Back to GetFilings.com
FORM 10-K 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 1-5153
USX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-0996816
(State of Incorporation) (I.R.S. Employer Identification No.)
600 Grant Street, Pittsburgh, PA 15219-4776
(Address of principal executive offices)
Tel. No. (412) 433-1121
Securities registered pursuant to Section 12 (b) of the Act:*
========================================================================================================
Title of Each Class
- --------------------------------------------------------------------------------------------------------
USX-Marathon Group 8-3/4% Cumulative Monthly Income Preferred Shares,
Common Stock, par value $1.00 Series A (Liquidation Preference $25 per share)**/(a)/
USX-U. S. Steel Group 6.75% Convertible Quarterly Income Preferred
Common Stock, par value $1.00 Securities (Initial Liquidation Amount $50 per
6.50% Cumulative Convertible Preferred Security)***/(a)/
(Liquidation Preference $50.00 per share) 7% Guaranteed Notes Due 2002 of Marathon Oil
Company/(a)/
========================================================================================================
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,
2001: $10 billion. The amount shown is based on the closing prices of the
registrant's Common Stocks 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 308,269,864 shares of USX-Marathon Group Common Stock and 88,767,023
shares of USX-U. S. Steel Group Common Stock outstanding as of January 31, 2001.
Documents Incorporated By Reference:
Proxy Statement dated March 12, 2001 is incorporated in Part III.
Proxy Statement dated March 9, 1998 is incorporated in Part IV.
_______________
* These securities are listed on the New York Stock Exchange. In addition,
the Common Stocks are listed on The Chicago Stock Exchange and the Pacific
Exchange.
** Issued by USX Capital LLC.
*** Issued by USX Capital Trust I.
/(a)/ Obligations of Marathon Oil Company, USX Capital LLC and USX Capital Trust
I, all wholly owned subsidiaries of the registrant, have been guaranteed
by the registrant.
INDEX
PART I
NOTE ON PRESENTATION........................................ 2
Item 1. BUSINESS
USX CORPORATION........................................... 3
MARATHON GROUP............................................ 5
U.S. STEEL GROUP.......................................... 27
Item 2. PROPERTIES.................................................. 38
Item 3. LEGAL PROCEEDINGS
MARATHON GROUP............................................ 38
U.S. STEEL GROUP.......................................... 41
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 46
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 47
Item 6. SELECTED FINANCIAL DATA
USX CONSOLIDATED.......................................... 49
MARATHON GROUP............................................ 51
U. S. STEEL GROUP......................................... 52
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
USX CONSOLIDATED.......................................... U-39
MARATHON GROUP............................................ M-25
U. S. STEEL GROUP......................................... S-25
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
USX CONSOLIDATED.......................................... U-60
MARATHON GROUP............................................ M-37
U. S. STEEL GROUP......................................... S-38
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
USX CONSOLIDATED.......................................... U-1
MARATHON GROUP............................................ M-1
U. S. STEEL GROUP......................................... S-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 53
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 54
Item 11. MANAGEMENT REMUNERATION..................................... 55
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 55
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 55
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K............................................... 56
SIGNATURE.............................................................. 60
GLOSSARY OF CERTAIN DEFINED TERMS...................................... 61
SUPPLEMENTARY DATA
SUMMARIZED FINANCIAL INFORMATION OF MARATHON OIL COMPANY............. 63
DISCLOSURES ABOUT FORWARD-LOOKING STATEMENTS......................... 64
NOTE ON PRESENTATION
USX Corporation ("USX" or the "Corporation") is a diversified company
principally engaged in the energy business through its Marathon Group and in the
steel business through its U. S. Steel Group. USX has two classes of common
stock, USX - Marathon Group Common Stock ("Marathon Stock") and USX - U. S.
Steel Group Common Stock ("Steel Stock"). Each class of Common Stock is intended
to provide stockholders of that class with a separate security reflecting the
performance of the related group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the USX - Delhi Group ("Delhi
Companies"). On January 26, 1998, USX used the $195 million net proceeds from
the sale to redeem all of the 9.45 million outstanding shares of USX-Delhi Group
Common Stock.
USX continues to include consolidated financial information in its
periodic reports required by the Securities Exchange Act of 1934, in its annual
shareholder reports and in other financial communications. The consolidated
financial statements are supplemented with separate financial statements of the
Marathon Group and the U. S. Steel Group, together with the related Management's
Discussion and Analyses, descriptions of business and other financial and
business information to the extent such information is required to be presented
in the report being filed. The financial information of the Marathon Group and
U. S. Steel Group and certain financial information relating to the Delhi
Companies, taken together, includes all accounts which comprise the
corresponding consolidated financial information of USX.
For consolidated financial reporting purposes, USX consists of the
Marathon Group and the U. S. Steel Group. The attribution of assets, liabilities
(including contingent liabilities) and stockholders' equity between the Marathon
Group and the U. S. Steel Group for the purpose of preparing their respective
financial statements does not affect legal title to such assets and
responsibility for such liabilities. Holders of Marathon Stock and Steel Stock
are holders of common stock of USX and continue to be subject to all of the
risks associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from either of the Groups that affect the
overall cost of USX's capital could affect the results of operations and
financial condition of both Groups. In addition, net losses of any Group, as
well as dividends and distributions on any class of USX common stock or series
of preferred stock and repurchases of any class of USX common stock or series of
preferred stock at prices in excess of par or stated value, will reduce the
funds of USX legally available for payment of dividends on both classes of USX
common stock. Accordingly, the USX consolidated financial information should be
read in connection with the Marathon Group and the U. S. Steel Group financial
information.
For information regarding accounting matters and policies affecting the
Marathon Group and the U. S. Steel Group financial statements, see "Financial
Statements and Supplementary Data - Notes to Financial Statements - 1. Basis of
Presentation and - 4. Corporate Activities" for each respective Group. For
information regarding dividend limitations and dividend policies affecting
holders of Marathon Stock and Steel Stock, see "Market for Registrant's Common
Equity and Related Stockholder Matters."
For a Glossary of Certain Defined Terms used in this document, see page
61.
Forward-Looking Statements
Certain sections of USX's Form 10-K, particularly Item 1. Business,
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
concerning trends or events potentially affecting USX. These statements
typically contain words such as "anticipates", "believes", "estimates",
"expects" or similar words indicating that future outcomes are uncertain. In
accordance with "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, these statements are accompanied by cautionary language
identifying important factors, though not necessarily all such factors, that
could cause future outcomes to differ materially from those set forth in
forward-looking statements. For additional factors affecting the businesses of
USX, see Supplementary Data - Disclosures About Forward-Looking Statements.
2
PART I
Item 1. BUSINESS
USX CORPORATION
USX Corporation was incorporated in 1901 and is a Delaware corporation.
Executive offices are located at 600 Grant Street, Pittsburgh, PA 15219-4776.
The terms "USX" and "Corporation" when used herein refer to USX Corporation or
USX Corporation and its subsidiaries, as required by the context.
Groups
For consolidated reporting purposes, USX consists of the Marathon Group
and the U. S. Steel Group. The businesses of the Marathon Group and the U. S.
Steel Group, are as follows:
. The Marathon Group includes Marathon Oil Company ("Marathon") and
certain other subsidiaries of USX, which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic
refining, marketing and transportation of petroleum products
primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62
percent by Marathon; and other energy related businesses. Marathon
Group revenues as a percentage of total USX consolidated revenues
were 85 percent in 2000, 81 percent in 1999 and 77 percent in
1998.
. The U. S. Steel Group is engaged in the production and sale of
steel mill products, coke and taconite pellets; the management of
mineral resources; coal mining; real estate development; and
engineering and consulting services. Certain business activities
are conducted through joint ventures and partially-owned
companies, such as USS-POSCO Industries, PRO-TEC Coating Company,
Transtar, Inc., Clairton 1314B Partnership, and Republic
Technologies International, LLC. On November 24, 2000, USX
acquired U. S. Steel Kosice s.r.o., which held the steel and
related assets of VSZ a.s., headquartered in the Slovak Republic.
U. S. Steel Group revenues as a percentage of total USX
consolidated revenues were 15 percent in 2000, 19 percent in 1999
and 23 percent in 1998.
On November 30, 2000, USX announced that the board of directors
authorized management to retain financial, tax and legal advisors to perform an
in-depth study of the corporation's targeted stock structure and all alternative
structures which may be in the best interest of all USX shareholders. This study
is ongoing and will take several months to complete. The advisors will report
their findings and recommendations to the USX board of directors, who will
review them to determine what actions to take.
3
A three-year summary of financial highlights for the groups is provided
below.
Revenues Income Assets
and from Net at Capital
(Millions) Other Income/(a)/ Operations/(b)/ Income (Loss) Year-End Expenditures
------------------------------------------------------------------------------------------------------------
Marathon Group
2000 $ 33,859 $ 1,648 $ 432 $ 15,232 $ 1,425
1999 23,707 1,713 654 15,674 1,378
1998 21,623 938 310 14,544 1,270
U. S. Steel Group
2000 6,132 104 (21) 8,711 244
1999 5,470 150 44 7,525 287
1998 6,477 579 364 6,749 310
Eliminations
2000 (77) - - (542) -
1999 (58) - - (268) -
1998 (23) - - (160) -
Total USX Corporation
2000 $ 39,914 $ 1,752 $ 411 $23,401 $ 1,669
1999 29,119 1,863 698 22,931 1,665
1998 28,077 1,517 674 21,133 1,580
------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss), gain
on ownership change in MAP, net gains (losses) on disposal of
assets, and other income.
/(b)/ Includes the following favorable (unfavorable) amounts:
adjustments to the inventory market valuation reserve for the
Marathon Group of $551 million and ($267) million in 1999 and
1998, respectively; and gain on ownership change in MAP of $12
million in 2000, $17 million in 1999 and $245 million in 1998.
For additional financial information about the Groups, see "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
8. Group and Segment Information" on page U-13.
The total number of active USX Headquarters employees not assigned to a
specific group at year-end 2000 was 235.
A narrative description of the primary businesses of the Marathon Group
and the U. S. Steel Group is provided below.
4
MARATHON GROUP
The Marathon Group is comprised of Marathon Oil Company and certain
other subsidiaries of USX which are engaged in worldwide exploration and
production of crude oil and natural gas; domestic refining, marketing and
transportation of petroleum products primarily through Marathon Ashland
Petroleum LLC ("MAP"), owned 62 percent by Marathon Oil Company; and other
energy related businesses. Marathon Group revenues as a percentage of total USX
consolidated revenues were 85 percent in 2000, 81 percent in 1999 and 77 percent
in 1998.
The following table summarizes Marathon Group revenues for each of the
last three years:
Revenues and Other Income
(Millions) 2000 1999 1998
---------------------------------------------------------------------------------------------
Revenues by product/(a)/:
Refined products.................................. $ 22,514 $ 15,181 $ 12,852
Merchandise....................................... 2,441 2,194 1,941
Liquid hydrocarbons............................... 6,856 4,587 5,023
Natural gas....................................... 2,518 1,429 1,187
Transportation and other products................. 158 199 271
Gain on ownership change in MAP/(b)/................. 12 17 245
Other/(c)/........................................... (640) 100 104
--------- --------- --------
Total revenues and other income................... $ 33,859 $ 23,707 $ 21,623
---------------------------------------------------------------------------------------------
/(a)/ Reclassified to conform to 2000 classifications.
/(b)/ See Note 5 to the Marathon Group Financial Statements for a
discussion of the gain on ownership change in MAP.
/(c)/ Includes dividend and investee income, net gains (losses) on
disposal of assets and other income.
For additional financial information about USX's operating segments,
see "Financial Statements and Supplementary Data - Notes to USX Consolidated
Financial Statements - 8, Group and Segment Information" on page U-13.
Exploration and Production
Oil and Natural Gas Exploration and Development
Marathon is currently conducting exploration and development activities
in 11 countries. Principal exploration activities are in the United States,
United Kingdom, Angola, Canada, Denmark, Ireland, the Netherlands and Norway.
Principal development activities are in the United States, United Kingdom,
Canada, Gabon, Ireland, the Netherlands and Norway. Marathon is also pursuing
opportunities in North and West Africa, the Middle East and Southeast Asia.
5
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)/
2000 1999 1998
- -----------------------------------------------------------------------------------------
United States
Development/(b)/ - Oil 23 11 28
- Gas 109 54 58
- Dry 2 1 2
---- ---- ----
Total 134 66 88
Exploratory - Oil 2 5 7
- Gas 6 9 5
- Dry 5 13 8
---- ---- ----
Total 13 27 20
---- ---- ----
Total United States 147 93 108
International/(c)/
Development/(b)/ - Oil 12 42 7
- Gas 111 55 7
- Dry 5 11 2
---- ---- ----
Total 128 108 16
Exploratory - Oil 4 2 5
- Gas 26 14 4
- Dry 14 16 15
---- ---- ----
Total 44 32 24
---- ---- ----
Total International 172 140 40
---- ---- ----
Total Worldwide 320 233 148
- -----------------------------------------------------------------------------------------
/(a)/ Includes the number of wells completed during the year regardless of the
year in which drilling was initiated. A dry well is a well found to be
incapable of producing hydrocarbons in sufficient quantities to justify
completion. A productive well is a well that is not a dry well.
/(b)/ Indicates wells drilled in the proved area of an oil or gas reservoir.
/(c)/ Includes Marathon's equity interest in CLAM Petroleum B.V. ("CLAM") and
Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy").
United States
In the United States during 2000, Marathon drilled 24 gross (12 net)
wildcat and delineation ("exploratory") wells of which 14 gross (8 net) wells
encountered hydrocarbons. Of these 14 wells, 1 gross (1 net) well was
temporarily suspended, and will be reported in the Net Productive and Dry Wells
Completed table when completed. Principal domestic exploratory and development
activities were in the U.S. Gulf of Mexico and the states of Alaska, Louisiana,
New Mexico, Oklahoma, Texas and Wyoming.
Exploration expenditures during the three-year period ended December 31,
2000, totaled $519 million in the United States, of which $161 million was
incurred in 2000. Development expenditures during the three-year period ended
December 31, 2000, totaled $951 million in the United States, of which $288
million was incurred in 2000.
6
On December 22, 2000, Marathon announced its plans to acquire Pennaco
Energy, Inc. ("Pennaco"). Pennaco is a coal bed methane gas producer in the
Powder River Basin, located in northern Wyoming and southern Montana. This
acquisition will enhance Marathon's presence in a core area, the North American
gas market, and will provide an opportunity for possible new reserves to be
developed. The tender offer expired on February 5, 2001 at 12:00 midnight,
Eastern time. Marathon acquired approximately 17.6 million shares of Pennaco
common stock which were validly tendered and not withdrawn in the offer,
representing approximately 87 percent of the outstanding Pennaco shares.
Marathon plans to acquire the remaining Pennaco shares through a merger
in which each share of Pennaco common stock, not purchased in the offer and not
held by stockholders who have properly exercised dissenters rights under
Delaware law, will be converted into the right to receive the tender offer price
in cash, without interest.
The following is a summary of recent, significant exploration and
development activity in the United States including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
Gulf of Mexico - Marathon continues to consider the Gulf of Mexico
("Gulf") as a core area for domestic growth in oil and gas production and has
committed significant resources to exploit its opportunities.
The Camden Hills field is located in the deepwater Gulf on Mississippi
Canyon Block 348 in approximately 7,200 feet of water. The field, operated by
Marathon with a 50.03 percent working interest, 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. Marathon personnel are engaged in several teams responsible for the
design and implementation of Canyon Express as well as the completion of the
subsea wells. The first production is scheduled for mid-2002.
In July 2000, production commenced from the Viosca Knoll Block 786
("Petronius") development in the deepwater Gulf. Proved reserves are estimated
to be approximately 57 million gross barrels of oil equivalent ("BOE"). Marathon
holds a 50 percent working interest in this project.
In 2001, Marathon plans to drill six deepwater exploratory wells. To
support the drilling of deepwater prospects, Marathon, along with two other
parties, began a five-year commitment in 1999 on the Noble Amos Runner, a
drilling rig capable of drilling in water depths up to 6,600 feet. Additionally,
in the second quarter of 2001, Marathon expects to take receipt of the
Transocean-Sedco-Forex Cajun Express, a drilling rig capable of drilling in
water depths up to 8,500 feet. Marathon has an eighteen month commitment to
utilize this rig.
