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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
Commission file number 1-5153
Marathon Oil Corporation
(Exact name of registrant as specified in its charter)
Delaware 25-0996816
(State of Incorporation) (I.R.S. Employer
Identification No.)
5555 San Felipe Road, Houston, TX 77056-2723
(Address of principal executive offices)
Tel. No. (713) 629-6600
Securities registered pursuant to Section 12(b) of the Act:*
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Title of Each Class
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Common Stock, par value $1.00 6.75% Convertible Quarterly Income
Preferred Securities (Initial
Rights to Purchase Series A Junior Liquidation Amount $50 per
Preferred Stock (Currently Traded Security)**(b)
with Common Stock)
7% Guaranteed Notes Due 2002 of
Marathon Oil Company(c)
6.50% Cumulative Convertible Preferred
(Liquidation Preference $50.00 per
share)(a)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
Aggregate market value of Common Stock held by non-affiliates as of January
31, 2002: $9 billion. The amount shown is based on the closing prices of the
registrant's Common Stock on the New York Stock Exchange composite tape on
that date. Shares of Common Stock held by executive officers and directors of
the registrant are not included in the computation. However, the registrant
has made no determination that such individuals are "affiliates" within the
meaning of Rule 405 under the Securities Act of 1933.
There were 309,518,016 shares of Marathon Oil Corporation Common Stock
outstanding as of January 31, 2002.
Documents Incorporated By Reference:
Portions of the registrant's proxy statement relating to its 2002 annual
meeting of stockholders, to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of
1934, are incorporated by reference to the extent set forth in Part III, Items
10-13 of this report.
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* These securities are listed on the New York Stock Exchange. In addition,
the Common Stock is listed on the Chicago Stock Exchange and the Pacific
Exchange.
** Issued by USX Capital Trust I.
(a) These securities were converted into the right to receive cash of $50 and
are no longer outstanding. A certification and notice of termination of
registration was filed with the SEC in January 2002.
(b) These securities were redeemed and are no longer outstanding. A
certification and notice of termination of registration was filed with the
SEC in January 2002.
(c) The obligations of Marathon Oil Company, a wholly owned subsidiary of the
registrant, have been guaranteed by the registrant.
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MARATHON OIL CORPORATION
Unless the context otherwise indicates, references in this Form 10-K to
"Marathon," "we," or "us" are references to Marathon Oil Corporation, its
wholly owned and majority owned subsidiaries, and its ownership interest in
equity affiliates (corporate entities, partnerships, limited liability
companies and other ventures, in which Marathon exerts significant influence
by virtue of its ownership interest, typically between 20 and 50 percent).
TABLE OF CONTENTS
PART I
Item 1. and 2. Business and Properties................................. 3
Item 3. Legal Proceedings....................................... 26
Item 4. Submission of Matters to a Vote of Security Holders..... 28
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................... 28
Item 6. Selected Financial Data................................. 29
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.................................................. 45
Item 8. Financial Statements and Supplementary Data............. F-1
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................... 48
PART III
Item 10. Directors and Executive Officers of The Registrant...... 48
Item 11. Management Remuneration................................. 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 48
Item 13. Certain Relationships and Related Transactions.......... 48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.............................................. 49
SIGNATURES............................................................... 56
GLOSSARY OF CERTAIN DEFINED TERMS........................................ 57
Disclosures Regarding Forward-Looking Statements
This annual report on Form 10-K, particularly Item 1. and Item 2. Business
and Properties, Item 3. Legal Proceedings, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and Item 7A.
Quantitative and Qualitative Disclosures About Market Risk, include forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These statements
typically contain words such as "anticipates", "believes", "estimates",
"expects", "forecasts", "predicts" or "projects" or variations of these words,
suggesting 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.
Forward-looking statements with respect to Marathon may include, but are
not limited to, levels of revenues, gross margins, income from operations, net
income or earnings per share; levels of capital, exploration, environmental or
maintenance expenditures; the success or timing of completion of ongoing or
anticipated capital, exploration or maintenance projects; volumes of
production, sales, throughput or shipments of liquid hydrocarbons, natural gas
and refined products; levels of worldwide prices of liquid hydrocarbons,
natural gas and refined products; levels of reserves, proved or otherwise, of
liquid hydrocarbons or natural gas; the acquisition or divestiture of assets;
the effect of restructuring or reorganization of business components; the
potential effect of judicial proceedings on the business and financial
condition; and the anticipated effects of actions of third parties such as
competitors, or federal, state or local regulatory authorities.
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. Marathon must compete with these companies
for the rights to explore for oil and gas. Marathon's expectations as to
revenues, margins and income are based upon assumptions as to future prices
and volumes of liquid hydrocarbons, natural gas and refined products. Prices
have historically been volatile and have frequently been driven by
unpredictable changes in supply and demand resulting from fluctuations in
economic activity and political developments in the world's major oil and gas
producing areas, including OPEC member countries. Any substantial decline in
such prices could have a material adverse effect on Marathon's results of
operations. A decline in such prices could also adversely affect the quantity
of liquid hydrocarbons and natural gas that can be economically produced and
the amount of capital available for exploration and development.
Marathon uses commodity-based and foreign currency derivative instruments
such as futures, forwards, swaps, and options to manage exposure to price
fluctuations. While commodity-based derivative instruments are generally used
to reduce risks from unfavorable commodity price movements, they also may
limit the opportunity to benefit from favorable movements. Levels of hedging
activity vary among oil industry competitors and could affect Marathon's
competitive position with respect to those competitors.
Liquidity Factors
Marathon's ability to finance its future business requirements through
internally generated funds, proceeds from the sale of stock, borrowings and
other external financing sources is affected by the performance of its
operations (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 and
actions, the overall U.S. financial climate, and, in particular, with respect
to borrowings, by Marathon's outstanding debt and credit ratings by investor
services.
Factors Affecting Exploration and Production Operations
Projected production levels for liquid hydrocarbons and natural gas are
based on a number of assumptions, including (among others) prices, supply and
demand, regulatory constraints, reserve estimates, production decline rates
for mature fields, reserve replacement rates, drilling rig availability and
geological and operating considerations. These assumptions may prove to be
inaccurate. Exploration and production operations are subject to various
hazards, including acts of war or terrorist acts and the governmental or
military response thereto, explosions, fires and uncontrollable flows of oil
and gas. Offshore production and marine operations in areas such as the Gulf
of Mexico, the North Sea, the U.K. Atlantic Margin, the Celtic Sea, offshore
Nova Scotia and offshore
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West Africa are also subject to severe weather conditions such as hurricanes
or violent storms or other hazards. Development of new production properties
in countries outside the United States may require protracted negotiations
with host governments and are frequently subject to political considerations,
such as tax regulations, which could adversely affect the economics of
projects.
Factors Affecting Refining, Marketing and Transportation Operations
Marathon conducts domestic refining, marketing and transportation
operations primarily through its 62 percent 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 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. Gross margins on merchandise sold at
retail outlets tend to moderate the volatility experienced in the retail sale
of gasoline and diesel fuel. Environmental regulations, particularly the 1990
Amendments to the Clean Air Act, 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. Refining,
marketing and transportation operations are subject to business interruptions
due to unforeseen events such as explosions, fires, 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.
Technology Factors
Longer-term projections of corporate strategy, including the viability,
timing or expenditures required for capital projects, can be affected by
changes in technology, especially innovations in processes used in the
exploration, production or refining of hydrocarbons. While specific future
changes are difficult to project, recent innovations affecting the oil
industry include the development of three-dimensional seismic imaging and
deep-water and horizontal drilling capabilities.
PART I
Item 1. and 2. Business and Properties
General
Marathon Oil Corporation was originally organized in 2001 as USX HoldCo,
Inc., a wholly owned subsidiary of USX Corporation ("Old USX"). As a result of
a reorganization completed in July 2001, USX HoldCo, Inc. (1) became the
parent entity of the consolidated enterprise (the former USX Corporation was
merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to USX
Corporation. In connection with the Separation discussed below, USX
Corporation (formerly USX HoldCo, Inc.) changed its name to Marathon Oil
Corporation. The accompanying consolidated financial statements reflect
Marathon Oil Corporation and its subsidiaries as the continuation of the
consolidated enterprise. In this Form 10-K, all references to "United States
Steel" mean United States Steel Corporation, its predecessors (including,
where applicable, the U.S. Steel Group of USX Corporation) and its
subsidiaries.
Prior to December 31, 2001, Marathon had two outstanding classes of common
stock: USX-Marathon Group common stock ("Marathon Stock"), which was intended
to reflect the performance of Marathon's energy business, and USX-U. S. Steel
Group common stock ("Steel Stock"), which was intended to reflect the
performance of Marathon's steel business. As described further in Note 2 to
the Financial Statements, on December 31, 2001, Marathon disposed of its steel
business through a tax-free distribution of the common stock of its wholly
owned subsidiary United States Steel Corporation ("United States Steel") to
holders of Steel Stock in exchange for all outstanding shares of Steel Stock
on a one-for-one basis ("the Separation").
In connection with the Separation, Marathon's certificate of incorporation
was amended on December 31, 2001 and, from that date, Marathon has only one
class of common stock authorized.
Marathon is engaged in worldwide exploration and production of crude oil
and natural gas; domestic refining, marketing and transportation of crude oil
and petroleum products primarily through its 62 percent owned subsidiary
Marathon Ashland Petroleum LLC ("MAP"); and other energy related businesses.
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The Separation
Marathon was originally organized in 2001 as USX HoldCo, Inc. ("USX
HoldCo") to become a holding company for the two principal businesses of the
former parent company, Old USX:
. the steel production and sale business, the steel mill products, coke,
taconite pellets and coal transportation business and other steel-
related businesses comprising the U.S. Steel Group; and
. the oil and gas exploration and production and other energy businesses
conducted by Marathon Oil Company, an Ohio corporation, and other
subsidiaries comprising the Marathon Group.
In a series of transactions (the "Holding Company Reorganization") Old USX
completed on July 2, 2001:
. USX HoldCo became the holding company for Marathon Oil Company and
United States Steel LLC;
. Old USX was merged with and into United States Steel LLC;
. USX HoldCo assumed a substantial part of the outstanding indebtedness,
obligations under various capital and operating leases and guarantee
obligations and other contingent liabilities of Old USX; and
. USX HoldCo changed its name to USX Corporation.
On December 31, 2001, pursuant to an Agreement and Plan of Reorganization
dated as of July 31, 2001 ("Reorganization Agreement") Marathon completed the
Separation transaction, in which:
. United States Steel LLC converted into a Delaware corporation named
United States Steel Corporation and became a separate, publicly traded
company; and
. USX HoldCo, then known as USX Corporation, changed its name to Marathon
Oil Corporation.
Marathon and its subsidiaries are continuing the energy business that
comprised the Marathon Group of Old USX.
Assumption of Indebtedness and Other Obligations by United States Steel
Prior to the Separation, Old USX, and then Marathon, managed most of its
financial activities on a centralized, consolidated basis and, in its
financial statements, attributed amounts that related primarily to the
following items to the Marathon Group and the U.S. Steel Group on the basis of
their cash flows for the applicable periods and the initial capital structure
for each group:
. invested cash;
. short-term and long-term debt, including convertible debt, and related
net interest and other financing costs; and
. preferred stock and related dividends.
The following items, however, were specifically attributed to and reflected
in their entirety in the financial statements of the group to which they
related:
. leases;
. collateralized financings;
. indexed debt instruments;
. financial activities of consolidated entities that were not wholly owned
subsidiaries; and
. transactions that related to securities convertible solely into common
stock that tracked the performance of the Marathon Group or the U.S.
Steel Group.
These attributions were for accounting purposes only and did not reflect
the legal ownership of cash or the legal obligations to pay and discharge debt
or other obligations.
In connection with the Separation:
. United States Steel and its subsidiaries incurred indebtedness to third
parties and assumed various obligations from Marathon in an aggregate
amount approximately equal to all the net amounts attributed to the U.
S. Steel Group immediately prior to the Separation, both absolute and
contingent, less the amount of a $900 million value transfer (the "Value
Transfer"); and
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. Marathon and its subsidiaries remained responsible for all the
liabilities attributed to the Marathon Group, both absolute and
contingent, plus $900 million.
These arrangements require a post-Separation cash settlement between Marathon
and United States Steel following the audit of the balance sheets for both the
Marathon Group and the U. S. Steel Group as of December 31, 2001, in order to
ensure that the Value Transfer was $900 million.
As a result of its assumption of various items of indebtedness and other
obligations from its former parent entity in the Holding Company
Reorganization, Marathon remained obligated after the Separation for the
following items of indebtedness and other obligations that were attributed to
the U.S. Steel Group in accordance with the provisions of the Reorganization
Agreement (amounts as of December 31, 2001):
. approximately $470 million of obligations under industrial revenue bonds
related to environmental projects for current and former U. S. Steel
Group facilities, with maturities ranging from 2009 through 2033;
. approximately $84 million of sale-leaseback financing obligations under
a lease for equipment at United States Steel's Fairfield Works facility,
with the lease term extending to 2012, subject to extensions;
. approximately $138 million in obligations relating to various lease
arrangements accounted for as operating leases and various guarantee
arrangements, all of which were assumed by United States Steel; and
. other guarantees referred to under "Relationship Between Marathon and
United States Steel After the Separation - Financial Matters Agreement"
on page 7.
As contemplated by the Reorganization Agreement, Marathon and United States
Steel entered into a financial matters agreement to reflect United States
Steel's agreement to assume and discharge all Marathon's principal repayment,
interest payment and other payment obligations under the industrial revenue
bonds, the capital lease arrangement and the guarantees associated with the
other lease and similar obligations referred to above. In addition, the
financial matters agreement requires United States Steel to use commercially
reasonable efforts to have Marathon released from its obligations under the
other guarantees referred to above. The financial matters agreement also
provides that on or before the tenth anniversary of the Separation, United
States Steel will provide for Marathon's discharge from any remaining
liability under any of the assumed industrial revenue bonds. United States
Steel may accomplish that discharge by refinancing or, to the extent not
refinanced, paying Marathon an amount equal to the remaining principal amount
of, all accrued and unpaid debt service outstanding on, and any premium
required to immediately retire, the then outstanding industrial revenue bonds.
Only $1.8 million of the industrial revenue bonds are scheduled to mature in
the period extending through 2012. For additional information relating to the
financial matters agreement, see "Relationship Between Marathon and United
States Steel After the Separation - Financial Matters Agreement" on page 7.
Effects on Historical Relationship
Historically, the U.S. Steel Group has funded its negative operating cash
flow with cash supplied by Marathon, a portion of which was reflected as a
payment under the tax allocation policy and the remainder of which was
represented by increased amounts of debt attributed by Marathon. As a stand-
alone company, United States Steel will need to fund any of its negative
operating cash flow from external sources, and adequate sources may be
unavailable or the cost of such funding may adversely impact United States
Steel.
As discussed below, the financial matters agreement does not contain any
financial covenants, and United States Steel is free to incur additional debt
and grant mortgages on or security interests in its property and sell or
transfer assets without Marathon's consent. United States Steel is more highly
leveraged than Marathon, has a noninvestment grade credit rating and has
granted security interests in some of its assets, including its accounts
receivable and inventory. Additionally, United States Steel's operations are
capital intensive. United States Steel's business also requires substantial
expenditures for routine maintenance. The steel business is highly competitive
and a large number of industry participants have sought protection under
bankruptcy laws in recent periods.
Relationship Between Marathon and United States Steel After the Separation
As a result of the Separation, Marathon and United States Steel are
separate companies, and neither has any ownership interest in the other.
Thomas J. Usher is chairman of the board of both companies, and four of the
remaining nine members of Marathon's board of directors are also directors of
United States Steel.
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In connection with the Separation and pursuant to the Plan of
Reorganization, Marathon and United States Steel have entered into a series of
agreements 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. Set forth below is a
description of the material terms of those agreements.
Tax Sharing Agreement
Marathon and United States Steel have a tax sharing agreement that applies
to each of their consolidated tax reporting groups. Provisions of this
agreement include the following:
. for any taxable period, or any portion of any taxable period, ended on
or before December 31, 2001, unpaid tax sharing payments will be made
between Marathon and United States Steel generally in accordance with
the general tax sharing principles in effect prior to the Separation;
. no tax sharing payments will be made with respect to taxable periods, or
portions thereof, beginning after December 31, 2001; and
. provisions relating to the tax and related liabilities, if any, that
result from the Separation ceasing to qualify as a tax-free transaction
and limitations on post-Separation activities that might jeopardize the
tax-free status of the Separation.
Under the general tax sharing principles in effect prior to the Separation:
. the taxes payable by each of the Marathon Group and the U.S. Steel Group
were determined as if each of them had filed its own consolidated,
combined or unitary tax return; and
. the U.S. Steel Group would receive the benefit, in the form of tax
sharing payments by the parent corporation, of the tax attributes,
consisting principally of net operating losses and various credits, that
its business generated and the parent used on a consolidated basis to
reduce its taxes otherwise payable.
In accordance with the tax sharing agreement, at the time of the
Separation, Marathon made a preliminary settlement with United States Steel of
approximately $440 million as the net tax sharing payments owed to it for the
year ended December 31, 2001 under the pre-Separation tax sharing principles.
The tax sharing agreement also addresses the handling of tax audits and
contests and other matters respecting taxable periods, or portions of taxable
periods, ended prior to December 31, 2001.
In the tax sharing agreement, each of Marathon and United States Steel
promised the other party that it:
. would not, prior to January 1, 2004, take various actions or enter into
various transactions that might, under section 355 of the Internal
Revenue Code of 1986, jeopardize the tax-free status of the Separation;
and
. would be responsible for, and indemnify and hold the other party
harmless from and against, any tax and related liability, such as
interest and penalties, that results from the Separation ceasing to
qualify as tax-free because of its taking of any such action or entering
into any such transaction.
The proscribed actions and transactions include:
. the liquidation of Marathon or United States Steel; and
. the sale by Marathon or United States Steel of its assets, except in the
ordinary course of business.
In case a taxing authority seeks to collect a tax liability from one party
which the tax sharing agreement has allocated to the other party, the other
party has agreed in the sharing agreement to indemnify the first party against
that liability.
Even if the Separation otherwise qualifies for tax-free treatment under
section 355 of the Internal Revenue Code, the Separation may become taxable to
Marathon under section 355(e) of the Internal Revenue Code if capital stock
representing a 50 percent or greater interest in either Marathon or United
States Steel is acquired, directly or indirectly, as part of a plan or series
of related transactions that include the Separation. For this purpose, a "50
percent or greater interest" means capital stock possessing at least 50
percent of the total combined voting power of all classes of stock entitled to
vote or at least 50 percent of the total value of shares of all classes of
capital stock. To minimize this risk, both Marathon and United States Steel
agreed in the tax sharing agreement that they would not enter into any
transactions or make any change in their equity structures that could cause
the
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Separation to be treated as part of a plan or series of related transactions
to which those provisions of section 355(e) of the Internal Revenue Code may
apply. If an acquisition occurs that results in the Separation being taxable
under section 355(e) of the Internal Revenue Code, the agreement provides that
the resulting corporate tax liability will be borne by the party involved in
that acquisition transaction.
Although the tax sharing agreement allocates tax liabilities relating to
taxable periods ending on or prior to the Separation, each of Marathon and
United States Steel, as members of the same consolidated tax reporting group
during any portion of a taxable period ended on or prior to the date of the
Separation, is jointly and severally liable under the Internal Revenue Code
for the federal income tax liability of the entire consolidated tax reporting
group for that year. To address the possibility that the taxing authorities
may seek to collect all or part of a tax liability from one party where the
tax sharing agreement allocates that liability to the other party, the
agreement includes indemnification provisions that would entitle the party
from whom the taxing authorities are seeking collection to obtain
indemnification from the other party, to the extent the agreement allocates
that liability to that other party. Marathon can provide no assurance,
however, that United States Steel will be able to meet its indemnification
obligations, if any, to Marathon that may arise under the tax sharing
agreement.
Transition Services Agreement
Marathon and United States Steel have a transition services agreement that
will govern the provision of the following services until December 31, 2002:
. common corporate support services; and
. inter-unit computer services.
Common corporate support services include services personnel at the former
Pittsburgh corporate headquarters historically provided prior to the
Separation. These include accounting, finance and financial management,
government affairs, investor relations, public affairs and tax services. Most
of these personnel now work for Marathon or United States Steel. Each company
has agreed to provide these services to the other, to the extent it is able to
do so and the other company cannot satisfy its own needs.
Inter-unit computer services consist of computer and information technology
services either company historically provided to the former Pittsburgh
corporate headquarters or to the other company.
A company providing common corporate support or inter-unit computer
services under the transition services agreement will be entitled to recover
the costs it incurs in providing those services.
The transition services agreement also includes each company's grant to the
other company and its subsidiaries of a nonexclusive, fully paid, worldwide
license for their internal use only of the granting company's computer
programs, software, source code and know-how that were utilized prior to the
Separation or are utilized under the transition services agreement to provide
common corporate support or inter-unit computer services to the other company
and its subsidiaries.
Financial Matters Agreement
Marathon and United States Steel have a financial matters agreement that
provides for United States Steel's assumption of the obligations under
Marathon's outstanding industrial revenue bonds, the sale-leaseback financing
arrangement and the lease and guarantee obligations referred to above under
"The Separation--Assumption of Indebtedness and Other Obligations by United
States Steel" on page 5. Under the financial matters agreement, United States
Steel has assumed and agreed to discharge all Marathon's principal repayment,
interest payment and other obligations under those industrial revenue bonds
and lease and guarantee arrangements described above, including any amounts
due on any default or acceleration of any of those obligations, other than any
default caused by Marathon.
The financial matters agreement also provides that, on or before the tenth
anniversary of the Separation, United States Steel will provide for Marathon's
discharge from any remaining liability under any of the assumed industrial
revenue bonds.
The financial matters agreement also requires United States Steel to use
commercially reasonable efforts to have Marathon released from its obligations
under a guarantee Marathon provided with respect to all United States Steel's
obligations under a partnership agreement between United States Steel, as
general partner, and General Electric Credit Corporation of Delaware and
Southern Energy Clairton, LLC, as limited partners.
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United States Steel may dissolve the partnership under certain circumstances
including if it is required to fund accumulated cash shortfalls of the
partnership in excess of $150 million. In addition to the normal commitments
of a general partner, United States Steel has indemnified the limited partners
for certain income tax exposures. As of December 31, 2001, United States Steel
had no unpaid outstanding obligations to the limited partners.
The financial matters agreement requires Marathon to use commercially
reasonable efforts to take all necessary action or refrain from acting so as
to assure compliance with all covenants and other obligations under the
documents relating to the assumed obligations to avoid the occurrence of a
default or the acceleration of the payment obligations under the assumed
obligations. The agreement also obligates Marathon to use commercially
reasonable efforts to obtain and maintain letters of credit and other
liquidity arrangements required under the assumed obligations.
United States Steel's obligations to Marathon under the financial matters
agreement are general unsecured obligations which rank equal to United States
Steel's accounts payable and other general unsecured obligations. The
financial matters agreement does not contain any financial covenants, and
United States Steel is free to incur additional debt, grant mortgages on or
security interests in its property and sell or transfer assets without our
consent.
License Agreement
Marathon and United States Steel have entered into a license agreement
under which Marathon granted to United States Steel a nonexclusive, fully
paid, worldwide license to use the "USX" name and various trade secrets, know-
how and intellectual property rights previously used in connection with the
business of both companies. The license agreement provides that United States
Steel may use these rights solely in the conduct of its internal business. It
also provides United States Steel with the right to sublicense these rights to
any of its subsidiaries. The license agreement provides for a perpetual term,
so long as United States Steel performs its obligations under the agreement.
Insurance Assistance Agreement
Marathon and United States Steel have an insurance assistance agreement,
which provides for:
. the division of responsibility for joint insurance arrangements; and
. the entitlement to insurance claims and the allocation of deductibles
with respect to claims associated with pre-Separation periods.
Under the insurance assistance agreement:
. Marathon is entitled to all rights in and to all claims and is solely
liable for the payment of uninsured retentions and deductibles arising
out of or relating to pre-Separation events or conditions exclusively
associated with the business of the Marathon Group;
. United States Steel is entitled to all rights in and to all claims and
is solely liable for the payment of uninsured retentions and deductibles
arising out of or relating to pre-Separation events or conditions
exclusively associated with the business of the U. S. Steel Group;
. Marathon is entitled to 65 percent and United States Steel is entitled
to 35 percent of all rights in and to all claims, and Marathon and
United States Steel are liable on the same percentage basis for the
payment of uninsured retentions and deductibles, arising out of or
relating to pre-Separation events or conditions and not related
exclusively to either the Marathon Group or the U.S. Steel Group; and
. the cost of extended reporting insurance for pre-Separation periods will
be split between Marathon and United States Steel on a 65 percent-35
percent basis, respectively, if both companies elect to purchase the
same extended reporting insurance.
Exploration and Production
Oil and Natural Gas Exploration and Development
Marathon is currently conducting exploration and development activities in
11 countries, including its January 2002 acquisition of interests in
Equatorial Guinea, West Africa. Principal exploration activities are in the
United States, the United Kingdom, Angola, Canada, and Norway. Principal
development activities are in the
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United States, the United Kingdom, Canada, Equatorial Guinea, Gabon, Ireland,
the Netherlands and Norway. Marathon is also pursuing opportunities in North
and West Africa, the Middle East, Southeast Asia and the Commonwealth of
Independent States.
The following table sets forth, by geographic area, the number of net
productive and dry development and exploratory wells completed in each of the
last three years (references to "net" wells or production indicate Marathon's
ownership interest or share, as the context requires):
Net Productive and Dry Wells Completed(a)
2001 2000 1999
- ----------------------------------------------------
United States(b)
Development(c) - Oil 10 23 11
- Gas 751 109 54
- Dry 3 2 1
--- --- ---
Total 764 134 66
Exploratory(d) - Oil 2 2 5
- Gas 9 6 9
- Dry 6 5 13
--- --- ---
Total 17 13 27
--- --- ---
Total United States 781 147 93
International(e)
Development(c) - Oil 1 12 42
- Gas 54 111 55
- Dry 5 5 11
--- --- ---
Total 60 128 108
Exploratory(d) - Oil 0 4 2
- Gas 16 26 14
- Dry 5 14 16
--- --- ---
Total 21 44 32
Total International 81 172 140
--- --- ---
Total Worldwide 862 319 233
- ----------------------------------------------------
(a) Includes the number of wells completed during the applicable year
regardless of the year in which drilling was initiated. Does not include any
wells where drilling operations were continuing or were temporarily suspended
as of the end of the applicable year. A dry well is a well found to be
incapable of producing hydrocarbons in sufficient quantities to justify
completion. A productive well is an exploratory or development well that is
not a dry well.
(b) Includes Marathon's equity interest in MKM Partners L.P. ("MKM"). Also
includes Marathon's ownership of Pennaco Energy Company ("Pennaco"), acquired
in February 2001. Pennaco is a coal bed methane exploration and production
company with a very active drilling program.
(c) Indicates wells drilled in the proved area of an oil or gas reservoir.
(d) Includes both wildcat and delineation wells.
(e) Includes Marathon's equity interest in CLAM Petroleum B.V. ("CLAM") and in
2000 and 1999 Marathon's equity interest in Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy").
United States
In the United States during 2001, Marathon drilled 26 gross (19 net)
wildcat and delineation ("exploratory") wells of which 20 gross (12 net) wells
encountered hydrocarbons. Of these 20 wells, 2 gross (1 net) wells were
temporarily suspended, and will be reported in the Net Productive and Dry
Wells Completed table in Marathon's future reports when completed. Marathon's
principal domestic exploratory and development activities in 2001 were in the
U.S. Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma, Texas and
Wyoming.
Exploration expenditures in the United States during the three-year period
ended December 31, 2001, including Marathon's 85 percent equity interest in
MKM's exploration expenditures, totaled $492 million, of which $190 million
was incurred in 2001. Development expenditures in the United States during the
three-year period ended December 31, 2001, including Marathon's 85 percent
equity interest in MKM's development expenditures, totaled $887 million, of
which $367 million was incurred in 2001.
9
The following is a summary of recent, significant exploration and
development activity in the United States including discussion, as deemed
appropriate, of completed wells, wells being drilled and wells under
evaluation.
Gulf of Mexico - The Gulf of Mexico ("Gulf") continues to be a core area
for Marathon with the potential to add new reserves and increase production.
At the end of 2001, Marathon had interests in 145 blocks in the Gulf,
including 110 in the deepwater area. In 2002, Marathon plans to drill, or
complete drilling operations on, three or four deepwater wells, including
appraisal of the Ozona Deep discovery.
Marathon's 2001 Gulf exploration drilling program was delayed due to the
cancellation of the contract for the Cajun Express drilling rig in early July
2001. Of the two wells originally scheduled to be drilled with this rig, the
Flathead prospect was delayed until December 2001, and resumption of drilling
operations on the Redwood prospect were delayed until January 2002.
The Flathead prospect, located in Walker Ridge Block 30, was plugged back
to a shallower depth and temporarily abandoned. After further evaluations,
Marathon will consider possible options to reenter and sidetrack this well.
Marathon holds a 100 percent interest in Block 30. The Redwood prospect,
located in Green Canyon Block 1001, completed drilling operations in 2002 and
was abandoned as a dry hole. Marathon held a 75 percent interest in Block
1001. Marathon held an 8.25 percent interest in the Timber Wolf prospect,
located in Mississippi Canyon 555, which was temporarily abandoned pending
further evaluation. Additionally, Marathon participated in the drilling of two
other Gulf prospects in 2001. The Paris Carver prospect, located in Green
Canyon Block 601, did not encounter hydrocarbons and was abandoned. Marathon
holds a 50 percent interest in Block 601. The Ozona Deep prospect, located in
Garden Banks Block 515 resulted in a deepwater discovery. The well was drilled
to a total measured depth of 26,352 feet and encountered approximately 345
feet of net pay in two primary intervals. Further appraisal drilling is
expected to be conducted during 2002 to determine a plan of development.
Marathon is operator and has a 68 percent working interest.
The Camden Hills field, located in the deepwater Gulf on Mississippi Canyon
Block 348 in approximately 7,200 feet of water, was discovered in August 1999
and confirmed by a subsequent well in January 2000. Development is being
achieved with the sharing of infrastructure that will service two other fields
in the area. The Canyon Express natural gas gathering system will link three
gas fields, including Camden Hills, to a host processing platform named Canyon
Station. Completion of the discovery well is underway, and installation of the
Canyon Express pipeline began in January 2002 after a three-month delay in
obtaining permits. Despite the delays, first gas production continues to be
targeted for mid-2002. Marathon is operator of the Camden Hills field with a
50.03 percent interest.
Alaska - During 2001, Marathon completed successful drilling operations on
six wells in Alaska. Included in this program were two exploration wells
related to the recently announced natural gas discovery on the Ninilchik Unit
on the Kenai Peninsula, approximately 35 miles south of Kenai, Alaska. Proved
remaining reserves at year-end 2001 are approximately 19 billion net cubic
feet ("bcf") of natural gas. One well is scheduled for drilling in 2002, with
additional drilling anticipated during 2003 to further delineate the upside
potential of the structure. Marathon is operator of the Ninilchik Unit with a
60 percent interest. Marathon and a co-venturer have formed the Kenai Kachemak
Pipeline Company, LLC, to transport natural gas from the Ninilchik Unit and
other potential southern Kenai Peninsula gas prospects for sales into the
existing Cook Inlet natural gas infrastructure. Initial production from the
Ninilchik Field is planned for early 2004 commensurate with completion of
pipeline construction.
Marathon announced first natural gas production from its 100 percent owned
Wolf Lake Field in November 2001. The Wolf Lake Field is located within the
Kenai National Wildlife Refuge approximately 12 miles northeast of Soldotna,
Alaska. Ultimate development at the Wolf Lake Field may require up to six
natural gas wells at three sites. One well is expected to be drilled in 2002.
New Mexico - In 2001, nine development wells were completed in the Indian
Basin field to take advantage of Marathon's earlier expansion of the Indian
Basin gas plant. Focus continued this year in the eastern area of the field
which accounted for seven of the new wells. These wells extended last year's
record gross production of 160 million cubic feet per day ("mmcfd") to 180
mmcfd from Marathon-operated wells. These new wells, combined with several
recompletions of existing gas wells, more than doubled oil production from the
field to 6,500 gross barrels of liquid hydrocarbons a day ("bpd"). In 2002,
six new well completions and several recompletions are planned in the east
Indian Basin area targeting both oil and gas.
Oklahoma - Marathon's 2001 Southern Anadarko Basin exploration efforts
focused on a continued Western Oklahoma Granite Wash program, as well as the
Cement field Springer/Sycamore play. Exploration drilling efforts resulted in
seven successful discoveries. The acquisition of approximately 250 square
miles of 3-D seismic data has helped in identifying seven exploration projects
(five Granite Wash, two Cement) that are scheduled to be drilled in 2002.
10
Marathon continued to develop the 1998 Granite Wash discovery by drilling
16 development wells in 2001. Current production rates from the Granite Wash
play are approximately 24 net mmcfd and 1,300 net bpd. In 2002, current plans
are to drill, or participate in the drilling of, 14 additional Granite Wash
development wells.
Marathon drilled, or participated in the drilling of, 13 development wells
in the Carter Knox field in 2001. Most of this activity focused on completing
the development plan associated with properties acquired in 2000.
Drilling activity continued in the Cement field where efforts focused on
continued Springer/Sycamore development. Six development wells were drilled in
2001, resulting in current production rates of 24 net mmcfd, a 60 percent
increase over 2000 levels. In 2002, Marathon expects to drill, or participate
in the drilling of, eight additional development wells.
Texas - In West Texas, Marathon formed a joint venture with Kinder Morgan
Energy Partners, L.P. ("Kinder Morgan"), which commenced operations in January
2001. The formation of the joint venture included contribution of interests in
the Yates and SACROC assets. Marathon and Kinder Morgan have equal voting
rights and control is shared equally by both partners. As such, the joint
venture is accounted for on the equity method of accounting in which Marathon
recognizes its 85 percent share of earnings from the partnership. This
transaction has allowed Marathon to expand its interests in the Permian Basin
and has improved access to materials for use in enhanced recovery techniques
in the Yates field.
Wyoming - On February 9, 2001, Marathon completed the acquisition of
Pennaco Energy Company ("Pennaco"), creating a new core area of coal bed
methane production in the Powder River Basin of Wyoming. Pennaco controls more
than 400,000 net acres in northeast Wyoming and southeast Montana and is the
third largest operator in this very active play. Marathon was successful in
retaining the Pennaco expertise in coal bed methane operations and, as a
result, was able to execute a significant 2001 drilling program of
approximately 660 net wells, which exceeded previous Pennaco annual records.
For 2001, annualized production rates averaged 47 net mmcfd, with the December
rate reaching 59 net mmcfd. Proved remaining reserves at year-end 2001 are
approximately 256 net bcf of natural gas.
International
Outside the United States during 2001, Marathon drilled 31 gross (18 net)
exploratory wells in 6 countries. Of these 31 wells, 22 gross (14 net) wells
encountered hydrocarbons, of which 1 gross well was temporarily suspended.
Marathon's expenditures for international oil and natural gas exploration
activities, including Marathon's 50 percent equity interest in CLAM's
exploration expenditures and former 37.5 percent equity interest in Sakhalin
Energy's exploration expenditures, during the three-year period ended December
31, 2001, totaled $338 million, of which $91 million was incurred in 2001.
Marathon's international development expenditures, including its proportionate
share of CLAM and Sakhalin Energy's development expenditures, during the
three-year period ended December 31, 2001, totaled $722 million, of which $265
million was incurred in 2001.
