primarily related to the
voluntary early retirement program for salaried employees. Future net pension
credits will no longer benefit from the transition asset, which was fully
amortized in 2000, and can vary depending upon the market performance of plan
assets, changes in actuarial assumptions regarding such factors as a selection
of a discount rate and rate of return on assets, changes in the amortization
levels of prior period service costs, plan amendments affecting benefit payout
levels, business combinations and profile changes in the beneficiary
populations being valued. To the extent net pension credits decline in the
future, income from operations would be adversely affected.
Asset impairments--Coal were for asset impairments at U. S. Steel Mining's
coal mines in Alabama and West Virginia in 2000 following a reassessment of
long-term prospects after adverse geological conditions were encountered.
In 1999, an impairment of USX's investment in USS/Kobe and costs related to
the formation of Republic totaled $47 million.
Income from operations in 1999 also included a loss on investment in RTI
stock used to satisfy indexed debt obligations of $22 million from the
termination of ownership in RTI International Metals, Inc.
F-44
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Net interest and other financial costs for the first quarters of 2001 and
2000 and the years 2000, 1999 and 1998 are set forth in the following table:
First
Quarter
Ended
March 31
----------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in millions)
Net interest and other financial costs (income).... $(12) $24 $105 $74 $42
Less:
Favorable adjustment to carrying value of indexed
debt(a)......................................... -- -- -- (13) (44)
Favorable adjustment to interest related to prior
years' taxes.................................... (67) -- -- -- --
---- --- ---- --- ---
Net interest and other financial costs adjusted to
exclude above items............................... $ 55 $24 $105 $87 $86
==== === ==== === ===
- --------
(a) In December 1996, USX issued $117 million of 6 3/4% Exchangeable Notes Due
February 1, 2000 ("Indexed Debt") indexed to the price of RTI common stock.
The carrying value of Indexed Debt was adjusted quarterly to settlement
value, based on changes in the value of RTI common stock. Any resulting
adjustment was credited to income and included in interest and other
financial costs.
Adjusted net interest and other financial costs increased by $31 million in
the first quarter of 2001 as compared with the same period in 2000. This
increase was largely due to a higher average debt level, which primarily
resulted from the elective funding for employee benefits and the acquisition of
USSK, both of which occurred in the fourth quarter of 2000.
Adjusted net interest and other financial costs increased $18 million in
2000 as compared with 1999, primarily due to higher average debt levels.
Adjusted net interest and other financial costs were $87 million in 1999 as
compared with $86 million in 1998.
The credit for income taxes in the first quarter of 2001 was $98 million.
The credit contained a $33 million tax benefit associated with the Transtar
reorganization and an unfavorable adjustment of $15 million related to prior
years' taxes. In addition, as a result of tax credit provisions of laws of the
Slovak Republic and certain tax planning strategies, virtually no income tax
provision is recorded for income related to USSK.
The provision for income taxes in 2000 decreased compared to 1999 primarily
due to a decline in income from operations, partially offset by higher state
income taxes as certain previously recorded state tax benefits will not be
utilized. The provision for income taxes in 1999 decreased compared to 1998 due
to a decline in income from operations.
The extraordinary loss on extinguishment of debt of $7 million, net of
income tax benefit, in 1999 included a $5 million loss resulting from the
satisfaction of the indexed debt and a $2 million loss for United States
Steel's share of Republic's extraordinary loss related to the early
extinguishment of debt.
Net income in the first quarter of 2001 was $9 million, compared with net
income of $43 million in the first quarter of 2000, a decrease of $34 million.
United States Steel recorded a 2000 net loss of $21 million, compared with net
income of $44 million in 1999 and $364 million in 1998. Net income decreased
$65 million in 2000 from 1999 and decreased $320 million in 1999 from 1998.
These decreases in net income primarily reflect the factors discussed above.
F-45
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Operating Statistics
First quarter 2001 United States Steel shipments were 3.2 million net tons.
Domestic Steel shipments of 2.4 million tons and raw steel production of 2.6
million tons decreased 18% and 17%, respectively, from the same period in 2000.
Domestic raw steel capability utilization in the first quarter of 2001 averaged
83%, compared to 99% in the same period in 2000. At USSK, first quarter 2001
shipments were 749 thousand net tons, raw steel production was 952 thousand net
tons and raw steel capability utilization was 86%.
Total steel shipments were 11.1 million tons in 2000, 10.6 million tons in
1999, and 10.7 million tons in 1998. Domestic Steel shipments comprised
approximately 9.8% of the domestic steel market in 2000. Domestic Steel
shipments were negatively affected by high import levels in 2000, 1999 and 1998
and by weak tubular markets in 1999 and 1998. Exports accounted for
approximately 5% of Domestic Steel shipments in 2000, 3% in 1999 and 4% in
1998.
Domestic raw steel production was 11.4 million tons in 2000, compared with
12.0 million tons in 1999 and 11.2 million tons in 1998. Domestic raw steel
production averaged 89% of capability in 2000, compared with 94% of capability
in 1999 and 88% of capability in 1998. In 2000, domestic raw steel production
was negatively impacted by a planned reline at Gary Works No. 4 blast furnace
in July 2000. Because of market conditions, United States Steel limited its
domestic production by keeping the Gary Works No. 4 blast furnace out of
service until February 2001. In 1998, domestic raw steel production was
negatively affected by a planned reline at Gary Works No. 6 blast furnace, an
unplanned blast furnace outage at the Gary Works No. 13 blast furnace, and the
idling of certain facilities as a result of the increase in imports. Because of
market conditions, United States Steel curtailed its domestic production by
keeping the Gary Works No. 6 blast furnace out of service until February 1999,
after a scheduled reline was completed in mid-August 1998. In addition,
domestic raw steel production was cut back at Mon Valley Works and Fairfield
Works during 1998.
Financial Condition and Cash Flows
Current assets at March 31, 2001 decreased $298 million from year-end 2000
primarily due to the receipt of the income tax receivable from USX. Current
assets at year-end 2000 increased $736 million from year-end 1999 primarily due
to an increase in cash and cash equivalents, a larger income tax receivable
from USX, and increased trade receivables and inventories resulting from the
acquisition of USSK.
Net property, plant and equipment at March 31, 2001 increased $328 million
from year-end 2000 primarily due to the consolidation of Transtar and the
acquisition of LTV Tin. Net property, plant and equipment at year-end 2000
increased $223 million from year-end 1999 primarily due to the acquisition of
USSK.
Current liabilities at March 31, 2001 increased $136 million from year-end
2000 primarily due to an increase in notes payable and accounts payable.
Current liabilities in 2000 increased $107 million from 1999 primarily due to
increased notes payable and increased debt due within one year, partially
offset by a decrease in payroll and benefits payable.
Total long-term debt and notes payable was $2,236 million at March 31, 2001,
$209 million lower than year-end 2000. USX debt attributed to United States
Steel decreased primarily due to the payment received from USX for the 2000 tax
settlement. Total long-term debt and notes payable at December 31, 2000 of
$2,445 million was $1,530 million higher than year-end 1999. USX debt
attributed to United States Steel increased partially due to a $500 million
elective contribution to a Voluntary Employee Benefit Association ("VEBA"),
F-46
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
a trust established by contract in 1994 covering United Steelworkers of America
retirees' health care and life insurance benefits, and the acquisition of USSK.
Excluding the impact of these items, the increase in debt was primarily due to
lower cash flow provided from operating activities partially offset by reduced
capital expenditures. Most of the debt is a direct obligation of, or is
guaranteed by, USX.
Employee benefits at March 31, 2001 increased $130 million from year-end
2000 primarily due to additional liabilities resulting from the Transtar
consolidation and LTV Tin acquisition. Employee benefits at December 31, 2000
decreased $478 million from December 31, 1999 primarily due to the $500 million
elective contribution to a VEBA.
Net cash provided from operating activities increased $200 million in the
first quarter of 2001, compared with the first quarter of 2000. The increase
was due primarily to favorable working capital changes, which included a
favorable income tax settlement of $364 million with USX in the first quarter
of 2001 compared to a favorable settlement of $97 million in the first quarter
of 2000, partially offset by decreased net income (excluding noncash items).
Net cash used in operating activities in 2000 was $627 million and reflected
the $500 million elective contribution to a VEBA and a $30 million elective
contribution to a non-union retiree life insurance trust, partially offset by
an income tax settlement with USX in accordance with the group tax allocation
policy. Net cash used in operating activities was $80 million in 1999 including
a net payment of $320 million upon the expiration of the accounts receivable
program. Excluding these non-recurring items in both years, net cash provided
from operating activities decreased $434 million in 2000 due mainly to
decreased profitability and an increase in working capital.
Net cash provided from operating activities was $380 million in 1998 and
included proceeds of $38 million for the insurance litigation settlement
pertaining to the 1995 Gary Works No. 8 blast furnace explosion and the payment
of $30 million for the repurchase of sold accounts receivable, partially offset
by an income tax settlement with USX in accordance with the group tax
allocation policy. Excluding these non-recurring items in both years, net cash
provided from operating activities decreased $110 million in 1999 due mainly to
decreased profitability.
Capital expenditures in the first quarter of 2001 were $37 million, compared
with $45 million in the same period in 2000. The decrease of $8 million is due
to a reduction in budgeted projects.
Capital expenditures of $244 million in 2000 included exercising an early
buyout option of a lease for approximately half of the Gary Works No. 2 Slab
Caster; the continued replacement of coke battery thruwalls at Gary Works;
installation of the remaining two coilers at Gary's hot strip mill; a blast
furnace stove replacement at Gary Works; and the continuation of an upgrade to
the Mon Valley cold reduction mill.
Capital expenditures of $287 million in 1999 included the completion of the
new 64" pickle line at Mon Valley Works; the replacement of one coiler at the
Gary hot strip mill; an upgrade to the Mon Valley cold reduction mill;
replacement of coke battery thruwalls at Gary Works; several projects at Gary
Works allowing for production of specialized high strength steels, primarily
for the automotive market; and completion of the conversion of the Fairfield
pipemill to use rounds instead of square blooms.
Capital expenditures of $310 million in 1998 included a reline of the Gary
Works No. 6 blast furnace; an upgrade to the galvanizing line at Fairless
Works; replacement of coke battery thruwalls at Gary Works; conversion of the
Fairfield pipemill to use round instead of square blooms; and additional
environmental expenditures primarily at Fairfield Works and Gary Works.
F-47
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Contract commitments for capital expenditures at March 31, 2001 totaled $193
million compared with $206 million at year-end 2000 and $83 million at year-end
1999. In addition, USSK has a commitment to the Slovak government for a capital
improvements program of $700 million, subject to certain conditions, over a
period commencing with the acquisition date and ending on December 31, 2010.
Capital expenditures for 2001 are expected to be approximately $400 million,
which may be reduced if certain assets are leased. Major expenditures include
exercising an early buyout option of a lease for the balance of the Gary Works
No. 2 Slab Caster; work on the No. 3 blast furnace at Mon Valley Works; work on
the No. 2 stove at the No. 6 blast furnace at Gary Works; the completion of the
replacement of coke battery thruwalls at Gary Works; the completion of an
upgrade to the Mon Valley cold reduction mill; mobile equipment purchases;
systems development projects; and projects at USSK, including the completion of
the tin mill upgrade.
The preceding statement concerning expected 2001 capital expenditures is a
forward-looking statement. This forward-looking statement is based on
assumptions, which can be affected by, among other things, levels of cash flow
from operations, general economic conditions, whether or not assets are
purchased or financed by operating leases, unforeseen hazards such as weather
conditions, explosions or fires, which could delay the timing of completion of
particular capital projects. Accordingly, actual expenditures may differ
materially from current expectations in the forward-looking statement.
Investments in investees in 2000 of $35 million largely reflected an
investment in stock of VSZ in which United States Steel now holds a 25 percent
interest. Investments in investees in 1999 of $15 million was an investment in
Republic. Investments in investees in 1998 of $73 million mainly reflects
funding for entry into a joint venture in the Slovak Republic with VSZ.
The acquisition of U. S. Steel Kosice s.r.o. totaled $10 million in 2000,
which reflected a $69 million purchase price net of cash acquired in the
transaction of $59 million. The first quarter 2001 acquisition of LTV Tin and
consolidation of Transtar were noncash transactions.
Net cash changes related to financial obligations decreased by $226 million
in the first quarter of 2001, reflecting favorable cash from operations,
partially offset by capital expenditures and dividend payments. Financial
obligations consist of United States Steel'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 United States Steel.
Net cash changes related to financial obligations increased by $1,202
million, $486 million and $9 million in 2000, 1999 and 1998, respectively. The
increase in 2000 primarily reflected the net effects of cash used in operating
activities, including a VEBA contribution, cash used in investing activities,
dividend payments and preferred stock repurchases. The increase in 1999
primarily reflected the net effects of cash used in operating and investing
activities and dividend payments.
Liquidity
Prior to Separation
As a matter of policy, USX has managed most financial activities on a
centralized, consolidated basis, and will continue to do so until the
Separation. Such financial activities include the investment of surplus cash;
the issuance, repayment and repurchase of short-term and long-term debt; the
issuance, repurchase and redemption of preferred stock; and the issuance and
repurchase of common stock. Transactions related primarily to invested cash,
short-term and long-term debt (including convertible debt), related net
interest and other financial costs and preferred stock and related dividends
are attributed to United States Steel based upon its cash flows for the periods
presented and its initial capital structure. However, a portion of most
financing transactions are
F-48
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
attributed to and reflected in the combined financial statements of United
States Steel. Transactions such as leases, certain collateralized financings,
financial activities of consolidated entities that are less than wholly owned
by USX and transactions related to securities convertible solely into USX-U. S.
Steel Group Common Stock are or will be specifically attributed to and
reflected in their entirety in the combined financial statements of United
States Steel.
The cash requirements for United States Steel have been funded as part of
USX's program of managing financial activities on a centralized consolidated
basis. In December 2000, USX entered into a $1,354 million five-year revolving
credit agreement, terminating in November 2005, and a $451 million 364-day
facility, which together replaced the prior $2,350 million facility. At March
31, 2001, USX had $200 million of borrowings against its $1,354 million long-
term revolving credit agreement, no borrowings against its $451 million 364-day
facility and no commercial paper borrowings. There were no borrowings against
USX's short-term lines of credit totaling $150 million at March 31, 2001. At
March 31, 2001, there were no borrowings against the USSK revolving credit
agreement.
On April 24, 2001, USX announced that the Board had authorized management to
proceed with the necessary steps to implement a plan of reorganization of the
corporation in order to separate the energy and steel businesses. Until the
plan of reorganization is implemented or abandoned, USX management believes
that it will be more difficult to access traditional debt and equity markets.
Although USX management believes that it will not be necessary to access
financial markets during this time frame, nontraditional sources should be
available to provide adequate liquidity, if necessary.
After Separation
Upon Separation United States Steel will be an independent company and will
no longer have access to the financial resources of USX Corporation. It is
anticipated that United States Steel will have in place, at time of Separation,
a secured credit agreement of at least $400 million. USSK will continue to have
a $50 million short-term credit facility. This facility is non-recourse to
United States Steel.
United States Steel management believes that its short-term and long-term
liquidity will be adequate to satisfy its obligations after Separation,
including its obligations under the Financial Matters Agreement with Marathon
Oil Corporation and any other financing transactions related to the Separation,
and to complete currently authorized capital spending programs. Future
requirements for United States Steel's business needs, including the funding of
capital expenditures, debt service for the financing to be incurred in relation
to the Separation, and any amounts that may ultimately be paid in connection
with contingencies, are expected to be financed by a combination of internally
generated funds, proceeds from the sale of stock, borrowings and other external
financing sources. However, United States Steel will no longer be party to a
consolidated tax return and, therefore, will no longer be eligible for cash
settlements under USX's tax allocation policy, which were $364 million in the
first quarter 2001, $91 million in 2000, $(2) million in 1999 and $21 million
in 1998.
United States Steel management's opinion concerning liquidity and United
States Steel'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
United States Steel (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
F-49
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
future performance, the overall U.S. financial climate, and, in particular,
with respect to borrowings, by levels of United States Steel's outstanding debt
and credit ratings by rating agencies.
Debt Rating
Standard and Poor's has assigned a BB+ corporate credit rating to United
States Steel with a stable outlook, assuming the Plan of Reorganization is
completed.
Environmental Matters, Litigation and Contingencies
United States Steel 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 United States Steel's products and services, operating results will
be adversely affected. United States Steel 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 United States Steel could be
adversely affected.
In addition, United States Steel expects to incur capital expenditures for
its USSK operation to meet environmental standards under the Slovak Republic's
environmental laws.
The Resource Conservation and Recovery Act ("RCRA") establishes standards
for the management of solid and hazardous wastes. Besides affecting current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal operations, the recycling of wastes and the
regulation of storage tanks.
United States Steel is in the study phase of RCRA corrective action programs
at its Fairless Works and its former Geneva Works. A RCRA corrective action
program has been initiated at its Gary Works and at its Fairfield Works. Until
the studies are completed at these facilities, United States Steel is unable to
estimate the total cost of remediation activities that will be required.
United States Steel has been notified that it is a potential responsible
party ("PRP") at 24 waste sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as of March 31, 2001. In addition,
there are 16 sites where United States Steel has received information requests
or other indications that United States Steel may be a PRP under CERCLA but
where sufficient information is not presently available to confirm the
existence of liability or to make any judgment as to the amount thereof. There
are also 29 additional sites related to United States Steel 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, United States Steel is one of a number of
parties involved and the total cost of remediation, as well as United States
Steel's share thereof, is frequently dependent upon the outcome of
investigations and remedial studies. United States Steel 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.
F-50
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
In October 1996, United States Steel 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. United States
Steel was identified as a PRP along with 15 other companies owning property
along the river and harbor canal. United States Steel 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 United States Steel expects will resolve this claim. A reserve has
been established for United States Steel's share of this anticipated
settlement.
In 1998, United States Steel entered into a consent decree with the EPA
which resolved alleged violations of the Clean Water Act National Pollution
Discharge Elimination System ("NPDES") permit at Gary Works and provides for a
sediment remediation project for a section of the Grand Calumet River that runs
through Gary Works. Contemporaneously, United States Steel entered into a
consent decree with the public trustees which resolves potential liability for
natural resource damages on the same section of the Grand Calumet River. In
1999, United States Steel paid civil penalties of $2.9 million for the alleged
water act violations and $0.5 million in natural resource damages assessment
costs. In addition, United States Steel will pay the public trustees $1 million
at the end of the remediation project for future monitoring costs and United
States Steel is obligated to purchase and restore several parcels of property
that have been or will be conveyed to the trustees. During the negotiations
leading up to the settlement with the EPA, capital improvements were made to
upgrade plant systems to comply with the NPDES requirements. The sediment
remediation project is an approved final interim measure under the corrective
action program for Gary Works and is expected to cost approximately $36.4
million over the next five years. Estimated remediation and monitoring costs
for this project have been accrued.
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, United States Steel 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, United States Steel signed a consent decree
with the EPA to remediate this site. On April 6, 2001, United States Steel paid
$.4 million for costs associated with this site. The only remaining outstanding
claim is the natural resource damages claim filed by the Commonwealth of
Pennsylvania.
New or expanded environmental requirements, which could increase United
States Steel's environmental costs, may arise in the future. United States
Steel intends to comply with all legal requirements regarding the environment,
but since many of them are not fixed or presently determinable (even under
existing legislation) and may be affected by future legislation, it is not
possible to predict accurately the ultimate cost of compliance, including
remediation costs which may be incurred and penalties which may be imposed.
However, based on presently available information, and existing laws and
regulations as currently implemented, United States Steel does not anticipate
that environmental compliance expenditures (including operating and maintenance
and remediation) will materially increase in 2001. United States Steel's
capital expenditures for environmental are expected to be approximately $20
million in 2001 and are expected to be spent on projects primarily at Gary
Works and USSK. Predictions beyond 2001 can only be broad-based estimates which
have
F-51
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
varied, and will continue to vary, due to the ongoing evolution of specific
regulatory requirements, the possible imposition of more stringent requirements
and the availability of new technologies to remediate sites, among other
matters. Based upon currently identified projects, United States Steel
anticipates that environmental capital expenditures will be approximately $51
million in 2002; however, actual expenditures may vary as the number and scope
of environmental projects are revised as a result of improved technology or
changes in regulatory requirements and could increase if additional projects
are identified or additional requirements are imposed.
United States Steel has been and is a defendant in a large number of cases
in which plaintiffs allege injury resulting from exposure to asbestos. Many of
these cases involve multiple plaintiffs and most have multiple defendants.
These claims fall into three major groups: (1) claims made under certain
federal and general maritime law by employees of the Great Lakes or
Intercoastal Fleets, former operations of United States Steel; (2) claims made
by persons who did work at United States Steel facilities; and (3) claims made
by industrial workers allegedly exposed to an electrical cable product formerly
manufactured by United States Steel. To date all actions resolved have been
either dismissed or settled for immaterial amounts. It is not possible to
predict with certainty the outcome of these matters; however, based upon
present knowledge, United States Steel believes that the remaining actions will
be similarly resolved. This statement of belief is a forward-looking statement.
Predictions as to the outcome of pending litigation are subject to substantial
uncertainties with respect to (among other things) factual and judicial
determinations, and actual results could differ materially from those expressed
in the forward-looking statements.
United States Steel 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. The
ultimate resolution of these contingencies could, individually or in the
aggregate, be material to United States Steel Combined Financial Statements.
However, management believes that United States Steel will remain a viable and
competitive enterprise even though it is possible that these contingencies
could be resolved unfavorably to United States Steel.
Outlook
Although the domestic order book is stronger than in the second quarter of
2000, Domestic Steel continues to experience mills that are running at less-
than-efficient utilization rates, depressed prices for most products and high
natural gas prices. For Domestic Steel, United States Steel expects second
quarter shipments to be approximately 2.6 million net tons and second quarter
average realized prices to be somewhat lower than the first quarter, largely
due to a less favorable product mix. In early June, work began on the
refurbishment of the Mon Valley No. 3 blast furnace, which is expected to be
available to resume production in August, business conditions permitting.
On May 31, 2001, a major fire damaged the cold rolling mill at USS-POSCO,
which is fifty percent owned by United States Steel. Damage was limited to the
cold rolling mill area of the plant. USS-POSCO maintains insurance coverage
against such losses, including coverage for business interruption. At this
time, the financial impact and the duration of the outage have not been
determined. As a major supplier of hot-rolled bands to USS-POSCO, United States
Steel is experiencing some short-term disruption in shipments to USS-POSCO.
For USSK, second quarter shipments are expected to be more than 30 percent
higher than the first quarter and second quarter average realized prices are
expected to be more than 10 percent lower than the first quarter, largely due
to a less favorable product mix.
F-52
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
For the full year 2001, total shipments are expected to be approximately
14.0 to 14.5 million net tons with Domestic Steel shipments of approximately
10.5 to 11 million net tons and USSK shipments of approximately 3.5 million net
tons.
United States Steel owns a 16 percent equity method investment in Republic
(through USX's ownership in Republic Technologies International Holdings, LLC,
which is the sole owner of Republic), which is a major purchaser of raw
materials from United States Steel and the primary supplier of rounds for the
tubular facility in Lorain, Ohio. On April 2, 2001, Republic filed to
reorganize under Chapter 11 of the U.S. Bankruptcy Code. Republic has continued
to supply the Lorain mill since filing for bankruptcy and no supply
interruptions are anticipated. United States Steel's carrying value of this
investment in Republic has been reduced to zero. Upon Republic's filing for
bankruptcy, United States Steel accrued a charge for a substantial portion of
the receivables due from Republic. At March 31, 2001, United States Steel's
remaining financial exposure to Republic, after recording various losses and
reserves, totaled approximately $30 million.
The above discussion includes forward-looking statements concerning
shipments, pricing, and equity investee performance. These statements are based
on assumptions as to future product demand, prices and mix, and production.
Steel shipments and prices can be affected by imports and actions of the U.S.
Government and its agencies pertaining to trade, domestic and international
economies, domestic production capacity, and customer demand. Factors which may
affect USSK results are similar to domestic factors, including excess world
supply and foreign currency fluctuations, and also can be influenced by matters
peculiar to international marketing such as tariffs. In the event these
assumptions prove to be inaccurate, actual results may differ significantly
from those presently anticipated.
Steel imports to the United States accounted for an estimated 23%, 27% and
26% of the domestic steel market in the first quarter of 2001, and for the
years 2000 and 1999, respectively.
On November 13, 2000, United States Steel joined with eight other producers
and the Independent Steelworkers Union to file trade cases against hot-rolled
carbon steel flat products from 11 countries (Argentina, India, Indonesia,
Kazakhstan, the Netherlands, the People's Republic of China, Romania, South
Africa, Taiwan, Thailand and Ukraine). Three days later, the USWA also entered
the cases as a petitioner. Antidumping ("AD") cases were filed against all the
countries and countervailing duty ("CVD") cases were filed against Argentina,
India, Indonesia, South Africa, and Thailand. The U.S. International Trade
Commission ("ITC") made a preliminary determination that there is a reasonable
indication that the domestic industry is being materially injured by the
imports in question and the U.S. Department of Commerce ("Commerce") has made
preliminary findings of margins in all of the cases. As a result, both the ITC
and Commerce will continue their investigations.
United States Steel believes that the remedies provided by U.S. law to
private litigants are insufficient to correct the widespread dumping and
subsidy abuses that currently characterize steel imports into our country.
United States Steel, nevertheless, intends to file additional AD and CVD
petitions against unfairly traded imports that adversely impact, or threaten to
adversely impact, the results of United States Steel and is urging the U.S.
government to take additional steps.
On July 3, 2000, Commerce and the ITC initiated mandatory five-year "sunset"
reviews of AD orders issued in 1995 against seamless pipe from Argentina,
Brazil, Germany and Italy and oil country tubular goods ("OCTG") from
Argentina, Italy, Japan, Mexico and South Korea. The reviews also encompass the
1995 CVD orders against the same two products from Italy. The "sunset" review
procedures require that an order must be revoked after five years unless
Commerce and the ITC determine that, if the orders would be discontinued,
dumping or a countervailable subsidy would be likely to continue or recur. In
all of the cases, Commerce determined that dumping or countervailable subsidies
would be likely to continue or recur if the orders are
F-53
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
discontinued. The ITC is conducting full reviews in all the cases, despite the
fact that responses by some of the respondent countries were inadequate. In the
seamless pipe cases, the ITC voted on June 7, 2001 to continue the orders as to
Argentina, Brazil and Germany and to discontinue the order pertaining to Italy.
The decision of the ITC on the OCTG cases is expected June 15, 2001.
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 United States in such
quantities as to be a substantial cause of serious injury to the United States
steel industry. The products that will be included in the section 201
investigation remain to be determined.
F-54
UNITED STATES STEEL
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 as of March 31, 2001 are provided in the following
table(a):
Incremental
Decrease in
Income Before
Income Taxes
Assuming a
Hypothetical
Price Change
of:
-------------
10% 25%
------ ------
(Dollars in
millions)
Commodity-Based Derivative Instruments
Zinc
Other than trading............................................ 2.0(b) 5.0(b)
Tin
Other than trading............................................ 0.3(b) 0.7(b)
- --------
(a) Gains and losses on commodity-based derivative instruments used for other
than trading activities are generally offset by price changes in the
underlying commodity. With the adoption of SFAS No. 133, the definition of
a derivative instrument has been expanded to include certain fixed price
physical commodity contracts. Such instruments are included in the above
table. Amounts reflect the estimated incremental effect on pretax income of
a hypothetical 10% and 25% changes in closing commodity prices at March 31,
2001. Management evaluates the portfolios of commodity-based derivative
instruments on an ongoing basis and adjusts strategies to reflect
anticipated market conditions, changes in risk profiles and overall
business objectives. Changes to the portfolios subsequent to March 31,
2001, may cause future pretax income effects to differ from those presented
in the table.
(b) Price decrease.
F-55
UNITED STATES STEEL
Quantitative And Qualitative Disclosures About Market Risk--(Continued)
Interest Rate Risk
As of March 31, 2001, the discussion of United States Steel's interest rate
risk had not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 2000 Form 10-K.
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 year-end 2000
and 1999 interest rates on the fair value of United States Steel's specifically
attributed non-derivative financial instruments and the United States Steel's
portion of USX's non-derivative financial instruments is provided in the
following table:
As of December 31,
-----------------------------------------
2000 1999
-------------------- --------------------
Incremental Incremental
Increase in Increase in
Fair Fair Fair Fair
Value(b) Value(c) Value(b) Value(c)
-------- ----------- -------- -----------
(Dollars in millions)
Non-Derivative Financial
Instruments(a)
Financial assets:
Investments and long-term
receivables(d)...................... $ 137 $-- $ 122 $--
Financial liabilities:
Long-term debt (e)(f)................ $2,375 $ 80 $ 835 $ 20
Preferred stock of subsidiary........ 63 5 63 5
USX obligated mandatorily redeemable
convertible preferred securities of
a subsidiary trust.................. 119 10 169 15
------ ---- ------ ----
Total liabilities.................. $2,557 $ 95 $1,067 $ 40
====== ==== ====== ====
- --------
(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) See Note 24 to the United States Steel Combined Financial Statements for
the year ended December 31, 2000 for carrying value of instruments.
(c) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at December 31,
2000 and December 31, 1999, 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 December 31, 2000 and December 31, 1999.
(d) For additional information, see Note 17 to the United States Steel Combined
Financial Statements for the year ended December 31, 2000.
(e) Includes amounts due within one year.
(f) Fair value was based on market prices where available, or current borrowing
rates for financings with similar terms and maturities. For additional
information, see Note 12 to the United States Steel Combined Financial
Statements for the year ended December 31, 2000.
At December 31, 2000, USX's portfolio of long-term debt was comprised
primarily of fixed-rate instruments. Therefore, the fair value of the portfolio
is relatively sensitive to effects of interest rate fluctuations. This
sensitivity is illustrated by the $80 million increase in the fair value of
long-term debt assuming a hypothetical 10% decrease in interest rates. However,
USX's sensitivity to interest rate declines and corresponding increases in the
fair value of its debt portfolio would unfavorably affect USX's results and
cash flows only to the extent that USX elected to repurchase or otherwise
retire all or a portion of its fixed-rate debt portfolio at prices above
carrying value.
F-56
UNITED STATES STEEL
Quantitative And Qualitative Disclosures About Market Risk--(Continued)
Foreign Currency Exchange Rate Risk
United States Steel 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. United States Steel has not generally used derivative
instruments to manage this risk. However, United States Steel has made limited
use of forward currency contracts to manage exposure to certain currency price
fluctuations. At March 31, 2001, United States Steel had open Euro forward sale
contracts for both U.S. dollars and Slovak Koruna. A 10% increase in the March
31, 2001 Euro forward rates would result in an immaterial charge to income.
Equity Price Risk
United States Steel is subject to equity price risk and liquidity risk
related to its investment in VSZ. These risks are not readily quantifiable.
Safe Harbor
United States Steel's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to management's opinion
about risks associated with United States Steel's use of derivative
instruments. These statements are based on certain assumptions with respect to
market prices and industry supply and demand for steel products and certain raw
materials. To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to United States Steel's hedging programs may differ
materially from those discussed in the forward-looking statements.
F-57
Index For Annex G
Historical Financial Information for USX Corporation
Page
----
Management's Report....................................................... G-2
Report of Independent Accountants......................................... G-3
Audited Financial Statements:
Consolidated Statement of Operations--Years Ended December 31, 2000,
1999 and 1998.......................................................... G-4
Consolidated Balance Sheet--at December 31, 2000 and 1999............... G-6
Consolidated Statement of Cash Flows--Years Ended December 31, 2000,
1999, 1998............................................................. G-7
Consolidated Statement of Stockholders' Equity.......................... G-8
Notes to Consolidated Financial Statements.............................. G-10
Unaudited Financial Information:
Selected Quarterly Financial Data....................................... G-41
Principal Unconsolidated Investees...................................... G-42
Supplementary Information on Mineral Reserves........................... G-42
Supplementary Information on Oil and Gas Producing Activities........... G-43
Management's Discussion and Analysis...................................... G-51
Unaudited Interim Financial Information:
Consolidated Statement of Operations--First Quarter Ended March 31, 2001
and 2000............................................................... G-77
Consolidated Balance Sheet--at March 31, 2001 and December 31, 2000..... G-79
Statement of Cash Flows--First Quarter Ended March 31, 2001 and 2000.... G-81
Selected Notes to Consolidated Financial Statements..................... G-82
Management's Discussion and Analysis...................................... G-92
G-1
MANAGEMENT'S REPORT
The accompanying consolidated financial statements of USX Corporation and
Subsidiary Companies (USX) are the responsibility of and have been prepared by
USX in conformity with accounting principles generally accepted in the United
States. They necessarily include some amounts that are based on best judgments
and estimates. The consolidated financial information displayed in other
sections of this report is consistent with these consolidated financial
statements.
USX seeks to assure the objectivity and integrity of its financial records
by careful selection of its managers, by organizational arrangements that
provide an appropriate division of responsibility and by communications
programs aimed at assuring that its policies and methods are understood
throughout the organization.
USX has a comprehensive formalized system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded and that
financial records are reliable. Appropriate management monitors the system for
compliance, and the internal auditors independently measure its effectiveness
and recommend possible improvements thereto. In addition, as part of their
audit of the consolidated financial statements, USX's independent accountants,
who are elected by the stockholders, review and test the internal accounting
controls selectively to establish a basis of reliance thereon in determining
the nature, extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee. This
Committee, composed solely of nonmanagement directors, regularly meets (jointly
and separately) with the independent accountants, management and internal
auditors to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated financial
statements.