Alaska - After being placed in service during the second quarter of
2000, the Marathon-owned Glacier drilling rig was used to drill and complete
four development wells and perform two workovers. Marathon's strong Cook Inlet
lease position facilitates an aggressive 2001 drilling program to further its
competitive position in the local gas market, as well as extending the ongoing
liquefied natural gas ("LNG") export project. Marathon and a co-venturer have
extended their LNG contract with the Japanese buyers from 2004 to 2009. This
extension represents a total sales commitment of 125 billion cubic feet ("bcf")
over a five year term commencing in 2004. Additionally, a prior gas discovery at
Wolf Lake is expected to be developed in 2001.
Louisiana - In North Louisiana, Marathon continued an active
development program in the Haynesville, Cotton Valley and Logansport fields in
2000. These development programs will continue in 2001 with a total of 12 wells
planned.
7
New Mexico - Marathon's New Mexico gas production continued with
successful development activity in the Indian Basin field. In 2000, seven
development wells were completed in this field and Marathon's Indian Basin gas
plant was further expanded to a capacity of 300 million cubic feet per day
("mmcfd"). Of particular importance were three Upper Penn development wells in
the eastern area of the Indian Basin field, which added 30 gross mmcfd. On the
strength of these projects, record gross production of 160 mmcfd was reached by
year-end from Marathon-operated wells. In 2001, eleven new well completions are
planned, seven of which will be in the prospective east Indian Basin area.
Oklahoma - Marathon continued exploration in the Granite Wash play of
the Southern Anadarko Basin with four successful exploration wells drilled in
2000. Utilizing approximately 1,000 square miles of 3-D seismic data, Marathon
plans to drill six exploratory wells along the Granite Wash play in 2001.
With Marathon's active development drilling following its 1998 Granite
Wash formation discovery, 19 wells were drilled in 2000 increasing production by
86 percent. Marathon's current net production now exceeds 26 mmcfd and 1,400
barrels of liquid hydrocarbons per day ("bpd"). In 2001, 18 additional
development wells are planned in the Granite Wash formation.
Development drilling in the Carter Knox field included nine wells on
properties acquired in 2000. As a result, Marathon's production from acquired
properties increased from 13 to 46 net mmcfd. Production from the acquired
properties is nearly double expectations with well production fifteen percent
better than that of offset operators. Marathon's total net production from
Carter Knox increased 47 percent over the average 1999 total annual rate. In
2001, 14 development wells are planned for the Carter Knox field.
Marathon's deep drilling activity in the Cement field, one of
Oklahoma's oldest fields, increased Marathon's field production 60 percent in
2000. With six successful wells (all with depths of 14,000 feet or greater),
Marathon's production now exceeds 15 net mmcfd. In 2001, four development wells
and four exploratory wells (with depths greater than 16,000 feet) are planned.
Texas - In East Texas, Marathon continued an active development program
in the Oletha field after a January 2000 acquisition. An 11-well Travis
Peak/Cotton Valley development program is planned in the Oletha field for 2001.
Additionally, a horizontal well program in the James Lime play was initiated and
will continue. In 2000, Marathon drilled three horizontal exploratory wells and
participated in one horizontal exploratory well, all of which were successful.
In West Texas, on December 28, 2000, Marathon signed a definitive
agreement to form a joint venture with Kinder Morgan Energy Partners, L.P.,
which commenced operations in January 2001. The formation of the joint venture
included contribution of interests in the Yates and SACROC assets. This
transaction will allow Marathon to expand its interests in the Permian Basin and
will improve access to materials for use in enhanced recovery techniques in the
Yates field. Marathon holds an 85 percent economic interest in the combined
entity.
Wyoming - Successful exploratory and development drilling activity
along the Wamsutter Arch and in the Washakie Basin contributed to a growth in
gas production. This was offset, however, by a trade of minor interests in Moxa
Arch southwest Wyoming gas producing properties for oil producing properties in
the Big Horn Basin. The trade complements Marathon's position as Wyoming's
largest oil producer and enhances production, transportation and marketing
opportunities within the Big Horn Basin.
8
International
Outside the United States during 2000, Marathon drilled 89 gross (53
net) exploratory wells in 7 countries. Of these 89 wells, 68 gross (39 net)
wells encountered hydrocarbons, of which 6 gross (5 net) wells were temporarily
suspended and will be reported in the Net Productive and Dry Wells Completed
table when completed.
Marathon's expenditures for international oil and natural gas
exploration activities, including Marathon's 50 percent equity interest in CLAM
and former 37.5 percent equity interest in Sakhalin Energy Investment Company
Ltd. ("Sakhalin Energy"), during the three-year period ended December 31, 2000,
totaled $372 million, of which $128 million was incurred in 2000. Marathon's
international development expenditures, including CLAM and Sakhalin Energy,
during the three-year period ended December 31, 2000, totaled $707 million, of
which $222 million was incurred in 2000.
The following is a summary of recent, significant exploration and
development activity outside the United States, including discussion, as deemed
appropriate, of completed wells, drilling wells and wells under evaluation.
United Kingdom - 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. Development
activity is scheduled for both Foinaven and East Foinaven in 2001. The East
Foinaven field will initially consist of production and water injection wells
tied back to the floating production, storage and offloading (FPSO) vessel with
first production expected late third quarter 2001. A third production well is
planned in 2003. Further development drilling in the main Foinaven field
involves four new production wells, a possible side track of an existing
production well, and one new water injection well.
As an interest owner in Foinaven, Marathon also has an 11.465 percent
working interest in the West of Shetland gas evacuation line which is currently
under construction. The line 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 commencing in early 2002.
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, a 38.5 percent interest in the East Brae
field and a 28.1 percent interest in the West Brae/Sedgwick joint development
project. Marathon has interests in 30 blocks in the U.K. North Sea and other
offshore areas. Marathon drilled one and participated in one exploratory well
offshore U.K. in 2000, and both were dry. One exploratory well in the Brae area
is planned for 2001.
Angola - In May 1999, Marathon was awarded an interest 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 and 17 where major discoveries by others have been made. Marathon
holds a 10 percent working interest in these blocks, which are operated by
co-venturers. Surveys of 3-D seismic data have been acquired for both blocks and
two wells are planned to be drilled on Block 31 in 2001. Exploratory drilling
should commence on Block 32 in early 2002.
Canada - In May 1999, Marathon was awarded three exploration licenses
offshore Nova Scotia. Marathon has a 30, 33.75 and 37.5 percent interest in
Exploration Licenses ("EL") 2377, 2384 and 2376, respectively and will be the
operator of EL 2377. Two of the licenses are in the immediate proximity of
recent production by others. In 2000, 3-D seismic data was acquired for all
blocks and is being evaluated. It is anticipated that a well will be drilled on
EL 2376 in late 2001.
Congo - In February 2000, Marathon acquired a 15 percent equity
interest in the Mer Profonde Nord Permit, which is operated by a co-venturer.
One exploratory well was drilled and abandoned in 2000. This permit was
relinquished in December 2000.
9
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
2001.
Gabon - In November 2000, production commenced from the Tchatamba West
field in the Kowe Permit, located 15 miles offshore Gabon. This field was
developed as a one-well development tied back to the Tchatamba Marin facility.
Marathon is operator of this field. Its working interest was proportionately
reduced from 75 percent to 56.25 percent after the Gabonese government exercised
its right to obtain a 25 percent interest in the field.
In 1998, Marathon acquired a 50 percent working interest in the
Inguessi Permit, which is adjacent to the Kowe Permit. During 1999, Marathon
acquired 139 square miles of 3-D seismic data. The seismic data was evaluated
and the block was relinquished in June 2000.
Ireland - Plans are underway to convert the Southwest Kinsale field to
a gas storage field. The Southwest Kinsale field, located in the Celtic Sea 30
miles south of Cork, was brought online in 1999 through a single subsea well
tied back to the Kinsale Head field's Bravo platform. After producing just over
nine gross bcf, the field was shut-in during August 2000. Gas injection through
the existing well will commence in April 2001. Two additional wells to be used
for gas injection and withdrawal will be drilled and tied back to the existing
infrastructure during the second and third quarters of 2001. Marathon has a 100
percent interest in this field.
During 2000, two additional appraisal wells were drilled in the Corrib
gas field in the Slyne Trough License PL 2/93, located 40 miles off the west
coast of Ireland. Four wells have now been drilled and suspended as producers in
this field, and a fifth appraisal well is planned in 2001. In December 2000, a
development plan was submitted to the Irish authorities with first gas expected
in October 2003. Marathon owns 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.
In November 2000, Marathon approved the development of the Vale field,
located northeast of the Heimdal field. Production from Vale, which has
estimated net proven reserves of six and one half million BOE, is expected to
start early 2002. Marathon owns a 46.904 percent interest in this field. An
exploration well between the Vale and Heimdal fields is planned in 2001.
Netherlands - In 2000, Marathon, through its 50 percent equity interest
in CLAM, participated in two exploratory wells and one development well in the
Dutch sector of the North Sea. One exploration well was successful and was
brought on production at 45 mmcfd in October 2000. CLAM has a 9.95 percent
interest in this field. A second exploration well was spudded in late 2000. The
Q4 field came onstream in December 2000 at an initial rate of 48 mmcfd. CLAM has
a 19.8 percent interest in this field. The L12 FC field came onstream in
December 2000 at a rate of 16 mmcfd. CLAM holds a 15 percent interest in this
field.
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 wells were dry and the license will be relinquished
in 2001.
Independent from its interest in CLAM, Marathon holds a 24 percent
working interest in the A-15 block in the Netherlands North Sea, which is
operated by a co-venturer. One exploration well was drilled in 1999, which
successfully tested the upper North Sea Group Sand. 3-D seismic data has been
acquired and will be interpreted in early 2001 with another exploration well
planned for 2001. In 2000, Marathon was awarded a new block, F12. Marathon's
interest in F12 is 24 percent.
10
Russia - In December 2000, Marathon Sakhalin Limited transferred its
37.5 percent ownership interest in Sakhalin Energy to Shell Sakhalin Holdings
B.V. In exchange, Marathon received:
. Shell U.K. Limited's 28 percent interest in the BP-operated Foinaven
field, located in the Atlantic Margin west of the Shetland Islands
in the U.K.
. Shell U.K. Limited's interests in discoveries and prospects on
license areas adjacent to the Foinaven field.
. A 3.5 percent overriding royalty, payable from Shell's working
interest, on 100 percent of the production from an eight block area
in the Gulf of Mexico, which includes the producing Ursa field and
the recently announced Princess discovery.
. Reimbursement of $54 million for its expenditures on the Sakhalin
project for the year 2000.
Tunisia - Marathon's 60 percent working interest in the South Jenein
Permit in southern Tunisia was formally ratified by the government in 1996. In
2000, one exploratory well was drilled to test the Mabrouk prospect. The well
was abandoned and no further drilling is planned for this permit as all work
commitments have been fulfilled.
The above discussions include forward-looking statements concerning
various projects, 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 U.K. North Sea,
the U.K. Atlantic Margin and West Africa are also subject to severe weather
conditions such as hurricanes or violent storms or other hazards. 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, 2000, the Marathon Group's net proved liquid
hydrocarbon and natural gas reserves, including equity investee interests,
totaled approximately 1.2 billion barrels on a BOE basis, of which 63 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.) At year-end 2000, Marathon revised its estimate of proved developed
and undeveloped oil and gas reserves downward by 167 million BOE. These
revisions were principally in Canada, the North Sea and the United States and
are the result of production performance and disappointing drilling results.
11
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) 2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Liquid Hydrocarbons
United States.................. 414 476 489 458 520 549
Europe......................... 74 90 119 108 90 122
Other International............ 57 72 67 151 187 194
------ ------ ------ ------ ------ ------
Total Consolidated......... 545 638 675 717 797 865
Equity Investees/(a)/.......... - 69 - - 77 80
------ ------ ------ ------ ------ ------
WORLDWIDE........................... 545 707 675 717 874 945
====== ====== ====== ====== ====== ======
Developed reserves as % of
total net proved reserves...... 76.0% 80.9% 71.4%
(Billions of Cubic Feet)
Natural Gas
United States.................. 1,421 1,550 1,678 1,914 2,057 2,163
Europe......................... 563 741 909 614 774 966
Other International............ 381 497 534 477 833 830
------ ------ ------ ------ ------ ------
Total Consolidated......... 2,365 2,788 3,121 3,005 3,664 3,959
Equity Investee/(b)/........... 52 65 76 89 123 110
------ ------ ------ ------ ------ ------
WORLDWIDE........................... 2,417 2,853 3,197 3,094 3,787 4,069
====== ====== ====== ====== ====== ======
Developed reserves as % of
total net proved reserves...... 78.1% 75.3% 78.6%
(Millions of Barrels)
Total BOEs
United States.................. 651 734 769 777 863 910
Europe......................... 168 213 270 211 219 282
Other International............ 121 155 156 231 326 332
------ ------ ------ ------ ------ ------
Total Consolidated......... 940 1,102 1,195 1,219 1,408 1,524
Equity Investees/(a)/.......... 9 80 13 15 98 98
------ ------ ------ ------ ------ ------
WORLDWIDE........................... 949 1,182 1,208 1,234 1,506 1,622
====== ====== ====== ====== ====== ======
Developed reserves as % of
total net proved reserves...... 76.9% 78.5% 74.5%
- -------------------------------------------------------------------------------
/(a)/ Represents Marathon's equity interests in CLAM and in 1999 and 1998,
Sakhalin Energy.
/(b)/ Represents Marathon's equity interests in CLAM.
The above estimates, which are forward-looking statements, are based
upon 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 page U-32. Reports have been filed with the U.S. Department of
Energy ("DOE") for the years 1999 and 1998 disclosing the year-end estimated oil
and gas reserves. A similar report will be filed for 2000. The year-end
estimates reported to the DOE are the same as the estimates reported in the USX
Consolidated Supplementary Data.
12
Oil and Gas Acreage
The following table sets forth, by geographic area, the developed and
undeveloped oil and gas acreage held as of December 31, 2000:
Gross and Net Acreage
-----------------------------------------------------------------------------------------------------
Developed &
Developed Undeveloped Undeveloped
-------------------- -------------------- --------------------
(Thousands of Acres) Gross Net Gross Net Gross Net
-----------------------------------------------------------------------------------------------------
United States............... 1,997 839 3,092 1,764 5,089 2,603
Europe...................... 348 287 2,465 1,205 2,813 1,492
Other International......... 1,406 869 7,099 2,882 8,505 3,751
------ ------ ------ ------ ------ ------
Total Consolidated.......... 3,751 1,995 12,656 5,851 16,407 7,846
Equity Investee/(a)/........ 453 46 302 70 755 116
------ ------ ------ ------ ------ ------
WORLDWIDE................... 4,204 2,041 12,958 5,921 17,162 7,962
-----------------------------------------------------------------------------------------------------
/(a)/ Represents Marathon's equity interests in 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) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
United States/(b)/............................................ 131 145 135
Europe/(c)/................................................... 29 31 42
Other International/(c)/...................................... 36 31 19
---- ---- ----
Total Consolidated.................................... 196 207 196
Equity Investees (CLAM & Sakhalin Energy)/(c)/................ 11 1 -
---- ---- ----
WORLDWIDE..................................................... 207 208 196
==== ==== ====
Net Natural Gas Production/(d)/
(Millions of Cubic Feet per Day)
United States/(b)/............................................ 731 755 744
Europe/(e)/................................................... 327 325 360
Other International/(e)/...................................... 143 163 81
------ ------ ------
Total Consolidated.................................... 1,201 1,243 1,185
Equity Investee (CLAM)/(e)/................................... 29 36 33
------ ------ ------
WORLDWIDE..................................................... 1,230 1,279 1,218
- -------------------------------------------------------------------------------------------------------
/(a)/ Includes crude oil, condensate and natural gas liquids.
/(b)/ Amounts reflect production from leasehold and plant 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 and Russia where amounts 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 reflect sales of equity production, only. It excludes volumes
purchased from third parties for injection and subsequent resale of 11
mmcfd in 2000 and 16 and 23 mmcfd in 1999 and 1998, respectively.