On January 3, 2002, Marathon announced the completed acquisition of
interests in Equatorial Guinea, West Africa. Through this transaction,
Marathon acquired a 52.4 percent interest in, and operatorship of, the
offshore Alba Block, which contains the currently producing Alba gas field as
well as undeveloped oil and gas discoveries and several possible exploration
prospects; a 37.6 percent interest in the adjacent offshore Block D; a 52.4
percent interest in a condensate separation facility onshore Bioko Island; a
45 percent interest in a joint venture onshore methanol production plant; and
a 43.2 percent interest in an onshore Liquefied Petroleum Gas ("LPG")
processing plant. The acquisition will provide an estimated 250 million
barrels of oil equivalent ("BOE") to Marathon's proved reserves in 2002.
The following is a summary of recent, significant exploration and
development activity outside the United States including discussion, as deemed
appropriate, of completed wells, wells being drilled and wells under
evaluation.
United Kingdom - Marathon has interests in 34 blocks in the United Kingdom
("U.K.") and other areas offshore of the U.K. In 2000, Marathon acquired an
interest in the BP-operated Foinaven development in the U.K. Atlantic Margin.
Marathon's interest is 28 percent in the main Foinaven field (T34), 20 percent
in the deeper T35 Foinaven field and 47 percent in the East Foinaven field.
First production was achieved in September 2001 from the East Foinaven field,
which is estimated to have proved net remaining reserves at year-end 2001 of
approximately 14 million barrels of liquid hydrocarbons. The satellite field
is produced via subsea completions that flow into the existing floating
production, storage and offloading ("FPSO") vessel. A third production well is
planned at East Foinaven in 2003. Infill drilling in the main Foinaven field
was successful in 2001 with one
11
sidetrack, one water injector and two new producers being brought on line.
Infill drilling of two additional production wells is expected to continue
through spring 2002. Fluid handling upgrades on the FPSO in 2001 have allowed
record daily production levels for the field of 132,300 gross bpd.
As an interest owner in Foinaven, Marathon also has an 11.465 percent
working interest in the West of Shetland gas evacuation line. The line, which
is installed and ready for commissioning, will take gas from fields in the
West of Shetlands area to the BP-operated Magnus platform for injection and
enhanced oil recovery purposes. Gas from the Foinaven field, which is
currently injected for disposal, will be sold to the Magnus group, with sales
expected to commence in early 2002 upon completion of work by the Magnus
group.
Marathon is continuing its development of the Brae area in the U.K. North
Sea where it is the operator and owns a 41.6 percent interest in the South,
Central and North Brae fields and a 38.5 percent interest in the East Brae
field. Marathon's share in the West Brae/Sedgwick joint development increased
from 28.1 percent to 41.6 percent in September 2001 when the limit on
Sedgwick's share of production from the development was reached. During 2001,
Marathon participated in a successful Brae area well that was drilled to a
deeper exploration target. The well was completed as a gas and condensate
producer from the Brae B platform in June 2001. Well performance continues to
be monitored to assess upside potential.
Angola - In May 1999, Marathon was awarded interests in Blocks 31 and 32
offshore Angola. The blocks, which are located approximately 90 miles
northwest of Luanda in water depths between 5,400 and 9,200 feet, are adjacent
to Blocks 15, 17 and 18, where major discoveries by others have been made.
Marathon presently holds a 10 percent working interest in Blocks 31 and 32,
which are operated by co-venturers. Surveys of 3-D seismic data have been
acquired over both blocks and advanced processing and interpretation of this
data continues. One unsuccessful exploration well was drilled on Block 31 in
2001. Two additional wells in Block 31 are scheduled to begin drilling in the
second and third quarters of 2002. The initial exploration well in Block 32 is
expected to be drilled during the second half of 2002.
Canada - In November 2001, Marathon was awarded two additional offshore
Nova Scotia deepwater exploration licenses, with an effective date of January
1, 2002. Marathon has a 100 and 50 percent interest in exploration licenses
("EL") 2410 and 2411, respectively. This brings Marathon's total offshore Nova
Scotia exploration license acreage to 1.9 million acres, positioning Marathon
as a major player in the developing deepwater Atlantic Canada Gas Province.
One shallow-water well was drilled in 2001 in EL 2376 (Southampton), which did
not encounter hydrocarbons in commercial quantities. It is anticipated that
one deepwater well will be completed in EL 2377 (Annapolis) in 2002.
In Western Canada, Marathon anticipates drilling six wells in three
exploration plays during 2002. Three wells will test the Milo pinnacle reef
play, two wells will test the thrust Debolt foothills play, and one well will
test a Southern Alberta tight gas sand play. Five of these wells are expected
to be completed late first quarter 2002.
Denmark - In June 1998, Marathon acquired one block in Denmark. A 3-D
seismic program was completed in 1999, and evaluation of the data continues in
2002.
Gabon - In fourth quarter 2001, activities commenced to develop the Azile
reservoir of the Tchatamba South field. One existing well is planned for
recompletion, and facilities will be added to process the crude oil, which has
a higher sulfur content than the existing production. First production from
the Azile reservoir is planned for December 2002. Marathon is operator of the
Tchatamba South, West and Marin fields in Gabon, with a 56.25 percent working
interest.
Ireland - The Southwest Kinsale field was converted to a gas storage field
in 2001. The Southwest Kinsale field, located in the Celtic Sea 30 miles south
of Cork, was brought on line in 1999 through a single subsea well tied back to
the Kinsale Head field's Bravo platform. In April 2001, gas injection
commenced through this existing well and, by October 2001, two additional
wells were drilled and tied back to the existing infrastructure. This gas
storage facility, which is the first in Ireland, was fully operational in
October 2001. Marathon has a 100 percent interest in this field.
During 2001, a Petroleum Lease was issued for the Corrib field in the Slyne
Trough License 2/93, located 40 miles off the west coast of Ireland. An
additional appraisal well was drilled in the field in 2001, bringing the total
number of wells drilled and suspended as producers in the Corrib field to
five. Development work on the terminal, offshore pipelines, and subsea well
equipment will continue during 2002. First gas production is expected at the
beginning of 2004. Marathon has an 18.5 percent interest in the Corrib field.
Norway - In 2000, Marathon participated in a project to modify the Heimdal
platform to a processing and transportation center for third-party business.
Marathon owns a 23.798 percent interest in the Heimdal field and platform.
Production of the remaining gas (remnant gas) from the Heimdal field was
reinstated on the platform in August 2001, followed by the start-up of two
planned third-party projects.
12
In November 2000, Marathon approved the development of the Vale field,
located northeast of the Heimdal field. The single well was successfully
drilled and the flowline installed. Topside modifications on the Heimdal
platform continue, and the well is expected to be completed and brought on
line second quarter 2002. Marathon owns a 46.904 percent interest in this
field. An exploration well between the Vale and Heimdal fields has been
deferred until 2003 due to platform capacity constraints.
In January 2002, Marathon closed its acquisition of varied interests in
five licenses in the Norwegian Sector of the North Sea. In the Heimdal area of
the North Sea, Marathon acquired an 18.6 percent interest in License 088,
which contains the Peik gas condensate discovery; a 20 percent interest in
License 102, which contains the Byggve and Skirne gas discoveries and the East
Heimdal oil discovery; and a 10 percent interest in License 150, which also
contains an oil discovery. Approval of a plan of development is expected in
early 2002 for combined development of the Byggve and Skirne fields with first
production expected in early 2004. Close to the Brae fields, Marathon acquired
a 28.2 percent interest in License 025, which contains the Gudrun oil and gas
condensate discovery; and a 10 percent interest in adjacent License 187. In
December 2001, Marathon also successfully bid for an additional license in the
Heimdal area. Pending Norwegian governmental approvals, this could result in
Marathon becoming operator under the license in 2002.
Netherlands - In 2001, Marathon, through its 50 percent equity interest in
CLAM, participated in one development well and four exploration wells in the
Dutch sector of the North Sea. The Q4-A3 development well successfully
completed the planned development of the Q4-A field. CLAM has a 19.8 percent
interest in the field. The exploration well K15-16 was drilled into the K15-
Mike Prospect and discovered the K15-FK field. It was suspended as a future
producer. CLAM has a 9.95 percent interest in the K15-FK field. The Q4-10
exploratory well was drilled into the Q1-Deep Prospect, discovering the Q1-B
field. The well was suspended as a future producer. CLAM has a 3.6 percent
interest in the field. Two delineation wells were drilled into potential
extensions of the F16-E field. The E18-4 well proved up additional reserves
and was suspended as a future producer. The E18-5 well was abandoned as a dry
hole. CLAM's interest in the F16-E field is 4.2 percent.
In 1998, CLAM was awarded two blocks in the Danish sector of the North Sea.
Surveys of 3-D seismic data were acquired in 1999 and two exploration wells
were drilled in 2000, both of which were dry. CLAM is seeking ways of meeting
the minimum requirements of the Danish authorities for relinquishment of the
two blocks at a minimum cost.
Independent of its interest in CLAM, Marathon holds a 24 percent working
interest in the A-15 Block in the Dutch sector of the North Sea. Evaluation of
the deeper sands is expected to continue during 2002.
The above discussions include forward-looking statements concerning various
projects, plans to acquire interests in licenses, drilling plans, expected
production and sales levels, reserves and dates of initial production, which
are based on a number of assumptions, including (among others) prices, amount
of capital available for exploration and development, worldwide supply and
demand for petroleum products, regulatory constraints, reserve estimates,
production decline rates of mature fields, reserve replacement rates, drilling
rig availability, license relinquishments and other geological, operating and
economic considerations. Offshore production and marine operations in areas
such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the
Celtic Sea, offshore Nova Scotia and offshore West Africa are also subject to
severe weather conditions, such as hurricanes or violent storms or other
hazards. The plan to acquire an additional license in the Norwegian sector of
the North Sea is subject to the execution and closing of definitive
agreements, and the receipt of necessary approvals from the applicable
Norwegian authorities. 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
and tax regulations, which could adversely affect the economics of projects.
To the extent these assumptions prove inaccurate and/or negotiations and other
considerations are not satisfactorily resolved, actual results could be
materially different than present expectations.
Reserves
At December 31, 2001, Marathon's net proved liquid hydrocarbon and natural
gas reserves, including its proportionate share of equity investee net proved
reserves, totaled approximately 1 billion barrels on a barrel of oil
equivalent ("BOE") basis, of which 72 percent were located in the United
States. (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.) On a
BOE basis, excluding dispositions, Marathon replaced 62 percent of its
worldwide oil and gas production.
13
The table below sets forth estimated quantities of net proved oil and gas
reserves at the end of each of the last three years.
Estimated Quantities of Net Proved Oil and Gas Reserves at December 31
Developed &
Developed Undeveloped
----------------- -----------------
(Millions of Barrels) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
Liquid Hydrocarbons
United States............................ 243 414 476 268 458 520
Europe................................... 69 74 90 88 108 90
Other International...................... 25 57 72 30 151 187
----- ----- ----- ----- ----- -----
Total Consolidated...................... 337 545 638 386 717 797
Equity Investees(a)...................... 178 - 69 184 - 77
----- ----- ----- ----- ----- -----
WORLDWIDE.................................. 515 545 707 570 717 874
===== ===== ===== ===== ===== =====
Developed reserves as % of total net proved
reserves.................................. 90.4% 76.0% 80.9%
(Billions of Cubic Feet)
Natural Gas
Natural Gas United States................ 1,308 1,421 1,550 1,793 1,914 2,057
Europe................................... 473 563 741 615 614 774
Other International...................... 308 381 497 399 477 833
----- ----- ----- ----- ----- -----
Total Consolidated...................... 2,089 2,365 2,788 2,807 3,005 3,664
Equity Investee(b)....................... 32 52 65 51 89 123
----- ----- ----- ----- ----- -----
WORLDWIDE.................................. 2,121 2,417 2,853 2,858 3,094 3,787
===== ===== ===== ===== ===== =====
Developed reserves as % of total net proved
reserves.................................. 74.2% 78.1% 75.3%
(Millions of Barrels)
Total BOEs
United States............................ 461 651 734 567 777 863
Europe................................... 148 168 213 190 211 219
Other International...................... 76 121 155 96 231 326
----- ----- ----- ----- ----- -----
Total Consolidated...................... 685 940 1,102 853 1,219 1,408
Equity Investees(a)...................... 183 9 80 193 15 98
----- ----- ----- ----- ----- -----
WORLDWIDE.................................. 868 949 1,182 1,046 1,234 1,506
===== ===== ===== ===== ===== =====
Developed reserves as % of total net proved
reserves.................................. 83.0% 76.9% 78.5%
- --------------------------------------------------------------------------------
(a) Represents Marathon's equity interests in MKM and CLAM in 2001 and CLAM
and Sakhalin Energy in 2000 and 1999.
(b) Represents Marathon's equity interests in CLAM.
The above estimates, which are forward-looking statements, are based on a
number of assumptions, including (among others) prices, presently known
physical data concerning size and character of the reservoirs, economic
recoverability, production experience and other operating considerations. To
the extent these assumptions prove inaccurate, actual recoveries could be
materially different than current estimates.
For additional details of estimated quantities of net proved oil and gas
reserves at the end of each of the last three years, see "Consolidated
Financial Statements and Supplementary Data - Supplementary Information on Oil
and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas
Reserves" on pages F-36 through F-38. Marathon has filed reports with the U.S.
Department of Energy ("DOE") for the years 2000 and 1999 disclosing the year-
end estimated oil and gas reserves. Marathon will file a similar report for
2001. The year-end estimates reported to the DOE are the same as the estimates
reported in the Consolidated Supplementary Data.
Delivery Commitments
Marathon has commitments to deliver fixed and determinable quantities of
natural gas to customers under a variety of contractual arrangements.
In Alaska, Marathon has two long-term sales contracts with the local
utility companies, which obligates Marathon to supply approximately 270 bcf of
natural gas over the remaining life of these contracts. In addition, Marathon
has a 30 percent ownership interest in a Kenai, Alaska, liquefied natural gas
("LNG") plant and a proportionate share of the long-term LNG sales obligation
to two Japanese utility companies. This obligation is
14
estimated to total 178 bcf through the remaining life of the contract, which
terminates March 31, 2009. These commitments are structured with variable-
pricing terms. Marathon's production from various gas fields in the Cook Inlet
supply the natural gas to service these contracts. Marathon's proved reserves
and estimated production rates in the Cook Inlet sufficiently meet these
contractual obligations.
In the U.K., Marathon has two long-term sales contracts with utility
companies, which obligate Marathon to supply approximately 269 bcf of natural
gas over the remaining life of these contracts. Marathon's Brae-area
production, together with natural gas acquired for injection and subsequent
resale, will supply the natural gas to service these contracts. Marathon's
Brae-area proved reserves, acquired natural gas contracts and estimated
production rates sufficiently meet these contractual obligations. The terms of
these gas sales contracts also reflect variable-pricing structures.
Oil and Gas Acreage
The following table sets forth, by geographic area, the developed and
undeveloped oil and gas acreage that Marathon held as of December 31, 2001:
Gross and Net Acreage
Developed &
Developed Undeveloped Undeveloped
----------- ------------ ------------
(Thousands of Acres) Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------
United States............................. 1,955 845 3,435 1,862 5,390 2,707
Europe.................................... 351 289 1,843 881 2,194 1,170
Other International....................... 889 521 6,111 2,190 7,000 2,711
----- ----- ------ ----- ------ -----
Total Consolidated........................ 3,195 1,655 11,389 4,933 14,584 6,588
Equity Investees(a)....................... 529 63 302 69 831 132
----- ----- ------ ----- ------ -----
WORLDWIDE................................. 3,724 1,718 11,691 5,002 15,415 6,720
- --------------------------------------------------------------------------------
(a) Represents Marathon's equity interests in MKM and CLAM.
Oil and Natural Gas Production
The following tables set forth daily average net production of liquid
hydrocarbons and natural gas for each of the last three years:
Net Liquid Hydrocarbons Production(a)
(Thousands of Barrels per Day) 2001 2000 1999
- --------------------------------------------------------------------------------
United States(b).............................................. 127 131 145
Europe(c)..................................................... 46 29 31
Other International(c)........................................ 27 36 31
----- ----- -----
Total Consolidated.......................................... 200 196 207
Equity Investees (MKM, CLAM & Sakhalin Energy)(c)............. 9 11 1
----- ----- -----
WORLDWIDE..................................................... 209 207 208
===== ===== =====
Net Natural Gas Production(d)
(Millions of Cubic Feet per Day)
United States(b).............................................. 793 731 755
Europe(e)..................................................... 318 327 326
Other International(e)........................................ 123 143 163
----- ----- -----
Total Consolidated.......................................... 1,234 1,201 1,244
Equity Investees (CLAM and MKM)(e)............................ 31 29 36
----- ----- -----
WORLDWIDE..................................................... 1,265 1,230 1,280
- --------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas liquids.
(b) Amounts reflect production from leasehold ownership, after royalties and
interests of others.
(c) Amounts reflect equity tanker liftings, truck deliveries and direct
deliveries of liquid hydrocarbons before royalties, if any, excluding Canada,
Gabon, Russia and the United States where amounts shown are after royalties.
The amounts correspond with the basis for fiscal settlements with
governments. Crude oil purchases, if any, from host governments are not
included.
(d) Amounts exclude volumes purchased from third parties for injection and
subsequent resale of 8 mmcfd in 2001 and 11 and 16 mmcfd in 2000 and 1999,
respectively.
(e) Amounts reflect production before royalties, excluding Canada and the
United States where amounts shown are after royalties.
15
At year-end 2001, Marathon was producing crude oil and/or natural gas in
seven countries, including the United States. Marathon's worldwide liquid
hydrocarbon production, including Marathon's proportionate share of equity
investees' production, increased one percent over 2000 levels. Marathon's 2001
worldwide sales of natural gas production, including Marathon's proportionate
share of equity investees' production, increased approximately three percent
from 2000. In addition to sales of 441 net mmcfd of international natural gas
production, Marathon sold 8 net mmcfd of natural gas acquired for injection
and resale during 2001. In total, Marathon's 2001 worldwide production
averaged 421,000 BOE per day. In 2002, Marathon's worldwide production is
expected to average 430,000 BOE per day.
The above projection of 2002 worldwide liquid hydrocarbon production and
natural gas volumes is a forward-looking statement. Some factors that could
potentially affect timing and levels of production include pricing, 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, drilling rig availability, future acquisitions of
producing properties, and other geological, operating and economic
considerations. These factors (among others) could cause actual results to
differ materially from those set forth in the forward-looking statement.
United States
Including Marathon's proportionate share of equity investee production,
approximately 65 percent of Marathon's 2001 worldwide liquid hydrocarbon
production, and 63 percent of its worldwide natural gas production were from
domestic operations. Marathon's principal domestic producing areas are located
in the U.S. Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma,
Texas and Wyoming. Marathon's ongoing domestic growth strategy is to apply its
technical expertise in fields with undeveloped potential, to dispose of
interests in non-core properties with limited upside potential and high
production costs, and to acquire significant working interests in properties
with high development potential.
Gulf of Mexico - During 2001, Marathon's Gulf of Mexico production averaged
71,600 net bpd of liquid hydrocarbons and 112 net mmcfd of natural gas,
representing 53 percent and 14 percent of Marathon's total U.S. liquid
hydrocarbon and natural gas production, respectively. Liquid hydrocarbon and
natural gas production increased by 10,000 net bpd and by 24 net mmcfd,
respectively, from the prior year, mainly due to the ramp up and full year's
production from Viosca Knoll 786 (Petronius) and the addition of Ursa which
Marathon acquired in the December 2000 Sakhalin Energy exchange with Shell. At
year-end 2001, Marathon held working interests in 9 producing fields and 17
platforms, of which 7 platforms are operated by Marathon.
Production from Marathon's interests in the deepwater Gulf accounted for
approximately 93 percent of total Gulf of Mexico production in 2001. Major
components of Marathon's deepwater portfolio include the Marathon-operated
Ewing Bank 873, 917, and 963 and the co-venturer operated Green Canyon 244 and
Viosca Knoll 786.
Alaska - Marathon's production from Alaska averaged 179 net mmcfd of
natural gas in 2001, compared with 160 net mmcfd in 2000. Marathon's primary
focus in Alaska is the expansion of its natural gas business through
exploration, development and marketing.
New Mexico - Production in New Mexico, primarily from the Indian Basin
field, averaged 15,000 net bpd and 150 net mmcfd in 2001, compared with 12,600
net bpd and 121 net mmcfd in 2000. The increase in gas production was
primarily due to ongoing development of the eastern area of the Indian Basin
field and was preceded by the expansion in 2000 of Marathon's Indian Basin Gas
Plant.
Oklahoma - Gas production for 2001 averaged 124 net mmcfd, representing 16
percent of Marathon's total U.S. gas production, compared with 151 net mmcfd
in 2000. The decrease in gas production was primarily due to the decline in
Knox Morrow production.
Texas - Onshore production for 2001 averaged 17,400 net bpd of liquid
hydrocarbons and 111 net mmcfd of natural gas, representing 13 percent of
Marathon's total U.S. liquid hydrocarbon and 14 percent of natural gas
production. Liquid production volumes decreased by 6,000 net bpd from 2000
levels, and gas volumes decreased by 21 net mmcfd from 2000 levels. The volume
decreases were mainly due to natural decline and reduced net volumes from the
Yates field due to the contribution of Yates assets to the MKM joint venture.
Wyoming - Liquid hydrocarbon production for 2001 averaged 24,600 net bpd,
representing 18 percent of Marathon's total U.S. liquid hydrocarbon
production. Average gas production increased to 90 net mmcfd in 2001 compared
to 45 net mmcfd in 2000, as a result of the Pennaco acquisition.
16
International
Marathon holds interests in liquid hydrocarbon and/or natural gas
production in the U.K. North Sea, the U.K. Atlantic Margin, the Irish Celtic
Sea, the Norwegian North Sea, Canada and Gabon. In addition, Marathon has
interests through an equity investee in the Netherlands North Sea and recently
completed an acquisition of interests in Equatorial Guinea, West Africa.
U.K. North Sea - Production from the Brae area averaged 21,700 net bpd of
liquid hydrocarbons in 2001, compared with 26,500 net bpd in 2000. The
decrease is mainly within the Central and East Brae fields, reflecting field
decline.
The Brae A platform and facilities act as the host for the underlying South
Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. The
North Brae field, which is produced via the Brae B platform, and the East Brae
field are gas condensate fields. These fields are produced using the gas
cycling technique, whereby gas is injected into the reservoir for pressure
maintenance, improved sweep efficiency and increased condensate liquid
recovery. Although partial cycling continues, the majority of North Brae gas
is being transferred to the East Brae reservoir for pressure maintenance and
sales.
The strategic location of the Brae A, Brae B and East Brae platforms and
pipeline infrastructure has generated significant third-party processing and
transportation business since 1986. Currently, there are 14 agreements with
third-party fields contracted to use the Brae system. In addition to
generating processing and pipeline tariff revenue, this third-party business
also has a favorable impact on Brae area operations by optimizing
infrastructure usage and extending the economic life of the facilities.
Marathon owns a 41.6 percent interest in the Brae group which owns a 50
percent interest in the Scottish Area Gas Evacuation ("SAGE") system. The
other 50 percent is owned by the Beryl group, which operates the system. The
SAGE system provides pipeline transportation and onshore processing for Brae-
area gas and has a total wet gas capacity of approximately 1.0 bcfd. Pipelines
connect the Brae, Britannia, Beryl and Scott fields to the SAGE gas processing
terminal at St. Fergus in northeast Scotland.
Marathon's total United Kingdom gas sales from all sources averaged 242 net
mmcfd in 2001, compared with 223 net mmcfd in 2000. Of these totals, 234 mmcfd
and 212 mmcfd was Brae-area gas in 2001 and 2000, respectively, and 8 mmcfd
and 11 mmcfd was gas acquired for injection and subsequent resale in 2001 and
2000, respectively.
U.K. Atlantic Margin - Production from the Foinaven fields averaged 24,300
net bpd of liquid hydrocarbons in 2001.
Ireland - Marathon holds a 100 percent working interest in the Kinsale
Head, Ballycotton and Southwest Kinsale fields in the Irish Celtic Sea.
Natural gas sales were 79 net mmcfd in 2001, compared with 115 net mmcfd in
2000. This reduction is due to natural field declines and changes to the
production profile of the Southwest Kinsale field. The Southwest Kinsale field
has been converted to a gas storage reservoir, where gas is injected in the
summer and produced to meet peak demand in the winter.
Norway - In the Norwegian North Sea, Marathon holds a 23.8 percent working
interest in the Heimdal field. Production of the remaining remnant gas from
Heimdal commenced in August 2001 with sales of 5 net mmcfd. Marathon also
holds a 46.904 percent working interest in the Vale field. The Vale single
well sub-sea development will be tied back to the Heimdal platform, with first
production expected early 2002.
Canada - Production in Canada averaged 11,000 bpd and 123 mmcfd in 2001,
compared with 18,400 bpd and 143 mmcfd in 2000. During 2001, Marathon executed
a strategic plan to rationalize operations in Western Canada. As a result,
Marathon disposed of a significant number of non-core conventional oil and gas
properties as well as all heavy oil assets, equating to approximately 127
million BOE of net remaining proved reserves. Annualized production sold
approximated 9,800 net bpd and 30 net mmcfd.
Gabon - Production in Gabon averaged 16,000 net bpd of liquid hydrocarbons
in 2001, compared with 15,800 net bpd in 2000. This increase reflected a full
year of production from the Cap Lopez formation of the Tchatamba South field,
which began production in December 2000, and a full year of production from
the Tchatamba West field, which began production in November 2000. These
additions were partially offset by a reduction in Marathon's net share of
gross production, based on the payout terms of the production sharing contract
with Gabonese authorities.
17
Netherlands - Marathon's 50 percent equity interest in CLAM provides a 5
percent entitlement in the production from 25 gas fields, which provided sales
of 31 net mmcfd of natural gas in 2001, compared with 29 net mmcfd in 2000.
The following tables set forth productive wells and service wells for each
of the last three years and drilling wells as of December 31, 2001.
Gross and Net Wells
2001 Productive Wells(a)
- ---- ------------------------
Service Drilling
Oil Gas Wells(b) Wells(c)
------------ ----------- ----------- ---------
Gross Net Gross Net Gross Net Gross Net
- --------------------------------------------------------------------------------
United States.................... 6,550 2,415 4,828 2,935 2,852 856 25 18
Europe........................... 53 20 63 35 27 8 3 1
Other International.............. 508 251 1,352 986 52 25 3 1
------ ----- ----- ----- ----- ----- --- ---
Total Consolidated............. 7,111 2,686 6,243 3,956 2,931 889 31 20
Equity Investees(d).............. 2,002 609 83 4 1,142 243 1 0
------ ----- ----- ----- ----- ----- --- ---
WORLDWIDE........................ 9,113 3,295 6,326 3,960 4,073 1,132 32 20
====== ===== ===== ===== ===== ===== === ===
2000(e) Productive Wells(a)
- ------- ------------------------
Service
Oil Gas Wells(b)
------------ ----------- -----------
Gross Net Gross Net Gross Net
United States.................... 8,013 3,113 2,526 1,275 3,103 976
Europe........................... 54 18 66 34 25 9
Other International.............. 927 665 1,450 1,084 136 109
------ ----- ----- ----- ----- -----
Total Consolidated............. 8,994 3,796 4,042 2,393 3,264 1,094
Equity Investee(d)............... - - 85 5 - -
------ ----- ----- ----- ----- -----
WORLDWIDE........................ 8,994 3,796 4,127 2,398 3,264 1,094
====== ===== ===== ===== ===== =====
1999 Productive Wells(a)
- ---- ------------------------
Service
Oil Gas Wells(b)
------------ ----------- -----------
Gross Net Gross Net Gross Net
United States.................... 8,654 3,205 3,122 1,396 3,617 1,056
Europe........................... 36 14 65 33 18 7
Other International.............. 1,590 754 1,746 1,214 461 133
------ ----- ----- ----- ----- -----
Total Consolidated............. 10,280 3,973 4,933 2,643 4,096 1,196
Equity Investees(d).............. 5 2 83 4 1 -
------ ----- ----- ----- ----- -----
WORLDWIDE........................ 10,285 3,975 5,016 2,647 4,097 1,196
- --------------------------------------------------------------------------------
(a) Includes active wells and wells temporarily shut-in. Of the gross
productive wells, gross wells with multiple completions operated by Marathon
totaled 442, 469 and 478 in 2001, 2000 and 1999, respectively. Information on
wells with multiple completions operated by other companies is not available
to Marathon.
(b) Consist of injection, water supply and disposal wells.
(c) Consist of exploratory and development wells.
(d) Represents MKM and CLAM in 2001, CLAM in 2000 and CLAM and Sakhalin Energy
in 1999.
(e) Certain amounts have been restated.
18
Refining, Marketing and Transportation
Refining, Marketing and Transportation ("RM&T") operations are primarily
conducted by MAP and its subsidiaries, including its wholly-owned
subsidiaries, Speedway SuperAmerica LLC and Marathon Ashland Pipe Line LLC.
Marathon holds a 62 percent interest in MAP and Ashland Inc. holds the
remaining 38 percent interest.
Refining
MAP owns and operates seven refineries with an aggregate refining capacity
of 935,000 barrels of crude oil per day. The table below sets forth the
location and daily throughput capacity of each of MAP's refineries as of
December 31, 2001:
In-Use Refining Capacity
(Barrels per Day)
Garyville, LA............... 232,000
Catlettsburg, KY............ 222,000
Robinson, IL................ 192,000
Detroit, MI................. 74,000
Canton, OH.................. 73,000
Texas City, TX.............. 72,000
St. Paul Park, MN........... 70,000
-------
TOTAL....................... 935,000
=======
MAP's refineries include crude oil atmospheric and vacuum distillation,
fluid catalytic cracking, catalytic reforming, desulfurization and sulfur
recovery units. The refineries have the capability to process a wide variety
of crude oils and to produce typical refinery products, including reformulated
gasoline. MAP's refineries are integrated via pipelines and barges to maximize
operating efficiency. The transportation links that connect the refineries
allow the movement of intermediate products to optimize operations and the
production of higher margin products. For example, naphtha may be moved from
Texas City and Catlettsburg to Robinson where excess reforming capacity is
available, gas oil may be moved from Robinson to Detroit and Catlettsburg
where excess fluid catalytic cracking unit capacity is available, and light
cycle oil may be moved from Texas City to Robinson where excess
desulfurization capacity is available.
MAP also produces asphalt cements, polymerized asphalt, asphalt emulsions
and industrial asphalts. MAP manufactures petroleum pitch, primarily used in
the graphite electrode, clay target and refractory industries. Additionally,
MAP manufactures aromatics, aliphatic hydrocarbons, cumene, base lube oil,
polymer grade propylene and slack wax.
19
During 2001, MAP's refineries processed 929,000 bpd of crude oil and
143,000 bpd of other charge and blend stocks. The following table sets forth
MAP's refinery production by product group for each of the last three years:
Refined Product Yields
(Thousands of Barrels per Day) 2001 2000 1999
- --------------------------------------------------------------------------------
Gasoline...................................................... 581 552 566
Distillates................................................... 286 278 261
Propane....................................................... 22 20 22
Feedstocks & Special Products................................. 69 74 66
Heavy Fuel Oil................................................ 39 43 43
Asphalt....................................................... 76 74 69
----- ----- -----
TOTAL......................................................... 1,073 1,041 1,027
===== ===== =====
Planned maintenance activities requiring temporary shutdown of certain
refinery operating units ("turnarounds") are periodically performed at each
refinery. MAP completed a major turnaround at its Detroit refinery in 2001.
The Garyville, Louisiana coker unit project achieved mechanical completion
in October 2001 and was operating at full production capacity by mid-December
2001. This unit allows for the use of heavier, lower-cost crude and reduces
the production of heavy fuel oil. To supply this new unit, MAP entered into a
multi-year contract 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.
Marketing
In 2001, MAP's refined product sales volumes (excluding matching buy/sell
transactions) totaled 19.3 billion gallons (1,259,000 bpd). Excluding sales
related to matching buy/sell transactions, the wholesale distribution of
petroleum products to private brand marketers and to large commercial and
industrial consumers, primarily located in the Midwest, the upper Great Plains
and the Southeast, and sales in the spot market, accounted for about 65
percent of MAP's refined product sales volumes in 2001. Approximately 47
percent of MAP's gasoline volumes and 82 percent of its distillate volumes
were sold on a wholesale or spot market basis to independent unbranded
customers or other wholesalers in 2001.
20
MAP markets asphalt through owned and leased terminals throughout the
Midwest and Southeast. The MAP customer base includes approximately 900
asphalt paving contractors, government entities (states, counties, cities and
townships) and asphalt roofing shingle manufacturers.
The following table sets forth the volume of MAP's consolidated refined
product sales by product group for each of the last three years:
Refined Product Sales
(Thousands of Barrels per Day) 2001 2000 1999
- --------------------------------------------------------------------------------
Gasoline...................................................... 748 746 714
Distillates................................................... 345 352 331
Propane....................................................... 21 21 23
Feedstocks & Special Products................................. 71 69 66
Heavy Fuel Oil................................................ 41 43 43
Asphalt....................................................... 78 75 74
----- ----- -----
TOTAL......................................................... 1,304 1,306 1,251
===== ===== =====
Matching Buy/Sell Volumes included in above................... 45 52 45
MAP sells reformulated gasoline in parts of its marketing territory,
primarily Chicago, Illinois; Louisville, Kentucky; Northern Kentucky; and
Milwaukee, Wisconsin. MAP also markets low-vapor-pressure gasoline in nine
states.
As of December 31, 2001, MAP supplied petroleum products to about 3,800
Marathon and Ashland branded retail outlets located primarily in Michigan,
Ohio, Indiana, Kentucky and Illinois. Branded retail outlets are also located
in Florida, West Virginia, Georgia, Wisconsin, Minnesota, Tennessee, Virginia,
Pennsylvania, North Carolina, South Carolina and Alabama.
In 2001, retail sales of gasoline and diesel fuel were also made through
company-operated outlets by a wholly owned MAP subsidiary, Speedway
SuperAmerica LLC ("SSA"). As of December 31, 2001, this subsidiary had 2,104
retail outlets in 16 states which sold petroleum products and convenience-
store merchandise and services, primarily under the brand names "Speedway" and
"SuperAmerica". Excluding the travel centers contributed to Pilot Travel
Centers LLC, as described below, SSA's revenues from the sale of convenience-
store merchandise totaled $2.3 billion in 2001, compared with $2.2 billion in
2000. Profit levels from the sale of such merchandise and services tend to be
less volatile than profit levels from the retail sale of gasoline and diesel
fuel.
Effective September 1, 2001, MAP and Pilot Corporation ("Pilot") completed
a transaction to form Pilot Travel Centers LLC ("PTC"), which combined SSA's
and Pilot's travel centers. Pilot and MAP each own a 50 percent interest in
PTC. PTC is the largest operator of travel centers in the United States with
about 230 locations in 35 states. The travel centers offer diesel fuel,
gasoline and a variety of other services, including on-premises brand-name
restaurants. PTC provides MAP with the opportunity to participate in the
travel center business on a nationwide basis.
Supply and Transportation
MAP obtains the crude oil it processes from negotiated contracts and spot
purchases or exchanges. In 2001, MAP's net purchases of U.S. crude oil for
refinery input averaged 403,000 bpd, including 28,000 bpd from Marathon. In
2001, 57 percent or 526,000 bpd of the crude oil processed by MAP's refineries
was from foreign sources, including approximately 303,000 bpd from the Middle
East. This crude was acquired from various foreign national oil companies,
producing companies and traders.
