United States Steel Corporation Robert M. Stanton
Law Department Assistant General Counsel -
600 Grant Street Corporate & Assistant
Pittsburgh, PA 15219-2800 Secretary
412 433 2877
Fax: 412 433 2811
email: rmstanton@uss.com
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED PURSUANT TO 17 C.F.R. Sec. 200.83.
THIS LETTER OMITS CONFIDENTIAL INFORMATION INCLUDED IN THE UNREDACTED VERSION
OF THE LETTER THAT WAS DELIVERED TO THE DIVISION OF CORPORATION FINANCE,
AND THESE OMISSIONS ARE DENOTED WITH ASTERISKS.
October 4, 2006
Mr. Jeffrey Gordon
Staff Accountant
Division of Corporation Finance
Securities and Exchange Commission
100 F Street N.E.
Washington, DC 20549
Re: United States Steel Corporation Form 10-K for year ended December 31, 2005
and Forms 10-Q for Quarters ended March 31 and June 30, 2006
File No. 1-16811
Dear Mr. Gordon:
For the reasons articulated in our letter dated today to the Freedom of
Information Office, confidential treatment is sought for the marked portions of
this letter pursuant to 17 C.F.R. Sec. 200.83. The information in those portions
of this letter are treated confidentially by United States Steel Corporation
("U. S. Steel") in the regular course of its business and disclosure of it would
adversely impact U. S. Steel's competitive position and ability to resolve
matters with the lowest cost to our stockholders.
In response to the letter from John Hartz dated September 20, 2006, U. S. Steel
is pleased to voluntarily provide the following responses and information to the
staff of the Securities and Exchange Commission (the "Commission"). For
convenience, we have reproduced each of your comments below in italics in the
order in which it appeared in your letter, and our response to each comment
immediately follows it.
(a) We note from page 30 that your results of operations and cash flows for a
given period could be adversely affected by asbestos-related lawsuits. It is
unclear why you do not consider your estimates surrounding the asbestos
liability to be critical. Please advise.
RESPONSE: Page 30 of the Form 10-K contains the following statement:
"Despite this uncertainty, and although U. S. Steel's results of
operations and cash flows for a given period could be adversely
affected by asbestos-related lawsuits, claims and proceedings,
management believes that the ultimate resolution of these matters
will not have a material adverse effect on the Company's financial
condition."
The foregoing statement must be read in the context of the highly cyclical
nature of the steel industry. U. S. Steel has experienced quarters with
minimal net income. In 2002, for example, net income was $27 million in
the second quarter and $11 million in the fourth quarter. We therefore
thought it appropriate to caution the reader about the potential for
impacts on our quarterly results of operations and cash flows, while
indicating that we do not believe that there will be a longer term
material impact on our financial condition.
U. S. Steel identifies "potential litigation claims and settlements" as
one of several accounting estimates in the first paragraph under the
heading "Critical Accounting Estimates" on page 39 of the Form 10-K. In
that section of the Form 10-K, we discuss in more detail the most
significant estimates and judgments that are used in the preparation of
our financial statements. They are (i) pensions and OPEB; (ii) asset
impairments, (iii) taxes and (iv) environmental remediation. We did not
include asbestos related lawsuits in this list because our asbestos
reserves and historical costs represent only a tiny fraction of the
amounts involved in the other enumerated matters. In addition, estimates
for any litigation, not just asbestos, are dependent upon the facts and
circumstances of each particular case. Our counsel separately evaluates
each case, making specific judgments as to many matters that do not have
general applicability, such as credibility of witnesses, medical costs,
other damages and settlement and verdict amounts in the trial
jurisdiction.
(b) Please provide us with a company-wide roll-forward of your asbestos
related liability for all periods presented. Show beginning and ending balances,
expenses, expenditures and changes in estimates, separately. Provide a
narrative explaining the activity. Explain how you account for your legal and
administrative costs related to asbestos and quantify that activity also.
RESPONSE: U. S. Steel discloses on an annual and quarterly basis the
number of claims filed, the number of claims resolved through settlement,
the number of claims resolved without payment and aggregate payments made.