/(e)/ Amounts reflect production before royalties, excluding Canada where
amounts are after royalties.
13
At year-end 2000, 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 share of equity investee
production, remained consistent with 1999. Marathon's 2000 worldwide sales of
equity natural gas production, including Marathon's share of CLAM's production,
decreased about four percent from 1999 reflecting dispositions and natural field
declines. In addition to sales of 500 net mmcfd of international equity natural
gas production, Marathon sold 11 net mmcfd of natural gas acquired for injection
and resale during 2000. In 2001, Marathon's worldwide production is expected to
average 430,000 BOE per day.
The above projections of 2001 worldwide liquid hydrocarbon production
and natural gas volumes are forward-looking statements. 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, the completion of the
merger with Pennaco, 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 statements.
United States
Approximately 63 percent of Marathon's 2000 worldwide liquid
hydrocarbon production and equity investee liftings and 59 percent of worldwide
natural gas production (including CLAM volumes) were from domestic operations.
The 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 2000, Marathon's Gulf of Mexico production
averaged 61,600 net bpd of liquid hydrocarbons and 88 net mmcfd of natural gas,
representing 47 percent and 12 percent of Marathon's total U.S. liquid
hydrocarbon and natural gas production, respectively. Liquid hydrocarbon
production decreased by 12,900 net bpd and natural gas production decreased by
18 net mmcfd from the prior year, mainly due to dispositions and natural field
declines. At year-end 2000, Marathon held working interests in 9 fields and 17
platforms, of which 7 platforms are operated by Marathon.
Ewing Bank 873 is an important part of Marathon's deepwater
infrastructure. Marathon is the operator and holds a 66.7 percent working
interest. Production averaged 22,700 net bpd and 18 net mmcfd in 2000, compared
with 35,400 net bpd and 28 net mmcfd in 1999, primarily due to natural field
declines. Based on liquid hydrocarbon and natural gas production, Ewing Bank
ranked as Marathon's second highest domestic production field in 2000.
Alaska - Marathon's production from Alaska averaged 160 net mmcfd of
natural gas in 2000, compared with 148 net mmcfd in 1999. 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 12,600 net bpd and 121 net mmcfd in 2000, compared with 11,900
net bpd and 115 net mmcfd in 1999. The increase in gas production was primarily
due to ongoing development of the eastern area of the Indian Basin field.
Oklahoma - Gas production for 2000 averaged 151 net mmcfd, representing
21 percent of Marathon's total U.S. gas production, compared with 127 net mmcfd
in 1999. The increase in gas production was primarily due to exploration success
in the Anadarko Basin coupled with the acquisition and further development of
existing producing properties.
14
Texas - Onshore production for 2000 averaged 23,400 net bpd of liquid
hydrocarbons and 132 net mmcfd of natural gas, representing 18 percent of
Marathon's total U.S. liquid hydrocarbon and natural gas production. Liquid
production volumes decreased by 4,000 net bpd from 1999 levels, and gas volumes
decreased by 34 net mmcfd from 1999 levels. The volume decreases were mainly due
to natural field declines. Marathon's 13,900 net bpd of 2000 liquid hydrocarbon
production from the Yates field accounted for 11 percent of Marathon's total
U.S. liquids production.
Wyoming - Liquid hydrocarbon production for 2000 averaged 25,300 net
bpd, representing 19 percent of Marathon's total U.S. liquid hydrocarbon
production, up from 22,000 net bpd in 1999. The increase in 2000 from 1999 was
primarily due to the Moxa Arch for Big Horn Basin property exchange and
associated development drilling on the acquired properties. Gas production
averaged 45 net mmcfd in 2000, compared to 57 net mmcfd in 1999, with the
decrease due mainly to property exchanges and natural production declines.
International
Interests in liquid hydrocarbon and/or natural gas production are held
in the U.K. North Sea, the U.K. Atlantic Margin, Irish Celtic Sea, the Norwegian
North Sea, Canada and Gabon. In addition, Marathon has interests through an
equity investee in the Netherlands North Sea.
U.K. North Sea - Production from the Brae area averaged 26,500 net bpd
of liquid hydrocarbons in 2000, compared with 31,100 net bpd in 1999. The
decrease is mainly within the East Brae field, reflecting the expected decline
of the field.
The Brae A facilities act as the host platform 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. 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 business since
1986. Currently, there are 15 agreements with third-party fields contracted to
use the Brae system. In addition to generating processing and pipeline tariff
revenue, third-party business also has a favorable impact on Brae area
operations by optimizing infrastructure usage and extending the economic life of
the facilities.
Participation in the Scottish Area Gas Evacuation ("SAGE") system
provides pipeline transportation and onshore processing for Brae-area gas. The
Brae group owns 50 percent of SAGE, which has a total wet gas capacity of
approximately 1.0 bcfd. The other 50 percent is owned by the Beryl group, which
operates the system. 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 224
net mmcfd in 2000, compared with 184 net mmcfd in 1999. Sales of Brae-area gas
through the SAGE pipeline system averaged 222 net mmcfd for the year 2000 and
182 net mmcfd for the year 1999. Of these totals, 211 mmcfd and 166 mmcfd was
Brae-area equity gas in 2000 and 1999, respectively, and 11 and 16 mmcfd was gas
acquired for injection and subsequent resale in 2000 and 1999, respectively.
U.K. Atlantic Margin - As of the end of December 2000, the Foinaven
field was producing approximately 24,000 net bpd of liquid hydrocarbons.
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 114 net mmcfd in 2000, compared with 132 net mmcfd in 1999. 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 shut-in so
gas can be saved and produced at peak times.
15
Norway - In the Norwegian North Sea, Marathon holds a 23.8 percent
working interest in the Heimdal field. Heimdal production ceased at the end of
September 1999. Production of the remaining remnant gas from Heimdal is expected
to commence in the second quarter of 2001. Marathon also holds a 46.904 percent
working interest in the Vale field. This single well sub-sea development will be
tied back to the Heimdal platform, with first production expected early 2002.
Canada - Production in Canada averaged 18,400 bpd and 143 mmcfd in
2000, compared with 17,200 bpd and 150 mmcfd in 1999. The increase in liquid
hydrocarbon production was primarily due to higher heavy oil volumes. Natural
gas sales were lower because of natural declines and higher royalty payments due
to higher realized sales prices. This decline was partially offset by production
from new wells.
Gabon - Production in Gabon averaged 15,800 net bpd of liquid
hydrocarbons in 2000, compared with 9,000 net bpd in 1999. This increase
reflected a full year production from the Tchatamba South field, which began
production in August 1999, and the addition of the Tchatamba West field, which
began production in November 2000.
Netherlands - Marathon's 50 percent equity interest in CLAM provides a
5 percent entitlement in the production from 21 gas fields, which provided sales
of 29 net mmcfd of natural gas in 2000, compared with 36 net mmcfd in 1999.
16
The following tables set forth productive wells and service wells for
each of the last three years and drilling wells as of December 31, 2000:
Gross and Net Wells
2000 Productive Wells/(a)/
- ---- ---------------------------------
Oil Gas Service Wells/(b)/ Drilling Wells/(c)/
--------------- --------------- ---------------- ---------------
Gross Net Gross Net Gross Net Gross Net
- ----------------------------------------------------------------------------------------------------------
United States................. 8,013 3,113 2,526 1,275 3,103 976 31 16
Europe........................ 54 18 66 34 25 9 1 -
Other International .......... 868 616 1,832 1,257 249 172 5 4
------ ----- ----- ----- ----- ----- --- ---
Total Consolidated....... 8,935 3,747 4,424 2,566 3,377 1,157 37 20
Equity Investee/(e)/.......... - - 85 5 - - 2 -
------ ----- ----- ----- ----- ----- --- ---
WORLDWIDE..................... 8,935 3,747 4,509 2,571 3,377 1,157 39 20
====== ===== ===== ===== ===== ===== === ===
1999 Productive Wells/(a)/
---- ---------------------------------
Oil Gas Service 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
====== ===== ===== ===== ===== =====
1998 Productive Wells/(a)/
- ---- ---------------------------------
Oil Gas Service Wells/(b)/
--------------- --------------- ------------------
Gross Net Gross Net Gross Net
- -----------------------------------------------------------------------------------------
United States................. 9,396 3,616 3,214 1,414 4,062 1,127
Europe........................ 33 13 64 32 22 9
Other International........... 1,605 826 1,459 1,068 162 111
------ ----- ----- ----- ----- -----
Total Consolidated....... 11,034 4,455 4,737 2,514 4,246 1,247
Equity Investee/(e)/.......... - - 83 4 - -
------ ----- ----- ----- ----- -----
WORLDWIDE..................... 11,034 4,455 4,820 2,518 4,246 1,247
- -----------------------------------------------------------------------------------------
/a)/ Includes active wells and wells temporarily shut-in. Of the gross
productive wells, gross wells with multiple completions operated by
Marathon totaled 469, 478 and 518 in 2000, 1999 and 1998, 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 CLAM and Sakhalin Energy.
/(e)/ Represents CLAM.
17
The following tables set forth average production costs and sales
prices per unit of production for each of the last three years:
Average Production Costs/(a)/
(Dollars per BOE) 2000 1999 1998
- -------------------------------------------------------------------------------------------------
United States................................................. $ 4.01 $ 3.26 $ 3.12
International - Europe....................................... 3.82 4.62 4.29
- Other International.......................... 6.09 4.66 4.73
Total Consolidated............................................ $ 4.29 $ 3.73 $ 3.55
- Equity Investees/(c)/........................ 6.00 10.02 3.99
WORLDWIDE..................................................... $ 4.35 $ 3.83 $ 3.56
Average Sales Prices/(b)/ 2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- -------
(Dollars per Barrel) Crude Oil and Condensate Natural Gas Liquids
- ----------------------------------------------------------------------------------------------------------------
United States.............................. $ 25.96 $ 15.78 $ 10.60 $ 19.20 $ 12.30 $ 8.64
International - Europe.................... 27.90 17.59 12.87 24.98 13.84 11.49
- Other International....... 25.77 16.77 11.31 23.48 13.49 8.38
Total Consolidated......................... $ 26.22 $ 16.21 $ 11.14 $ 20.35 $ 12.67 $ 9.32
- Equity Investees/(c)/..... 29.64 23.43 - 28.74 13.22 12.65
WORLDWIDE.................................. $ 26.42 $ 16.25 $ 11.14 $ 20.37 $ 12.67 $ 9.33
(Dollars per Thousand Cubic Feet) Natural Gas
- -----------------------------------------------------------------------------
United States.............................. $ 3.30 $ 1.90 $ 1.79
International - Europe.................... 2.56 2.03 2.07
- Other International....... 3.20 1.64 1.34
Total Consolidated......................... $ 3.08 $ 1.90 $ 1.85
- Equity Investee (CLAM).... 2.75 1.87 2.37
WORLDWIDE.................................. $ 3.08 $ 1.90 $ 1.86
- ------------------------------------------------------------------------------
/(a)/ Production costs are as defined by the Securities and Exchange Commission
and include property taxes, severance taxes and other costs, but exclude
depreciation, depletion and amortization of capitalized acquisition,
exploration and development costs and certain administrative costs.
Natural gas volumes were converted to BOE using a conversion factor of six
mcf of natural gas to one barrel of oil.
/(b)/ Prices exclude gains/losses from hedging activities.
/(c)/ Represents CLAM and Sakhalin Energy for 2000 and 1999, and CLAM for 1998.
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. The following discussion of RM&T operations includes
historical data for the three-year period ended December 31, 2000.
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, 2000:
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 ("RFG"). 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 is moved from
Texas City and Catlettsburg to Robinson where excess reforming capacity is
available. Gas oil is moved from Robinson to Detroit and Catlettsburg where
excess fluid catalytic cracking unit capacity is available. Light cycle oil is
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
oil and slack wax.
19
During 2000, MAP's refineries processed 900,000 bpd of crude oil and
141,000 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) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Gasoline...................................................... 552 566 545
Distillates................................................... 278 261 270
Propane....................................................... 20 22 21
Feedstocks & Special Products................................. 74 66 64
Heavy Fuel Oil................................................ 43 43 49
Asphalt....................................................... 74 69 68
----- ----- -----
TOTAL......................................................... 1,041 1,027 1,017
===== ===== =====
Planned maintenance activities requiring temporary shutdown of certain
refinery operating units ("turnarounds") are periodically performed at each
refinery. MAP completed major turnarounds at the Catlettsburg, Detroit and
Robinson refineries in 2000.
MAP is constructing a delayed coker unit at its Garyville, Louisiana
refinery. This unit will allow for the use of heavier, lower cost crude and
reduce the production of heavy fuel oil. To supply this new unit, MAP reached an
agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate
of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy
Mayan crude oil. This is a multi-year contract, which will begin upon completion
of the delayed coker unit which is scheduled in the fall of 2001. In addition, a
project to increase light product output is underway at MAP's Robinson, Illinois
refinery and is expected to be completed in the second quarter of 2001.
Marketing
In 2000, MAP's refined product sales volumes (excluding matching
buy/sell transactions) totaled 19.3 billion gallons (1,254,000 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 64 percent
of MAP's refined product sales volumes in 2000. Approximately 46 percent of
MAP's gasoline volumes and 78 percent of its distillate volumes were sold on a
wholesale or spot market basis to independent unbranded customers or other
wholesalers in 2000.
20
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) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Gasoline ..................................................... 746 714 671
Distillates................................................... 352 331 318
Propane ..................................................... 21 23 21
Feedstocks & Special Products................................. 69 66 67
Heavy Fuel Oil................................................ 43 43 49
Asphalt....................................................... 75 74 72
----- ----- -----
TOTAL......................................................... 1,306 1,251 1,198
===== ===== =====
Matching Buy/Sell Volumes included in above................... 52 45 39
As of December 31, 2000, MAP supplied petroleum products to 3,729
Marathon and Ashland branded retail outlets located primarily in Michigan, Ohio,
Indiana, Kentucky and Illinois. Branded retail outlets are also located in West
Virginia, Florida, Georgia, Wisconsin, Minnesota, Virginia, Tennessee,
Pennsylvania, North Carolina, South Carolina and Alabama.
In 2000, retail sales of gasoline and diesel fuel were also made
through limited service and self-service stations and truck stops operated in 20
states by a wholly owned MAP subsidiary, Speedway SuperAmerica LLC ("SSA"). As
of December 31, 2000, this subsidiary had 2,242 retail outlets which sold
petroleum products and convenience-store merchandise, primarily under the brand
names "Speedway"and "SuperAmerica". SSA's revenues from the sale of
convenience-store merchandise totaled $2,322 million in 2000, compared with
$2,056 million in 1999. Profits generated from these sales tend to moderate the
margin volatility experienced in the retail sale of gasoline and diesel fuel.
The selection of merchandise varies among outlets. At December 31, 2000, 2,100
of SSA's 2,242 outlets had convenience stores which sold a variety of food and
merchandise, and the remaining outlets sold selected convenience-store items
such as cigarettes, candy and beverages.
MAP sells RFG in parts of its marketing territory, primarily Chicago,
Illinois; Louisville, Kentucky; Northern Kentucky; Maryland; Virginia; and
Milwaukee, Wisconsin. MAP also markets low-vapor-pressure gasolines in all or
parts of eleven states.
Supply and Transportation
The crude oil processed in MAP's refineries is obtained from negotiated
contract and spot purchases or exchanges. In 2000, MAP's net purchases of U.S.
crude oil for refinery input averaged 400,000 bpd including 24,000 bpd from
Marathon. In 2000, 56 percent or 500,000 bpd of the crude oil processed by MAP's
refineries was from foreign sources, including approximately 301,000 bpd from
the Middle East, and was acquired primarily 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. Ninety-one 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 trucks.
At December 31, 2000, MAP owned, leased or had an ownership interest in
approximately 68 miles of crude oil gathering lines; 3,564 miles of crude oil
trunk lines; and 2,834 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 Inc. ("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.
21
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 transportation from
Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity of
MAP's St. Paul Park, Minnesota, refinery.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier
pipeline company and the pipeline will be an interstate common carrier pipeline.