MAP operates a system of pipelines and terminals to provide crude oil to
its refineries and refined products to its marketing areas. At December 31,
2001, MAP owned, leased or had an ownership interest in approximately 3,450
miles of crude oil trunk lines and 2,847 miles of products trunk lines. MAP
owned a 46.7 percent interest in LOOP LLC ("LOOP"), which is the owner and
operator of the only U.S. deepwater oil port, located 18 miles off the coast
of Louisiana; a 49.9 percent interest in LOCAP LLC ("LOCAP"), which is the
owner and operator of a crude oil pipeline connecting LOOP and the Capline
system; and a 37.2 percent interest in the Capline system, a large diameter
crude oil pipeline extending from St. James, Louisiana to Patoka, Illinois.
MAP also has a 33.3 percent ownership interest in Minnesota Pipe Line
Company, which operates a crude oil pipeline in Minnesota. Minnesota Pipe Line
Company provides MAP with access to crude oil common carrier
21
transportation from Clearbrook, Minnesota to Cottage Grove, Minnesota, which
is in the vicinity of MAP's St. Paul Park, Minnesota, refinery.
MAP has a 33.3 percent ownership interest in Centennial Pipeline LLC, a
limited liability company formed to develop an interstate refined petroleum
products pipeline extending from the U.S. Gulf of Mexico to the Midwest. In
March 2001, the Federal Energy Regulatory Commission approved the abandonment
of a 720-mile, 26-inch diameter pipeline extending from Longville, Louisiana
to Bourbon, Illinois, from natural gas service, thereby allowing conversion to
refined products service by Centennial Pipeline LLC. Also as part of the
project, a two million barrel terminal storage facility has been constructed
and a new 74-mile, 24-inch diameter pipeline extending from Beaumont, Texas,
to Longville, Louisiana has been built. Marathon Ashland Pipe Line LLC has
been designated operator of the pipeline. The Centennial Pipeline system will
connect with existing MAP transportation assets and other common carrier
lines. It is expected to be operational in the first quarter of 2002.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common
carrier pipeline company, and the pipeline will be an interstate common
carrier pipeline. The pipeline is currently known as Cardinal Products Pipe
Line and is expected to initially move about 50,000 barrels per day of refined
petroleum into the central Ohio region. As of December 2001, ORPL had secured
all of the rights-of-way required to build the pipeline. Applications for the
remaining construction permits have been filed. Construction is currently
planned for summer 2002 pending receipt of permits, with start-up of the
pipeline to follow in first half 2003.
MAP's 88 light product and asphalt terminals are strategically located
throughout the Midwest, upper Great Plains and Southeast. These facilities are
supplied by a combination of pipelines, barges, rail cars and/or trucks.
MAP's marine transportation operations include towboats and barges that
transport refined products on the Ohio, Mississippi and Illinois rivers, their
tributaries and the Intercoastal Waterway. MAP also leases and owns rail cars
in various sizes and capacities for movement and storage of petroleum products
and a large number of tractors, tank trailers and general service trucks.
The above RM&T discussions include forward-looking statements concerning
anticipated pipeline projects. Some factors that could potentially cause
actual results to differ materially from present expectations include (among
others) price of petroleum products, levels of cash flow from operations,
obtaining the necessary construction and environmental permits, unforeseen
hazards such as weather conditions and regulatory approval constraints. This
forward-looking information may prove to be inaccurate and actual results may
differ significantly from those presently anticipated.
Other Energy Related Businesses
Natural Gas and Crude Oil Marketing and Transportation
Marathon owns an interest in the following pipeline systems that were not
contributed to MAP: Marathon has a 29 percent interest in Odyssey Pipeline LLC
and a 28 percent interest in Poseidon Oil Pipeline Company, LLC, both Gulf of
Mexico crude oil pipeline systems. Marathon has a 24 percent interest in
Nautilus Pipeline Company, LLC and a 24 percent interest in Manta Ray Offshore
Gathering Company, LLC, both Gulf of Mexico natural gas pipeline systems.
Marathon has a 17 percent interest in Explorer Pipeline Company and a 2.5
percent interest in Colonial Pipeline Company, both light product pipeline
systems extending from the Gulf of Mexico to the Midwest and East Coast,
respectively.
Marathon has a 30 percent ownership in a Kenai, Alaska, natural gas
liquefication plant and two 87,500 cubic meter tankers used to transport
liquefied natural gas ("LNG") to customers in Japan. Feedstock for the plant
is supplied from a portion of Marathon's natural gas production in the Cook
Inlet. From the first production in 1969, the LNG has been sold under a long-
term contract with two of Japan's largest utility companies. Marathon has a 30
percent participation in this contract, which has been extended to continue
through March 31, 2009. LNG deliveries totaled 66.5 gross bcf (20 net bcf) in
2001, up slightly from 2000.
Marathon has a 34 percent ownership interest in the Neptune natural gas
processing plant located in St. Mary Parish, Louisiana, which commenced
operations on March 20, 2000. The plant has the capacity to process 300 mmcfd
of natural gas, which is transported on the Nautilus pipeline system.
22
In addition to the sale of its own oil and natural gas production, Marathon
purchases oil and gas from third-party producers and marketers for resale.
Power Generation
Marathon, through its wholly owned subsidiary, Marathon Power Company,
Ltd., pursues development, construction, ownership and operation of integrated
gas and electric power projects in the global electrical power market.
Competition and Market Conditions
Strong competition exists in all sectors of the oil and gas industry and,
in particular, in the exploration and development of new reserves. Marathon
competes with major integrated and independent oil and gas companies for the
acquisition of oil and gas leases and other properties, for the equipment and
labor required to develop and operate those properties and in the marketing of
oil and natural gas to end-users. Many of Marathon's competitors have
financial and other resources substantially greater than those available to
Marathon. As a consequence, Marathon may be at a competitive disadvantage in
bidding for the rights to explore for oil and gas. Acquiring the more
attractive exploration opportunities frequently requires competitive bids
involving substantial front-end bonus payments or commitments to work
programs. Marathon also competes with its competitors in attracting and
retaining personnel, including geologist, geophysicists and other specialists.
Based on industry sources, Marathon believes it currently ranks eighth among
U.S.-based petroleum corporations on the basis of 2000 worldwide liquid
hydrocarbon and natural gas production.
Marathon through MAP must also compete with a large number of other
companies to acquire crude oil for refinery processing and in the distribution
and marketing of a full array of petroleum products. MAP believes it ranks
sixth among U.S. petroleum companies on the basis of crude oil refining
capacity as of January 1, 2002. MAP competes in four distinct markets -
wholesale, spot, branded and retail distribution--for the sale of refined
products and believes it competes with about 50 companies in the wholesale
distribution of petroleum products to private brand marketers and large
commercial and industrial consumers; about 84 companies in the sale of
petroleum products in the spot market; 12 refiner/marketers in the supply of
branded petroleum products to dealers and jobbers; and over 600 petroleum
product retailers in the retail sale of petroleum products. Marathon also
competes in the convenience store industry through SSA's retail outlets. The
retail outlets offer consumers gasoline, diesel fuel (at selected locations)
and a broad mix of other merchandise and services. Some locations also have
on-premises brand-name restaurants such as Subway(TM) and Taco Bell(TM).
Marathon's operating results are affected by price changes in crude oil,
natural gas and petroleum products, as well as changes in competitive
conditions in the markets it serves. Generally, results from production
operations benefit from higher crude oil and natural gas prices while refining
and marketing margins may be adversely affected by crude oil price increases.
Market conditions in the oil and gas industry are cyclical and subject to
global economic and political events.
Employees
Marathon had 30,671 active employees as of December 31, 2001, including
27,698 MAP employees. Of the total number of MAP employees, 21,223 were
employees of Speedway SuperAmerica LLC, most of whom were employees at retail
marketing outlets.
Certain hourly employees at the Catlettsburg and Canton refineries are
represented by the Paper, Allied-Industrial, Chemical and Energy Workers
International Union under labor agreements that expired on January 31, 2002.
Negotiations are underway on new collective bargaining agreements. Certain
hourly employees at the Texas City refinery are represented by the same union
under a labor agreement that is scheduled to expire on March 31, 2002. Certain
hourly employees at the St. Paul Park and Detroit refineries are represented
by the International Brotherhood of Teamsters under labor agreements that are
scheduled to expire on May 31, 2002 and January 31, 2003, respectively.
Properties
The location and general character of the principal oil and gas properties,
refineries and gas plants, pipeline systems and other important physical
properties of Marathon are described above. Except for oil and gas producing
properties, which generally are leased, or as otherwise stated, such
properties are held in fee. The plants and facilities have been constructed or
acquired over a period of years and vary in age and operating efficiency. At
the
23
date of acquisition of important properties, titles were examined and opinions
of counsel obtained, but no title examination has been made specifically for
the purpose of this document. The properties classified as owned in fee
generally have been held for many years without any material unfavorably
adjudicated claim.
The basis for estimating oil and gas reserves is set forth in "Consolidated
Financial Statements and Supplementary Data - Supplementary Information on Oil
and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas
Reserves" on pages F-36 and F-37.
Unless otherwise indicated, all reserves shown are as of December 31, 2001.
Property, Plant and Equipment Additions
For property, plant and equipment additions, see "Management's Discussion
and Analysis of Financial Condition, Cash Flows and Liquidity - Capital
Expenditures" on page 37.
Environmental Matters
Marathon maintains a comprehensive environmental policy overseen by the
Corporate Governance and Public Policy Committee of Marathon's Board of
Directors. Marathon's Health, Environment and Safety organization has the
responsibility to ensure that Marathon's operating organizations maintain
environmental compliance systems that are in accordance with applicable laws
and regulations. The Health, Environment and Safety Management Committee,
which is comprised of officers of Marathon, is charged with reviewing its
overall performance with various environmental compliance programs. Marathon
has also formed an Emergency Management Team, composed of senior management,
which will oversee the response to any major emergency environmental incident
involving Marathon or any of its properties.
Marathon's businesses are subject to numerous 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, the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA") with respect to releases and remediation of
hazardous substances and the Oil Pollution Act of 1990 ("OPA-90") 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 subject to frequent change and many of them have
become more stringent. In some cases, they can impose liability for the entire
cost of cleanup on any responsible party without regard to negligence or fault
and impose liability on Marathon for the conduct of others or conditions
others have caused, or for Marathon's acts that complied with all applicable
requirements when we performed them. 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 some 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.
For a discussion of environmental capital expenditures and costs of
compliance for air, water, solid waste and remediation, see "Management's
Discussion and Analysis of Environmental Matters, Litigation and
Contingencies" on page 40 and "Legal Proceedings" on page 26.
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 are not
ultimately reflected in the prices of Marathon's products and services,
Marathon's 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.
In connection with government inspections at some of its refineries, MAP
has received a number of notices of violations of environmental laws from the
U.S. Environmental Protection Agency (the "EPA") and state environmental
agencies. In some cases, MAP has entered into consent decrees or orders that
require it to pay fines or install pollution controls to settle its alleged
liability. For example, MAP agreed to settle alleged violations of
24
several environmental laws, including New Source Review regulations, with a
consent decree signed on May 11, 2001. The agreement requires MAP to complete
certain agreed upon environmental control programs over an eight-year period.
The current estimated cost to complete these programs is approximately $300
million in expenditures over the next seven years. The agreement also requires
MAP to perform supplemental environmental projects which are expected to cost
approximately $8 million. These supplemental environmental projects are being
undertaken as part of this settlement of an enforcement action for alleged CAA
violations. In addition, MAP paid a $3.8 million penalty in 2001.
Air
Of particular significance to MAP are new EPA regulations that require
substantially reduced sulfur levels in the manufacture of gasoline and diesel
fuel. Marathon estimates that MAP's combined capital costs to achieve
compliance with these rules could amount to approximately $700 million between
2002 and 2006. Some factors that could potentially affect MAP's gasoline and
diesel fuel compliance costs include obtaining the necessary construction and
environmental permits, operating and logistical considerations, further
refinement of preliminary engineering studies and project scopes and
unforeseen hazards.
In July 1997, the EPA promulgated more stringent revisions to the National
Ambient Air Quality Standards ("NAAQS") for ozone and particulate matter.
These revisions had been vacated by the Court of Appeals for the District of
Columbia and remanded to the EPA for further action. The EPA sought review of
the matter by the United States Supreme Court, and the Supreme Court heard the
case in the fall of 2000. On February 27, 2001, the Supreme Court affirmed in
part, reversed in part and remanded the case to the EPA to develop a
reasonable interpretation of the nonattainment implementation provisions
insofar as they relate to the revised ozone NAAQS. On remand, the EPA stood
firm on the ozone standard, but another part of this case remains with the
D.C. Circuit Court of Appeals for further determination. Additionally, in
1998, the EPA published a nitrogen oxide ("NOx") State Implementation Plan
("SIP") call, which would require some 22 states, including many states where
Marathon has operations, to revise their SIPs to reduce NOx emissions. In
December 1999, the EPA granted a petition from several northeastern states
requesting that stricter NOx standards be adopted by midwestern states,
including several states where Marathon has refineries. The impact of the
revised NAAQS and NOx standards could be significant to Marathon, but the
potential financial effects cannot be reasonably estimated until the EPA takes
further action on the revised ozone NAAQS (along with any further judicial
review) and the states, as necessary, develop and implement revised SIPs in
response to the revised NAAQS and NOx standards.
Water
Marathon maintains numerous discharge permits as required under the
National Pollutant Discharge Elimination System program of the CWA and has
implemented systems to oversee its compliance efforts. In addition, Marathon
is regulated under OPA-90, which amended the CWA. Among other requirements,
OPA-90 requires the owner or operator of a tank vessel or a facility to
maintain an emergency plan to respond to releases of oil or hazardous
substances. Also, in case of such releases OPA-90 requires responsible
companies to pay resulting removal costs and damages, provides for substantial
civil penalties and imposes criminal sanctions for violations of its
provisions.
Additionally, OPA-90 requires that new tank vessels entering or operating
in domestic waters be double-hulled and that existing tank vessels that are
not double-hulled be retrofitted or removed from domestic service, according
to a phase-out schedule. Most of the barges used in MAP's river transportation
operations meet the double-hulled requirements of OPA-90. Single-hulled barges
owned and operated by MAP are in the process of being phased out. Displaced
single-hulled barges will be divested or recycled into docks or floats within
MAP's system.
Marathon operates facilities at which spills of oil and hazardous
substances could occur. Several coastal states in which Marathon operates have
passed state laws similar to OPA-90, but with expanded liability provisions,
including provisions for cargo owner responsibility as well as ship owner and
operator responsibility. Marathon has implemented emergency oil response plans
for all of its components and facilities covered by OPA-90.
Solid Waste
Marathon 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 waste disposal practices, RCRA
also addresses the environmental effects of certain past waste disposal
operations, the recycling of wastes and the regulation of underground storage
tanks ("USTs") containing regulated substances. Since the EPA has not yet
promulgated implementing regulations for all provisions of RCRA and has not
yet made clear the
25
practical application of all the implementing regulations it has promulgated,
the ultimate cost of compliance with this statute cannot be accurately
estimated. In addition, new laws are being enacted and regulations are being
adopted by various regulatory agencies on a continuing basis, and the costs of
compliance with these new rules can only be broadly appraised until their
implementation becomes more accurately defined.
Remediation
Marathon operates certain retail outlets where, during the normal course of
operations, releases of petroleum products from USTs have occurred. Federal
and state laws require that contamination caused by such releases at these
sites be assessed and remediated to meet applicable standards. The enforcement
of the UST regulations under RCRA has been delegated to the states, which
administer their own UST programs. Marathon's obligation to remediate such
contamination varies, depending on the extent of the releases and the
stringency of the laws and regulations of the states in which it operates. A
portion of these remediation costs may be recoverable from the appropriate
state UST reimbursement fund once the applicable deductible has been
satisfied. Accruals for remediation expenses and associated reimbursements are
established for sites where contamination has been determined to exist and the
amount of associated costs is reasonably determinable.
As a general rule, Marathon and Ashland retained responsibility for certain
remediation costs arising out of the prior ownership and operation of
businesses transferred to MAP. Such continuing responsibility, in certain
situations, may be subject to threshold or sunset agreements, which gradually
diminish this responsibility over time.
Item 3. Legal Proceedings
Marathon 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 included below in this discussion. The ultimate
resolution of these contingencies could, individually or in the aggregate, be
material. However, management believes that Marathon will remain a viable and
competitive enterprise even though it is possible that these contingencies
could be resolved unfavorably.
Natural Gas Royalty Litigation
Marathon was served in two qui tam cases, which allege that federal and
Indian lessees violated the False Claims Act with respect to the reporting and
payment of royalties on natural gas and natural gas liquids. The first case,
U.S. ex rel Jack J. Grynberg v. Alaska Pipeline Co., et al. is primarily a gas
measurement case, and the second case, U.S. ex rel Harrold e. Wright v Agip
Petroleum Co. et al, is primarily a gas valuation case. These cases assert
that false claims have been filed by lessees and that penalties, damages and
interest total more than $25 billion. The Department of Justice has announced
that it would intervene or has reserved judgment on whether to intervene
against specified oil and gas companies and also announced that it would not
intervene against certain other defendants including Marathon. In July 2001,
the court in the consolidated proceeding denied defendants' motions to
dismiss. Marathon intends to vigorously defend these cases.
Cajun Express Arbitration
Marathon canceled the Cajun Express rig contract on July 5, 2001 for
persistent non-performance. Transocean Sedco Forex Inc. gave notice of its
demand for arbitration on July 19, 2001 in which it sought net lost revenue of
an unspecified amount. The contract may have generated $90 million dollars in
gross revenues over the remainder of the 18 month period. Arbitration is
scheduled for May 13, 2002 in Houston, Texas before one arbitrator applying
the American Arbitration Association commercial rules. Marathon believes it
properly canceled the contract and intends to vigorously defend against this
claim.
Environmental Proceedings
The following is a summary of proceedings involving Marathon that were
pending or contemplated as of December 31, 2001, under federal and state
environmental laws. Except as described herein, it is not possible to predict
accurately the ultimate outcome of these matters; however, management's belief
set forth in the first paragraph under Item 3. "Legal Proceedings" above takes
such matters into account.
Claims under the Comprehensive Environmental Response, Compensation and
Liability Act ("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.
Potentially responsible parties ("PRPs") for each site include present and
former owners and operators of, transporters to and generators of the
26
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,
Marathon is unable 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 the forward-looking statements.
At December 31, 2001, Marathon had been identified as a PRP at a total of
13 CERCLA waste sites. Based on currently available information, which is in
many cases preliminary and incomplete, Marathon believes that its liability
for cleanup and remediation costs in connection with all but one of these
sites will be under $1 million per site, and most will be under $100,000.
Marathon believes that its liability for cleanup and remediation costs in
connection with the one remaining site will be under $4 million.
In addition, there are three sites where Marathon has received information
requests or other indications that it may be a PRP under CERCLA but where
sufficient information is not presently available to confirm the existence of
liability.
There are also 114 additional sites, excluding retail marketing outlets,
related to Marathon where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation through discussions or litigation. Of these sites, 13 were
associated with properties conveyed to MAP by Ashland which have retained
liability for all costs associated with remediation. Based on currently
available information, which is in many cases preliminary and incomplete,
Marathon believes that its liability for cleanup and remediation costs in
connection with 18 of these sites will be under $100,000 per site, 32 sites
have potential costs between $100,000 and $1 million per site, 12 sites may
involve remediation costs between $1 million and $5 million per site and 7
sites have incurred remediation costs of more than $5 million per site. Of the
7 sites, only 1 site as described in the following paragraph has future costs
that are estimated to exceed $5 million. There are 32 sites with insufficient
information to estimate any remediation costs.
There is one site that involves a remediation program in cooperation with
the Michigan Department of Environmental Quality at a closed and dismantled
refinery site located near Muskegon, Michigan. During the next 10 to 20 years,
Marathon anticipates spending less than $7 million at this site. Expenditures
in 2002 are expected to be approximately $500,000. Additionally, negotiations
are taking place with the Michigan Department of Environmental Quality to
eventually perform a risk-based closure on this site.
In May 2001, Marathon and MAP settled, in a consent decree, EPA allegations
that the Robinson refinery did not qualify for an exemption under the National
Emission Standards for Benzene Waste Operations pursuant to the CAA. The
government had alleged in a federal court lawsuit that the refinery's Total
Annual Benzene releases exceeded the limitation of 10 megagrams per year, and
as a result, the refinery was in violation of the benzene waste emission
control, record keeping, and reporting requirements. The consent decree was
approved by the court on July 26, 2001 and requires Marathon and MAP to pay a
combined $1.6 million civil penalty and install various controls and other
improvements. Marathon and MAP were also required to perform $125,000 in
supplemental environmental projects, with these projects undertaken in
connection with the settlement of an enforcement action undertaken by the
United States.
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and
Robinson refineries, covering compliance with the CAA, the CWA, reporting
obligations under the Emergency Planning and Community Right to Know Act,
CERCLA and the handling of process waste. The EPA served a number of Notices
of Violation ("NOV") and Findings of Violation as a result of these
inspections, but these allegations were resolved as part of the New Source
Review consent decree which MAP agreed to on May 11, 2001. MAP's settlement
with the EPA includes all of MAP's refineries and commits MAP to specific
control technologies and implementation schedules for environmental
expenditures and improvements to MAP's refineries over approximately an eight
year period. The current estimated cost to complete these programs is
approximately $300 million in expenditures over the next seven years. MAP is
also committed to the performance of about $8 million in supplemental
environmental projects and has paid an aggregate civil penalty in 2001 of $3.8
million, as part of this settlement of an enforcement action for alleged CAA
violations. MAP believes that this settlement will provide MAP with increased
permitting and operating flexibility while achieving significant emission
reductions. The court approved this consent decree on August 28, 2001.
27
In 2000, the Kentucky Natural Resources and Environmental Cabinet
("Cabinet") sent Catlettsburg Refining, LLC a NOV seeking a $150,000 civil
penalty for a tank rupture and spill at the Catlettsburg refinery. This matter
is pending.
In 2000, the Kentucky Natural Resources and Environmental Cabinet sent
Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a
pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this
NOV in the form of an Agreed-to Administrative Order which was finalized and
entered in January 2002 and required payment of a $170,000 penalty and
reimbursement of past response costs up to $131,000.
Item 4. Submission of Matters to a Vote of Security Holders
A description of the matters voted upon by the stockholders of USX
Corporation at an October 25, 2001 special meeting was reported in USX
Corporation's Form 10-Q for the quarter ended September 30, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The principal market on which the Company's common stock is traded is the
New York Stock Exchange. Information concerning the high and low sales prices
for the common stock as reported in the consolidated transaction reporting
system and the frequency and amount of dividends paid during the last two
years is set forth in "Selected Quarterly Financial Data (Unaudited)" on page
F-33.
As of January 31, 2002, there were 69,264 registered holders of Marathon
common stock.
The Board of Directors intends to declare and pay dividends on Marathon
common stock based on the financial condition and results of operations of
Marathon Oil Corporation, although it has no obligation under Delaware law or
the Restated Certificate of Incorporation to do so. In determining its
dividend policy with respect to Marathon common stock, the Board will rely on
the financial statements of Marathon. Dividends on Marathon common stock are
limited to legally available funds of Marathon.
28
Item 6. Selected Financial Data(a)
Dollars in millions (except per
share data) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Statement of Income Data:
Total revenues and other
income(b)....................... $33,066 $33,799 $23,666 $21,602 $15,670
Cost of revenues (excludes items
shown below).................... 23,255 25,417 16,612 14,609 10,217
Selling, general and
administrative expenses......... 726 643 498 519 379
Depreciation, depletion and
amortization.................... 1,236 1,245 950 941 664
Taxes other than income taxes.... 4,679 4,626 4,218 4,029 3,030
Exploration expenses............. 144 238 238 313 188
Inventory market valuation
charges (credits)............... 72 - (551) 267 284
------- ------- ------- ------- -------
Income from operations........... 2,954 1,630 1,701 924 908
Net interest and other financial
costs........................... 173 236 288 237 260
Minority interest in income of
Marathon
Ashland Petroleum LLC........... 704 498 447 249 -
------- ------- ------- ------- -------
Income from continuing
operations before income
taxes.......................... 2,077 896 966 438 648
Provision for income taxes....... 759 476 320 137 207
Income from continuing
operations..................... 1,318 420 646 301 441
Income (loss) from discontinued
operations..................... (169) (9) 59 373 547
Loss on disposition of United
States Steel Corporation....... (984) - - - -
------- ------- ------- ------- -------
Income before extraordinary
losses and cumulative effect of
change in accounting
principle...................... 165 411 705 674 988
Extraordinary losses............. - - (7) - -
Cumulative effect of change in
accounting principle............ (8) - - - -
------- ------- ------- ------- -------
Net income...................... $ 157 $ 411 $ 698 $ 674 $ 988
- --------------------------------------------------------------------------------
Segment Income From Operations:
Exploration and production:
Domestic........................ $ 1,124 $ 1,111 $ 494 $ 190 $ 500
International................... 297 420 124 88 273
Refining, marketing and
transportation.................. 1,914 1,273 611 896 563
Other energy related business.... 60 42 61 33 48
------- ------- ------- ------- -------
Segment income from operations.. 3,395 2,846 1,290 1,207 1,384
Items not allocated to segments.. (441) (1,216) 411 (283) (476)
------- ------- ------- ------- -------
Income from operations.......... $ 2,954 $ 1,630 $ 1,701 $ 924 $ 908
- --------------------------------------------------------------------------------
Earnings Per Share
Common Stock
Income from continuing
operations
Basic........................... $ 4.26 $ 1.35 $ 2.09 $ 1.03 $ 1.53
Diluted......................... $ 4.26 $ 1.35 $ 2.09 $ 1.02 $ 1.52
Net Income
Basic........................... $ 1.22 $ 1.39 $ 2.11 $ 1.06 $ 1.59
Diluted......................... $ 1.22 $ 1.39 $ 2.11 $ 1.05 $ 1.58
Dividends paid per share........ $ .92 $ .88 $ .84 $ .84 $ .76
Shares of common stock
outstanding (thousands)
Basic........................... 309,150 311,531 309,696 292,876 288,038
Diluted......................... 309,510 311,761 310,010 293,435 290,520
Steel Stock
Income/(loss) from discontinued
operations
Basic........................... $ (1.90) $ (.10) $ .67 $ 4.16 $ 6.35
Diluted......................... $ (1.90) $ (.10) $ .67 $ 4.02 $ 5.89
Net Income/(loss)
Basic........................... $ (2.73) $ (.33) $ .40 $ 4.05 $ 5.24
Diluted......................... $ (2.74) $ (.33) $ .40 $ 3.92 $ 4.88
Dividends paid per share........ $ .55 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Shares of common stock
outstanding (thousands)
Basic........................... 89,058 88,613 88,392 87,508 85,672
Diluted......................... 89,058 88,613 88,396 94,943 94,203
- --------------------------------------------------------------------------------
(a) Historical data has been restated to reflect the effect of the separation
of United States Steel.
(b) Consists of revenues, dividend and investee income, gain on ownership
change in MAP, net gain/(losses) on disposal of assets and other income.
29
Dollars in millions (except per share data) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Other Data:
Net cash from operating activities (from
continuing operations)................... $2,919 $3,146 $2,008 $1,633 $1,231
Capital expenditures...................... 1,639 1,425 1,378 1,270 1,038
Ratio of earnings to fixed charges(b)..... 7.47 4.06 4.24 2.60 2.55
Ratio of earnings to combined fixed
charges and preferred stock
dividends(b)............................. 7.26 3.95 4.11 2.51 2.43
- --------------------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents................. $ 657 $ 340 $ 111 $ 137 $ 36
Working capital........................... 943 973 937 366 (244)
Net property, plant and equipment......... 9,578 9,375 10,293 10,429 7,566
Total assets.............................. 16,129 17,151 17,730 16,637 12,347
Long-term debt............................ 3,432 1,937 3,320 3,456 2,476
Minority interest in Marathon Ashland
Petroleum LLC............................ 1,963 1,840 1,753 1,590 -
Total stockholders' equity................ 4,940 6,764 6,856 6,405 5,400
- -------------------------------------------------------------------------------
(b) Amounts represent fixed charges and earnings from continued operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
On December 31, 2001, USX Corporation disposed of its steel business
through a tax-free distribution of the common stock of its wholly-owned
subsidiary United States Steel Corporation ("United States Steel") to holders
of USX-U.S. Steel Group common stock ("Steel Stock") in exchange for all
outstanding shares of Steel Stock on a one-for-one basis (the "Separation")
and changed its name to Marathon Oil Corporation ("Marathon"). Marathon is
engaged in worldwide exploration and production of crude oil and natural gas;
domestic refining, marketing and transportation of crude oil and petroleum
products primarily through its 62 percent owned subsidiary Marathon Ashland
Petroleum LLC ("MAP"); and other energy related businesses. The Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the Financial Statements and Notes to
Consolidated Financial Statements.
Marathon's 2001 financial performance benefited from strong worldwide
natural gas prices and domestic refining margins. However, later in the year,
performance was negatively impacted by lower crude oil and natural gas prices,
as well as lower downstream margins, primarily from decreased demand caused by
the general downturn in the global economy and warmer than normal weather.
Certain sections of Management's Discussion and Analysis of Financial
Condition and Results of Operations include forward-looking statements
concerning trends or events potentially affecting the businesses of Marathon.
These statements typically contain words such as "anticipates", "believes",
"estimates", "expects", "targets" 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 Marathon, see "Disclosures
Regarding Forward-Looking Statements" on page 2.
Management's Discussion and Analysis of Critical Accounting Policies
The preparation of consolidated financial statements for Marathon requires
management to make estimates and judgments that affect the amounts reported in
the primary financial statements and the related footnote disclosures.
Marathon considers the following accounting policies to be most significantly
impacted by the estimates and judgments used in the preparation of its
consolidated financial statements.
Deferred Taxes
Oil and gas exploration and production is a global business. As a result,
Marathon is subject to taxation on its income in numerous jurisdictions. State
and local income taxes are deductible and foreign income taxes in certain
circumstances are creditable against U. S. federal income taxes. These
interrelationships complicate the assessment of the realizability of deferred
income tax assets. Marathon considers future taxable income in making such
assessments. Numerous judgments and assumptions are inherent in the
determination of future taxable income, including factors such as future
operating conditions (particularly as related to prevailing oil prices). The
30
judgments and assumptions used in determining future taxable income are
consistent with those used for other financial statement purposes, including
the determination of possible impairment of long-lived assets held and used.
Additionally, generally accepted accounting principles require that Marathon
consider any prudent and feasible tax planning strategies that would minimize
the amount of deferred tax liabilities recognized or the amount of any
valuation allowance recognized against deferred tax assets. The principal tax
planning strategy available to Marathon relates to the permanent reinvestment
of the earnings of foreign subsidiaries. As a result of the complexities
inherent in multiple tax jurisdictions and the focus of generally accepted
accounting principles on the proper measurement of deferred taxes recorded on
the balance sheet, deferred tax adjustments included in the provision for
income taxes do not necessarily correspond with amounts reported in income
before income taxes.
Property, Plant and Equipment
Marathon uses the successful efforts method of accounting for its oil and
gas producing activities. The successful efforts method inherently relies upon
the estimation of proved reserves, which includes proved developed and proved
undeveloped volumes. The existence and the estimated amount of proved reserves
affects, among other things, whether or not costs are capitalized or expensed,
the amount and timing of costs depleted or amortized into income and whether
or not the costs capitalized in the balance sheet should be impaired.
Marathon's estimation of total proved reserves is a highly technical process
performed primarily by in-house reservoir engineers and geoscience
professionals. The actual recoverability of hydrocarbons can vary from
estimated amounts. Due to the inherent uncertainties and the limited nature of
reservoir data, estimates of proved reserves are subject to potentially
substantial changes, either positively or negatively, as additional
information becomes available and contractual and economic conditions change.
Marathon adheres to Statement of Financial Accounting Standard ("SFAS") No.
19 for recognizing any impairment of capitalized costs relating to unproved
property investments. Generally, the greatest portion of these costs relate to
the acquisition of leasehold interests. The costs incurred are capitalized and
periodically evaluated as to recoverability, based on changes brought about by
general economic factors and potential shifts in the business strategy
employed by management. Marathon considers a combination of time and geologic
factors to evaluate the need for impairment of these capitalized costs.
Contingent Liabilities
Marathon accrues liabilities for income and other tax deficiencies in
accordance with SFAS No. 5. Such contingent obligations are assessed regularly
by Marathon's in-house tax legal counsel and advisers. In certain
circumstances, outside legal counsel is utilized. Each potential issue is
assessed individually, although accrued liabilities are aggregated and
recorded by jurisdiction and by type of tax. Although it is difficult to
predict with any degree of certainty the ultimate outcome of examinations of
open tax years, management believes that the recorded amounts are reasonable.
Marathon accrues its environmental remediation liabilities in accordance
with American Institute of Certified Public Accountants ("AICPA") Statement of
Position 96-1. Liabilities for litigation claims and settlements are accrued
in accordance with SFAS No. 5. Such contingent obligations are assessed
regularly by Marathon's in-house legal counsel. In certain circumstances,
outside legal counsel is utilized. Both environmental remediation liabilities
and liabilities for litigation claims and settlements are recognized based on
the likelihood of a third party having a viable claim against Marathon's
assets. Each potential liability is assessed individually. For additional
information on environmental liabilities, see Note 3 to the Financial
Statements.
Employee Related Benefits
Accounting for pensions and other postretirement benefits involves several
assumptions relating to expected rates of return on plan assets, determination
of discount rates for remeasuring plan obligations, determination of inflation
rates regarding compensation levels and health care cost projections. Marathon
develops its demographics and utilizes the work of actuaries to assist with
the measurement of employee related obligations. The assumptions used vary
from year-to-year, which will affect future results of operations. Any
differences among these assumptions and Marathon's actual return on assets,
financial market-based discount rates, and the level of cost sharing
provisions will also impact future results of operations.
31
Management's Discussion and Analysis of Income and Operations
Revenues and Other Income for each of the last three years are summarized
in the following table:
(Dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Exploration & production ("E&P").................... $ 4,580 $ 4,687 $ 3,104
Refining, marketing & transportation ("RM&T")(a).... 27,356 28,849 20,076
Other energy related businesses(b).................. 1,915 1,691 835
------- ------- -------
Revenues and other income of reportable segments.. 33,851 35,227 24,015
Revenues and other income not allocated to segments:
Loss related to sale of certain Canadian assets.... (221) - -
Joint venture formation charges(c)................. - (931) -
Gain (loss) on ownership change in MAP............. (6) 12 17
Net gains (losses) on certain asset sales.......... - 124 (36)
Gain on offshore lease resolution with U.S.
Government........................................ 59 - -
Elimination of intersegment revenues................ (587) (573) (289)
Elimination of sales to United States Steel......... (30) (60) (41)
------- ------- -------
Total revenues and other income................... $33,066 $33,799 $23,666
======= ======= =======
Items included in both revenues and costs and expenses, resulting in no
effect on income:
Consumer excise taxes on petroleum products and
merchandise........................................ $ 4,404 $ 4,344 $ 3,973
Matching crude oil and refined product buy/sell
transactions settled in cash:
E&P............................................... $ 454 $ 643 $ 732
RM&T.............................................. 3,797 3,811 2,472
------- ------- -------
Total buy/sell transactions...................... $ 4,251 $ 4,454 $ 3,204
- --------------------------------------------------------------------------------
(a) Amounts include 100 percent of MAP.
(b) Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(c) Represents a charge related to the joint venture formation between
Marathon and Kinder Morgan Energy Partners, L.P.
E&P segment revenues decreased by $107 million in 2001 from 2000 following
an increase of $1,583 million in 2000 from 1999. The decrease in 2001 was
primarily due to lower domestic liquid hydrocarbon production and prices,
partially offset by higher domestic natural gas prices and production, and
gains from derivative activities. 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.