Thomas J. Usher Robert M. Hernandez Larry G. Schultz
Chairman, Board of Directors & Vice Chairman & Vice President-
Chief Executive Officer Chief Financial Officer Accounting
G-2
USX CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of USX Corporation:
In our opinion, the accompanying consolidated financial statements appearing
on pages G-4 through G-40 present fairly, in all material respects, the
financial position of USX Corporation and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of USX's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
600 Grant Street
Pittsburgh, Pennsylvania 15219-2794
February 7, 2001
G-3
USX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
2000 1999 1998
------- ------- -------
(Dollars in millions)
Revenues and other income:
Revenues (Note 6)................................. $40,500 $29,068 $27,629
Dividend and investee income (loss)............... 94 (20) 96
Net gains (losses) on disposal of assets (Note
27).............................................. (739) 21 82
Gain on ownership change in Marathon Ashland
Petroleum LLC (Note 3)........................... 12 17 245
Other income...................................... 47 33 25
------- ------- -------
Total revenues and other income............... 39,914 29,119 28,077
------- ------- -------
Costs and expenses:
Cost of revenues (excludes items shown below)..... 31,056 21,679 20,211
Selling, general and administrative expenses...... 402 203 304
Depreciation, depletion and amortization.......... 1,605 1,254 1,224
Taxes other than income taxes..................... 4,861 4,433 4,241
Exploration expenses.............................. 238 238 313
Inventory market valuation charges (credits) (Note
15).............................................. -- (551) 267
------- ------- -------
Total costs and expenses...................... 38,162 27,256 26,560
------- ------- -------
Income from operations.............................. 1,752 1,863 1,517
Net interest and other financial costs (Note 6)..... 341 362 279
Minority interest in income of Marathon Ashland
Petroleum LLC (Note 3)............................. 498 447 249
------- ------- -------
Income before income taxes and extraordinary
losses............................................. 913 1,054 989
Provision for income taxes (Note 11)................ 502 349 315
------- ------- -------
Income before extraordinary losses.................. 411 705 674
Extraordinary losses (Note 7)....................... -- 7 --
------- ------- -------
Net income.......................................... 411 698 674
Dividends on preferred stock........................ 8 9 9
------- ------- -------
Net income applicable to common stocks.............. $ 403 $ 689 $ 665
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
G-4
USX CORPORATION
INCOME PER COMMON SHARE
2000 1999 1998
----- ---- -----
(Dollars in
millions,
except per share
data)
Applicable to Marathon Stock:
Net income................................................. $ 432 $654 $ 310
Per Share Data:
Basic..................................................... 1.39 2.11 1.06
Diluted................................................... 1.39 2.11 1.05
Applicable to Steel Stock:
Income (loss) before extraordinary losses.................. $ (29) $ 42 $ 355
Extraordinary losses....................................... -- 7 --
----- ---- -----
Net income (loss).......................................... $ (29) $ 35 $ 355
===== ==== =====
Per Share Data
Basic:
Income (loss) before extraordinary losses................ $(.33) $.48 $4.05
Extraordinary losses..................................... -- .08 --
----- ---- -----
Net income (loss)........................................ $(.33) $.40 $4.05
===== ==== =====
Diluted:
Income (loss) before extraordinary losses................ $(.33) $.48 $3.92
Extraordinary losses..................................... -- .08 --
----- ---- -----
Net income (loss)........................................ $(.33) $.40 $3.92
===== ==== =====
See Note 20, for a description and computation of income per common share.
The accompanying notes are an integral part of these consolidated financial
statements.
G-5
USX CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
----------------------
2000 1999
---------- ----------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 559 $ 133
Receivables, less allowance for doubtful accounts of
$60 and $12........................................ 2,888 2,367
Receivables subject to a security interest (Note
14)................................................ 350 350
Inventories (Note 15)............................... 2,813 2,627
Deferred income tax benefits (Note 11).............. 261 303
Assets held for sale (Note 27)...................... 330 84
Other current assets................................ 131 92
---------- ----------
Total current assets............................ 7,332 5,956
Investments and long-term receivables, less reserves
of $28 and $3 (Note 12).............................. 801 1,237
Property, plant and equipment--net (Note 21).......... 12,114 12,809
Prepaid pensions (Note 9)............................. 2,879 2,629
Other noncurrent assets............................... 275 300
---------- ----------
Total assets.................................... $ 23,401 $ 22,931
========== ==========
LIABILITIES
Current liabilities:
Notes payable (Note 13)............................. $ 150 $ --
Accounts payable.................................... 3,774 3,409
Payroll and benefits payable........................ 432 468
Accrued taxes....................................... 281 283
Accrued interest.................................... 108 107
Long-term debt due within one year (Note 14)........ 287 61
---------- ----------
Total current liabilities....................... 5,032 4,328
Long-term debt (Note 14).............................. 4,173 4,222
Deferred income taxes (Note 11)....................... 2,020 1,839
Employee benefits (Note 9)............................ 2,415 2,809
Deferred credits and other liabilities................ 724 691
Preferred stock of subsidiary (Note 22)............... 250 250
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust holding
solely junior subordinated convertible debentures of
USX (Note 22)........................................ 183 183
Minority interest in Marathon Ashland Petroleum LLC
(Note 3)............................................. 1,840 1,753
STOCKHOLDERS' EQUITY (Details on pages G-8 and G-9)
Preferred stock (Note 23) - 6.50% Cumulative
Convertible issued--2,413,487 shares and 2,715,287
shares ($121 and $136 liquidation preference,
respectively)........................................ 2 3
Common stocks:
Marathon Stock issued--312,165,978 shares and
311,767,181 shares (par value $1 per share,
authorized 550,000,000 shares)..................... 312 312
Steel Stock issued--88,767,395 shares and 88,397,714
shares (par value $1 per share,
authorized 200,000,000 shares)..................... 89 88
Securities exchangeable solely into Marathon Stock
issued--281,148 shares and 288,621 shares (Note
3)................................................. -- --
Treasury common stock, at cost--Marathon Stock--
3,899,714 shares and -0- shares...................... (104) --
Additional paid-in capital............................ 4,676 4,673
Deferred compensation................................. (8) --
Retained earnings..................................... 1,847 1,807
Accumulated other comprehensive income (loss)......... (50) (27)
---------- ----------
Total stockholders' equity...................... 6,764 6,856
---------- ----------
Total liabilities and stockholders' equity...... $ 23,401 $ 22,931
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
G-6
USX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
2000 1999 1998
------- ------- -------
(Dollars in millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income......................................... $ 411 $ 698 $ 674
Adjustments to reconcile to net cash provided from
operating activities:
Extraordinary losses............................. -- 7 --
Minority interest in income of Marathon Ashland
Petroleum LLC................................... 498 447 249
Depreciation, depletion and amortization......... 1,605 1,254 1,224
Exploratory dry well costs....................... 86 109 186
Inventory market valuation charges (credits)..... -- (551) 267
Pensions and other postretirement benefits....... (778) (220) (181)
Deferred income taxes............................ 149 212 184
Gain on ownership change in Marathon Ashland
Petroleum LLC................................... (12) (17) (245)
Net (gains) losses on disposal of assets......... 739 (21) (82)
Changes in: Current receivables--sold............ -- (320) (30)
- --operating turnover............................... (375) (988) 451
Inventories................................. (46) (77) (6)
Current accounts payable and accrued
expenses................................... 182 1,251 (497)
All other--net................................... 72 152 (172)
------- ------- -------
Net cash provided from operating activities... 2,531 1,936 2,022
------- ------- -------
Investing activities:
Capital expenditures............................... (1,669) (1,665) (1,580)
Acquisitions--U. S. Steel Kosice s.r.o., net of
cash acquired of $59.............................. (10) -- --
- --Tarragon Oil and Gas Limited..................... -- -- (686)
Disposal of assets................................. 560 366 86
Restricted cash--withdrawals....................... 273 60 241
- --deposits......................................... (270) (61) (67)
Investees--investments............................. (100) (74) (115)
- --loans and advances............................... (16) (70) (104)
- --returns and repayments........................... 10 1 71
All other--net..................................... 29 (25) (4)
------- ------- -------
Net cash used in investing activities......... (1,193) (1,468) (2,158)
------- ------- -------
Financing activities:
Commercial paper and revolving credit
arrangements--net................................. 62 (381) 724
Other debt--borrowings............................. 273 810 1,036
- --repayments....................................... (339) (242) (1,445)
Common stock--issued............................... -- 89 668
- --repurchased...................................... (105) -- (195)
Treasury common stock reissued..................... 1 -- --
Preferred stock repurchased........................ (12) (2) (8)
Dividends paid..................................... (371) (354) (342)
Distributions to minority shareholder of Marathon
Ashland Petroleum LLC............................. (420) (400) (211)
------- ------- -------
Net cash provided from (used in) financing
activities................................... (911) (480) 227
------- ------- -------
Effect of exchange rate changes on cash............ (1) (1) 1
------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... 426 (13) 92
Cash and cash equivalents at beginning of year..... 133 146 54
------- ------- -------
Cash and cash equivalents at end of year........... $ 559 $ 133 $ 146
======= ======= =======
See Note 16, for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
G-7
USX CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
USX has two classes of common stock: USX--Marathon Group Common Stock
(Marathon Stock) and USX--U. S. Steel Group Common Stock (Steel Stock), which
are intended to reflect the performance of the Marathon and U. S. Steel Groups,
respectively. (See Note 8, for a description of the two Groups.) During 1998,
USX issued 878,074 Exchangeable Shares (exchangeable solely into Marathon
Stock) related to the purchase of Tarragon Oil and Gas Limited. (See Note 3.)
On all matters where the holders of Marathon Stock and Steel Stock vote
together as a single class, Marathon Stock has one vote per share and Steel
Stock has a fluctuating vote per share based on the relative market value of a
share of Steel Stock to the market value of a share of Marathon Stock. In the
event of a disposition of all or substantially all the properties and assets of
the U. S. Steel Group, USX must either distribute the net proceeds to the
holders of the Steel Stock as a special dividend or in redemption of the stock,
or exchange the Steel Stock for the Marathon Stock. In the event of liquidation
of USX, the holders of the Marathon Stock and Steel Stock will share in the
funds remaining for common stockholders based on the relative market
capitalization of the respective Marathon Stock and Steel Stock to the
aggregate market capitalization of both classes of common stock.
Dollars in
millions Shares in thousands
----------------- -------------------------
2000 1999 1998 2000 1999 1998
----- ---- ---- ------- ------- -------
Preferred stock (Note 23):
6.50% Cumulative Convertible:
Balance at beginning of year... $ 3 $ 3 $ 3 2,715 2,768 2,962
Repurchased.................... (1) -- -- (302) (53) (194)
----- ---- ---- ------- ------- -------
Balance at end of year......... $ 2 $ 3 $ 3 2,413 2,715 2,768
===== ==== ==== ======= ======= =======
Common stocks:
Marathon Stock:
Balance at beginning of year... $ 312 $308 $289 311,767 308,459 288,786
Issued in public offering...... -- -- 17 -- 67 17,000
Issued for:
Employee stock plans.......... -- 3 2 391 2,903 2,236
Dividend Reinvestment and
Direct Stock Purchase Plan... -- -- -- -- 120 66
Exchangeable Shares........... -- 1 -- 8 218 371
----- ---- ---- ------- ------- -------
Balance at end of year......... $ 312 $312 $308 312,166 311,767 308,459
===== ==== ==== ======= ======= =======
Steel Stock:
Balance at beginning of year... $ 88 $ 88 $ 86 88,398 88,336 86,578
Issued for:
Employee stock plans.......... 1 -- 2 369 62 1,733
Dividend Reinvestment and
Direct Stock Purchase Plan... -- -- -- -- -- 25
----- ---- ---- ------- ------- -------
Balance at end of year......... $ 89 $ 88 $ 88 88,767 88,398 88,336
===== ==== ==== ======= ======= =======
Securities exchangeable solely
into Marathon Stock:
Balance at beginning of year... $ -- $ 1 $-- 289 507 --
Issued to acquire Tarragon
stock......................... -- -- 1 -- -- 878
Exchanged for Marathon Stock... -- (1) -- (8) (218) (371)
----- ---- ---- ------- ------- -------
Balance at end of year......... $ -- $-- $ 1 281 289 507
===== ==== ==== ======= ======= =======
Treasury common stock, at cost:
Marathon Stock:
Balance at beginning of year... $ -- $-- $-- -- -- --
Repurchased.................... (105) -- -- (3,957) -- --
Reissued for:
Employee stock plans.......... 1 -- -- 43 -- --
Non-employee Board of
Directors deferred
compensation plan ........... -- -- -- 14 -- --
----- ---- ---- ------- ------- -------
Balance at end of year......... $(104) $-- $-- (3,900) -- --
===== ==== ==== ======= ======= =======
(Table continued on next page)
G-8
Comprehensive
Stockholders' Equity Income
---------------------- ----------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ---- ---- ----
(Dollars in millions)
Additional paid-in capital:
Balance at beginning of year....... $4,673 $4,587 $3,924
Marathon Stock issued.............. 9 92 598
Steel Stock issued................. 5 2 57
Exchangeable Shares:
Issued............................ -- -- 28
Exchanged for Marathon Stock...... -- (6) (12)
Repurchase of 6.50% preferred
stock............................. (11) (2) (8)
------ ------ ------
Balance at end of year............. $4,676 $4,673 $4,587
====== ====== ======
Deferred compensation (Note 17)...... $ (8) $ -- $(1)
====== ====== ======
Retained earnings:
Balance at beginning of year....... $1,807 $1,467 $1,138
Net income......................... 411 698 674 $411 $698 $674
Dividends on preferred stock....... (8) (9) (9)
Dividends on Marathon Stock (per
share: $.88 in 2000 and $.84 in
1999 and 1998).................... (274) (261) (248)
Dividends on Steel Stock (per share
$1.00)............................ (89) (88) (88)
------ ------ ------
Balance at end of year............. $1,847 $1,807 $1,467
====== ====== ======
Accumulated other comprehensive
income (loss):
Minimum pension liability
adjustments:
Balance at beginning of year...... $ (10) $ (37) $ (32)
Changes during year, net of
taxes(a)......................... (11) 27 (5) (11) 27 (5)
------ ------ ------
Balance at end of year............ (21) (10) (37)
------ ------ ------
Foreign currency translation
adjustments:
Balance at beginning of year...... $ (17) $ (11) $ (8)
Changes during year, net of
taxes(a)......................... (12) (6) (3) (12) (6) (3)
------ ------ ------
Balance at end of year............ (29) (17) (11)
------ ------ ------
Unrealized holding losses on
investments:
Balance at beginning of year...... $ -- $ -- $ 3
Changes during year, net of
taxes(a)......................... -- (1) 2 -- (1) 2
Reclassification adjustment
included in net income........... -- 1 (5) -- 1 (5)
------ ------ ------
Balance at end of year............ -- -- --
------ ------ ------
Total balances at end of year..... $ (50) $ (27) $ (48)
====== ====== ====== ---- ---- ----
Total comprehensive income(b)... $388 $719 $663
==== ==== ====
Total stockholders' equity........... $6,764 $6,856 $6,405
====== ====== ======
2000 1999 1998
------ ------ ------
(a)Related income tax provision
(credit):
Minimum pension liability
adjustments...................... $ 4 $ (13) $ 3
Foreign currency translation
adjustments...................... (4) 3 4
Unrealized holding gains on
investments...................... -- -- 2
(b)Total comprehensive income (loss)
by Group:
Marathon Group.................... $ 419 $ 660 $ 306
U. S. Steel Group................. (31) 59 357
------ ------ ------
Total........................... $ 388 $ 719 $ 663
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
G-9
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Principal Accounting Policies
Principles applied in consolidation--The consolidated financial statements
include the accounts of USX Corporation and the majority-owned subsidiaries
which it controls (USX).
Investments in unincorporated oil and gas joint ventures, undivided interest
pipelines and jointly owned gas processing plants are consolidated on a pro
rata basis.
Investments in entities over which USX has significant influence are
accounted for using the equity method of accounting and are carried at USX's
share of net assets plus loans and advances.
Investments in companies whose stock is publicly traded are carried
generally at market value. The difference between the cost of these investments
and market value is recorded in other comprehensive income (net of tax).
Investments in companies whose stock has no readily determinable fair value are
carried at cost.
Dividend and investee income includes USX's proportionate share of income
from equity method investments and dividend income from other investments.
Dividend income is recognized when dividend payments are received.
Gains or losses from a change in ownership of a consolidated subsidiary or
an unconsolidated investee are recognized in the period of change.
Use of estimates--Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at year-end and the reported amounts of revenues and expenses during the year.
Significant items subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; environmental liabilities;
liabilities for potential tax deficiencies and potential litigation claims and
settlements; and assets and obligations related to employee benefits.
Additionally, certain estimated liabilities are recorded when management
commits to a plan to close an operating facility or to exit a business
activity. Actual results could differ from the estimates and assumptions used.
Revenue recognition--Revenues are recognized generally when products are
shipped or services are provided to customers, the sales price is fixed and
determinable, and collectibility is reasonably assured. Costs associated with
revenues, including shipping and other transportation costs, are recorded in
cost of revenues. Matching buy/sell transactions settled in cash are recorded
in both revenues and cost of revenues as separate sales and purchase
transactions, with no net effect on income. USX follows the sales method of
accounting for gas production imbalances and would recognize a liability if the
existing proved reserves were not adequate to cover the current imbalance
situation.
Cash and cash equivalents--Cash and cash equivalents include cash on hand
and on deposit and investments in highly liquid debt instruments with
maturities generally of three months or less.
Inventories--Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO) method.
Derivative instruments--USX uses commodity-based and foreign currency
derivative instruments to manage its exposure to price risk. Management is
authorized to use futures, forwards, swaps and options related to the purchase,
production or sale of crude oil, natural gas, refined products, nonferrous
metals and electricity. While USX's risk management activities generally reduce
market risk exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also encompass
strategies which assume price risk.
G-10
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Commodity-Based Hedging Transactions--For transactions that qualify for
hedge accounting, the resulting gains or losses are deferred and subsequently
recognized in income from operations, as a component of revenues or cost of
revenues, in the same period as the underlying physical transaction. To qualify
for hedge accounting, derivative positions cannot remain open if the underlying
physical market risk has been removed. If such derivative positions remain in
place, they would be marked-to- market and accounted for as trading or other
activities. Recorded deferred gains or losses are reflected within other
current and noncurrent assets or accounts payable and deferred credits and
other liabilities, as appropriate.
Commodity-Based Trading and Other Activities--Derivative instruments used
for trading and other activities are marked-to-market and the resulting gains
or losses are recognized in the current period within income from operations.
This category also includes the use of derivative instruments that have no
offsetting underlying physical market risk.
Foreign Currency Transactions--USX uses forward exchange contracts to manage
currency risks. Gains or losses related to firm commitments are deferred and
recognized concurrent with the underlying transaction. All other gains or
losses are recognized in income in the current period as revenues, cost of
revenues, interest income or expense, or other income, as appropriate. Forward
exchange contracts are recorded as receivables or payables, as appropriate.
Exploration and development--USX follows the successful efforts method of
accounting for oil and gas exploration and development.
Long-lived assets--Except for oil and gas producing properties, depreciation
is generally computed on the straight-line method based upon estimated lives of
assets. USX's method of computing depreciation for domestic steel producing
assets modifies straight-line depreciation based on the level of production.
The modification factors range from a minimum of 85% at a production level
below 81% of capability, to a maximum of 105% for a 100% production level. No
modification is made at the 95% production level, considered the normal long-
range level.
Depreciation and depletion of oil and gas producing properties are computed
using predetermined rates based upon estimated proved oil and gas reserves
applied on a units-of-production method.
Depletion of mineral properties, other than oil and gas, is based on rates
which are expected to amortize cost over the estimated tonnage of minerals to
be removed.
USX evaluates impairment of its oil and gas producing assets primarily on a
field-by-field basis using undiscounted cash flows based on total proved
reserves. Other assets are evaluated on an individual asset basis or by logical
groupings of assets. Assets deemed to be impaired are written down to their
fair value, including any related goodwill, using discounted future cash flows
and, if available, comparable market values.
When long-lived assets depreciated on an individual basis are sold or
otherwise disposed of, any gains or losses are reflected in income. Gains on
disposal of long-lived assets are recognized when earned, which is generally at
the time of closing. If a loss on disposal is expected, such losses are
recognized when long-lived assets are reclassified as assets held for sale.
Proceeds from disposal of long-lived assets depreciated on a group basis are
credited to accumulated depreciation, depletion and amortization with no
immediate effect on income.
Major maintenance activities--USX incurs planned major maintenance costs
primarily for refinery turnarounds in the Marathon Group and blast furnace
relines in the U. S. Steel Group. Costs associated with refinery turnarounds
are expensed in the same annual period as incurred; however, estimated annual
turnaround costs are recognized in income throughout the year on a pro rata
basis. Costs associated with blast furnace
G-11
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
relines are separately capitalized in property, plant and equipment. Such costs
are amortized over their estimated useful life, which is generally the period
until the next scheduled reline.
Environmental liabilities--USX provides for remediation costs and penalties
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. Generally, the timing of remediation accruals
coincides with completion of a feasibility study or the commitment to a formal
plan of action. Remediation liabilities are accrued based on estimates of known
environmental exposure and are discounted in certain instances. If recoveries
of remediation costs from third parties are probable, a receivable is recorded.
Estimated abandonment and dismantlement costs of offshore production platforms
are accrued based on production of estimated proved oil and gas reserves.
Postemployment benefits--USX recognizes an obligation to provide
postemployment benefits, primarily for disability-related claims covering
indemnity and medical payments. The obligation for these claims and the related
periodic costs are measured using actuarial techniques and assumptions,
including an appropriate discount rate, analogous to the required methodology
for measuring pension and other postretirement benefit obligations. Actuarial
gains and losses are deferred and amortized over future periods.
Insurance--USX is insured for catastrophic casualty and certain property and
business interruption exposures, as well as those risks required to be insured
by law or contract. Costs resulting from noninsured losses are charged against
income upon occurrence.
Reclassifications--Certain reclassifications of prior years' data have been
made to conform to 2000 classifications.
2. New Accounting Standards
In the fourth quarter of 2000, USX adopted the following accounting
pronouncements primarily related to the classification of items in the
financial statements. The adoption of these new pronouncements had no net
effect on the financial position or results of operations of USX, although they
required reclassifications of certain amounts in the financial statements,
including all prior periods presented.
. In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in
Financial Statements," which summarizes the SEC staff's interpretations
of generally accepted accounting principles related to revenue
recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," which addresses
whether certain items should be reported as a reduction of revenue or as
a component of both revenues and cost of revenues, and EITF Consensus
No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping goods to
customers.
. In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS 140). SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. USX adopted certain
recognition and reclassification provisions of SFAS 140, which were
effective for fiscal years ending after December 15, 2000. The remaining
provisions of SFAS 140 are effective after March 31, 2001.
G-12
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133), which later was amended by SFAS Nos.
137 and 138. This Standard requires recognition of all derivatives as either
assets or liabilities at fair value. Changes in fair value will be reflected in
either current period net income or other comprehensive income, depending on
the designation of the derivative instrument. USX may elect not to designate a
derivative instrument as a hedge even if the strategy would be expected to
qualify for hedge accounting treatment. The adoption of SFAS No. 133 will
change the timing of recognition for derivative gains and losses as compared to
previous accounting standards.
USX will adopt the Standard effective January 1, 2001. The transition
adjustment resulting from the adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle. The unfavorable
cumulative effect on net income, net of tax, is expected to approximate $9
million. The unfavorable cumulative effect on other comprehensive income, net
of tax, will approximate $7 million. The amounts reported as other
comprehensive income will be reflected in net income when the anticipated
physical transactions are consummated. It is not possible to estimate the
effect that this Standard will have on future results of operations.
3. Business Combinations
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. (USSK), which
is 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 cash purchase price was $69 million. Additional payments to
VSZ of not less than $25 million and up to $75 million are contingent upon the
future performance of USSK. Additionally, $325 million of debt was included
with the acquisition. The acquisition was accounted for under the purchase
method of accounting. The 2000 results of operations include the operations of
USSK from the date of acquisition.
Prior to this transaction, USX and VSZ were equal partners in VSZ U. S.
Steel s.r.o. (VSZUSS), a tin mill products manufacturer. The assets of USSK
included VSZ's interest in VSZUSS. The acquisition of the remaining interest in
VSZUSS was accounted for under the purchase method of accounting. Previously,
USX had accounted for its investment in VSZUSS under the equity method of
accounting.
VSZ did not provide historical carve-out financial information for its steel
activities prepared in accordance with generally accepted accounting principles
in the United States. USX was unable to fully determine the effects of transfer
pricing, intercompany eliminations and expense allocations in order to prepare
such carve-out information from Slovak statutory reports and VSZ internal
records. USX broadly estimates that the unaudited pro forma effect on its 2000
and 1999 revenues, giving effect to the acquisition as if it had been
consummated at the beginning of those periods, would have been to increase
revenues in each period by approximately $1 billion. USX cannot determine the
unaudited pro forma effect on its 2000 and 1999 net income. In any event,
historical pro forma information is not necessarily indicative of future
results of operations.
In August 1998, Marathon Oil Company (Marathon) acquired Tarragon Oil and
Gas Limited (Tarragon), a Canadian oil and gas exploration and production
company. Securityholders of Tarragon received, at their election, Cdn$14.25 for
each Tarragon share, or the economic equivalent in Exchangeable Shares of an
indirect Canadian subsidiary of Marathon, which are exchangeable solely on a
one-for-one basis into Marathon Stock. The purchase price included cash
payments of $686 million, issuance of 878,074 Exchangeable Shares valued at $29
million and the assumption of $345 million in debt.
The Exchangeable Shares are exchangeable at the option of the holder at any
time and automatically redeemable on August 11, 2003 (and, in certain
circumstances, as early as August 11, 2001). The holders of
G-13
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Exchangeable Shares are entitled to receive declared dividends equivalent to
dividends declared from time to time by USX on Marathon Stock.
USX accounted for the acquisition using the purchase method of accounting.
The 1998 results of operations include the operations of Marathon Canada
Limited, formerly known as Tarragon, commencing August 12, 1998.
During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major
elements of their refining, marketing and transportation (RM&T) operations. On
January 1, 1998, Marathon transferred certain RM&T net assets to Marathon
Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1,
1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a
38% interest in MAP. The acquisition was accounted for under the purchase
method of accounting. The purchase price was determined to be $1.9 billion,
based upon an external valuation. The change in Marathon's ownership interest
in MAP resulted in a gain of $245 million in 1998. In accordance with MAP
closing agreements, Marathon and Ashland have made capital contributions to MAP
for environmental improvements. The closing agreements stipulate that ownership
interests in MAP will not be adjusted as a result of such contributions.
Accordingly, Marathon recognized a gain on ownership change of $12 million in
2000 and $17 million in 1999.
In connection with the formation of MAP, Marathon and Ashland entered into a
Limited Liability Company Agreement dated January 1, 1998 (the LLC Agreement).
The LLC Agreement provides for an initial term of MAP expiring on December 31,
2022 (25 years from its formation). The term will automatically be extended for
ten-year periods, unless a termination notice is given by either party.
Also in connection with the formation of MAP, the parties entered into a
Put/Call, Registration Rights and Standstill Agreement (the Put/Call
Agreement). The Put/Call Agreement provides that at any time after December 31,
2004, Ashland will have the right to sell to Marathon all of Ashland's
ownership interest in MAP, for an amount in cash and/or Marathon or USX debt or
equity securities equal to the product of 85% (90% if equity securities are
used) of the fair market value of MAP at that time, multiplied by Ashland's
percentage interest in MAP. Payment could be made at closing, or at Marathon's
option, in three equal annual installments, the first of which would be payable
at closing. At any time after December 31, 2004, Marathon will have the right
to purchase all of Ashland's ownership interests in MAP, for an amount in cash
equal to the product of 115% of the fair market value of MAP at that time,
multiplied by Ashland's percentage interest in MAP.
4. Transactions Between MAP and Ashland
At December 31, 2000 and 1999, MAP had current receivables from Ashland of
$35 million and $26 million, respectively, and current payables to Ashland of
$2 million.
MAP has a $190 million revolving credit agreement with Ashland. Interest on
borrowings is based on defined short-term market rates. At December 31, 2000
and 1999, there were no borrowings against this facility.
During 2000, 1999 and 1998, MAP's sales to Ashland, consisting primarily of
petroleum products, were $285 million, $198 million and $190 million,
respectively, and MAP's purchases of products and services from Ashland were
$26 million, $22 million and $47 million, respectively. These transactions were
conducted under terms comparable to those with unrelated parties.
5. Discontinued Operations
Effective October 31, 1997, USX sold its stock in Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all of the Delhi
Group. USX elected to use the net proceeds of $195 million, or $20.60
G-14
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
per share, to redeem all shares of Delhi Stock. The net proceeds were
distributed to the Delhi shareholders on January 26, 1998. After the
redemption, 50,000,000 shares of Delhi Stock remain authorized but unissued.
6. Other Items
2000 1999 1998
---- ---- ----
(In millions)
Net interest and other financial costs
Interest and other financial income:
Interest income............................................ $ 29 $ 16 $ 35
Other...................................................... 5 (13) 4
---- ---- ----
Total.................................................... 34 3 39
---- ---- ----
Interest and other financial costs:
Interest incurred.......................................... 328 326 325
Less interest capitalized.................................. 19 26 46
---- ---- ----
Net interest............................................. 309 300 279
Interest on tax issues..................................... 17 20 21
Financial costs on trust preferred securities.............. 13 13 13
Financial costs on preferred stock of subsidiary........... 22 22 22
Amortization of discounts.................................. 3 3 6
Expenses on sales of accounts receivable................... -- 15 21
Adjustment to settlement value of indexed debt............. -- (13) (44)
Other...................................................... 11 5 --
---- ---- ----
Total.................................................... 375 365 318
---- ---- ----
Net interest and other financial costs....................... $341 $362 $279
==== ==== ====
Foreign currency transactions
For 2000, 1999 and 1998, the aggregate foreign currency transaction gains
(losses) included in determining net income were $37 million, $(12) million and
$13 million, respectively.
Consumer excise taxes
Included in revenues and costs and expenses for 2000, 1999 and 1998 were
$4,344 million, $3,973 million and $3,824 million, respectively, representing
consumer excise taxes on petroleum products and merchandise.
7. Extraordinary Losses
In 1999, USX irrevocably deposited with a trustee the entire 5.5 million
common shares it owned in RTI International Metals, Inc. (RTI). The deposit of
the shares resulted in the satisfaction of USX's obligation under its 6 3/4%
Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the
indenture, the trustee exchanged one RTI share for each note at maturity. All
shares were required for satisfaction of the indexed debt; therefore, none
reverted back to USX.
As a result of the above transaction, USX recorded in 1999 an extraordinary
loss of $5 million, net of a $3 million income tax benefit, representing
prepaid interest expense and the write-off of unamortized debt issue costs, and
a pretax charge of $22 million, representing the difference between the
carrying value of the investment in RTI and the carrying value of the indexed
debt, which is included in net gains (losses) on
G-15
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
disposal of assets. Since USX's investment in RTI was attributed to the U. S.
Steel Group, the indexed debt was also attributed to the U. S. Steel Group.
In 1999, Republic Technologies International, LLC, an equity investee of
USX, recorded an extraordinary loss related to the early extinguishment of
debt. As a result, USX recorded an extraordinary loss of $2 million, net of a
$1 million income tax benefit, representing its share of the extraordinary
loss.
8. Group and Segment Information
USX has two classes of common stock: Marathon Stock and Steel Stock, which
are intended to reflect the performance of the Marathon Group and the U. S.
Steel Group, respectively. A description of each group and its products and
services is as follows:
Marathon Group--The Marathon Group includes Marathon Oil Company and certain
other subsidiaries of USX. Marathon Group revenues as a percentage of total
consolidated USX revenues were 85% in 2000, 81% in 1999 and 77% in 1998.
U. S. Steel Group--The U. S. Steel Group consists of U. S. Steel, the
largest domestic integrated steel producer and U. S. Steel operations in the
Slovak Republic. U. S. Steel Group revenues as a percentage of total
consolidated USX revenues were 15% in 2000, 19% in 1999 and 23% in 1998.
Group Operations:
Income Net
From Income Capital
Year Revenues Operations (Loss) Expenditures Assets
---- -------- ---------- ------ ------------ -------
(In millions)
Marathon Group............ 2000 $34,487 $1,648 $432 $1,425 $15,232
1999 23,590 1,713 654 1,378 15,674
1998 21,274 938 310 1,270 14,544
U. S. Steel Group......... 2000 6,090 104 (21) 244 8,711
1999 5,536 150 44 287 7,525
1998 6,378 579 364 310 6,749
Eliminations.............. 2000 (77) -- -- -- (542)
1999 (58) -- -- -- (268)
1998 (23) -- -- -- (160)
Total USX Corporation..... 2000 $40,500 $1,752 $411 $1,669 $23,401
1999 29,068 1,863 698 1,665 22,931
1998 27,629 1,517 674 1,580 21,133
G-16
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenues by Product:
2000 1999 1998
------- ------- -------
(In millions)
Marathon Group
Refined products..................................... $22,514 $15,181 $12,852
Merchandise.......................................... 2,441 2,194 1,941
Liquid hydrocarbons.................................. 6,856 4,587 5,023
Natural gas.......................................... 2,518 1,429 1,187
Transportation and other products.................... 158 199 271
U. S. Steel Group
Sheet and semi-finished steel products............... $ 3,288 $ 3,433 $ 3,598
Tubular, plate and tin mill products................. 1,731 1,140 1,546
Raw materials (coal, coke and iron ore).............. 626 549 744
Other(a)............................................. 445 414 490
- --------
(a) Includes revenue from the sale of steel production by-products,
engineering and consulting services, real estate development and resource
management.
Operating Segments:
USX's reportable operating segments are business units within the Marathon
and U. S. Steel Groups, each providing their own unique products and services.
Each operating segment is independently managed and requires different
technology and marketing strategies. Segment income represents income from
operations allocable to operating segments. The following items included in
income from operations are not allocated to operating segments:
. Gain on ownership change in MAP
. Net pension credits associated with the U. S. Steel Group's pension plan
assets and liabilities
. Certain costs related to former U. S. Steel Group business activities
. Certain general and administrative costs related to all Marathon Group
operating segments in excess of amounts billed to MAP under service
contracts and amounts charged out to operating segments under Marathon's
shared services procedures
. USX corporate general and administrative costs. These costs primarily
consist of employment costs including pension effects, professional
services, facilities and other related costs associated with corporate
activities.
. Inventory market valuation adjustments
. Certain other items not allocated to operating segments for business
performance reporting purposes (see (a) in reconcilement table on page
G-19)
G-17
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 MAP;
and 3) Other Energy Related Businesses (OERB). Other Energy Related Businesses
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 in the Slovak Republic.
Domestic Steel is engaged in the domestic production and sale of steel mill
products, coke and taconite pellets; the management of mineral resources; coal
mining; engineering and consulting services; and real estate development and
management. USSK is engaged in the production and sale of steel mill products
and coke and primarily serves European markets.
Information on assets by segment is not provided as it is not reviewed by
the chief operating decision maker.