The pipeline is expected to initially move about 50,000 bpd of refined petroleum
into the central Ohio region. The pipeline is currently expected to be
operational in mid-2002. The startup of this pipeline is largely dependent on
obtaining the final regulatory approvals, obtaining the necessary rights-of-way,
of which approximately 95 percent have been obtained to date, and completion of
construction. ORPL is still negotiating with a few landowners to obtain the
remaining rights-of-way. Where necessary, ORPL has filed condemnation actions to
acquire some rights-of-way. These actions are at various stages of litigation
and appeal with several recent decisions supporting ORPL's use of eminent
domain.
MAP has joined CMS Energy Corporation and TEPPCO Partners, L.P., in an
agreement to form a limited liability company with equal ownership to operate an
interstate refined petroleum products pipeline extending from the U.S. Gulf of
Mexico to the Midwest. The new company plans to build a 74-mile, 24-inch
diameter pipeline connecting TEPPCO's facility in Beaumont, Texas, with an
existing 720-mile, 26-inch diameter pipeline extending from Longville, Louisiana
to Bourbon, Illinois. In addition, a two million barrel terminal storage
facility will be constructed. The system will be called Centennial Pipeline and
will connect with existing MAP transportation assets and other common carrier
lines. Construction is expected to be completed in the fourth quarter of 2001.
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 refinery and 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, obtaining the necessary
rights-of-way 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 and operates, as a common carrier, approximately 174
miles of crude oil gathering lines and 187 miles of crude oil trunk lines that
were not contributed to MAP. Marathon also 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.
22
Marathon has a 30 percent ownership in a Kenai, Alaska, natural gas
liquefication plant and two 87,500 cubic meter tankers used to transport LNG to
customers in Japan. Feedstock for the plant is supplied from a portion of
Marathon's equity natural gas production in the Cook Inlet. LNG is sold under a
long-term contract with two of Japan's largest utility companies which calls for
the sale of more than 900 gross bcf over the term of the contract. Marathon has
a 30 percent participation in this contract which is effective through March 31,
2004, and provides an option for a five-year extension. During 2000, LNG
deliveries totaled 64 gross bcf (19 net bcf), unchanged from 1999.
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.
In addition to the sale of equity 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. ("Marathon Power"), pursues development, construction, ownership and
operation of independent electric power projects in the global electrical power
market.
Competition and Market Conditions
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. Acquiring the more attractive
exploration opportunities frequently requires competitive bids involving
substantial front-end bonus payments or commitments to work programs. Based on
industry sources, Marathon believes it currently ranks 9th among U.S. based
petroleum corporations on the basis of 1999 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 fifth
among U.S. petroleum companies on the basis of crude oil refining capacity as of
January 1, 2001. 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 75 companies in the sale of petroleum products in the spot
market; 10 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 products and
services, such as tobacco, soft drinks, health and beauty aids, groceries,
fresh-baked goods, automated teller machines, automotive accessories and a line
of private-label items. Some locations also have on-premises brand-name
restaurants such as Subway and Taco Bell.
The Marathon Group'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 industry are cyclical and subject to global
economic and political events.
Employees
The Marathon Group had 30,892 active employees as of December 31, 2000,
which included 27,799 MAP employees. Of the MAP total, 21,677 were employees of
Speedway SuperAmerica LLC, primarily representing employees at retail marketing
outlets.
23
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 which expire on January 31, 2002,
while certain hourly employees at the Texas City refinery are represented by the
same union under a labor agreement which expires 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 which expire
on May 31, 2002 and January 31, 2003, respectively.
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"for the Marathon Group on page M-30.
Environmental Matters
The Marathon Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Health, Environment and Safety organization has the responsibility to ensure
that the Marathon Group'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 the group, is charged with reviewing its overall performance with
various environmental compliance programs. Also, the Marathon Group has formed
an Emergency Management Team, composed of senior management, which will oversee
the response to any major emergency environmental incident throughout the group.
The businesses of the Marathon Group are subject to numerous federal,
state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air Act
("CAA") with respect to air emissions, the Clean Water Act ("CWA") with respect
to water discharges, the Resource Conservation and Recovery Act ("RCRA") with
respect to solid and hazardous waste treatment, storage and disposal, 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 the Marathon Group operates have similar laws
dealing with the same matters. These laws and their associated regulations are
constantly evolving and many of them have become more stringent. The ultimate
impact of complying with existing laws and regulations is not always clearly
known or determinable due in part to the fact that certain implementing
regulations for laws such as RCRA and the CAA have not yet been finalized or in
certain instances are undergoing revision. These environmental laws and
regulations, particularly the 1990 Amendments to the CAA, new water quality
standards and stricter fuel regulations could result in increased capital,
operating and compliance costs.
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 Financial Condition and Results of Operations -
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies"on page M-31 and "Legal Proceedings"for the Marathon Group on page
38.
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on each
competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business or the marine
transportation of crude oil or refined products.
24
Air
The CAA imposes stringent limits on air emissions, establishes a
federally mandated operating permit program and allows for civil and criminal
enforcement sanctions. The principal impact of the CAA on the Marathon Group is
on its RM&T operations. The CAA also establishes attainment deadlines and
control requirements based on the severity of air pollution in a geographical
area. It is estimated that, from 2001 to 2004, the Marathon Group, which
includes all seven MAP refineries, may spend approximately $110 million in order
to comply with the proposed Maximum Achievable Control Technology ("MACT") Phase
II standards under the CAA. These standards require new control equipment on
Fluid Catalytic Cracking Units and other units. New Tier II Fuels regulations
were proposed in late 1999. The gasoline rules, which were finalized by the U.S.
Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel
rule which was finalized in January 2001, require substantially reduced sulfur
levels. The combined capital cost to achieve compliance with the gasoline and
diesel regulations could amount to approximately $600 - $700 million between
2003 and 2005.
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. 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 the Marathon
Group 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 the Marathon Group 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 NAAQA (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
The Marathon Group 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, the
Marathon Group 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
this law.
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. The Coast Guard National Pollution Funds
Center has granted permission to Marathon and Ashland to self-insure the
financial responsibility amount for liability purposes for MAP's tankers, as
provided in OPA-90. In addition, most of the barges, which are 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.
The Marathon Group 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.
25
Solid Waste
The Marathon Group continues to seek methods to minimize the generation
of hazardous wastes in its operations. RCRA establishes standards for the
management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
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 practical application of all the implementing
regulations it has promulgated, the ultimate cost of compliance 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
The Marathon Group 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. The Marathon Group's obligation
to remediate such contamination varies, depending upon 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
those 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.
USX is also involved in a number of remedial actions under RCRA, CERCLA
and similar state statutes related to the Marathon Group. It is possible that
additional matters relating to the Marathon Group may come to USX's attention
which may require remediation.
26
U. S. STEEL GROUP
The U. S. Steel Group is engaged in the production and sale of steel
mill products, coke, and taconite pellets; the management of mineral resources;
coal mining; real estate development; and engineering and consulting services.
Certain business activities are conducted through joint ventures and
partially-owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC
Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B
Partnership, and Republic Technologies International LLC ("Republic"). On
November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which held
the steel and related assets of VSZ a.s., headquartered in the Slovak Republic.
U. S. Steel Group revenues as a percentage of total USX consolidated revenues
were approximately 15 percent in 2000, 19 percent in 1999 and 23 percent in
1998.
The following table sets forth the total revenues of the U. S. Steel
Group for each of the last three years.
Revenues and other income
(Millions) 2000 1999 1998
--------------------------------------------------------------------------------------------
Revenues by product:
Sheet and semi-finished steel products............ $ 3,288 $ 3,433 $ 3,598
Tubular, plate, and tin mill products ............ 1,731 1,140 1,546
Raw materials (coal, coke and iron ore)........... 626 549 744
Other/(a)/........................................ 445 414 490
Income (loss) from affiliates........................ (8) (89) 46
Gain on disposal of assets........................... 46 21 54
Other income (loss).................................. 4 2 (1)
------- ------- -------
Total revenues and other income................... $ 6,132 $ 5,470 $ 6,477
--------------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-products, real
estate development, resource management, and engineering and consulting services.
For additional financial information about USX's industry segments, see
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - 8. Group and Segment Information"on page U-13.
The total number of active U. S. Steel Group domestic employees at
year-end 2000 was 18,784. The total number of active USSK employees was 16,244.
Most hourly and certain salaried employees in the United States are represented
by the United Steelworkers of America ("USWA"). Most USSK employees are
represented by OZ Metalurg which on February 16, 2001 signed a Collective Labor
Agreement with USSK which, for nonwage issues, covers the years 2001 to 2004 and
covers all 2001 wage issues. Wage issues for the remainder of the term of the
Collective Labor Agreement are expected to be renegotiated annually.
Steel Industry Background and Competition
The steel industry is cyclical and highly competitive and is affected
by excess world capacity, which has restricted price increases during periods of
economic growth and led to price decreases during economic contraction. In
addition, the domestic and international steel industries face competition from
producers of materials such as aluminum, cement, composites, glass, plastics and
wood in many markets.
27
U. S. Steel Group is one of the largest steel producers in the United
States and, through its subsidiary USSK, the largest integrated flat rolled
producer in Central Europe, and competes with many domestic and foreign steel
producers. Competitors include integrated producers which, like U. S. Steel
Group, use iron ore and coke as primary raw materials for steel production, and
mini-mills which primarily use steel scrap and, increasingly, iron bearing
feedstocks as raw materials. Mini-mills generally produce a narrower range of
steel products than integrated producers, but typically enjoy certain
competitive advantages such as lower capital expenditures for construction of
facilities and non-unionized work forces with lower employment costs and more
flexible work rules. An increasing number of mini-mills utilize thin slab
casting technology to produce flat-rolled products. Through the use of thin slab
casting, mini-mill competitors are increasingly able to compete directly with
integrated producers of flat-rolled products. Depending on market conditions,
the additional production generated by flat-rolled mini-mills could have an
adverse effect on U. S. Steel Group's selling prices and shipment levels.
Steel imports to the United States accounted for an estimated 27%, 26%
and 30% of the domestic steel market for 2000, 1999 and 1998, respectively.
Steel imports of pipe increased 37% and of hot rolled steel increased 19% in
2000, compared to 1999. Foreign competitors typically have lower labor costs and
are often owned, controlled or subsidized by their governments, allowing their
production and pricing decisions to be influenced by political and economic
policy considerations as well as prevailing market conditions. High levels of
imported steel are expected to continue to have an adverse effect on future
market prices and demand levels for domestic steel.
On November 13, 2000, U. S. Steel Group joined with eight other
producers and the Independent Steelworkers Union to file trade cases against
hot-rolled carbon steel flat products from 11 countries (Argentina, India,
Indonesia, Kazakhstan, the Netherlands, the People's Republic of China, Romania,
South Africa, Taiwan, Thailand and Ukraine). Three days later the USWA also
entered the cases as a petitioner. Antidumping ("AD") cases were filed against
all the countries and countervailing duty ("CVD") cases were filed against
Argentina, India, Indonesia, South Africa and Thailand. On December 28, 2000,
the U.S. International Trade Commission ("ITC") made a preliminary determination
that there is a reasonable indication that the domestic industry is materially
injured by the imports in question. As a result, both the ITC and the U.S.
Department of Commerce ("Commerce") will continue their investigations in these
cases.
U. S. Steel Group believes that the remedies provided by U.S. law to
private litigants are insufficient to correct the widespread dumping and subsidy
abuses that currently characterize steel imports into our country. U. S. Steel
Group, nevertheless, intends to file additional AD and CVD petitions against
unfairly traded imports that adversely impact, or threaten to adversely impact,
the results of the U. S. Steel Group and is urging the U.S. government to take
additional steps.
On July 3, 2000, Commerce and the ITC initiated the mandatory five-year
"sunset"reviews of AD orders issued in 1995 against seamless pipe from
Argentina, Brazil, Germany and Italy and oil country tubular goods ("OCTG") from
Argentina, Italy, Japan, Mexico and South Korea. The reviews also encompass the
1995 CVD orders against the same two products from Italy. The "sunset" review
procedures require that an order must be revoked after five years unless
Commerce and the ITC determine that, if the orders would be discontinued,
dumping or a countervailable subsidy would be likely to continue or recur and
that material injury to the domestic industry would be likely to continue or
recur. Of the 11 orders, 8 are the subject of expedited review at Commerce
because there was no response, inadequate response, or waiver of participation
by the respondent parties. Therefore, at Commerce, only three of the orders (AD:
OCTG from Mexico; and CVD: OCTG and seamless pipe from Italy) are the subject of
a full review. The ITC is conducting full reviews of all the cases, despite the
fact that responses by some of the respondent countries were inadequate.
28
The U. S. Steel Group's domestic businesses are subject to numerous
federal, state and local laws and regulations relating to the storage, handling,
emission and discharge of environmentally sensitive materials. U. S. Steel Group
believes that its major domestic integrated steel competitors are confronted by
substantially similar conditions and thus does not believe that its relative
position with regard to such other competitors is materially affected by the
impact of environmental laws and regulations. However, the costs and operating
restrictions necessary for compliance with environmental laws and regulations
may have an adverse effect on U. S. Steel Group's competitive position with
regard to domestic mini-mills and some foreign steel producers and producers of
materials which compete with steel, which may not be required to undertake
equivalent costs in their operations. For further information, see Environmental
Proceedings on page 42, Legal Proceedings on page 42, and Management's
Discussion and Analysis of Environmental Matters, Litigation and Contingencies
on page S-30.
USSK does business primarily in Central Europe and is subject to market
conditions in this area which are similar to domestic factors, including excess
world supply, and also can be influenced by matters peculiar to international
marketing such as tariffs.
Business Strategy
U. S. Steel Group produces raw steel at Gary Works in Indiana, Mon
Valley Works in Pennsylvania, Fairfield Works in Alabama, and USSK in Kosice,
Slovak Republic.
U. S. Steel Group has responded to competition resulting from excess
steel industry capability by eliminating less efficient facilities, modernizing
those that remain and entering into joint ventures, all with the objective of
focusing production on higher value-added products, where superior quality and
special characteristics are of critical importance. These products include bake
hardenable steels and coated sheets for the automobile and appliance industries,
laminated sheets for the manufacture of motors and electrical equipment, higher
strength plate products, improved tin mill products for the container industry
and oil country tubular goods. Several recent modernization projects further
support U. S. Steel Group's objectives of providing value-added products and
services to customers. These projects include, for the automotive industry - the
degasser facility at Mon Valley Works, the second hot-dip galvanized sheet at
PRO-TEC, the Fairless Works galvanizing line upgrade and the cold reduction mill
upgrades at Gary Works and Mon Valley Works; for the construction industry - the
dual coating lines at Fairfield Works and Mon Valley Works; for the tubular
market - the Fairfield Works pipemill upgrade and acquiring full ownership of
Lorain Tubular Company LLC's tubular facilities and for the plate market - the
heat treat facility at the Gary Works plate mill. Also, a new pickle line was
built at the Mon Valley Works which replaced three older and less efficient
facilities located at Fairless Works and Mon Valley Works.
Through its purchase in 2000 of USSK, which held the steel producing
operations and related assets of VSZ a.s. in the Slovak Republic, the U. S.
Steel Group took a major strategic step by expanding offshore and following many
of its customers into the European market. The objective is to advance USSK to
become a leader among European steel producers and the prime supplier of
flat-rolled steel to the growing central European market. This globalization
strategy is also being pursued through our Acero Prime joint venture in Mexico.
The location of this joint venture allows for easy servicing and just-in-time
delivery to customers throughout Mexico.
In addition, in October 2000, U. S. Steel Group entered into an
agreement with LTV Corporation ("LTV") to purchase LTV's tin mill products
business, including its Indiana Harbor, Indiana tin operations. This acquisition
recently closed and was effective March 1, 2001. Under this agreement, U. S.
Steel Group will lease the land and take title to the buildings, facilities and
inventory of LTV's Indiana Harbor tin operations. U. S. Steel Group intends to
operate these facilities as an ongoing business and tin mill employees at
Indiana Harbor became U. S. Steel Group employees. The U. S. Steel Group and LTV
also entered into 5-year agreements for LTV to supply U. S. Steel Group with
pickled hot bands and for U. S. Steel Group to provide LTV with processing of
cold rolled steel. U. S. Steel Group will not lease the land or take title to
the buildings of LTV's Aliquippa, Pennsylvania tin operations. However, U. S.