This information is repeated in the following table together with the
accrual and expenditure information you requested. *****
Estimated Number of Asbestos Claims
----------------------------------------
YTD June
2004 2005 2006
------ ------ --------
Number of
Claims at 14,835 10,999 8,399
Beginning
of Period
Number of
Claims 5,300 3,800 4,736
Resolved
During
Period
Number of
Claims 1,464 1,200 389
Filed
During
Period
Number of
Claims at 10,999 8,399 4,052
End of
Period
Asbestos Liability Accruals (in Millions)
----------------------------------------------------
YTD June
2004 2005 2006
---- ---- --------
Beginning Balance
** ** **
Plus: Accrual
Additions/(Reductions) ** ** **(i)
Less: Payments $15 $11 $2
Ending Balance ** ** **
(i) *****
In order to better understand the methodology we use to calculate our
reserve we refer to our disclosure on page 29 of the Form 10-K where we
state:
"Many of these cases involve multiple defendants (typically from fifty
to more than one hundred defendants). More than 8,000, or
approximately 95 percent, of these claims are pending in jurisdictions
which permit filings with massive numbers of plaintiffs. Based upon
U. S. Steel's experience in such cases, it believes that the actual
number of plaintiffs who ultimately assert claims against U. S. Steel
will likely be a small fraction of the total number of plaintiffs."
For example, based on our experience, a mass filing might plead that (i)
each of the following 1,000 or so named persons was exposed to asbestos,
(ii) each of them suffers from one or more conditions including
mesothelioma, lung cancer, asbestosis, pleural disease or some other lung
condition, and (iii) each contracted this condition due to exposures
caused by one or more of the 50 to 100 defendants named. The threshold
issue therefore is to determine which of these plaintiffs, if any, have
any evidence of exposure related to U. S. Steel. As we state in the Form
10-K, ultimately most of the plaintiffs have no such evidence. In several
of these mass plaintiff jurisdictions, discovery is stayed, often for
years, until the court sets some or all of the claims for trial. During
such stay it is difficult or impossible to determine which claims relate
to U. S. Steel.
U. S. Steel accrues for asbestos claims in the following manner. *******
Concerning legal costs, outside counsel generally bills monthly and bills
are paid within 30 days or less. We accrue unpaid bills as well as our
estimate of unbilled work that has been performed. U. S. Steel does not
track internal time spent on, or otherwise allocate internal costs to,
specific legal matters. The following table shows our outside counsel
expenditures for asbestos cases during the relevant time periods:
Outside Counsel Expenses for Asbestos Cases (in Millions)
-----------------------------------------------------------
YTD June
2004 2005 2006
---- ---- --------
Expenses
During ** ** **
Period
(c) In the context of the Business section, it is unclear why you only
mention the $8 million expense associated with USSK, and make no mention of
the $49 million total company expense in the same context. See page 19.
RESPONSE: This disclosure began in 2001 in order to give some context to
the extent of our environmental expenditures related to our Slovakian
operations, which we had acquired in November 2000. In future filings, we
will include a discussion of our total environmental remediation expense,
as well as our total environmental accrual, in this section.
(d) On page 32 under the paragraph "Other Remediation Sites" you indicate
that one site may exceed $25 million, however both Gary and Geneva indicate
costs in excess of $25 million.
RESPONSE: The reference on page 32 to a site which may exceed $25 million
is to the Geneva Site. Although the aggregate costs of the separate
matters discussed under the caption "Gary Works" exceed $25 million, we
treat those separate matters as individual sites because each is the
subject of a separate order that is issued under the authority of a
different statute and administered by a different governmental agency. We
will change future filings in a manner that will eliminate this potential
confusion.
(e) Since you have included the RCRA Corrective Action Program at Gary Works,
Fairfield Works, and Elizabeth, PA as your "material" sites as described on F-53
and indicated that an additional $40 million may be incurred at those sites, it
would appear appropriate and consistent to include the range of reasonably
possible additional losses associated with each individual site.