Total Total
Marathon Domestic U. S. Steel
E&P RM&T OERB Segments Steel USSK Segments Total
------ ------- ------ -------- -------- ---- ----------- -------
(In millions)
2000
Revenues and other
income:
Customer............... $4,184 $28,693 $1,550 $34,427 $5,981 $ 92 $6,073 $40,500
Intersegment(a)........ 412 83 78 573 -- -- -- 573
Intergroup(a).......... 30 1 29 60 17 -- 17 77
Equity in earnings
(losses) of
unconsolidated
investees............. 47 22 15 84 (8) -- (8) 76
Other.................. 21 50 12 83 50 -- 50 133
------ ------- ------ ------- ------ ---- ------ -------
Total revenues and
other income.......... $4,694 $28,849 $1,684 $35,227 $6,040 $ 92 $6,132 $41,359
====== ======= ====== ======= ====== ==== ====== =======
Segment income.......... $1,535 $ 1,273 $ 38 $ 2,846 $ 23 $ 2 $ 25 $ 2,871
Significant noncash
items included in
segment income--
depreciation, depletion
and amortization(b).... 723 315 3 1,041 285 4 289 1,330
Capital
expenditures(c)........ 742 656 2 1,400 239 5 244 1,644
1999
Revenues and other
income:
Customer............... $2,856 $19,962 $ 731 $23,549 $5,519 $-- $5,519 $29,068
Intersegment(a)........ 202 47 40 289 -- -- -- 289
Intergroup(a).......... 19 -- 22 41 17 -- 17 58
Equity in earnings
(losses) of
unconsolidated
investees............. (2) 17 26 41 (43) -- (43) (2)
Other.................. 30 50 15 95 46 -- 46 141
------ ------- ------ ------- ------ ---- ------ -------
Total revenues and
other income.......... $3,105 $20,076 $ 834 $24,015 $5,539 $-- $5,539 $29,554
====== ======= ====== ======= ====== ==== ====== =======
Segment income.......... $ 618 $ 611 $ 61 $ 1,290 $ 91 $-- $ 91 $ 1,381
Significant noncash
items included in
segment income--
depreciation, depletion
and amortization(b).... 638 280 5 923 304 -- 304 1,227
Capital
expenditures(c)........ 744 612 4 1,360 286 -- 286 1,646
1998
Revenues and other
income:
Customer............... $1,905 $19,018 $ 306 $21,229 $6,374 $-- $6,374 $27,603
Intersegment(a)........ 144 10 17 171 -- -- -- 171
Intergroup(a).......... 13 -- 7 20 2 -- 2 22
Equity in earnings of
unconsolidated
investees............. 2 12 14 28 46 -- 46 74
Other.................. 26 40 11 77 55 -- 55 132
------ ------- ------ ------- ------ ---- ------ -------
Total revenues and
other income.......... $2,090 $19,080 $ 355 $21,525 $6,477 $-- $6,477 $28,002
====== ======= ====== ======= ====== ==== ====== =======
Segment income.......... $ 278 $ 896 $ 33 $ 1,207 $ 517 $-- $ 517 $ 1,724
Significant noncash
items included in
segment income--
depreciation, depletion
and amortization(b).... 581 272 6 859 283 -- 283 1,142
Capital
expenditures(c)........ 839 410 8 1,257 305 -- 305 1,562
- --------
(a) Intersegment and intergroup revenues and transfers were conducted under
terms comparable to those with unrelated parties.
(b) Differences between segment totals and consolidated totals represent
amounts included in administrative expenses, international and domestic
oil and gas property impairments and impairment of coal assets.
(c) Differences between segment totals and consolidated totals represent
amounts related to corporate administrative activities.
G-18
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following schedules reconcile segment amounts to amounts reported in the
Groups' financial statements:
Marathon Group U. S. Steel Group
------------------------- ----------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------
(In millions)
Revenues and Other Income:
Revenues and other income
of reportable segments... $35,227 $24,015 $21,525 $6,132 $5,539 $6,477
Items not allocated to
segments:
Joint venture formation
charges................ (931) -- -- -- -- --
Gain on ownership change
in MAP................. 12 17 245 -- -- --
Losses on certain equity
investments............ -- -- -- -- (69) --
Other................... 124 (36) 24 -- -- --
Elimination of
intersegment revenues.... (573) (289) (171) -- -- --
------- ------- ------- ------ ------ ------
Total Group revenues
and other income...... $33,859 $23,707 $21,623 $6,132 $5,470 $6,477
======= ======= ======= ====== ====== ======
Income:
Income for reportable
segments................. $ 2,846 $ 1,290 $ 1,207 $ 25 $ 91 $ 517
Items not allocated to
segments:
Joint venture formation
charges................ (931) -- -- -- -- --
Gain on ownership change
in MAP................. 12 17 245 -- -- --
Administrative
expenses............... (136) (108) (106) (25) (17) (24)
Net pension credits..... -- -- -- 266 228 186
Costs related to former
business activities.... -- -- -- (91) (83) (100)
Inventory market
valuation adjustments.. -- 551 (267) -- -- --
Other(a)................ (143) (37) (141) (71) (69) --
------- ------- ------- ------ ------ ------
Total Group income from
operations............ $ 1,648 $ 1,713 $ 938 $ 104 $ 150 $ 579
======= ======= ======= ====== ====== ======
- --------
(a) Represents in 2000, for the Marathon Group, certain oil and gas property
impairments, net gains on certain asset sales and reorganization charges
and for the U. S. Steel Group, impairment of coal assets. Represents in
1999, for the Marathon Group, primarily certain oil and gas property
impairments, costs of a voluntary early retirement program and net losses
on certain asset sales and, for the U. S. Steel Group, certain losses
related to investments in equity investees. Represents in 1998, certain
international oil and gas property impairments, certain suspended
exploration well write-offs, a gas contract settlement and MAP transition
charges.
G-19
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Geographic Area:
The information below summarizes the operations in different geographic
areas. Transfers between geographic areas are at prices which approximate
market.
Revenues and Other Income
-----------------------------------------
Within Between
Year Geographic Areas Geographic Areas Total Assets(a)
---- ---------------- ---------------- ------- ---------
(In millions)
Marathon Group:
United States......... 2000 $32,239 $ -- $32,239 $ 6,711
1999 22,716 -- 22,716 7,555
1998 20,837 -- 20,837 7,659
Canada................ 2000 856 899 1,755 940
1999 426 521 947 1,112
1998 209 368 577 1,094
United Kingdom........ 2000 567 -- 567 1,698
1999 459 -- 459 1,581
1998 462 -- 462 1,739
Other Foreign
Countries............ 2000 197 188 385 310
1999 106 88 194 735
1998 115 52 167 468
Eliminations.......... 2000 -- (1,087) (1,087) --
1999 -- (609) (609) --
1998 -- (420) (420) --
Total Marathon
Group.............. 2000 $33,859 $ -- $33,859 $ 9,659
1999 23,707 -- 23,707 10,983
1998 21,623 -- 21,623 10,960
U. S. Steel Group:
United States......... 2000 $ 6,027 $ -- $ 6,027 $ 2,745
1999 5,452 -- 5,452 2,889
1998 6,460 -- 6,460 3,043
Foreign Countries..... 2000 105 -- 105 386
1999 18 -- 18 63
1998 17 -- 17 69
Total U. S. Steel
Group.............. 2000 $ 6,132 $ -- $ 6,132 $ 3,131
1999 5,470 -- 5,470 2,952
1998 6,477 -- 6,477 3,112
Eliminations............ 2000 $ (77) $ -- $ (77) $ --
1999 (58) -- (58) --
1998 (23) -- (23) --
Total USX Corporation... 2000 $39,914 $ -- $39,914 $12,790
1999 29,119 -- 29,119 13,935
1998 28,077 -- 28,077 14,072
- --------
(a) Includes property, plant and equipment and investments.
G-20
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Pensions and Other Postretirement Benefits
USX has noncontributory defined benefit pension plans covering substantially
all U.S. employees. Benefits under these plans are primarily based upon years
of service and final average pensionable earnings, or a minimum benefit based
upon years of service, whichever is greater. In addition, pension benefits
based upon a percent of total career pensionable earnings cover certain
participating salaried employees.
USX also has defined benefit retiree health care and life insurance plans
(other benefits) covering most U.S. employees upon their retirement. Health
care benefits are provided through comprehensive hospital, surgical and major
medical benefit provisions or through health maintenance organizations, both
subject to various cost sharing features. Life insurance benefits are provided
to certain nonunion and union represented retiree beneficiaries primarily based
on employees' annual base salary at retirement. For most U.S. union retirees,
benefits are provided for the most part based on fixed amounts negotiated in
labor contracts with the appropriate unions.
Pension
Benefits Other Benefits
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
(In millions)
Change in benefit obligations
Benefit obligations at January 1.... $ 7,584 $ 8,629 $ 2,374 $ 2,710
Service cost........................ 128 152 26 32
Interest cost....................... 572 540 184 169
Plan amendments..................... 6 399(a) 1 (30)
Actuarial (gains) losses............ 551 (1,019) 306 (333)
Plan mergers and acquisitions....... -- 56 -- 11
Settlements, curtailments and
termination benefits............... (99) (329) 22 --
Benefits paid....................... (883) (844) (189) (185)
------- ------- ------- -------
Benefit obligations at December 31.. $ 7,859 $ 7,584 $ 2,724 $ 2,374
======= ======= ======= =======
Change in plan assets
Fair value of plan assets at January
1.................................. $11,305 $11,574 $ 281 $ 265
Actual return on plan assets........ 131 865 26 20
Plan merger and acquisitions........ (1) 38 -- 1
Employer contributions.............. 1 2 576(b) 34
Trustee distributions(c)............ (34) (30) -- --
Settlements paid.................... (134) (306) -- --
Benefits paid from plan assets...... (877) (838) (41) (39)
------- ------- ------- -------
Fair value of plan assets at
December 31........................ $10,391 $11,305 $ 842 $ 281
======= ======= ======= =======
Funded status of plans at December
31................................. $ 2,532(d) $ 3,721(d) $(1,882) $(2,093)
Unrecognized net gain from
transition......................... (20) (95) -- --
Unrecognized prior service costs
(credits).......................... 778 880 (47) (53)
Unrecognized net actuarial gains.... (499) (1,945) (126) (458)
Additional minimum liability(e)..... (38) (24) -- --
------- ------- ------- -------
Prepaid (accrued) benefit cost...... $ 2,753 $ 2,537 $(2,055) $(2,604)
======= ======= ======= =======
- --------
(a) Results primarily from a five-year labor contract with the United
Steelworkers of America ratified in August 1999.
(b) Includes for the U. S. Steel Group, contributions of $530 million to a
Voluntary Employee Benefit Association trust, comprised of $30 million in
contractual requirements and an elective contribution of $500 million.
Also includes for the U. S. Steel Group, a $30 million elective
contribution to the non-union retiree life insurance trust.
G-21
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(c) Represents transfers of excess pension assets to fund retiree health care
benefits accounts under Section 420 of the Internal Revenue Code.
(d) Includes several plans that have accumulated benefit obligations in excess
of plan assets:
2000 1999
---- ----
Aggregate accumulated benefit obligations...................... $(74) $(53)
Aggregate projected benefit obligations........................ (92) (76)
Aggregate plan assets.......................................... -- --
(e) Additional minimum liability recorded was offset by the following:
Intangible asset............................................... $ 6 $ 9
Accumulated other comprehensive income (losses):
Beginning of year.............................................. $(10) $(37)
Change during year (net of tax)................................ (11) 27
---- ----
Balance at end of year......................................... $(21) $(10)
==== ====
Pension Benefits Other Benefits
------------------------ --------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
(In millions)
Components of net periodic
benefit cost (credit)
Service cost.............. $ 128 $ 152 $ 119 $ 26 $ 32 $ 27
Interest cost............. 572 540 544 184 169 172
Expected return on plan
assets................... (958) (895) (876) (24) (21) (21)
Amortization
--net transition gain... (71) (72) (74) -- -- --
--prior service costs
(credits).............. 102 87 75 (6) (4) 1
--actuarial (gains)
losses................. (53) 7 6 (26) (5) (13)
Multiemployer and other
USX plans................ 5 5 6 9(a) 7(a) 13(a)
Settlement and termination
(gains) losses........... 32(b) (42)(b) 10(b) 21(b) -- --
----- ----- ----- ---- ---- ----
Net periodic benefit cost
(credit)................. $(243) $(218) $(190) $184 $178 $179
===== ===== ===== ==== ==== ====
- --------
(a) Represents payments to a multiemployer health care benefit plan created by
the Coal Industry Retiree Health Benefit Act of 1992 based on assigned
beneficiaries receiving benefits. The present value of this unrecognized
obligation is broadly estimated to be $84 million, including the effects of
future medical inflation, and this amount could increase if additional
beneficiaries are assigned.
(b) Relates primarily to voluntary early retirement programs.
Other
Pension Benefits Benefits
----------------- ---------
2000 1999 2000 1999
-------- -------- ---- ----
Weighted average actuarial assumptions at December
31
Discount rate..................................... 7.5% 8.0% 7.5% 8.0%
Expected annual return on plan assets............. 9.0% 8.6% 8.5% 8.5%
Increase in compensation rate..................... 4.1% 4.1% 4.1% 4.1%
For measurement purposes, a 7.6% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2001. The rate was assumed
to decrease gradually to 5% in 2006 for the U. S. Steel Group and in 2007 for
the Marathon Group and remain at that level thereafter.
G-22
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A one-percentage-point change in assumed health care cost trend rates would
have the following effects:
1-Percentage- 1-Percentage-
Point Point
Increase Decrease
------------- -------------
(In millions)
Effect on total of service and interest cost
components....................................... $ 25 $ (21)
Effect on other postretirement benefit
obligations...................................... 248 (209)
10. Leases
Future minimum commitments for capital leases (including sale-leasebacks
accounted for as financings) and for operating leases having remaining
noncancelable lease terms in excess of one year are as follows:
Capital Operating
Leases Leases
------- ---------
(In millions)
2001......................................................... $ 12 $173
2002......................................................... 12 139
2003......................................................... 12 98
2004......................................................... 12 87
2005......................................................... 12 141
Later years.................................................. 89 173
Sublease rentals............................................. -- (80)
---- ----
Total minimum lease payments............................. 149 $731
====
Less imputed interest costs.................................. 54
----
Present value of net minimum lease payments included in
long-term debt.......................................... $ 95
====
Operating lease rental expense:
2000 1999 1998
---- ---- ----
(In millions)
Minimum rental................................................ $288 $273 $288
Contingent rental............................................. 30 29 29
Sublease rentals.............................................. (19) (19) (14)
---- ---- ----
Net rental expense.......................................... $299 $283 $303
==== ==== ====
USX leases a wide variety of facilities and equipment under operating
leases, including land and building space, office equipment, production
facilities and transportation equipment. Most long-term leases include renewal
options and, in certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other circumstances,
operating lease obligations totaling $104 million may be declared immediately
due and payable.
G-23
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
Provisions (credits) for income taxes were:
2000 1999 1998
---------------------- ---------------------- ----------------------
Current Deferred Total Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- ----- ------- -------- -----
(In millions)
Federal................. $257 $196 $453 $107 $257 $364 $102 $168 $270
State and local......... 41 3 44 4 1 5 33 18 51
Foreign................. 55 (50) 5 26 (46) (20) (4) (2) (6)
---- ---- ---- ---- ---- ---- ---- ---- ----
Total................. $353 $149 $502 $137 $212 $349 $131 $184 $315
==== ==== ==== ==== ==== ==== ==== ==== ====
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
2000 1999 1998
---- ---- ----
(In millions)
Statutory rate applied to income before income taxes........ $320 $369 $346
Effects of foreign operations:
Impairment of deferred tax benefits....................... 235 -- --
Adjustments to foreign valuation allowances............... (30) -- --
All other, including foreign tax credits.................. (35) (20) (37)
State and local income taxes after federal income tax
effects.................................................... 29 3 33
Credits other than foreign tax credits...................... (10) (10) (12)
Excess percentage depletion................................. (3) (7) (11)
Effects of partially owned companies........................ (5) (5) (4)
Dispositions of subsidiary investments...................... -- 7 --
Adjustment of prior years' federal income taxes............. (6) 4 (5)
Other....................................................... 7 8 5
---- ---- ----
Total provisions.......................................... $502 $349 $315
==== ==== ====
G-24
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities resulted from the following:
December 31
--------------
2000 1999
------ ------
(In millions)
Deferred tax assets:
Minimum tax credit carryforwards............................. $ 39 $ 131
State tax loss carryforwards (expiring in 2001 through
2020)....................................................... 125 122
Foreign tax loss carryforwards (portion of which expire in
2001 through 2015).......................................... 269 408
Employee benefits............................................ 1,028 1,204
Expected federal benefit for:
Crediting certain foreign deferred income taxes............ 315 530
Deducting state deferred income taxes...................... 36 36
Receivables, payables and debt............................... 93 82
Contingency and other accruals............................... 226 202
Investments in foreign subsidiaries.......................... 39 52
Other........................................................ 62 45
Valuation allowances:
Federal.................................................... -- (30)
State...................................................... (50) (52)
Foreign.................................................... (252) (282)
------ ------
Total deferred tax assets(a)............................. 1,930 2,448
------ ------
Deferred tax liabilities:
Property, plant and equipment................................ 1,890 2,365
Prepaid pensions............................................. 1,165 1,048
Inventory.................................................... 335 340
Investments in subsidiaries and equity investees............. 52 76
Other........................................................ 221 155
------ ------
Total deferred tax liabilities........................... 3,663 3,984
------ ------
Net deferred tax liabilities........................... $1,733 $1,536
====== ======
- --------
(a) USX expects to generate sufficient future taxable income to realize the
benefit of its deferred tax assets. In addition, the ability to realize the
benefit of foreign tax credits is based upon certain assumptions concerning
future operating conditions (particularly as related to prevailing oil
prices), income generated from foreign sources and USX's tax profile in the
years that such credits may be claimed. During 2000, the amount of net
deferred tax assets expected to be realized was reduced as a result of the
change in the amount and timing of future foreign source income due to the
exchange of Marathon's interest in Sakhalin Energy Investment Company Ltd.
(Sakhalin Energy) for other oil and gas producing interests. Additionally,
gross deferred tax assets and the associated valuation allowance were
reduced by a change in management's intent regarding the permanent
reinvestment of the earnings from certain foreign subsidiaries.
The consolidated tax returns of USX for the years 1990 through 1997 are
under various stages of audit and administrative review by the IRS. USX
believes it has made adequate provision for income taxes and interest which may
become payable for years not yet settled.
Pretax income (loss) included $245 million, $63 million and $(75) million
attributable to foreign sources in 2000, 1999 and 1998, respectively.
G-25
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Undistributed earnings of certain consolidated foreign subsidiaries at
December 31, 2000, amounted to $223 million. No provision for deferred U.S.
income taxes has been made for these subsidiaries because USX intends to
permanently reinvest such earnings in those foreign operations. If such
earnings were not permanently reinvested, a deferred tax liability of $78
million would have been required.
12. Investments and Long-Term Receivables
December 31
-----------
2000 1999
---- ------
(In
millions)
Equity method investments.......................................... $575 $1,055
Other investments.................................................. 101 71
Receivables due after one year..................................... 59 57
Deposits of restricted cash........................................ 19 22
Other.............................................................. 47 32
---- ------
Total............................................................ $801 $1,237
==== ======
Summarized financial information of investees accounted for by the equity
method of accounting follows:
2000 1999 1998
------ ------ ------
(In millions)
Income data--year:
Revenues and other income............................. $3,901 $3,449 $3,510
Operating income...................................... 286 95 324
Net income (loss)..................................... (43) (74) 176
Balance sheet data--December 31:
Current assets........................................ $1,239 $1,382
Noncurrent assets..................................... 3,443 5,008
Current liabilities................................... 1,427 1,481
Noncurrent liabilities................................ 1,957 2,317
USX acquired a 25% interest in VSZ during 2000. VSZ does not provide its
shareholders with financial statements prepared in accordance with generally
accepted accounting principles in the United States (USGAAP). Although shares
of VSZ are traded on the Bratislava Stock Exchange, those securities do not
have a readily determinable fair value as defined under USGAAP. Accordingly,
USX accounts for its investment in VSZ under the cost method of accounting.
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a transaction that
combined the steelmaking and bar producing assets of USS/Kobe Steel Company
(USS/Kobe) with companies controlled by Blackstone Capital Partners II. The
combined entity was named Republic Technologies International, LLC and is a
wholly owned subsidiary of Republic Technologies International Holdings, LLC
(Republic). As a result of this transaction, USX recorded $47 million in
charges related to the impairment of the carrying value of its investment in
USS/Kobe and costs related to the formation of Republic. These charges were
included in dividend and investee income (loss) in 1999. In addition, USX made
a $15 million equity investment in Republic. USX owned 50% of USS/Kobe and now
owns 16% of Republic. USX accounts for its investment in Republic under the
equity method of accounting. The seamless pipe business of USS/Kobe was
excluded from this transaction. That business, now known as Lorain Tubular
Company, LLC, became a wholly owned subsidiary of USX at the close of business
on December 31, 1999.
G-26
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends and partnership distributions received from equity investees were
$56 million in 2000, $46 million in 1999 and $42 million in 1998.
USX purchases from equity investees totaled $627 million, $411 million and
$395 million in 2000, 1999 and 1998, respectively. USX sales to equity
investees totaled $986 million, $853 million and $747 million in 2000, 1999 and
1998, respectively.
13. Short-Term Debt
In November 2000, USX entered into a $451 million 364-day revolving credit
agreement, which terminates in November 2001. Interest is based on defined
short-term market rates. During the term of the agreement, USX is obligated to
pay a variable facility fee on total commitments, which at December 31, 2000
was .10%. At December 31, 2000, there were no borrowings against this facility.
USX has a short-term line of credit totaling $150 million, bearing interest at
a defined short-term market rate, which at December 31, 2000 was 7.10%. At
December 31, 2000, USX had borrowed $150 million against this facility. Certain
other banks provide short-term lines of credit totaling $150 million which
require a .125% fee or maintenance of compensating balances of 3%. At December
31, 2000, there were no borrowings against these facilities.
MAP has a $100 million short-term revolving credit facility that terminates
in July 2001. Interest is based on defined short-term market rates. During the
term of the agreement, MAP is required to pay a variable facility fee on total
commitments, which at December 31, 2000 was .11%. At December 31, 2000, there
were no borrowings against this facility.
USSK has a short-term $50 million credit facility that expires in November
2001. The facility, which is non-recourse to USX, bears interest on prevailing
short-term market rates plus 1%. USSK is obligated to pay a .25% commitment fee
on undrawn amounts. At December 31, 2000, there were no borrowings against this
facility.
G-27
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Long-Term Debt
December 31
Interest -------------
Rates -- % Maturity 2000 1999
--------------- ----------- ------ ------
(In millions)
USX Corporation:
Revolving credit facility(a)....... 2005 $ 300 $ 300
Commercial paper(a)................ 7.68 77 165
Notes payable...................... 6 13/20 - 9 4/5 2001 - 2023 2,505 2,525
Obligations relating to Industrial
Development and Environmental
Improvement Bonds and Notes(b).... 4 1/4 - 6 7/8 2009 - 2033 494 494
Receivables facility(c)............ 2004 350 350
All other obligations, including
sale-leaseback financing and
capital leases.................... 2001 - 2012 88 92
Consolidated subsidiaries:
Revolving credit facilities(d)..... 2001 - 2003 -- --
USSK loan facility(e).............. 8 1/2 2010 325 --
Guaranteed Notes................... 7 2002 135 135
Guaranteed Loan(f)................. 9 1/20 2001 - 2006 199 223
Notes payable...................... 8 1/2 2001 1 1
All other obligations, including
capital leases.................... 2001 - 2011 11 26
------ ------
Total(g)(h)...................... 4,485 4,311
Less unamortized discount............ 25 28
Less amount due within one year...... 287 61
------ ------
Long-term debt due after one
year............................ $4,173 $4,222
====== ======
- --------
(a) In November 2000, USX entered into a $1,354 million 5-year revolving credit
agreement, terminating in November 2005, which in conjunction with a $451
million 364-day revolving credit agreement, terminating in December 2001,
replaced the prior $2,350 million facility. Interest on the facility is
based on defined short-term market rates. During the term of the agreement,
USX is obligated to pay a variable facility fee on total commitments, which
at December 31, 2000 was .125%. At December 31, 2000, $300 million had been
borrowed against this facility. The commercial paper is supported by the
unused and available credit on the 5-year facility and, accordingly, is
classified as long-term debt.
(b) At December 31, 2000, USX had outstanding obligations relating to
Environmental Improvement Bonds in the amount of $141 million, which were
supported by letter of credit arrangements that could become short-term
obligations under certain circumstances.
(c) In December 1999, USX entered into an agreement under which the U. S. Steel
Group participates in a program to sell an undivided interest in certain
accounts receivable. A previous program expired in October 1999 and was
accounted for as a transfer of receivables. The new program is accounted
for as a secured borrowing. Payments are collected from sold accounts
receivable and invested in new accounts receivable for the purchaser and a
yield, based on short-term market rates, is transferred to the purchaser.
If the U. S. Steel Group does not have sufficient eligible receivables to
reinvest for the purchaser, the size of the program is reduced accordingly.
The purchaser has a security interest in a pool of receivables to secure
USX's obligations under the program. If the receivables facility is not
renewed annually, the balance outstanding of such facility could be
refinanced by the 5-year facility discussed in (a), or another long-term
debt source; and therefore, is classified as long-term debt. The amounts
sold under the previous receivables programs averaged $291 million and $347
million for the years 1999 and 1998, respectively.
(d) MAP has a $400 million revolving credit facility that terminates in July
2003. Interest is based on defined short-term market rates. During the term
of the agreement, MAP is required to pay a variable facility fee
G-28
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
on total commitments, which at December 31, 2000 was .125%. At December 31,
2000, the unused and available credit was $352 million, which reflects
reductions for outstanding letters of credit. In the event that MAP
defaults on indebtedness (as defined in the agreement) in excess of $100
million, USX has guaranteed the payment of any outstanding obligations.
(e) USSK has a loan facility with a group of financial institutions
aggregating $325 million. The loan, which is non-recourse to USX, bears
interest at a fixed rate of 8.5% per annum. The loan is subject to annual
repayments of $20 million beginning in 2003, with the balance due in 2010.
Mandatory prepayments of the loan may be required based upon a cash flow
formula or a change in control of USX.
(f) The Guaranteed Loan was used to fund a portion of the costs in connection
with the development of the East Brae Field and the SAGE pipeline in the
North Sea. A portion of proceeds from a long-term gas sales contract is
dedicated to loan service under certain circumstances. Prepayment of the
loan may be required under certain situations, including events impairing
the security interest.
(g) Required payments of long-term debt for the years 2002-2005 are $209
million, $207 million, $710 million and $440 million, respectively.
(h) In the event of a change in control of USX, as defined in the related
agreements, debt obligations totaling $3,614 million may be declared
immediately due and payable. The principal obligations subject to such a
provision are Notes payable--$2,505 million; USSK loan facility--$325
million; and Guaranteed Loan--$199 million. 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.
15. Inventories
December 31
-------------
2000 1999
------ ------
(In millions)
Raw materials.................................................... $ 915 $ 830
Semi-finished products........................................... 429 392
Finished products................................................ 1,279 1,239
Supplies and sundry items........................................ 190 166
------ ------
Total (at cost)................................................ 2,813 2,627
Less inventory market valuation reserve.......................... -- --
------ ------
Net inventory carrying value................................... $2,813 $2,627
====== ======
At December 31, 2000 and 1999, the LIFO method accounted for 92% and 91%,
respectively, of total inventory value. Current acquisition costs were
estimated to exceed the above inventory values at December 31 by approximately
$880 million and $570 million in 2000 and 1999, respectively. Cost of revenues
was reduced and income from operations was increased by $17 million in 2000 as
a result of liquidations of LIFO inventories.
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories exceeds
net realizable value. The reserve is decreased to reflect increases in market
prices and inventory turnover and increased to reflect decreases in market
prices. Changes in the inventory market valuation reserve result in noncash
charges or credits to costs and expenses. During 2000, there were no charges
or credits to costs and expenses.
G-29
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Supplemental Cash Flow Information
2000 1999 1998
------- ------- --------
(In millions)
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized)............................. $ (341) $ (366) $ (336)
Income taxes paid................................ (387) (98) (183)
Commercial paper and revolving credit
arrangements--net:
Commercial paper
--issued....................................... $ 3,362 $ 6,282 $ --
--repayments................................... (3,450) (6,117) --
Credit agreements
--borrowings................................... 437 5,529 17,486
--repayments................................... (437) (5,980) (16,817)
Other credit arrangements--net................... 150 (95) 55
------- ------- --------
Total........................................ $ 62 $ (381) $ 724
======= ======= ========
Noncash investing and financing activities:
Common stock issued for dividend reinvestment and
employee stock plans............................ $ 15 $ 6 $ 5
Marathon Stock issued for Exchangeable Shares.... -- 7 11
Investee preferred stock received in conversion
of investee loan................................ -- 142 --
Disposal of assets:
Exchange of Sakhalin Energy investment......... 410 -- --
Deposit of RTI common shares in satisfaction of
indexed debt.................................. -- 56 --
Interest in USS/Kobe contributed to Republic... -- 40 --
Other--notes or common stock received.......... 20 20 2
Business combinations:
Acquisition of USSK:
Liabilities assumed.......................... 568 -- --
Contingent consideration payable at present
value....................................... 21 -- --
Investee liabilities consolidated in step
acquisition................................. 3 -- --
Acquisition of Tarragon:
Exchangeable Shares issued................... -- -- 29
Liabilities assumed.......................... -- -- 433
Acquisition of Ashland RM&T net assets:
38% interest in MAP.......................... -- -- 1,900
Liabilities assumed.......................... -- -- 1,038
Other acquisitions:
Liabilities assumed.......................... -- 42 --
Investee liabilities consolidated in step
acquisition................................. -- 26 --
17. Stock-Based Compensation Plans
The 1990 Stock Plan, as amended and restated, authorizes the Compensation
Committee of the Board of Directors to grant restricted stock, stock options
and stock appreciation rights to key management employees. Such employees are
generally granted awards of the class of common stock intended to reflect the
performance of the group(s) to which their work relates. Up to 0.5 percent of
the outstanding Marathon Stock and 0.8 percent of the outstanding Steel Stock,
as determined on December 31 of the preceding year, are available for grants
during each calendar year the 1990 Plan is in effect. In addition, awarded
shares that do not result in shares
G-30
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
being issued are available for subsequent grant, and any ungranted shares from
prior years' annual allocations are available for subsequent grant during the
years the 1990 Plan is in effect. As of December 31, 2000, 8,519,302 Marathon
Stock shares and 2,108,128 Steel Stock shares were available for grants in
2001.
Restricted stock represents stock granted for such consideration, if any, as
determined by the Compensation Committee, subject to provisions for forfeiture
and restricting transfer. Those restrictions may be removed as conditions such
as performance, continuous service and other criteria are met. Restricted stock
is issued at the market price per share at the date of grant and vests over
service periods that range from one to five years.
Deferred compensation is charged to stockholders' equity when the restricted
stock is granted and subsequently adjusted for changes in the market value of
the underlying stock. The deferred compensation is expensed over the balance of
the vesting period and adjusted if conditions of the restricted stock grant are
not met.
The following table presents information on restricted stock grants:
Marathon Stock Steel Stock
--------------------- ---------------------
2000 1999 1998 2000 1999 1998
------- ------ ------ ------- ------ ------
Number of shares granted.......... 410,025 28,798 25,378 305,725 18,272 17,742
Weighted-average grant-date fair
value per share.................. $25.50 $29.38 $34.00 $23.00 $28.22 $37.28
Stock options represent the right to purchase shares of Marathon Stock or
Steel Stock at the market value of the stock at date of grant. Certain options
contain the right to receive cash and/or common stock equal to the excess of
the fair market value of shares of common stock, as determined in accordance
with the plan, over the option price of shares. Most stock options vest after a
one-year service period and all expire 10 years from the date they are granted.
The following is a summary of stock option activity:
Marathon Stock Steel Stock
------------------- -------------------
Shares Price(a) Shares Price(a)
--------- -------- --------- --------
Balance December 31, 1997............... 3,694,865 $24.81 1,633,100 $34.35
Granted................................. 987,535 34.00 611,515 37.28
Exercised............................... (594,260) 27.61 (230,805) 32.00
Canceled................................ (13,200) 27.22 (21,240) 35.89
--------- ---------
Balance December 31, 1998............... 4,074,940 26.62 1,992,570 35.50
Granted................................. 1,005,000 29.38 656,400 28.22
Exercised............................... (176,160) 27.27 (2,580) 24.92
Canceled................................ (121,055) 30.19 (20,005) 38.51
--------- ---------
Balance December 31, 1999............... 4,782,725 27.08 2,626,385 33.67
Granted................................. 1,799,880 25.18 915,470 23.00
Exercised............................... (58,870) 23.11 (400) 24.30
Canceled................................ (410,115) 28.06 (62,955) 38.19
--------- ---------
Balance December 31, 2000............... 6,113,620 26.50 3,478,500 30.78
========= =========
- --------
(a) Weighted-average exercise price
G-31
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average grant-date fair value per option for the Marathon Stock
was $7.51 in 2000, $8.89 in 1999 and $10.43 in 1998. For the Steel Stock such
amounts were $6.63 in 2000, $6.95 in 1999 and $8.29 in 1998.
The following table represents stock options at December 31, 2000:
Outstanding Exercisable
-------------------------------------------- ---------------------------
Weighted-
Range of Number of Average Weighted- Number of Weighted-
Exercise Shares Under Remaining Average Shares Under Average
Prices Option Contractual Life Exercise Price Option Exercise Price
------------ ------------ ---------------- -------------- ------------ --------------
Marathon Stock.......... $17.00-23.44 1,947,290 4.5 years $21.03 1,647,290 $20.60
25.38-26.47 1,512,905 8.6 25.53 135,225 25.38
29.38-34.00 2,653,425 7.5 31.06 2,653,425 31.06
--------- ---------
Total...... 6,113,620 4,435,940
========= =========
Steel Stock............. $23.00-28.22 1,592,305 8.8 years $25.17 678,135 $28.10
31.69-34.44 1,050,920 5.2 32.53 1,050,920 32.53
37.28-44.19 835,275 6.0 39.26 835,275 39.26
--------- ---------
Total...... 3,478,500 2,564,330
========= =========
Actual stock-based compensation expense (credit) was $6 million in 2000 and
$(3) million in 1999 and 1998. Incremental compensation expense, as determined
under a fair value model, was not material ($.02 or less per share for all
years presented). Therefore, pro forma net income and earnings per share data
have been omitted.