Steel Group has the right to transfer certain tin line equipment from Aliquippa
to Indiana Harbor and other U. S. Steel Group tin operations to upgrade those
facilities.
In addition to the modernization of its production facilities, USX has
entered into a number of joint ventures with domestic and foreign partners to
take advantage of market or manufacturing opportunities in the sheet, tin mill,
tubular, bar and plate consuming industries.
29
U. S. Steel Group continues to pursue lower manufacturing cost
objectives through continuing cost improvement programs. These initiatives
include, but are not limited to, reduced production cycle time, improved yields,
increased customer orientation and improved process control. In January 2001,
U. S. Steel domestic operations requested from current suppliers an immediate,
temporary eight percent price reduction from existing levels.
The following table lists products and services by facility or business
unit:
Domestic Steel
--------------
Gary............................................. Sheets; Tin Mill; Plates; Coke
Fairfield........................................ Sheets; Tubular
Mon Valley....................................... Sheets
Fairless......................................... Sheets; Tin Mill
USS-POSCO/(a)/................................... Sheets; Tin Mill
Lorain Tubular Company LLC....................... Tubular
Republic Technologies International, LLC/(a)/.... Bar
PRO-TEC/(a)/..................................... Galvanized Sheet
Clairton......................................... Coke
Clairton 1314B Partnership/(a)/.................. Coke
Transtar/(a)/.................................... Transportation
Minntac.......................................... Taconite Pellets
U. S. Steel Mining............................... Coal
Resource Management.............................. Administration of Mineral, Coal and Timber Properties
USX Realty Development........................... Real estate sales, leasing and management
USX Engineers and Consultants.................... Engineering and Consulting Services
USSK
----
U. S. Steel Kosice s.r.o......................... Sheets; Tin Mill; Plates; Coke
------------------------------------------------------------------------------------------------------------------
/(a)/ Equity investee
U. S. Steel Domestic Operations
U. S. Steel domestic operations includes plants which produce steel
products in a variety of forms and grades. Raw steel production was 11.4 million
tons in 2000, compared with 12.0 million tons in 1999 and 11.2 million tons in
1998. Raw steel produced was nearly 100% continuous cast in 2000, 1999 and 1998.
Raw steel production averaged 89% of capability in 2000, compared with 94% of
capability in 1999 and 88% of capability in 1998. U. S. Steel's stated annual
raw steel production capability was 12.8 millions tons for 2000 (7.5 million at
Gary Works, 2.9 million at Mon Valley Works, and 2.4 million at Fairfield
Works).
Steel shipments were 10.8 million tons in 2000, 10.6 million tons in
1999 and 10.7 million tons in 1998. U. S. Steel Group shipments comprised
approximately 9.8% of domestic steel shipments in 2000. Exports accounted for
approximately 5% of U. S. Steel Group shipments in 2000, 3% in 1999 and 4% in
1998.
30
The following tables set forth significant U. S. Steel domestic
operations shipment data by major markets and products for each of the last
three years. Such data does not include shipments by joint ventures and other
affiliates of USX accounted for by the equity method.
Steel Shipments By Market and Product (United States production only)
Sheets & Tubular,
Semi-finished Plate & Tin
Major Market - 2000 Steel Mill Products Total
- ------------------------------------------------------------------------------------------------------
(Thousands of Net Tons)
Steel Service Centers......................................... 1,636 679 2,315
Further Conversion:
Trade Customers.......................................... 742 432 1,174
Joint Ventures........................................... 1,771 - 1,771
Transportation (Including Automotive)......................... 1,206 260 1,466
Containers.................................................... 182 520 702
Construction and Construction Products........................ 778 158 936
Oil, Gas and Petrochemicals................................... - 973 973
Export........................................................ 346 198 544
All Other..................................................... 748 127 875
----- ----- ------
TOTAL................................................. 7,409 3,347 10,756
===== ===== ======
Major Market - 1999
- -------------------
(Thousands of Net Tons)
Steel Service Centers......................................... 1,867 589 2,456
Further Conversion:
Trade Customers.......................................... 1,257 376 1,633
Joint Ventures........................................... 1,818 - 1,818
Transportation (Including Automotive)......................... 1,280 225 1,505
Containers.................................................... 167 571 738
Construction and Construction Products........................ 660 184 844
Oil, Gas and Petrochemicals................................... - 363 363
Export........................................................ 246 75 321
All Other..................................................... 819 132 951
----- ----- ------
TOTAL.................................................... 8,114 2,515 10,629
===== ===== ======
Major Market - 1998
- -------------------
(Thousands of Net Tons)
Steel Service Centers......................................... 1,867 696 2,563
Further Conversion:
Trade Customers.......................................... 706 434 1,140
Joint Ventures........................................... 1,473 - 1,473
Transportation (Including Automotive)......................... 1,438 347 1,785
Containers.................................................... 222 572 794
Construction and Construction Products........................ 809 178 987
Oil, Gas and Petrochemicals................................... - 509 509
Export........................................................ 226 156 382
All Other..................................................... 867 186 1,053
----- ----- ------
TOTAL.................................................... 7,608 3,078 10,686
===== ===== ======
31
USX and its wholly owned entity, U. S. Steel Mining, have domestic coal
properties with demonstrated bituminous coal reserves of approximately 787
million net tons at year-end 2000 and at year-end 1999. The reserves are of
metallurgical and steam quality in approximately equal proportions. They are
located in Alabama, Illinois, Indiana, Pennsylvania, Tennessee and West
Virginia. Approximately 93% of the reserves are owned, and the rest are leased.
The leased properties are covered by leases which expire in 2005 and 2012.
During 2000, the U. S. Steel Group recorded $71 million of impairments relating
to coal assets located in West Virginia and Alabama. The impairment was recorded
as a result of a reassessment of long-term prospects after geological conditions
were encountered. U. S. Steel Mining's coal production was 6.2 million tons in
2000, compared with 6.6 million tons in 1999 and 8.2 million tons in 1998. Coal
shipments were 6.8 million tons in 2000, compared with 6.9 million tons in 1999
and 7.7 million tons in 1998.
USX controls domestic iron ore properties having demonstrated iron ore
reserves in grades subject to beneficiation processes in commercial use by U. S.
Steel domestic operations of approximately 710 million tons at year-end 2000,
substantially all of which are iron ore concentrate equivalents available from
low-grade iron-bearing materials. All demonstrated reserves are located in
Minnesota. Approximately 32% of these reserves are owned and the remaining 68%
are leased. Most of the leased reserves are covered by a lease expiring in 2058
and the remaining leases have expiration dates ranging from 2021 to 2026. U. S.
Steel Group's iron ore operations at Mt. Iron, Minnesota ("Minntac") produced
16.3 million net tons of taconite pellets in 2000, 14.3 million net tons in 1999
and 15.8 million net tons in 1998. Taconite pellet shipments were 15.0 million
tons in 2000, compared with 15.0 million tons in 1999 and 15.4 million tons in
1998.
USX's Resource Management administers the remaining mineral lands and
timber lands of U. S. Steel domestic operations and is responsible for the lease
or sale of these lands and their associated resources, which encompass
approximately 270,000 acres of surface rights and 1,500,000 acres of mineral
rights in 13 states.
USX Engineers and Consultants, Inc. sells technical services worldwide
to the steel, mining, chemical and related industries. Together with its
subsidiary companies, it provides engineering and consulting services for
facility expansions and modernizations, operating improvement projects,
integrated computer systems, coal and lubrication testing and environmental
projects.
USX Realty Development develops real estate for sale or lease and
manages retail and office space, business and industrial parks and residential
and recreational properties.
For significant operating data for U. S. Steel Group for each of the
last five years, see "USX Consolidation Financial Statements and Supplementary
Data - Five-Year Operating Summary - U. S. Steel Group" on page U-37.
USX participates directly and through subsidiaries in a number of joint
ventures included in the Domestic Steel segment. All of the joint ventures are
accounted for under the equity method. Certain of the joint ventures and other
investments are described below, all of which are at least 50% owned except
Transtar, Republic, Acero Prime and the Clairton 1314B Partnership. For
financial information regarding joint ventures and other investments, see
"Financial Statements and Supplementary Data - Notes to Financial Statements -
16. Investments and Long-Term Receivables" for the U. S. Steel Group on page
S-16.
USX and Pohang Iron & Steel Co., Ltd. ("POSCO") of South Korea
participate in a joint venture, USS-POSCO, which owns and operates the former U.
S. Steel Pittsburg, California plant. The joint venture markets high quality
sheet and tin products, principally in the western United States. USS-POSCO
produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel,
with hot bands principally provided by U. S. Steel Group and POSCO. Total
shipments by USS-POSCO were approximately 1.5 million tons in 2000.
USX owns approximately a 16% interest in Republic Technologies
International, LLC ("Republic"), a subsidiary of Republic Technologies
International Holdings, LLC which is controlled by Blackstone Capital Partners
II. Republic produces raw steel, semi-finished steel products and bar products.
Total shipments by Republic were approximately 2.5 million tons in 2000.
32
USX and Kobe Steel, Ltd. ("Kobe") participate in a joint venture,
PRO-TEC, which owns and operates two hot-dip galvanizing lines in Leipsic, Ohio.
The first galvanizing line commenced operations in early 1993. In November 1998,
operations commenced on a second hot-dip galvanized sheet line which expanded
PRO-TEC's capacity nearly 400,000 tons a year to 1.0 million tons annually.
Total shipments by PRO-TEC were approximately 1.0 million tons in 2000.
USX and Worthington Industries Inc. participate in a joint venture
known as Worthington Specialty Processing which operates a steel processing
facility in Jackson, Michigan. The plant is operated by Worthington Industries,
Inc. The facility contains state-of-the-art technology capable of processing
master steel coils into both slit coils and sheared first operation blanks
including rectangles, trapezoids, parallelograms and chevrons. It is designed to
meet specifications for the automotive, appliance, furniture and metal door
industries. In 2000, Worthington Specialty Processing shipments were
approximately 299 thousand tons.
USX and Rouge Steel Company participate in Double Eagle Steel Coating
Company ("DESCO"), a joint venture which operates an electrogalvanizing facility
located in Dearborn, Michigan. This facility enables U. S. Steel Group to supply
the automotive demand for steel with corrosion resistant properties. The
facility can coat both sides of sheet steel with zinc or alloy coatings and has
the capability to coat one side with zinc and the other side with alloy.
Availability of the facility is shared equally by the partners. In 2000, DESCO
produced approximately 799 thousand tons of electrogalvanized steel.
USX and Olympic Steel, Inc. participate in a 50-50 joint venture to
process laser welded sheet steel blanks at a facility in Van Buren, Michigan.
The joint venture conducts business as Olympic Laser Processing. Startup began
in 1998. In February 2000 an expansion project was announced adding two manually
operated welding lines. The expansion will create the needed flexibility and
capacity to service current and growing requirements for automotive laser weld
applications. Laser welded blanks are used in the automotive industry for an
increasing number of body fabrication applications. U. S. Steel Group is the
venture's primary customer and is responsible for marketing the laser-welded
blanks. In 2000, Olympic Laser Processing shipments were approximately 676
thousand parts.
In 2000, USX owned a 46% interest in Transtar, which in 1988 purchased
the former domestic transportation businesses of USX including railroads, a dock
company, USS Great Lakes Fleet, Inc. and Warrior & Gulf Navigation Company.
Blackstone Transportation Partners, L.P. and Blackstone Capital Partners L.P.,
both affiliated with The Blackstone Group, together owned 53% of Transtar, and
the senior management of Transtar owned the remaining 1%. In October 2000,
Transtar announced that it had entered into a Reorganization and Exchange
Agreement with its two voting shareholders, USX and Transtar Holdings, L.P.
("Holdings"), an affiliate of Blackstone Capital Partners L.P. Upon closing, USX
will become sole owner of Transtar and certain of its subsidiaries, namely, the
Birmingham Southern Railroad Company; the Elgin, Joliet and Eastern Railway
Company; the Lake Terminal Railroad Company; the McKeesport Connecting Railroad
Company; the Mobile River Terminal Company, Inc.; the Union Railroad Company;
the Warrior & Gulf Navigation Company; and Tracks Traffic Management Services,
Inc. and their subsidiaries. Holdings will own the other subsidiaries.
In 1998, USX and VSZ a.s. ("VSZ"), formed a 50-50 joint venture in
Kosice, Slovak Republic for the production and marketing of tin mill products.
VSZ's interest in the joint venture was transferred as part of the November 24,
2000 transaction in which USX purchased USSK. In 2000, through the date of the
acquisition, the former joint venture shipments were approximately 148 thousand
net tons.
USX, through its subsidiary, United States Steel Export Company de
Mexico, along with Feralloy Mexico, S.R.L. de C.V., and Intacero de Mexico, S.A.
de C.V., participate in a joint venture, Acero Prime, for a slitting and
warehousing facility in San Luis Potosi, Mexico. In May 2000, an expansion
project was announced for the joint venture. The expansion project involves the
construction of a 60,000 square-foot addition that will double the current
facility's size and total warehousing capacity. A second slitting line and an
automatic packaging system will also be installed as part of the project. Also,
a new 70,000 square-foot, in-bond warehouse facility will be built in Coahuilla
state in Ramos Arizpe. The warehouse will store and manage coil inventories.
Startup is scheduled for the first quarter of 2001. In 2000, the joint venture
processed approximately 95 thousand tons.
33
On February 24, 2000, U. S. Steel Group entered into a strategic
alliance with e-STEEL Corporation ("e-STEEL"), a leading online exchange for the
global steel industry. e-STEEL provides an easy-to-use, secure web site where
both steel buyers and sellers can initiate, describe, specifically target,
negotiate in real time, and conclude transactions online. As part of the
agreement, U. S. Steel Group has taken a minority stake in e-STEEL. e-STEEL also
entered into agreements with USX Engineers and Consultants, Inc., a wholly owned
subsidiary of USX, for joint marketing and implementation of system integration
services.
U. S. Steel Kosice
On November 24, 2000, USX completed the acquisition of the steelmaking
operations and related assets of VSZ located in Kosice in the Slovak Republic.
These operations are now operating as USSK. The commercial strategy is to serve
existing U. S. Steel Group customers in Central Europe and to grow our customer
base in this region. For more information on this transaction, see "Financial
Statements and Supplementary Data - Notes to Financial Statements - 5. Business
Combination" for the U. S. Steel Group on page S-8.
USSK produces steel products in a variety of forms and grades. For the
38 days of U. S. Steel Group's ownership in 2000, USSK raw steel production was
382 thousand tons or 82% of capability, based on annual capability of 4.5
million tons. USSK has three blast furnaces, two steel shops with two vessels
each, a dual strand caster attached to each steel shop, a hot strip mill, cold
rolling mill, pickling lines, galvanizing line, tin coating line and two coke
batteries. Raw steel produced in 2000 was 100% continuous cast.
USSK shipped 317 thousand tons following the acquisition. These
shipments included sheet products, galvanized sheet products, tin mill products
and plate products. In addition, USSK includes Walzwerk Finow GmbH, located in
eastern Germany, which produces about 90,000 tons per year of welded precision
steel tubes from both cold rolled and hot rolled product as well as cold rolled
specialty shaped sections. USSK also has facilities for manufacturing heating
radiators and spiral weld pipe.
A majority of product sales by USSK are anticipated to be denominated
in Euros while only a small percent of expected expenditures is anticipated to
be in Euros. In addition, most interest and debt payments will be in U.S.
dollars and the majority of other spending is expected to be in U.S. dollars and
the Slovak koruna. This introduces exposure to currency fluctuations.
Property, Plant and Equipment Additions
For property, plant and equipment additions, including capital leases,
see "Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity - Capital Expenditures for the U. S. Steel Group" on page S-28.
Environmental Matters
The U. S. Steel Group maintains a comprehensive environmental policy
overseen by the Public Policy Committee of the USX Board of Directors. The
Environmental Affairs organization has the responsibility to ensure that the U.
S. Steel Group's operating organizations maintain environmental compliance
systems that are in accordance with applicable laws and regulations. The
Executive Environmental Committee, which is comprised of officers of the U. S.
Steel Group, is charged with reviewing its overall performance with various
environmental compliance programs. Also, the U. S. Steel Group, largely through
the American Iron and Steel Institute, continues its involvement in the
negotiation of various air, water, and waste regulations with federal, state and
local governments concerning the implementation of cost effective pollution
reduction strategies.