RM&T segment revenues decreased by $1,493 million in 2001 from 2000
following an increase of $8,773 million in 2000 from 1999. The decrease in
2001 primarily reflected lower refined product prices. The increase in 2000
primarily reflected higher refined product prices and increased refined
product sales volumes.
Other energy related businesses segment revenues increased by $224 million
in 2001 from 2000 following an increase of $856 million in 2000 from 1999. The
increase in 2001 reflected higher natural gas prices and crude oil resale
activity, partially offset by lower crude oil prices and natural gas resale
activity. The increase in 2000 reflected higher natural gas and crude oil
resale activity accompanied by higher crude oil and natural gas prices.
For additional discussion of revenues, see Note 10 to the Financial
Statements.
32
Income from operations for each of the last three years is summarized in
the following table:
(Dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
E&P
Domestic............................................. $1,124 $1,111 $ 494
International........................................ 297 420 124
------ ------ ------
Income of E&P reportable segment..................... 1,421 1,531 618
RM&T(a) 1,914 1,273 611
Other energy related businesses........................ 60 42 61
------ ------ ------
Income for reportable segments....................... 3,395 2,846 1,290
Items not allocated to reportable segments:
Administrative expenses............................... (162) (136) (108)
Gain on offshore lease resolution with U.S.
Government........................................... 59 - -
Gain/(loss) on disposal of assets(b).................. (221) 124 (36)
Charge on formation of MKM Partners L.P. JV(c)........ - (931) -
Impairment of oil and gas properties, and assets held
for sale(d).......................................... - (197) (16)
Gain (loss) on ownership change in MAP................ (6) 12 17
IMV reserve adjustment(e)............................. (72) - 551
Reorganization charges including pension settlement
(loss)/gain & benefit accruals(f).................... (14) (70) 15
SG&A costs applicable to Steel Stock.................. (25) (18) (12)
------ ------ ------
Total income from operations........................ $2,954 $1,630 $1,701
- -------------------------------------------------------------------------------
(a) Amounts include 100 percent of MAP.
(b) In 2001, represents a loss on the sale of certain Canadian assets. 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, and Carnegie Natural Gas Company
and affiliated subsidiaries, and a gain on certain Egyptian properties.
(c) Represents a charge related to the joint venture formation between
Marathon and Kinder Morgan Energy Partners, L.P.
(d) 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.
(e) 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 19 to the Financial Statements.
(f) Represents reorganization charges in 2001 and 2000 and pension settlement
gains/(losses) and various benefit accruals resulting from retirement plan
settlements and voluntary early retirement programs in 2000 and 1999. 2001
reorganization charges include costs related to the Separation from United
States Steel.
33
Income for reportable segments increased by $549 million in 2001 from 2000,
mainly due to a higher refining and wholesale marketing margin. Income for
reportable segments increased by $1,556 in 2000 from 1999, mainly due to
higher worldwide liquid hydrocarbon and natural gas prices, and higher refined
product margins, partially offset by decreased natural gas volumes.
Average Volumes and Selling Prices
2001 2000 1999
- ------------------------------------------------------------------------------
(thousands of barrels per day)
Net liquids production(a) - U.S. 127 131 145
- International(b) 73 65 62
------- ------- -------
- Total consolidated 200 196 207
- Equity investees(c) 9 11 1
------- ------- -------
- Worldwide 209 207 208
(millions of cubic feet per day)
Net natural gas production - U.S. 793 731 755
- International - equity 441 470 489
- International - other(d) 8 11 16
------- ------- -------
- Total consolidated 1,242 1,212 1,260
- Equity investee(e) 31 29 36
------- ------- -------
- Worldwide 1,273 1,241 1,296
- ------------------------------------------------------------------------------
(dollars per barrel)
Liquid hydrocarbons(a)(f) - U.S. $ 20.62 $ 25.55 $ 16.01
- International 23.26 26.54 16.90
(dollars per mcf)
Natural gas(f) - U.S. $ 3.69 $ 3.49 $ 2.07
- International - equity 2.97 2.76 1.90
(thousands of barrels per day)
Refined products sold(g) 1,304 1,306 1,251
Matching buy/sell volumes included in above 45 52 45
- ------------------------------------------------------------------------------
(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 MKM Partners L.P. ("MKM") and
CLAM Petroleum B.V. ("CLAM") for 2001 and Sakhalin Energy Investment Company
Ltd. ("Sakhalin Energy") and 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
gas purchased for injection and subsequent resale.
(g) Refined products sold and matching buy/sell volumes include 100 percent of
MAP.
Domestic E&P income increased by $13 million in 2001 from 2000 following an
increase of $617 million in 2000 from 1999. The increase in 2001 was primarily
due to gains from derivative activities and higher natural gas volumes and
prices, partially offset by lower liquid hydrocarbon prices.
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 losses from
derivative activities.
International E&P income decreased by $123 million in 2001 from 2000
following an increase of $296 million in 2000 from 1999. The decrease in 2001
was primarily due to lower liquid hydrocarbon prices, increased depreciation
expense due primarily to 2000 reserve write downs and lower natural gas
volumes, partially offset by increased natural gas prices, lower dry well
expense, and lower foreign royalty and geophysical contract expenditures.
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.
34
RM&T segment income increased by $641 million in 2001 from 2000 following
an increase of $662 million in 2000 from 1999. The increase in 2001 was
primarily due to a higher refining and wholesale marketing gross margin
partially offset by lower SSA gasoline and distillate sales volumes and
increased refining and wholesale marketing transportation expense.
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.
Other energy related businesses segment income increased by $18 million in
2001 following a decrease of $19 million in 2000 from 1999. The increase in
2001 was primarily a result of higher crude oil purchase and resale activity
accompanied by increased margins and losses from derivative activities
recorded in 2000. The decrease in 2000 was primarily due to losses from
derivative activities and the reversal of pipeline abandonment accruals
recorded in 1999.
Items not allocated to reportable segments:
IMV reserve adjustment - When Marathon was acquired in March 1982, crude
oil and refined product prices were at historically high levels. In applying
the purchase method of accounting, 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, Marathon 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, Marathon
established a new LIFO cost basis for those inventories. The acquisition cost
of these inventories lowered the overall average cost of the combined RM&T
inventories. As a result, the price threshold at which an IMV reserve will be
recorded was also lowered.
In 2001, the IMV reserve adjustment resulted in a charge to income from
operations of $72 million. No adjustment was required in 2000. The unfavorable
2001 IMV reserve adjustment was primarily due to the significant decrease in
refined product prices, which occurred during the fourth quarter of 2001.
Net interest and other financial costs decreased by $63 million in 2001
from 2000, following a decrease of $52 million in 2000 from 1999. The decrease
in 2001 was primarily due to lower average debt levels and increased
capitalized interest on RM&T projects. The decrease in 2000 was primarily due
to lower average debt levels and increased interest income. For additional
details, see Note 7 to the Financial Statements.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased by $206 million in 2001 from 2000,
following an increase of $51 million in 2000 from 1999. The increase in 2001
and 2000 was primarily due to higher MAP income.
The provision for income taxes was $759 million in 2001, compared with $476
in 2000 and $320 in 1999. The higher 2001 provision is primarily a result of
increased income from operations. The 2000 provision included a one-time,
noncash deferred tax charge of $235 million as a result of the change in the
amount, timing and nature of expected future foreign source income due to the
exchange of Marathon's interest in Sakhalin Energy for other oil and gas
producing interests. For additional discussion of income taxes, see Note 18 to
the Financial Statements.
Discontinued operations in 2001, represents the net income or loss
attributed to Steel Stock, adjusted for certain corporate administrative
expenses and interest expense (net of income tax effects). The loss on
disposition of United States Steel Corporation represents the excess of the
net investment in United States Steel over the aggregate fair market value of
the outstanding shares of the Steel Stock at the time of the Separation. For
additional discussion of discontinued operations, see Note 2 to the Financial
Statements.
Net income decreased by $254 million in 2001 from 2000, following a
decrease of $287 million in 2000 from 1999, primarily reflecting the factors
discussed above.
35
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets decreased $574 million from year-end 2000, primarily due to
a decrease in receivables and assets held for sale, partially offset by an
increase in cash and cash equivalents. The decrease in receivables was mainly
due to lower year-end commodity prices and the decrease in assets held for
sale was primarily the result of the contribution of the Yates field assets to
the MKM Partners L.P. joint venture. The increase in cash and cash equivalents
primarily resulted from cash balances which were attributed in part to United
States Steel in prior years.
Current liabilities decreased $544 million from year-end 2000, primarily
due to a decrease in accounts payable, including accounts payable to United
States Steel, partially offset by an increase in redeemable securities. The
decrease in accounts payable was due to lower year-end commodity prices. The
decrease in accounts payable to United States Steel resulted from the
settlement of 2001 income taxes with United States Steel upon Separation.
Under Marathon's previous tax allocation policy, income tax settlements with
United States Steel generally occurred in March of the following year.
Obligations to repay preferred securities reflect securities that became
redeemable or that were converted to a right to receive cash upon Separation.
These obligations were paid in January 2002.
Investments and long-term receivables increased $714 million from year-end
2000, primarily due to the contribution of assets to MKM Partners L.P. and
Pilot Travel Centers LLC joint ventures.
Net investment in United States Steel was eliminated with the disposition
of the steel business.
Long-term receivables from United States Steel of $551 million represents
long-term debt for which United States Steel has assumed responsibility for
repayment.
Net property, plant and equipment increased $203 million from year-end
2000, primarily due to the acquisition of Pennaco Energy, Inc. ("Pennaco"),
completion of the coker unit at the Garyville refinery and implementation of
an integrated software system, partially offset by the sale of certain
Canadian assets and the contribution of travel centers to Pilot Travel Centers
LLC. Net property, plant and equipment for each of the last three years is
summarized in the following table:
(Dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
E&P
Domestic............................................. $ 2,851 $ 2,229 $ 3,435
International........................................ 2,472 2,924 2,987
------- ------- --------
Total E&P........................................... 5,323 5,153 6,422
RM&T(a)............................................... 4,010 4,035 3,712
Other(b).............................................. 245 187 159
------- ------- --------
Total.............................................. $ 9,578 $ 9,375 $ 10,293
- --------------------------------------------------------------------------------
(a) Amounts include 100 percent of MAP.
(b) Includes other energy related businesses and other miscellaneous corporate
net property, plant and equipment.
Long-term debt at December 31, 2001 was $3,432 million, an increase of
$1,495 million from year-end 2000. The increase in debt was mainly due to the
additional net debt and other financings retained by Marathon upon Separation.
See Notes 2 and 13 to the Financial Statements.
Preferred stock of subsidiary of $184 million was redeemed in 2001. See
Note 23 to the Financial Statements.
Stockholders' equity decreased $1,824 million from year-end 2000, primarily
reflecting the distribution of Steel Stock to holders of the former USX-U.S.
Steel Group common stock.
Net cash provided from operating activities (for continuing operations)
totaled $2,919 million in 2001, compared with $3,146 million in 2000 and
$2,008 million in 1999. The decrease in 2001 mainly reflected unfavorable
working capital changes partially offset by the favorable effects of improved
net income (excluding noncash items).
36
Net cash provided from operating activities (for discontinued operations)
totaled $717 million in 2001, compared with net cash used in operating
activities of $615 million in 2000 and $72 million in 1999. This activity is
related to the business of United States Steel.
Net cash used in investing activities (for continuing operations) totaled
$1,999 million in 2001, compared with $923 million in 2000 and $1,174 million
in 1999. The increase in 2001 primarily resulted from the acquisition of
Pennaco, decreased asset disposals and increased capital expenditures.
Proceeds from the disposal of assets in 2001 of $296 million were primarily
from the sale of certain Canadian assets, SSA stores, and various domestic
producing properties. Proceeds in 2000 were mainly from the Sakhalin exchange,
the disposition of Marathon's interest in the Angus/Stellaria development in
the Gulf of Mexico, the sale of non-core SSA stores and other domestic
production properties. Proceeds in 1999 were mainly from the sale of Scurlock
Permian LLC, over 150 non-strategic domestic and international production
properties and Carnegie Natural Gas Company and affiliated subsidiaries.
Capital expenditures for each of the last three years are summarized in the
following table:
(Dollars in
millions) 2001 2000 1999
- --------------------------------------
E&P
Domestic(a) $ 537 $ 516 $ 356
International 400 226 388
------- ------- -------
Total E&P 937 742 744
RM&T(b) 591 656 612
Other(c) 111 27 22
------- ------- -------
Total $ 1,639 $ 1,425 $ 1,378
- --------------------------------------
(a) Amounts exclude the acquisition of Pennaco.
(b) Amounts include 100 percent of MAP.
(c) Includes other energy related business and other miscellaneous corporate
capital expenditures.
During 2001, Domestic E&P capital spending mainly included exploration and
development drilling in the Gulf of Mexico, and natural gas developments in
gas basins throughout the western United States. International E&P projects
included projects in the North Sea, primarily in the newly acquired Foinaven
field, natural gas developments in Canada and exploration drilling in Nova
Scotia and Angola. RM&T spending by MAP primarily consisted of refinery
modifications, including completion of the coker project at the Garyville
refinery, and upgrades and expansions of retail marketing outlets. Other
spending primarily consisted of the implementation of an integrated software
system.
Capital expenditures, excluding the portion of exploration expenditures
expected to be expensed, are estimated to be approximately $1.7 billion in
2002, a slight increase over 2001 levels. Domestic E&P spending for 2002 will
be primarily focused on onshore natural gas exploration and development and
offshore deepwater Gulf exploration. International E&P will primarily continue
oil developments in the U.K. North Sea and natural gas developments in Canada
and exploration in Angola. RM&T spending by MAP will primarily consist of
refinery improvements, including the Catlettsburg refinery repositioning
project, upgrades and expansions of retail marketing outlets and
transportation assets, including construction of the Cardinal Products Pipe
Line. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Outlook" on page 42, for additional discussion on the
Catlettsburg refinery repositioning project. Other Marathon spending will
include funds for natural gas and crude oil marketing and transportation
projects as well as various other corporate capital expenditures. An
additional $1.1 billion is anticipated for upstream acquisition expenditures,
including the recently completed acquisition of interests in Equatorial
Guinea.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at year-end 2001 were $297 million, compared with $457
million at year-end 2000. For further discussion on commitments, see
"Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity - Liquidity and Capital Resources" on page 38.
Costs incurred for the periods ended December 31, 2001, 2000, and 1999
relating to the development of proved undeveloped oil and gas reserves,
including Marathon's proportionate share of equity investee's costs incurred,
were $365 million, $316 million, and $333 million, respectively. As of
December 31, 2001, estimated future development costs relating to the
development of proved undeveloped oil and gas reserves for the years 2002
through 2004 are projected to be $308 million, $155 million, and $40 million,
respectively.
Net cash used in investing activities (for discontinued operations) totaled
$245 million in 2001, compared with $270 million in 2000 and $294 million in
1999. This activity related to the business of United States Steel.
37
Net cash used in financing activities totaled $1,290 million in 2001,
compared with $911 million in 2000 and $480 million in 1999. Marathon manages
its financing activities on a centralized, consolidated basis. Generally,
financing transactions were not separately associated with either continuing
or discontinued operations but rather were attributed to both businesses. The
cash used in 2001 primarily reflects distributions to minority shareholder of
MAP, dividends paid and the redemption of the 8.75% Cumulative Monthly Income
Preferred Shares ("MIPS"). The cash used in 2000 primarily reflects
distributions to minority shareholder of MAP, dividends paid and a stock
repurchase program. The cash used in 1999 reflects distributions to minority
shareholder of MAP and dividends paid, offset by other net borrowings.
Debt Rating
Marathon's senior debt is currently rated investment grade by Standard and
Poor's Corporation, Moody's Investor Services, Inc. and Fitch Ratings with
ratings of BBB+, Baa1, and BBB+, respectively.
Derivative Instruments
See "Quantitative and Qualitative Disclosures About Market Risk" on page
45, for a discussion of derivative instruments and associated market risk.
Liquidity and Capital Resources
Marathon's main sources of liquidity and capital resources are internally
generated cash flow from operations, committed and uncommitted credit
facilities, and access to both the debt and equity capital markets. Marathon's
ability to access the debt capital market is supported by its investment grade
credit ratings. Because of the liquidity and capital resource alternatives
available to Marathon, including internally generated cash flow, Marathon's
management believes that its short-term and long-term liquidity is adequate to
fund operations, including its capital spending program, repayment of debt
maturities for the years 2002, 2003, and 2004, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in
Note 26 to the Financial Statements).
Marathon has a committed $1,354 million long-term revolving credit facility
and a committed $451 million 364-day revolving credit facility. At December
31, 2001, $475 million had been drawn against these facilities. Additionally,
at December 31, 2001, Marathon had an aggregate of $550 million in three other
short-term credit facilities, of which no amounts were drawn. MAP currently
has a committed $350 million long-term revolving credit facility and a
committed $100 million 364-day revolving credit facility. As of December 31,
2001, MAP did not have any borrowings against these facilities or under its
$190 million revolving credit agreement with Ashland Inc.
Certain securities became redeemable or were converted to a right to
receive cash upon the Separation of United States Steel. In early January
2002, Marathon paid $185 million to retire the 6.75% Convertible Quarterly
Income Preferred Securities and $110 million to retire the 6.50% Cumulative
Convertible Preferred Stock.
In early March 2002, Marathon issued notes of $450 million due 2012 and
$550 million due 2032, bearing interest at 6.125 percent and 6.8 percent,
respectively. Marathon used the net proceeds to repay amounts borrowed to fund
the purchase price and associated costs of the January 2002 acquisition of
interests in oil and gas properties and related assets in Equatorial Guinea,
West Africa. Marathon initially funded this acquisition through a combination
of borrowings under long-term and short-term revolving credit facilities,
borrowings under other short-term credit facilities and cash on hand.
Marathon is not dependent on off-balance sheet arrangements to meet its
liquidity and capital resource needs. Marathon has used and may use in the
future off-balance sheet arrangements to fund specific projects. The largest
category of off-balance sheet arrangements is operating lease obligations, for
which contractual cash obligations totaled $422 million at December 31, 2001.
Of that total, $160 million related to three agreements which covered two LNG
tankers and Marathon's headquarters building, respectively. Under those three
arrangements, Marathon does not have an ownership interest in the entities
that hold the leased assets nor does Marathon hold title to the respective
leased assets. These entities were established by financial institutions for
the purpose of leasing specific assets to Marathon. Such entities are limited
in the type of business activity that can be transacted.
38
The table below provides aggregated information on Marathon's obligations
and commitments to make future payments under existing contracts as of
December 31, 2001:
Summary of Contractual Cash Obligations and Commercial Commitments
2003- 2005-
(Dollars in millions) Total 2002 2004 2006 Later Years
- --------------------------------------------------------------------------------
Contractual cash obligations (excluding
amounts assumed by United States Steel)
Short and long-term debt................. $3,093 210 529 863 1,491
Capital lease obligations................ 10 1 2 2 5
Off-balance sheet arrangements:
Operating lease obligations............. 403 86 117 135 65
Operating lease obligations under
sublease............................... 16 5 6 3 2
Unconditional purchase obligations...... 70 5 10 10 45
Commercial commitments (excluding amounts
related to United States Steel)
Throughput and deficiency agreements..... 112 14 16 20 62
Guarantees of the indebtedness of
others.................................. 35 -- -- -- 35
Contract commitments to acquire property,
plant and equipment..................... 297 184 90 23 --
------ --- --- ----- -----
Total excluding amounts related to United
States Steel.............................. 4,036 505 770 1,056 1,705
Contractual cash obligations assumed by
United States Steel
Long-term debt........................... 470 -- -- -- 470
Sale-leaseback financing................. 128 11 22 22 73
Off-balance sheet arrangements:
Operating lease obligations............. 19 7 6 6 --
Operating lease obligations under
sublease............................... 96 18 38 10 30
Commercial commitments related to United
States Steel
Guarantees of indebtedness of others..... 28 5 -- -- 23
------ --- --- ----- -----
Total amounts related to United States
Steel..................................... 741 41 66 38 596
------ --- --- ----- -----
Total contractual obligations and
commercial commitments.................... $4,777 546 836 1,094 2,301
- --------------------------------------------------------------------------------
Marathon remains primarily obligated for certain debt and other financings
for which United States Steel has assumed responsibility for repayment under
the terms of the Separation. In addition, Marathon remains contingently liable
for certain operating lease obligations of United States Steel. Marathon has
also guaranteed certain obligations related to the business of United States
Steel.
United States Steel is the sole general partner of Clairton 1314B
Partnership, L.P., which owns certain coke-making facilities formerly owned by
United States Steel. Marathon has guaranteed to the limited partners all
obligations of United States Steel under the partnership documents. United
States Steel may dissolve the partnership under certain circumstances,
including if it is required to fund accumulated cash shortfalls of the
partnership in excess of $150 million. In addition to the normal commitments
of a general partner, United States Steel has indemnified the limited partners
for certain income tax exposures. As of December 31, 2001, United States Steel
had no unpaid outstanding obligations to the limited partners and,
accordingly, no amounts were reflected in the above table for this guarantee.
Excluded from the table is indebtedness of equity investees which Marathon
does not support through guarantees or otherwise. If Marathon were obligated
to share in this debt on a pro rata basis, its share would have been
approximately $353 million as of December 31, 2001. In the event of default by
any of these equity investees, Marathon has no obligation to support the debt;
however, any such default could adversely impact our financial investment in
the respective equity investee.
The table excludes commitments to transport crude oil, natural gas and
refined products that were not negotiated as part of arranging the financing
of the transportation facilities under contract, which totaled $780 million at
December 31, 2001. The table also excludes contractual obligations under long-
term agreements to purchase crude oil, refinery feedstock and refined products
used in day-to-day operations to generate revenues.
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 adversely affected. Factors that 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 global financial climate, and, in particular,
with respect to borrowings, the levels of Marathon's outstanding debt and
credit ratings by rating agencies.
39
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies
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, power business or the marine
transportation of crude oil and refined products.
Marathon's environmental expenditures for each of the last three years
were(a):
(Dollars in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Capital...................................................... $ 67 $ 73 $ 46
Compliance
Operating & maintenance..................................... 155 139 117
Remediation(b).............................................. 34 30 25
----- ----- -----
Total..................................................... $ 256 $ 242 $ 188
- --------------------------------------------------------------------------------
(a) Amounts are determined based on American Petroleum Institute survey
guidelines and include 100 percent of MAP.
(b) These amounts include spending charged against remediation reserves, net
of recoveries, where permissible, but do not include noncash provisions
recorded for environmental remediation.
Marathon's environmental capital expenditures accounted for four percent of
total capital expenditures in 2001, five percent in 2000, and three percent in
1999.
During 1999 through 2001, compliance expenditures represented one percent
of Marathon's total operating costs. Remediation spending during this period
was primarily related to retail marketing outlets which incur ongoing clean-up
costs for soil and groundwater contamination associated with underground
storage tanks and piping.
Marathon has been notified that it is a potentially responsible party
("PRP") at 13 waste sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as of December 31, 2001. In
addition, there are three sites where Marathon has received information
requests or other indications that Marathon may be a PRP under CERCLA but
where sufficient information is not presently available to confirm the
existence of liability.
There are also 114 additional sites, excluding retail marketing outlets,
related to Marathon where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation through discussions or litigation. Of these sites, 13 were
associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation.
At many of these sites, Marathon is one of a number of parties involved and
the total cost of remediation, as well as Marathon's share thereof, is
frequently dependent upon the outcome of investigations and remedial studies.
Marathon 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
Financial Statements.
New or expanded environmental requirements, which could increase Marathon's
environmental costs, may arise in the future. Marathon 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, Marathon does not anticipate that environmental compliance
expenditures (including operating and maintenance and remediation) will
materially increase in 2002. Marathon's environmental capital expenditures are
expected to be approximately $130 million in 2002. Predictions beyond 2002 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
40
projects, Marathon anticipates that environmental capital expenditures will be
approximately $157 million in 2003; 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.
New Tier II gasoline rules, which were finalized by the EPA in February
2000, and the diesel fuel rules, which were finalized in January 2001, require
substantially reduced sulfur levels. The combined capital costs to achieve
compliance with the gasoline and diesel regulations could amount to
approximately $700 million between 2002 and 2006. This is a forward-looking
statement. 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, further
refinement of preliminary engineering studies and project scopes, and
unforeseen hazards.
In May 2001, Marathon and MAP settled, in a consent decree, EPA allegations
that the Robinson refinery did not qualify for an exemption under the National
Emission Standards for Benzene Waste Operations pursuant to the Clean Air Act
("CAA"). The government had alleged in a federal court lawsuit that the
refinery's Total Annual Benzene releases exceeded the limitation of 10
megagrams per year, and as a result, the refinery was in violation of the
benzene waste emission control, record keeping, and reporting requirements.
The consent decree was approved by the court on July 26, 2001 and requires
Marathon and MAP to pay a combined $1.6 million civil penalty, perform
$125,000 in supplemental environmental projects, as part of an enforcement
action for alleged CAA violations, and install various controls and other
improvements.
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and
Robinson refineries, covering compliance with the CAA, the Clean Water Act,
reporting obligations under the Emergency Planning and Community Right to Know
Act, CERCLA and the handling of process waste. The EPA served a number of
Notices of Violation ("NOV") and Findings of Violation as a result of these
inspections, but these allegations were resolved as part of the New Source
Review consent decree which MAP agreed to on May 11, 2001. MAP's settlement
with the EPA includes all of MAP's refineries and commits MAP to specific
control technologies and implementation schedules for environmental
expenditures and improvements to MAP's refineries over approximately an eight
year period. The current estimated cost to complete these programs is
approximately $300 million in expenditures over the next seven years. MAP is
also committed to the performance of about $8 million in supplemental
environmental projects and has paid an aggregate civil penalty in 2001 of $3.8
million, as part of this settlement of an enforcement action for alleged CAA
violations. MAP believes that this settlement will provide MAP with increased
permitting and operating flexibility while achieving significant emission
reductions. The court approved this consent decree on August 28, 2001.
In 2000, the Kentucky Natural Resources and Environmental Cabinet sent
Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a
pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this
NOV in the form of an Agreed-to Administrative Order which was finalized and
entered in January 2002 and required payment of a $170,000 penalty and
reimbursement of past response costs up to $131,000.
Marathon 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
26 to the 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 Marathon. However, management believes that Marathon
will remain a viable and competitive enterprise even though it is possible
that these contingencies could be resolved unfavorably to Marathon. See
"Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity" on page 36.
41
Outlook
The outlook regarding Marathon'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 Marathon'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 2002, worldwide production is expected to average 430,000 barrels of oil
equivalent per day, split evenly between liquid hydrocarbons and natural gas,
including Marathon's proportionate share of equity investee's production and
future acquisitions.
On January 3, 2002, Marathon completed its acquisition of CMS Energy's
interests in Equatorial Guinea. For a total cash consideration of $993
million, excluding working capital adjustments, Marathon acquired:
. a 52.4 percent interest in, and operatorship of, the offshore Alba
Block, which contains the currently producing Alba gas field as well as
undeveloped oil and gas discoveries and several possible exploration
prospects;
. a 37.6 percent interest in the adjacent offshore Block D;
. a 52.4 percent interest in an onshore condensate separation facility;
. a 45 percent interest in a joint venture onshore methanol production
plant;
. a 43.2 percent interest in an onshore liquefied petroleum gas processing
plant.
In 2002, Marathon plans to drill, or complete drilling operations on three
or four deepwater wells in the Gulf of Mexico, including the appraisal of the
Ozona Deep discovery.
Other major upstream projects, which are currently underway or under
evaluation and are expected to improve future income streams, include:
. Norway, where Marathon has completed the acquisition of various
interests in five licenses in the Norwegian sector of the North Sea;
. Alaska, where Marathon recently had a natural gas discovery on the
Ninilchik Unit on the Kenai Peninsula. Additional drilling is planned in
2002.
. Angola, where Marathon expects to participate in the drilling of up to
three exploration wells during 2002.
On February 28, 2002, Marathon announced proposed plans for a major
liquefied natural gas ("LNG") re-gasification and power generation complex
near Tijuana in the Mexican State of Baja California. The proposed complex
would consist of a LNG marine terminal, an off-loading terminal, onshore LNG
re-gasification facilities, and pipeline infrastructure necessary to transport
the natural gas. In addition, a 400 megawatt natural gas-fired power
generation plant would be constructed on the site. The complex would supply
natural gas and electricity for local use as well as for export to Southern
California. Completion and potential start-up is projected for 2005.
On February 28, 2002, Marathon announced plans to lead an initiative for a
new North Sea natural gas pipeline designed to provide additional gas for the
U.K. market. The proposed 675 kilometer dry natural gas pipeline would connect
the Norwegian Heimdal area of the North Sea to Bacton, on the southeast coast
of the U.K. The pipeline would pass through the Brae complex and pass adjacent
to other large gas processing/transportation facilities in the U.K. North Sea.
The pipeline would terminate at or near the existing Bacton Terminal. The
pipeline would allow gas to be aggregated from numerous U.K. and Norwegian
North Sea producers for transportation to Bacton where it would then be sold
to commercial, industrial and residential customers. Marathon estimates that
the pipeline could begin operations in 2005.
The above discussion includes forward-looking statements with respect to
the timing and levels of Marathon's worldwide liquid hydrocarbon and natural
gas production, and the exploration drilling program. Some factors that could
potentially affect worldwide liquid hydrocarbon and natural gas production and
the exploration drilling program include acts of war or terrorist acts and the
governmental or military response thereto, pricing, supply and demand for
petroleum products, amount of capital available for exploration and
development, occurrence of
42
acquisitions/dispositions of oil and gas properties, regulatory constraints,
timing of commencing production from new wells, drilling rig availability and
other geological, operating and economic considerations. These factors (among
others) could cause actual results to differ materially from those set forth
in the forward-looking statements. Some factors that could affect the planned
construction of the LNG re-gasification, power generation and related
facilities, as well as the North Sea pipeline transportation and related
facilities, include, but are not limited to, unforeseen difficulty in the
negotiation of definitive agreements among project participants,
identification of additional participants to reach optimum levels of
participation, inability or delay in obtaining necessary government and third
party approvals, arranging sufficient project financing, unanticipated changes
in market demand or supply, competition with similar projects, and
environmental and permitting issues. Additionally, the LNG project could be
impacted by the availability or construction of sufficient LNG vessels.
Marathon's downstream income is largely dependent upon the refining and
wholesale marketing margin for refined products, the retail gross margin for
gasoline and distillates, and the gross margin on retail merchandise sales.
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 including secondary transportation. 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.
The gross margin on retail merchandise sales tends to be less volatile than
the retail gasoline and distillate margin. Factors affecting the gross margin
on retail merchandise sales include consumer demand for merchandise items and
the level of economic activity in the marketing area.
At its Catlettsburg, Kentucky refinery, MAP has initiated a multi-year
integrated investment program to upgrade product yield realizations and reduce
fixed and variable manufacturing expenses. This program involves the
expansion, conversion and retirement of certain refinery processing units
which, in addition to improving profitability, will reduce the refinery's
total gasoline pool sulfur below 30 ppm, thereby eliminating the need for
additional clean fuels program investments at the refinery. The project is
expected to be completed in 2004.
MAP is working to improve its logistics network and Marathon Ashland Pipe
Line LLC has been designated operator of the Centennial Pipeline, owned
jointly by Panhandle Eastern Pipe Line Company, a subsidiary of CMS Energy
Corporation, MAP, and TE Products Pipe Line Company, Limited Partnership. The
new pipeline, which will connect the Gulf Coast refiners with the Midwest
market, will have the capacity to transport approximately 210,000 barrels per
day of refined petroleum products and is expected to be operational in the
first quarter of 2002.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common
carrier pipeline company and the pipeline will be an interstate common carrier
pipeline. The pipeline is currently known as Cardinal Products Pipe Line and
is expected to initially move about 50,000 barrels per day of refined
petroleum into the central Ohio region. As of December 2001, ORPL has secured
all of the rights-of-way required to build the pipeline. Applications for the
remaining construction permits have been filed. Construction is currently
planned for summer 2002 pending receipt of permits, with start-up of the
pipeline to follow in first half 2003.
The above discussion includes forward-looking statements with respect to
the Catlettsburg refinery and the Centennial Pipeline and Cardinal Products
Pipe Line systems. Some factors which could potentially cause the actual
results from the Catlettsburg investment program to differ materially from
current expectations include the price of petroleum products, levels of cash
flows from operations, obtaining the necessary construction and environmental
permits, unforeseen hazards such as weather conditions and regulatory approval
constraints. The primary factor, which could impact the Centennial Pipeline
system, is unforeseen hazards. Some factors, which could impact the Cardinal
Products Pipe Line, include obtaining the necessary permits and completion of
construction. These factors (among others) could cause actual results to
differ materially from those set forth in the forward-looking statements.
43
Accounting Standards
Adopted in 2001 - Effective January 1, 2001, Marathon 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 Statement, as amended, requires recognition of all derivatives at fair
value as either assets or liabilities. For additional information, see Note 4
of the Financial Statements.
To be adopted in future periods - In June 2001, the Financial Accounting
Standards Board (FASB) issued Statements of Financial Accounting Standards No.
141 "Business Combinations" (SFAS No. 141), No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142) and No. 143 "Accounting for Asset Retirement
Obligations" (SFAS No. 143).
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method, eliminating the use of
the pooling method. This Statement also establishes for all business
combinations made after June 30, 2001, specific criteria for the allocation of
the purchase price to intangible assets separately from goodwill. SFAS No. 141
also requires that the excess of fair value of acquired assets over cost in a
business combination (negative goodwill) be recognized immediately as an
extraordinary gain, rather than deferred and amortized. Marathon will account
for the acquisition of certain interests from CMS Energy in January 2002 under
SFAS No. 141.
SFAS No. 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS No. 142
are: 1) goodwill and intangible assets with indefinite lives will no longer be
amortized; 2) goodwill and intangible assets with indefinite lives must be
tested for impairment at least annually; and 3) the amortization period for
intangible assets with finite lives will no longer be limited to forty years.
Marathon will adopt SFAS No. 142 effective January 1, 2002, as required. At
that time, the annual amortization of existing goodwill of $3 million, net of
tax, will cease on the unamortized portion associated with previous
acquisitions and certain investments accounted for under the equity method. A
transitional impairment test is required for existing goodwill as of the date
of adoption of this Standard, which must be completed within the first year.
Any impairment loss resulting from applying the transitional goodwill
impairment test will be reported as a change in accounting principle. Goodwill
recorded after adoption of this Standard is to be tested for impairment at
least annually and any resulting impairment is not considered part of the
change in accounting principle.
SFAS No. 143 establishes a new accounting model for the recognition and
measurement of retirement obligations associated with tangible long-lived
assets. SFAS No. 143 requires that an asset retirement cost be capitalized as
part of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. Marathon will adopt this
Statement effective January 1, 2003, as required. The transition adjustment
resulting from the adoption of SFAS No. 143 will be reported as a cumulative
effect of a change in accounting principle. At this time, Marathon cannot
reasonably estimate the effect of the adoption of this Statement on either its
financial position or results of operations.
In August 2001, the FASB approved SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement establishes a
single accounting model for long-lived assets to be disposed of by sale and
provides additional implementation guidance for assets to be held and used and
assets to be disposed of other than by sale. Marathon will adopt the Statement
prospectively effective January 1, 2002. The timing of classifying a long-
lived asset as held for sale may change as compared to previous accounting
standards.
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
Marathon 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, and refined
products. For transactions that qualify for hedge accounting under SFAS No.