USX has a deferred compensation plan for non-employee directors of its Board
of Directors. The plan permits participants to defer some or all of their
annual retainers in the form of common stock units or cash and it requires new
directors to defer at least half of their annual retainer in the form of common
stock units. Common stock units are book entry units equal in value to a share
of Marathon Stock or Steel Stock. Deferred stock benefits are distributed in
shares of common stock within five business days after a participant leaves the
Board of Directors. During 2000, 14,242 shares of Marathon Stock and 4,872
shares of Steel Stock were issued and during 1999, 10,541 shares of Marathon
Stock and 3,798 shares of Steel Stock were issued. During 1998, no shares of
common stock were issued.
18. Dividends
In accordance with the USX Certificate, dividends on the Marathon Stock and
Steel Stock are limited to the legally available funds of USX. Net losses of
any Group, as well as dividends and 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 all
classes of Common Stock. Subject to this limitation, the Board of Directors
intends to declare and pay dividends on the Marathon Stock and Steel Stock
based on the financial condition and results of operations of the related
group, although it has no obligation under Delaware law to do so. In making its
dividend decisions with respect to each of the Marathon Stock and Steel Stock,
the Board of Directors considers, among other things, the long-term earnings
and cash flow capabilities of the related group as well as the dividend
policies of similar publicly traded companies.
G-32
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Dividends on the Steel Stock are further limited to the Available Steel
Dividend Amount. At December 31, 2000, the Available Steel Dividend Amount was
at least $3,161 million. The Available Steel Dividend Amount will be increased
or decreased, as appropriate, to reflect U. S. Steel Group net income,
dividends, repurchases or issuances with respect to the Steel Stock and
preferred stock attributed to the U. S. Steel Group and certain other items.
19. Stockholder Rights Plan
On September 28, 1999, USX's Board of Directors adopted a new Stockholder
Rights Plan and declared a dividend distribution of one right for each
outstanding share of Marathon Stock and Steel Stock (referred to together as
"Voting Stock") to stockholders of record on October 9, 1999. Each right
becomes exercisable, at a price of $110, after any person or group has
acquired, obtained the right to acquire or made a tender or exchange offer for
15% or more of the outstanding voting power represented by the outstanding
Voting Stock, except pursuant to a qualifying all-cash tender offer for all
outstanding shares of Voting Stock which results in the offeror owning shares
of Voting Stock representing a majority of the voting power (other than Voting
Stock beneficially owned by the offeror immediately prior to the offer). Each
right entitles the holder, other than the acquiring person or group, to
purchase one one-hundredth of a share of Series A Junior Preferred Stock or,
upon the acquisition by any person of 15% or more of the outstanding voting
power represented by the outstanding Voting Stock, Marathon Stock or Steel
Stock (or, in certain circumstances, other property) having a market value of
twice the exercise price. After a person or group acquires 15% or more of the
outstanding voting power, if USX engages in a merger or other business
combination where it is not the surviving corporation or where it is the
surviving corporation and the Voting Stock is changed or exchanged, or if 50%
or more of USX's assets, earnings power or cash flow are sold or transferred,
each right entitles the holder to purchase common stock of the acquiring entity
having a market value of twice the exercise price. The rights and the exercise
price are subject to adjustment. The rights will expire on October 9, 2009,
unless such date is extended or the rights are earlier redeemed by USX for one
cent per right at any time prior to the point they become exercisable. Under
certain circumstances, the Board of Directors has the option to exchange one
share of the respective class of Voting Stock for each exercisable right.
20. Income Per Common Share
The method of calculating net income (loss) per share for the Marathon Stock
and the 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 Certificate, 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 for
dividend requirements of preferred stock and is based on the weighted average
number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of stock
options, provided in each case, the effect is not antidilutive.
G-33
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 1999 1998
---------------- --------------- ---------------
Basic Diluted Basic Diluted Basic Diluted
------- ------- ------- ------- ------- -------
COMPUTATION OF INCOME PER
SHARE
Marathon Group
Net income (millions)...... $ 432 $ 432 $ 654 $ 654 $ 310 $ 310
======= ======= ======= ======= ======= =======
Shares of common stock
outstanding (thousands):
Average number of common
shares outstanding....... 311,531 311,531 309,696 309,696 292,876 292,876
Effect of dilutive
securities--stock
options.................. -- 230 -- 314 -- 559
------- ------- ------- ------- ------- -------
Average common shares
and dilutive effect.... 311,531 311,761 309,696 310,010 292,876 293,435
======= ======= ======= ======= ======= =======
Net income per share....... $ 1.39 $ 1.39 $ 2.11 $ 2.11 $ 1.06 $ 1.05
======= ======= ======= ======= ======= =======
U. S. Steel Group
Net income (loss)
(millions):
Income (loss) before
extraordinary losses..... $ (21) $ (21) $ 51 $ 51 $ 364 $ 364
Dividends on preferred
stock.................... 8 8 9 9 9 --
Extraordinary losses...... -- -- 7 7 -- --
------- ------- ------- ------- ------- -------
Net income (loss)
applicable to Steel
Stock.................... (29) (29) 35 35 355 364
Effect of dilutive
securities--trust
preferred securities..... -- -- -- -- -- 8
------- ------- ------- ------- ------- -------
Net income (loss)
assuming conversions... $ (29) $ (29) $ 35 $ 35 $ 355 $ 372
======= ======= ======= ======= ======= =======
Shares of common stock
outstanding (thousands):
Average number of common
shares outstanding....... 88,613 88,613 88,392 88,392 87,508 87,508
Effect of dilutive
securities:
Trust preferred
securities............... -- -- -- -- -- 4,256
Preferred stock........... -- -- -- -- -- 3,143
Stock options............. -- -- -- 4 -- 36
------- ------- ------- ------- ------- -------
Average common shares
and dilutive effect.... 88,613 88,613 88,392 88,396 87,508 94,943
======= ======= ======= ======= ======= =======
Per share:
Income (loss) before
extraordinary losses..... $ (.33) $ (.33) $ .48 $ .48 $ 4.05 $ 3.92
Extraordinary losses...... -- -- .08 .08 -- --
------- ------- ------- ------- ------- -------
Net income (loss)......... $ (.33) $ (.33) $ .40 $ .40 $ 4.05 $ 3.92
======= ======= ======= ======= ======= =======
21. Property, Plant and Equipment
December 31
---------------
2000 1999
------- -------
(In millions)
Marathon Group............ $19,066 $20,860
U. S. Steel Group......... 9,270 8,748
------- -------
Total................... 28,336 29,608
Less accumulated
depreciation, depletion
and amortization......... 16,222 16,799
------- -------
Net..................... $12,114 $12,809
======= =======
Property, plant and equipment includes gross assets acquired under capital
leases (including sale-leasebacks accounted for as financings) of $106 million
at December 31, 2000, and $125 million at December 31, 1999; related amounts in
accumulated depreciation, depletion and amortization were $79 million and $81
million, respectively.
During 2000, the U. S. Steel Group recorded $71 million of impairments
relating to coal assets located in West Virginia and Alabama. The impairment
was recorded as a result of a reassessment of long-term prospects after adverse
geological conditions were encountered.
G-34
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 2000, the Marathon Group recorded $193 million of impairments of
certain E&P segment oil and gas properties, primarily located in Canada. The
impairments were recorded due to reserve revisions as a result of production
performance and disappointing drilling results.
These impairment charges are included in depreciation, depletion and
amortization.
22. Preferred Stock of Subsidiary and Trust Preferred Securities
USX Capital LLC, a wholly owned subsidiary of USX, sold 10,000,000 shares
(carrying value of $250 million) of 8 3/4% Cumulative Monthly Income Preferred
Shares (MIPS) (liquidation preference of $25 per share) in 1994. Proceeds of
the issue were loaned to USX. USX has the right under the loan agreement to
extend interest payment periods for up to 18 months, and as a consequence,
monthly dividend payments on the MIPS can be deferred by USX Capital LLC during
any such interest payment period. In the event that USX exercises this right,
USX may not declare dividends on any share of its preferred or common stocks.
The MIPS are redeemable at the option of USX Capital LLC and subject to the
prior consent of USX, in whole or in part from time to time, for $25 per share,
and will be redeemed from the proceeds of any repayment of the loan by USX. In
addition, upon final maturity of the loan, USX Capital LLC is required to
redeem the MIPS. The financial costs are included in net interest and other
financial costs.
In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly
Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust
I, a Delaware statutory business trust (Trust), for an equivalent number of
shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred
Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred
Securities at a fair value of $182 million.
USX owns all of the common securities of the Trust, which was formed for the
purpose of the Exchange. (The Trust Common Securities and the Trust Preferred
Securities are together referred to as the Trust Securities.) The Trust
Securities represent undivided beneficial ownership interests in the assets of
the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated
Debentures maturing March 31, 2037 (Debentures), having an aggregate principal
amount equal to the aggregate initial liquidation amount ($50.00 per security
and $203 million in total) of the Trust Securities issued by the Trust.
Interest and principal payments on the Debentures will be used to make
quarterly distributions and to pay redemption and liquidation amounts on the
Trust Preferred Securities. The quarterly distributions, which accumulate at
the rate of 6.75% per annum on the Trust Preferred Securities and the accretion
from fair value to the initial liquidation amount, are charged to income and
included in net interest and other financial costs.
Under the terms of the Debentures, USX has the right to defer payment of
interest for up to 20 consecutive quarters and, as a consequence, monthly
distributions on the Trust Preferred Securities will be deferred during such
period. If USX exercises this right, then, subject to limited exceptions, it
may not pay any dividend or make any distribution with respect to any shares of
its capital stock.
The Trust Preferred Securities are convertible at any time prior to the
close of business on March 31, 2037 (unless such right is terminated earlier
under certain circumstances) at the option of the holder, into shares of Steel
Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a
conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred
Security), subject to adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time at the option of
USX, at a premium of 101.95% of the initial liquidation amount through March
31, 2001, and thereafter, declining annually to the initial liquidation amount
on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31,
2037, or earlier under certain circumstances.
G-35
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Payments related to quarterly distributions and to the payment of redemption
and liquidation amounts on the Trust Preferred Securities by the Trust are
guaranteed by USX on a subordinated basis. In addition, USX unconditionally
guarantees the Trust's Debentures. The obligations of USX under the Debentures,
and the related indenture, trust agreement and guarantee constitute a full and
unconditional guarantee by USX of the Trust's obligations under the Trust
Preferred Securities.
23. Preferred Stock
USX is authorized to issue 40,000,000 shares of preferred stock, without par
value -
6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock)--As of
December 31, 2000, 2,413,487 shares (stated value of $1.00 per share;
liquidation preference of $50.00 per share) were outstanding. The 6.50%
Preferred Stock is convertible at any time, at the option of the holder, into
shares of Steel Stock at a conversion price of $46.125 per share of Steel
Stock, subject to adjustment in certain circumstances. This stock is redeemable
at USX's sole option, at a price of $50.975 per share beginning April 1, 2000,
and thereafter at prices declining annually on each April 1 to an amount equal
to $50.00 per share on and after April 1, 2003.
24. Derivative Instruments
USX remains at risk for possible changes in the market value of derivative
instruments; however, such risk should be mitigated by price changes in the
underlying hedged item. USX is also exposed to credit risk in the event of
nonperformance by counterparties. The credit-worthiness of counterparties is
subject to continuing review, including the use of master netting agreements to
the extent practical, and full performance is anticipated.
G-36
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth quantitative information by class of
derivative instrument for derivative instruments categorized as trading or
other than trading:
Recognized
Fair Value Carrying Trading Recorded Aggregate
Assets Amount Assets Gain or (Loss) Deferred Contract
(Liabilities)(a)(b) (Liabilities) for the Year Gain or (Loss) Values(c)
------------------- ------------- -------------- -------------- ---------
(In millions)
December 31, 2000:
Exchange-traded
commodity futures:
Trading................ $-- $-- $(19) $-- $ --
Other than trading..... -- -- -- 7 897
Exchange-traded
commodity options:
Trading................ -- -- -- -- --
Other than trading..... (6)(d) (6) -- (1) 971
OTC commodity swaps(e):
Trading................ -- -- -- -- --
Other than trading..... 35 (f) 35 -- 25 426
OTC commodity options:
Trading................ -- -- -- -- --
Other than trading..... (52)(g) (52) -- (40) 94
---- ---- ---- ---- ------
Total commodities...... $(23) $(23) $(19) $ (9) $2,388
==== ==== ==== ==== ======
Forward exchange
contracts(h):
--receivable........... $ 14 $ 14 $-- $-- $ 14
==== ==== ==== ==== ======
December 31, 1999:
Exchange-traded
commodity futures:
Trading................ $-- $-- $ 4 $-- $ 8
Other than trading..... -- -- -- 28 344
Exchange-traded
commodity options:
Trading................ -- -- 4 -- 179
Other than trading..... (6)(d) (6) -- (10) 1,262
OTC commodity swaps:
Trading................ -- -- -- -- --
Other than trading..... 6 (f) 6 -- 5 193
OTC commodity options:
Trading................ -- -- -- -- --
Other than trading..... 4 (g) 4 -- 5 238
---- ---- ---- ---- ------
Total commodities...... $ 4 $ 4 $ 8 $ 28 $2,224
==== ==== ==== ==== ======
Forward exchange
contracts:
--receivable........... $ 52 $ 52 $-- $-- $ 51
==== ==== ==== ==== ======
- --------
(a) The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the
forward exchange contract. The exchange-traded futures contracts and
certain option contracts do not have a corresponding fair value since
changes in the market prices are settled on a daily basis.
(b) The aggregate average fair value of all trading activities for 2000 and
1999 was $(5) million and $3 million, respectively. Detail by class of
instrument was not available.
(c) Contract or notional amounts do not quantify risk exposure, but are used in
the calculation of cash settlements under the contracts. The contract or
notional amounts do not reflect the extent to which positions may offset
one another.
(d) Includes fair values as of December 31, 2000 and 1999, for assets of $10
million and $11 million and for liabilities of $(16) million and $(17)
million, respectively.
(e) The OTC swap arrangements vary in duration with certain contracts extending
into 2008.
(f) Includes fair values as of December 31, 2000 and 1999, for assets of $84
million and $11 million and for liabilities of $(49) million and $(5)
million, respectively.
(g) Includes fair values as of December 31, 2000 and 1999, for assets of $1
million and $5 million and for liabilities of $(53) million and $(1)
million, respectively.
(h) The forward exchange contracts relating to USX's foreign operations have
various maturities ending in March 2001.
G-37
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
25. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
The following table summarizes financial instruments, excluding derivative
financial instruments disclosed in Note 24, by individual balance sheet
account:
December 31
-------------------------------
2000 1999
--------------- ---------------
Fair Carrying Fair Carrying
Value Amount Value Amount
------ -------- ------ --------
(In millions)
Financial assets:
Cash and cash equivalents..................... $ 559 $ 559 $ 133 $ 133
Receivables................................... 3,238 3,238 2,717 2,717
Investments and long-term receivables......... 211 147 190 134
------ ------ ------ ------
Total financial assets....................... $4,008 $3,944 $3,040 $2,984
====== ====== ====== ======
Financial liabilities:
Notes payable................................. $ 150 $ 150 $ -- $ --
Accounts payable.............................. 3,774 3,774 3,409 3,409
Accrued interest.............................. 108 108 107 107
Long-term debt (including amounts due within
one year).................................... 4,549 4,365 4,278 4,176
Preferred stock of subsidiary and trust
preferred securities......................... 357 433 408 433
------ ------ ------ ------
Total financial liabilities.................. $8,938 $8,830 $8,202 $8,125
====== ====== ====== ======
Fair value of financial instruments classified as current assets or
liabilities approximates carrying value due to the short-term maturity of the
instruments. Fair value of investments and long-term receivables was based on
discounted cash flows or other specific instrument analysis. Certain foreign
cost method investments are excluded from investments and long-term receivables
because the fair value is not readily determinable. USX is subject to market
risk and liquidity risk related to its investments; however, these risks are
not readily quantifiable. Fair value of preferred stock of subsidiary and trust
preferred securities was based on market prices. Fair value of long-term debt
instruments was based on market prices where available or current borrowing
rates available for financings with similar terms and maturities.
USX's only unrecognized financial instruments are financial guarantees and
commitments to extend credit. It is not practicable to estimate the fair value
of these forms of financial instrument obligations because there are no quoted
market prices for transactions which are similar in nature. For details
relating to financial guarantees, see Note 26.
26. Contingencies and Commitments
USX is the subject of, or 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.
G-38
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental matters--
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 December 31, 2000 and 1999, accrued liabilities
for remediation totaled $212 million and $170 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 $57 million at December 31, 2000, and $52 million at December 31,
1999.
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 2000 and 1999, such capital expenditures totaled $91 million
and $78 million, respectively. USX anticipates making additional such
expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
At December 31, 2000 and 1999, accrued liabilities for platform abandonment
and dismantlement totaled $162 million and $152 million, respectively.
Guarantees--
Guarantees of the liabilities of unconsolidated entities by USX and its
consolidated subsidiaries totaled $82 million at December 31, 2000, and $219
million at December 31, 1999. In the event that any defaults of guaranteed
liabilities occur, USX has access to its interest in the assets of most of the
investees to reduce potential losses resulting from these guarantees. As of
December 31, 2000, the largest guarantee for a single such entity was $59
million.
At December 31, 2000 and 1999, USX's pro rata share of obligations of LOOP
LLC and various pipeline investees secured by throughput and deficiency
agreements totaled $119 million and $146 million, respectively. Under the
agreements, USX is required to advance funds if the investees are unable to
service debt. Any such advances are prepayments of future transportation
charges.
Commitments--
At December 31, 2000 and 1999, contract commitments to acquire property,
plant and equipment and long-term investments totaled $663 million and $568
million, respectively.
USSK has a commitment to the Slovak government for a capital improvements
program of $700 million, subject to certain conditions, over a period
commencing with the acquisition date and ending on December 31, 2010. USSK is
required to report periodically to the Slovak government on its status toward
meeting this commitment. The first reporting period ends on December 31, 2003.
USX entered into a 15-year take-or-pay arrangement in 1993, which requires
USX to accept pulverized coal each month or pay a minimum monthly charge of
approximately $1 million. Charges for deliveries of pulverized coal totaled $23
million in 2000, 1999 and 1998. If USX elects to terminate the contract early,
a maximum termination payment of $96 million, which declines over the duration
of the agreement, may be required.
USX is a party to a 15-year transportation services agreement with a natural
gas transmission company. The contract requires USX to pay minimum annual
demand charges of approximately $5 million starting in
G-39
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 2000 and concluding in 2015. The payments are required even if the
transportation facility is not utilized. Demand charges paid in 2000 were less
than $1 million.
27. Joint Venture Formation
In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed a
definitive agreement to form a joint venture combining certain of their oil and
gas producing activities in the U.S. Permian Basin, including Marathon's
interest in the Yates Field. This transaction will allow Marathon to expand its
interests in the Permian Basin and will improve access to materials for use in
enhanced recovery techniques in the Yates Field. The joint venture named MKM
Partners L.P., commenced operations in January 2001 and will be accounted for
under the equity method of accounting.
As a result of the agreement to form this joint venture, Marathon recognized
a pretax charge of $931 million in the fourth quarter 2000, which is included
in net gains (losses) on disposal of assets, and reclassified the remaining
book value associated with the Yates Field from property, plant and equipment
to assets held for sale. Upon completion of this transaction in January 2001,
the book value will be transferred from assets held for sale to investments and
long-term receivables.
28. Subsequent Event--Business Combination
On February 7, 2001, Marathon acquired 87% of the outstanding common stock
of Pennaco Energy Inc., a natural gas producer. Marathon plans to acquire the
remaining Pennaco shares through a merger in which each share of Pennaco common
stock, not purchased in the offer and not held by stockholders who have
properly exercised dissenters rights under Delaware law, will be converted into
the right to receive the tender offer price in cash, without interest. The
purchase price is expected to approximate $500 million. The acquisition will be
accounted for using the purchase method of accounting.
G-40
USX CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 1999
-------------------------------------------------- --------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
(In millions, except per share data)
Revenues and other
income:
Revenues(a)............. $10,293 $10,607 $10,293 $9,307 $8,725 $7,713 $6,649 $5,981
Other income (loss)..... (837) 72 57 122 53 (13) 35 (24)
------- ------- ------- ------ ------ ------ ------ ------
Total................... 9,456 10,679 10,350 9,429 8,778 7,700 6,684 5,957
Income (loss) from
operations.............. (625) 789 972 616 425 535 502 401
Includes:
Joint venture formation
charges................ (931) -- -- -- -- -- -- --
Inventory market
valuation credits...... -- -- -- -- -- 136 66 349
Income (loss) before
extraordinary losses.... (449) 140 423 297 205 201 189 110
Net income (loss)........ (449) 140 423 297 205 199 189 105
Marathon Stock data:
Net income (loss)........ $ (310) $ 121 $ 367 $ 254 $ 171 $ 230 $ 134 $ 119
Per share--basic and
diluted................ (1.00) .38 1.18 .81 .55 .74 .43 .38
Dividends paid per
share................... .23 .23 .21 .21 .21 .21 .21 .21
Price range of Marathon
Stock(b):
--Low................... 25 1/4 23 1/2 22 13/16 20 11/16 23 5/8 28 1/2 25 13/16 19 5/8
--High.................. 30 3/8 29 5/8 29 3/16 27 1/2 30 5/8 33 7/8 32 3/4 31 3/8
Steel Stock data:
Income (loss) before
extraordinary losses
applicable to Steel
Stock................... $ (141) $ 17 $ 54 $ 41 $ 32 $ (31) $ 52 $ (11)
Per share:
--basic................. (1.59) .19 .62 .45 .35 (.35) .60 (.13)
--diluted............... (1.59) .19 .62 .45 .35 (.35) .59 (.13)
Dividends paid per
share................... .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel
Stock(b):
--Low................... 12 11/16 14 7/8 18 1/4 20 5/8 21 3/4 24 9/16 23 1/2 22 1/4
--High.................. 18 5/16 19 11/16 26 7/8 32 15/16 33 30 1/16 34 1/4 29 1/8
- --------
(a) Certain items have been reclassified between revenues and cost of
revenues, primarily to give effect to new accounting standards as
disclosed in Note 2 of the Notes to Consolidated Financial Statements.
Amounts reclassified in the first, second and third quarters of 2000 were
$(65) million, $(138) million and $(14) million, respectively, and for the
first, second, third and fourth quarters of 1999 were $(97) million, $(82)
million, $(113) million and $(172) million, respectively.
(b) Composite tape.
G-41
USX CORPORATION
PRINCIPAL UNCONSOLIDATED INVESTEES (UNAUDITED)
December 31, 2000
-----------------
Company Country Ownership Activity
- ------- ------------- --------- --------
Clairton 1314B Partnership, United States 10% Coke & Coke By-Products
L.P.........................
CLAM Petroleum B.V........... Netherlands 50% Oil & Gas Production
Double Eagle Steel Coating United States 50% Steel Processing
Company.....................
Kenai LNG Corporation........ United States 30% Natural Gas
Liquification
LOCAP, Inc. ................. United States 50%(a) Pipeline & Storage
Facilities
LOOP LLC..................... United States 47%(a) Offshore Oil Port
Manta Ray Offshore Gathering United States 24% Natural Gas Transmission
Company, LLC................
Minnesota Pipe Line Company.. United States 33%(a) Pipeline Facility
Nautilus Pipeline Company, United States 24% Natural Gas Transmission
LLC.........................
Odyssey Pipeline LLC......... United States 29% Pipeline Facility
Poseidon Oil Pipeline United States 28% Crude Oil Transportation
Company, LLC................
PRO-TEC Coating Company...... United States 50% Steel Processing
Republic Technologies United States 16% Steel Products
International, LLC..........
Transtar, Inc. .............. United States 46% Transportation
USS-POSCO Industries......... United States 50% Steel Processing
Worthington Specialty United States 50% Steel Processing
Processing..................
- --------
(a) Represents the ownership of MAP.
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)
Mineral Reserves (other than oil and gas)
Reserves at December 31(a) Production
----------------------------- ------------------------
2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
----- ----- ----- ----- ----- ---- ---- ---- ---- ----
(Million tons)
Iron(b).................. 709.8 726.1 738.6 754.8 716.3 16.3 14.3 15.8 16.8 15.1
Coal(c).................. 786.6 787.4 789.7 798.8 859.5 5.5 6.2 7.3 7.5 7.1
- --------
(a) Commercially recoverable reserves include demonstrated (measured and
indicated) quantities which are expressed in recoverable net product tons.
(b) Iron ore reserves decreased in 2000, 1999 and 1998 due to production, lease
activity and engineering revisions. The increase in 1997 resulted from
lease exchanges of 55.3 million tons.
(c) Coal reserves decreased due to production, lease activity and engineering
revisions, and additionally in 1997 due to a 53.2 million ton lease
termination.
G-42
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
December 31
---------------------------------------------------
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ------ ------------ --------- -------
(In millions)
2000
Capitalized costs:
Proved properties......... $5,752 $4,739 $1,373 $11,864 $226 $12,090
Unproved properties....... 343 124 180 647 2 649
------ ------ ------ ------- ---- -------
Total..................... 6,095 4,863 1,553 12,511 228 12,739
------ ------ ------ ------- ---- -------
Accumulated depreciation,
depletion and
amortization:
Proved properties......... 3,435 3,074 420 6,929 170 7,099
Unproved properties....... 107 -- 13 120 1 121
------ ------ ------ ------- ---- -------
Total..................... 3,542 3,074 433 7,049 171 7,220
------ ------ ------ ------- ---- -------
Net capitalized costs...... $2,553 $1,789 $1,120 $ 5,462 $ 57 $ 5,519
====== ====== ====== ======= ==== =======
1999
Capitalized costs:
Proved properties......... $8,270 $4,465 $1,270 $14,005 $612 $14,617
Unproved properties....... 349 55 187 591 123 714
------ ------ ------ ------- ---- -------
Total..................... 8,619 4,520 1,457 14,596 735 15,331
------ ------ ------ ------- ---- -------
Accumulated depreciation,
depletion and
amortization:
Proved properties......... 5,019 2,859 136 8,014 169 8,183
Unproved properties....... 78 -- 6 84 -- 84
------ ------ ------ ------- ---- -------
Total..................... 5,097 2,859 142 8,098 169 8,267
------ ------ ------ ------- ---- -------
Net capitalized costs...... $3,522 $1,661 $1,315 $ 6,498 $566 $ 7,064
====== ====== ====== ======= ==== =======
G-43
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Results of Operations for Oil and Gas Producing Activities, Excluding Corporate
Overhead and Interest Costs(a)
United Other Equity
States Europe Intl. Consolidated Investees Total
------- ------ ----- ------------ --------- -------
(In millions)
2000:
Revenues:
Sales.................. $ 783 $ 579 $ 310 $ 1,672 $145 $ 1,817
Transfers.............. 1,337 -- 188 1,525 -- 1,525
Other revenues(b)...... (875) 10 55 (810) -- (810)
------- ----- ----- ------- ---- -------
Total revenues......... 1,245 589 553 2,387 145 2,532
Expenses:
Production costs....... (371) (111) (133) (615) (34) (649)
Shipping and handling
costs(c).............. (72) -- -- (72) -- (72)
Exploration expenses... (125) (37) (74) (236) (6) (242)
Reorganization costs... (45) (12) (10) (67) -- (67)
Depreciation, depletion
and amortization...... (380) (175) (122) (677) (27) (704)
Impairments............ (5) -- (188) (193) -- (193)
Other expenses......... (33) (3) (15) (51) -- (51)
------- ----- ----- ------- ---- -------
Total expenses......... (1,031) (338) (542) (1,911) (67) (1,978)
Other production-related
earnings (losses)(d)... 4 (21) 4 (13) 1 (12)
------- ----- ----- ------- ---- -------
Results before income
taxes.................. 218 230 15 463 79 542
Income taxes
(credits)(e)........... 70 62 (1) 131 27 158
------- ----- ----- ------- ---- -------
Results of operations... $ 148 $ 168 $ 16 $ 332 $ 52 $ 384
======= ===== ===== ======= ==== =======
1999:
Revenues:
Sales.................. $ 547 $ 431 $ 200 $ 1,178 $ 33 $ 1,211
Transfers.............. 882 -- 88 970 -- 970
Other revenues(b)...... 4 -- (2) 2 -- 2
------- ----- ----- ------- ---- -------
Total revenues......... 1,433 431 286 2,150 33 2,183
Expenses:
Production costs....... (322) (137) (99) (558) (25) (583)
Shipping and handling
costs(c).............. (77) -- -- (77) -- (77)
Exploration expenses... (134) (42) (51) (227) (4) (231)
Depreciation, depletion
and amortization...... (362) (143) (99) (604) (13) (617)
Impairments............ (16) -- -- (16) -- (16)
Other expenses......... (28) (7) (15) (50) -- (50)
------- ----- ----- ------- ---- -------
Total expenses......... (939) (329) (264) (1,532) (42) (1,574)
Other production-related
earnings (losses)(d)... 1 4 4 9 1 10
------- ----- ----- ------- ---- -------
Results before income
taxes.................. 495 106 26 627 (8) 619
Income taxes (credits).. 168 33 (7) 194 (3) 191
------- ----- ----- ------- ---- -------
Results of operations... $ 327 $ 73 $ 33 $ 433 $ (5) $ 428
======= ===== ===== ======= ==== =======
- --------
(a) Includes the results of using derivative instruments to manage commodity
and foreign currency risks.
(b) Includes net gains (losses) on asset dispositions and contract
settlements.
(c) Represents a reclassification of shipping and handling costs previously
reported as a reduction from oil and gas revenues.
(d) Includes revenues, net of associated costs, from third-party activities
that are an integral part of USX's production operations which may include
the processing and/or transportation of third-party production, and the
purchase and subsequent resale of gas utilized in reservoir management.
(e) Excludes net valuation allowance tax charges of $205 million.
G-44
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Results of Operations for Oil and Gas Producing Activities, Excluding Corporate
Overhead and Interest Costs(a)
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ----- ------------ --------- -------
(In millions)
1998:
Revenues:
Sales................... $ 542 $ 454 $ 71 $ 1,067 $ 28 $ 1,095
Transfers............... 536 -- 51 587 -- 587
Other revenues(b)....... 43 -- -- 43 -- 43
------ ----- ----- ------- ---- -------
Total revenues.......... 1,121 454 122 1,697 28 1,725
Expenses:
Production costs........ (295) (153) (57) (505) (8) (513)
Shipping and handling
costs(c)............... (67) -- -- (67) -- (67)
Exploration expenses.... (165) (23) (49) (237) (5) (242)
Depreciation, depletion
and amortization....... (339) (150) (58) (547) (8) (555)
Impairments(d).......... (14) (22) (47) (83) -- (83)
Other expenses.......... (37) (3) (11) (51) -- (51)
------ ----- ----- ------- ---- -------
Total expenses.......... (917) (351) (222) (1,490) (21) (1,511)
Other production-related
earnings (losses)(e).... 1 15 3 19 1 20
------ ----- ----- ------- ---- -------
Results before income
taxes................... 205 118 (97) 226 8 234
Income taxes (credits)... 61 22 (28) 55 3 58
------ ----- ----- ------- ---- -------
Results of operations.... $ 144 $ 96 $ (69) $ 171 $ 5 $ 176
====== ===== ===== ======= ==== =======
- --------
(a) Includes the results of using derivative instruments to manage commodity
and foreign currency risks.
(b) Includes net gains (losses) on asset dispositions and contract
settlements.
(c) Represents a reclassification of shipping and handling costs previously
reported as a reduction from oil and gas revenues.
(d) Includes suspended exploration well write-offs.
(e) Includes revenues, net of associated costs, from third-party activities
that are an integral part of USX's production operations which may include
the processing and/or transportation of third-party production, and the
purchase and subsequent resale of gas utilized in reservoir management.
G-45
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Costs Incurred for Property Acquisition, Exploration and Development--Including
Capital Expenditures
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ------ ------------ --------- ------
(In millions)
2000:
Property acquisition:
Proved................. $128 $-- $ 12 $ 140 $-- $ 140
Unproved............... (5)(a) -- 10 5 -- 5
Exploration.............. 161 33 93 287 2 289
Development.............. 288 42 103 433 77 510
1999:
Property acquisition:
Proved................. $ 20 $-- $ 10 $ 30 $-- $ 30
Unproved............... 26 12 107 145 -- 145
Exploration.............. 141 47 64 252 8 260
Development.............. 232 34 117 383 84 467
1998:
Property acquisition:
Proved................. $ 3 $ 3 $1,051 $1,057 $-- $1,057
Unproved............... 82 -- 57 139 -- 139
Exploration.............. 217 39 75 331 11 342
Development.............. 431 39 46 516 165 681
- --------
(a) Includes proceeds of $25 million realized from the reduction of mineral
interests.
G-46
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Estimated Quantities of Proved Oil and Gas Reserves
The following estimates of net reserves have been determined by deducting
royalties of various kinds from USX's gross reserves. The reserve estimates are
believed to be reasonable and consistent with presently known physical data
concerning size and character of the reservoirs and are subject to change as
additional knowledge concerning the reservoirs becomes available. The estimates
include only such reserves as can reasonably be classified as proved; they do
not include reserves which may be found by extension of proved areas or
reserves recoverable by secondary or tertiary recovery methods unless these
methods are in operation and are showing successful results. Undeveloped
reserves consist of reserves to be recovered from future wells on undrilled
acreage or from existing wells where relatively major expenditures will be
required to realize production. USX did not have any quantities of oil and gas
reserves subject to long-term supply agreements with foreign governments or
authorities in which USX acts as producer.