34
The businesses of the U. S. Steel Group are subject to numerous
federal, state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air Act
("CAA") with respect to air emissions; the Clean Water Act ("CWA") with respect
to water discharges; the Resource Conservation and Recovery Act ("RCRA") with
respect to solid and hazardous waste treatment, storage and disposal; and the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
with respect to releases and remediation of hazardous substances. In addition,
all states where the U. S. Steel Group operates have similar laws dealing with
the same matters. These laws are constantly evolving and becoming increasingly
stringent. The ultimate impact of complying with existing laws and regulations
is not always clearly known or determinable due in part to the fact that certain
implementing regulations for laws such as RCRA and the CAA have not yet been
promulgated or in certain instances are undergoing revision. These environmental
laws and regulations, particularly the CAA, could result in substantially
increased capital, operating and compliance costs.
For a discussion of environmental capital expenditures and the cost of
compliance for air, water, solid waste and remediation, see "Management's
Discussion and Analysis of Environmental Matters, Litigation and
Contingencies" on page S-30 and "Legal Proceedings" for the U. S. Steel Group on
page 42.
The U. S. Steel Group has incurred and will continue to incur
substantial capital, operating and maintenance, and remediation expenditures as
a result of environmental laws and regulations. In recent years, these
expenditures have been mainly for process changes in order to meet CAA
obligations, although ongoing compliance costs have also been significant. To
the extent these expenditures, as with all costs, are not ultimately reflected
in the prices of the U. S. Steel Group's products and services, operating
results will be adversely affected. U. S. Steel believes that its major domestic
integrated steel competitors are confronted by substantially similar conditions
and thus does not believe that its relative position with regard to such
competitors is materially affected by the impact of environmental laws and
regulations. However, the costs and operating restrictions necessary for
compliance with environmental laws and regulations may have an adverse effect on
U. S. Steel's competitive position with regard to domestic mini-mills and some
foreign steel producers and producers of materials which compete with steel,
which may not be required to undertake equivalent costs in their operations. In
addition, the specific impact on each competitor may vary depending on a number
of factors, including the age and location of its operating facilities and its
production methods. For further information, see "Legal Proceedings" on page 42,
and "Management's Discussion and Analysis of Environmental Matters, Litigation
and Contingencies" on page S-30.
The 1997 Kyoto Global Climate Change Agreement ("Kyoto Protocol")
produced by the United Nations convention on climate change, if ratified by the
U. S. Senate, would require restrictions on greenhouse gas emissions in the
United States. Options that could be considered by federal regulators to force
the reductions necessary to meet these restrictions could escalate energy costs
and thereby increase steel production costs. Until action is taken by the U. S.
Senate to ratify or reject the Kyoto Protocol, it is not possible to estimate
the effect of regulations that may be considered for implementation of emissions
restrictions in the United States.
Air
The CAA imposed more stringent limits on air emissions, established a
federally mandated operating permit program and allowed for enhanced civil and
criminal enforcement sanctions. The principal impact of the CAA on the U. S.
Steel Group is on the coke-making and primary steel-making operations of U. S.
Steel, as described in this section. The coal mining operations and sales of U.
S. Steel Mining may also be affected.
The CAA requires the regulation of hazardous air pollutants and
development and promulgation of Maximum Achievable Control Technology ("MACT")
Standards. The amendment to the Chrome Electroplating MACT to include the chrome
processes at Gary and Fairless is expected sometime in the next couple years.
The EPA is also promulgating MACT standards for integrated iron and steel plants
and taconite iron ore processing which are expected to be finalized in 2002. The
impact of these new standards could be significant to U. S. Steel, but the cost
cannot be reasonably estimated until the rules are finalized.
35
The CAA specifically addressed the regulation and control of coke oven
batteries. The National Emission Standard for Hazardous Air Pollutants for coke
oven batteries was finalized in October 1993, setting forth the MACT standard
and, as an alternative, a Lowest Achievable Emission Rate ("LAER") standard.
Effective January 1998, U. S. Steel elected to comply with the LAER standards.
U. S. Steel believes it will be able to meet the current LAER standards. The
LAER standards will be further revised in 2010 and additional health risk-based
standards are expected to be adopted in 2020. EPA is in the process of
developing the Phase II Coke MACT for pushing, quenching and battery stacks
which is scheduled to be finalized in 2002. This MACT will impact U. S. Steel,
but the cost cannot be reasonably estimated at this time.
The CAA also mandates the nationwide reduction of emissions of acid
rain precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired
electrical utility plants. U. S. Steel, like all other electricity consumers,
will be impacted by increased electrical energy costs that are expected as
electric utilities seek rate increases to comply with the acid rain
requirements.
In September 1997, the EPA adopted revisions to the National Ambient
Air Quality Standards for ozone and particulate matter which are significantly
more stringent than prior standards. EPA has issued a Nitrogen Oxide ("NOx")
State Implementation Plan ("SIP") call to require certain states to develop
plans to reduce NOx emissions focusing on large utility and industrial boilers.
The impact of these revised standards could be significant to U. S. Steel, but
the cost cannot be reasonably estimated until the final revised standards and
the NOx SIP call are issued and, more importantly, the states implement their
SIPs covering their standards.
In 2000, all of the coal production of U. S. Steel Mining was
metallurgical coal, which is primarily used in coke production. While USX
believes that the new environmental requirements for coke ovens will not have an
immediate effect on U. S. Steel Mining, the requirements may encourage
development of steelmaking processes that reduce the usage of coke. The new
ozone and particulate matter standards could be significant to U. S. Steel
Mining, but the cost is not capable of being reasonably estimated until rules
are proposed or finalized.
Water
The U. S. Steel Group maintains the necessary discharge permits as
required under the National Pollutant Discharge Elimination System ("NPDES")
program of the CWA, and it is in compliance with such permits. In 1998, USX
entered into a consent decree with the Environmental Protection Agency ("EPA")
which resolved alleged violations of the Clean Water Act NPDES permit at Gary
Works and provides for a sediment remediation project for a section of the Grand
Calumet River that runs through Gary Works. Contemporaneously, USX entered into
a consent decree with the public trustees which resolves potential liability for
natural resource damages on the same section of the Grand Calumet River. In
1999, USX paid civil penalties of $2.9 million for the alleged water act
violations and $0.5 million in natural resource damages assessment costs. In
addition, USX will pay the public trustees $1 million at the end of the
remediation project for future monitoring costs and USX is obligated to purchase
and restore several parcels of property that have been or will be conveyed to
the trustees. During the negotiations leading up to the settlement with EPA,
capital improvements were made to upgrade plant systems to comply with the NPDES
requirements. The sediment remediation project is an approved final interim
measure under the corrective action program for Gary Works and is expected to
cost approximately $36.4 million over the next five years. Estimated remediation
and monitoring costs for this project have been accrued.
Solid Waste
The U. S. Steel Group continues to seek methods to minimize the
generation of hazardous wastes in its operations. RCRA establishes standards for
the management of solid and hazardous wastes. Besides affecting current waste
disposal practices, RCRA also addresses the environmental effects of certain
past waste disposal operations, the recycling of wastes and the regulation of
storage tanks. Corrective action under RCRA related to past waste disposal
activities is discussed below under "Remediation."
36
Remediation
A significant portion of the U. S. Steel Group's currently identified
environmental remediation projects relate to the remediation of former and
present operating locations. These projects include the remediation of the Grand
Calumet River (discussed above), and the closure and remediation of permitted
hazardous and non-hazardous waste landfills.
The U. S. Steel Group is also involved in a number of remedial actions
under CERCLA, RCRA and other federal and state statutes, and it is possible that
additional matters may come to its attention which may require remediation. For
a discussion of remedial actions related to the U. S. Steel Group, see "Legal
Proceedings - U. S. Steel Group Environmental Proceedings" on page 42.
37
Item 2. PROPERTIES
The location and general character of the principal oil and gas
properties, plants, mines, pipeline systems and other important physical
properties of USX are described in the Item 1. Business section of this
document. 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 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.
Several steel production facilities and interests in two liquefied
natural gas tankers are leased. See "Financial Statements and Supplementary Data
- - Notes to Consolidated Financial Statements - 10. Leases" on page U-17.
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 U-32 and U-33.
USX believes that its surface and mineral rights covering reserves are
adequate to assure the basic legal right to extract the minerals, but may not
yet have obtained all governmental permits necessary to do so.
Unless otherwise indicated, all reserves shown are as of December 31,
2000.
Item 3. LEGAL PROCEEDINGS
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments related to the Marathon Group and
the U. S. Steel Group 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 to the consolidated financial
statements and/or to the financial statements of the applicable Group. However,
management believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be resolved
unfavorably.
Marathon Group
Posted Price Litigation
The Marathon Group, alone or with other energy companies, was named in
a number of lawsuits in State and Federal courts alleging various causes of
action related to crude oil royalty payments based on posted prices, including
underpayment of royalty interests, underpayment of severance taxes, antitrust
violations, and violation of the Texas common purchaser statute. Plaintiffs in
these actions included governmental entities and private entities or
individuals. Except for the litigation described in the following paragraph, all
posted price litigation involving crude oil royalties has been resolved as to
Marathon.
During November 1997, Marathon and over twenty other defendants entered
into a proposed class settlement agreement covering antitrust and contract
claims from January 1, 1986, through September 30, 1997, excluding federal and
Indian royalty claims, common purchaser claims and severance tax claims. A new
settlement agreement was filed with the U.S. District Court for the Southern
District of Texas on June 26, 1998, which replaced the November 1997 Settlement
Agreement. The new settlement agreement omits from the settlement class all
State entities which receive royalty payments and only covers private claimants.
At a hearing on December 1, 1998, the court preliminarily approved the new
settlement agreement for the group of defendants of which Marathon is a part.
The new settlement agreement settles all private claims, subject to opt-outs.
The agreement was approved by the court in April 1999. The approval of the
settlement has been appealed to the 5th Circuit Court of Appeals. A decision
from the court is expected in 2001. This statement as to the expected decision
from the court is a forward-looking statement. Predictions as to the date of the
decision are subject to uncertainties with respect to (among other things) the
court's docket and caseload.
38
Marathon has been named by private plaintiffs as a defendant, along
with 17 other energy companies, in a lawsuit under the False Claims Act in the
U.S. District Court for the Eastern District of Texas. In February 2001,
Marathon paid $7.7 million to settle this dispute over the calculation and
amount of royalties due from leases on federal and Native American lands between
1988 and 1998.
Marathon is a named defendant in Wright v. Chevron, et al., a qui tam
case originally filed in the U.S. District Court for the Eastern District of
Texas against over 125 companies which alleges violations under the federal
False Claims Act arising from the reporting and payment of royalties on natural
gas and natural gas liquids in connection with leases on federal and Native
American lands. The Department of Justice decided not to intervene in the case
against Marathon.
The Marathon Group intends to vigorously defend such remaining cases.
Manteo
On July 18, 1997, the United States Court of Federal Claims, Case No.
92-331C, entered a judgment in the amount of $78 million in favor of Marathon
Oil Company and against the United States of America. The U.S. government was
effectively ordered to return lease bonuses that Marathon paid in 1981 for
interest in five oil and gas leases offshore North Carolina. The lawsuit filed
in May 1992 alleged, inter alia, that the federal government breached the leases
through passage of legislation which disputed the company's rights to explore,
develop, and produce hydrocarbons from the leases. The Department of Justice
appealed the trial court's decision to the U.S. Court of Appeals for Federal
Claims which reversed the trial court. During the fourth quarter of 1999,
Marathon's request for Writ of Certiorari to the U.S. Supreme Court was granted.
On June 26, 2000, the U.S. Supreme Court reversed and remanded the case to the
U.S. Court of Appeals for the Federal Circuit for further action. The court of
appeals subsequently ordered full restitution. The U.S. government's request for
reconsideration was denied.
FTC Investigation
On June 27, 2000, the Federal Trade Commission ("FTC") issued a
subpoena to MAP as part of an investigation to determine whether firms engaged
in the production, transportation, distribution, marketing or sale of petroleum
products have engaged in any unfair methods of competition in the Midwest in
violation of Section 5 of the Federal Trade Commission Act. MAP responded to the
subpoena and has cooperated with the investigation. On June 29, 2000, MAP
received a demand for information from the Wisconsin Attorney General which is
substantially similar to the FTC subpoena. MAP has responded to the request and
certain other informal requests for information.
The investigation was in response to gasoline price increases during
the summer of 2000, particularly those in the Midwest. MAP believes that much of
the increase nationwide was related to the price of crude oil, which nearly
tripled between January 1999 and the summer of 2000, and to the implementation
of regulations which force refiners to produce an ever-widening array of motor
fuels for different markets. In addition to these factors, the Midwest had been
experiencing an imbalance of gasoline supply and demand. The primary causes of
this imbalance were new fuels required June 1, 2000 for the Chicago, Milwaukee
and St. Louis markets and a series of pipeline and refinery disruptions. MAP
believes that it properly responded to market forces in its gasoline pricing
practices.
Environmental Proceedings
The following is a summary of proceedings attributable to the Marathon
Group that were pending or contemplated as of December 31, 2000, 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
substances at the site. Liability is strict and can be joint and several.
39
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, USX
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
forward-looking statements.
At December 31, 2000, USX had been identified as a PRP at a total of 13
CERCLA waste sites related to the Marathon Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX 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. USX believes that its liability for cleanup and remediation costs in
connection with the one remaining site will be under $2.5 million.
In addition, there are 6 waste sites related to the Marathon Group
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability.
There are also 115 additional sites, excluding retail marketing
outlets, related to the Marathon Group where remediation is being sought under
other environmental statutes, both federal and state, or where private parties
are seeking remediation through discussions or litigation. Of these sites, 15
were associated with properties conveyed to MAP by Ashland which has retained
liability for all costs associated with remediation. Based on currently
available information, which is in many cases preliminary and incomplete, the
Marathon Group believes that its liability for cleanup and remediation costs in
connection with 20 of these sites will be under $100,000 per site, 32 sites have
potential costs between $100,000 and $1 million per site, 10 sites may involve
remediation costs between $1 million and $5 million per site and 6 sites have
incurred remediation costs of more than $5 million per site. Of the 6 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,
the Marathon Group anticipates spending less than $7 million at this site.
Expenditures in 2001 are expected to be approximately $500,000. Additionally,
negotiations are taking place with Michigan Department of Environmental Quality
to eventually perform a risk-based closure on this site.
In October 1998, the National Enforcement Investigations Center and
Region V of the EPA conducted a multi-media inspection of MAP's Detroit
refinery. Subsequently, in November 1998, Region V conducted a multi-media
inspection of MAP's Robinson refinery. These inspections covered compliance with
the Clean Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. MAP has been
advised, in ongoing discussions with the EPA, as to certain compliance issues
regarding MAP's Detroit and Robinson refineries. Thus far, MAP has been served
with two Notices of Violation ("NOV") and three Findings of Violation in
connection with the multi-media inspection at its Detroit refinery. The Detroit
notices allege violations of the Michigan State Air Pollution Regulations, the
EPA New Source Performance Standards and National Emission Standards for
Hazardous Air Pollutants for Benzene. On March 6, 2000, MAP received its first
NOV arising out of the multi-media inspection of the Robinson refinery conducted
in November 1998. The NOV is for alleged Resource Conservation and Recovery Act
(hazardous waste) violations.
40
MAP has responded to information requests from the EPA regarding New
Source Review ("NSR") compliance at its Garyville and Texas City refineries. In
addition, the scope of the EPA's 1998 multi-media inspections of the Detroit and
Robinson refineries included NSR compliance. NSR requires new major stationary
sources and major modifications at existing major stationary sources to obtain
permits, perform air quality analysis and install stringent air pollution
control equipment at affected facilities. The current EPA initiative appears to
target many items that the industry has historically considered routine repair,
replacement and maintenance or other activity exempted from the NSR
requirements. MAP is engaged in ongoing discussions with the EPA on these issues
concerning all of MAP's refineries.