133, the changes in fair value of the derivative instruments are classified
within Other Comprehensive Income, if the hedge qualifies as a Cash Flow
Hedge. The resulting deferred gains or losses are subsequently recognized in
income from operations, in the same period as the underlying physical
transaction. If the hedge position qualifies as a Fair Value Hedge, the
resulting gains or losses from the change in fair value of both the hedged
item and the related derivative, are reflected within income in that period.
Marathon also uses derivative instruments to economically hedge price risk but
designates such strategies as nonhedge. Changes in fair value for these
contracts is reflected within income in that period. 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 Marathon'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 Marathon to
material risk. The use of derivative instruments could materially affect
Marathon'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 3 to the
Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, Marathon is exposed to market risk or
price fluctuations related to the purchase, production or sale of crude oil,
natural gas and refined products. To a lesser extent, Marathon is exposed to
the risk of price fluctuations on natural gas liquids and petroleum feedstocks
used as raw materials.
Marathon'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, Marathon uses
fixed-price contracts and derivative commodity instruments to manage a minor
portion of its commodity price risk. Marathon 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
Marathon's overall risk management programs.
45
Quantitative and Qualitative Disclosures About Market Risk CONTINUED
Sensitivity analyses of the incremental effects on pretax income of
hypothetical 10 percent and 25 percent changes in commodity prices for open
derivative commodity instruments as of December 31, 2001 and December 31,
2000, are provided in the following table:(a)
(Dollars in millions)
- -------------------------------------------------------------------------------
Incremental Decrease in Pretax
Income Assuming a Hypothetical
Price Change of(a)
2001 2000
Derivative Commodity Instruments(b)(c) 10% 25% 10% 25%
- -------------------------------------------------------------------------------
Crude oil(d)............................. $ 23.4(e) $ 46.7(e) $9.1(e) $ 27.2(e)
Natural gas(d)........................... 8.6(e) 18.2(e) 20.2(e) 50.6(e)
Refined products(d)...................... 1.0(f) 3.9(f) 6.1(e) 16.5(e)
- -------------------------------------------------------------------------------
(a) Marathon 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. Effects of these offsets are not
reflected in the sensitivity analyses. Amounts reflect the estimated
incremental effect on pretax income, after deducting for minority interest.
Amounts reflect hypothetical 10% and 25% changes in closing commodity prices
for each open contract position at December 31, 2001 and December 31, 2000.
Marathon 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. Marathon 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.
Changes to the portfolio subsequent to December 31, 2001, would cause future
pretax income effects to differ from those presented in the table.
(b) The number of net open contracts varied throughout 2001, from a low of
19,040 contracts at July 18, to a high of 41,298 contracts at November 8, and
averaged 29,279 for the year. The derivative commodity instruments used and
hedging positions taken also varied throughout 2001, and will continue to
vary in the future. Because of these variations in the composition of the
portfolio over time, the number of open contracts, by itself, cannot be used
to predict future income effects.
(c) The calculation of sensitivity amounts for basis swaps assumes that the
physical and paper indices are perfectly correlated. Gains and losses on
options are based on changes in intrinsic value only.
(d) 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.
Marathon uses derivative instruments in its exploration and production
("E&P") operations to mitigate the price risk associated with equity
production of crude oil and natural gas volumes. In addition, Marathon has
sold forward a specified volume of natural gas. Marathon has used derivatives
to convert the fixed price in this contract to market prices. The underlying
physical contract matures in 2008. Marathon recorded total net pretax
derivative gains/(losses) of approximately $85 million in 2001 and $(47)
million in 2000. The amounts for 1999 were diminimus.
Marathon's refining, marketing, and transportation (RM&T) 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 RM&T
operations recorded total net pretax derivative gains/(losses), net of the 38
percent minority interest in MAP, of approximately $130 million in 2001,
$(127) million in 2000, and $13 million for 1999. Marathon's trading activity
gains/(losses) are included in the afore-mentioned amounts and totaled $3
million in 2001, $(11) million in 2000 and $5 million in 1999, respectively.
Marathon's other energy related businesses are exposed to market risk
associated with the purchase and subsequent resale of natural gas. Marathon
uses derivative instruments to mitigate the price risk on purchased volumes
and anticipated sales volumes. Marathon recorded net pretax derivative
gains/(losses) of $(29) million in 2001, $13 million in 2000 and $3 million in
1999, respectively.
Marathon 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.
46
Quantitative and Qualitative Disclosures About Market Risk CONTINUED
Marathon 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
Marathon is subject to the effects of interest rate fluctuations affecting
the fair value of certain non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10 percent
decrease in year-end 2001 and 2000 interest rates is provided in the following
table:
(Dollars in millions)
- --------------------------------------------------------------------------------
As of December 31, 2001 2000
Incremental Incremental
Increase in Increase in
Non-Derivative Financial Fair Fair Fair Fair
Instruments(a) Value(b) Value(c) Value(b) Value(c)
- --------------------------------------------------------------------------------
Financial assets:
Investments and long-term
receivables(d)................... $ 192 $ - $ 171 $ -
Financial liabilities:
Long-term debt(e)(f).............. $ 3,830 $127 $ 2,174 $ 86
Preferred stock of subsidiary(g).. - - 175 15
------- ---- ------- -----
Total liabilities................ $ 3,830 $127 $ 2,349 $ 101
- --------------------------------------------------------------------------------
(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 22 to the Financial Statements for carrying value of instruments.
(c) For financial liabilities, this assumes a 10% decrease in the weighted
average yield to maturity of Marathon's long-term debt at December 31, 2001
and December 31, 2000.
(d) For additional information, see Note 20 to the 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 13 to the Financial Statements.
(g) See Note 22 to the Financial Statements for further explanation.
At December 31, 2001 and 2000, Marathon's portfolio of long-term debt was
substantially comprised 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 $127 million increase in
the fair value of long-term debt assuming a hypothetical 10 percent decrease
in interest rates. However, Marathon's sensitivity to interest rate declines
and corresponding increases in the fair value of its debt portfolio would
unfavorably affect Marathon's results and cash flows only to the extent that
Marathon would elect 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
Marathon 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 the U.S. dollar. Marathon has used on occasion forward currency
contracts or other derivative instruments to manage this risk. At December 31,
2001, Marathon had no open forward currency contracts in place. At December
31, 2000, Marathon had open Canadian dollar forward purchase contracts with a
total carrying value of approximately $14 million. A 10 percent increase in
the December 31, 2000, Canadian dollar to U.S. dollar forward rate, would have
resulted in a charge to income of approximately $1 million.
Safe Harbor
Marathon's quantitative and qualitative disclosures about market risk
include forward-looking statements with respect to management's opinion about
risks associated with the 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 and other
feedstocks. To the extent that these assumptions prove to be inaccurate,
future outcomes with respect to Marathon's hedging programs may differ
materially from those discussed in the forward-looking statements.
47
Item 8. Financial Statements and Supplementary Data
MARATHON OIL
CORPORATION
Index to 2001 Consolidated Financial Statements and Supplementary Data
Page
----
Management's Report........................................................ F-1
Audited Consolidated Financial Statements:
Report of Independent Accountants........................................ F-1
Consolidated Statement of Income......................................... F-2
Consolidated Balance Sheet............................................... F-4
Consolidated Statement of Cash Flows..................................... F-5
Consolidated Statement of Stockholders' Equity........................... F-6
Notes to Consolidated Financial Statements............................... F-8
Selected Quarterly Financial Data.......................................... F-33
Principal Unconsolidated Investees......................................... F-33
Supplementary Information.................................................. F-34
Management's Report
The accompanying consolidated financial statements of Marathon Oil Corporation
(formerly USX Corporation) are the responsibility of and have been prepared by
Marathon Oil Corporation in conformity with accounting principles generally
accepted in the United States of America. They necessarily include some
amounts that are based on best judgments and estimates. The financial
information displayed in other sections of this report is consistent with
these financial statements.
Marathon Oil Corporation 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.
Marathon Oil Corporation 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 financial statements, Marathon Oil
Corporation'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.
/s/ Clarence P. Cazalot, Jr. /s/ John T. Mills /s/ Albert G. Adkins
Clarence P. Cazalot, Jr. John T. Mills Albert G. Adkins
President and Chief Financial Officer Vice President-
Chief Executive Officer Accounting and Controller
Report of Independent Accountants
To the Stockholders of Marathon Oil Corporation:
In our opinion, the accompanying consolidated financial statements appearing
on pages F-2 through F-32 present fairly, in all material respects, the
financial position of Marathon Oil Corporation and its subsidiaries (Marathon)
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of
Marathon'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.
As discussed in Note 4 to the financial statements, Marathon changed its
method of accounting for derivatives in 2001.
As discussed in Note 2 to the financial statements, on December 31, 2001,
Marathon distributed its steel business to the holders of USX-U. S. Steel
Group common stock and has accounted for this business as a discontinued
operation.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 15, 2002
F-1
Consolidated Statement of Income
(Dollars in millions) 2001 2000 1999
- ------------------------------------------------------------------------------
Revenues and other income:
Revenues $ 33,019 $ 34,427 $ 23,549
Dividend and investee income 138 102 69
Net losses on disposal of assets (177) (785) -
Gain (loss) on ownership change in
Marathon Ashland Petroleum LLC (6) 12 17
Other income 92 43 31
-------- -------- --------
Total revenues and other income 33,066 33,799 23,666
-------- -------- --------
Costs and expenses:
Cost of revenues (excludes items shown below) 23,255 25,417 16,612
Selling, general and administrative expenses 726 643 498
Depreciation, depletion and amortization 1,236 1,245 950
Taxes other than income taxes 4,679 4,626 4,218
Exploration expenses 144 238 238
Inventory market valuation charges (credits) 72 - (551)
-------- -------- --------
Total costs and expenses 30,112 32,169 21,965
-------- -------- --------
Income from operations 2,954 1,630 1,701
Net interest and other financial costs 173 236 288
Minority interest in income of
Marathon Ashland Petroleum LLC 704 498 447
-------- -------- --------
Income from continuing operations before income
taxes 2,077 896 966
Provision for income taxes 759 476 320
-------- -------- --------
Income from continuing operations 1,318 420 646
Discontinued operations
Income (loss) from discontinued operations (169) (9) 59
Loss on disposition of United States Steel
Corporation (984) - -
-------- -------- --------
Income before extraordinary losses and
cumulative effect of change in accounting
principle 165 411 705
Extraordinary losses - - (7)
Cumulative effect of change in accounting
principle (8) - -
-------- -------- --------
Net income $ 157 $ 411 $ 698
- ------------------------------------------------------------------------------
Included in revenues and costs and expenses for 2001, 2000 and 1999 were $4,404
million, $4,344 million and $3,973 million, respectively, representing consumer
excise taxes on petroleum products and merchandise.
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
Income Per Common Share
(Dollars in millions, except per share data) 2001 2000 1999
- ---------------------------------------------------------------------
MARATHON COMMON STOCK
Income from continuing operations
applicable to Common Stock $ 1,317 $ 420 $ 646
------- ------ ------
Net income applicable to Common Stock $ 377 $ 432 $ 654
------- ------ ------
Per Share Data
Basic and diluted:
Income from continuing operations $ 4.26 $ 1.35 $ 2.09
------- ------ ------
Net income $ 1.22 $ 1.39 $ 2.11
------- ------ ------
STEEL STOCK
Net income (loss) applicable to Steel Stock $ (243) $ (29) $ 35
------- ------ ------
Per Share Data
Basic:
Net income (loss) $ (2.73) $ (.33) $ .40
------- ------ ------
Diluted:
Net income (loss) $ (2.74) $ (.33) $ .40
- ---------------------------------------------------------------------
See Note 8, for a description and computation of income per common share.
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Consolidated Balance Sheet
(Dollars in millions) December 31 2001 2000
- -----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 657 $ 340
Receivables, less allowance for doubtful accounts of $8
and $3 1,708 2,262
Receivables from United States Steel 64 5
Inventories 1,851 1,867
Assets held for sale 16 330
Deferred income tax benefits 13 60
Other current assets 102 121
-------- --------
Total current assets 4,411 4,985
Investments and long-term receivables 1,076 362
Net investment in United States Steel - 1,919
Receivables from United States Steel 551 -
Property, plant and equipment - net 9,578 9,375
Prepaid pensions 207 207
Other noncurrent assets 306 303
-------- --------
Total assets $ 16,129 $ 17,151
- -----------------------------------------------------------------------------
Liabilities
Current liabilities:
Notes payable $ - $ 80
Accounts payable 2,431 3,019
Payable to United States Steel 28 366
Payroll and benefits payable 243 230
Accrued taxes 171 108
Accrued interest 85 61
Obligations to repay preferred securities 295 -
Long-term debt due within one year 215 148
-------- --------
Total current liabilities 3,468 4,012
Long-term debt 3,432 1,937
Deferred income taxes 1,297 1,354
Employee benefits 677 648
Payable to United States Steel 8 97
Deferred credits and other liabilities 344 315
Preferred stock of subsidiary - 184
Minority interest in Marathon Ashland Petroleum LLC 1,963 1,840
Stockholders' Equity
Preferred stock -
6.50% Cumulative Convertible issued -
2,413,487 shares ($121 liquidation preference) at
December 31, 2000 - 2
Common stocks:
Common Stock issued - 312,165,978 shares at December 31,
2001 and 2000 (par value $1 per share, authorized
550,000,000 shares) 312 312
Steel Stock issued - 88,767,395 shares at December 31,
2000
(par value $1 per share, authorized 200,000,000 shares) - 89
Securities exchangeable solely into Common Stock -
issued - 281,148 shares at December 31, 2000 - -
Common Stock held in treasury - 2,770,929 shares at
December 31, 2001 and 3,899,714 shares at December 31,
2000 (74) (104)
Additional paid-in capital 3,035 4,676
Retained earnings 1,643 1,847
Accumulated other comprehensive income (loss) 34 (50)
Deferred compensation (10) (8)
-------- --------
Total stockholders' equity 4,940 6,764
-------- --------
Total liabilities and stockholders' equity $ 16,129 $ 17,151
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Consolidated Statement of Cash Flows
(Dollars in millions) 2001 2000 1999
- ---------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents
Operating activities:
Net income $ 157 $ 411 $ 698
Adjustments to reconcile to net cash provided
from operating activities:
Cumulative effect of change in accounting
principle 8 - -
Extraordinary losses - - 7
Loss (income) from discontinued operations 169 9 (59)
Loss on disposition of United States Steel 984 - -
Minority interest in income of Marathon
Ashland Petroleum LLC 704 498 447
Depreciation, depletion and amortization 1,236 1,245 950
Exploratory dry well costs 60 86 109
Inventory market valuation charges (credits) 72 - (551)
Deferred income taxes (217) (240) 105
Net losses on disposal of assets 177 785 -
Changes in: Current receivables 172 (377) (844)
Inventories (66) 17 (63)
Current accounts payable and accrued
expenses (601) 717 1,106
All other - net 64 (5) 103
------- ------- -------
Net cash provided from continuing operations 2,919 3,146 2,008
Net cash provided from (used in)
discontinued operations 717 (615) (72)
------- ------- -------
Net cash provided from operating activities 3,636 2,531 1,936
------- ------- -------
Investing activities:
Capital expenditures (1,639) (1,425) (1,378)
Acquisition of Pennaco Energy, Inc. (506) - -
Disposal of assets 296 539 356
Cash held by United States Steel upon
disposition (147) - -
Restricted cash - withdrawals 67 271 45
- deposits (62) (268) (44)
Investees - investments (17) (65) (59)
- loans and advances (6) (6) (70)
- returns and repayments 10 10 1
All other - net 5 21 (25)
------- ------- -------
Net cash used in continuing operations (1,999) (923) (1,174)
Net cash used in discontinued operations (245) (270) (294)
------- ------- -------
Net cash used in investing activities (2,244) (1,193) (1,468)
Financing activities:
Commercial paper and revolving credit
arrangements--net (51) 62 (381)
Other debt - borrowings 649 273 810
- repayments (758) (339) (242)
Redemption of preferred stock of subsidiary (223) - -
Preferred stock repurchased - (12) (2)
Common stock - issued - - 89
- repurchased (1) (105) -
Treasury common stock reissued 12 1 -
Dividends paid (341) (371) (354)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (577) (420) (400)
------- ------- -------
Net cash used in financing activities (1,290) (911) (480)
------- ------- -------
Effect of exchange rate changes on cash:
Continuing operations (3) (2) (1)
Discontinued operations (1) 1 -
------- ------- -------
Net increase (decrease) in cash and cash
equivalents 98 426 (13)
Cash and cash equivalents at beginning of year 559 133 146
------- ------- -------
Cash and cash equivalents at end of year $ 657 $ 559 $ 133
- ---------------------------------------------------------------------------
Cash and cash equivalents at end of year for 2000 and 1999 include $219 million
and $22 million, respectively, of cash held by United States Steel.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
Consolidated Statement of Stockholders' Equity
Dollars in
millions Shares in thousands
------------------- -------------------------
2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
Preferred stock -
6.50% Cumulative Convertible:
Balance at beginning of year $ 2 $ 3 $ 3 2,413 2,715 2,768
Repurchased - (1) - (9) (302) (53)
Converted into Steel Stock - - - (1) - -
Exchanged for debt - - - (195) - -
Converted to right to receive
cash at Separation (2) - - (2,208) - -
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ 2 $ 3 - 2,413 2,715
- --------------------------------------------------------------------------------
Common stocks:
Common Stock:
Balance at beginning of year $ 312 $ 312 $ 308 312,166 311,767 308,459
Issued in public offering - - - - - 67
Issued for:
Employee stock plans - - 3 - 391 2,903
Dividend Reinvestment and
Direct Stock Purchase Plan - - - - - 120
Exchangeable Shares - - 1 - 8 218
----- ----- ----- ------- ------- -------
Balance at end of year $ 312 $ 312 $ 312 312,166 312,166 311,767
- --------------------------------------------------------------------------------
Steel Stock:
Balance at beginning of year $ 89 $ 88 $ 88 88,767 88,398 88,336
Issued for:
Employee stock plans - 1 - 430 369 62
Conversion of preferred stock - - - 1 - -
Exchanged for investment in
United States Steel (89) - - (89,198) - -
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ 89 $ 88 - 88,767 88,398
- --------------------------------------------------------------------------------
Securities exchangeable solely
into
Common Stock:
Balance at beginning of year $ - $ - $ 1 281 289 507
Exchanged for Common Stock - - (1) (281) (8) (218)
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ - $ - - 281 289
- --------------------------------------------------------------------------------
Treasury common stocks, at
cost:
Common Stock:
Balance at beginning of year $(104) $ - $ - (3,900) - -
Repurchased (1) (105) - (27) (3,957) -
Reissued for:
Exchangeable shares 7 - - 281 - -
Employee stock plans 24 1 - 875 43 -
Nonemployee directors
deferred compensation plan - - - - 14 -
----- ----- ----- ------- ------- -------
Balance at end of year $ (74) $(104) $ - (2,771) (3,900) -
- --------------------------------------------------------------------------------
Steel Stock:
Balance at beginning of year $ - $ - $ - - - -
Repurchased - - - (20) - -
Reissued for employee stock
plans - - - 18 - -
Distributed to United States
Steel - - - 2 - -
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ - $ - - - -
- --------------------------------------------------------------------------------
(Table continued on next page)
F-6
Comprehensive
Stockholders' Equity Income
------------------------ -------------------
(Dollars in millions) 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year $ 4,676 $ 4,673 $4,587
Marathon Stock issued 4 9 92
Steel Stock issued 8 5 2
Exchanged for investment in
United States Steel (1,526) - -
Exchangeable Shares exchanged
for Common Stock (9) - (6)
6.50% Preferred stock:
Repurchased - (11) (2)
Converted to right to receive
cash at Separation (118) - -
------- ------- ------
Balance at end of year $ 3,035 $ 4,676 $4,673
- --------------------------------------------------------------------------------
Deferred compensation net of
taxes:
Balance at beginning of year $ (8) $ - $ 1
Change during year (11) (8) (1)
Transfer to United States Steel 9 - -
------- ------- ------
Balance at end of year $ (10) $ (8) $ -
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $ 1,847 $ 1,807 $1,467
Net income 157 411 698 $ 157 $ 411 $ 698
Excess redemption value over
carrying value of preferred
securities (20) - -
Dividends on preferred stock (8) (8) (9)
Dividends on Common Stock (per
share: $.92 in 2001, $.88 in
2000 and $.84 in 1999) (284) (274) (261)
Dividends on Steel Stock (per
share $.55 in 2001 and $1.00
in 2000 and 1999) (49) (89) (88)
------- ------- ------
Balance at end of year $ 1,643 $ 1,847 $1,807
- --------------------------------------------------------------------------------
Accumulated other comprehensive
income (loss) net of taxes(a):
Minimum pension liability
adjustments:
Balance at beginning of year $ (21) $ (10) $ (37)
Changes during year (13) (11) 27 (13) (11) 27
Reclassified to earnings 20 - - 20 - -
------- ------- ------
Balance at end of year (14) (21) (10)
------- ------- ------
Foreign currency translation
adjustments:
Balance at beginning of year $ (29) $ (17) $ (11)
Changes during year (3) (12) (6) (3) (12) (6)
Reclassified to earnings 29 - - 29 - -
------- ------- ------
Balance at end of year (3) (29) (17)
------- ------- ------
Unrealized holding losses on
investments:
Balance at beginning of year $ - $ - $ -
Changes during year - - (1) - - (1)
Reclassified to earnings - - 1 - - 1
------- ------- ------
Balance at end of year - - -
------- ------- ------
Deferred gains (losses) on
derivative instruments:
Balance at beginning of year $ - $ - $ -
Cumulative effect adjustment (8) - - (8) - -
Reclassification of the
cumulative effect adjustment
into earnings 23 - - 23 - -
Changes in fair value 34 - - 34 - -
Reclassification to earnings 2 - - 2 - -
------- ------- ------
Balance at end of year $ 51 $ - $ -
------- ------- ------
Total balances at end of year $ 34 $ (50) $ (27)
- --------------------------------------------------------------------------------
Total comprehensive income $ 241 $ 388 $ 719
- --------------------------------------------------------------------------------
Total stockholders' equity $ 4,940 $ 6,764 $6,856
- --------------------------------------------------------------------------------
(a) Related income tax provision
(credit): 2001 2000 1999
Minimum pension liability
adjustments $ 4 $ (4) $ 13
Foreign currency translation
adjustments - (1) (3)
Net deferred gains on
derivative instruments 27 - -
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1. Basis of Presentation
Marathon Oil Corporation (Marathon) was originally organized in 2001 as USX
HoldCo, Inc., a wholly owned subsidiary of USX Corporation. As a result of a
reorganization transaction completed in July 2001, USX HoldCo, Inc. (1) became
the parent entity of the consolidated enterprise (the former USX Corporation
was merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to
USX Corporation. In connection with the Separation transaction discussed
below, USX Corporation changed its name to Marathon Oil Corporation. The
accompanying consolidated financial statements reflect Marathon Oil
Corporation and its subsidiaries as the continuation of the consolidated
enterprise.
Prior to December 31, 2001, Marathon had two outstanding classes of common
stock: USX-Marathon Group common stock (Marathon Stock), which was intended to
reflect the performance of Marathon's energy business, and USX-U. S. Steel
Group common stock (Steel Stock), which was intended to reflect the
performance of Marathon's steel business. As described further in Note 2, on
December 31, 2001, Marathon disposed of its steel business through a tax-free
distribution of the common stock of its wholly owned subsidiary United States
Steel Corporation (United States Steel) to holders of Steel Stock in exchange
for all outstanding shares of Steel Stock on a one-for-one basis (the
Separation).
In connection with the Separation, Marathon's certificate of incorporation
was amended on December 31, 2001 and, from that date, Marathon has only one
class of common stock authorized.
Marathon is engaged in worldwide exploration and production of crude oil
and natural gas; domestic refining, marketing and transportation of crude oil
and petroleum products primarily through its 62 percent owned subsidiary
Marathon Ashland Petroleum LLC (MAP); and other energy related businesses.
- -------------------------------------------------------------------------------
2. Discontinued Operations
On December 31, 2001, in a tax-free distribution to holders of Steel Stock,
Marathon exchanged the common stock of United States Steel for all outstanding
shares of Steel Stock on a one-for-one basis. The net assets of United States
Steel at Separation were approximately the same as the net assets attributable
to Steel Stock immediately prior to the Separation, except for a value
transfer of $900 million in the form of additional net debt and other
financings retained by Marathon. During the last six months of 2001, United
States Steel completed a number of financings so that upon Separation, the net
debt and other financings of United States Steel as a separate legal entity
would approximate the net debt and other financings attributable to Steel
Stock. At December 31, 2001, the net debt and other financings of United
States Steel was $54 million less than the net debt and other financings
attributable to the Steel Stock, adjusted for the value transfer and certain
one-time items related to the Separation. On February 6, 2002, United States
Steel made a payment to Marathon of $54 million, plus applicable interest, to
settle this difference.
Marathon has accounted for the business of United States Steel as a
discontinued operation. The income or loss from discontinued operations for
the periods ended December 31, 2001, 2000 and 1999 represent the net income or
loss attributable to Steel Stock for the periods presented, adjusted for
corporate administrative expenses and interest expense (net of income tax
effects) which may not be allocated to discontinued operations under generally
accepted accounting principles in the United States of America (USGAAP). The
loss on disposition of United States Steel represents the excess of the net
investment in United States Steel over the aggregate fair market value of the
outstanding shares of the Steel Stock at the time of the Separation. The net
investment in United States Steel at December 31, 2000, represents the net
assets attributable to Steel Stock at that date. Because operating and
investing activities are separately identifiable to each of Marathon and
United States Steel, such amounts have been separately disclosed in the
statement of cash flows. Financing activities were managed on a centralized,
consolidated basis. Therefore they have been reflected on a consolidated basis
in the statement of cash flows.
Transactions related to invested cash, debt and related interest and other
financial costs, and preferred stock and related dividends were attributed to
discontinued operations based on the cash flows of United States Steel for the
periods presented and the initial capital structure attributable to Steel
Stock. However, certain limitations on the amount of interest expense
allocated to discontinued operations are required by USGAAP. Corporate general
and administrative costs attributable to Steel Stock that were allocated using
methods which considered certain measures of business activities, such as
employment, investments and revenues, are not permitted to be classified as
discontinued operations under USGAAP. Income taxes were allocated to
discontinued operations in accordance with Marathon's tax allocation policy.
In general, such policy provided that the consolidated tax provision and
related tax payments or refunds were allocated to discontinued operations
based principally upon the financial income, taxable income, credits,
preferences and other amounts directly related to United States Steel.
F-8
The results of operations of United States Steel, subject to the
limitations described above, have been reclassified as discontinued operations
for all periods presented in the Statement of Income and are summarized as
follows:
(In millions) 2001 2000 1999
- ------------------------------------------------------------------------
Revenues and other income $ 6,375 $ 6,132 $ 5,470
Costs and expenses 6,755 6,010 5,308
------- ------- -------
Income (loss) from operations (380) 122 162
Net interest and other financial costs 101 105 74
------- ------- -------
Income (loss) before income taxes (481) 17 88
Provision (credit) for estimated income taxes (312) 26 29
------- ------- -------
Net income (loss) $ (169) $ (9) $ 59
- ------------------------------------------------------------------------
The computation of the loss on disposition of United States Steel on
December 31, 2001 was as follows:
(In millions)
- -------------------------------------------------------------------------
Market value of Steel Stock (89,197,740 shares of stock
issued and outstanding at $18.11 per share) $ 1,615
Less:
Net investment in United States Steel 2,564
Costs associated with the Separation, net of tax 35
-------
Loss on disposition of United States Steel $ (984)
- -------------------------------------------------------------------------
The net investment in United States Steel as of December 31, 2000 was
comprised of:
(In millions)
- ------------------------------------------------------
Current assets $ 2,717
Property, plant and equipment - net 2,739
Prepaid pensions 2,672
Other noncurrent assets 583
-------
Total assets 8,711
-------
Current liabilities 1,391
Long-term debt 2,236
Employee benefits 1,767
Other liabilities 1,149
Preferred stock of subsidiary 66
Trust preferred securities 183
-------
Total liabilities 6,792
-------
Net investment in United States Steel $ 1,919
- ------------------------------------------------------
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously
announced reorganization with its two voting shareholders, United States Steel
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 2001 a pretax gain of $68
million (included in dividend and investee income) and a favorable deferred
tax adjustment of $33 million related to this transaction. United States Steel
previously accounted for its investment in Transtar under the equity method of
accounting.
On March 1, 2001, United States Steel completed the purchase of the tin
mill products business of LTV Corporation (LTV), which is now operated as East
Chicago Tin. In this noncash transaction, United States Steel assumed
approximately $66 million of certain employee related obligations from LTV.
The acquisition was accounted for using the purchase method of accounting.
Results of operations for the year 2001 include the operations of East Chicago
Tin from the date of acquisition.
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 totaling $75 million, which were contingent upon
the performance of USSK in 2001, will be made in 2002 and 2003. The
acquisition was accounted for under the purchase
F-9
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.
Marathon remains primarily obligated for certain financings for which
United States Steel has assumed responsibility for repayment under the terms
of the Separation. These obligations totaled $561 million at December 31,
2001. When United States Steel makes payments on the principal of these
financings, both the receivable and the obligation will be reduced. In
addition, Marathon remains contingently liable for certain operating lease
obligations of United States Steel, which totaled $115 million at December 31,
2001. As discussed in Note 26, Marathon has also guaranteed certain
obligations related to the business of United States Steel.
The Tax Sharing Agreement between Marathon and United States Steel
governing the liability for and administration of tax matters for periods
prior to the Separation is discussed in Note 18.
- -------------------------------------------------------------------------------
3. Summary of Principal Accounting Policies
Principles applied in consolidation - These consolidated financial statements
include the accounts of the businesses comprising Marathon.
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 Marathon has significant influence are
accounted for using the equity method of accounting and are carried at
Marathon's share of net assets plus loans and advances. Differences in the
basis of the investment and the separate net asset value of the investee, if
any, are amortized into earnings in accordance with the underlying remaining
useful life of the associated assets.
Investments in companies whose stock is publicly traded are carried 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 Marathon'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 property, plant and equipment; valuation allowances for
receivables, inventories and deferred income tax assets; environmental
liabilities; liabilities for tax deficiencies and 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. Marathon 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 - Marathon uses commodity-based and foreign currency
derivative instruments to manage its exposure to price risk. Management has
authorized the use of futures, forwards, swaps and options to reduce the
effects of fluctuations related to the purchase, production or sale of crude
oil, natural gas and refined products and also certain business transactions
denominated
F-10
in foreign currencies. Changes in the fair value of all derivatives are
recognized immediately in earnings, either within revenues or cost of
revenues, unless the derivative qualifies as a hedge of future cash flows or
certain foreign currency exposures.
For derivatives qualifying as hedges of future cash flows or certain
foreign currency exposures, the effective portion of any changes in fair value
is recognized in a component of stockholders' equity called other
comprehensive income and then reclassified to earnings, either within revenues
or cost of revenues, when the underlying anticipated transaction is
consummated. Any ineffective portion of such hedges is recognized in earnings
as it occurs.
For derivatives designated as hedges of the fair value of recognized
assets, liabilities or firm commitments, changes in the fair value of both the
hedged item and the related derivative are recognized immediately in earnings,
either within revenues or cost of revenues, with an offsetting effect included
in the basis of the hedged item. The net effect is to reflect in earnings the
extent to which the hedge is not effective in achieving offsetting changes in
fair value.
Property, plant and equipment - Marathon uses the successful efforts method of
accounting for oil and gas producing activities. Costs to acquire mineral
interests in oil and gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved
reserves, geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties are depreciated and
depleted by the units-of-production method. Support equipment and other
property, plant and equipment are depreciated over their estimated useful
lives.
Marathon evaluates its oil and gas producing properties for impairment of
value on a field-by-field basis or, in certain instances, by logical grouping
of assets if there is significant shared infrastructure, using undiscounted
future cash flows based on total proved and risk-adjusted probable and
possible reserves. Oil and gas producing properties deemed to be impaired are
written down to their fair value, as determined by discounted future cash
flows based on total proved and risk-adjusted probable and possible reserves
or, if available, comparable market values. Unproved oil and gas properties
that are individually significant are periodically assessed for impairment of
value, and a loss is recognized at the time of impairment. Other unproved
properties are amortized over their remaining holding period.
For property, plant and equipment unrelated to oil and gas producing
activities, depreciation is generally computed on the straight-line method
over their estimated useful lives.
When property, plant and equipment depreciated on an individual basis are
sold or otherwise disposed of, any gains or losses are reflected in income.
Gains on disposal of property, plant and equipment are recognized when earned,
which is generally at the time of closing. If a loss on disposal is expected,
such losses are recognized when the assets are reclassified as held for sale.
Proceeds from disposal of property, plant and equipment depreciated on a group
basis are credited to accumulated depreciation, depletion and amortization
with no immediate effect on income.
Major maintenance activities - Marathon incurs planned major maintenance costs
primarily for refinery turnarounds. Such costs 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.
Environmental liabilities - Environmental expenditures are capitalized if the
costs mitigate or prevent future contamination or if the costs improve
existing assets' environmental safety or efficiency. Marathon 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
upon estimated proved oil and gas reserves on a units-of-production method.
Stock-based compensation - In 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". The Company has elected to continue to apply the
principles of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees".
Deferred taxes - Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. The realization of deferred tax assets is assessed
periodically based on several interrelated factors. These factors include
Marathon's expectation to generate sufficient future taxable income including
future foreign source income, tax credits, operating loss carryforwards, and
management's intent regarding the permanent reinvestment of the earnings from
certain foreign subsidiaries.
F-11
Reclassifications - Certain reclassifications of prior years' data have been
made to conform to 2001 classifications.
- -------------------------------------------------------------------------------
4. New Accounting Standards
Adopted in 2001 - Effective January 1, 2001, Marathon 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 Statement, as amended, requires recognition of all derivatives at fair
value as either assets or liabilities.
The transition adjustment related to adopting SFAS No. 133 on January 1,
2001, was recognized as a cumulative effect of a 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
included within Other Comprehensive Income (OCI), net of a tax benefit of $4
million, was $8 million.
A portion of the cumulative effect adjustment relating to the adoption of
SFAS No. 133 was recognized in OCI which relates only to deferred gains or
losses for hedge transactions as of December 31, 2000. OCI is also impacted by
the changes in fair value associated with cash flow hedges. A reconciliation
of the changes in OCI relating to derivative instruments is included in the
Statement of Stockholders' Equity.
Of the $51 million recorded in OCI net of income taxes as of December 31,
2001, $21 million is expected to be reclassified to earnings over the 12-month
period ending December 31, 2002. The actual amounts that will be reclassified
to earnings over the next twelve months will vary as a result of changes in
fair value.
To be adopted in future periods - In June 2001, the Financial Accounting
Standards Board (FASB) issued Statements of Financial Accounting Standards No.
141 "Business Combinations" (SFAS No. 141), No. 142 "Goodwill and Other
Intangible Assets" (SFAS No. 142) and No. 143 "Accounting for Asset Retirement
Obligations" (SFAS No. 143).
SFAS No. 141 requires that all business combinations initiated after June
30, 2001, be accounted for under the purchase method. This Statement
establishes specific criteria for the allocation of purchase price to
intangible assets separately from goodwill for all business combinations made
after June 30, 2001.
SFAS No. 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS No. 142
are: 1) goodwill and intangible assets with indefinite lives will no longer be
amortized; 2) goodwill and intangible assets with indefinite lives must be
tested for impairment at least annually; and 3) the amortization period for
intangible assets with finite lives will no longer be limited to forty years.