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ----- ------------ --------- -----
(Millions of barrels)
Liquid Hydrocarbons
Proved developed and
undeveloped reserves:
Beginning of year--1998..... 590 161 26 777 82 859
Purchase of reserves in
place...................... 1 -- 156 157 -- 157
Revisions of previous
estimates.................. (1) (28) 1 (28) (2) (30)
Improved recovery........... 3 -- -- 3 -- 3
Extensions, discoveries and
other additions............ 10 4 18 32 -- 32
Production.................. (49) (15) (7) (71) -- (71)
Sales of reserves in place.. (5) -- -- (5) -- (5)
--- --- --- --- --- ---
End of year--1998........... 549 122 194 865 80 945
Purchase of reserves in
place...................... 14 -- 7 21 -- 21
Revisions of previous
estimates.................. 2 (20) -- (18) (3) (21)
Improved recovery........... 11 -- 1 12 -- 12
Extensions, discoveries and
other additions............ 9 -- 5 14 -- 14
Production.................. (53) (12) (11) (76) -- (76)
Sales of reserves in place.. (12) -- (9) (21) -- (21)
--- --- --- --- --- ---
End of year--1999........... 520 90 187 797 77 874
Purchase of reserves in
place...................... 27 -- -- 27 -- 27
Exchange of interest(a)..... 6 60 -- 66 (73) (7)
Revisions of previous
estimates.................. (4) (35) (21) (60) -- (60)
Improved recovery........... 7 -- -- 7 -- 7
Extensions, discoveries and
other additions............ 15 3 1 19 -- 19
Production.................. (48) (10) (13) (71) (4) (75)
Sales of reserves in place.. (65) -- (3) (68) -- (68)
--- --- --- --- --- ---
End of year--2000........... 458 108 151 717 -- 717
=== === === === === ===
Proved developed reserves:
Beginning of year--1998..... 486 161 12 659 -- 659
End of year--1998........... 489 119 67 675 -- 675
End of year--1999........... 476 90 72 638 69 707
End of year--2000........... 414 74 57 545 -- 545
- --------
(a) Reserves represent the exchange of an equity interest in Sakhalin Energy
Investment Company Ltd. for certain interests in the UK Atlantic Margin
area and the Gulf of Mexico.
G-47
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ----- ------------ --------- -----
(Billions of cubic feet)
Natural Gas
Proved developed and
undeveloped reserves:
Beginning of year--
1998................... 2,232 1,048 23 3,303 111 3,414
Purchase of reserves in
place.................. 10 -- 782 792 -- 792
Revisions of previous
estimates.............. (16) 10 (1) (7) 5 (2)
Improved recovery....... -- -- -- -- -- --
Extensions, discoveries
and other additions.... 238 32 55 325 5 330
Production.............. (272) (124) (29) (425) (11) (436)
Sales of reserves in
place.................. (29) -- -- (29) -- (29)
----- ----- ---- ----- --- -----
End of year--1998....... 2,163 966 830 3,959 110 4,069
Purchase of reserves in
place.................. 5 -- 11 16 -- 16
Revisions of previous
estimates.............. (83) (81) (3) (167) 13 (154)
Improved recovery....... 8 -- 2 10 -- 10
Extensions, discoveries
and other additions.... 281 -- 94 375 13 388
Production.............. (275) (111) (59) (445) (13) (458)
Sales of reserves in
place.................. (42) -- (42) (84) -- (84)
----- ----- ---- ----- --- -----
End of year--1999....... 2,057 774 833 3,664 123 3,787
Purchase of reserves in
place.................. 114 -- 15 129 -- 129
Exchange of
interest(a)............ 14 31 -- 45 -- 45
Revisions of previous
estimates.............. (154) (114) (347) (615) (26) (641)
Improved recovery....... -- -- -- -- -- --
Extensions, discoveries
and other additions.... 217 35 38 290 2 292
Production.............. (268) (112) (52) (432) (10) (442)
Sales of reserves in
place.................. (66) -- (10) (76) -- (76)
----- ----- ---- ----- --- -----
End of year--2000....... 1,914 614 477 3,005 89 3,094
===== ===== ==== ===== === =====
Proved developed
reserves:
Beginning of year--
1998................... 1,702 1,024 19 2,745 78 2,823
End of year--1998....... 1,678 909 534 3,121 76 3,197
End of year--1999....... 1,550 741 497 2,788 65 2,853
End of year--2000....... 1,421 563 381 2,365 52 2,417
- --------
(a) Reserves represent the exchange of an equity interest in Sakhalin Energy
Investment Company Ltd. for certain interests in the UK Atlantic Margin
area and the Gulf of Mexico.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves
Estimated discounted future net cash flows and changes therein were
determined in accordance with Statement of Financial Accounting Standards No.
69. Certain information concerning the assumptions used in computing the
valuation of proved reserves and their inherent limitations are discussed
below. USX believes such information is essential for a proper understanding
and assessment of the data presented.
Future cash inflows are computed by applying year-end prices of oil and gas
relating to USX's proved reserves to the year-end quantities of those reserves.
Future price changes are considered only to the extent provided by contractual
arrangements in existence at year-end.
The assumptions used to compute the proved reserve valuation do not
necessarily reflect USX's expectations of actual revenues to be derived from
those reserves nor their present worth. Assigning monetary values to the
estimated quantities of reserves, described on the preceding page, does not
reduce the subjective and ever-changing nature of such reserve estimates.
G-48
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Additional subjectivity occurs when determining present values because the
rate of producing the reserves must be estimated. In addition to uncertainties
inherent in predicting the future, variations from the expected production rate
also could result directly or indirectly from factors outside of USX's control,
such as unintentional delays in development, environmental concerns, changes in
prices or regulatory controls.
The reserve valuation assumes that all reserves will be disposed of by
production. However, if reserves are sold in place or subjected to
participation by foreign governments, additional economic considerations also
could affect the amount of cash eventually realized.
Future development and production costs, including abandonment and
dismantlement costs, are computed by estimating the expenditures to be incurred
in developing and producing the proved oil and gas reserves at the end of the
year, based on year-end costs and assuming continuation of existing economic
conditions.
Future income tax expenses are computed by applying the appropriate year-end
statutory tax rates, with consideration of future tax rates already legislated,
to the future pretax net cash flows relating to USX's proved oil and gas
reserves. Permanent differences in oil and gas related tax credits and
allowances are recognized.
Discount was derived by using a discount rate of 10 percent a year to
reflect the timing of the future net cash flows relating to proved oil and gas
reserves.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves
United Other Equity
States Europe Intl. Consolidated Investees Total
------- ------- ------- ------------ --------- -------
(In millions)
December 31, 2000:
Future cash inflows.... $25,052 $ 4,571 $ 6,704 $36,327 $ 313 $36,640
Future production
costs................. (5,689) (1,662) (1,156) (8,507) (125) (8,632)
Future development
costs................. (638) (185) (309) (1,132) (26) (1,158)
Future income tax
expenses.............. (6,290) (677) (2,102) (9,069) (76) (9,145)
------- ------- ------- ------- ------ -------
Future net cash flows.. 12,435 2,047 3,137 17,619 86 17,705
10% annual discount for
estimated timing of
cash flows............ (5,403) (486) (1,524) (7,413) (19) (7,432)
------- ------- ------- ------- ------ -------
Standardized measure of
discounted future net
cash flows relating to
proved oil and gas
reserves.............. $ 7,032 $ 1,561 $ 1,613 $10,206 $ 67 $10,273
======= ======= ======= ======= ====== =======
December 31, 1999:
Future cash inflows.... $15,393 $ 4,426 $ 5,242 $25,061 $2,154 $27,215
Future production
costs................. (4,646) (1,864) (1,107) (7,617) (850) (8,467)
Future development
costs................. (445) (86) (315) (846) (88) (934)
Future income tax
expenses.............. (3,102) (987) (1,581) (5,670) (328) (5,998)
------- ------- ------- ------- ------ -------
Future net cash flows.. 7,200 1,489 2,239 10,928 888 11,816
10% annual discount for
estimated timing of
cash flows............ (3,371) (374) (862) (4,607) (372) (4,979)
------- ------- ------- ------- ------ -------
Standardized measure of
discounted future net
cash flows relating to
proved oil and gas
reserves.............. $ 3,829 $ 1,115 $ 1,377 $ 6,321 $ 516 $ 6,837
======= ======= ======= ======= ====== =======
December 31, 1998:
Future cash inflows.... $ 8,442 $ 3,850 $ 2,686 $14,978 $1,036 $16,014
Future production
costs................. (3,731) (2,240) (950) (6,921) (586) (7,507)
Future development
costs................. (559) (130) (323) (1,012) (124) (1,136)
Future income tax
expenses.............. (816) (630) (542) (1,988) (45) (2,033)
------- ------- ------- ------- ------ -------
Future net cash flows.. 3,336 850 871 5,057 281 5,338
10% annual discount for
estimated timing of
cash flows............ (1,462) (256) (392) (2,110) (136) (2,246)
------- ------- ------- ------- ------ -------
Standardized measure of
discounted future net
cash flows relating to
proved oil and gas
reserves.............. $ 1,874 $ 594 $ 479 $ 2,947 $ 145 $ 3,092
======= ======= ======= ======= ====== =======
G-49
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
Consolidated Equity Investees Total
------------------------- ------------------- -------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ----- ----- ----- ------- ------- -------
(In millions)
Sales and transfers of
oil and gas produced,
net of production
costs.................. $(2,508) $(1,516) $(1,125) $(111) $ (8) $ (20) $(2,619) $(1,524) $(1,145)
Net changes in prices
and production costs
related to future
production............. 6,820 5,891 (3,579) 12 484 (372) 6,832 6,375 (3,951)
Extensions, discoveries
and improved recovery,
less related costs..... 1,472 566 284 3 9 4 1,475 575 288
Development costs
incurred during the
period................. 433 383 516 77 84 165 510 467 681
Changes in estimated
future development
costs.................. (273) (69) (285) (22) (52) (100) (295) (121) (385)
Revisions of previous
quantity estimates..... (1,899) (346) (110) (43) (8) (2) (1,942) (354) (112)
Net changes in purchases
and sales of minerals
in place............... 380 68 637 -- -- -- 380 68 637
Net change in exchanges
of reserves in place... 755 -- -- (547) -- -- 208 -- --
Accretion of discount... 843 382 623 62 18 39 905 400 662
Net change in income
taxes.................. (1,969) (1,995) 825 90 (117) 57 (1,879) (2,112) 882
Other................... (169) 10 401 30 (39) 102 (139) (29) 503
------- ------- ------- ----- ----- ----- ------- ------- -------
Net change for the
year................... 3,885 3,374 (1,813) (449) 371 (127) 3,436 3,745 (1,940)
Beginning of year....... 6,321 2,947 4,760 516 145 272 6,837 3,092 5,032
------- ------- ------- ----- ----- ----- ------- ------- -------
End of year............. $10,206 $ 6,321 $ 2,947 $ 67 $ 516 $ 145 $10,273 $ 6,837 $ 3,092
======= ======= ======= ===== ===== ===== ======= ======= =======
G-50
USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
USX Corporation ("USX") is a diversified company engaged primarily in the
energy business through its Marathon Group, and in the steel business through
its U. S. Steel Group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the USX--Delhi Group ("Delhi
Companies"). On January 26, 1998, USX used the $195 million net proceeds from
the sale to redeem all of the 9.45 million outstanding shares of USX--Delhi
Group Common Stock. For additional information, see Note 5 to the USX
Consolidated Financial Statements.
On January 1, 1998, Marathon Oil Company ("Marathon") transferred certain
refining, marketing and transportation ("RM&T") net assets to Marathon Ashland
Petroleum LLC ("MAP"), a new consolidated subsidiary. Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland Inc. ("Ashland") in
exchange for a 38 percent interest in MAP. Financial measures such as revenues,
income from operations and capital expenditures in 2000, 1999 and 1998 include
100 percent of MAP and are not comparable to prior period amounts. Net income
and related per share amounts for 2000, 1999 and 1998 are net of minority
interest. For further discussion of MAP, see Note 3 to the USX Consolidated
Financial Statements.
On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited
("Tarragon"), a Canadian oil and gas exploration and production company. The
purchase price included $686 million in cash payments, the assumption of $345
million in debt and the issuance of Exchangeable Shares of an indirect Canadian
subsidiary of Marathon valued at $29 million. The Exchangeable Shares are
exchangeable at any time on a one-for-one basis for shares of USX -Marathon
Group Common Stock ("Marathon Stock"). On November 4, 1998, USX sold 17 million
shares of Marathon Stock. The proceeds to USX of $528 million were used to
reduce indebtedness incurred to fund the Tarragon acquisition. Financial
measures such as revenues, income from operations and capital expenditures
include operations of Marathon Canada Limited, formerly known as Tarragon,
commencing August 12, 1998. For further discussion of Tarragon, see Note 3 to
the USX Consolidated Financial Statements.
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which
held the steel operations and related assets of VSZ a.s. ("VSZ"), located in
the Slovak Republic. The 2000 results include USSK operations after the
acquisition date. For further discussion of USSK, see Note 3 to the USX
Consolidated Financial Statements.
Management's Discussion and Analysis of USX Consolidated Financial
Statements provides certain information about the Marathon and U. S. Steel
Groups, particularly in Management's Discussion and Analysis of Operations by
Group. More expansive Group information is provided in Management's Discussion
and Analysis of the Marathon Group and U. S. Steel Group, which are included in
the USX 2000 Form 10-K. Management's Discussion and Analysis should be read in
conjunction with the USX Consolidated Financial Statements and Notes to the USX
Consolidated Financial Statements.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in the forward-looking statements. For additional risk factors
affecting the businesses of USX, see Supplementary Data--Disclosures About
Forward-Looking Statements in the USX 2000 Form 10-K.
G-51
Management's Discussion and Analysis of Income
Revenues and Other Income for each of the last three years are summarized in
the following table:
2000 1999 1998
------- ------- -------
(Dollars in millions)
Revenues and other income(a)
Marathon Group................................. $33,859 $23,707 $21,623
U. S. Steel Group.............................. 6,132 5,470 6,477
Eliminations................................... (77) (58) (23)
------- ------- -------
Total USX Corporation revenues and other
income...................................... 39,914 29,119 28,077
Less:
Consumer excise taxes on petroleum products and
merchandise(b)................................ 4,344 3,973 3,824
------- ------- -------
Revenues and other income adjusted to exclude
above item.................................. $35,570 $25,146 $24,253
======= ======= =======
- --------
(a) Consists of revenues, dividend and investee income (loss), gain on
ownership change in MAP, net gains (losses) on disposal of assets and
other income.
(b) Included in both revenues and costs and expenses for the Marathon Group
and USX Consolidated, resulting in no effect on income.
Adjusted revenues and other income increased by $10,424 million in 2000
compared with 1999, reflecting a 43 percent increase for the Marathon Group and
a 12 percent increase for the U. S. Steel Group. Adjusted revenues and other
income increased by $893 million in 1999 compared with 1998, reflecting a 10
percent increase for the Marathon Group, partially offset by a 16 percent
decrease for the U. S. Steel Group. For further discussion, see Management's
Discussion and Analysis of Operations by Group, herein.
Income from operations for each of the last three years are summarized in
the following table:
2000 1999 1998
------- ------ ------
(Dollars in millions)
Reportable segments
Marathon Group
Exploration & production.......................... $ 1,535 $ 618 $ 278
Refining, marketing & transportation.............. 1,273 611 896
Other energy related businesses................... 38 61 33
------- ------ ------
Income for reportable segments--Marathon Group.. 2,846 1,290 1,207
U. S. Steel Group
Domestic Steel.................................... 23 91 517
U. S. Steel Kosice................................ 2 -- --
------- ------ ------
Income for reportable segments--U. S. Steel
Group.......................................... 25 91 517
------- ------ ------
Income for reportable segments--USX
Corporation.................................... 2,871 1,381 1,724
Items not allocated to reportable segments:
Marathon Group..................................... (1,198) 423 (269)
U. S. Steel Group.................................. 79 59 62
------- ------ ------
Total income from operations--USX Corporation... $ 1,752 $1,863 $1,517
======= ====== ======
Income from operations decreased $111 million in 2000 compared with 1999 and
increased $346 million in 1999 compared with 1998. The decrease in 2000,
despite higher income from reportable segments for the Marathon Group, was
primarily due to special charges at Marathon, in particular a noncash
adjustment related
G-52
to the formation of a joint venture with Kinder Morgan Energy Partners, L.P.
In addition, income from operations for the U. S. Steel Group declined in 2000
due primarily to higher costs related to energy and inefficient operating
levels, lower income from raw materials operations, particularly coal
operations, and lower sheet shipments resulting from high levels of imports
that continued in 2000. For further discussion, see Management's Discussion
and Analysis of Operations by Group, herein.
Net interest and other financial costs for each of the last three years are
summarized in the following table:
2000 1999 1998
---- ---- ----
(Dollars in
millions)
Interest and other financial income....................... $ 34 $ 3 $ 39
Interest and other financial costs........................ 375 365 318
---- ---- ----
Net interest and other financial costs................ 341 362 279
Less:
Favorable adjustment to carrying value of indexed
debt/(a)/.............................................. -- (13) (44)
---- ---- ----
Net interest and other financial costs adjusted to exclude
above item............................................... $341 $375 $323
==== ==== ====
- --------
(a) In December 1996, USX issued $117 million in aggregate principal amount
of 6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily
exchangeable at maturity for common stock of RTI International Metals,
Inc. ("RTI") or for the equivalent amount of cash, at USX's option. The
carrying value of indexed debt was adjusted quarterly to settlement value
based on changes in the value of RTI common stock. Any resulting
adjustment was charged or credited to income and included in interest and
other financial costs. In 1999, USX irrevocably deposited with a trustee
the RTI common stock resulting in satisfaction of USX's obligation. For
further information see Note 7 to the USX Consolidated Financial
Statements.
Excluding the effect of the adjustment to the carrying value of indexed
debt, net interest and other financial costs decreased by $34 million in 2000
as compared with 1999, and increased by $52 million in 1999 as compared with
1998. The decrease in 2000 was primarily due to higher interest income. The
increase in 1999 was primarily due to lower interest income and increased
financial costs as a result of higher average debt levels. For additional
information, see Note 6 to the USX Consolidated Financial Statements.
The provision for income taxes was $502 million in 2000, compared with $349
million in 1999 and $315 million in 1998. The 2000 provision included a $235
million one-time, noncash deferred tax charge for the Marathon Group as a
result of the change in the amount and timing of future foreign source income
due to the exchange of its interest in Sakhalin Energy Investment Company Ltd.
for oil and gas producing interests. The 1999 provision included a $23 million
favorable adjustment to deferred taxes for the Marathon Group related to the
outcome of a United States Tax Court case. The 1998 income tax provision
included $33 million of favorable income tax accrual adjustments relating to
foreign operations. For reconciliation of the federal statutory rate to total
provisions on income from continuing operations, see Note 11 to the USX
Consolidated Financial Statements.
Extraordinary loss of $7 million, net of income tax benefit, in 1999
included a $5 million loss resulting from the satisfaction of the indexed debt
and a $2 million loss for USX's share of Republic Technologies International,
LLC's extraordinary loss related to the early extinguishment of debt. For
additional information, see Note 7 to the USX Consolidated Financial
Statements.
Net income was $411 million in 2000, $698 million in 1999 and $674 million
in 1998. Excluding the gain on change of ownership in MAP in 2000, 1999 and
1998 and adjustments to the inventory market valuation reserve in 1999 and
1998, net income decreased by $69 million in 2000 compared with 1999, and
decreased by $152 million in 1999 compared with 1998.
G-53
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets increased by $1,376 million from year-end 1999, primarily
reflecting increased cash and cash equivalents, receivables, inventories and
assets held for sale. Receivables primarily increased as a result of higher
commodity prices. Cash and cash equivalents increased primarily due to an
increase in cash held by certain foreign subsidiaries. Inventories increased by
$186 million largely due to increases at the U. S. Steel Group, in particular
the acquisition of USSK. Assets held for sale increased mainly due to the
reclassification of the Yates field from property, plant and equipment.
Current liabilities increased by $704 million from year-end 1999, primarily
due to an increase in accounts payable reflecting higher year-end commodity
prices for the Marathon Group and the acquisition of USSK for the U. S. Steel
Group. In addition, notes payable increased and, because of the
reclassification of long- term debt to short-term, short-term debt also
increased.
Investments and long-term receivables decreased by $436 million from year-
end 1999, primarily due to the exchange of Marathon's interest in Sakhalin
Energy Investment Company Ltd.
Net property, plant and equipment decreased by $695 million from year-end
1999, primarily due to depreciation, asset impairments and sales, and
reclassifications to assets held for sale, partially offset by property
additions, including USSK.
Total long-term debt and notes payable increased by $327 million from year-
end 1999, primarily due to $325 million of debt related to the acquisition of
USSK, which is nonrecourse to USX. Debt attributed to the U. S. Steel Group
increased, while debt attributed to the Marathon Group decreased.
Stockholders' equity decreased by $92 million from year-end 1999 mainly
reflecting net income of $411 million offset by dividends declared and Marathon
Stock repurchases of $105 million. In July 2000, the USX Board of Directors
authorized spending up to $450 million to repurchase shares of Marathon Stock.
This repurchase program will continue from time to time as the Corporation's
financial condition and market conditions warrant.
Net cash provided from operating activities was $2,531 million in 2000,
$1,936 million in 1999 and $2,022 million in 1998. Cash provided from operating
activities in 2000 included a $500 million elective contribution to a Voluntary
Employee Benefit Association Trust ("VEBA"), a trust established by contract in
1994 covering United Steelworkers of America retirees' health care and life
insurance benefits and a $30 million elective contribution to a non-union
retiree life insurance trust. Cash provided from operating activities in 1999
included a payment of $320 million resulting from the expiration of a program
to sell U. S. Steel Group's accounts receivable. Excluding the effects of these
items, cash provided from operating activities increased $805 million in 2000
compared with 1999 primarily due to increased cash provided from operations at
the Marathon Group partially offset by increased income tax payments. Cash
provided from operating activities in 1998 included proceeds of $38 million for
the insurance litigation settlement pertaining to the 1995 Gary Works #8 blast
furnace explosion and the payment of $30 million for the repurchase of sold
accounts receivable. Excluding the effects of these adjustments, cash provided
from operating activities increased by $242 million in 1999 compared with 1998
primarily due to favorable working capital changes.
Capital expenditures for each of the last three years are summarized in the
following table:
2000 1999 1998
------ ------ ------
(Dollars in
millions)
Marathon Group
Exploration & production
Domestic............................................. $ 516 $ 356 $ 652
International........................................ 226 388 187
Refining, marketing & transportation................... 656 612 410
Other.................................................. 27 22 21
------ ------ ------
Subtotal Marathon Group............................ 1,425 1,378 1,270
U. S. Steel Group...................................... 244 287 310
------ ------ ------
Total USX Corporation capital expenditures......... $1,669 $1,665 $1,580
====== ====== ======
G-54
Domestic exploration and production capital expenditures for the Marathon
Group in 2000 mainly included the completion of the Viosca Knoll Block 786
(Petronius) development in the Gulf of Mexico, various producing property
acquisitions, and natural gas developments in East Texas and other gas basins
throughout the western United States. International exploration and production
projects included the completion of the Tchatamba West development, located
offshore Gabon, and continued oil and natural gas developments in Canada.
Refining, marketing and transportation capital expenditures by MAP primarily
consisted of refinery modifications, including the initiation of the delayed
coker unit project at the Garyville refinery, and upgrades and expansions of
retail marketing outlets.
Capital expenditures for the U. S. Steel Group in 2000 included exercising
an early buyout option of a lease for approximately half of the Gary Works No.
2 Slab Caster, the continued replacement of coke battery thruwalls at Gary
Works, installation of the remaining two coilers at Gary's hot strip mill, a
blast furnace stove replacement at Gary Works and the continuation of an
upgrade to the Mon Valley cold reduction mill.
Capital expenditures in 2001 are expected to be approximately $1.9 billion.
Expenditures for the Marathon Group are expected to be approximately $1.5
billion. Domestic exploration and production projects planned for 2001 will
focus on gas projects and include various producing property acquisitions.
Planned capital expenditures in 2001 do not include the capital requirements
related to the acquisition of Pennaco Energy, Inc. ("Pennaco"). International
exploration and production projects include the continued development of the
Foinaven area in the U.K. Atlantic Margin and continued oil and natural gas
developments in Canada. Refining, marketing and transportation spending by MAP
will primarily consist of refinery improvements, including the completion of
the delayed coker unit project at the Garyville refinery, upgrades and
expansions of retail marketing outlets, and expansion and enhancement of
logistics systems. Other Marathon spending will include funds for development
and installation of SAP software, which is an enterprise resource planning
system that will allow the integration of processes among business units and
with outside enterprises.
Capital expenditures for the U. S. Steel Group in 2001 are expected to be
approximately $425 million. Planned projects include exercising an early buyout
option of a lease for the balance of the Gary Works No. 2 Slab Caster, work on
the No. 3 blast furnace at Mon Valley Works, work on the No. 2 stove at the No.
6 blast furnace at Gary Works, the completion of the replacement of coke
battery thruwalls at Gary Works, the completion of an upgrade to the Mon Valley
cold reduction mill, mobile equipment purchases, systems development projects,
and projects at USSK, including the completion of the tin mill upgrade.
Contract commitments to acquire property, plant and equipment and long-term
investments at December 31, 2000, totaled $663 million compared with $568
million at December 31, 1999.
Investments in investees of $100 million in 2000 mainly reflected Marathon
Group development spending for the Sakhalin II project in Russia and U. S.
Steel Group investment in stock of VSZ in which USX now holds a 25 percent
interest.
The above statements with respect to capital expenditures are forward-
looking statements reflecting management's best estimates based on information
currently available. To the extent this information proves to be inaccurate,
the timing and levels of future expenditures could differ materially from those
included in the forward-looking statements. Factors that could cause future
capital expenditures to differ materially include changes in industry supply
and demand, general economic conditions, the availability of business
opportunities and levels of cash flow from operations for each of the Groups.
The timing of completion or cost of particular capital projects could be
affected by unforeseen hazards such as weather conditions, explosions or fires.
Proceeds from disposal of assets were $560 million in 2000, compared with
$366 million in 1999 and $86 million in 1998. Proceeds in 2000 primarily
reflected Marathon's Sakhalin exchange, sales of interest in the
Angus/Stellaria development in the Gulf of Mexico, the sale of non-core
Speedway SuperAmerica stores and other domestic production properties. Proceeds
in 1999 primarily reflected the sales of Scurlock Permian LLC,
G-55
over 150 non-strategic domestic and international production properties and
Carnegie Natural Gas Company and affiliated subsidiaries, all of which were
attributed to the Marathon Group.
The net change in restricted cash was a net withdrawal of $3 million in
2000, compared with a net deposit of $1 million in 1999 and a net withdrawal of
$174 million in 1998. The $174 million net withdrawal in 1998 was primarily the
result of redeeming all of the outstanding shares of USX--Delhi Group Common
Stock with the $195 million of net proceeds from the sale of the Delhi
Companies.
Repayments of loans and advances to investees were $10 million in 2000
compared with $1 million in 1999 and $71 million in 1998. In 1998, Sakhalin
Energy Investment Company Ltd. repaid advances made by Marathon in connection
with the Sakhalin II project.
Net cash changes related to financial obligations (the net of commercial
paper and revolving credit arrangements, debt borrowings and repayments on the
Consolidated Statement of Cash Flows) decreased $4 million in 2000, compared
with an increase of $187 million in 1999 and an increase of $315 million in
1998. The decrease in 2000 reflects the net effects of net cash provided from
operating activities, net cash used in investing activities, distributions to
minority shareholder of MAP, dividends paid and a stock repurchase program for
Marathon Group. The increase in 1999 reflects the net effects of net cash
provided from operating activities, net cash used in investing activities,
distributions to minority shareholder of MAP and dividends paid. The increase
in 1998 was primarily the result of borrowings against revolving credit
agreements to fund the acquisition of Tarragon.
Significant additions to long-term debt for each of the last three years are
summarized in the following table:
2000 1999 1998
---- ---- ----
(Dollars in
millions)
Aggregate principal amounts of:
6.65% Notes due 2006....................................... $-- $300 $--
6.85% Notes due 2008....................................... -- -- 400
U. S. Steel receivables facility........................... -- 350 --
USSK loan facility(a)...................................... 325 -- --
Environmental bonds and capital leases(b).................. -- 37 280
---- ---- ----
Total.................................................... $325 $687 $680
==== ==== ====
- --------
(a) The USSK loan facility is nonrecourse to USX.
(b) Issued to refinance an equivalent amount of environmental improvement
refunding bonds.
In the event of a change in control of USX, debt and lease obligations
totaling $3,818 million at year-end 2000 may be declared immediately due and
payable or required to be collateralized. See Notes 10 and 14 to the USX
Consolidated Financial Statements.
Marathon Stock repurchased was $105 million in 2000. In July 2000, the USX
Board of Directors authorized spending up to $450 million to repurchase shares
of Marathon Stock. This repurchase program will continue from time to time as
the Corporation's financial condition and market conditions warrant.
Dividends paid increased $17 million in 2000 compared with 1999 and
increased $12 million in 1999 compared with 1998. The increase in 2000 was due
primarily to a two-cents-per-share increase in the quarterly Marathon Stock
dividend effective with dividends paid in the third quarter 2000.
Benefit Plan Activity
In 2000, USX contributed $530 million to a VEBA, including a $500 million
elective contribution, and $30 million to a non- union retiree life insurance
trust. In 1999, USX contributed $20 million to a VEBA.
G-56
Debt and Preferred Stock Ratings
In May 2000, Standard & Poor's Corp. upgraded USX's and Marathon's senior
debt to BBB, which continues the investment grade rating. At the same time,
USX's subordinated debt was upgraded to BBB- and preferred stock was upgraded
to BB+. Also in May 2000, Moody's Investors Services, Inc., upgraded USX's and
Marathon's senior debt to the investment grade rating of Baa1, USX's
subordinated debt to Baa2 and USX's preferred stock to baa3. Fitch IBCA Duff &
Phelps currently rates USX's senior notes as investment grade at BBB and USX's
subordinated debt as BBB-. In December 2000, Standard & Poor's Corp. advised
that they had put USX on "Credit Watch Developing" status and Fitch IBCA, Duff
& Phelps advised that they had put USX on "Rating Watch-Evolving" status. Both
moves were in response to USX's announced structure study.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk for
discussion of derivative instruments and associated market risk.
Liquidity
In December 2000, USX entered into a $1,354 million five- year revolving
credit agreement, terminating in November 2005, and a $451 million 364-day
facility, which together replaced the prior $2,350 million facility. At
December 31, 2000, USX had $300 million of borrowings against its $1,354
million long-term revolving credit agreements and commercial paper borrowings
of $77 million. Also, USX had a short-term line of credit totaling $150 million
which was fully drawn at December 31, 2000. There were no borrowings against
MAP or USSK revolving credit agreements at December 31, 2000.
USX had a total of $1,678 million available at December 31, 2000 under
existing shelf registration statements filed with the Securities and Exchange
Commission. These allow USX to offer and issue unsecured debt securities,
common and preferred stock and warrants in one or more separate offerings on
terms to be determined at the time of sale.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of December 31, 2000, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the years 2001, 2002 and 2003, and any amounts that may ultimately be paid
in connection with contingencies (which are discussed in Note 26 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 or other external financing sources. However, on November 30, 2000,
USX announced that the USX Board of Directors had authorized management to
retain financial, tax and legal advisors to perform an in-depth study of the
corporation's targeted stock structure. Until the study is complete, USX
management believes it will be more difficult to access traditional debt and
equity markets. Although USX management believes that it will not be necessary
to access financial markets during this time frame, nontraditional sources
should be available to provide adequate liquidity, if necessary.
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are based on currently available information. To the extent
that this information proves to be inaccurate, future availability of financing
may be adversely affected. Factors that affect the availability of financing
include the performance of each Group (as indicated by levels of cash provided
from operating activities and other measures), the results of the announced
structure study, the state of the debt and equity markets, investor perceptions
of past performance and expectations regarding future actions and performance,
the overall U.S. financial climate, and, in particular, with respect to
borrowings, levels of USX's outstanding debt and credit ratings by rating
agencies. For a summary of short-term and long-term debt, see Notes 13 and 14
to the USX Consolidated Financial Statements.
G-57
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental
laws and regulations. To the extent these expenditures, as with all costs, are
not ultimately reflected in the prices of USX's products and services,
operating results will be adversely affected. USX believes that domestic
competitors of the U. S. Steel Group and substantially all the competitors of
the Marathon Group are subject to similar environmental laws and regulations.
However, the specific impact on each competitor may vary depending on a number
of factors, including the age and location of its operating facilities,
marketing areas, production processes and the specific products and services
it provides.
In addition, USX expects to incur capital expenditures to meet
environmental standards under the Slovak Republic's environmental laws for the
U. S. Steel Group's USSK operation.
The following table summarizes USX's environmental expenditures for each of
the last three years(a):
2000 1999 1998
---- ---- ----
(Dollars in
millions)
Capital
Marathon Group............................................. $ 73 $ 46 $ 83
U. S. Steel Group.......................................... 18 32 49
---- ---- ----
Total capital............................................ $ 91 $ 78 $132
==== ==== ====
Compliance
Operating & maintenance
Marathon Group............................................. $139 $117 $126
U. S. Steel Group.......................................... 194 199 198
---- ---- ----
Total operating & maintenance............................ 333 316 324
---- ---- ----
Remediation(b)
Marathon Group............................................. 30 25 10
U. S. Steel Group.......................................... 18 22 19
---- ---- ----
Total remediation........................................ 48 47 29
---- ---- ----
Total compliance......................................... $381 $363 $353
==== ==== ====
- --------
(a) Amounts for the Marathon Group are calculated based on American Petroleum
Institute survey guidelines and include 100% of MAP. Amounts for the U. S.
Steel Group are based on previously established U.S. Department of
Commerce survey guidelines.
(b) Amounts do not include noncash provisions recorded for environmental
remediation, but include spending charged against remediation reserves,
net of recoveries where permissible.
USX's environmental capital expenditures accounted for 5%, 5% and 8% of
total consolidated capital expenditures in 2000, 1999 and 1998, respectively.
USX's environmental compliance expenditures averaged 1% of total
consolidated costs in each of 2000, 1999 and 1998. Remediation spending
primarily reflected ongoing clean-up costs for soil and groundwater
contamination associated with underground storage tanks and piping at retail
gasoline stations, and remediation activities at former and present operating
locations.
The Resource Conservation and Recovery Act ("RCRA") establishes standards
for the management of solid and hazardous wastes. Besides affecting current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal operations, the recycling of wastes and the
regulation of storage tanks.
G-58
A significant portion of USX's currently identified environmental
remediation projects relate to the remediation of former and present operating
locations. These projects include remediation of contaminated sediments in a
river that receives discharges from the Gary Works and the closure of permitted
hazardous and non-hazardous waste landfills.