RESPONSE: We do not possess the detailed information necessary to
estimate possible additional losses on a site-by-site basis because of the
numerous uncertainties inherent in environmental remediation activities,
including the nature and extent of the contamination, the extent of the
required cleanup, the widely varying costs of alternate cleanup methods
and unanticipated findings as cleanup activities progress. Our statement
on page F-53 that additional liabilities could "range in the aggregate up
to 100 percent of the accrued liabilities" is based on our experience in
dealing with remediation activities of this type. Cost estimates are
inherently imprecise, and we believe that it is helpful to the reader to
at least understand the order of magnitude of deviation that may occur for
these "material" sites. The potential aggregate range would appear to be
more meaningful in the context of an investment in U.S. Steel than the
accumulation of range maximums for the individual sites.
(f) It is unclear whether Geneva Works is one of the "four" material sites.
There are only three mentioned in the second paragraph. Please clarify. If so,
it would appear appropriate and consistent to include the range of reasonably
possible additional losses associated with Geneva Works on page 35. Further, if
Geneva is one of the four, the disclosure in the fourth sentence of the second
paragraph on page F-53 does not appear to encompass Geneva. If Geneva is not
one of the four, please identify the fourth site.
RESPONSE: Geneva Works was one of the four sites referred to in the second
paragraph on page F-53 and was intended to be encompassed within the
disclosure in the fourth sentence of the second paragraph. However, as a
result of the $25 million accrual recorded in the fourth quarter of 2005 and
additional information obtained regarding the Geneva Works site, we
concluded during our assessment for the first quarter of 2006 that the
uncertainty and potential for additional material losses for this site no
longer existed. Consequently, the disclosure in our Form 10-Q for the
first quarter of 2006 refers to only three sites (Gary Works, Fairfield
Works, and the Municipal Industrial & Disposal Superfund site) for which
there is the potential for additional material losses. We disclosed that
the accrued liabilities for these three sites totaled $16 million and
additional losses could range up to 100% of the accrued liabilities. The
Geneva Works site is discussed in the subsequent paragraph. In future
filings we will move the discussion of the Geneva Works site to be in close
proximity to our discussion of other mature major sites that do not have the
potential for additional material losses.
(g) On page 35 you indicate that the remaining costs associated with Geneva
Works are $29.4 million. On page F-53, it is $26 million.
RESPONSE: As the language in our Form 10-K indicates, the $26 million
amount shown on page F-53 includes only remediation costs while the $29.4
million amount shown on page 35 includes both remediation costs and post-
closure care costs. We will change future disclosures to eliminate this
potential confusion.
(h) Under Critical Accounting Estimates, you should quantify the dollar
amount of the range of reasonably possible additional loss related to all
environmental liabilities, as this is the disclosure discussing your critical
estimates.
RESPONSE: See our response to comment (e).
(i) In future filings, if material, you should discuss the underlying reasons
for the amount of environmental expense each period. For example, although you
disclose the $49 million charge in 2005, you do not explain what the underlying
triggering events (estimate changes, new sites, new discovered issues) that
caused you to record that amount. In addition you should disclose prior years
for comparison and provide narrative context on future expectations.
RESPONSE: Estimate changes, new sites and newly discovered issues are
among the reasons for period to period changes in environmental expense.
Others include new legal or regulatory requirements, contractor and
equipment availability, weather conditions and agency responses to our
submissions. In our future filings, we will discuss any material reasons
for changes to environmental expense. Also see our response to comment
(j) below.
(j) Please provide us with a company-wide roll-forward of accrued
environmental expenses for all periods presented. Show beginning and ending
balances, expenses, expenditures and changes in estimates, separately.
Provide a narrative explaining the activity.
RESPONSE: Accrued liabilities for remediation activities totaled $145
million at December 31, 2005, of which $26 million was classified as
current, and $123 million at December 31, 2004, of which $21 million was
classified as current. Please refer to the Environmental Proceedings
section of the Form 10-K at pages 31-35 for further discussion of the
status and reasons for the changes in the accrual from period to period.
Set forth below is a table showing the company-wide roll-forward of
accrued environmental expenses:
Environmental Remediation Liability (in millions)
-------------------------------------------------
YTD June
2004 2005 2006
---- ---- --------
Beginning
Balance $113 $123 $145
Plus:
Accrual
Additions 32(i) 49(iii) 11(v)
Less:
Payments
22(ii) 27(iv) 11(vi)
Ending
Balance $123 $145 $145
(i) Composed of many accruals, only one of which was greater than $5 million
for the Grand Calumet River remediation at Gary Works ($10 million).