Marathon will adopt SFAS No. 142 effective January 1, 2002, as required. At
that time, annual amortization of existing goodwill of $3 million, net of tax,
will cease on the unamortized portion associated with previous acquisitions
and certain investments accounted for under the equity method. As required, a
transitional impairment test is required for existing goodwill as of the date
of adoption of this Standard. This test must be completed within the first
year. Any loss resulting from applying the transitional impairment test will
be reported as a cumulative effect of a change in accounting principle.
Goodwill recorded after adoption of this Standard is to be tested for
impairment at least annually and any resulting impairment is included in
income from operations.
SFAS No. 143 establishes a new accounting model for the recognition and
measurement of retirement obligations associated with tangible long-lived
assets. SFAS No. 143 requires that an asset retirement cost be capitalized as
part of the cost of the related long-lived asset and subsequently allocated to
expense using a systematic and rational method. Marathon will adopt this
Statement effective January 1, 2003, as required. The transition adjustment
resulting from the adoption of SFAS No. 143 will be reported as a cumulative
effect of a change in accounting principle. At this time, Marathon cannot
reasonably estimate the effect of the adoption of this Statement on either its
financial position or results of operations.
In August 2001, the FASB approved SFAS No. 144, "Accounting for Impairment
or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement establishes a
single accounting model for long-lived assets to be disposed of by sale and
provides additional implementation guidance for assets to be held and used and
assets to be disposed of other than by sale. Marathon will adopt the Statement
prospectively effective January 1, 2002.
F-12
- -------------------------------------------------------------------------------
5. Extraordinary Losses
In 1999, Marathon 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 Marathon'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 Marathon.
As a result of the above transaction, Marathon 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 income (loss) from discontinued
operations. Since Marathon's investment in RTI was attributed to United States
Steel, the indexed debt was also attributed to United States Steel.
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, Marathon recorded an extraordinary loss
of $2 million, net of a $1 million income tax benefit, representing its share
of the extraordinary loss.
- -------------------------------------------------------------------------------
6. Business Combinations
In the first quarter 2001, Marathon acquired Pennaco Energy, Inc. (Pennaco), a
natural gas producer. Marathon acquired 87% of the outstanding stock of
Pennaco through a tender offer completed on February 7, 2001 at $19 a share.
On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of
Marathon. Under the terms of the merger, each share not held by Marathon was
converted into the right to receive $19 in cash. The total cash purchase price
of Pennaco was $506 million. The acquisition was accounted for under the
purchase method of accounting. The excess of the purchase price over the
preliminary fair value of net assets acquired (goodwill) was $70 million and
was originally to be amortized over 17 years. However, with the adoption of
SFAS No. 142, effective January 1, 2002, Marathon will cease the amortization
of goodwill and will test the unamortized balance for impairment on an annual
basis. Results of operations for the year 2001 include the results of Pennaco
from February 7, 2001.
The following unaudited pro forma data includes the results of operations
of the Pennaco acquisition giving effect to it as if it had been consummated
at the beginning of the years presented. It 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.
(In millions, except per share amounts) 2001 2000
- ---------------------------------------------------------------
Revenues and other income $ 33,074 $ 33,852
Income from continuing operations 1,314 389
Net income 374 401
Per share amounts applicable to Common Stock
Income from continuing operations - basic 4.25 1.25
- diluted 4.24 1.25
Net income - basic and diluted 1.21 1.29
- ---------------------------------------------------------------
- -------------------------------------------------------------------------------
7. Other Items
(In millions) 2001 2000 1999
- ------------------------------------------------------------------------
Net interest and other financial costs
from continuing operations
Interest and other financial income:
Interest income $ 29 $ 26 $ 15
Other (6) (2) (13)
----- ----- -----
Total 23 24 2
----- ----- -----
Interest and other financial costs:
Interest incurred 203 240 281
Less interest capitalized 26 16 20
----- ----- -----
Net interest 177 224 261
Interest on tax issues (2) 6 5
Financial costs on preferred stock of subsidiary 11 17 17
Amortization of discounts 2 2 2
Other 8 11 5
----- ----- -----
Total 196 260 290
----- ----- -----
Net interest and other financial costs $ 173 $ 236 $ 288
- ------------------------------------------------------------------------
F-13
Foreign currency transactions
For 2001, 2000 and 1999, the aggregate foreign currency transaction gains
(losses) from continuing operations included in determining net income were $2
million, $30 million and $(12) million, respectively.
- -------------------------------------------------------------------------------
8. Income Per Common Share
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 exercise of stock options and
warrants and conversion of convertible debt and preferred securities, provided
the effect is not antidilutive.
COMPUTATION OF INCOME PER SHARE
2001 2000 1999
------------------ ------------------ ------------------
(Dollars in millions,
except per share data) Basic Diluted Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------------
COMMON STOCK
Income from continuing
operations $ 1,318 $ 1,318 $ 420 $ 420 $ 646 $ 646
Excess redemption value
of preferred
securities (1) (1) - - - -
-------- -------- -------- -------- -------- --------
Income from continuing
operations applicable
to Common Stock 1,317 1,317 420 420 646 646
Expenses included in
income from continuing
operations applicable
to Steel Stock 41 41 12 12 8 8
Loss on disposition of
United States Steel (984) (984) - - - -
Expenses included in
loss on disposition of
United States Steel
applicable to Steel
Stock 11 11 - - - -
Cumulative effect of
change in accounting
principle (8) (8) - - - -
-------- -------- -------- -------- -------- --------
Net income applicable
to Common Stock $ 377 $ 377 $ 432 $ 432 $ 654 $ 654
======== ======== ======== ======== ======== ========
Shares of common stock
outstanding
(thousands):
Average number of
common shares
outstanding 309,150 309,150 311,531 311,531 309,696 309,696
Effect of dilutive
securities - stock
options - 360 - 230 -- 314
-------- -------- -------- -------- -------- --------
Average common shares
including dilutive
effect 309,150 309,510 311,531 311,761 309,696 310,010
======== ======== ======== ======== ======== ========
Per share:
Income from continuing
operations $ 4.26 $ 4.26 $ 1.35 $ 1.35 $ 2.09 $ 2.09
======== ======== ======== ======== ======== ========
Loss on disposition of
United States Steel $ (3.18) $ (3.18) $ - $ - $ - $ -
======== ======== ======== ======== ======== ========
Cumulative effect of
change in accounting
principle $ (.03) $ (.03) $ - $ - $ - $ -
======== ======== ======== ======== ======== ========
Net income $ 1.22 $ 1.22 $ 1.39 $ 1.39 $ 2.11 $ 2.11
- ------------------------------------------------------------------------------------
STEEL STOCK
Income (loss) from
discontinued
operations $ (169) $ (169) $ (9) $ (9) $ 59 $ 59
Expenses included in
income from continuing
operations applicable
to Steel Stock (41) (41) (12) (12) (8) (8)
Expenses included in
loss on disposition of
United States Steel
applicable to Steel
Stock (11) (11) -- - - -
Preferred stock
dividends (8) (8) (8) (8) (9) (9)
Loss on redemption of
preferred securities (14) (14) - - - -
Extraordinary losses - - - - (7) (7)
-------- -------- -------- -------- -------- --------
Net income (loss)
applicable to Steel
Stock $ (243) $ (243) $ (29) $ (29) $ 35 $ 35
======== ======== ======== ======== ======== ========
Shares of common stock
outstanding
(thousands):
Average number of
common shares
outstanding 89,058 89,058 88,613 88,613 88,392 88,392
Effect of dilutive
securities - stock
options - - - - - 4
-------- -------- -------- -------- -------- --------
Average common shares
including dilutive
effect 89,058 89,058 88,613 88,613 88,392 88,396
======== ======== ======== ======== ======== ========
Per share:
Income (loss) from
discontinued
operations $ (1.90) $ (1.90) $ (.10) $ (.10) $ .67 .67
======== ======== ======== ======== ======== ========
Extraordinary losses $ - $ - $ - $ - $ (.08) $ (.08)
======== ======== ======== ======== ======== ========
Net income (loss) $ (2.73) $ (2.74) $ (.33) $ (.33) $ .40 $ .40
- ------------------------------------------------------------------------------------
F-14
- -------------------------------------------------------------------------------
9. Transactions Between MAP and Ashland
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.
At December 31, 2001 and 2000, MAP had current receivables from Ashland of
$19 million and $35 million, respectively, and current payables to Ashland of
$20 million and $2 million, respectively.
MAP has a $190 million revolving credit agreement with Ashland. Interest on
borrowings is based on defined short-term market rates. At December 31, 2001
and 2000, there were no borrowings against this facility.
During 2001, 2000 and 1999, MAP's sales to Ashland, consisting primarily of
petroleum products, were $237 million, $285 million and $198 million,
respectively, and MAP's purchases of products and services from Ashland were
$29 million, $26 million and $22 million, respectively. Management believes
these transactions were conducted under terms comparable to those with
unrelated parties.
- -------------------------------------------------------------------------------
10. Segment Information
Marathon's operations consist of three reportable operating segments: 1)
Exploration and Production - explores for and produces crude oil and natural
gas on a worldwide basis; 2) Refining, Marketing and Transportation - 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. 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.
Revenues by product line are:
(In millions) 2001 2000 1999
- -------------------------------------------------------------
Refined products $ 20,841 $ 22,513 $ 15,143
Merchandise 2,506 2,441 2,194
Liquid hydrocarbons 6,585 6,856 4,587
Natural gas 2,933 2,459 1,429
Transportation and other products 154 158 196
-------- -------- --------
Total $ 33,019 $ 34,427 $ 23,549
- -------------------------------------------------------------
Segment income represents income from operations allocable to operating
segments. Marathon corporate general and administrative costs are not
allocated to operating segments. These costs primarily consist of employment
costs including pension effects, professional services, facilities and other
related costs associated with corporate activities. Certain general and
administrative costs related to all Marathon's 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 also are not
allocated to operating segments. Additionally, the following items are not
allocated to operating segments: inventory market valuation adjustments, gain
(loss) on ownership change in MAP and certain other items not allocated to
operating segments for business performance reporting purposes (see
reconcilement table on page F-17).
Information on assets by segment is not provided as it is not reviewed by
the chief operating decision maker.
F-15
The following presents information by operating segment:
Refining, Other
Exploration Marketing Energy
and and Related
(In millions) Production Transportation Businesses Total
- -----------------------------------------------------------------------------
2001
Revenues and other income:
Customer $ 3,991 $ 27,225 $ 1,803 $ 33,019
Intersegment(a) 495 21 71 587
United States Steel(a) 21 1 8 30
Equity in earnings of
unconsolidated investees 59 41 18 118
Other 14 68 15 97
------- -------- ------- --------
Total revenues and other
income $ 4,580 $ 27,356 $ 1,915 $ 33,851
======= ======== ======= ========
Segment income $ 1,421 $ 1,914 $ 60 $ 3,395
Significant noncash items
included in segment income -
Depreciation, depletion and
amortization(b) 868 345 4 1,217
Capital expenditures(c) 937 591 8 1,536
- -----------------------------------------------------------------------------
2000
Revenues and other income:
Customer $ 4,177 $ 28,693 $ 1,557 $ 34,427
Intersegment(a) 412 83 78 573
United States Steel(a) 30 1 29 60
Equity in earnings of
unconsolidated investees 47 22 15 84
Other 21 50 12 83
------- -------- ------- --------
Total revenues and other
income $ 4,687 $ 28,849 $ 1,691 $ 35,227
======= ======== ======= ========
Segment income $ 1,531 $ 1,273 $ 42 $ 2,846
Significant noncash items
included in segment income -
Depreciation, depletion and
amortization(b) 723 315 3 1,041
Capital expenditures(c) 742 656 2 1,400
- -----------------------------------------------------------------------------
1999
Revenues and other income:
Customer $ 2,855 $ 19,962 $ 732 $ 23,549
Intersegment(a) 202 47 40 289
United States Steel(a) 19 - 22 41
Equity in earnings (losses)
of unconsolidated investees (2) 17 26 41
Other 30 50 15 95
------- -------- ------- --------
Total revenues and other
income $ 3,104 $ 20,076 $ 835 $ 24,015
======= ======== ======= ========
Segment income $ 618 $ 611 $ 61 $ 1,290
Significant noncash items
included in segment income -
Depreciation, depletion and
amortization(b) 638 280 5 923
Capital expenditures(c) 744 612 4 1,360
- -----------------------------------------------------------------------------
(a) Management believes intersegment transactions and transactions with United
States Steel were conducted under terms comparable to those with unrelated
parties.
(b) Differences between segment totals and Marathon totals represent amounts
included in administrative expenses and international and domestic oil and
gas property impairments.
(c) Differences between segment totals and Marathon totals represent amounts
related to corporate administrative activities.
F-16
The following schedules reconcile segment amounts to amounts reported in
Marathon's consolidated financial statements:
(In millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Revenues and Other Income:
Revenues and other income of reportable segments $ 33,851 $ 35,227 $ 24,015
Items not allocated to segments:
Loss related to sale of certain Canadian assets (221) - -
Joint venture formation charges - (931) -
Gain (loss) on ownership change in MAP (6) 12 17
Net gains (losses) on certain asset sales - 124 (36)
Gain on offshore lease resolution with U.S.
Government 59 - -
Elimination of intersegment revenues (587) (573) (289)
Elimination of sales to United States Steel (30) (60) (41)
-------- -------- --------
Total revenues and other income $ 33,066 $ 33,799 $ 23,666
======== ======== ========
Income from Operations:
Income for reportable segments $ 3,395 $ 2,846 $ 1,290
Items not allocated to segments:
Administrative expenses (162) (136) (108)
Gain on offshore lease resolution with U.S.
Government 59 - -
Loss related to sale of certain Canadian assets (221) - -
Net gains (losses) on certain asset sales - 124 (36)
Joint venture formation charges - (931) -
Impairment of certain oil and gas properties,
and assets held for sale - (197) (16)
Gain (loss) on ownership change in MAP (6) 12 17
Inventory market valuation adjustments (72) - 551
Other(a) (39) (88) 3
-------- -------- --------
Total income from operations $ 2,954 $ 1,630 $ 1,701
- -------------------------------------------------------------------------------
(a) Includes selling, general and administrative expenses related to Steel
Stock for all periods presented. Includes costs related to Separation in
2001. Includes reorganization charges in 2000. Includes costs of a voluntary
early retirement program in 1999.
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
(In millions) Year Geographic Areas Geographic Areas Total Assets(a)
- -----------------------------------------------------------------------------------
United States 2001 $ 31,889 $ - $ 31,889 $ 8,046
2000 32,179 - 32,179 6,711
1999 22,675 - 22,675 7,555
Canada 2001 390 871 1,261 498
2000 856 899 1,755 940
1999 426 521 947 1,112
United Kingdom 2001 680 - 680 1,534
2000 567 - 567 1,698
1999 459 - 459 1,581
Other Foreign Countries 2001 107 134 241 474
2000 197 188 385 310
1999 106 88 194 735
Eliminations 2001 - (1,005) (1,005) -
2000 - (1,087) (1,087) -
1999 - (609) (609) -
Total 2001 $ 33,066 $ - $ 33,066 $10,552
2000 33,799 - 33,799 9,659
1999 23,666 - 23,666 10,983
- -----------------------------------------------------------------------------------
(a) Includes property, plant and equipment and investments.
F-17
- -------------------------------------------------------------------------------
11. 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
(In millions) Leases Leases
- ----------------------------------------------------------------
2002 $ 12 $ 116
2003 12 90
2004 12 77
2005 12 120
2006 12 34
Later years 78 97
Sublease rentals - (112)
---- ------
Total minimum lease payments 138 $ 422
======
Less imputed interest costs 47
----
Present value of net minimum lease payments
included in long-term debt $ 91
- ----------------------------------------------------------------
In connection with past sales of various plants and operations, United
States Steel assigned and the purchasers assumed certain leases of major
equipment used in the divested plants and operations. In the event of a
default by any of the purchasers, United States Steel has assumed these
obligations; however, Marathon remains primarily obligated under these leases.
Minimum lease payments under these operating leases of $96 million have been
included above and an equal amount has been reported as sublease rentals.
Of the $91 million present value of net minimum capital lease payments, $84
million was related to sale-leaseback financing assumed by United States Steel
under the Financial Matters Agreement. For additional information, see Note
13. Of the $422 million total minimum operating lease payments, $19 million
was assumed by United States Steel under the Financial Matters Agreement.
Operating lease rental expense from continuing operations:
(In millions) 2001 2000 1999
- ------------------------------------------
Minimum rental $ 159 $ 156 $ 149
Contingent rental 15 13 11
Sublease rentals (11) (13) (13)
----- ----- -----
Net rental expense $ 163 $ 156 $ 147
- ------------------------------------------
Marathon 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 Marathon, as defined in the agreements, or certain other
circumstances, operating lease obligations totaling $101 million may be
declared immediately due and payable.
- -------------------------------------------------------------------------------
12. Short-Term Debt
In November 2001, Marathon renewed its $451 million 364-day revolving credit
agreement, which now terminates in November 2002. Interest is based on defined
short-term market rates. During the term of the agreement, Marathon is
obligated to pay a facility fee on total commitments, which at December 31,
2001, was 0.10%. At December 31, 2001, there were no borrowings against this
facility. Additionally, Marathon has an aggregate of $550 million in three
other short-term credit facilities. Interest is based on short-term market
rates. At December 31, 2001, there were no borrowings against these
facilities.
In July 2001, MAP renewed its $100 million 364-day revolving credit
agreement, which now terminates in July 2002. Interest is based on defined
short-term market rates. During the term of the agreement, MAP is required to
pay a facility fee on total commitments, which at December 31, 2001 was 0.11%.
At December 31, 2001, there were no borrowings against this facility.
Additionally, MAP has a revolving credit agreement with Ashland as discussed
in Note 9.
F-18
- -------------------------------------------------------------------------------
13. Long-Term Debt
Interest December 31
(In millions) Rates - % Maturity 2001 2000
- -------------------------------------------------------------------------------
Marathon:
Revolving credit
facility(a) 2005 $ 475 $ 300
Commercial paper(a) 7.68 - 77
Notes payable 6.57 - 9 5/8 2002 - 2023 2,281 2,505
Obligations relating to
Industrial Development and
Environmental Improvement
Bonds and Notes(b) 1 17/25 - 6 7/8 2009 - 2033 499 494
Receivables facility(c) 2004 - 350
Sale-leaseback financing(d) 2002 - 2012 84 88
Consolidated subsidiaries:
Revolving credit
facilities(e) 2003 - -
Loan facility(f) 8 1/2 2010 - 325
Guaranteed Notes 7 2002 135 135
Guaranteed Loan(g) 9 1/20 2002 - 2006 172 199
All other obligations,
including capital leases 2002 - 2011 8 12
Amounts attributed to United
States Steel(h) - (2,387)
------- -------
Total(i)(j) 3,654 2,098
Less unamortized discount 7 13
Less amount due within one
year 215 148
------- -------
Long-term debt due after
one year $ 3,432 $ 1,937
- -------------------------------------------------------------------------------
(a) Marathon has a $1,354 million 5-year revolving credit agreement, that
terminates in November 2005. Interest on the facility is based on defined
short-term market rates. During the term of the agreement, Marathon is
obligated to pay a variable facility fee on total commitments, which at
December 31, 2001 was 0.125%. At December 31, 2001, $475 million had been
borrowed against this facility. Commercial paper is supported by the unused
and available credit on the 5-year facility and, accordingly, is classified
as long-term debt.
(b) United States Steel has assumed responsibility for repayment of $470
million of these obligations. At December 31, 2001, Environmental Improvement
Bonds in the amount of $146 million were supported by letter of credit
arrangements that could become short-term obligations under certain
circumstances.
(c) United States Steel participated in a program, which was terminated in
2001, to sell an undivided interest in certain accounts receivable. The
program was accounted for as a secured borrowing.
(d) This sale-leaseback financing arrangement relates to a lease of a slab
caster at United States Steel's Fairfield Works facility in Alabama with a
term through 2012. Marathon is the obligor under this lease. Under the
Financial Matters Agreement, United States Steel has assumed responsibility
for all obligations under this lease. This lease is an amortizing financing
with a final maturity of 2012, subject to additional extensions.
(e) MAP has a $350 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 on total
commitments, which at December 31, 2001 was 0.125%. At December 31, 2001,
there were no borrowings or letters of credit outstanding against the
revolving credit facility. In the event that MAP defaults on indebtedness (as
defined in the agreement) in excess of $100 million, Marathon has guaranteed
the payment of any outstanding obligations.
(f) A United States Steel subsidiary has a loan with a group of financial
institutions aggregating $325 million. The loan bears interest at a fixed
rate of 8.5% per annum. This obligation remained with United States Steel.
Marathon has no ongoing responsibility associated with this debt.
(g) 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.
(h) Long-term debt attributed to United States Steel was determined based on
the cash flows of United States Steel and the initial capital structure
attributable to Steel Stock and was included in net investment in United
States Steel.
(i) Required payments of long-term debt for the years 2003-2006 are $188
million, $341 million, $520 million and $343 million, respectively.
(j) In the event of a change in control of Marathon, as defined in the related
agreements, debt obligations totaling $3,297 million may be declared
immediately due and payable. The principal obligations subject to such a
provision are Notes payable - $2,255 million; Revolving credit facility -
$475 million; Guaranteed Loan - $172 million; and Environmental Improvement
Bonds - $151 million.
F-19
- --------------------------------------------------------------------------------
14. Supplemental Cash Flow Information
(In Millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Net cash provided from operating activities
from continuing operations included:
Interest and other financial costs paid (net of
amount capitalized) $ (165) $ (270) $ (289)
Income taxes paid to taxing authorities (437) (377) (103)
Income tax settlements received from (paid to)
United States Steel (819) (91) 2
- -------------------------------------------------------------------------------
Commercial paper and revolving credit arrangements -
net:
Commercial paper - issued $ 389 $ 3,362 $ 6,282
- repayments (465) (3,450) (6,117)
Credit agreements - borrowings 925 437 5,529
- repayments (750) (437) (5,980)
Other credit arrangements - net (150) 150 (95)
------ ------- -------
Total $ (51) $ 62 $ (381)
- -------------------------------------------------------------------------------
Noncash investing and financing activities:
Common Stock issued for dividend reinvestment and
employee stock plans $ 23 $ 10 $ 4
Common Stock issued for Exchangeable Shares 9 - 7
Investee preferred stock received in conversion of
investee loan - - 142
Capital expenditures for which payment has been
deferred 29 - -
Disposal of assets:
Exchange of Steel Stock for net investment in
United States Steel 1,615 - -
Exchange of Sakhalin Energy Investment Company Ltd. - 410 -
Notes received - 6 19
Business combinations:
Acquisition of Pennaco - liabilities assumed 309 - -
Other acquisitions - liabilities assumed - - 16
Net assets contributed to joint ventures 571 - -
Preferred stocks exchanged for debt 49 - -
- -------------------------------------------------------------------------------
F-20
- -------------------------------------------------------------------------------
15. Transactions with United States Steel
Revenues and purchases - Marathon's revenues for sales to United States Steel
totaled $30 million, $60 million and $41 million in 2001, 2000 and 1999,
respectively. Marathon's purchases from United States Steel totaled $7 million
in 2001 and $17 million in both 2000 and 1999. Marathon revenues for sales to
United States Steel equity investees were $29 million in 2001, $28 million in
2000 and $22 million in 1999. Management believes these transactions were
conducted under terms comparable to those with unrelated parties.
Receivables from/payables to United States Steel - At December 31, 2001 and
2000, amounts receivable or payable were included in the balance sheet as
follows:
(In millions) December 31 2001 2000
- ----------------------------------------------------------------------------
Receivables:
Current:
Trade receivables $ - $ 1
Income tax settlement receivable - 4
Separation settlement receivable 54 -
Receivables related to debt and other obligations for which
United States Steel has assumed responsibility for repayment 10 -
---- ----
Current receivables from United States Steel 64 5
---- ----
Noncurrent:
Receivables related to debt and other obligations for which
United States Steel has assumed responsibility for repayment 551 -
---- ----
Payables:
Current:
Trade payables - 2
Income tax settlement payable 28 364
---- ----
Current payables to United States Steel 28 366
---- ----
Noncurrent:
Estimated future income tax settlements payable - 97
Reimbursements payable under nonqualified employee benefit plans 8 -
---- ----
Noncurrent payables to United States Steel $ 8 $ 97
- ----------------------------------------------------------------------------
In connection with the Separation, Marathon and United States Steel entered
into the following Agreements:
Financial Matters Agreement - This agreement establishes the responsibilities
of Marathon and United States Steel relating to certain corporate obligations
of Marathon at the time of Separation as follows:
. The assumption by United States Steel of payment responsibility for
certain industrial revenue bonds and certain other financial obligations
of Marathon. See Note 13 for details.
. Obligations for which Marathon is solely responsible. See Note 13 for
details of Marathon's debt obligations.
. Obligations of Marathon for which United States Steel remains
contingently liable.
. Obligations of United States Steel for which Marathon remains
contingently liable. See Notes 11 and 26 for details.
Tax Sharing Agreement - See Note 18, for a discussion of this agreement.
Transition Services Agreement - This agreement provides that, to the extent
that one company or the other is not able to immediately service its own needs
relating to services formerly managed on a corporate-wide basis, Marathon and
United States Steel will provide such services to the other to the extent
requested if the providing company is able to do so. Such agreements will be
for a term of up to twelve months and be on a cost reimbursement basis.
License Agreement - This agreement granted to United States Steel a non-
exclusive license to use the USX name rights and certain intellectual property
with the right to sublicense to subsidiaries.
Insurance Assistance Agreement - This agreement provides 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.
F-21
- -------------------------------------------------------------------------------
16. Pensions and Other Postretirement Benefits
Marathon has noncontributory defined benefit pension plans covering
substantially all employees. Benefits under these plans are based primarily
upon years of service and final average pensionable earnings. Certain
subsidiaries provide benefits for employees covered by other plans based
primarily upon employees' service and career earnings.
Marathon also has defined benefit retiree health care and life insurance
plans (other benefits) covering most 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 most union represented retiree beneficiaries primarily
based on employees' annual base salary at retirement. Other benefits have not
been prefunded.
Pension Other
Benefits Benefits
------------------ --------------
(In millions) 2001 2000 2001 2000
- ------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at January 1 $ 938 $ 868 $ 575 $ 478
Service cost 55 52 14 14
Interest cost 68 67 42 37
Plan amendments - 6 - 1
Actuarial (gains) losses 197 121 (13) 46
Settlements, curtailments and
termination benefits (6) (99) - 22
Benefits paid (95) (77) (28) (23)
------- ------ ------ ------
Benefit obligations at December 31 $ 1,157 $ 938 $ 590 $ 575
- ------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January
1 $ 1,079 $1,310
Actual return on plan assets (35) (8)
Employer contributions - 1
Trustee distributions(a) (20) (18)
Settlements paid - (134)
Benefits paid from plan assets (82) (72)
------- ------
Fair value of plan assets at December
31 $ 942 $1,079
- ------------------------------------------------------------------------------
Funded status of plans at December 31 $ (215)(b) $ 141 (b) $ (590) $ (575)
Unrecognized net gain from transition (14) (18) - -
Unrecognized prior service costs
(credits) 53 59 (51) (59)
Unrecognized actuarial (gains) losses 299 (37) 97 115
Additional minimum liability(c) (21) (19) - -
------- ------ ------ ------
Prepaid (accrued) benefit cost $ 102 $ 126 $ (544) $ (519)
- ------------------------------------------------------------------------------
(a) Represents transfers of excess pension assets to fund retiree health care
benefits accounts under Section 420 of the Internal Revenue Code.
(b) Includes several plans that have accumulated benefit obligations in excess
of plan assets:
2001 2000
------- ------
Aggregate accumulated benefit
obligations $ (26) $ (34)
Aggregate projected benefit
obligations (58) (43)
Aggregate plan assets - -
(c)Additional minimum liability recorded was offset by the following:
Intangible asset $ - $ 3
======= ======
Accumulated other comprehensive income (losses):
Beginning of year $ (11) $ (3)
Change during year (net of tax) (3) (8)
------- ------
Balance at end of year $ (14) $ (11)
Differences in accumulated other comprehensive losses between the above
presentation and amounts reported in the statement of equity represent
amounts related to the net investment in United States Steel.
- -------------------------------------------------------------------------------
F-22
Pension Benefits Other Benefits
--------------------- ------------------
(In millions) 2001 2000 1999 2001 2000 1999
- -----------------------------------------------------------------------------------
Components of net periodic
benefit cost (credit) -
continuing operations
Service cost $ 55 $ 52 $ 65 $ 14 $ 14 $ 17
Interest cost 68 67 67 42 37 36
Expected return on plan assets (107) (117) (114) - - -
Amortization - net transition gain (4) (4) (5) - - -
- prior service costs (credits) 5 4 4 (7) (10) (8)
- actuarial (gains) losses - (9) 1 4 3 7
Multiemployer and other plans 5 5 5 - - -
Settlement and termination (gain)
loss 3 32(a) (7)(a) - 21(a) -
----- ----- ----- ---- ---- ----
Net periodic benefit cost $ 25 $ 30 $ 16 $ 53 $ 65 $ 52
- -----------------------------------------------------------------------------------
(a) Includes voluntary early retirement programs.
Pension Benefits Other Benefits
----------------- ---------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------
Weighted average actuarial assumptions at
December 31:
Discount rate 7.0% 7.5% 7.0% 7.5%
Expected annual return on plan assets 9.5% 9.5% n/a n/a
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
- ----------------------------------------------------------------------------
For measurement purposes, a 7.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2002. The rate was
assumed to decrease gradually to 5% for 2007 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-
(In millions) Point Increase Point Decrease
- ---------------------------------------------------------------------------
Effect on total of service and interest cost
components $ 9 $ (7)
Effect on other postretirement benefit
obligations 77 (63)
- ---------------------------------------------------------------------------
Marathon also contributes to several defined contribution plans for
salaried employees. Contributions to these plans, which for the most part are
based on a percentage of the employees' salaries, totaled $35 million in 2001,
$32 million in 2000 and $34 million in 1999.
- -------------------------------------------------------------------------------
17. Property, Plant and Equipment
December
(In millions) 31 2001 2000
- ----------------------------------------------------------------------
Production $12,965 $12,266
Refining 3,078 2,800
Marketing 2,043 2,286
Transportation 1,492 1,402
Other 384 312
------- -------
Total 19,962 19,066
Less accumulated depreciation, depletion and
amortization 10,384 9,691
------- -------
Net $ 9,578 $ 9,375
- ----------------------------------------------------------------------
Property, plant and equipment includes gross assets acquired under capital
leases of $8 million at December 31, 2001 and 2000, with related amounts in
accumulated depreciation, depletion and amortization of $1 million at December
31, 2001.
During 2000, Marathon 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. The fair value of the properties was
determined using a discounted cash flow model, unless an indicative offer to
purchase was available. Marathon used pricing assumptions based on forecasted
prices applicable for the remaining life of the assets derived from current
market conditions and long-term forecasts. The discounted cash flow
calculation included risk-adjusted probable and possible reserve quantities.
Impairment charges were included in depreciation, depletion and amortization.
F-23
- -------------------------------------------------------------------------------
18. Income Taxes
Provisions (credits) for income taxes from continuing operations were:
2001 2000 1999
---------------------- ---------------------- ----------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
- --------------------------------------------------------------------------------------
Federal $ 706 $ (96) $ 610 $ 608 $ (144) $ 464 $ 187 $ 158 $ 345
State and local 86 16 102 53 (46) 7 3 (7) (4)
Foreign 184 (137) 47 55 (50) 5 25 (46) (21)
----- ------ ----- ----- ------ ----- ----- ----- -----
Total $ 976 $ (217) $ 759 $ 716 $ (240) $ 476 $ 215 $ 105 $ 320
- --------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total provisions
from continuing operations follows:
(In millions) 2001 2000 1999
- ---------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ 727 $ 314 $ 338
Effects of foreign operations:
Impairment of deferred tax benefits(a) - 235 -
Adjustments to foreign valuation allowances - (30) -
All other, including foreign tax credits (30) (30) (18)
State and local income taxes after federal income tax
effects 66 5 (3)
Credits other than foreign tax credits (9) (7) (7)
Effects of partially owned companies (5) (5) (5)
Dispositions of subsidiary investments - - 7
Adjustment of prior years' federal income taxes 3 (11) 4
Other 7 5 4
----- ----- -----
Total provisions $ 759 $ 476 $ 320
- ---------------------------------------------------------------------------
(a) 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.
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 2001 2000
- -------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards (expiring in 2021) $ 13 $ -
State tax loss carryforwards (expiring in 2007 through 2019) 153 70
Foreign tax loss carryforwards (portions of which expire in
2004 through 2008) 361 269
Employee benefits 236 246
Receivables, payables and debt 7 41
Expected federal benefit for:
Crediting certain foreign deferred income taxes 288 315
Deducting state deferred income taxes 13 20
Contingencies and other accruals 159 155
Investments in subsidiaries and equity investees 72 69
Other 56 60
Valuation allowances:
State (76) (16)
Foreign (285) (252)
------- -------
Total deferred tax assets(b) 997 977
------- -------
Deferred tax liabilities:
Property, plant and equipment 1,705 1,642
Inventory 313 320
Prepaid pensions 82 119
Other 151 160
------- -------
Total deferred tax liabilities 2,251 2,241
------- -------
Net deferred tax liabilities $ 1,254 $ 1,264
- -------------------------------------------------------------------------------
(b) Marathon expects to generate sufficient future taxable income to realize
the benefit of the 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 Marathon's tax profile
in the years that such credits may be claimed.
F-24
The consolidated tax returns of Marathon for the years 1992 through 1997
are under various stages of audit and administrative review by the IRS.
Marathon believes it has made adequate provision for income taxes and interest
which may become payable for years not yet settled.
Pretax income from continuing operations included $102 million, $237
million and $66 million attributable to foreign sources in 2001, 2000 and
1999, respectively.
Undistributed earnings of certain consolidated foreign subsidiaries at
December 31, 2001, amounted to $342 million. No provision for deferred U.S.
income taxes has been made for these subsidiaries because Marathon intends to
permanently reinvest such earnings in those foreign operations. If such
earnings were not permanently reinvested, a deferred tax liability of $91
million would have been required.
On December 31, 2001, the Separation Date, Marathon and United States Steel
entered into a Tax Sharing Agreement 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 incorporates the general tax sharing principles
of the former tax allocation policy. In general, Marathon and United States
Steel will make payments between them such that, with respect to any
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 Marathon and United States Steel will be determined,
subject to certain adjustments, as if the former groups each filed their own
consolidated, combined or unitary tax return. The Tax Sharing Agreement also
provides for payments between Marathon and United States Steel for certain tax
adjustments which may be made after the Separation. Other provisions address,
but are not limited to, the handling of tax audits, settlements and return
filing in cases where both Marathon and United States Steel have an interest
in the results of these activities.
A preliminary settlement for the calendar year 2001 federal income taxes,
which would have been made in March 2002 under the former tax allocation
policy, was made immediately prior to the Separation at a discounted amount to
reflect the time value of money. Under the preliminary settlement for calendar
year 2001, United States Steel received approximately $440 million from
Marathon immediately prior to Separation arising from the application of the
tax allocation policy. This policy provided that United States Steel would
receive the benefit of tax attributes (principally net operating losses and
various tax credits) that arose out of its business and which were used on a
consolidated basis.
Additionally, pursuant to the Tax Sharing Agreement, Marathon and United
States Steel have agreed to protect the tax-free status of the Separation.
Marathon and United States Steel each 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 has represented 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 of
business) during the two-year period following the Separation. To the extent
that a breach of a representation or covenant results in corporate tax being
imposed, the breaching party, either Marathon or United States Steel, will be
responsible for the payment of the corporate tax.