USX has been notified that it is a potentially responsible party ("PRP") at
38 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of December 31, 2000. In addition, there are 23
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 144 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, 15 were associated with properties conveyed to MAP by Ashland for which
Ashland has retained liability for all costs associated with remediation. At
many of these sites, USX is one of a number of parties involved and the total
cost of remediation, as well as USX's share thereof, is frequently dependent
upon the outcome of investigations and remedial studies. USX accrues for
environmental remediation activities when the responsibility to remediate is
probable and the amount of associated costs is reasonably determinable. As
environmental remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of those previously
accrued may be required. See Note 26 to the USX Consolidated Financial
Statements.
New Tier II Fuels regulations were proposed in late 1999. The gasoline
rules, which were finalized by the U.S. Environmental Protection Agency ("EPA")
in February 2000, and the diesel fuel rule, which was finalized in January
2001, require substantially reduced sulfur levels. The combined capital cost to
achieve compliance with the gasoline and diesel regulations could amount to
approximately $700 million between 2003 and 2005. This is a forward-looking
statement and can only be a broad-based estimate due to the ongoing evolution
of regulatory requirements. Some factors (among others) that could potentially
affect gasoline and diesel fuel compliance costs include obtaining the
necessary construction and environmental permits, operating considerations, and
unforeseen hazards such as weather conditions.
In October 1998, the National Enforcement Investigations Center and Region V
of the EPA conducted a multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a multi-media inspection of
MAP's Robinson refinery. These inspections covered compliance with the Clean
Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. MAP has been
advised, in ongoing discussions with the EPA, as to certain compliance issues
regarding MAP's Detroit and Robinson refineries. Thus far, MAP has been served
with two Notices of Violation ("NOV") and three Findings of Violation in
connection with the multi-media inspection at its Detroit refinery. The Detroit
notices allege violations of the Michigan State Air Pollution Regulations, the
EPA New Source Performance Standards and National Emission Standards for
Hazardous Air Pollutants for Benzene. On March 6, 2000, MAP received its first
NOV arising out of the multi-media inspection of the Robinson refinery
conducted in November 1998. The NOV is for alleged Resource Conservation and
Recovery Act (hazardous waste) violations.
MAP has responded to information requests from the EPA regarding New Source
Review ("NSR") compliance at its Garyville and Texas City refineries. In
addition, the scope of the EPA's 1998 multi-media inspections of the Detroit
and Robinson refineries included NSR compliance. NSR requires new major
stationary sources and major modifications at existing major stationary sources
to obtain permits, perform air quality analysis and install stringent air
pollution control equipment at affected facilities. The current EPA initiative
appears to target many items that the industry has historically considered
routine repair, replacement and maintenance or other activity exempted from the
NSR requirements. MAP is engaged in ongoing discussions with the EPA on these
issues concerning all of MAP's refineries.
G-59
While MAP has not been notified of any formal findings or violations
resulting from either the information requests or inspections regarding NSR
compliance, MAP has been informed during discussions with the EPA of potential
non-compliance concerns of the EPA based on these inspections and other
information identified by the EPA. Recently, discussions with the EPA have
included commitment to some specific control technologies and implementation
schedules, but not penalties. In addition, MAP anticipates that some or all of
the non-NSR related issues arising from the multi-media inspections may also be
resolved as part of the current discussions with the EPA. A negotiated
resolution with the EPA could result in increased environmental capital
expenditures in future years, in addition to as yet, undetermined penalties.
During 1999 an EPA advisory panel on oxygenate use in gasoline issued
recommendations to the EPA, calling for the improved protection of drinking
water from methyl tertiary butyl ether ("MTBE") impacts, a substantial
reduction in the use of MTBE, and action by Congress to remove the oxygenate
requirements for reformulated gasoline under the Clean Air Act. The panel
reviewed public health and environmental issues that have been raised by the
use of MTBE in gasoline, and specifically by the discovery of MTBE in water
supplies. State and federal environmental regulatory agencies could implement
the majority of the recommendations, while some would require Congressional
legislative action. California has acted to ban MTBE use by December 31, 2002
and has requested a waiver from the EPA of California state oxygenate
requirements. In addition, a number of states have passed laws which limit or
require the phase out of MTBE in gasoline, including states in MAP's marketing
area such as Michigan and Minnesota. Many other states are considering bills
which require similar limitations or the phase out of MTBE.
MAP has a non-material investment in MTBE units at its Robinson,
Catlettsburg and Detroit refineries. Approximately seven percent of MAP's
refinery gasoline production includes MTBE. Potential phase-outs or
restrictions on the use of MTBE would not be expected to have a material impact
on MAP and its operations, although it is not possible to reach any conclusions
until further federal or state actions, if any, are taken.
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 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 an NRD
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. The trustees notified the public of their plan for
assessment and later adopted the plan. In 2000, the trustees concluded their
assessment of sediment injuries, which includes a technical review of
environmental conditions. The PRP joint defense group is discussing settlement
opportunities with the trustees and the EPA.
In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture between USX
and Kobe Steel, Ltd. ("Kobe"), was the subject of a multi-media audit by the
EPA that included an air, water and hazardous waste compliance review. USS/Kobe
and the EPA entered into a tolling agreement pending issuance of the final
audit and commenced settlement negotiations in July 1999. In August 1999, the
steelmaking and bar producing operations of USS/Kobe were combined with
companies controlled by Blackstone Capital Partners II to form Republic
Technologies International, LLC ("Republic"). The tubular operations of
USS/Kobe were transferred to a newly formed entity, Lorain Tubular Company, LLC
("Lorain Tubular"), which operated as a joint venture between USX and Kobe
until December 31, 1999 when USX purchased all of Kobe's interest in Lorain
Tubular. Republic and Lorain Tubular are continuing negotiations with the EPA.
Most of the matters raised by the EPA relate to Republic's facilities; however,
air discharges from Lorain Tubular's #3 seamless pipe mill have also been
cited. Lorain Tubular will be responsible for matters relating to its
facilities. The final report and citations from the EPA have not been issued.
In 1998, USX entered into a consent decree with the EPA which resolved
alleged violations of the Clean Water Act National Pollution Discharge
Elimination System ("NPDES") permit at Gary Works and provides for a sediment
remediation project for a section of the Grand Calumet River that runs through
Gary Works.
G-60
Contemporaneously, USX entered into a consent decree with the public trustees
which resolves potential liability for natural resource damages on the same
section of the Grand Calumet River. In 1999, USX paid civil penalties of $2.9
million for the alleged water act violations and $0.5 million in natural
resource damages assessment costs. In addition, USX will pay the public
trustees $1 million at the end of the remediation project for future monitoring
costs and USX is obligated to purchase and restore several parcels of property
that have been or will be conveyed to the trustees. During the negotiations
leading up to the settlement with EPA, capital improvements were made to
upgrade plant systems to comply with the NPDES requirements. The sediment
remediation project is an approved final interim measure under the corrective
action program for Gary Works and is expected to cost approximately $36.4
million over the next five years. Estimated remediation and monitoring costs
for this project have been accrued.
In February 1999, the U.S. Department of Justice and EPA issued a letter
demanding a cash payment of approximately $4 million to resolve a Finding of
Violation issued in 1997 alleging improper sampling of benzene waste streams at
Gary Coke. On September 18, 2000, a Consent Decree was entered which required
USX to pay a civil penalty of $587,000 and to replace PCB transformers as a
Supplemental Environmental Program at a cost of approximately $2.2 million.
Payment of the civil penalty was made on October 13, 2000.
New or expanded environmental requirements, which could increase USX's
environmental costs, may arise in the future. USX intends to comply with all
legal requirements regarding the environment, but since many of them are not
fixed or presently determinable (even under existing legislation) and may be
affected by future legislation, it is not possible to predict accurately the
ultimate cost of compliance, including remediation costs which may be incurred
and penalties which may be imposed. However, based on presently available
information, and existing laws and regulations as currently implemented, USX
does not anticipate that environmental compliance expenditures (including
operating and maintenance and remediation) will materially increase in 2001.
USX expects environmental capital expenditures in 2001 to be approximately $120
million, or approximately 5% of total estimated consolidated capital
expenditures. Predictions beyond 2001 can only be broad-based estimates which
have varied, and will continue to vary, due to the ongoing evolution of
specific regulatory requirements, the possible imposition of more stringent
requirements and the availability of new technologies, among other matters.
Based upon currently identified projects, USX anticipates that environmental
capital expenditures in 2002 will total approximately $143 million; however,
actual expenditures may vary as the number and scope of environmental projects
are revised as a result of improved technology or changes in regulatory
requirements, and could increase if additional projects are identified or
additional requirements are imposed.
USX is the subject of, or party to, a number of pending or threatened legal
actions, contingencies and commitments involving a variety of matters. 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.
Outlook
For Outlook, see Management's Discussion and Analysis for the Marathon Group
and the U. S. Steel Group, herein.
Accounting Standards
In the fourth quarter of 2000, USX adopted the following accounting
pronouncements primarily related to the classification of items in the
financial statements. The adoption of these new pronouncements had no net
effect on the financial position or results of operations of USX, although they
required reclassifications of certain amounts in the financial statements,
including all prior periods presented.
. In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
Financial Statements," which summarizes the SEC
G-61
staff's interpretations of generally accepted accounting principles
related to revenue recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("EITF") issued EITF consensus No. 99-19 "Reporting
Revenue Gross as a Principal versus Net as an Agent," which addresses
whether certain items should be reported as a reduction of revenue or as
a component of both revenues and cost of revenues, and EITF Consensus No.
00-10 "Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping goods to
customers.
. In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 140"). SFAS 140 revises the standards for accounting
for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. USX adopted certain
recognition and reclassification provisions of SFAS 140, which were
effective for fiscal years ending after December 15, 2000. The remaining
provisions of SFAS 140 are effective after March 31, 2001.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which later was amended by SFAS Nos.
137 and 138. This Standard requires recognition of all derivatives as either
assets or liabilities at fair value. Changes in fair value will be reflected in
either current period net income or other comprehensive income, depending on
the designation of the derivative instrument. USX may elect not to designate a
derivative instrument as a hedge even if the strategy would be expected to
qualify for hedge accounting treatment. The adoption of SFAS No. 133 will
change the timing of recognition for derivative gains and losses as compared to
previous accounting standards.
USX will adopt the Standard effective January 1, 2001. The transition
adjustment resulting from adoption of SFAS No. 133 will be reported as a
cumulative effect of a change in accounting principle. The unfavorable
cumulative effect on net income, net of tax, is expected to approximate $9
million. The unfavorable cumulative effect on other comprehensive income, net
of tax, will approximate $7 million. The amounts reported as other
comprehensive income will be reflected in net income when the anticipated
physical transactions are consummated. It is not possible to estimate the
effect that this Standard will have on future results of operations.
Management's Discussion and Analysis by Group
The Marathon Group
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products primarily through Marathon
Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy
related businesses. The Management's Discussion and Analysis should be read in
conjunction with the Marathon Group's Financial Statements and Notes to
Financial Statements.
The Marathon Group's 2000 financial performance was primarily affected by
the strong recovery in worldwide liquid hydrocarbon and natural gas prices and
stronger refining margins. During 2000, Marathon focused on the acquisition of
assets with a strong strategic fit, the disposal of non-core properties, and
workforce reductions through a voluntary early retirement program.
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Revenues and Other Income for each of the last three years are summarized in
the following table:
2000 1999 1998
------- ------- -------
(Dollars in millions)
Exploration & production ("E&P")................ $ 4,694 $ 3,105 $ 2,090
Refining, marketing & transportation
("RM&T")(a).................................... 28,849 20,076 19,080
Other energy related businesses(b).............. 1,684 834 355
------- ------- -------
Revenues and other income of reportable
segments..................................... 35,227 24,015 21,525
Revenues and other income not allocated to
segments:
Joint venture formation charges(c)............ (931) -- --
Gain on ownership change in MAP............... 12 17 245
Other(d)...................................... 124 (36) 24
Elimination of intersegment revenues............ (573) (289) (171)
------- ------- -------
Total Group revenues and other income....... $33,859 $23,707 $21,623
======= ======= =======
Items included in both revenues and costs and
expenses, resulting in no effect on income:
Consumer excise taxes on petroleum products and
merchandise.................................... $ 4,344 $ 3,973 $ 3,824
======= ======= =======
- --------
(a) Amounts include 100 percent of MAP.
(b) Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(c) Represents a pretax charge related to the joint venture formation between
Marathon and Kinder Morgan Energy Partners, L.P.
(d) Represents net gains/(losses) on certain asset sales.
E&P segment revenues increased by $1,589 million in 2000 from 1999 following
an increase of $1,015 million in 1999 from 1998. The increase in 2000 was
primarily due to higher worldwide liquid hydrocarbon and natural gas prices,
partially offset by lower domestic liquid hydrocarbon and worldwide natural gas
production. The increase in 1999 was primarily due to higher worldwide liquid
hydrocarbon prices, increased domestic liquid hydrocarbon production and higher
E&P crude oil buy/sell volumes.
RM&T segment revenues increased by $8,773 million in 2000 from 1999
following an increase of $996 million in 1999 from 1998. The increase in 2000
primarily reflected higher refined product prices and increased refined product
sales volumes. The increase in 1999 was mainly due to higher refined product
prices, increased volumes of refined product sales and higher merchandise
sales, partially offset by reduced crude oil sales revenues following the sale
of Scurlock Permian LLC.
Other energy related businesses segment revenues increased by $850 million
in 2000 from 1999 following an increase of $479 million in 1999 from 1998. The
increase in 2000 reflected higher natural gas and crude oil resale activity
accompanied by higher crude oil and natural gas prices. The increase in 1999
was primarily due to increased crude oil and natural gas purchase and resale
activity.
For additional discussion of revenues, see Note 10 to the Marathon Group
Financial Statements.
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Income from operations for each of the last three years is summarized in the
following table:
2000 1999 1998
------ ------ -----
(Dollars in
millions)
E&P
Domestic.......................................... $1,115 $ 494 $ 190
International..................................... 420 124 88
------ ------ -----
Income of E&P reportable segment.................. 1,535 618 278
RM&T(a)............................................. 1,273 611 896
Other energy related businesses..................... 38 61 33
------ ------ -----
Income for reportable segments.................... 2,846 1,290 1,207
Items not allocated to reportable segments:
Joint venture formation charges(b)................ (931) -- --
Administrative expenses(c)........................ (136) (108) (106)
IMV reserve adjustment(d)......................... -- 551 (267)
Gain on ownership change & transition charges--
MAP(e)........................................... 12 17 223
Impairment of oil and gas properties, assets held
for sale, and gas contract settlement(f)......... (197) (16) (119)
Gain/(loss) on disposal of assets(g).............. 124 (36) --
Reorganization charges including pension settlement
(loss)/gain & benefit accruals(h).................. (70) 15 --
------ ------ -----
Total income from operations.................... $1,648 $1,713 $ 938
====== ====== =====
- --------
(a) Amounts include 100 percent of MAP.
(b) Represents a pretax charge related to the joint venture formation between
Marathon and Kinder Morgan Energy Partners, L.P.
(c) 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.
(d) The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. For additional discussion of the IMV, see
Note 20 to the Marathon Group Financial Statements.
(e) The gain on ownership change and one-time transition charges in 1998 relate
to the formation of MAP. For additional discussion of the gain on ownership
change in MAP, see Note 5 to the Marathon Group Financial Statements.
(f) Represents in 2000, an impairment of certain oil and gas properties,
primarily in Canada, and assets held for sale. Represents in 1999, an
impairment of certain domestic properties. Represents in 1998, a write-off
of certain non-revenue producing international investments and several
exploratory wells which had encountered hydrocarbons but had been suspended
pending further evaluation. It also includes in 1998 a gain from the
resolution of a contract dispute with a purchaser of Marathon's natural gas
production from certain domestic properties.
(g) The net gain in 2000 represents a gain on the disposition of
Angus/Stellaria, a gain on the Sakhalin exchange, a gain on the sale of
Speedway SuperAmerica LLC ("SSA") non-core stores, and a loss on the sale
of the Howard Glasscock field. The net loss in 1999 represents a loss on
the sale of Scurlock Permian LLC, certain domestic production properties,
Carnegie Natural Gas Company and affiliated subsidiaries and a gain on
certain Egyptian properties.
(h) Amounts in 2000 and 1999 represent pension settlement gains/(losses) and
various benefit accruals resulting from retirement plan settlements, the
voluntary early retirement program, and reorganization charges.
Income for reportable segments increased by $1,556 million in 2000 from
1999, mainly due to higher worldwide liquid hydrocarbon and natural gas prices,
and higher refined product margins, partially offset by
G-64
decreased natural gas volumes. Income for reportable segments increased by $83
million in 1999 from 1998, mainly due to higher worldwide liquid hydrocarbon
prices, partially offset by lower refined product margins. Income from
operations includes 100 percent of MAP beginning in 1998, and results from
Marathon Canada Limited (formerly known as Tarragon) commencing August 12,
1998.
Average Volumes and Selling Prices
2000 1999 1998
---------- ---------- ----------
(thousands of barrels per day)
Net liquids
production(a).......... -- U.S. 131 145 135
-- International(b) 65 62 61
---------- ---------- ----------
-- Total consolidated 196 207 196
-- Equity investees(c) 11 1 --
---------- ---------- ----------
-- Worldwide 207 208 196
(millions of cubic feet per day)
Net natural gas
production............. -- U.S. 731 755 744
-- International--equity 470 489 441
-- International--other(d) 11 16 23
---------- ---------- ----------
-- Total consolidated 1,212 1,260 1,208
-- Equity investee(e) 29 36 33
---------- ---------- ----------
-- Worldwide 1,241 1,296 1,241
========== ========== ==========
(dollars per barrel)
Liquid
hydrocarbons(a)(f)..... -- U.S. $ 25.11 $ 15.44 $ 10.42
-- International 26.54 16.90 12.24
(dollars per mcf)
Natural gas(f).......... -- U.S. $ 3.30 $ 1.90 $ 1.79
-- International--equity 2.76 1.90 1.94
(thousands of barrels per day)
Refined products
sold(g)................ 1,306 1,251 1,198
Matching buy/sell
volumes included in
above................ 52 45 39
========== ========== ==========
- --------
(a) Includes crude oil, condensate and natural gas liquids.
(b) Represents equity tanker liftings, truck deliveries and direct deliveries.
(c) Represents Marathon's equity interest in Sakhalin Energy Investment Company
Ltd. ("Sakhalin Energy") and CLAM Petroleum B.V. ("CLAM") for 2000 and
1999.
(d) Represents gas acquired for injection and subsequent resale.
(e) Represents Marathon's equity interest in CLAM.
(f) Prices exclude gains/losses from hedging activities, equity investees and
purchase/resale gas.
(g) Refined products sold and matching buy/sell volumes include 100 percent of
MAP.
Domestic E&P income increased by $621 million in 2000 from 1999 following an
increase of $304 million in 1999 from 1998. The increase in 2000 was primarily
due to higher liquid hydrocarbon and natural gas prices, partially offset by
lower liquid hydrocarbon and natural gas volumes due to natural field declines
and asset sales, and derivative losses from other than trading activities.
The increase in 1999 was primarily due to higher liquid hydrocarbon and
natural gas prices, increased liquid hydrocarbon volumes resulting from new
production in the Gulf of Mexico and lower exploration expense.
International E&P income increased by $296 million in 2000 from 1999
following an increase of $36 million in 1999 from 1998. The increase in 2000
was mainly due to higher liquid hydrocarbon and natural gas prices, higher
liquid hydrocarbon liftings, primarily in Russia and Gabon, and lower dry well
expense, partially offset by lower natural gas volumes.
G-65
The increase in 1999 was primarily due to higher liquid hydrocarbon prices,
partially offset by lower liquid hydrocarbon and natural gas production in
Europe and higher exploration expense.
RM&T segment income increased by $662 million in 2000 from 1999 following a
decrease of $285 million in 1999 from 1998. The increase in 2000 was primarily
due to higher refined product margins, partially offset by higher operating
expenses for SSA, higher administrative expenses including increased variable
pay plan costs, and higher transportation costs.
The decrease in 1999 was primarily due to lower refined product margins,
partially offset by recognized mark-to-market derivative gains, increased
refined product sales volumes, higher merchandise sales at SSA and the
realization of additional operating efficiencies as a result of forming MAP.
Other energy related businesses segment income decreased by $23 million in
2000 from 1999 following an increase of $28 million in 1999 from 1998. The
decrease in 2000 was primarily a result of derivative losses from other than
trading activities and lower equity earnings as a result of decreased pipeline
throughput. The increase in 1999 was primarily due to higher equity earnings as
a result of increased pipeline throughput and a reversal of abandonment
accruals of $10 million in 1999.
Items not allocated to reportable segments: IMV reserve adjustment--When U.
S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and
refined product prices were at historically high levels. In applying the
purchase method of accounting, the Marathon Group's crude oil and refined
product inventories were revalued by reference to current prices at the time of
acquisition, and this became the new LIFO cost basis of the inventories.
Generally accepted accounting principles require that inventories be carried at
lower of cost or market. Accordingly, the Marathon Group has established an IMV
reserve to reduce the cost basis of its inventories to net realizable value.
Quarterly adjustments to the IMV reserve result in noncash charges or credits
to income from operations.
When Marathon acquired the crude oil and refined product inventories
associated with Ashland's RM&T operations on January 1, 1998, the Marathon
Group established a new LIFO cost basis for those inventories. The acquisition
cost of these inventories lowered the overall average cost of the Marathon
Group's combined RM&T inventories. As a result, the price threshold at which an
IMV reserve will be recorded was also lowered.
These adjustments affect the comparability of financial results from period
to period as well as comparisons with other energy companies, many of which do
not have such adjustments. Therefore, the Marathon Group reports separately the
effects of the IMV reserve adjustments on financial results. In management's
opinion, the effects of such adjustments should be considered separately when
evaluating operating performance.
In 1999, the IMV reserve adjustment resulted in a credit to income from
operations of $551 million compared to a charge of $267 million in 1998, or a
change of $818 million. The favorable 1999 IMV reserve adjustment, which is
almost entirely recorded by MAP, was primarily due to the significant increase
in refined product prices experienced during 1999. For additional discussion of
the IMV reserve, see Note 20 to the Marathon Group Financial Statements.
Joint venture formation charges represent a pretax charge of $931 million in
2000 related to the joint venture formation between Marathon and Kinder Morgan
Energy Partners, L.P. The formation of the joint venture included contribution
of interests in the Yates and SACROC assets. Marathon holds an 85 percent
economic interest in the combined entity which commenced operations in January
2001.
Impairment of oil and gas properties, assets held for sale, and gas contract
settlement includes in 2000, the impairments of certain oil and gas properties
primarily in Canada and assets held for sale totaling $197 million. In 1999,
the $16 million charge relates to the impairment of certain domestic
properties. In 1998, the $119 million charge relates to a write-off of certain
non- revenue producing international investments and several
G-66
exploratory wells, partially offset by a gain from the resolution of a contract
dispute with a purchaser of Marathon's natural gas production from certain
domestic properties.
Gain/(loss) on disposal of assets represents in 2000 a net gain on the sale
of Marathon's interest in the Angus/Stellaria development in the Gulf of
Mexico, a gain on the Sakhalin exchange, a loss on the sale of the Howard
Glasscock Field, and a gain on the sale of non-core SSA stores. In 1999, the
net loss represents losses on the sale of Scurlock Permian LLC, certain
domestic production properties, Carnegie Natural Gas Company and affiliated
subsidiaries and a gain on certain Egyptian properties.
Reorganization charges including pension settlement (loss)/gain and benefit
accruals represent charges related to a reorganization program initiated by
Marathon for its upstream business during 2000.
Outlook--Marathon Group
For a recent outlook pertaining to the Marathon Group, see USX CORPORATION
AND SUBSIDIARY COMPANIES--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Outlook--Marathon Group, page G-98 in
Annex G.
The outlook regarding the results of operations for the Marathon Group's
upstream segment 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.
At year-end 2000, Marathon revised its estimate of proved developed and
undeveloped oil and gas reserves downward by 167 million barrels of oil
equivalent ("BOE"). These revisions were principally in Canada, the North Sea
and United States and are the result of production performance and
disappointing drilling results.
BOE is a combined measure of worldwide liquid hydrocarbon and natural gas
production, measured in barrels per day and cubic feet per day, respectively.
For purposes of determining BOE, natural gas volumes are converted to
approximate liquid hydrocarbon barrels by dividing the natural gas volumes
expressed in thousands of cubic feet ("mcf") by 6. The liquid hydrocarbon
volume is added to the barrel equivalent of gas volume to obtain BOE. Marathon
intends to disclose total production estimates on a BOE basis from this point
forward.
In 2001, worldwide production is expected to average 430,000 BOE per day,
split evenly between liquid hydrocarbons and natural gas, including production
from Marathon's share of equity investees and future acquisitions.
On December 28, 2000, Marathon signed a definitive agreement to form a joint
venture with Kinder Morgan Energy Partners, L.P., which commenced operations in
January 2001. The formation of the joint venture included contribution of
interests in the Yates and SACROC assets. This transaction will allow Marathon
to expand its interests in the Permian Basin and will improve access to
materials for use in enhanced recovery techniques in the Yates Field. Marathon
holds an 85 percent economic interest in the combined entity, which will be
accounted for under the equity method of accounting.
On December 22, 2000, Marathon announced its plans to acquire Pennaco. This
acquisition will enhance Marathon's presence in a core area, the North American
gas market, and will provide a significant new reserve base that can be
developed. The tender offer expired on February 5, 2001 at 12:00 midnight,
Eastern time. Marathon acquired approximately 17.6 million shares of Pennaco
common stock which were validly tendered and not withdrawn in the offer,
representing approximately 87 percent of the outstanding Pennaco shares.
G-67
Marathon plans to acquire the remaining Pennaco shares through a merger in
which each share of Pennaco common stock not purchased in the offer and not
held by stockholders who have properly exercised dissenters rights under
Delaware law will be converted into the right to receive the tender offer price
in cash, without interest.
Marathon plans to drill six deepwater Gulf of Mexico exploratory wells in
2001. To support this increased drilling activity, Marathon has contracted two
new deepwater rigs, capable of drilling in water depths beyond 6,500 feet.
Other major upstream projects, which are currently underway or under
evaluation and are expected to improve future income streams, include the
Mississippi Canyon Block 348 in the Gulf of Mexico and various North American
natural gas fields. Also, Marathon expects continued development in the
Foinaven area in the U.K. Atlantic Margin. Marathon acquired an interest in
this location through the exchange of its Sakhalin interests with Shell Oil in
the fourth quarter of 2000.
Marathon E&P is currently on target for achieving $150 million in annual
repeatable pre-tax operating efficiencies by year-end 2001. Marathon initiated
a reorganization program for its upstream business units which will contribute
to an overall workforce reduction of 24% compared to 1999 levels. In addition,
regional production offices in Lafayette, Louisiana and Tyler, Texas have been
closed along with the Petroleum Technology Center in Littleton, Colorado.
The above discussion includes forward-looking statements with respect to
2001 worldwide liquid hydrocarbon production and natural gas volumes, the
acquisition of Pennaco, commencement of upstream projects, and the Gulf of
Mexico drilling program. Some factors that could potentially affect worldwide
liquid hydrocarbon production/gas volumes, upstream projects, and the drilling
program include: pricing, worldwide supply and demand for petroleum products,
amount of capital available for exploration and development, regulatory
constraints, reserve estimates, reserve replacement rates, production decline
rates of mature fields, timing of commencing production from new wells, timing
and results of future development drilling, drilling rig availability, the
completion of the merger with Pennaco, future acquisitions of producing
properties, and other geological, operating and economic considerations. In
addition, development of new production properties in countries outside the
United States may require protracted negotiations with host governments and is
frequently subject to political considerations, such as tax regulations, which
could adversely affect the timing and economics of projects. A factor that
could affect the Pennaco acquisition is successful completion of the merger.
These factors (among others) could cause actual results to differ materially
from those set forth in the forward-looking statements.
Downstream income of the Marathon Group is largely dependent upon refined
product margins, which reflect the difference between the selling prices of
refined products and the cost of raw materials refined and manufacturing costs.
Refined product margins have been historically volatile and vary with the level
of economic activity in the various marketing areas, the regulatory climate,
crude oil costs, manufacturing costs, logistical limitations and the available
supply of crude oil and refined products.
In 2000, MAP, CMS Energy Corporation, and TEPPCO Partners, L.P. formed a
limited liability company with equal ownership to operate an interstate refined
petroleum products pipeline extending from the U.S. Gulf of Mexico to the
Midwest. The new company plans to build a 74-mile, 24-inch diameter pipeline
connecting TEPPCO's facility in Beaumont, Texas, with an existing 720-mile, 26-
inch diameter pipeline extending from Longville, Louisiana to Bourbon,
Illinois. In addition, a two million barrel terminal storage facility will be
constructed. The system will be called Centennial Pipeline and will connect
with existing MAP transportation assets and other common carrier lines.
Construction is expected to be completed in the fourth quarter of 2001.
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 is expected to initially move about 50,000 bpd of
refined petroleum into the central Ohio region. The pipeline is currently
expected to be operational in mid-2002. The startup of this pipeline is largely
dependent on obtaining the final regulatory approvals, obtaining the necessary
rights-of-way,
G-68
of which approximately 95 percent have been obtained to date, and completion of
construction. ORPL is still negotiating with a few landowners to obtain the
remaining rights-of-way. Where necessary, ORPL has filed condemnation actions
to acquire some rights-of-way. These actions are at various stages of
litigation and appeal with several recent decisions supporting ORPL's use of
eminent domain.
MAP is constructing a delayed coker unit at its Garyville, Louisiana
refinery. This unit will allow for the use of heavier, lower cost crude and
reduce the production of heavy fuel oil. To supply this new unit, MAP reached
an agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an
affiliate of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd
of heavy Mayan crude oil. This is a multi-year contract, which will begin upon
completion of the delayed coker unit which is scheduled in the fall of 2001. In
addition, a project to increase light product output is underway at MAP's
Robinson, Illinois refinery and is expected to be completed in the second
quarter of 2001.
MAP initiated a program for 2000 to dispose of approximately 270 non-core
SSA retail outlets in the Midwest and Southeast. At the end of this program
through December 31, 2000, 159 stores, which comprise about 7 percent of MAP's
owned and operated SSA retail network, had been sold. MAP will continue to sell
additional SSA stores as part of its ongoing store development process.
The above discussion includes forward-looking statements with respect to
pipeline and refinery improvement projects. Some factors that could potentially
cause actual results to differ materially from present expectations include the
price of petroleum products, levels of cash flow from operations, obtaining the
necessary construction and environmental permits, unforeseen hazards such as
weather conditions, obtaining the necessary rights-of-way, outcome of pending
litigation, and regulatory approval constraints. These factors (among others)
could cause actual results to differ materially from those set forth in the
forward-looking statements.
The U. S. Steel Group
The U. S. Steel Group is engaged in the production and sale of steel mill
products, coke, and taconite pellets; the management of mineral resources; coal
mining; real estate development; and engineering and consulting services.
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"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership,
and Republic Technologies International, LLC ("Republic"). On November 24,
2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which held the steel and
related assets of VSZ a.s. ("VSZ"), headquartered in the Slovak Republic.
Management's Discussion and Analysis should be read in conjunction with the U.
S. Steel Group's Financial Statements and Notes to Financial Statements.
Revenues and Other Income for each of the last three years are summarized in
the following table:
2000 1999 1998
------ ------ ------
(Dollars in
millions)
Revenues by product:
Sheet and semi-finished steel products............. $3,288 $3,433 $3,598
Tubular, plate, and tin mill products.............. 1,731 1,140 1,546
Raw materials (coal, coke and iron ore)............ 626 549 744
Other(a)........................................... 445 414 490
Income (loss) from investees......................... (8) (89) 46
Net gains on disposal of assets...................... 46 21 54
Other income (loss).................................. 4 2 (1)
------ ------ ------
Total revenues and other income.................. $6,132 $5,470 $6,477
====== ====== ======
- --------
(a) Includes revenue from the sale of steel production by-products, real
estate development, resource management, and engineering and consulting
services.
G-69
Total revenues and other income increased by $662 million in 2000 from 1999
primarily due to the consolidation of Lorain Tubular Company, LLC, ("Lorain
Tubular") effective January 1, 2000, higher average realized prices,
particularly tubular product prices, and lower losses from investees, which, in
1999, included a $47 million charge for the impairment of U. S. Steel's
investment in USS/Kobe Steel Company. Total revenues and other income in 1999
decreased by $1,007 million from 1998 primarily due to lower average realized
prices and lower income from investees.
Income from operations for the U. S. Steel Group for the last three years
was:
2000 1999 1998
---- ---- -----
(Dollars in
millions)
Segment income for Domestic Steel(a).................... $ 23 $ 91 $ 517
Segment income for U. S. Steel Kosice(b)................ 2 -- --
---- ---- -----
Income for reportable segments...................... 25 91 517
Items not allocated to segments:
Net pension credits................................... 266 228 186
Administrative expenses............................... (25) (17) (24)
Costs related to former business activities(c)........ (91) (83) (100)
Asset impairments--Coal............................... (71) -- --
Impairment of USX's investment in USS/Kobe and costs
related to formation of Republic..................... -- (47) --
Loss on investment in RTI stock used to satisfy
indexed debt obligations(d).......................... -- (22) --
---- ---- -----
Total income from operations........................ $104 $150 $ 579
==== ==== =====
- --------
(a) Includes income from the sale and domestic production of steel mill
products, coke and taconite pellets; the management of mineral resources;
coal mining; real estate development and management; and engineering and
consulting services.
(b) Includes the sale and production of steel products from facilities
primarily located in the Slovak Republic commencing November 24, 2000. For
further details, see Note 5 to the U. S. Steel Group Financial Statements.
(c) Includes the portion of postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(d) For further details, see Note 6 to the U. S. Steel Group Financial
Statements.
Segment income for Domestic Steel
Domestic Steel operations recorded segment income of $23 million in 2000
versus segment income of $91 million in 1999, a decrease of $68 million. The
2000 segment income included $36 million for certain environmental and legal
accruals, a $34 million charge to establish reserves against notes and
receivables from financially distressed steel companies and a $10 million
charge for USX's share of Republic special charges. Results in 1999 included
$17 million in charges for certain environmental and legal accruals and $7
million in various non-recurring equity investee charges. Excluding these
items, the decrease in segment income for Domestic Steel was primarily due to
higher costs related to energy and inefficient operating levels due to lower
throughput, lower income from raw materials operations, particularly coal
operations and lower sheet shipments resulting from high levels of imports that
continued in 2000.