(ii) Composed of many payments, none of which were greater than $5 million.
(iii) Composed of many accruals only one of which was greater than $5 million
for the former Geneva Works ($26 million, $20 million of which was
recorded in the fourth quarter).
(iv) Composed of many payments, only one of which was greater than $5 million
for the Gary Works natural resource damages along the east branch of the
Grand Calumet River and Indiana Harbor Canal.
(v) Composed of many accruals, none of which were greater than $5 million.
(vi) Composed of many payments, none of which were greater than $5 million.
(k) On page F-53 it is unclear whether the $52 million accrual for legal and
administrative costs is included in the $145 million total, or is in addition to
that amount.
RESPONSE: The first paragraph of page F-53 of the Form 10-K contains the
following sentence:
"As of December 31, 2005, a total of $52 million was accrued for
legal and administrative costs and for post closure costs for
various landfills closed under the Resource Conservation and
Recovery Act (RCRA); for two [Natural] Resource Damage claims at
Gary Works; and for the completion of projects for the Grand Calumet
River dredging and the related Corrective Action Management Unit
(CAMU)."
This portion of our disclosure recaps the status of mature, major sites
where we do not expect significant additional accruals. Legal and
administrative costs are a small part of the $52 million, as discussed in
our response to comment (l) below. The $52 million is included in the
$145 million total. We will clarify this in future disclosures in order
to avoid confusion.
(l) Provide us with a comprehensive accounting policy for any and all legal
fees. In other words do you accrue legal fees when probable and estimable, or
expense when incurred, or both? If both, explain how you differentiate between
accruing legal fees and expensing when incurred. Tell us whether there are
legal fees accrued other than the $52 million related to the other sites. Are
the expected legal fees for all other sites accrued, and if so quantify such
amounts for us. If they are not, explain why the accounting is different.
RESPONSE: Our accounting policy for legal fees is consistent with that
for other services that are provided. We expense all billed charges and
accrue for unbilled charges for services that have been provided. The
exception is for legal and administrative charges related to environmental
remediation liabilities. SOP 96-1 requires accrual of expected future
costs for legal and administrative costs to support this activity. Of the
$52 million accrual, only about 10% is for legal and administrative costs
related to environmental remediation liabilities, as required under SOP 96-
1. Total legal fees for all matters, including asbestos and
environmental, have not been material, and we do not expect them to become
material in the future.
(m) It is unclear whether you consider your legal accruals to be critical
estimates. In this regard, please provide us with a company-wide roll-forward of
accrued legal expenses for all periods presented. Show beginning and ending
balances, expenses, expenditures and changes in estimates, separately. Provide a
narrative explaining the activity.
RESPONSE: Our accrued expenses for legal services are not material, and we
do not consider them to be critical estimates. Our SOP 96-1 accrual for
future legal services is rather static and is evaluated each fourth
quarter unless a significant event occurs during the year. Also note that
the $52 million accrual is included in the roll-forward of environmental
liabilities provided in our response to comment (j).
(n) On page F-53 you mention that it is reasonably possible that additional
costs could be material at the Fairfield Works location. Your description of
this site on page 33 provides very little context as to its materiality.
RESPONSE: The disclosure on page 33 addresses currently ongoing activity
at Fairfield Works. The RCRA corrective action program is at an early
stage. As we disclose on page 33, we submitted the first RCRA Facility
Investigation (RFI) report in February 2005, and are still awaiting agency
response. Any disclosure about agency reaction or concerning additional
RFI matters would be pure speculation. In future filings, we will
identify in the Legal Proceedings section (as we have already done in the
Contingency footnote) those sites at which additional costs could be
material (including the Fairfield site). We provide an overview of our
environmental exposures on pages 19-21 of the Form 10-K and in the Risk
Factor on page 24.
(o) On page F-53 you mention 4 sites where the additional costs could be
material and then discuss the "remaining 45 sites." This is unclear,
considering you mention 60 sites on page 24.