- -------------------------------------------------------------------------------
19. Inventories
(In millions) December 31 2001 2000
- --------------------------------------------------------
Crude oil and natural gas liquids $ 693 $ 701
Refined products and merchandise 1,143 1,069
Supplies and sundry items 87 97
------- -------
Total (at cost) 1,923 1,867
Less inventory market valuation reserve 72 -
------- -------
Net inventory carrying value $ 1,851 $ 1,867
- --------------------------------------------------------
Inventories of crude oil and refined products are valued by the LIFO
method. The LIFO method accounted for 92% of total inventory value at December
31, 2001 and 2000. Current acquisition costs were estimated to exceed the
above inventory values at December 31, 2000, by approximately $500 million.
Cost of revenues was reduced and income from operations was increased by $17
million in 2001 and $14 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.
F-25
- -------------------------------------------------------------------------------
20. Investments and Long-Term Receivables
(In millions) December 31 2001 2000
- ---------------------------------------------
Equity method investments $ 940 $ 250
Other investments 34 34
Receivables due after one year 90 54
Deposits of restricted cash 11 16
Other 1 8
------- -----
Total $ 1,076 $ 362
- ---------------------------------------------
Summarized financial information of investees accounted for by the equity
method of accounting follows:
(In millions) 2001 2000 1999
- --------------------------------------------------------
Income data - year:
Revenues and other income $ 2,824 $ 417 $ 422
Operating income 332 174 152
Net income 257 123 119
- --------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 598 $ 328
Noncurrent assets 3,172 1,247
Current liabilities 534 256
Noncurrent liabilities 1,097 650
- --------------------------------------------------------
Marathon's carrying value of its equity method investments is $118 million
lower than the underlying net assets of investees. Generally this basis
difference is being amortized into earnings over the lives of the underlying
net assets.
In the third quarter of 2001, MAP and Pilot Corporation formed a joint
venture combining their travel center operations. The joint venture company,
named Pilot Travel Centers LLC (PTC), commenced operations on September 1,
2001 and is accounted for under the equity method of accounting. MAP sales to
PTC totaled $210 million in 2001. There were no sales to PTC in 2000 or 1999.
In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed a
definitive agreement to form a joint venture combining certain of their oil
and gas producing activities in the U.S. Permian Basin, including Marathon's
interest in the Yates Field. The joint venture, named MKM Partners L.P.,
commenced operations in January 2001 and is accounted for under the equity
method of accounting. 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.
In 2000, Marathon exchanged its investment in Sakhalin Energy for a working
interest in the Foinaven field located in the Atlantic Margin offshore the
United Kingdom and an overriding royalty interest in an eight block area in
the Gulf of Mexico, which includes the Ursa field. Additionally, Marathon
received reimbursement for amounts advanced to Sakhalin Energy in 2000 and a
cash settlement for certain other activities in 2000. The transaction was
recorded at fair value and resulted in a pretax gain on disposal of assets of
$58 million.
Dividends and partnership distributions received from equity investees were
$95 million in 2001, $46 million in 2000 and $44 million in 1999.
Marathon purchases from equity investees totaled $54 million, $61 million
and $50 million in 2001, 2000 and 1999, respectively.
F-26
- -------------------------------------------------------------------------------
21. Stock-Based Compensation Plans
The 1990 Stock Plan, amended and restated as the Marathon Oil Corporation 1990
Stock Plan, authorizes the Compensation and Organization Committee of the
board of directors of Marathon to grant restricted stock, stock options and
stock appreciation rights to key management employees. Up to 0.5 percent of
the outstanding stock, as determined on December 31 of the preceding year, is
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.
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 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:
Shares Price(a)
- ----------------------------------------------
Balance December 31, 1998 4,074,940 $26.62
Granted 1,005,000 29.38
Exercised (176,160) 27.27
Canceled (121,055) 30.19
---------
Balance December 31, 1999 4,782,725 27.08
Granted 1,799,880 25.18
Exercised (58,870) 23.11
Canceled (410,115) 28.06
---------
Balance December 31, 2000 6,113,620 26.50
Granted 1,642,395 32.52
Exercised (961,480) 21.70
Canceled (64,430) 30.11
---------
Balance December 31, 2001 6,730,105 28.62
- ----------------------------------------------
(a) Weighted-average exercise price.
The following table represents stock options at December 31, 2001:
Outstanding Exercisable
------------------------------------------- --------------------------
Number of Number of
Range of Shares Weighted-Average Shares
Exercise Under Remaining Weighted-Average Under Weighted-Average
Prices Option Contractual Life Exercise Price Option Exercise Price
- --------------------------------------------------------------------------------------
$17.00 - 23.44 1,131,035 4.3 years $21.06 1,131,035 $21.06
25.50 - 26.47 1,359,010 8.4 25.54 1,359,010 25.54
29.38 - 34.00 4,240,060 7.6 31.62 2,624,565 31.07
--------- ---------
Total 6,730,105 7.2 28.62 5,114,610 27.39
- --------------------------------------------------------------------------------------
The following net income and per share data represent the difference
between stock-based compensation valued at fair value on the date of grant and
recognized compensation costs.
(In millions, except per share data) December 31 2001 2000 1999
- ---------------------------------------------------------------------------
Income from continuing operations applicable to Common
Stock
- As reported $ 1,317 $ 420 $ 646
- Pro forma 1,311 415 642
Basic and diluted net income per share
- As reported 4.26 1.35 2.09
- Pro forma 4.24 1.34 2.08
Net income applicable to Common Stock
- As reported $ 377 $ 432 $ 654
- Pro forma 371 427 650
Basic and diluted net income per share
- As reported 1.22 1.39 2.11
- Pro forma 1.20 1.38 2.10
- ---------------------------------------------------------------------------
F-27
The above pro forma amounts were based on a Black-Scholes option-pricing
model, which included the following information and assumptions:
2001 2000 1999
- -----------------------------------------------------------------------------
Weighted-average grant-date exercise price per share $ 32.52 $ 25.18 $ 29.38
Expected annual dividends per share $ .92 $ .88 $ .84
Expected life in years 5 5 7
Expected volatility 34% 33% 29%
Risk-free interest rate 4.9% 6.5% 5.8%
- -----------------------------------------------------------------------------
Weighted-average grant-date fair value of options
granted during the year, as calculated from above $ 9.45 $ 7.51 $ 8.89
- -----------------------------------------------------------------------------
Restricted stock represents stock granted for such consideration, if any, as
determined by the Compensation and Organization Committee, subject to
forfeiture provisions and restrictions on 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 under
the 1990 Stock Plan:
2001 2000 1999
- ------------------------------------------------------------------------------
Number of shares granted 205,346 410,025 28,798
Weighted-average grant-date fair value per share $ 31.30 $ 25.50 $ 29.38
- ------------------------------------------------------------------------------
Marathon also has a restricted stock plan for certain salaried employees
that are not officers of Marathon. Participants in the plan are awarded
restricted stock by the Salary and Benefits Committee based on their
performance within certain guidelines. 50% of the awarded stock vests at the
end of two years from the date of grant and the remaining 50% vests in four
years from the date of grant. Prior to vesting, the employee has the right to
vote such stock and receive dividends thereon. The nonvested shares are not
transferable and are retained by the Corporation until they vest.
Deferred compensation is charged to equity when the restricted stock is
granted. 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 the restricted stock grants
under the nonofficers plan for 2001:
- -----------------------------------------------------------
Number of shares granted 540,488
Weighted-average grant-date fair value per share $ 29.31
- -----------------------------------------------------------
Marathon has a deferred compensation plan for nonemployee 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. During 2001, 12,358 shares of stock were issued,
during 2000, 14,242 shares of stock were issued and during 1999, 10,541 shares
of stock were issued.
Actual stock based compensation expense (credit) was $16 million in 2001, $5
million in 2000 and $(4) million in 1999.
F-28
- -------------------------------------------------------------------------------
22. 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 25, by individual balance sheet
account. Marathon's financial instruments at December 31, 2001 and 2000 were:
2001 2000
---------------- ----------------
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
- -------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 657 $ 657 $ 340 $ 340
Receivables 1,708 1,708 2,262 2,262
Receivables from United States Steel 515 615 5 5
Investments and long-term receivables 192 136 171 107
------- ------- ------- -------
Total financial assets $ 3,072 $ 3,116 $ 2,778 $ 2,714
- -------------------------------------------------------------------------------
Financial liabilities:
Notes payable $ - $ - $ 80 $ 80
Accounts payable 2,431 2,431 3,019 3,019
Accrued interest 85 85 61 61
Payable to United States Steel 28 28 366 366
Obligations to repay preferred securities 295 295 - -
Long-term debt (including amounts due within
one year) 3,830 3,556 2,174 2,078
Preferred stock of subsidiary - - 175 184
------- ------- ------- -------
Total financial liabilities $ 6,669 $ 6,395 $ 5,875 $ 5,788
- -------------------------------------------------------------------------------
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. Fair value of
preferred stock of subsidiary 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.
Marathon'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.
- -------------------------------------------------------------------------------
23. Preferred Stocks
USX Capital LLC, a former wholly owned subsidiary of Marathon, had 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. In December 2001, $27 million of MIPS was exchanged for debt
securities of United States Steel. On December 31, 2001, USX Capital LLC
redeemed all of the remaining outstanding MIPS. At the redemption date, USX
Capital LLC paid $25.18 per share reflecting the redemption price of $25 per
share, plus a cash payment for accrued but unpaid dividends through the
redemption date. After the redemption date, the MIPS ceased to accrue
dividends and only represented the right to receive the redemption price.
In 1997, Marathon exchanged approximately 3.9 million, $50 face value,
6.75% Convertible Quarterly Income Preferred Securities of USX Capital Trust I
(QUIPS), a Delaware statutory business trust, for an equivalent number of
shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred
Stock). In December 2001, $12 million of QUIPS was exchanged for debt
securities of United States Steel. At the time of Separation, all outstanding
QUIPS became redeemable at their face value plus accrued but unpaid
distributions. The QUIPS were included in the net investment in United States
Steel.
Marathon had issued 6.50% Preferred Stock and, prior to the Separation, had
2,209,042 shares (stated value of $1.00 per share; liquidation preference of
$50.00 per share) outstanding. In December 2001, $10 million of 6.50%
Preferred Stock was exchanged for debt securities of United States Steel. At
the time of Separation, all outstanding shares of the 6.50% Preferred Stock
were converted into the right to receive $50.00 in cash. Holders received
payment on January 3, 2002.
F-29
- -------------------------------------------------------------------------------
24. Stockholder Rights Plan
In 2002, the Marathon's stockholder rights plan (the Rights Plan), was amended
due to the Separation. Under the Rights Plan each outstanding share of Common
Stock currently includes one right to purchase from Marathon one one-hundredth
of a share of its Series A Junior Preferred Stock at an exercise price of $110
per unit, subject to adjustment. Under the Rights Plan, the rights will become
exercisable, subject to certain exceptions, after any person or group of
affiliated or associated persons 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 Common Stock, except pursuant to a
qualifying all-cash tender offer for all outstanding shares of Common Stock
which results in the offeror owning shares of Common Stock representing a
majority of the voting power (other than Voting Stock beneficially owned by
the offeror immediately prior to the offer). If the rights become exercisable,
each right will entitle 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 Common Stock (or, in certain
circumstances, other property) or other securities of Marathon 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 engages in a merger or other
business combination where it is not the surviving corporation or where it is
the surviving corporation and the Common Stock is changed or exchanged, or if
50% or more of Marathon's assets, earnings power or cash flow are sold or
transferred, each right will entitle 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 Marathon before they become exercisable. Under certain
circumstances, the Board of Directors has the option to exchange one share of
the respective class of Common Stock for each exercisable right.
- -------------------------------------------------------------------------------
25. Derivative Instruments
The following table sets forth quantitative information by category of
derivative instrument at December 31, 2001. The amounts exclude the variable
margin deposit balances held in various brokerage accounts. Marathon did not
have any foreign currency contracts in place at December 31, 2001.
Fair Carrying
Value Fair Value Value Carrying Value
(In millions) Assets(a) (Liabilities)(a) Assets(b) (Liabilities)(b)
- ----------------------------------------------------------------------------
Fair Value Hedges(c):
Exchange-traded
commodity futures $ - $ (1) $ -- $ (1)
Exchange-traded
commodity options - - - -
OTC commodity swaps - (13) - (13)
OTC commodity options - -- - --
Cash Flow Hedges(d):
Exchange-traded
commodity futures $ - $ (3) $ - $ (3)
Exchange-traded
commodity options - - - -
OTC commodity swaps 68 (15) 68 (15)
OTC commodity options - - - -
Non-Hedge
Designation(e):
Exchange-traded
commodity futures $ 16 $ (31) $ 16 $ (31)
Exchange-traded
commodity options 15 (10) 15 (10)
OTC commodity swaps 152 (85) 152 (85)
OTC commodity options 32 (14) 32 (14)
- ----------------------------------------------------------------------------
(a) The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value of exchange-traded positions are based on
market price changes for each commodity.
(b) The carrying values represent the value of the derivative instruments.
This excludes any margin deposit amounts with respective brokers. These
amounts are reflected on a gross basis. Marathon's consolidated balance
sheet is reflected on a net asset/(liability) basis, as permitted by the
master netting agreements, by brokerage firm.
(c) There was no ineffectiveness associated with fair value hedges for 2001
because the hedging instrument and the existing firm commitment contracts
are priced on the same underlying index. Certain derivative instruments
used in the fair value hedges mature between 2002 and 2008.
(d) The ineffective portion of changes in the fair value, on a pretax basis,
for cash flow hedges recognized during 2001 was a favorable $3 million.
In addition, during 2001, $12 million was recognized in income before tax
as the result of a discontinuation of a portion of a cash flow hedge
related to sales of natural gas production. This amount was reflected
within revenues. Certain derivative instruments used in the cash flow
hedges mature in 2002.
(e) The table excludes nontraditional derivative instruments which are
created due to netting of physical receipts and delivery volumes with the
same counterparty. At December 31, 2001, the fair value of these assets
and liabilities was $27 million and $26 million, respectively.
F-30
- -------------------------------------------------------------------------------
26. Contingencies and Commitments
Marathon 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 Marathon's
consolidated financial statements. However, management believes that Marathon
will remain a viable and competitive enterprise even though it is possible
that these contingencies could be resolved unfavorably.
Environmental matters - Marathon 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, 2001 and
2000, accrued liabilities for remediation totaled $77 million and $75 million,
respectively. It is not presently possible to estimate the ultimate amount of
all remediation costs that might be incurred or the penalties that may be
imposed. Receivables for recoverable costs from certain states, under programs
to assist companies in cleanup efforts related to underground storage tanks at
retail marketing outlets, were $60 million and $57 million at December 31,
2001 and 2000, respectively.
For a number of years, Marathon has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to the
environment. In 2001 and 2000, such capital expenditures totaled $67 million
and $73 million, respectively. Marathon anticipates making additional such
expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
On May 11, 2001, MAP entered into a consent decree with the U.S.
Environmental Protection Agency which commits it to complete certain agreed
upon environmental programs over an eight-year period primarily aimed at
reducing air emissions at its seven refineries. This consent decree was
approved by the court on August 28, 2001. The current estimated cost to
complete these programs is approximately $300 million in expenditures over the
next seven years. In addition, MAP is required to complete certain agreed upon
supplemental environmental projects as part of this settlement of an
enforcement action for alleged Clean Air Act violations, at a current
estimated cost of $8 million.
At December 31, 2001 and 2000, accrued liabilities for platform abandonment
and dismantlement totaled $193 million and $162 million, respectively.
Guarantees - Marathon guaranteed certain obligations related to the business
of United States Steel. As of December 31, 2001, the exposure for all of these
matters totaled $28 million.
United States Steel is the sole general partner of Clairton 1314B
Partnership, L.P., which owns certain cokemaking facilities formerly owned by
United States Steel. Marathon has guaranteed to the limited partners all
obligations of United States Steel under the partnership documents. United
States Steel may dissolve the partnership under certain circumstances,
including if it is required to fund accumulated cash shortfalls of the
partnership in excess of $150 million. In addition to the normal commitments
of a general partner, United States Steel has indemnified the limited partners
for certain income tax exposures. As of December 31, 2001, United States Steel
had no unpaid outstanding obligation to the limited partners.
At December 31, 2001 and 2000, Marathon's pro rata share of obligations of
LOOP LLC and various pipeline investees secured by throughput and deficiency
agreements totaled $112 million and $119 million, respectively. Under the
agreements, Marathon is required to advance funds if the investees are unable
to service debt. Any such advances are prepayments of future transportation
charges.
At December 31, 2001, MAP had guaranteed the repayment of $35 million of
the outstanding balance of Centennial Pipeline LLC's Master Shelf Agreement.
Concentration of credit risk - Marathon is exposed to credit risk in the event
of nonpayment by counterparties, a significant portion of which are
concentrated in energy related industries. The creditworthiness of customers
and other counterparties is subject to continuing review, including the use of
master netting agreements, where appropriate. While no single customer
accounts for more than 5% of annual gross revenues, Marathon has significant
exposures to United States Steel arising from the separation. Those exposures
are discussed in Notes 2, 11 and 15.
Commitments - At December 31, 2001 and 2000, Marathon's contract commitments
to acquire property, plant and equipment totaled $297 million and $457
million, respectively.
Marathon is a party to a 15-year transportation services agreement with a
natural gas transmission company. The contract requires Marathon to pay
minimum annual charges of approximately $5 million and concludes in 2015. The
payments are required even if the transportation facility is not utilized.
Payments made under the contract in 2001 were $5 million. Payments of less
than $1 million were made in 2000.
F-31
Put/Call Agreements - In connection with the 1998 formation of MAP, Marathon
and Ashland 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 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.
As part of the formation of Pilot Travel Centers LLC (PTC), MAP and Pilot
Corporation (Pilot) entered into a Put/Call and Registration Rights Agreement
(Agreement). The Agreement provides that any time after September 1, 2006,
Pilot can sell its interest in PTC to MAP for an amount of cash and/or
Marathon, MAP or Ashland equity securities equal to the product of 90% (95% if
paid in securities) of the fair market value of PTC at the time multiplied by
Pilot's percentage interest in PTC. At any time after September 1, 2011, under
certain conditions MAP will have the right to purchase Pilot's interest in PTC
for an amount of cash and/or Marathon, MAP or Ashland equity securities equal
to the product of 105% (110% if paid in securities) of the fair market value
of PTC at the time multiplied by Pilot's percentage interest in PTC.
- -------------------------------------------------------------------------------
27. Subsequent Event - Business Combination
On January 3, 2002, Marathon completed its acquisition of certain interests in
Equatorial Guinea, West Africa from CMS Energy Corporation for $993 million in
cash, excluding working capital adjustments. The acquisition includes oil and
gas producing assets, exploration interests and certain processing facilities.
Marathon utilized unused lines of credit to fund this acquisition until
permanent financing is obtained.
Marathon will account for this acquisition under SFAS No. 141, which was
described in Note 4. Any goodwill arising from this transaction will be
accounted for under SFAS No. 142, which also was described in Note 4.
F-32
Selected Quarterly Financial Data (Unaudited)
2001 2000
-------------------------------------- ------------------------------------
(In millions, except
per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ---------------------------------------------------------------------------------------------------
Revenues and other
income:
Revenues $ 6,803 $ 8,496 $ 9,113 $ 8,607 $ 8,881 $ 9,150 $ 8,667 $ 7,729
Other income (loss) 43 (166) 55 115 (833) 59 30 116
------- ------- ------- ------- ------- ------- ------- -------
Total 6,846 8,330 9,168 8,722 8,048 9,209 8,697 7,845
Income (loss) from
operations 216 577 1,253 908 (471) 723 857 521
Includes:
Loss related to sale
of certain Canadian
assets - (221) - - - - - -
Inventory market
valuation reserve
adjustments (72) - - - - - - -
Joint venture
formation
charges - - - - (931) - - -
Income (loss) from
continuing operations 53 183 580 502 (313) 116 365 252
Income (loss) from
discontinued
operations (1,127) (13) (29) 16 (136) 23 60 44
Income (loss) before
cumulative effect of
change in accounting
principle (1,074) 170 551 518 (449) 139 425 296
Net income (loss) (1,074) 170 551 510 (449) 139 425 296
- ---------------------------------------------------------------------------------------------------
Common Stock data:
Net income (loss) (898) 193 582 500 (310) 121 367 254
- Per share - basic
and diluted(a) (2.90) .63 1.88 1.62 (1.00) .38 1.18 .81
Dividends paid per
share .23 .23 .23 .23 .23 .23 .21 .21
Price range of Common
Stock(b)
- Low 25.27 24.95 26.23 25.85 25.25 23.50 22.81 20.69
- High 30.35 32.75 33.73 29.99 30.38 29.63 29.19 27.50
- ---------------------------------------------------------------------------------------------------
Steel Stock data:
Net income (loss) (193) (25) (32) 7 (141) 17 54 41
- Per share - basic
and diluted (2.17) (.28) (.36) .08 (1.59) .19 .62 .45
Dividends paid per
share .10 .10 .10 .25 .25 .25 .25 .25
Price range of Steel
Stock(b)
- Low 13.00 13.08 13.72 14.00 12.69 14.88 18.25 20.63
- High 18.75 21.70 22.00 18.00 18.31 19.69 26.88 32.94
- ---------------------------------------------------------------------------------------------------
(a) Net income (loss) per share equals income (loss) per share before
cumulative effect of change in accounting principle for all periods except
the first quarter of 2001, where there was a negative $.03 per share
cumulative effect. Basic and diluted earnings (loss) per share are equal
for all periods except the third quarter of 2001 where diluted earnings
per share is $.01 less than basic earnings per share presented.
(b)Composite tape.
Principal Unconsolidated Investees (Unaudited)
December 31, 2001
Company Country Ownership Activity
- ---------------------------------------------------------------------------------------
Centennial Pipeline LLC United States 33%(a) Pipeline & Storage Facility
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Kenai LNG Corporation United States 30% Natural Gas Liquefication
LOCAP LLC United States 50%(a) Pipeline & Storage Facilities
LOOP LLC United States 47%(a) Offshore Oil Port
MKM Partners L.P. United States 50%(b) Oil & Gas Production
Manta Ray Offshore
Gathering Company, LLC United States 24% Natural Gas Transmission
Minnesota Pipe Line
Company United States 33%(a) Pipeline Facility
Nautilus Pipeline
Company, LLC United States 24% Natural Gas Transmission
Odyssey Pipeline LLC United States 29% Pipeline Facility
Pilot Travel Centers LLC United States 50%(a) Travel Centers
Poseidon Oil Pipeline
Company, LLC United States 28% Crude Oil Transportation
Southcap Pipe Line
Company United States 22%(a) Crude Oil Transportation
- ---------------------------------------------------------------------------------------
(b) Marathon's income participation is 85%.
(a) Represents the ownership interest held by MAP.
F-33
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
The Supplementary Information on Oil and Gas Producing Activities is
presented in accordance with Statement of Financial Accounting Standards No.
69, "Disclosures about Oil and Gas Producing Activities". Included as
supplemental information are capitalized costs related to oil and gas
producing activities, results of operations for oil and gas producing
activities and costs incurred in oil and gas property acquisition, exploration
and development activities. These tables reflect data related to oil and gas
producing activities only and do not correspond with the Exploration and
Production data reported in Management's Discussion and Analysis of Income and
Operations and in Note 10 of the Notes to Consolidated Financial Statements.
Supplemental information is also provided for estimated quantities of proved
oil and gas reserves, standardized measure of discounted future net cash flows
relating to proved oil and gas reserve quantities and a summary of changes
therein.
The supplemental information is disclosed by the following geographic
areas: the United States, Europe, which primarily includes activities in the
United Kingdom, Denmark, Ireland, the Netherlands and Norway; and Other
International, which includes activities in Angola, Canada, Gabon and other
international locations outside of Europe. Equity Investees include Marathon's
equity share of the activities of oil and gas companies that are accounted for
by the equity method. This includes MKM Partners L.P. (MKM) and CLAM Petroleum
B.V. (CLAM) for 2001 and CLAM and Sakhalin Energy Investment Company Ltd.
(Sakhalin Energy) for 2000 and 1999.
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
United Other Equity
(In millions) December 31 States Europe Intl. Consolidated Investees Total
- ---------------------------------------------------------------------------------------
2001
Capitalized costs:
Proved properties $ 6,123 $ 4,920 $ 840 $ 11,883 $ 569 $ 12,452
Unproved properties 651 183 262 1,096 2 1,098
------- ------- ------- -------- ----- --------
Total 6,774 5,103 1,102 12,979 571 13,550
------- ------- ------- -------- ----- --------
Accumulated
depreciation, depletion
and amortization:
Proved properties 3,789 3,375 360 7,524 183 7,707
Unproved properties 68 - 11 79 - 79
------- ------- ------- -------- ----- --------
Total 3,857 3,375 371 7,603 183 7,786
------- ------- ------- -------- ----- --------
Net capitalized costs $ 2,917 $ 1,728 $ 731 $ 5,376 $ 388 $ 5,764
- ---------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------
Costs Incurred for Property Acquisition, Exploration and Development -
Including Capital Expenditures
United Other Equity
(In millions) States Europe Intl. Consolidated Investees Total
- ---------------------------------------------------------------------------------------
2001: Property acquisition:
Proved $ 231 $ - $ 1 $ 232 $ - $ 232
Unproved 395 24 91 510 - 510
Exploration 190 20 63 273 8 281
Development 356 205 52 613 19 632
- ---------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------
(a) Includes proceeds of $25 million realized from the reduction of mineral
interests.
F-34
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) C O N T I N U E D
Results of Operations for Oil and Gas Producing Activities, Excluding
Corporate Overhead and Interest Costs(a)
United Other Equity
(In millions) States Europe(b) Intl. Consolidated Investees Total
- -----------------------------------------------------------------------------------
2001:Revenues:
Sales $ 871 $ 706 $ 247 $ 1,824 $ 49 $ 1,873
Transfers 1,235 - 134 1,369 69 1,438
Other revenues(c) 68 - (221) (153) - (153)
------- ----- ----- ------- ---- -------
Total revenues 2,174 706 160 3,040 118 3,158
Expenses:
Production costs (356) (154) (103) (613) (34) (647)
Shipping and handling
costs (99) (35) - (134) (1) (135)
Exploration expenses (90) (8) (46) (144) - (144)
Depreciation,
depletion and
amortization (449) (249) (113) (811) (13) (824)
Impairments - - (1) (1) - (1)
Other expenses (38) (4) (58) (100) - (100)
------- ----- ----- ------- ---- -------
Total expenses (1,032) (450) (321) (1,803) (48) (1,851)
Other production-
related earnings
(losses)(d) 3 (24) 5 (16) 1 (15)
------- ----- ----- ------- ---- -------
Results before income
taxes 1,145 232 (156) 1,221 71 1,292
Income taxes (credits) 389 69 (58) 400 25 425
------- ----- ----- ------- ---- -------
Results of operations $ 756 $ 163 $ (98) $ 821 $ 46 $ 867
- -----------------------------------------------------------------------------------
2000:Revenues:
Sales $ 783 $ 579 $ 310 $ 1,672 $145 $ 1,817
Transfers 1,337 - 188 1,525 - 1,525
Other revenues(c) (875) 10 55 (810) - (810)
------- ----- ----- ------- ---- -------
Total revenues 1,245 589 553 2,387 145 2,532
Expenses:
Production costs (371) (101) (133) (605) (34) (639)
Shipping and handling
costs (72) (10) - (82) - (82)
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(c) 4 - (2) 2 - 2
------- ----- ----- ------- ---- -------
Total revenues 1,433 431 286 2,150 33 2,183
Expenses:
Production costs (322) (135) (99) (556) (25) (581)
Shipping and handling
costs (77) (2) - (79) - (79)
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
- -----------------------------------------------------------------------------------
(b) Prior years reclassified to conform to 2001 classifications.
(a) Includes the results of using derivative instruments to manage commodity
and foreign currency risks.
(c) Includes gain on offshore lease resolution with U.S. Government and net
gains (losses) on asset dispositions.
(d) Includes revenues, net of associated costs, from third-party activities
that are an integral part of Marathon'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.
F-35
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
Average Production Costs(a)
(Dollars per BOE) 2001 2000 1999
- ----------------------------------------------------------
United States $ 3.78 $ 4.01 $ 3.26
International - Europe 4.31 3.48 4.55
- Other International 5.93 6.09 4.66
Total Consolidated 4.16 4.22 3.71
- Equity Investees 6.37 6.00 10.02
Worldwide 4.24 4.29 3.82
- ----------------------------------------------------------
(a) Computed using production costs as disclosed in Results of Operations for
Oil and Gas Activities and as defined by the Securities and Exchange
Commission. Natural gas volumes were converted to barrels of oil
equivalent (BOE) using a conversion factor of six mcf of natural gas to
one barrel of oil.
Average Sales Prices
Crude Oil and
Condensate Natural Gas Liquids Natural Gas
----------------------- ----------------------- --------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- ------- ------ ------ ------
Average Sales Prices(a)
(excluding results of (Dollars per
hedging) (Dollars per Barrel) Thousand Cubic Feet)
- ---------------------------------------------------------------------------------------------
United States $ 21.13 $ 26.47 $ 16.41 $ 16.67 $ 19.20 $ 12.30 $ 3.69 $ 3.49 $ 2.07
International - Europe 23.74 27.90 17.59 19.17 24.98 13.84 2.77 2.56 2.03
- Other
International 22.97 25.77 16.77 21.34 23.48 13.49 3.48 3.20 1.64
Total Consolidated 22.02 26.56 16.65 17.46 20.35 12.67 3.43 3.20 2.00
- Equity
Investee 23.59 29.64 23.43 19.58 28.74 13.22 3.39 2.75 1.87
Worldwide 22.09 26.74 16.68 17.50 20.37 12.67 3.43 3.19 2.00
- ---------------------------------------------------------------------------------------------
Crude Oil and
Condensate Natural Gas Liquids Natural Gas
----------------------- ----------------------- --------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- ------- ------ ------ ------
Average Sales Prices(a)
(including results of (Dollars per
hedging) (Dollars per Barrel) Thousand Cubic Feet)
- ---------------------------------------------------------------------------------------------
United States $ 21.56 $ 26.00 $ 16.31 $ 16.67 $ 19.20 $ 12.30 $ 3.92 $ 3.40 $ 2.09
International - Europe 23.74 27.90 17.59 19.17 24.98 13.84 2.77 2.56 2.03
- Other
International 22.97 25.77 16.63 21.34 23.48 13.49 3.48 3.14 1.66
Total Consolidated 22.28 26.25 16.56 17.46 20.35 12.67 3.58 3.14 2.02
- Equity Investee 23.59 29.64 23.43 19.58 28.74 13.22 3.39 2.75 1.87
Worldwide 22.35 26.44 16.59 17.50 20.37 12.67 3.58 3.13 2.01
- ---------------------------------------------------------------------------------------------
(a) Prior years reclassified to conform to 2001 classifications.
Estimated Quantities of Proved Oil and Gas Reserves
Marathon's estimated net proved liquid hydrocarbon (oil, condensate, and
natural gas liquids) and gas reserves and the changes thereto for the years
2001, 2000 and 1999 are shown in the following tables. Estimates of the proved
reserves have been prepared by asset teams including reservoir engineers and
geoscience professionals. Reserve estimates are periodically reviewed by the
Corporate Reserves Group to assure that rigorous professional standards and
the reserves definitions prescribed by the U. S. Securities and Exchange
Commission (SEC) are consistently applied throughout the company.
Proved reserves are the estimated quantities of oil and gas that geologic
and engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating
conditions. Due to the inherent uncertainties and the limited nature of the
reservoir data, estimates of proved reserves are subject to potentially
substantial changes, either positively or negatively, as additional
information becomes available and contractual and economic conditions change.
Marathon's net proved reserve estimates have been adjusted as necessary to
reflect all contractual agreements, royalty obligations and interests owned by
others at the time of the estimate. Only reserves that are estimated to be
recovered during the term of the current contract, unless there is a clear and
consistent history of contract extension, have been included in the proved
reserve estimate. Reserves from properties governed by Production Sharing
Contracts have been calculated using the "economic interest" method prescribed
by the SEC. Reserves that are not currently considered proved, that may result
from extensions of currently proved areas, or that may result from applying
secondary or tertiary recovery processes not yet tested and determined to be
economic, are excluded. Purchased natural gas utilized in reservoir management
and subsequently resold is also excluded. Marathon does not have any
quantities of oil and gas reserves subject to long-term supply agreements with
foreign governments or authorities in which Marathon acts as producer.
F-36
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
Proved developed reserves are the quantities of oil and gas expected to be
recovered through existing wells with existing equipment and operating
methods. In some cases, proved undeveloped reserves may require substantial
new investments in additional wells and related facilities. Production volumes
shown are sales volumes, net of any products consumed during production
activities.
United Other Equity
(Millions of barrels) States Europe Intl. Consolidated Investees Total
- -------------------------------------------------------------------------------
Liquid Hydrocarbons
Proved developed and
undeveloped reserves:
Beginning of year - 1999 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 reserves in
place(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
Purchase of reserves in
place 8 - - 8 - 8
Exchange of reserves in
place(b) (191) - - (191) 191 -
Revisions of previous
estimates 14 (3) - 11 (3) 8
Improved recovery 13 - - 13 - 13
Extensions, discoveries and
other additions 12 - 1 13 - 13
Production (46) (17) (10) (73) (4) (77)
Sales of reserves in place - - (112) (112) - (112)
---- --- ---- ---- --- ----
End of year - 2001 268 88 30 386 184 570
- -------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1999 489 119 67 675 - 675
End of year - 1999 476 90 72 638 69 707
End of year - 2000 414 74 57 545 - 545
End of year - 2001 243 69 25 337 178 515
- -------------------------------------------------------------------------------
(a) Reserves represent the exchange of an equity interest in Sakhalin Energy
Investment Company Ltd. for certain interests in the U.K. Atlantic Margin
area and the Gulf of Mexico.
(b) Reserves represent the contribution of certain oil and gas interests to
MKM Partners L.P., a joint venture accounted for under the equity method
of accounting.
F-37
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
CONTINUED
Estimated Quantities of Proved Oil and Gas Reserves (continued)
United Other Equity
(Billions of cubic feet) States Europe Intl. Consolidated Investees Total
- ------------------------------------------------------------------------------
Natural Gas
Proved developed and undeveloped
reserves:
Beginning of year - 1999 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(a) (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 reserves in
place(b) 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(a) (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
Purchase of reserves in
place 223 - - 223 - 223
Exchange of reserves in
place - - - - - -
Revisions of previous
estimates (267) (12) 3 (276) (27) (303)
Improved recovery 10 - - 10 - 10
Extensions, discoveries
and other additions 210 126 48 384 - 384
Production(a) (289) (113) (45) (447) (11) (458)
Sales of reserves in
place (8) - (84) (92) - (92)
----- ---- ---- ----- --- -----
End of year - 2001 1,793 615 399 2,807 51 2,858
- ------------------------------------------------------------------------------
Proved developed
reserves:
Beginning of year - 1999 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
End of year - 2001 1,308 473 308 2,089 32 2,121
- ------------------------------------------------------------------------------
(a) Excludes the resale of purchased gas utilized in reservoir management.
(b) Reserves represent the exchange of an equity interest in Sakhalin Energy
Investment Company Ltd. for certain interests in the U.K. 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. Marathon 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 Marathon'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 Marathon'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.
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
Marathon'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 Marathon'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.