Segment income for Domestic Steel operations in 1999 decreased $426 million
from 1998. Results in 1998 included a net favorable $30 million for an
insurance litigation settlement and charges of $10 million related to a
voluntary workforce reduction plan. Excluding these items, the decrease in
segment income for Domestic Steel was primarily due to lower average steel
prices, lower income from raw materials operations, a less favorable product
mix and lower income from investees.
G-70
Segment income for U. S. Steel Kosice
USSK segment income for the period following the November 24, 2000
acquisition was $2 million.
Items not allocated to segments: Net pension credits, which are primarily
noncash, totaled $266 million in 2000, $228 million in 1999 and $186 million in
1998. Net pension credits in 1999 included $35 million for a one-time favorable
pension settlement primarily related to the voluntary early retirement program
for salaried employees. For additional information on pensions, see Note 12 to
the U. S. Steel Group Financial Statements.
Asset impairments--Coal, were for asset impairments at U. S. Steel Mining's
coal mines in Alabama and West Virginia in 2000 following a reassessment of
long-term prospects after adverse geological conditions were encountered.
In 1999, an impairment of USX's investment in USS/Kobe and costs related to
the formation of Republic totaled $47 million.
Income from operations in 1999 also included a loss on investment in RTI
stock used to satisfy indexed debt obligations of $22 million from the
termination of ownership in RTI International Metals, Inc. For further
discussion, see Note 6 to the U. S. Steel Group Financial Statements.
Outlook--U. S. Steel Group
For a recent outlook pertaining to the U. S. Steel Group, see UNITED STATES
STEEL--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Outlook, page F-52 in Annex F.
Domestic Steel's order book and prices remain soft due to continued high
import volumes (which in 2000 were second only to record-year 1998 levels), a
draw-down of inventories by spot purchasers and increasing evidence that the
growth in the domestic economy is slowing. In addition to these factors, our
plate products business is being impacted by recently added domestic capacity.
Although domestic shipments for the first quarter of 2001 are projected to be
somewhat better than fourth quarter 2000 levels, we expect that sheet and plate
pricing, which declined markedly in the fourth quarter, will continue to be
depressed as a result of the factors cited above. The tubular business,
however, remains strong. For the year 2001, domestic shipments are expected to
be approximately 11 million net tons, excluding any shipments from the
potential acquisition of LTV Corporation tin operations. For the year 2001,
USSK shipments are expected to be approximately 3.3 million to 3.6 million net
tons.
High natural gas prices adversely affected our results in 2000 and are
expected to persist for some time. The blast furnace idled at Gary Works in
July 2000 for a planned 10-day outage remained down until late February 2001
due to business conditions. The U. S. Steel Group has continued its cost
reduction efforts, and has recently requested from its current suppliers an
immediate, temporary eight percent price reduction from existing levels to help
weather this difficult period.
Several domestic competitors recently have filed for Chapter 11 bankruptcy
protection. This provides them with certain competitive advantages and further
demonstrates the very difficult economic circumstances faced by the domestic
industry.
U. S. Steel Group's income from operations includes net pension credits,
which are primarily noncash, associated with all of U. S. Steel's pension
plans. Net pension credits were $266 million in 2000. At the end of 2000, U. S.
Steel's main pension plans' transition asset was fully amortized, decreasing
the pension credit by $69 million annually in future years for this component.
In addition, for the year 2001, low marketplace returns on trust assets in the
year 2000 and pending business combinations in the current year are expected to
further reduce net pension credits to approximately $160 million. The above
includes forward-looking statements concerning net pension credits which can
vary depending upon the market performance of plan assets, changes in actuarial
assumptions regarding such factors as the selection of a discount rate and rate
of return on plan assets, changes in the amortization levels of transition
amounts or prior period service costs, plan amendments affecting benefit payout
levels, business combinations and profile changes in the beneficiary
populations being
G-71
valued. Changes in any of these factors could cause net pension credits to
change. To the extent net pension credits decline in the future, income from
operations would be adversely affected.
The U. S. Steel Group includes a 16 percent equity method investment in
Republic (through an ownership interest in Republic Technologies International
Holdings, LLC ("Republic Holdings"), which is the sole owner of Republic). In
the third quarter of 2000, Republic announced that it had completed a financial
restructuring to improve its liquidity position. Republic raised approximately
$30 million in loans from certain of its direct and indirect equity partners in
exchange for notes of Republic and warrants to purchase Class D common stock of
Republic Technologies International, Inc., Republic's majority owner. The U. S.
Steel Group's portion was approximately $6 million and the U. S. Steel Group
also agreed to certain deferred payment terms into the year 2002, up to a
maximum of $30 million, with regard to Republic's obligations relating to iron
ore pellets supplied to Republic. In its Form 10-Q for the period ended
September 30, 2000, which was filed with the SEC on October 31, 2000, Republic
Holdings stated that "Notwithstanding these efforts, [Republic Holdings] may
need to obtain additional financing to meet its cash flow requirements,
including financing from the sale of additional debt or equity securities."
Republic Holdings also stated "As a result of the factors mentioned above,
[Republic Holdings] is highly leveraged and could be considered a risky
investment."
At December 31, 2000, the U. S. Steel Group's financial exposure to Republic
totaled approximately $131 million, consisting of amounts owed by Republic to
the U. S. Steel Group and debt obligations assumed by Republic.
In early October 2000, the U. S. Steel Group announced an agreement with LTV
Corporation ("LTV") to purchase LTV's tin mill products business, including its
Indiana Harbor, Indiana tin operations. This acquisition recently closed and
was effective March 1, 2001. Terms of this noncash transaction call for the
U. S. Steel Group to assume certain employee-related obligations of LTV. The U.
S. Steel Group intends to operate these facilities as an ongoing business and
tin mill employees at Indiana Harbor became U. S. Steel Group employees. The U.
S. Steel Group and LTV also entered into 5-year agreements for LTV to supply
the U. S. Steel Group with pickled hot bands and for the U. S. Steel Group to
provide LTV with processing of cold rolled steel.
In October 2000, Transtar announced it had entered into a Reorganization and
Exchange Agreement with its two voting shareholders. Upon closing, Transtar and
certain of its subsidiaries, namely, the Birmingham Southern Railroad Company;
the Elgin, Joliet and Eastern Railway Company; the Lake Terminal Railroad
Company; the McKeesport Connecting Railroad Company; the Mobile River Terminal
Company, Inc.; the Union Railroad Company; the Warrior & Gulf Navigation
Company; and Tracks Traffic and Management Services, Inc. will become
subsidiaries within the U. S. Steel Group. The other shareholder, Transtar
Holdings, L.P., an affiliate of Blackstone Capital Partners L.P., will become
the owner of the other subsidiaries.
The preceding statements concerning anticipated steel demand, steel pricing,
and shipment levels are forward-looking and are based upon assumptions as to
future product prices and mix, and levels of steel production capability,
production and shipments. These forward-looking statements can be affected by
imports, domestic and international economies, domestic production capacity,
the completion of the LTV and Transtar transactions, and customer demand. In
the event these assumptions prove to be inaccurate, actual results may differ
significantly from those presently anticipated.
G-72
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management Opinion Concerning Derivative Instruments
USX uses commodity-based and foreign currency derivative instruments to
manage its price risk. Management has authorized the use of futures, forwards,
swaps and options to manage exposure to price fluctuations related to the
purchase, production or sale of crude oil, natural gas, refined products, and
nonferrous metals. For transactions that qualify for hedge accounting, the
resulting gains or losses are deferred and subsequently recognized in income
from operations, in the same period as the underlying physical transaction.
Derivative instruments used for trading and other activities are marked-to-
market and the resulting gains or losses are recognized in the current period
in income from operations. While USX's risk management activities generally
reduce market risk exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also encompass
strategies that assume price risk.
Management believes that use of derivative instruments along with risk
assessment procedures and internal controls does not expose USX to material
risk. The use of derivative instruments could materially affect USX's results
of operations in particular quarterly or annual periods. However, management
believes that use of these instruments will not have a material adverse effect
on financial position or liquidity. For a summary of accounting policies
related to derivative instruments, see Note 1 to the USX Consolidated Financial
Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, USX is exposed to market risk or price
fluctuations related to the purchase, production or sale of crude oil, natural
gas, refined products and steel products. To a lesser extent, USX is exposed to
the risk of price fluctuations on coal, coke, natural gas liquids, petroleum
feedstocks and certain nonferrous metals used as raw materials.
USX's market risk strategy has generally been to obtain competitive prices
for its products and services and allow operating results to reflect market
price movements dictated by supply and demand. However, USX uses fixed-price
contracts and derivative commodity instruments to manage a relatively small
portion of its commodity price risk. USX uses fixed-price contracts for
portions of its natural gas production to manage exposure to fluctuations in
natural gas prices. Certain derivative commodity instruments have the effect of
restoring the equity portion of fixed-price sales of natural gas to variable
market-based pricing. These instruments are used as part of USX's overall risk
management programs.
Sensitivity analyses of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of December 31, 2000 and December 31, 1999, are
provided for the Marathon Group in the following table. While the U. S. Steel
Group uses derivative commodity instruments, its usage is immaterial to the
results of operations.
Incremental Decrease
in
Pretax Income
Assuming a
Hypothetical Price
Change of(a)
------------------------
2000 1999
--------- -----------
Derivative Commodity Instruments 10% 25% 10% 25%
- -------------------------------- ---- ---- ----- -----
(Dollars in millions)
Marathon Group(b)(c):
Crude oil(d)
Trading.......................................... $-- $-- (e) $ 1.3 $ 7.7(e)
Other than trading............................... 9.1 27.2(e) 16.5 54.0(e)
Natural gas(d)
Trading.......................................... -- -- (e) -- -- (f)
Other than trading............................... 20.2 50.6(e) 4.7 16.8(f)
Refined products(d)
Trading.......................................... -- -- (e) -- -- (e)
Other than trading............................... 6.1 16.5(e) 8.4 23.8(e)
- --------
(a) Gains and losses on derivative commodity instruments are generally offset
by price changes in the underlying commodity. Effects of these offsets are
not reflected in the sensitivity analyses. Amounts reflect
G-73
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position at
December 31, 2000 and December 31, 1999. Marathon Group management evaluates
their portfolio of derivative commodity instruments on an ongoing basis and
adds or revises strategies to reflect anticipated market conditions and
changes in risk profiles. Changes to the portfolio subsequent to December
31, 2000, would cause future pretax income effects to differ from those
presented in the table.
(b) The number of net open contracts varied throughout 2000, from a low of
12,252 contracts at July 5, to a high of 34,554 contracts at October 25,
and averaged 21,875 for the year. The derivative commodity instruments used
and hedging positions taken also varied throughout 2000, 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) The direction of the price change used in calculating the sensitivity
amount for each commodity reflects that which would result in the largest
incremental decrease in pretax income when applied to the derivative
commodity instruments used to hedge that commodity.
(e) Price increase.
(f) Price decrease.
In total, Marathon's exploration and production operations recorded net
pretax other than trading activity losses of approximately $34 million in 2000,
gains of $3 million in 1999 and losses of $3 million in 1998.
Marathon's refining, marketing and transportation operations generally use
derivative commodity instruments to lock-in costs of certain crude oil and
other feedstocks, to protect carrying values of inventories and to protect
margins on fixed-price sales of refined products. Marathon's refining,
marketing and transportation operations recorded net pretax other than trading
activity losses, net of the 38% minority interest in MAP, of approximately $116
million in 2000, and net pretax other than trading activity gains, net of the
38% minority interest in MAP, of $8 million in 1999 and $28 million in 1998.
Marathon's refining, marketing and transportation operations used derivative
instruments for trading activities and recorded net pretax trading activity
losses, net of the 38% minority interest in MAP, of $11 million in 2000 and net
pretax trading activity gains, net of the 38% minority interest in MAP, of $5
million in 1999.
The U. S. Steel Group uses OTC commodity swaps to manage exposure to market
risk related to the purchase of natural gas, heating oil and certain nonferrous
metals. The U. S. Steel Group recorded net pretax other than trading activity
gains of $2 million in 2000, losses of $4 million in 1999 and losses of $6
million in 1998. These gains and losses were offset by changes in the realized
prices of the underlying hedged commodities.
For additional quantitative information relating to derivative commodity
instruments, including aggregate contract values and fair values, where
appropriate, see Note 24 to the USX Consolidated Financial Statements.
USX is subject to basis risk, caused by factors that affect the relationship
between commodity futures prices reflected in derivative commodity instruments
and the cash market price of the underlying commodity. Natural gas transaction
prices are frequently based on industry reference prices that may vary from
prices experienced in local markets. For example, New York Mercantile Exchange
("NYMEX") contracts for natural gas are priced at Louisiana's Henry Hub, while
the underlying quantities of natural gas may be produced and sold in the
Western United States at prices that do not move in strict correlation with
NYMEX prices. To the extent that commodity price changes in one region are not
reflected in other regions, derivative commodity instruments may no longer
provide the expected hedge, resulting in increased exposure to basis risk.
These regional price differences could yield favorable or unfavorable results.
OTC transactions are being used to manage exposure to a portion of basis risk.
G-74
USX is subject to liquidity risk, caused by timing delays in liquidating
contract positions due to a potential inability to identify a counterparty
willing to accept an offsetting position. Due to the large number of active
participants, liquidity risk exposure is relatively low for exchange-traded
transactions.
Interest Rate Risk
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 year-end 2000
and 1999 interest rates on the fair value of USX's non-derivative financial
instruments, is provided in the following table:
As of December 31,
-----------------------------------------
2000 1999
Incremental Incremental
Increase in Increase in
Non-Derivative Financial Fair Fair Fair Fair
Instruments(a) Value(b) Value(c) Value(b) Value(c)
------------------------ -------- ----------- -------- -----------
(Dollars in millions)
Financial assets:
Investments and long-term
receivables(d).................... $ 211 $-- $ 190 $--
Financial liabilities:
Long-term debt(e)(f)............... $4,549 $166 $4,278 $164
Preferred stock of subsidiary(g)... 238 20 239 21
USX obligated mandatorily
redeemable convertible preferred
securities of a subsidiary
trust(g).......................... 119 10 169 15
------ ---- ------ ----
Total liabilities................ $4,906 $196 $4,686 $200
====== ==== ====== ====
- --------
(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) See Note 25 to the USX Consolidated Financial Statements for carrying
value of instruments.
(c) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at December 31,
2000 and December 31, 1999, 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 December 31, 2000 and December 31, 1999.
(d) For additional information, see Note 12 to the USX Consolidated Financial
Statements.
(e) Includes amounts due within one year.
(f) Fair value was based on market prices where available, or current
borrowing rates for financings with similar terms and maturities. For
additional information, see Note 14 to the USX Consolidated Financial
Statements.
(g) See Note 22 to the USX Consolidated Financial Statements.
At December 31, 2000, USX's portfolio of long-term debt was comprised
primarily of fixed-rate instruments. Therefore, the fair value of the portfolio
is relatively sensitive to effects of interest rate fluctuations. This
sensitivity is illustrated by the $166 million increase in the fair value of
long-term debt assuming a hypothetical 10% decrease in interest rates. However,
USX's sensitivity to interest rate declines and corresponding increases in the
fair value of its debt portfolio would unfavorably affect USX's results and
cash flows only to the extent that USX elected to repurchase or otherwise
retire all or a portion of its fixed-rate debt portfolio at prices above
carrying value.
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
G-75
U.S. dollars, such as the Euro, the Slovak koruna and the Canadian dollar. 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 December 31, 2000, USX had open
Canadian dollar forward purchase contracts with a total carrying value of
approximately $14 million compared to $52 million at December 31, 1999. A 10%
increase in the December 31, 2000, Canadian dollar to U.S. dollar forward rate,
would result in a charge to income of approximately $1 million. Last year, a
10% increase in the December 31, 1999, Canadian dollar to U.S. dollar forward
rate, would have resulted in a charge to income of $5 million.
Equity Price Risk
USX is subject to equity price risk and liquidity risk related to its
investment in VSZ, 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 of 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.
G-76
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
First Quarter
Ended March 31
---------------
2001 2000
------- ------
(Dollars in
millions)
Revenues and other income:
Revenues.......................................................................... $10,116 $9,307
Dividend and investee income...................................................... 80 4
Net gains on disposal of assets................................................... 20 107
Gain on ownership change in Marathon Ashland Petroleum LLC........................ 1 4
Other income...................................................................... 68 7
------- ------
Total revenues and other income................................................. 10,285 9,429
------- ------
Costs and expenses:
Cost of revenues (excludes items shown below)..................................... 7,769 7,213
Selling, general and administrative expenses...................................... 125 71
Depreciation, depletion and amortization.......................................... 376 321
Taxes other than income taxes..................................................... 1,181 1,163
Exploration expenses.............................................................. 23 45
------- ------
Total costs and expenses........................................................ 9,474 8,813
------- ------
Income from operations.............................................................. 811 616
Net interest and other financial costs.............................................. 23 95
Minority interest in income of Marathon Ashland Petroleum LLC....................... 107 55
------- ------
Income before income taxes and cumulative effect of change in accounting principle.. 681 466
Provision for income taxes.......................................................... 164 169
------- ------
Income before cumulative effect of change in accounting principle................... 517 297
Cumulative effect of change in accounting principle................................. (8) --
------- ------
Net income.......................................................................... 509 297
Dividends on preferred stock........................................................ 2 2
------- ------
Net income applicable to common stocks.............................................. $ 507 $ 295
======= ======
Selected notes to financial statements appear on pages G-82 to G-90.
G-77
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
INCOME PER COMMON SHARE
(Unaudited)
First Quarter
Ended March 31
----------------
2001 2000
------- -------
(Dollars in
millions,
except per
share amounts)
Applicable to Marathon Stock:
Income before cumulative effect of change in accounting
principle.................................................. $508 $254
--Per share--basic and diluted............................ 1.65 .81
Cumulative effect of change in accounting principle......... (8) --
--Per share--basic and diluted............................ (.03) --
Net income.................................................. $500 $254
--Per share--basic and diluted............................ 1.62 .81
Dividends paid per share.................................... .23 .21
Weighted average shares, in thousands
--Basic................................................... 308,753 312,128
--Diluted................................................. 309,073 312,285
Applicable to Steel Stock:
Net income.................................................. $ 7 $ 41
--Per share--basic and diluted............................ .08 .45
Dividends paid per share.................................... .25 .25
Weighted average shares, in thousands
--Basic................................................... 88,806 88,422
--Diluted................................................. 88,806 88,430
Selected notes to financial statements appear on pages G-82 to G-90.
G-78
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
March 31 December 31
2001 2000
-------- -----------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash
equivalents...... $ 591 $ 559
Receivables, less
allowance for
doubtful accounts
of $133 and $60.. 2,770 2,888
Receivables
subject to a
security
interest......... 350 350
Inventories....... 2,997 2,813
Deferred income
tax benefits..... 230 261
Assets held for
sale............. -- 330
Other current
assets........... 122 131
------- -------
Total current
assets......... 7,060 7,332
Investments and
long-term
receivables, less
reserves of $26 and
$28................ 1,034 801
Property, plant and
equipment, less
accumulated
depreciation,
depletion and
amortization of
$16,484 and
$16,222............ 12,967 12,114
Prepaid pensions.... 2,886 2,879
Other noncurrent
assets............. 376 275
------- -------
Total assets.... $24,323 $23,401
======= =======
Selected notes to financial statements appear on pages G-82 to G-90.
G-79
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET--(Continued)
(Unaudited)
March 31 December 31
2001 2000
-------- -----------
(Dollars in
millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Notes payable........................................... $ 400 $ 150
Accounts payable........................................ 3,620 3,774
Payroll and benefits payable............................ 455 432
Accrued taxes........................................... 564 281
Accrued interest........................................ 74 108
Long-term debt due within one year...................... 301 287
------- -------
Total current liabilities............................. 5,414 5,032
Long-term debt, less unamortized discount................. 4,012 4,173
Deferred income taxes..................................... 2,057 2,020
Employee benefits......................................... 2,543 2,415
Deferred credits and other liabilities.................... 715 724
Preferred stock of subsidiary............................. 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX............... 183 183
Minority interest in Marathon Ashland Petroleum LLC....... 1,938 1,840
STOCKHOLDERS' EQUITY
Preferred stock--
6.50% Cumulative Convertible issued--2,404,487 shares
and 2,413,487 shares ($120 and $121 liquidation
preference, respectively).............................. 2 2
Common stocks:
Marathon Stock issued--312,165,978 shares and
312,165,978 shares..................................... 312 312
Steel Stock issued--88,800,321 shares and 88,767,395
shares................................................. 89 89
Securities exchangeable solely into Marathon Stock
issued--280,348 shares and 281,148 shares.............. -- --
Treasury common stock, at cost--Marathon Stock--3,576,723
shares and 3,899,714 shares.............................. (95) (104)
Additional paid-in capital................................ 4,675 4,676
Deferred compensation..................................... (15) (8)
Retained earnings......................................... 2,261 1,847
Accumulated other comprehensive loss...................... (18) (50)
------- -------
Total stockholders' equity............................ 7,211 6,764
------- -------
Total liabilities and stockholders' equity............ $24,323 $23,401
======= =======
Selected notes to financial statements appear on pages G-82 to G-90.
G-80
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
First
Quarter
Ended March
31
------------
2001 2000
----- -----
(Dollars in
millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income...................................................... $ 509 $ 297
Adjustments to reconcile to net cash provided from operating
activities:
Cumulative effect of change in accounting principle........... 8 --
Minority interest in income of Marathon Ashland Petroleum
LLC.......................................................... 107 55
Depreciation, depletion and amortization...................... 376 321
Exploratory dry well costs.................................... 4 15
Pensions and other postretirement benefits.................... (21) (77)
Deferred income taxes......................................... (179) 73
Net gains on disposal of assets............................... (20) (107)
Changes in:
Current receivables......................................... 190 (36)
Inventories................................................. (154) (49)
Current accounts payable and accrued expenses............... (42) (104)
All other--net................................................ 36 (31)
----- -----
Net cash provided from operating activities............... 814 357
----- -----
Investing activities:
Capital expenditures............................................ (313) (382)
Acquisition of Pennaco Energy, Inc.............................. (506) --
Disposal of assets.............................................. 37 210
Restricted cash--withdrawals.................................... 19 127
- --deposits...................................................... (6) (186)
All other--net.................................................. 1 (5)
----- -----
Net cash used in investing activities..................... (768) (236)
----- -----
Financing activities:
Commercial paper and revolving credit arrangements--net......... 73 (21)
Other debt--borrowings.......................................... 139 231
- --repayments.................................................... (125) (255)
Preferred stock repurchased..................................... -- (11)
Dividends paid.................................................. (95) (90)
Distributions to minority shareholder of Marathon Ashland
Petroleum LLC.................................................. (3) --
----- -----
Net cash used in financing activities..................... (11) (146)
----- -----
Effect of exchange rate changes on cash......................... (3) (1)
----- -----
Net increase (decrease) in cash and cash equivalents............ 32 (26)
Cash and cash equivalents at beginning of year.................. 559 133
----- -----
Cash and cash equivalents at end of period...................... $ 591 $ 107
===== =====
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of amount
capitalized)................................................. $(127) $(136)
Income taxes refunded (paid).................................. 47 (19)
Selected notes to financial statements appear on pages G-82-G-90.
G-81
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The information furnished in these financial statements is unaudited but,
in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments are
of a normal recurring nature unless disclosed otherwise. These financial
statements, including selected notes, have been prepared in accordance with the
applicable rules of the Securities and Exchange Commission and do not include
all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. Certain
reclassifications of prior year data have been made to conform to 2001
classifications. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 2000.
2. Effective January 1, 2001, USX adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Standard
requires recognition of all derivatives as either assets or liabilities at fair
value.
The transition adjustment related to adopting SFAS No. 133 on January 1,
2001, was recognized as a cumulative effect of change in accounting principle.
The unfavorable cumulative effect on net income, net of a tax benefit of $5
million, was $8 million. The unfavorable cumulative effect on other
comprehensive income (OCI), net of a tax benefit of $4 million, was $8 million.
The amounts reported as OCI will be reflected in net income when the
anticipated physical transactions are consummated.
The $8 million transition adjustment recorded in OCI at January 1, 2001,
included $42 million of net losses that were reclassified into income during
the first quarter of 2001. In future periods, $34 million of net gains will be
reclassified into income relating to the OCI transition adjustment when the
related physical transactions are completed.
3. The Marathon Group's operations consist of three reportable operating
segments: 1) Exploration and Production (E&P)--explores for and produces crude
oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T)--refines, markets and transports crude oil and petroleum
products, primarily in the Midwest and southeastern United States through
Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses
(OERB). OERB is an aggregation of two segments which fall below the
quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and
Transportation--markets and transports its own and third-party natural gas and
crude oil in the United States; and 2) Power Generation--develops, constructs
and operates independent electric power projects worldwide.
The U. S. Steel Group consists of two reportable operating segments: 1)
Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the
United States operations of U. S. Steel while USSK includes the U. S. Steel
Kosice operations primarily located in the Slovak Republic. Domestic Steel is
engaged in the domestic production, sale and transportation of steel mill
products, coke, taconite pellets and coal; the management of mineral resources;
real estate development; and engineering and consulting services. USSK is
engaged in the production and sale of steel mill products and coke and
primarily serves central European markets.
G-82
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The results of segment operations for USX are as follows:
Total
Marathon
E&P RM&T OERB Segments
------ ------ ---- --------
(In millions)
First quarter 2001
Revenues and other income:
Customer........................................ $1,238 $6,742 $628 $8,608
Intersegment(a)................................. 134 6 25 165
Intergroup(a)................................... 10 -- 2 12
Equity in earnings of unconsolidated investees.. 20 6 4 30
Other........................................... 8 15 2 25
------ ------ ---- ------
Total revenues and other income................. $1,410 $6,769 $661 $8,840
====== ====== ==== ======
Segment income.................................... $ 600 $ 276 $ 8 $ 884
====== ====== ==== ======
First quarter 2000
Revenues and other income:
Customer........................................ $ 952 $6,427 $350 $7,729
Intersegment(a)................................. 69 20 19 108
Intergroup(a)................................... 5 -- 5 10
Equity in earnings (losses) of unconsolidated
investees...................................... (1) 4 4 7
Other........................................... 3 11 4 18
------ ------ ---- ------
Total revenues and other income................. $1,028 $6,462 $382 $7,872
====== ====== ==== ======
Segment income.................................... $ 309 $ 140 $ 13 $ 462
====== ====== ==== ======
- --------
(a) Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
G-83
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Total Total
Domestic U. S. Steel Marathon
Steel USSK Segments Segments Total
-------- ---- ----------- -------- -------
(In millions)
First quarter 2001
Revenues and other income:
Customer.......................... $1,262 $246 $1,508 $8,608 $10,116
Intersegment(a)................... 1 -- 1 165 166
Intergroup(a)..................... 2 -- 2 12 14
Equity in earnings of
unconsolidated investees......... 47 -- 47 30 77
Other............................. 6 1 7 25 32
------ ---- ------ ------ -------
Total revenues and other income... $1,318 $247 $1,565 $8,840 $10,405
====== ==== ====== ====== =======
Segment income (loss)............... $ (151) $ 41 $ (110) $ 884 $ 774
====== ==== ====== ====== =======
First quarter 2000
Revenues and other income:
Customer.......................... $1,578 $-- $1,578 $7,729 $ 9,307
Intersegment(a)................... -- -- -- 108 108
Intergroup(a)..................... 4 -- 4 10 14
Equity in earnings (losses) of
unconsolidated investees......... (7) -- (7) 7 --
Other............................. 13 -- 13 18 31
------ ---- ------ ------ -------
Total revenues and other income... $1,588 $-- $1,588 $7,872 $ 9,460
====== ==== ====== ====== =======
Segment income...................... $ 54 $-- $ 54 $ 462 $ 516
====== ==== ====== ====== =======
- --------
(a) Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
G-84
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following schedule reconciles segment revenues and income to amounts
reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon U. S. Steel
Group First Group First
Quarter Ended Quarter Ended
March 31 March 31
-------------- --------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions)
Revenues and other income:
Revenues and other income of reportable
segments.................................... $8,840 $7,872 $1,565 $1,588
Items not allocated to segments:
Gain on ownership change in MAP............ 1 4 -- --
Other (a).................................. 59 87 -- --
Elimination of intersegment revenues......... (165) (108) (1) --
------ ------ ------ ------
Total Group revenues and other income.... $8,735 $7,855 $1,564 $1,588
====== ====== ====== ======
Income:
Income (loss) for reportable segments........ $ 884 $ 462 $ (110) $ 54
Items not allocated to segments:
Gain on ownership change in MAP............ 1 4 -- --
Administrative expenses.................... (32) (28) (8) (6)
Net pension credits........................ -- -- 41 65
Costs related to former business
activities................................ -- -- (24) (22)
Other (a).................................. 59 87 -- --
------ ------ ------ ------
Total Group income (loss) from
operations.............................. $ 912 $ 525 $ (101) $ 91
====== ====== ====== ======
- --------
(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.
4. In the first quarter 2001, Marathon Oil Company (Marathon) acquired
Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87%
of the outstanding stock of Pennaco through a tender offer completed on
February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a
wholly owned subsidiary of Marathon. Under the terms of the merger, each share
not held by Marathon was converted into the right to receive $19 in cash. The
total cash purchase price of Pennaco was $506 million. The acquisition was
accounted for under the purchase method of accounting. The excess of the
purchase price over the preliminary fair value of net assets acquired
(goodwill) approximates $64 million and will be amortized over 17 years. First
quarter results of operations include the results of Pennaco from February 7,
2001.
On March 1, 2001, USX completed the purchase of the tin mill products
business of LTV Corporation (LTV). In this noncash transaction, USX assumed
certain employee related obligations of LTV. The acquisition was accounted for
using the purchase method of accounting. First quarter 2001 results of
operations include the operations of the LTV assets acquired from the date of
acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, USX and Transtar
Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As
a result of this transaction, USX became sole owner of Transtar and certain of
its subsidiaries. Holdings became owner of the other subsidiaries of Transtar.
USX accounted for the change in its ownership interest in Transtar using the
purchase method of accounting. USX recognized in the first quarter of 2001, a
pretax gain of $70 million (included in dividend and investee income) and a
favorable deferred tax adjustment
G-85
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
of $33 million related to this transaction. USX previously accounted for its
investment in Transtar under the equity method of accounting.
The following unaudited pro forma data for USX includes the results of
operations of the above acquisitions giving effect to them as if they had been
consummated at the beginning of the years presented. The pro forma data is
based on historical information and does not necessarily reflect the actual
results that would have occurred nor is it necessarily indicative of future
results of operations.
First Quarter
Ended March 31
---------------
2001 2000
------- ------
(In millions,
except
per share
amounts)
Revenues and other income..................................... $10,269 $9,508
Income before cumulative effect of change in accounting
principle.................................................... 411 290
--Per common share:
Marathon Stock--basic and diluted......................... 1.64 .78
Steel Stock--basic and diluted............................ (1.09) .49
Net income.................................................... 403 290
--Per common share:
Marathon Stock--basic and diluted......................... 1.61 .78
Steel Stock--basic and diluted............................ (1.09) .49
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. (USSK), which
is primarily located in the Slovak Republic. USSK was formed in June 2000 to
hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified
Slovak corporation. The acquisition was accounted for under the purchase method
of accounting. VSZ did not provide historical carve-out financial information
for its steel activities prepared in accordance with generally accepted
accounting principles in the United States. USX was unable to fully determine
the effects of transfer pricing, intercompany eliminations and expense
allocations in order to prepare such carve-out information from Slovak
statutory reports and VSZ internal records. USX broadly estimates that the
unaudited pro forma effect on its first quarter 2000 revenues, giving effect to
the acquisition as if it had been consummated at the beginning of this period,
would have been to increase revenues in the period by approximately $250
million. USX cannot determine the unaudited pro forma effect on its first
quarter 2000 net income. However, historical pro forma information is not
necessarily indicative of future results of operations.
5. In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed
a definitive agreement to form a joint venture combining certain of their oil
and gas producing activities in the U.S. Permian Basin, including Marathon's
interest in the Yates Field. This transaction has allowed Marathon to expand
its interests in the Permian Basin and improve access to materials for use in
enhanced recovery techniques in the Yates Field. The joint venture, named MKM
Partners L.P., commenced operations in January 2001 and is accounted for under
the equity method of accounting.
G-86
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. Inventories are carried at lower of cost or market. Cost of inventories
is determined primarily under the last-in, first-out (LIFO) method.
March 31 December 31
2001 2000
-------- -----------
(In millions)
Raw materials.............................................. $1,026 $ 915
Semi-finished products..................................... 434 429
Finished products.......................................... 1,360 1,279
Supplies and sundry items.................................. 177 190
------ ------
Total.................................................... $2,997 $2,813
====== ======
7. Total comprehensive income was $541 million for the first quarter of 2001
and $296 million for the first quarter of 2000.
8. The method of calculating net income per share for the Marathon Stock and
Steel Stock reflects the USX Board of Directors' intent that the separately
reported earnings and surplus of the Marathon Group and the U. S. Steel Group,
as determined consistent with the USX Restated Certificate of Incorporation,
are available for payment of dividends on the respective classes of stock,
although legally available funds and liquidation preferences of these classes
of stock do not necessarily correspond with these amounts. The financial
statements of the Marathon Group and the U. S. Steel Group, taken together,
include all accounts which comprise the corresponding consolidated financial
statements of USX.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted average
number of common shares outstanding.
Diluted net income per share assumes exercise of stock options, provided the
effect is not antidilutive.