While MAP has not been notified of any formal findings or violations
resulting from either the information requests or inspections regarding NSR
compliance, MAP has been informed during discussions with the EPA of potential
non-compliance concerns of the EPA based on these inspections and other
information identified by the EPA. Recently, discussions with the EPA have
included commitment to some specific control technologies and implementation
schedules, but not penalties. In addition, MAP anticipates that some or all of
the non-NSR related issues arising from the multi-media inspections may also be
resolved as part of the current discussions with the EPA. A negotiated
resolution with the EPA could result in increased environmental capital
expenditures in future years, in addition to as yet, undetermined penalties.
In connection with the multi-media inspection at MAP's Detroit
refinery, in December 1998, EPA, Region V issued a Notice of Violation against
the refinery alleging that, as a result of "stack tests" conducted in 1992,
1995, 1997 and 1998, at the fluid catalytic cracking unit and the fluid
catalytic cracking unit carbon monoxide boiler, the refinery exceeded the
emission limits for particulate matter and sulfur dioxide thereby violating the
CAA.
In January 1997, a Notice of Violation ("NOV") was served by the
Illinois Environmental Protection Agency on the Marathon Group, including
Marathon Oil Company (Robinson Refinery and Brand Marketing, now operating
organizations within MAP), Marathon Pipe Line Company (now Marathon Ashland Pipe
Line LLC) and Emro Marketing Company (now Speedway SuperAmerica LLC),
consolidating various alleged violations of federal and state environmental laws
and regulations relating to air, water and soil contamination. Three of these
matters have been resolved through two court consent decrees (relating to an
Underground Storage Tank ("UST") site in Chicago, Illinois and Stage II Vapor
Recovery Systems at certain station sites) and an administrative order (a UST
site in Springfield, Illinois) with civil penalties of less than $100,000 per
matter. Three more matters have settlements in concept (two refining and one
pipeline) with civil penalties of less than $100,000 per matter.
In October 1996, EPA Region V issued a Finding of Violation against the
Robinson refinery alleging that it does not qualify for an exemption under the
National Emission Standards for Benzene Waste Operations pursuant to the CAA,
because the refinery's Total Annual Benzene releases exceed the limitation of 10
megagrams per year, and as a result, the refinery is in violation of the
emission control, record keeping, and reports requirements. The Marathon Group
contends that it does qualify for the exemption. However, in February 1999, the
U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint
in the U.S. District Court for the Southern District of Illinois alleging six
counts of violations of the CAA with respect to the benzene releases. The case
has been settled in concept with Marathon and MAP agreeing to pay a combined
$1.8 million civil penalty and conduct various injunctive remedies. It is
anticipated that a consent decree will be negotiated and agreed to in the first
half of 2001.
In connection with the formation of MAP all three of the refineries
owned by Ashland Inc. ("Ashland") were conveyed effective January 1, 1998, to
MAP or its subsidiaries. Ashland reported in its 1997 Form 10-K, that during
1997, the EPA completed comprehensive inspections of these three refineries,
prior to formation of MAP. These inspections resulted in a consent decree, which
required Ashland to pay civil penalties and to undertake specific remedial
projects and improvements at the refinery sites, as well as a number of
supplemental environmental projects involving improvements to the facilities'
operations. Under the terms of its agreements with MAP, Ashland has retained
responsibility for matters arising out of these inspections, including
commencement of work as soon as practical on certain enumerated projects. During
2000, Ashland continued its work under its consent decree with the EPA regarding
these matters.
41
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 Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking
a $300,000 civil penalty associated with a pipeline spill earlier that year in
Winchester, Kentucky. Discussions with the Cabinet have been ongoing.
U. S. Steel Group
Inland Steel Patent Litigation
In July 1991, Inland Steel Company ("Inland") filed an action against
USX and another domestic steel producer in the U. S. District Court for the
Northern District of Illinois, Eastern Division, alleging defendants had
infringed two of Inland's steel-related patents. Inland seeks monetary damages
of up to approximately $50 million and an injunction against future
infringement. USX in its answer and counterclaim alleges the patents are invalid
and not infringed and seeks a declaratory judgment to such effect. In May 1993,
a jury found USX to have infringed the patents. The District Court has yet to
rule on the validity of the patents. In July 1993, the U.S. Patent Office
rejected the claims of the two Inland patents upon a reexamination at the
request of USX and the other steel producer. A further request was submitted by
USX to the Patent Office in October 1993, presenting additional questions as to
patentability which was granted and consolidated for consideration with the
original request. In 1994, the Patent Office issued a decision rejecting all
claims of the Inland patents. On September 21, 1999, the Patent Office Board of
Appeals affirmed the decision of the Patent Office. Inland filed a notice of
appeal with the Court of Appeals for the Federal Circuit on November 17, 1999. A
hearing was held before the court on January 10, 2001, and the decision is
pending.
Asbestos Litigation
USX has been and is a defendant in a large number of cases in which
plaintiffs allege injury resulting from exposure to asbestos. Many of these
cases involve multiple plaintiffs and most have multiple defendants. These
claims fall into three major groups: (1) claims made under the Jones Act and
general maritime law by employees of the Great Lakes or Intercoastal Fleets,
former operations of USX; (2) claims made by persons who did work at U. S. Steel
Group facilities; and (3) claims made by industrial workers allegedly exposed to
an electrical cable product formerly manufactured by USX. To date all actions
resolved have been either dismissed or settled for immaterial amounts. It is not
possible to predict with certainty the outcome of these matters; however, based
upon present knowledge, USX believes that the remaining actions will be
similarly resolved. This statement of belief is a forward-looking statement.
Predictions as to the outcome of pending litigation are subject to substantial
uncertainties with respect to (among other things) factual and judicial
determinations, and actual results could differ materially from those expressed
in the forward-looking statements.
Environmental Proceedings
The following is a summary of the proceedings attributable to the U. S.
Steel Group that were pending or contemplated as of December 31, 2000, under
federal and state environmental laws. Except as described herein, it is not
possible to accurately predict 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 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. PRPs for each site include present and former owners and operators of,
transporters to and generators of the substances at the site. Liability is
strict and can be joint and several. Because of various factors including the
ambiguity of the regulations, the difficulty of identifying the responsible
parties for any particular site, the complexity of determining the relative
liability among them, the uncertainty as to the most desirable remediation
techniques and the amount of damages and cleanup costs and the time period
during which such costs may be incurred, USX is unable to reasonably estimate
its ultimate cost of compliance with CERCLA.
42
Projections, provided in the following paragraphs, of spending for
and/or timing of completion of specific projects are forward-looking statements.
These forward-looking statements are based on certain assumptions including, but
not limited to, the factors provided in the preceding paragraph. To the extent
that these assumptions prove to be inaccurate, future spending for, or timing of
completion of environmental projects may differ materially from those stated in
forward-looking statements.
At December 31, 2000, USX had been identified as a PRP at a total of 25
CERCLA sites related to the U. S. Steel Group. Based on currently available
information, which is in many cases preliminary and incomplete, USX believes
that its liability for cleanup and remediation costs in connection with 11 of
these sites will be between $100,000 and $1 million per site and 7 will be under
$100,000.
At the remaining 7 sites, USX expects that its share in the remaining
cleanup costs at any single site will not exceed $5 million, although it is not
possible to accurately predict the amount of USX's share in any final allocation
of such costs. Following is a summary of the status of these sites:
1. At USX's former Duluth, Minn. Works, USX spent a total of
approximately $11.2 million through 2000. The Duluth Works was
listed by the Minnesota Pollution Control Agency under the
Minnesota Environmental Response and Liability Act on its
Permanent List of Priorities. The EPA has consolidated and
included the Duluth Works site with the St. Louis River and
Interlake sites on the EPA's National Priorities List. The Duluth
Works cleanup has proceeded since 1989. USX is conducting an
engineering study of the estuary sediments and the construction of
a breakwater in the estuary. Depending upon the method and extent
of remediation at this site, future costs are presently unknown
and indeterminable.
2. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has
been used at various times as a disposal site for coal mine refuse
and municipal and industrial waste. USX is one of 15 PRPs that
have entered into an agreed order with the EPA to perform a
remediation of the site. Implementation of the remedial design
plan, resulting in a long-term cleanup of the site, is estimated
to cost approximately $28.5 million.
One of the PRPs filed suit against the EPA, the Ohio Environmental
Protection Agency, and 13 PRPs including USX. The EPA, in turn,
filed suit against the PRPs to recover $1.5 million in oversight
costs. In May 1996, USX entered into a final settlement agreement
to resolve this litigation and the overall allocation. USX agreed
to pay 4.8% of the estimated costs which would result in USX
paying an additional amount of approximately $1.1 million over a
two- to three-year period. To date USX has spent $900,000 at the
site. Remediation commenced in 1999 and should be substantially
completed in 2001.
3. The D'Imperio/Ewan sites in New Jersey are waste disposal sites
where a former USX subsidiary allegedly disposed of used paint and
solvent wastes. USX has entered into a settlement agreement with
the major PRPs at the sites which fixes USX's share of liability
at approximately $1.2 million, $598,000 of which USX has already
paid. The balance, which is expected to be paid over the next
several years, has been accrued.
4. The Berks Associates/Douglassville Site ("Berks Site") is situated
on a 50-acre parcel located on the Schuylkill River in Berks
County, Pa. Used oil and solvent reprocessing operations were
conducted on the Berks Site between 1941 and 1986. The EPA
undertook the dismantling of the Berks Site's former processing
area and instituted a cost recovery suit in July 1991 against 30
former Berks Site customers, as PRPs to recover $8 million it
expended in the process area dismantling. The 30 PRPs targeted by
the EPA joined over 400 additional PRPs in the EPA's cost recovery
litigation. On June 30, 1993, the EPA issued a unilateral
administrative order to the original 30 PRPs ordering remediation
which the EPA estimated would cost over $70 million. In June 1996,
the PRPs proposed an alternative remedy estimated to cost
approximately $20 million. USX expected its share of these costs
to be approximately 7%. In September 1997, USX signed a consent
decree to conduct a feasibility study at the site relating to the
alternative remedy. In 1999, a new Record of Decision was approved
by EPA and the DOJ. On January 19, 2001, USX signed a consent
decree with the EPA to remediate this site. The cost to USX for
remediating this site is approximately $450,000.
43
In February 1996, USX and other Berks Site PRPs were sued by the
Pennsylvania Department of Environmental Resources ("PaDER") for
$6 million in past costs.
5. In 1987 the California Department of Health Services ("DHS")
issued a remedial action order for the GBF/Pittsburg landfill near
Pittsburg, Calif. DHS alleged that from 1972 through 1974,
Pittsburg Works arranged for the disposal of approximately 2.6
million gallons of waste oil, sludge, caustic mud and acid which
were eventually taken to this landfill for disposal. The parties
are attempting to negotiate a buyout arrangement with a third
party remediation firm, whereby the firm would agree to take title
to and remediate the site and also indemnify the PRPs. This
commitment would be backed by pollution insurance. USX's share to
participate in the buyout has been estimated at approximately
$1.05 million.
6. In 1988, USX and three other PRPs agreed to the issuance of an
administrative order by the EPA to undertake emergency removal
work at the Municipal & Industrial Disposal Co. site in Elizabeth,
Pa. The cost of such removal, which has been completed, was
approximately $4.2 million, of which USX paid $3.4 million. The
EPA has indicated that further remediation of this site may be
required in the future, but it has not conducted any assessment or
investigation to support what remediation would be required. In
October 1991, the PaDER placed the site on the Pennsylvania State
Superfund list and began a Remedial Investigation ("RI") which was
issued in 1997. It is not possible to estimate accurately the cost
of any remediation or USX's share in any final allocation formula;
however, based on presently available information, USX may have
been responsible for as much as 70% of the waste material
deposited at the site. On October 10, 1995, the DOJ filed a
complaint in the U.S. District Court for Western Pennsylvania
against USX and other Municipal & Industrial Disposal Co.
defendants to recover alleged costs incurred at the site. In June
1996, USX agreed to pay $245,000 to settle the government's claims
for costs against USX, American Recovery, and Carnegie Natural
Gas. In 1996, USX filed a cost recovery action against parties who
did not contribute to the cost of the removal activity at the
site. USX has reached a settlement in principle with all of the
parties except the site owner. The PRPs are awaiting issuance of
the State's Feasibility Study ("FS").
7. USX participated with 35 other PRPs in performing removal work at
the Ekotek/Petrochem site in Salt Lake City, Utah under the terms
of a 1991 administrative order negotiated with the EPA. The
removal work was completed in 1992 at a cost of over $9 million.
In July 1992, the PRP Remediation Committee negotiated an
administrative order on consent to perform a RI/FS of the site.
The RI/FS was completed in 1995. A remediation plan estimated to
cost $16.6 million was proposed by the EPA in 1995. In 1997, the
EPA issued a revised Record of Decision with a remedial action
estimated to cost $12.2 million. USX has contributed approximately
$1.1 million through 1999 towards completing the removal work and
performing the RI/FS. USX's proportionate share of costs presently
being used by the PRP Remediation Committee is approximately 5% of
the participating PRPs. The PRP Remediation Committee commenced
cost recovery litigation against approximately 1,100 non-
participating PRPs. Almost all of these defendants have settled
their liability or joined the PRP Remediation Committee. In
February 1997, the EPA issued an administrative order to USX and
other PRPs to undertake the proposed remedial action and to
reimburse approximately $5 million to de minimus PRPs who had
earlier settled with the EPA on the basis of a substantially
greater remedial cost estimate. On December 15, 1997, USX, along
with forty other parties, signed a consent decree to clean up the
site. Site cleanup commenced in 1999 and was completed in 2000.
Payment has been made for all remediation work.
In addition, there are 17 sites related to the U. S. Steel Group where
USX has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability.
44
There are also 29 additional sites related to the U. S. Steel Group
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. Based on currently available information, which is in
many cases preliminary and incomplete, the U. S. Steel Group believes that its
liability for cleanup and remediation costs in connection with 4 of these sites
will be under $100,000 per site, another 3 sites have potential costs between
$100,000 and $1 million per site, and 7 sites may involve remediation costs
between $1 million and $5 million. Another 3 sites, including the Grand Calumet
River remediation at Gary Works, the Peters Creek Lagoon remediation at
Clairton, and the potential claim for investigation, restoration and
compensation of injuries to sediments in the East Branch of the Grand Calumet
River near Gary Works, have or are expected to have costs for remediation,
investigation, restoration or compensation in excess of $5 million. Potential
costs associated with remediation at the remaining 12 sites are not presently
determinable.
The following is a discussion of remediation activities at the U. S.
Steel Group's major facilities:
Gary Works
In 1990 a consent decree was signed by USX which, among other things,
required USX to study and implement a program to remediate the sediment in a
portion of the Grand Calumet River. USX has developed a sediment remediation
plan for the section of the Grand Calumet River that runs through Gary Works. As
proposed, this project would require five to six years to complete after
approval and would be followed by an environmental recovery validation. The
estimated program cost, which has been accrued, is approximately $36.4 million.
In 1998, USX entered into a consent decree with the EPA which provides for the
expanded sediment remediation program and resolves alleged violations of the
prior consent decree and National Pollutant Discharge Elimination System permit
since 1990. In 1999, USX paid civil penalties of $2.9 million for alleged
violations of the Clean Water Act at Gary Works. In addition, USX has entered
into a consent decree with the public trustees to settle natural resource damage
claims for the portion of the Grand Calumet River that runs through Gary Works.
This settlement obligates USX to purchase and restore several parcels of
property and pay $1.5 million in past and future assessment and monitoring
costs. In 1999, USX reimbursed past assessment costs of $570,000 and purchased
properties which were conveyed to trustees.
In October 1996, USX was notified by the Indiana Department of
Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S.
Department of the Interior had concluded a preliminary investigation of
potential injuries to natural resources related to releases of hazardous
substances from various municipal and industrial sources along the east branch
of the Grand Calumet River and Indiana Harbor Canal. The Public Trustees
completed a preassessment screen pursuant to federal regulations and have
determined to perform a NRD Assessment. USX was identified as a PRP along with
15 other companies owning property along the river and harbor canal. USX and
eight other PRPs have formed a joint defense group. The Trustees notified the
public of their plan for assessment and later adopted the plan. In 2000, the
Trustees concluded their assessment of sediment injuries, which includes a
technical review of environmental conditions. The PRP joint defense group is
discussing settlement opportunities with the Trustees and EPA.