RESPONSE: The environmental risk factor on page 24 states that U. S. Steel
is involved in approximately 60 remediation projects. It includes a
general statement of the magnitude of this risk to U. S. Steel. The
environmental portion of the contingency footnote on pages F-52 through F-
54 contains much greater detail. Although the number does not
specifically appear on the page, the disclosure on page F-53 discusses a
total of 62 sites consisting of: (i) 4 sites included in the $52 million
accrual, where we do not expect significant future accrual changes; (ii) 4
specifically identified major sites where, at the time of filing the Form
10-K, we believed there could be material accrual additions (Gary Works,
Fairfield Works, the Municipal Industrial & Disposal Superfund Site and
Geneva Works); (iii) 9 additional sites with accruals over $1 million,
consisting of $14 million for closure costs for three hazardous waste
sites at Gary Works and $20 million for the other 8 sites; and (iv) 45
remaining sites that have accrued liabilities of less than $1 million,
with 36 of these sites having liabilities of less than $500,000. In
future filings we will enumerate the sites as set forth above.
(p) Overall, it appears that you are disclosing that you have accrued $145
million related to environmental liabilities. It is unclear whether the $52
million disclosed on page F-53 is included in that amount. It is also unclear
whether you have accrued any other legal/administrative costs related to issues,
other than those associated with the $52 million on page F-53. Further it
appears that you believe the high end of the reasonably possible range of
additional loss related to those four liabilities is $40 million. In other
words the only additional estimate range is that established for those four
environmental sites described in the beginning of the second paragraph on page
F-53. For all other sites, no estimate of reasonably possible additional costs
can be made.
RESPONSE: Please see our responses to comments (f), (k), (l) and (o). We
have not provided any estimate of the range of potential additional
liability on any sites other than the aggregate for these four sites (now
only for the three sites identified in our Form 10-Q for the first quarter
of 2006). As indicated in our response to comment (e), we do not possess
the detailed information necessary to reasonably estimate possible
additional losses on a site-by-site basis.
(q) In this regard, please help us better understand, addressing each site
individually, why you cannot establish ranges of reasonably possible losses in
excess of amounts accrued for any other site, except those four. Address each
individual site noted on pages 31-35 (other than the four sites).
RESPONSE: Please see our responses to comments (e) and (r). As stated
above, we do not possess the detailed information necessary to estimate
possible additional losses for the additional sites noted on pages 31-35.
(r) Further address for us whether you believe it is, or is not, reasonably
possible that additional material loss could occur, for all the sites in
aggregate, other than the "material four".
RESPONSE: At this time, and based upon our knowledge of the other sites,
we do not believe that additional material losses are reasonably possible.
However, this is an imprecise and ever evolving area. For example, it is
possible that additional information could become available as site
investigations continue that could change our assessment of the amount of
potential losses. In addition, as we disclose on page 32 of the Form 10-
K, there are 12 additional sites where we have received information
requests or there are other indications that U. S. Steel may be a PRP.
However, neither the agency nor we have sufficient information to
determine whether U. S. Steel was actually involved at the site, the level
of U. S. Steel's activity or the nature of the underlying environmental
concern. We believe that the overview of our environmental exposures on
pages 19-21 and 31-35 of the Form 10-K and in the Risk Factor on page 24
provide a reader with a meaningful sense of the additional possible risks.
As indicated in several of the responses above, U. S. Steel will incorporate
those comments of the Commission that are pertinent to our quarterly filings
into our next Form 10-Q and address the remaining comments as we draft our next
Form 10-K and other future filings.
As requested in your letter, U. S. Steel acknowledges that it is responsible for
the adequacy and accuracy of its filings; that the Commission is not foreclosed
from taking action as a result of staff comments or changes in disclosure as a
result of staff comments; and that U. S. Steel may not assert staff comments as
a defense in any proceeding initiated by the Commission or any other person
under the federal securities law.
Please contact me, or, in my absence, Jack Moran, Senior Counsel - Corporate
(412-433-2890) with any questions. With respect to any accounting issues,
please contact Larry Schultz, Vice President and Controller (412-433-1139),
Hayley Scott-Davis, Director - Financial Analysis & External Reporting (412-433-
5556) or Colleen Darragh, Director - Financial Analysis & External Reporting
(412-433-5606) directly.
Very truly yours,
/s/ Robert M. Stanton
Robert M. Stanton