G-87
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Computation of Income Per Share
First Quarter Ended March 31
-------------------------------------
2001 2000
------------------ -----------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
Marathon Group
Net income (millions):
Income before cumulative effect of
change in accounting principle........ $ 508 $ 508 $ 254 $ 254
Cumulative effect of change in
accounting principle.................. (8) (8) -- --
-------- -------- -------- --------
Net income............................. $ 500 $ 500 $ 254 $ 254
======== ======== ======== ========
Shares of common stock outstanding
(thousands):
Average number of common shares
outstanding........................... 308,753 308,753 312,128 312,128
Effect of dilutive securities--stock
options............................... -- 320 -- 157
-------- -------- -------- --------
Average common shares and dilutive
effect.............................. 308,753 309,073 312,128 312,285
======== ======== ======== ========
Per share:
Income before cumulative effect of
change in accounting principle........ $ 1.65 $ 1.65 $ .81 $ .81
Cumulative effect of change in
accounting principle.................. (.03) (.03) -- --
-------- -------- -------- --------
Net income............................. $ 1.62 $ 1.62 $ .81 $ .81
======== ======== ======== ========
U. S. Steel Group
Net income (millions):
Net income............................. $ 9 $ 9 $ 43 $ 43
Dividends on preferred stock........... 2 2 2 2
-------- -------- -------- --------
Net income applicable to Steel Stock... $ 7 $ 7 $ 41 $ 41
======== ======== ======== ========
Shares of common stock outstanding
(thousands):
Average number of common shares
outstanding........................... 88,806 88,806 88,422 88,422
Effect of dilutive securities--stock
options............................... -- -- -- 8
-------- -------- -------- --------
Average common shares and dilutive
effect.............................. 88,806 88,806 88,422 88,430
======== ======== ======== ========
Net income per share..................... $ .08 $ .08 $ .45 $ .45
======== ======== ======== ========
9. Included in revenues and costs and expenses for the first quarter of 2001
and 2000 were $1,038 million and $1,039 million, respectively, representing
excise taxes on petroleum products and merchandise.
10. The provision for income taxes for the periods reported is based on tax
rates and amounts which recognize management's best estimate of current and
deferred tax assets and liabilities.
In the first quarter of 2001, interest and other financial costs includes a
favorable adjustment of $76 million and provision for income taxes includes an
unfavorable adjustment of $20 million, both of which are related to prior
years' taxes.
11. At March 31, 2001, USX had $200 million in borrowings against its $1,354
million long-term revolving credit facility and no borrowings against its $451
million short-term revolving credit facility.
G-88
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Certain banks provide USX with short-term lines of credit totaling $150
million which require a .125% fee or maintenance of compensating balances of
3%. At March 31, 2001, there were no borrowings against these facilities.
At March 31, 2001, MAP had no borrowings against its $500 million revolving
credit agreements with banks and had no amounts outstanding against its $190
million revolving credit agreement with Ashland, which was amended and extended
for one year to March 15, 2002.
At March 31, 2001, USSK had no borrowings against its $50 million short-term
credit facility.
At March 31, 2001, in the event of a change in control of USX, debt
obligations totaling $3,531 million and operating lease obligations of $101
million may be declared immediately due and payable. In such event, USX may
also be required to either repurchase the leased Fairfield slab caster for $100
million or provide a letter of credit to secure the remaining obligation.
12. On February 16, 2001, USX borrowed $250 million under a six-month term
loan facility agreement. The loan is unsecured and any borrowings bear interest
at defined short-term market rates. At March 31, 2001, $250 million had been
borrowed against this facility.
On March 30, 2001, USX borrowed $30 million under a five-year promissory
note agreement. The amount borrowed is unsecured and requires quarterly
principal payments and interest at a rate of 6.57%. At March 31, 2001, $30
million was outstanding under the agreement.
13. In 1998, USX redeemed all shares of USX-Delhi Group Common Stock. After
the redemption, 50,000,000 shares of this stock remain authorized but unissued.
14. USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment. Certain of these
matters are discussed below. The ultimate resolution of these contingencies
could, individually or in the aggregate, be material to the consolidated
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably. See discussion of Liquidity in USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
USX is subject to federal, state, local and foreign laws and regulations
relating to the environment. These laws generally provide for control of
pollutants released into the environment and require responsible parties to
undertake remediation of hazardous waste disposal sites. Penalties may be
imposed for noncompliance. At March 31, 2001, and December 31, 2000, accrued
liabilities for remediation totaled $226 million and $212 million,
respectively. It is not presently possible to estimate the ultimate amount of
all remediation costs that might be incurred or the penalties that may be
imposed. Receivables for recoverable costs from certain states, under programs
to assist companies in cleanup efforts related to underground storage tanks at
retail marketing outlets, were $64 million at March 31, 2001, and $57 million
at December 31, 2000.
For a number of years, USX has made substantial capital expenditures to
bring existing facilities into compliance with various laws relating to the
environment. In the first quarter of 2001 and for the years 2000 and 1999, such
capital expenditures totaled $9 million, $91 million and $78 million,
respectively. USX anticipates making additional such expenditures in the
future; however, the exact amounts and timing of such expenditures are
uncertain because of the continuing evolution of specific regulatory
requirements.
G-89
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
At March 31, 2001, and December 31, 2000, accrued liabilities for platform
abandonment and dismantlement totaled $170 million and $162 million,
respectively.
Guarantees by USX of the liabilities of affiliated entities totaled $68
million at March 31, 2001. In the event that any defaults of guaranteed
liabilities occur, USX has access to its interest in the assets of most of the
affiliates to reduce losses resulting from these guarantees. As of March 31,
2001, the largest guarantee for a single affiliate was $59 million.
At March 31, 2001, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $119 million. Under the agreements, USX is required to advance funds if
the affiliates are unable to service debt. Any such advances are prepayments of
future transportation charges.
Contract commitments to acquire property, plant and equipment and long-term
investments at March 31, 2001, totaled $778 million compared with $663 million
at December 31, 2000.
15. USX has a 16% investment in Republic Technologies International LLC
(Republic) which was accounted for under the equity method of accounting.
During the first quarter of 2001, USX discontinued applying the equity method
since investments in and advances to Republic had been reduced to zero. Also,
USX has recognized certain debt obligations of $14 million previously assumed
by Republic. On April 2, 2001, Republic filed a voluntary petition with the
U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S.
Bankruptcy Code. In the first quarter of 2001, as a result of Republic's
action, USX recorded a pretax charge of $74 million for potentially
uncollectible receivables from Republic.
G-90
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS--(Unaudited)
CONTINUING OPERATIONS
First Quarter
Ended March 31 Year Ended December 31
------------------ ------------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----- ---- ---- ---- ---- ---- ----
13.79 5.16 3.79 4.20 3.45 3.63 3.41
===== ==== ==== ==== ==== ==== ====
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS--(Unaudited)
CONTINUING OPERATIONS
First Quarter
Ended March 31 Year Ended December 31
------------------ ------------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
----- ---- ---- ---- ---- ---- ----
14.56 5.29 3.89 4.32 3.56 3.79 3.65
===== ==== ==== ==== ==== ==== ====
G-91
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
USX Corporation ("USX") is a diversified company that is principally engaged
in the energy business through its Marathon Group and in the steel business
through its U. S. Steel Group. The following discussion should be read in
conjunction with the first quarter 2001 USX Consolidated Financial Statements
and selected notes. For income per common share amounts applicable to USX's two
classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and
USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement
of Operations--Income per Common Share. For individual Group results, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Marathon Group and the U. S. Steel Group. For operating
statistics, see Supplemental Statistics following Management's Discussion and
Analysis of Financial Condition and Results of Operations for each of the
respective Groups.
On April 24, 2001, USX announced that its Board of Directors authorized
management to proceed with the necessary steps to implement a plan of
reorganization of the corporation in order to separate the energy and steel
businesses. The plan envisions a tax-free spin-off of the steel and steel-
related businesses of USX Corporation into a freestanding, publicly traded
company to be known as United States Steel Corporation ("U. S. Steel"). Holders
of current Steel Stock would become holders of United States Steel Corporation
Common Stock. Holders of current Marathon Stock would become holders of
Marathon Oil Company Common Stock. The plan does not contemplate a cash
distribution to shareholders. Each new company would carry approximately the
same assets and liabilities now associated with its existing businesses, except
for a value transfer of approximately $900 million from Marathon Oil Company to
U. S. Steel, intended to maintain U. S. Steel as a strong, independent company.
The form of the value transfer would be a reallocation of USX corporate debt
between the current Marathon Group and the U. S. Steel Group. The plan of
reorganization is subject to the approval of a majority of the outstanding
shares of each class of the current USX common stock, receipt of a favorable
tax ruling from the Internal Revenue Service ("IRS") on the tax-free nature of
the transaction, completion of necessary financing arrangements, receipt of
necessary regulatory and third party consents, and board approval of definitive
documentation for the transaction. The transaction is expected to occur at
year-end, subject to the absence of any materially adverse change in business
conditions for the energy and/or steel business, delay in obtaining the IRS
ruling or other unfavorable circumstances.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in the forward-looking statements. For additional risk factors
affecting the businesses of USX, see Supplementary Data--Disclosures About
Forward-Looking Statements in the USX 2000 Form 10-K.
G-92
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Results of Operations
Revenues and other income for the first quarter of 2001 and 2000 are set
forth in the following table:
First Quarter
Ended March 31
---------------
2001 2000
------- ------
(Dollars in
millions)
Revenues and other income
Marathon Group............................................... $ 8,735 $7,855
U. S. Steel Group............................................ 1,564 1,588
Eliminations................................................. (14) (14)
------- ------
Total USX Corporation revenues and other income............ 10,285 9,429
Less:
Excise taxes(a).............................................. 1,038 1,039
------- ------
Revenues and other income--excluding above item............ $ 9,247 $8,390
======= ======
- --------
(a) Consumer excise taxes on petroleum products and merchandise are included in
both revenues and costs and expenses for the Marathon Group and USX
Consolidated.
Revenues and other income (excluding excise taxes) increased $857 million in
the first quarter of 2001 compared with the first quarter of 2000, reflecting
an increase of 13 percent for the Marathon Group and a decrease of 2 percent
for the U. S. Steel Group.
For discussion of revenues by Group, see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon
Group and the U. S. Steel Group.
Income from operations for the first quarter of 2001 and 2000 are set forth
in the following table:
First
Quarter
Ended
March 31
-----------
2001 2000
----- ----
(Dollars
in
millions)
Reportable segments
Marathon Group
Exploration & production.......................................... $ 600 $309
Refining, marketing & transportation.............................. 276 140
Other energy related businesses................................... 8 13
----- ----
Income for reportable segments--Marathon Group.................. 884 462
----- ----
U. S. Steel Group
Domestic Steel.................................................... (151) 54
U. S. Steel Kosice................................................ 41 --
----- ----
Income (loss) for reportable segments--U. S. Steel Group........ (110) 54
----- ----
Income for reportable segments--USX Corporation................. 774 516
Items not allocated to reportable segments:
Marathon Group..................................................... 28 63
U. S. Steel Group.................................................. 9 37
----- ----
Total income from operations--USX Corporation................... $ 811 $616
===== ====
G-93
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Income for reportable segments increased $258 million in the first quarter
of 2001 as compared with the first quarter of 2000, reflecting increases of
$422 million for the Marathon Group reportable segments and decreases of $164
million for the U. S. Steel Group reportable segments.
For discussion of income from operations by segment, see Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the Marathon Group and the U. S. Steel Group.
Net interest and other financial costs for the first quarters of 2001 and
2000 are set forth in the following table:
First
Quarter
Ended
March 31
----------
2001 2000
---- ----
(Dollars
in
millions)
Net interest and other financial costs.............................. $ 23 $95
Less:
Favorable adjustment to interest related to prior years' taxes.... (76) --
---- ---
Net interest and other financial costs adjusted to exclude above
item............................................................... $ 99 $95
==== ===
Adjusted net interest and other financial costs increased by $4 million in
the first quarter of 2001 as compared with the same period in 2000. This
increase was primarily due to a higher average debt level.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased $52 million in the first quarter of 2001
from the comparable 2000 period, due to higher RM&T segment income. For further
discussion, see Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Marathon Group.
Provision for income taxes of $164 million in the first quarter of 2001 and
$169 million for the first quarter of 2000, were based on tax rates and amounts
that recognize management's best estimate of current and deferred tax assets
and liabilities. In the first quarter of 2001, the provision included a $33
million tax benefit associated with the Transtar reorganization and an
unfavorable adjustment of $20 million related to prior years' taxes.
Cumulative effect of change in accounting principle of $8 million, net of a
tax benefit of $5 million, in the first quarter of 2001 was an unfavorable
transition adjustment related to adopting SFAS No. 133. For further discussion,
see Note 2 to the USX Consolidated Financial Statements.
Net income in the first quarter of 2001 was $509 million, an increase of
$212 million from the first quarter of 2000, reflecting an increase of $246
million for the Marathon Group and a decrease of $34 million for the U. S.
Steel Group.
Dividends to Stockholders
On April 24, 2001, the USX Board of Directors (the "Board") declared
dividends of 23 cents per share on Marathon Stock and 10 cents per share on
Steel Stock, a decrease of 15 cents per share on Steel Stock, both payable June
9, 2001, to stockholders of record at the close of business on May 16, 2001.
The Board also declared a dividend of $0.8125 per share on USX's 6.50%
Cumulative Convertible Preferred Stock, payable June 29, 2001, to stockholders
of record at the close of business on May 31, 2001.
G-94
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On April 24, 2001, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3561 per share on its non-
voting Exchangeable Shares, payable June 9, 2001, to stockholders of record at
the close of business on May 16, 2001. Previously, Marathon Oil Canada Limited
announced that the redemption of these Exchangeable Shares will be accelerated
to August 13, 2001. These shares will be exchanged for Marathon Stock on a one-
for-one basis.
Cash Flows
Cash and cash equivalents totaled $591 million at March 31, 2001, compared
with $107 million at March 31, 2000, reflecting increases of $309 million for
the Marathon Group and $175 million for the U. S. Steel Group. These increases
primarily reflect an increase in cash held by certain foreign subsidiaries.
Net cash provided from operating activities totaled $814 million in the
first quarter of 2001, compared with $357 million in the first quarter of 2000.
The $457 million increase mainly reflected improved net income and working
capital changes.
Capital expenditures for property, plant and equipment in the first quarter
of 2001 were $313 million, compared with $382 million in the first quarter of
2000. For further details, see Management's Discussion and Analysis of
Financial Condition and Results of Operations for each of the respective
Groups.
The acquisition of Pennaco Energy, Inc. ("Pennaco") included cash payments
of $506 million. For further discussion of Pennaco, see Note 4 to the USX
Consolidated Financial Statements.
Cash from disposal of assets in the first quarter of 2001 was $37 million,
compared with $210 million in the first quarter of 2000. Proceeds in 2000 were
mainly from the disposition of Marathon's 33.34 percent interest in the
Angus/Stellaria development in the Gulf of Mexico.
The net change in restricted cash was a net withdrawal of $13 million in the
first quarter of 2001 compared with a net deposit of $59 million in the first
quarter of 2000. Restricted cash in both periods primarily reflected the net
effects of cash deposited and withdrawn from domestic production property
dispositions and acquisitions.
Financial obligations (the net of commercial paper and revolving credit
arrangements, debt borrowings and repayments on the Consolidated Statement of
Cash Flows) increased $87 million in the first quarter of 2001 compared with a
decrease of $45 million in the first quarter of 2000. The increase in 2001
reflects cash used for capital expenditures, acquisition of Pennaco and
dividend payments that were greater than net cash provided from operating
activities and asset sales.
Contract commitments to acquire property, plant and equipment and long-term
investments at March 31, 2001, totaled $778 million compared with $663 million
at December 31, 2000.
Debt and Preferred Stock Ratings
Standard & Poor's Corp. rates USX's and Marathon's senior debt BBB, USX's
subordinated debt BBB- and preferred stock BB+. Moody's Investor Services, Inc.
rates USX's and Marathon's senior debt Baa1, USX's subordinated debt Baa2 and
USX's preferred stock baa3. Fitch IBCA Duff & Phelps rates USX's senior notes
BBB and USX's subordinated debt as BBB-. All senior debt holds an investment
grade rating. On April 24, 2001, after USX announced the plan of
reorganization, Standard & Poor's maintained the current rating on
G-95
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
USX debt and the "Credit Watch Developing" status and Fitch IBCA Duff & Phelps
advised that they had raised the Rating Watch status on USX to "Positive".
Liquidity
At March 31, 2001, USX had $200 million of borrowings against its $1,354
million long-term revolving credit agreement, no borrowings against its $451
million 364-day facility and no commercial paper borrowings. There were no
borrowings against USX's short-term lines of credit totaling $150 million at
March 31, 2001. At March 31, 2001, there were no borrowings against MAP or USSK
revolving credit agreements.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of March 31, 2001, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 2001 and years 2002 and 2003, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in
Note 14 to the USX Consolidated Financial Statements), are expected to be
financed by a combination of internally generated funds, proceeds from the sale
of stock, borrowings and other external financing sources. However, on April
24, 2001, USX announced that the Board had authorized management to proceed
with the necessary steps to implement a plan of reorganization of the
corporation in order to separate the energy and steel businesses. Until the
plan of reorganization is implemented or abandoned, USX management believes
that it will be more difficult to access traditional debt and equity markets.
Although USX management believes that it will not be necessary to access
financial markets during this time frame, nontraditional sources should be
available to provide adequate liquidity, if necessary.
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are based on currently available information. To the extent
that this information proves to be inaccurate, future availability of financing
may be adversely affected. Factors that could affect the availability of
financing include the performance of each Group (as measured by various factors
including cash provided from operating activities), the state of worldwide debt
and equity markets, investor perceptions and expectations of past and future
performance, the overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of USX's outstanding debt and credit ratings
by rating agencies.
Environmental Matters, Contingencies and Commitments
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group are subject to similar environmental laws and regulations. However, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities, marketing areas,
production processes and the specific products and services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
36 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of March 31, 2001. In addition, there are 21 sites
where USX has received information requests or other indications that USX may
be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability. There are also 143 additional
sites, excluding retail gasoline stations, where remediation
G-96
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
is being sought under other environmental statutes, both federal and state, or
where private parties are seeking remediation through discussions or
litigation. Of these sites, 14 were associated with properties conveyed to MAP
by Ashland for which Ashland has retained liability for all costs associated
with remediation. At many of these sites, USX is one of a number of parties
involved and the total cost of remediation, as well as USX's share thereof, is
frequently dependent upon the outcome of investigations and remedial studies.
USX accrues for environmental remediation activities when the responsibility to
remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required.
New Tier II gasoline rules, which were finalized by the U.S. Environmental
Protection Agency ("EPA") in February 2000, and the diesel fuel rule which was
finalized in January 2001, require substantially reduced sulfur levels. The
combined capital cost to achieve compliance with the gasoline and diesel
regulations could amount to approximately $700 million between 2003 and 2005.
This is a forward-looking statement and can only be a broad-based estimate due
to the ongoing evolution of regulatory requirements. Some factors (among
others) that could potentially affect gasoline and diesel fuel compliance costs
include obtaining the necessary construction and environmental permits,
operating and logistical considerations, and unforeseen hazards such as weather
conditions.
In October 1998, the National Enforcement Investigations Center and Region V
of the EPA conducted a multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a multi-media inspection of
MAP's Robinson refinery. These inspections covered compliance with the Clean
Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (Permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. MAP has been
served with two Notices of Violation ("NOV") and three Findings of Violation in
connection with the multi-media inspections at its Detroit refinery. The
Detroit notices allege violations of the Michigan State Air Pollution
Regulations, the EPA New Source Performance Standards and National Emission
Standards for Hazardous Air Pollutant for benzene. On March 6, 2000, MAP
received its first NOV arising out of the multi-media inspection of the
Robinson Refinery conducted in November 1998. The NOV is for alleged Resource
Conservation and Recovery Act (hazardous waste) violations.
MAP has recently settled with the EPA certain New Source Review ("NSR")
compliance issues as well as multi-media issues related to the EPA's 1998
multi-media inspections of the Detroit and Robinson refineries. MAP's
settlement with the EPA includes all of MAP's refineries and commits MAP to
specific control technologies and implementation schedules for approximately
$263 million in environmental capital expenditures and improvements to MAP's
refineries over approximately an 8 year period that are consistent with MAP's
current capital spending plans. It also commits MAP to payment of an aggregate
civil penalty in the amount of $3.8 million and the performance of $6.5 million
in supplemental environmental projects as a part of an enforcement action for
alleged Clean Air Act violations. MAP believes that the settlement will provide
MAP with increased permitting and operating flexibility while achieving
significant emission reductions.
In October 1996, USX was notified by the Indiana Department of Environmental
Management ("IDEM") acting as lead trustee, that IDEM and the U.S. Department
of the Interior had concluded a preliminary investigation of potential injuries
to natural resources related to the releases of hazardous substances from
various municipal and industrial sources along the east branch of the Grand
Calumet River and Indiana Harbor
G-97
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Canal. The public trustees completed a pre-assessment screen pursuant to
federal regulations and have determined to perform a Natural Resource Damages
Assessment. USX was identified as a PRP along with 15 other companies owning
property along the river and harbor canal. USX and eight other PRPs have formed
a joint defense group. In 2000, the trustees concluded their assessment of
sediment injuries, which includes a technical review of environmental
conditions. The PRP joint defense group has proposed terms for the settlement
of this claim which have been endorsed by representatives of the trustees and
the EPA to be included in a consent decree that USX expects will resolve this
claim. A reserve has been established for the USX share of this anticipated
settlement.
The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-
acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and
solvent reprocessing operations were conducted on the Berks Site between 1941
and 1986. In September 1997, USX signed a consent decree to conduct a
feasibility study at the site relating to the alternative remedy. In 1999, a
new Record of Decision was approved by the EPA and the U.S. Department of
Justice. On January 19, 2001, USX signed a consent decree with the EPA to
remediate this site. On April 6, 2001, USX paid $.4 million for costs
associated with this site. The only remaining outstanding claim is the natural
resource damages claim filed by the Commonwealth of Pennsylvania.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment (see Note 14 to the
USX Consolidated Financial Statements for a discussion of certain of these
matters). The ultimate resolution of these contingencies could, individually or
in the aggregate, be material to the USX Consolidated Financial Statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be
resolved unfavorably. See discussion of Liquidity herein.
Outlook--U. S. Steel Group
For a recent outlook pertaining to the U. S. Steel Group, see UNITED STATES
STEEL--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--Outlook, page F-52 in Annex F.
Outlook--Marathon Group
The outlook regarding the Marathon Group's upstream revenues and income is
largely dependent upon future prices and volumes of liquid hydrocarbons and
natural gas. Prices have historically been volatile and have frequently been
affected by unpredictable changes in supply and demand resulting from
fluctuations in worldwide economic activity and political developments in the
world's major oil and gas producing and consuming areas. Any significant
decline in prices could have a material adverse effect on the Marathon Group's
results of operations. A prolonged decline in such prices could also adversely
affect the quantity of crude oil and natural gas reserves that can be
economically produced and the amount of capital available for exploration and
development.
In second quarter 2001, worldwide production is expected to be approximately
400 to 405 thousand barrels of oil equivalent ("BOE") per day. For the year,
worldwide production is expected to average between 425 and 430 thousand BOE
per day, split evenly between liquid hydrocarbons and natural gas, including
production from Marathon's share of investees and future acquisitions.
On February 7, 2001, Marathon acquired 87% of the outstanding stock of
Pennaco through a tender offer. The merger was completed on March 26, 2001,
after approval by Pennaco shareholders. Results of operations
G-98
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
for the first quarter include the results of Pennaco from February 7, 2001.
Pennaco's current net production is over 45 million cubic feet of natural gas
per day.
Marathon plans to drill three deepwater Gulf of Mexico exploratory wells in
2001. To support this increased drilling activity, Marathon has contracted two
new deepwater rigs, capable of drilling in water depths beyond 6,500 feet. In
addition, Marathon will drill a well on its Southhampton prospect in the
Atlantic Ocean off the Nova Scotian coast in the fourth quarter and will
participate in a well on Block 31 offshore Angola.
On May 1, 2001, the cash related to the recorded gain on the offshore lease
resolution with the U.S. Government was received in the amount of $78 million.
The above discussion includes forward-looking statements with respect to the
expected levels of Marathon's worldwide liquid hydrocarbon and natural gas
production and the drilling program. Some factors that could potentially affect
worldwide liquid hydrocarbon and natural gas production include pricing, supply
and demand for petroleum products, amount of capital available for exploration
and development, regulatory constraints, timing of commencing production from
new wells, and other geological, operating and economic considerations. Some
factors that affect the drilling program include the timing and results of
future development drilling and drilling rig availability.
Downstream income of the Marathon Group is largely dependent upon the
refining and wholesale marketing margin for refined products and the retail
gross margin for gasoline and distillates. The refining and wholesale marketing
margin reflects the difference between the wholesale selling prices of refined
products and the cost of raw materials refined, purchased product costs and
manufacturing expenses. Refining and wholesale marketing margins have been
historically volatile and vary with the level of economic activity in the
various marketing areas, the regulatory climate, the seasonal pattern of
certain product sales, crude oil costs, manufacturing costs, the available
supply of crude oil and refined products, and logistical constraints. The
retail gross margin for gasoline and distillates reflects the difference
between the retail selling prices of these products and their wholesale cost.
Retail gasoline and distillate margins have also been historically volatile,
but tend to be counter cyclical to the refining and wholesale marketing margin.
Factors affecting the retail gasoline and distillate margin include seasonal
demand fluctuations, the available wholesale supply, the level of economic
activity in the marketing areas and weather situations which impact driving
conditions.
In 2000, MAP, Panhandle Eastern Pipe Line Company, a subsidiary of CMS
Energy Corporation, and TE Products Pipe Line Company, Limited Partnership
("TEPPCO"), formed a limited liability company with equal ownership called
Centennial Pipeline LLC to operate an interstate refined petroleum products
pipeline extending from the U.S. Gulf of Mexico to the Midwest. The new company
plans to build a 74-mile, 24-inch diameter pipeline connecting TEPPCO's
facility in Beaumont, Texas, with an existing 720-mile, 26-inch diameter
pipeline extending from Longville, Louisiana to Bourbon, Illinois. A
significant milestone in the project was reached on March 29, 2001, when the
Federal Energy Regulatory Commission ("FERC") approved the abandonment of the
720-mile pipeline from natural gas service thus allowing conversion to refined
products transportation. As part of the project, a two million barrel terminal
storage facility will be constructed. The Centennial Pipeline system will
connect with existing MAP transportation assets and other common carrier lines
and is expected to be operational in first quarter 2002.
MAP and Pilot Corporation announced in March 2001 that they have signed a
letter of intent to pursue a combination of the travel center operations of
MAP's wholly owned subsidiary, SSA, and Pilot. Under its terms, MAP and Pilot
would each have a 50 percent interest in the new company that would comprise a
G-99
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
nationwide chain of about 250 Travel Centers, consisting of 110 SSA Travel
Centers in 18 states and 140 Pilot Travel Centers in 39 states. This
combination represents a step forward in MAP's plans to expand to a national
truck stop network. The companies anticipate closing the transaction this
summer, pending completion of due diligence and the execution of definitive
agreements.
MAP also announced in March 2001 an agreement with Welsh Inc. to purchase
all of its convenience stores located in Indiana and Michigan. Welsh is
recognized as a leader in developing convenience store formats with car washes
and quick-service restaurants. The transaction is expected to close in the
second quarter 2001.
In connection with the plan of reorganization described on page 43, Standard
& Poor's reported that they had assigned a BBB+ corporate credit rating to
Marathon Oil Company with a stable outlook assuming the reorganization plan is
completed.
The above discussion includes forward-looking statements with respect to the
expected completion of construction and commencement of operation of Centennial
Pipeline, the expected successful completion and timing of the two proposed
retail marketing transactions, and the plan of reorganization. Some factors
which impact the Centennial Pipeline project include obtaining the necessary
construction and environmental permits, unforeseen hazards such as weather
conditions, obtaining the necessary rights-of-way, and regulatory approval
constraints. Some factors which affect the successful completion of the two
proposed retail marketing transactions are the execution and closing of
definitive agreements, and the receipt of government and third party approvals.
Some factors which will affect the plan of reorganization include approval of a
majority of the outstanding shares of each class of the current USX common
stock, receipt of a favorable tax ruling from the IRS on the tax-free nature of
the transaction, completion of necessary financing arrangements, receipt of
necessary regulatory and third party consents, any materially adverse changes
in business conditions for the energy and/or steel businesses, board approval
of definitive documentation of the transaction or other unfavorable
circumstances. These factors (among others) could cause actual results to
differ materially from those set forth in the forward-looking statements.
G-100
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:
-------------
10% 25%
------ ------
(Dollars in
millions)
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil
Trading(f)(g)............................................. $ 3.9 $ 9.8(e)
Other than trading(f)(g).................................. 0.6 22.2(e)
Natural gas
Other than trading(f)(g).................................. 20.3 50.6(d)
Refined products
Other than trading(f)(g).................................. 1.0 2.6(d)
U. S. Steel Group
Zinc
Other than trading........................................ 2.0 5.0(e)
Tin
Other than trading........................................ 0.3 0.7(e)
- --------
(a) Gains and losses on commodity-based derivative instruments used for other
than trading activities are generally offset by price changes in the
underlying commodity. With the adoption of SFAS No. 133, the definition of
a derivative instrument has been expanded to include certain fixed price
physical commodity contracts. Such instruments are included in the above
table. Amounts reflect the estimated incremental effect on pretax income of
a hypothetical 10% and 25% change in closing commodity prices at March 31,
2001. Management evaluates the portfolios of commodity-based derivative
instruments on an ongoing basis and adjusts strategies to reflect
anticipated market conditions, changes in risk profiles and overall
business objectives. Changes to the portfolios subsequent to March 31,
2001, may cause future pretax income effects to differ from those presented
in the table.
(b) The number of net open contracts varied throughout first quarter 2001, from
a low of 21,416 contracts at March 31, to a high of 35,646 contracts at
February 8, and averaged 30,462 for the quarter. The type of derivative
instruments and number of positions entered into will vary which changes
the composition of the portfolio. Because of these variations, the number
of open contracts, by itself, cannot be used to predict future income
effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that the
physical and paper indices are perfectly correlated. Gains and losses on
options are based on changes in intrinsic value only.
(d) Price increase.
(e) Price decrease.
(f) The direction of the price change used in calculating the sensitivity
amount for each commodity reflects that which would result in the largest
incremental decrease in pretax income.
(g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
G-101
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS--(Continued)
Interest Rate Risk
As of March 31, 2001, the discussion of USX's interest rate risk has not
changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in USX's 2000 Form 10-K.
Foreign Currency Exchange Rate Risk
USX is subject to the risk of price fluctuations related to anticipated
revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies other than U.S.
dollars. USX has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to manage
exposure to certain currency price fluctuations.
At March 31, 2001, USX had open Euro forward sale contracts for both U.S.
dollars and Slovak Koruna. A 10% increase in the March 31, 2001 Euro forward
rates would result in an immaterial charge to income. The entire amount of
these contracts is attributed to the U. S. Steel Group.
At March 31, 2001, the discussion of the Marathon Group's foreign currency
exchange rate risk has not changed materially from that presented in
Quantitative and Qualitative Disclosures About Market Risk included in USX's
2000 Form 10-K.
Safe Harbor
USX's quantitative and qualitative disclosures about market risk include
forward-looking statements with respect to management's opinion about risks
associated with USX's use of derivative instruments. These statements are based
on certain assumptions with respect to market prices and industry supply and
demand for crude oil, natural gas, refined products, steel products and certain
raw materials. To the extent that these assumptions prove to be inaccurate,
future outcomes with respect to USX's hedging programs may differ materially
from those discussed in the forward-looking statements.
G-102
[USX CORPORATION LOGO]
ATTENDANCE CARD
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2001
You are cordially invited to attend the Special Meeting of Stockholders on
, 2001. The Meeting will be held in [PLACE] at A.M. Eastern Time.
Use of this attendance card is for our mutual convenience. Your right to
attend the meeting without this attendance card is not affected, upon
presentation of identification.
Attached below is your Proxy Card for the Special Meeting.
Dan D. Sandman
Secretary
For the personal use of the named stockholder(s)--not transferable. Please
present this card upon arrival.
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YOU MAY VOTE
(A) BY COMPLETING THE PROXY CARD ATTACHED BELOW AND RETURNING IT IN
THE ENCLOSED ENVELOPE, OR
(B) BY TOLL-FREE TELEPHONE CALL, OR
(C) ON THE INTERNET
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TO VOTE BY TELEPHONE OR INTERNET
USE THE CONTROL NUMBER IN THE BOX BELOW
YOUR CONTROL NUMBER
[ ]
BY TELEPHONE BY INTERNET
Toll-free [1-888- - ] [https://www. .com/usx]
Have your control number available when you call or visit the Internet
site and follow the prompts. If voting on the Internet, be certain to
enter the complete address as shown above.
Voting is available 24 hours a day, 7 days a week.
Do NOT return the proxy card if you have voted by telephone or
Internet.
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The undersigned appoint(s) Thomas J. Usher, Clarence P. Cazalot, Jr. and
Robert M. Hernandez, or any of them, proxies to vote as herein stated on behalf
of the undersigned at the Special Meeting of Stockholders of USX Corporation on
, 2001, and any adjournment or postponement thereof, upon each of the
proposals set forth below, as set forth in the Proxy Statement for such Special
Meeting, with respect to which the proxies are instructed to vote as follows:
PROPOSALS OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE ITEMS
BELOW.
1. Approval and adoption of the FOR [_] AGAINST [_] ABSTAIN [_]
Agreement and Plan of
Reorganization, dated as of
, 2001, between USX Corporation
and United States Steel LLC,
providing for the separation of
the U. S. Steel Group and the
Marathon Group into two
independent companies, by way of
a merger of a wholly owned
subsidiary of USX Corporation
with and into USX Corporation.
2. Approval of the United States FOR [_] AGAINST [_] ABSTAIN [_]
Steel Corporation 2002 Stock
Plan.
3. Approval of the United States FOR [_] AGAINST [_] ABSTAIN [_]
Steel Corporation Senior
Executive Officer Annual
Incentive Compensation Plan.
4.To adjourn the special meeting, if FOR [_] AGAINST [_] ABSTAIN [_]
necessary.
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SIGNATURE(S) ________________________________
_________________________________
Dated: ____________________, 2001
Please sign exactly as your name appears
hereon, including representative capacity where
applicable. If more than one named owner, all
owners should sign.
THIS PROXY IS SOLICITED BY THE BOARD OF DIREC-
TORS AND REPRESENTS YOUR HOLDINGS OF USX-MARA-
THON GROUP COMMON STOCK AND/OR USX-U.S. STEEL
GROUP COMMON STOCK. UNLESS OTHERWISE MARKED,
PROXIES ARE TO VOTE "FOR" PROPOSALS 1, 2, 3 AND
4.
2