F-38
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) CONTINUED
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (continued)
United Other Equity
(In millions) States Europe Intl. Consolidated Investees Total
- ----------------------------------------------------------------------------------------
December 31, 2001:
Future cash inflows $ 8,210 $ 3,601 $ 1,520 $ 13,331 $ 3,456 $ 16,787
Future production costs (3,013) (1,630) (863) (5,506) (1,211) (6,717)
Future development
costs (496) (141) (73) (710) (165) (875)
Future income tax
expenses (1,480) (572) (142) (2,194) (468) (2,662)
-------- -------- -------- -------- -------- --------
Future net cash flows 3,221 1,258 442 4,921 1,612 6,533
10% annual discount for
estimated timing of
cash flows (1,086) (267) (180) (1,533) (1,400) (2,933)
-------- -------- -------- -------- -------- --------
Standardized measure of
discounted future net
cash flows relating to
proved oil and gas
reserves(a) $ 2,135 $ 991 $ 262 $ 3,388 $ 212 $ 3,600
- ----------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------
(a)Excludes $59 million of discounted future net cash flows from the effects of
hedging transactions.
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
Consolidated Equity Investees Total
---------------------------- ---------------------- -----------------------------
(In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Sales and transfers of
oil and gas produced,
net of production costs $ (2,405) $ (2,508) $ (1,516) $ (83) $ (111) $ (8) $ (2,488) $ (2,619) $ (1,524)
Net changes in prices
and production costs
related to future
production (9,242) 6,820 5,891 (141) 12 484 (9,383) 6,832 6,375
Extensions, discoveries
and improved recovery,
less related costs 646 1,472 566 - 3 9 646 1,475 575
Development costs
incurred during the
period 613 433 383 19 77 84 632 510 467
Changes in estimated
future development
costs (242) (273) (69) (16) (22) (52) (258) (295) (121)
Revisions of previous
quantity estimates (217) (1,899) (346) (38) (43) (8) (255) (1,942) (354)
Net changes in purchases
and sales of minerals
in place (1,291) 380 68 - - - (1,291) 380 68
Net change in exchanges
of reserves in place (357) 755 - 357 (547) - - 208 -
Accretion of discount 1,565 843 382 56 62 18 1,621 905 400
Net change in income
taxes 3,466 (1,969) (1,995) 124 90 (117) 3,590 (1,879) (2,112)
Other 646 (169) 10 (133) 30 (39) 513 (139) (29)
- --------------------------------------------------------------------------------------------------------------
Net change for the year (6,818) 3,885 3,374 145 (449) 371 (6,673) 3,436 3,745
Beginning of year 10,206 6,321 2,947 67 516 145 10,273 6,837 3,092
- --------------------------------------------------------------------------------------------------------------
End of year $ 3,388 $ 10,206 $ 6,321 $ 212 $ 67 $ 516 $ 3,600 $ 10,273 $ 6,837
- --------------------------------------------------------------------------------------------------------------
F-39
Five-Year Operating Summary
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------
Net Liquid Hydrocarbon Production
(thousands of barrels per day)
United States (by business unit)(a))
Gulf Coast 72 62 74 55 29
Northern 29 30 28 30 32
Southern 26 39 43 50 54
------- ------- ------- ------- -------
Total United States 127 131 145 135 115
------- ------- ------- ------- -------
International
Canada 11 19 17 6 -
Egypt - 1 5 8 8
Gabon 16 16 9 5 -
Norway - - - 1 2
United Kingdom 46 29 31 41 39
------- ------- ------- ------- -------
Total International 73 65 62 61 49
------- ------- ------- ------- -------
Consolidated 200 196 207 196 164
Equity investee(b) 9 11 1 - -
------- ------- ------- ------- -------
Total 209 207 208 196 164
Natural gas liquids included in above 19 22 19 17 17
- ------------------------------------------------------------------------------
Net Natural Gas Production (millions
of cubic feet per day)
United States (by business unit)(a)
Alaska 179 160 148 144 151
Gulf Coast 112 88 107 84 78
Northern 218 203 193 183 179
Southern 284 280 307 333 314
------- ------- ------- ------- -------
Total United States 793 731 755 744 722
------- ------- ------- ------- -------
International
Canada 123 143 150 65 -
Egypt - - 13 16 11
Ireland 79 115 132 168 228
Norway 5 - 26 27 54
United Kingdom - equity 234 212 168 165 130
- other(c) 8 11 16 23 32
------- ------- ------- ------- -------
Total International 449 481 505 464 455
------- ------- ------- ------- -------
Consolidated 1,242 1,212 1,260 1,208 1,177
Equity investee(d) 31 29 36 33 42
------- ------- ------- ------- -------
Total 1,273 1,241 1,296 1,241 1,219
- ------------------------------------------------------------------------------
Average Sales Prices(a)
Liquid Hydrocarbons (dollars per
barrel)(e)
United States $ 20.62 $ 25.55 $ 16.01 $ 10.90 $ 17.22
International 23.26 26.54 16.90 12.24 18.77
Natural Gas (dollars per thousand
cubic feet)(e)
United States $ 3.69 $ 3.49 $ 2.07 $ 1.95 $ 2.34
International 2.97 2.76 1.90 1.94 2.00
- ------------------------------------------------------------------------------
Net Proved Reserves at year-end
(developed and undeveloped)
Liquid Hydrocarbons (millions of
barrels)
United States 268 458 520 549 590
International 118 259 277 316 187
------- ------- ------- ------- -------
Consolidated 386 717 797 865 777
Equity investee(b) 184 - 77 80 82
------- ------- ------- ------- -------
Total 570 717 874 945 859
Developed reserves as % of total net
reserves 90% 76% 81% 71% 77%
------- ------- ------- ------- -------
Natural Gas (billions of cubic feet)
United States 1,793 1,914 2,057 2,163 2,232
International 1,014 1,091 1,607 1,796 1,071
------- ------- ------- ------- -------
Consolidated 2,807 3,005 3,664 3,959 3,303
Equity investee(d) 51 89 123 110 111
------- ------- ------- ------- -------
Total 2,858 3,094 3,787 4,069 3,414
Developed reserves as % of total net
reserves 74% 78% 75% 79% 83%
- ------------------------------------------------------------------------------
(a) Prior years reclassified to conform to 2001 classifications.
(b) Represents Marathon's equity interest in MKM Partners L.P., Sakhalin
Energy Investment Company Ltd. and CLAM Petroleum B.V.
(c) Represents gas acquired for injection and subsequent resale.
(d) Represents Marathon's equity interest in CLAM Petroleum B.V.
(e) Prices exclude gains/losses from hedging activities, equity investees and
gas purchased for injection and subsequent resale.
F-40
Five-Year Operating Summary CONTINUED
2001(a) 2000(a) 1999(a) 1998(a) 1997
- ---------------------------------------------------------------------------------
Refinery Operations (thousands of
barrels per day)
In-use crude oil capacity at year-end 935 935 935 935 575
Refinery runs - crude oil refined 929 900 888 894 525
- other charge and blend
stocks 143 141 139 127 99
In-use crude oil capacity utilization
rate 99% 96% 95% 96% 92%
- ---------------------------------------------------------------------------------
Source of Crude Processed (thousands
of barrels per day)
United States 403 400 349 317 202
Canada 115 102 92 98 24
Middle East and Africa 347 346 363 394 241
Other International 64 52 84 85 58
------- ------- ------- ------- -------
Total 929 900 888 894 525
- ---------------------------------------------------------------------------------
Refined Product Yields (thousands of
barrels per day)
Gasoline 581 552 566 545 353
Distillates 286 278 261 270 154
Propane 22 20 22 21 13
Feedstocks and special products 69 74 66 64 36
Heavy fuel oil 39 43 43 49 35
Asphalt 76 74 69 68 39
------- ------- ------- ------- -------
Total 1,073 1,041 1,027 1,017 630
- ---------------------------------------------------------------------------------
Refined Product Sales Volumes (thousands of
barrels per day)(b)
Gasoline 748 746 714 671 452
Distillates 345 352 331 318 198
Propane 21 21 23 21 12
Feedstocks and special products 71 69 66 67 40
Heavy fuel oil 41 43 43 49 34
Asphalt 78 75 74 72 39
------- ------- ------- ------- -------
Total 1,304 1,306 1,251 1,198 775
Matching buy/sell volumes included in
above 45 52 45 39 51
- ---------------------------------------------------------------------------------
Refined Products Sales Volumes by
Class of Trade (as a % of total sales
volumes)
Wholesale - independent private-brand
marketers and consumers 66% 65% 66% 65% 61%
Marathon and Ashland brand jobbers
and dealers 13 12 11 11 13
Speedway SuperAmerica retail outlets 21 23 23 24 26
------- ------- ------- ------- -------
Total 100% 100% 100% 100% 100%
- ---------------------------------------------------------------------------------
Refined Products (dollars per barrel)
Average sales price $ 34.54 $ 38.24 $ 24.59 $ 20.65 $ 26.38
Average cost of crude oil throughput 23.47 29.07 18.66 13.02 19.00
- ---------------------------------------------------------------------------------
Refining and Wholesale Marketing
Margin (dollars per gallon)(c) $ .1167 $ .0788 $ .0353 $ .0536 $ .0540
- ---------------------------------------------------------------------------------
Refined Product Marketing Outlets at
year-end
MAP operated terminals 88 90 92 87 50
Retail - Marathon and Ashland brand 3,800 3,728 3,482 3,117 2,465
- Speedway SuperAmerica(d) 2,104 2,148 2,346 2,178 1,468
- ---------------------------------------------------------------------------------
Speedway SuperAmerica(d)
Gasoline & distillates sales
(millions of gallons) 3,572 3,732 3,610 3,681 2,511
Gasoline & distillates gross margin
(dollars per gallon) $ .1206 $ .1261 $ .1274 $ .1368 $ .1106
Merchandise sales (millions) $ 2,253 $ 2,160 $ 1,917 $ 1,708 $ 936
Merchandise gross margin (millions) $ 527 $ 510 $ 500 $ 462 $ 226
- ---------------------------------------------------------------------------------
Petroleum Inventories at year-end
(thousands of barrels)
Crude oil, raw materials and natural
gas liquids 32,741 33,884 34,470 35,937 19,385
Refined products 36,310 34,386 32,853 32,334 20,598
- ---------------------------------------------------------------------------------
Pipelines (miles of common carrier
pipelines)(e)
Crude Oil - gathering lines 271 419 557 2,827 1,003
- trunklines 4,511 4,623 4,720 4,859 2,665
Products - trunklines 2,847 2,834 2,856 2,861 2,310
------- ------- ------- ------- -------
Total 7,629 7,876 8,133 10,547 5,978
- ---------------------------------------------------------------------------------
Pipeline Barrels Handled (millions)(f)
Crude Oil - gathering lines 16.3 22.7 30.4 47.8 43.9
- trunklines 570.6 563.6 545.7 571.9 369.6
Products - trunklines 345.6 329.7 331.9 329.7 262.4
------- ------- ------- ------- -------
Total 932.5 916.0 908.0 949.4 675.9
- ---------------------------------------------------------------------------------
River Operations
Barges - owned/leased 156 158 169 169 -
Boats - owned/leased 8 7 8 8 -
- ---------------------------------------------------------------------------------
(a) 1998-2001 statistics include 100% of MAP and should be considered when
compared to 1997.
(b) Total average daily volumes of all refined product sales to MAP's
wholesale, branded and retail (SSA) customers.
(c) Sales revenue less cost of refinery inputs, purchased products and
manufacturing expenses, including depreciation.
(d) Excludes travel centers contributed to Pilot Travel Centers LLC. Periods
prior to September 1, 2001 have been restated.
(e) Pipelines for downstream operations also include non-common carrier,
leased and equity investees.
(f) Pipeline barrels handled on owned common carrier pipelines, excluding
equity investees.
F-41
Five-Year Financial Summary
(Dollars in millions, except
as noted) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------
From Continuing Operations
Revenues and Other Income
Revenues by product:
Refined products $ 20,841 $ 22,513 $ 15,143 $ 12,852 $ 10,300
Merchandise 2,506 2,441 2,194 1,941 1,099
Liquid hydrocarbons 6,585 6,856 4,587 5,023 2,755
Natural gas 2,933 2,459 1,429 1,168 1,264
Transportation and other
products 154 158 196 269 166
Gain (loss) on ownership
change in MAP (6) 12 17 245 -
Other(a) 53 (640) 100 104 86
-------- -------- -------- -------- --------
Total revenues and other
income $ 33,066 $ 33,799 $ 23,666 $ 21,602 $ 15,670
- -----------------------------------------------------------------------------------------
Income From Operations
Exploration and production
(E&P)
Domestic $ 1,124 $ 1,111 $ 494 $ 190 $ 500
International 297 420 124 88 273
-------- -------- -------- -------- --------
Income for E&P reportable
segment 1,421 1,531 618 278 773
Refining, marketing and
transportation 1,914 1,273 611 896 563
Other energy related
businesses 60 42 61 33 48
-------- -------- -------- -------- --------
Income for reportable
segments 3,395 2,846 1,290 1,207 1,384
Items not allocated to
reportable segments:
Administrative expenses (162) (136) (108) (106) (168)
Loss related to sale of
certain Canadian assets (221) - - - -
Joint venture formation
charges - (931) - - -
Inventory market valuation
adjustments (72) - 551 (267) (284)
Gain (loss) on ownership
change & transition
charges - MAP (6) 12 17 223 -
Int'l. & domestic oil &
gas impairments & gas
contract settlement - (197) (16) (119) -
Other items 20 36 (33) (14) (24)
-------- -------- -------- -------- --------
Income from operations 2,954 1,630 1,701 924 908
Minority interest in income
of MAP 704 498 447 249 -
Net interest and other
financial costs 173 236 288 237 260
Provision for income taxes 759 476 320 137 207
-------- -------- -------- -------- --------
Income From Continuing
Operations $ 1,318 $ 420 $ 646 $ 301 $ 441
Per common share - basic
(in dollars) 4.26 1.35 2.09 1.03 1.53
- diluted (in
dollars) 4.26 1.35 2.09 1.02 1.52
Net Income 377 432 654 310 456
Per common share - basic
(in dollars) 1.22 1.39 2.11 1.06 1.59
- diluted (in
dollars) 1.22 1.39 2.11 1.05 1.58
- -----------------------------------------------------------------------------------------
Balance Sheet Position at
year-end
Current assets $ 4,411 $ 4,985 $ 4,081 $ 2,976 $ 2,018
Net investment in United
States Steel - 1,919 2,056 2,093 1,782
Net property, plant and
equipment 9,578 9,375 10,293 10,429 7,566
Total assets 16,129 17,151 17,730 16,637 12,347
Short-term debt 215 228 48 191 525
Other current liabilities 3,253 3,784 3,096 2,419 1,737
Long-term debt 3,432 1,937 3,320 3,456 2,476
Minority interest in MAP 1,963 1,840 1,753 1,590 -
Common stockholders' equity 4,940 6,764 6,856 6,405 5,400
- -----------------------------------------------------------------------------------------
Cash Flow Data--Continuing
Operations
Net cash from operating
activities $ 2,919 $ 3,146 $ 2,008 $ 1,633 $ 1,231
Capital expenditures(b) 1,639 1,425 1,378 1,270 1,038
Disposal of assets 296 539 356 65 60
Dividends paid 284 274 257 246 219
- -----------------------------------------------------------------------------------------
Employee Data--Continuing
Operations(c)
Marathon:
Total employment costs $ 1,498 $ 1,474 $ 1,421 $ 1,054 $ 854
Average number of employees 30,791 31,515 33,086 24,344 20,695
Number of pensioners at
year-end 3,105 3,255 3,402 3,378 3,099
Speedway SuperAmerica LLC:
(Included in Marathon
totals)
Total employment costs $ 496 $ 489 $ 452 $ 283 $ 263
Average number of employees 21,449 21,649 22,801 12,831 12,816
Number of pensioners at
year-end 205 211 209 212 215
- -----------------------------------------------------------------------------------------
Stockholder Data at year-end
Number of common shares
outstanding (in millions) 309.4 308.3 311.8 308.5 288.8
Registered shareholders (in
thousands) 69.7 65.0 71.4 77.3 84.0
Market price of common
stock $ 30.000 $ 27.750 $ 24.688 $ 30.125 $ 33.750
- -----------------------------------------------------------------------------------------
(b) Includes capital expenditures for which payment has been deferred in 2001.
(c) Employee Data for 1998 includes Ashland employees from the date of their
payroll transfer to MAP, which occurred at various times throughout 1998.
These employees were contracted to MAP in 1998, prior to their payroll
transfer.
(a) Includes dividend and investee income, net gains (losses) on disposal of
assets and other income.
F-42
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of The Registrant
Information concerning the directors of Marathon required by this item is
incorporated by reference to the material appearing under the heading
"Election of Directors" in Marathon's Proxy Statement dated March 11, 2002,
for the 2002 Annual Meeting of Stockholders.
The executive officers of Marathon or its subsidiaries and their ages as of
February 1, 2002, are as follows:
Albert G. Adkins........ 54 Vice President, Accounting and Controller
Philip G. Behrman....... 51 Senior Vice President, Worldwide Exploration
Clarence P. Cazalot,
Jr..................... 51 President and Chief Executive Officer, and Director
G. David Golder......... 54 Senior Vice President, Commercialization and Development
Steven B. Hinchman...... 43 Senior Vice President, Production Operations
Jerry Howard............ 53 Senior Vice President, Corporate Affairs
Steven J. Lowden........ 42 Senior Vice President, Business Development
Kenneth L. Matheny...... 54 Vice President, Investor Relations
John T. Mills........... 54 Chief Financial Officer
Paul C. Reinbolt........ 46 Vice President, Finance and Treasurer
William F. Schwind,
Jr..................... 57 Vice President, General Counsel and Secretary
Thomas J. Usher......... 59 Chairman of the Board of Directors
With the exception of Mr. Cazalot, Mr. Behrman and Mr. Lowden mentioned
above, all of the executive officers have held responsible management or
professional positions with Marathon or its subsidiaries for more than the
past five years.
Item 11. Management Remuneration
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in Marathon's
Proxy Statement dated March 11, 2002, for the 2002 Annual Meeting of
Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information required by this item is incorporated by reference to the
material appearing under the headings, "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Directors and Executive
Officers" in Marathon's Proxy Statement dated March 11, 2002, for the 2002
Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
Information required by this item is incorporated by reference to the
material appearing under the heading "Transactions" in Marathon's Proxy
Statement dated March 11, 2002, for the 2002 Annual Meeting of Stockholders.
48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
A. Documents Filed as Part of the Report
1. Financial Statements (see Part II, Item 8. of this report regarding
financial statements).
2. Financial Statement Schedules.
Financial Statement Schedules listed under SEC rules but not included
in this report are omitted because they are not applicable or the
required information is contained in the financial statements or notes
thereto.
Schedule II--Valuation and Qualifying Accounts is provided on page 55.
B. Reports on Form 8-K
Form 8-K dated October 12, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the October 12, 2001
press release titled "United States Steel Announces Filing for Exchange
Offer".
Form 8-K dated October 22, 2001, as amended, reporting under Item 5.
Other Events, that USX Corporation is furnishing information for the
October 22, 2001 USX-Marathon Group and USX-U. S. Steel Group Earnings
Releases.
Form 8-K dated October 25, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the October 25, 2001
press release titled "USX Shareholders Approve Plan of Reorganization".
Form 8-K dated November 2, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the November 2, 2001
press release titled "Marathon continues international growth strategy;
announces plans to acquire interests in Equatorial Guinea, West Africa".
Form 8-K dated November 5, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the November 5, 2001
press release titled "USX Capital LLC Calls Its MIPS".
Form 8-K dated November 7, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the November 7, 2001
press release titled "United States Steel to Commence Exchange Offers".
Form 8-K dated November 14, 2001, reporting under Item 9. Regulation FD
Disclosure, that USX Corporation is furnishing information relating to
Clarence P. Cazalot, Jr.'s presentation to analysts.
Form 8-K dated November 28, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the November 28, 2001
press release titled "USX Capital Trust I Redeems Its QUIPS".
Form 8-K dated December 4, 2001, reporting under item 5. Other Events,
that USX Corporation is furnishing information for the December 4, 2001
press release titled "U.S. Steel Developing Plan for Significant
Consolidation in Domestic Integrated Steel Industry".
Form 8-K dated December 9, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the December 9, 2001
press release titled "U. S. Steel, NKK Corporation and National Steel in
Consolidation Talks".
Form 8-K dated December 10, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the December 10, 2001
press release titled "United States Steel Extends and Decreases Minimum
Condition to Exchange Offers".
49
Form 8-K dated December 13, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the December 13, 2001
press release titled "United States Steel Discloses Updated Outlook",
and filing the following unaudited combined financial statements for
United States Steel: Combined Statement of Operations - Third Quarter
and Nine Months Ended September 30, 2001 and 2000; Combined Balance
Sheet - at September 30, 2001 and December 31, 2000; Combined Statement
of Cash Flows - Nine Months Ended September 30, 2001 and 2000; and
Selected Notes to Combined Financial Statements, all of which are
unaudited.
Form 8-K dated December 17, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the December 17, 2001
press release titled "Fire Halts Production at Double Steel Coating
Company".
Form 8-K dated December 17, 2001, reporting under Item 5. Other Events,
that USX Corporation is furnishing information for the December 17, 2001
press release titled "United States Steel Completes Exchange Offers".
Form 8-K dated December 31, 2001 (as amended by a Form 8-K/A (dated
January 3, 2002)) filed January 15, 2002), reporting under Item 2.
Acquisition or Disposition of Assets, that Marathon Oil Corporation,
formerly known as USX Corporation, is furnishing information relating to
the completion on December 31, 2001 of the separation of USX
Corporation's steel and energy businesses pursuant to the Agreement and
Plan of Reorganization, dated as of July 31, 2001, by and between USX
Corporation and United States Steel LLC, filing by amendment to this 8-K
of Pro Forma Financial Information, and information for the December 31,
2001, press release titled "USX to Complete Previously Announced Spin-
Off of its Steel Business".
Form 8-K/A dated January 3, 2002, reporting under Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits, that Marathon
Oil Corporation is filing Unaudited Pro Forma Condensed Financial
Statements to give effect to the separation of and significant
transactions related to the separation of USX Corporation (renamed
Marathon Oil Corporation) into two separate companies, Marathon Oil
Corporation and United States Steel Corporation.
Form 8-K dated February 27, 2002, reporting under Item 5. Other Events,
the filing of the audited Financial Statements and Supplementary Data
for the fiscal year ended December 31, 2001, reports of independent
accountants, the computation of the ratio of earnings to combined fixed
charges and preferred stock dividends, and the ratio of earnings to
fixed charges for Marathon Oil Corporation for the fiscal year ended
December 31, 2001.
Form 8-K dated February 27, 2002, reporting under Item 5. Other Events,
that Marathon Oil Corporation entered into an underwriting agreement for
the public offering of $450 million aggregate principal amount of 6.125%
Notes due 2012 and $550 million aggregate principal amount of 6.800%
Notes due 2032.
50
C. Exhibits
Exhibit No.
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession
(a) Holding Company Reorganization
Agreement, dated as of July 1,
2001, by and among USX Corporation,
USX Holdco, Inc. and United States
Steel LLC........................... Incorporated by reference to
Exhibit 3.1 to USX Corporation's
Form 8-K dated July 2, 2001.
(b) Agreement and Plan of
Reorganization, dated as of July
31, 2001, by and between USX
Corporation and United States Steel
LLC ................................ Incorporated by reference to
Exhibit 2.1 to USX Corporation's
Registration Statement on Form S-
4 filed September 7, 2001
(Registration No. 333-69090).
3. Articles of Incorporation and By-laws
(a) Restated Certificate of
Incorporation of Marathon Oil
Corporation.........................
(b) By-laws of Marathon Oil
Corporation......................... Incorporated by reference to
Exhibit 3.2 to USX Corporation's
Form 8-K dated July 2, 2001.
4. Instruments Defining the Rights of Security Holders, Including Indentures
(a) Five Year Credit Agreement dated as
of November 30, 2000................ Incorporated by reference to
Exhibit 4(a) to USX Corporation's
Form 10-K for the year ended
December 31, 2000.
(b) Rights Agreement between Marathon
Oil Corporation and National City
Bank, as Right Agent, as amended.... Incorporated by reference to
Exhibit 4.6 to Post-Effective
Amendment No. 2 to Marathon Oil
Corporation's Registration
Statement on Form S-3 filed on
February 6, 2002 (Registration
No. 333-88797).
(c) Senior Indenture dated February 26,
2002 between Marathon Oil
Corporation and JPMorgan Chase
Bank, as Trustee.................... Incorporated by reference to
Exhibit 4.1 to Marathon Oil
Corporation's Form 8-K dated
February 27, 2002.
(d) Pursuant to CFR 229.601(b)(4)(iii),
instruments with respect to long-
term debt issues have been omitted
where the amount of securities
authorized under such instruments
does not exceed 10% of the total
consolidated assets of Marathon.
Marathon hereby agrees to furnish a
copy of any such instrument to the
Commission upon its request.
10. Material Contracts
(a) Marathon Oil Corporation 1990 Stock
Plan, As Amended and Restated
Effective January 1, 2002...........
(b) Marathon Oil Corporation Annual
Incentive Compensation Plan, As
Amended Effective January 1, 2002...
51
(c) Marathon Oil Corporation Senior
Executive Officer Annual Incentive
Compensation Plan, As Amended and
Restated Effective January 1,
2002................................
(d) Marathon Oil Corporation Deferred
Compensation Plan for Non-Employee
Directors, Amended and Restated as
of January 1, 2002..................
(e) Marathon Oil Corporation Non-
Officer Restricted Stock Plan, As
Amended and Restated Effective
January 1, 2002.....................
(f) Marathon Oil Corporation Non-
Employee Director Stock Plan, As
Amended and Restated Effective
January 1, 2002.....................
(g) Marathon Oil Company Annual
Incentive Compensation Plan, As
Amended November 23, 1999........... Incorporated by reference to
Exhibit 10(d) of USX
Corporation's Form 10-K for the
year ended December 31, 1999.
(h) Form of Change of Control Agreement
between USX Corporation and Various
Officers............................ Incorporated by reference to
Exhibit 10.12 to Amendment No. 1
to USX Corporation's Registration
Statement on Form S-4 filed
September 20, 2001. (Registration
No. 333-69090)
(i) Completion and Retention Agreement,
dated as of August 8, 2001, among
USX Corporation, United States
Steel LLC and Thomas J. Usher....... Incorporated by reference to
Exhibit 10.10 to Amendment No. 1
to USX Corporation's Registration
Statement on Form S-4 filed
September 20, 2001. (Registration
No. 333-69090)
(j) Agreement between Marathon Oil
Company and Clarence P. Cazalot,
Jr., executed February 28, 2000..... Incorporated by reference to
Exhibit 10(k) of USX
Corporation's Form 10-K for the
year ended December 31, 1999.
(k) Letter Agreement between Marathon
Oil Company and Steven J. Lowden,
executed September 17, 2000.........
(l) Letter Agreement between Marathon
Oil Company and Philip G. Behrman,
executed September 19, 2000.........
(m) Letter Agreement between USX
Corporation and John T. Mills,
executed September 25, 2000.........
(n) Amended and Restated Limited
Liability Company Agreement of
Marathon Ashland Petroleum LLC,
dated as of December 31, 1998....... Incorporated by reference to
Exhibit 10(b) of USX
Corporation's Form 10-Q for the
quarter ended June 30, 1999.
52
(o) Amendment No. 1 dated as of
December 31, 1998 to Put/Call,
Registration Rights and Standstill
Agreement of Marathon Ashland
Petroleum LLC dated as of January
1, 1998............................. Incorporated by reference to
Exhibit 10.2 of USX Corporation's
Form 8-K dated January 1, 1998,
and Exhibit 10(i) of USX
Corporation's Form 10-Q for the
quarter ended June 30, 1999.
(p) Tax Sharing Agreement between USX
Corporation (renamed Marathon Oil
Corporation) and United States
Steel LLC (converted into United
States Steel Corporation) dated as
of December 31, 2001................ Incorporated by reference to
Exhibit 99.3 to Marathon Oil
Corporation's Form 8-K dated
December 31, 2001.
(q) Transition Services Agreement
between USX Corporation (renamed
Marathon Oil Corporation) and
United States Steel LLC (converted
into United States Steel
Corporation) dated as of December
31, 2001............................ Incorporated by reference to
Exhibit 99.4 to Marathon Oil
Corporation's Form 8-K dated
December 31, 2001.
(r) Financial Matters Agreement between
USX Corporation (renamed Marathon
Oil Corporation) and United States
Steel LLC (converted into United
States Steel Corporation) dated
December 31, 2001................... Incorporated by reference to
Exhibit 99.5 to Marathon Oil
Corporation's Form 8-K dated
December 31, 2001.
(s) Insurance Assistance Agreement
between USX Corporation (renamed
Marathon Oil Corporation) and
United States Steel LLC (converted
into United States Steel
Corporation) dated as of December
31, 2001............................ Incorporated by reference to
Exhibit 99.6 to Marathon Oil
Corporation's Form 8-K dated
December 31, 2001.
(t) License Agreement between USX
Corporation (renamed Marathon Oil
Corporation) and United States
Steel LLC (converted into United
States Steel Corporation) dated as
of December 31, 2001................ Incorporated by reference to
Exhibit 99.7 to Marathon Oil
Corporation's Form 8-K dated
December 31, 2001.
(u) Letter Agreement between John P.
Surma and Marathon Group of USX
Corporation, executed January 27,
1997................................
(v) Letter Agreement between John P.
Surma and USX Corporation, executed
December 21, 2001...................
12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
21. List of Significant Subsidiaries
23. Consent of Independent Accountants
53
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of Marathon Oil Corporation:
Our audit of the consolidated financial statements referred to in our
report dated February 15, 2002 appearing in the 2001 Annual Report of Marathon
Oil Corporation (which report and consolidated financial statements are
included in this Annual Report on Form 10-K) also included an audit of the
financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
February 15, 2002
54
Marathon Oil Corporation
Schedule II--Valuation and Qualifying Accounts
For the Years Ended December 31, 2001, 2000 and 1999
Additions
-------------------
Balance at Charged to Charged Balance at
Beginning of Costs and to Other End of
(In millions) Period Expenses Accounts Deductions(a) Period
- -----------------------------------------------------------------------------------
Year ended December 31,
2001
Reserves deducted in
the balance sheet
from the assets to
which they apply:
Allowance for
doubtful accounts... $ 3 $25 $ - $ 20 $ 8
Inventory market
valuation reserve... - 72 - - 72
Tax valuation
allowances:
State.............. 16 7 53(b) - 76
Foreign............ 252 - 43(c) 10 285
Year ended December 31,
2000
Reserves deducted in
the balance sheet
from the assets to
which they apply:
Allowance for
doubtful accounts... $ 2 $ 8 $ - $ 7 $ 3
Tax valuation
allowances:
Federal............ 30 - - 30 -
State.............. 11 - 5(c) - 16
Foreign............ 282 - - 30 252
Year ended December 31,
1999
Reserves deducted in
the balance sheet
from the assets to
which they apply:
Allowance for
doubtful accounts... $ 3 $ 3 $ - $ 4 $ 2
Inventory market
valuation reserve... 551 - - 551 -
Tax valuation
allowances:
Federal............ 30 - - - 30
State.............. 8 - 3(c) - 11
Foreign............ 260 22 - - 282
- -----------------------------------------------------------------------------------
(a) Deductions for the allowance for doubtful accounts and long-term
receivables include amounts written off as uncollectible, net of
recoveries. Deductions in the inventory market valuation reserve reflect
increases in market prices and inventory turnover, resulting in noncash
credits to costs and expenses. Reductions in the tax valuation allowances
reflect changes in the amount of deferred taxes expected to be realized,
resulting in credits to the provision for income taxes.
(b) The increase in the valuation allowance is related to net operating losses
previously attributed to United States Steel which were retained by
Marathon in connection with the Separation. The transfer of net operating
losses and the related valuation allowance was recorded as a capital
transaction with United States Steel.
(c) Reflects valuation allowances established for deferred tax assets
generated in the current period, primarily related to net operating
losses.
55
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated on March 11, 2002.
MARATHON OIL CORPORATION
/s/ Albert G. Adkins
By: _______________________________
Albert G. Adkins
Vice President, Accounting and
Controller
Signature Title
--------- -----
/s/ Thomas J. Usher Chairman of the Board and Director
__________________________________________
Thomas J. Usher
/s/ Clarence P. Cazalot, Jr. President & Chief Executive Officer and
__________________________________________ Director
Clarence P. Cazalot, Jr.
/s/ John T. Mills Chief Financial Officer
__________________________________________
John T. Mills
/s/ Albert G. Adkins - Vice President, Accounting and Controller
__________________________________________
Albert G. Adkins
/s/ Shirley Ann Jackson Director
__________________________________________
Shirley Ann Jackson
/s/ Seth E. Schofield Director
__________________________________________
Seth E. Schofield
/s/ Douglas C. Yearly Director
__________________________________________
Douglas C. Yearly
/s/ Neil A. Armstrong Director
__________________________________________
Neil A. Armstrong
/s/ David A. Daberko Director
__________________________________________
David A. Daberko
/s/ Charles R. Lee Director
__________________________________________
Charles R. Lee
/s/ Dennis H. Reilley Director
__________________________________________
Dennis H. Reilley
56
GLOSSARY OF CERTAIN DEFINED TERMS
The following definitions apply to terms used in this document:
Ashland................. Ashland Inc.
bcf..................... billion cubic feet
bcfd.................... billion cubic feet per day
BOE..................... barrels of oil equivalent
bpd..................... barrels per day
CAA..................... Clean Air Act
CERCLA.................. Comprehensive Environmental Response, Compensation, and
Liability Act
CLAM.................... CLAM Petroleum B.V.
CWA..................... Clean Water Act
DOE..................... Department of Energy
downstream.............. refining, marketing and transportation operations
E&P..................... exploration and production
EPA..................... U.S. Environmental Protection Agency
exploratory............. wildcat and delineation, i.e., exploratory wells
Gulf.................... Gulf of Mexico
IMV..................... Inventory Market Valuation
Indexed Debt............ 6 3/4% Exchangeable Notes Due February 1, 2000
Kinder Morgan........... Kinder Morgan Energy Partners, L.P.
LNG..................... liquefied natural gas
LPG..................... liquefied petroleum gas
LTV..................... LTV Corporation
MAP..................... Marathon Ashland Petroleum LLC
Marathon................ Marathon Oil Corporation
Marathon Stock.......... USX-Marathon Group Common Stock
mcf..................... thousand cubic feet
MIPS.................... 8 3/4% Cumulative Monthly Income Preferred Stock
MKM..................... MKM Partners L.P.
mmcfd................... million cubic feet per day
NOV..................... Notice of Violation
OPA-90.................. Oil Pollution Act of 1990
OTC..................... over the counter
Pennaco................. Pennaco Energy
Petronius............... Viosca Knoll Block 786
Pilot................... Pilot Corporation
PRP..................... potentially responsible party
PTC..................... Pilot Travel Centers LLC
QUIPS................... 6.75% Convertible Quarterly Income Preferred Securities
of
USX Capital Trust I
RCRA.................... Resource Conservation and Recovery Act
RM&T.................... refining, marketing and transportation
RTI..................... RTI International Metals, Inc. (formerly RMI Titanium
Company)
SAGE.................... Scottish Area Gas Evacuation
Sakhalin Energy......... Sakhalin Energy Investment Company Ltd.
SG&A.................... selling, general and administrative
SSA..................... Speedway SuperAmerica LLC
Steel Stock............. USX-U. S. Steel Group Common Stock
Transtar................ Transtar Inc.
U.K. ................... United Kingdom
United States Steel..... United States Steel Corporation
upstream................ exploration and production operations
USSK.................... U. S. Steel Kosice s.r.o.
USTs.................... underground storage tanks
VSZ..................... VSZ a.s.
VSZ U. S. Steel s. U. S. Steel and VSZ a.s. joint venture in Kosice,
r.o. .................. Slovakia
57