On October 23, 1998, a final Administrative Order on Consent was issued
by EPA addressing Corrective Action for Solid Waste Management Units throughout
Gary Works. This order requires USX to perform a RCRA Facility Investigation
("RFI") and a Corrective Measure Study ("CMS") at Gary Works. The Current
Conditions Report, USX's first deliverable, was submitted to EPA in January 1997
and was approved by EPA in 1998. The Phase I RFI work plan was submitted to the
EPA in July 1999.
IDEM issued NOVs to USS Gary Works in 1994 alleging various violations
of air pollution requirements. In early 1996, USX paid a $6 million penalty and
agreed to install additional pollution control equipment and programs and
implement programs costing over $100 million over a period of several years. In
1999, USS Gary Works entered into an Agreed Order with IDEM to resolve
outstanding air issues. USX paid a penalty of $207,400 and installed equipment
at the No. 8 Blast Furnace and the No. 1 BOP to reduce air emissions. In
November 1999, IDEM issued to USS Gary Works a NOV alleging various air
violations. USS and IDEM are in the process of negotiating an Agreed Order.
45
In February 1999, the DOJ and EPA issued a letter demanding a cash
payment of approximately $4 million to resolve a Finding of Violation issued in
1997 alleging improper sampling of benzene waste streams at Gary Coke. On
September 18, 2000, a Consent Decree was entered which required USX to pay a
civil penalty of $587,000 and to replace PCB transformers as a Supplemental
Environmental Program ("SEP") at a cost of approximately $2.2 million. Payment
of the civil penalty was made on October 13, 2000.
Clairton
In 1987, USX and the PaDER entered into a consent Order to resolve an
incident in January 1985 involving the alleged unauthorized discharge of benzene
and other organic pollutants from Clairton Works in Clairton, Pa. That consent
Order required USX to pay a penalty of $50,000 and a monthly payment of $2,500
for five years. In 1990, USX and the PaDER reached agreement to amend the
consent Order. Under the amended Order, USX agreed to remediate the Peters Creek
Lagoon (a former coke plant waste disposal site); to pay a penalty of $300,000;
and to pay a monthly penalty of up to $1,500 each month until the former
disposal site is closed. Remediation costs have amounted to $8.8 million with
another $634,000 presently projected to complete the project.
Fairless Works
In January 1992, USX commenced negotiations with the EPA regarding the
terms of an Administrative Order on consent, pursuant to the RCRA, under which
USX would perform a RFI and a CMS at Fairless Works. A Phase I RFI report was
submitted during the third quarter of 1997. A Phase II/III RFI will be submitted
following EPA approval. The RFI/CMS will determine whether there is a need for,
and the scope of, any remedial activities at Fairless Works. USX is working with
the Commonwealth of Pennsylvania to use PA Act 2 to facilitate the site cleanup.
Fairfield Works
In December 1995, USX reached an agreement in principle with the EPA
and the DOJ with respect to alleged RCRA violations at Fairfield Works. A
consent decree was signed by USX and the United States and filed with the court
on December 11, 1997, under which USX will pay a civil penalty of $1 million,
implement two SEPs costing a total of $1.75 million and implement a RCRA
corrective action at the facility. One SEP was completed during 1998 at a cost
of $250,000. The second SEP is underway. The first RFI work plan for the site
will be submitted for agency approval in the first quarter of 2001.
In November 2000, Fairfield received a Notice of Violation from
Jefferson County Health Department ("JHCD") alleging violation of the
Halogenated Solvent NESHAP and the JCHD VOC regulation at the Sheet Mill Stretch
Leveler. USX has proposed a civil penalty of $100,000 and a VOC emission limit.
Mon Valley Works/Edgar Thomson Plant
In September 1997, USX received a draft consent decree addressing
issues raised in a NOV issued by the EPA in January 1997. The NOV alleged air
quality violations at U. S. Steel's Edgar Thomson Plant, which is part of Mon
Valley Works. The draft consent decree addressed these issues, including various
operational requirements, which EPA believed were necessary to bring the plant
into compliance. USX has completed implementing the compliance requirements
identified by EPA. USX has paid a cash penalty of $550,000 and implemented five
SEPs valued at approximately $1.5 million in settlement of the government's
allegations. On February 1, 2000, the U.S. District Court for Western
Pennsylvania entered the consent decree.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
46
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market on which Marathon Stock and Steel Stock are traded
is the New York Stock Exchange. Information concerning the high and low sales
prices for the common stocks 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 "Consolidated Financial Statements and Supplementary
Data - Selected Quarterly Financial Data (Unaudited)"on page U-29.
As of January 31, 2001, there were 64,511 registered holders of
Marathon Stock and 49,940 registered holders of Steel Stock.
The Board of Directors intends to declare and pay dividends on Marathon
Stock and Steel Stock based on the financial condition and results of operations
of the Marathon Group and the U. S. Steel Group respectively, although it has no
obligation under Delaware law or the USX Restated Certificate of Incorporation
to do so. In determining its dividend policy with respect to Marathon Stock and
Steel Stock, the Board will rely on the separate financial statements of the
Marathon Group and the U. S. Steel Group, respectively. The method of
calculating earnings per share for Marathon Stock and Steel Stock reflects the
Board's intent that separately reported earnings and the surplus the Marathon
Group and the U. S. Steel Group would have if separately calculated, as
determined consistent with the USX Restated Certificate of Incorporation, are
available for payment of dividends to the respective classes of stock, although
the amount of funds legally available under Delaware law for the payment of
dividends on these classes of stock do not necessarily correspond with these
amounts. Dividends on all classes of preferred stock and USX common stock are
limited to legally available funds of USX, which are determined on the basis of
the entire Corporation. Distributions on Marathon Stock and Steel Stock would be
precluded by a failure to pay dividends on any series of preferred stock of USX.
In addition, net losses of either Group, as well as dividends or distributions
on either class of USX common stock or series of preferred stock and repurchases
of any class of USX common stock or preferred stock at prices in excess of par
or stated value will reduce the funds of USX legally available for payment of
dividends on the two classes of USX common stock as well as any preferred stock.
Dividends on Steel Stock are further limited to the Available Steel
Dividend Amount. Net losses of the Marathon Group and distributions on Marathon
Stock, and on any preferred stock attributed to the Marathon Group will not
reduce the funds available for declaration and payment of dividends on Steel
Stock unless the legally available funds of USX are less than the Available
Steel Dividend Amount.
See "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - 18. Dividends" on page U-23.
The Board has adopted certain policies with respect to the Marathon
Group and the U. S. Steel Group, including, without limitation, the intention
to: (i) limit capital expenditures of the U. S. Steel Group over the long term
to an amount equal to the internally generated cash flow of the U. S. Steel
Group, including funds generated by sales of assets of the U. S. Steel Group,
(ii) sell assets and provide services between the Marathon Group and the U. S.
Steel Group only on an arm's-length basis and (iii) treat funds generated by
sales of Marathon Stock or Steel Stock and securities convertible into such
stock as assets of the Marathon Group or the U. S. Steel Group, as the case may
be, and apply such funds to acquire assets or reduce liabilities of the Marathon
Group or the U. S. Steel Group, respectively. These policies may be modified or
rescinded by action of the Board, or the Board may adopt additional policies,
without the approval of holders of the two classes of USX common stock, although
the Board has no present intention to do so.
47
Fiduciary Duties of the Board; Resolution of Conflicts
Under Delaware law, the Board must act with due care and in the best
interest of all the stockholders, including the holders of the shares of each
class of USX common stock. The interests of the holders of any class of USX
common stock may, under some circumstances, diverge or appear to diverge.
Examples include the optional exchange of Steel Stock for Marathon Stock at the
10% premium, the determination of the record date of any such exchange or for
the redemption of any Steel Stock; the establishing of the date for public
announcement of the liquidation of USX and the commitment of capital among the
Marathon Group and the U. S. Steel Group.
Because the Board owes an equal duty to all common stockholders
regardless of class, the Board is the appropriate body to deal with these
matters. In order to assist the Board in this regard, the Board has adopted
policies to serve as guidelines for the resolution of matters involving a
conflict or a potential conflict, including policies dealing with the payment of
dividends, limiting capital investment in the U. S. Steel Group over the long
term to its internally generated cash flow and allocation of corporate expenses
and other matters. The Board has been advised concerning the applicable law
relating to the discharge of its fiduciary duties to the common stockholders in
the context of the separate classes of USX common stock and has delegated to the
Audit Committee of the Board the responsibility to review matters which relate
to this subject and report to the Board. Under principles of Delaware law and
the "business judgment rule,"absent abuse of discretion, a good faith
determination made by a disinterested and adequately informed Board with respect
to any matter having disparate impacts upon holders of Marathon and Steel Stock
would be a defense to any challenge to such determination made by or on behalf
of the holders of either class of USX common stock.
48
Item 6. SELECTED FINANCIAL DATA
USX - Consolidated
Dollars in millions (except per share data) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues and other income/(a)(b)/.............. $ 39,914 $ 29,119 $28,077 $22,824 $ 22,938
Income from operations/(b)/................. 1,752 1,863 1,517 1,705 1,779
Includes:
Inventory market valuation
charges (credits)........................ - (551) 267 284 (209)
Gain on ownership change in MAP............. (12) (17) (245) - -
Income from continuing operations.............. $ 411 $ 705 $ 674 $ 908 $ 946
Income (loss) from discontinued operations..... - - - 80 6
Extraordinary losses........................... - (7) - - (9)
------- ------- ------- ------- -------
Net income .................................... $ 411 $ 698 $ 674 $ 988 $ 943
Noncash credit from exchange of
preferred stock............................. - - - 10 -
Dividends on preferred stock................... (8) (9) (9) (13) (22)
------- ------- ------- ------- -------
Net income applicable to common stocks......... $ 403 $ 689 $ 665 $ 985 $ 921
- ------------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss), gain on
ownership change in MAP, net gains/(losses) on disposal of assets, gain on
investee stock offering and other income.
/(b)/ Excludes amounts for the Delhi Companies (sold in 1997), which have been
reclassified as discontinued operations. See Note 5 to the USX
Consolidated Financial Statements, on page U-12.
- --------------------------------------------------------------------------------
Common Share Data
Marathon Stock:
Income before extraordinary losses
applicable to Marathon Stock................ $ 432 $ 654 $ 310 $ 456 $ 671
Per share - basic (in dollars)................ 1.39 2.11 1.06 1.59 2.33
- diluted (in dollars).............. 1.39 2.11 1.05 1.58 2.31
Net income applicable to
Marathon Stock.............................. 432 654 310 456 664
Per share - basic (in dollars) ............... 1.39 2.11 1.06 1.59 2.31
- diluted (in dollars).............. 1.39 2.11 1.05 1.58 2.29
Dividends paid per share (in dollars).......... .88 .84 .84 .76 .70
Common Stockholders' Equity
per share (in dollars)................... 15.70 15.38 13.95 12.53 11.62
49
SELECTED FINANCIAL DATA (contd.)
USX - Consolidated (contd.)
Dollars in millions (except per share data) 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Steel Stock:
Income (loss) before extraordinary losses
applicable to Steel Stock................... $ (29) $ 42 $ 355 $ 449 $ 253
Per share - basic (in dollars) ............... (.33) .48 4.05 5.24 3.00
- diluted (in dollars).............. (.33) .48 3.92 4.88 2.97
Net income (loss) applicable to Steel Stock.... (29) 35 355 449 251
Per share - basic (in dollars) ............... (.33) .40 4.05 5.24 2.98
- diluted (in dollars).............. (.33) .40 3.92 4.88 2.95
Dividends paid per share (in dollars).......... 1.00 1.00 1.00 1.00 1.00
Common Stockholders' Equity
per share (in dollars)...................... 21.58 23.23 23.66 20.56 18.37
- -------------------------------------------------------------------------------------------------------------------
Balance Sheet Data - December 31:
Capital expenditures - for year................ $ 1,669 $ 1,665 $ 1,580 $ 1,373 $ 1,168
Total assets................................ 23,401 22,931 21,133 17,284 16,980
Capitalization:
Notes payable............................... $ 150 $ - $ 145 $ 121 $ 81
Total long-term debt........................ 4,460 4,283 3,991 3,403 4,212
Preferred stock of subsidiary/(a)/.......... 250 250 250 250 250
Trust preferred securities/(a)/............. 183 183 182 182 -
Minority interest in MAP.................... 1,840 1,753 1,590 - -
Redeemable Delhi Stock/(b)/................. - - - 195 -
Preferred stock............................. 2 3 3 3 7
Common stockholders' equity................. 6,762 6,853 6,402 5,397 5,015
-------- --------- -------- -------- ---------
Total capitalization........................ $ 13,647 $ 13,325 $ 12,563 $ 9,551 $ 9,565
======== ========= ======== ======== =========
Ratio of earnings to fixed charges/(c)/........ 3.89 4.32 3.56 3.79 3.65
Ratio of earnings to combined fixed charges
and preferred stock dividends/(c)/.......... 3.79 4.20 3.45 3.63 3.41
- -------------------------------------------------------------------------------------------------------------------
/(a)/ See Note 22 to the USX Consolidated Financial Statements, on page U-25.
/(b)/ On January 26, 1998, USX redeemed all of the outstanding shares of Delhi
Stock. For additional information regarding Delhi Stock, see Note 5 to the
USX Consolidated Financial Statements, on page U-12.
/(c)/ Amounts represent combined fixed charges and earnings from continuing
operations.
50
SELECTED FINANCIAL DATA (contd.)
USX - Marathon Group
Dollars in millions (except per share data) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues and other income/(a)/................. $ 33,859 $ 23,707 $21,623 $15,775 $ 16,153
Income from operations......................... 1,648 1,713 938 932 1,296
Includes:
Inventory market valuation
charges (credits)........................ - (551) 267 284 (209)
Gain on ownership change in MAP............. (12) (17) (245) - -
Income before extraordinary losses............. 432 654 310 456 671
Net income..................................... $ 432 $ 654 $ 310 $ 456 $ 664
Net income applicable to
Marathon Stock.............................. $ 432 $ 654 $ 310 $ 456 $ 664
- ------------------------------------------------------------------------------------------------------------------
Per Common Share Data
Income before extraordinary losses
- basic..................................... $ 1.39 $ 2.11 $ 1.06 $ 1.59 $ 2.33
- diluted................................... 1.39 2.11 1.05 1.58 2.31
Net income - basic........................... 1.39 2.11 1.06 1.59 2.31
- diluted......................... 1.39 2.11 1.05 1.58 2.29
Dividends paid................................. .88 .84 .84 .76 .70
Common stockholders' equity.................... 15.70 15.38 13.95 12.53 11.62
- ------------------------------------------------------------------------------------------------------------------
Balance Sheet Data-December 31:
Capital expenditures - for year................ $ 1,425 $ 1,378 $ 1,270 $ 1,038 $ 751
Total assets................................... 15,232 15,674 14,544 10,565 10,151
Capitalization:
Notes payable............................... $ 80 $ - $ 132 $ 108 $ 59
Total long-term debt........................ 2,085 3,368 3,515 2,893 2,906
Preferred stock of subsidiary............... 184 184 184 184 182
Minority interest in MAP.................... 1,840 1,753 1,590 - -
Common stockholders' equity................. 4,845 4,800 4,312 3,618 3,340
--------- --------- -------- -------- ---------
Total capitalization..................... $ 9,034 $ 10,105 $ 9,733 $ 6,803 $ 6,487
- ------------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income, gain on ownership
change in MAP, net gains/(losses) on disposal of assets and other income.
51
SELECTED FINANCIAL DATA (contd.)
USX - U. S. Steel Group
Dollars in millions (except per share data) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Revenues and other income/(a)/................. $ 6,132 $ 5,470 $ 6,477 $ 7,156 $ 6,872
Income from operations......................... 104 150 579 773 483
Income (loss) before extraordinary losses...... (21) 51 364 452 275
Net income (loss).............................. $ (21) $ 44 $ 364 $ 452 $ 273
Noncash credit from exchange
of preferred stock.......................... - - - 10 -
Dividends on preferred stock................... (8) (9) (9) (13) (22)
-------- -------- ------- ------- --------
Net income (loss) applicable to Steel Stock.... $ (29) $ 35 $ 355 $ 449 $ 251
- ------------------------------------------------------------------------------------------------------------------
Per Common Share Data
Income (loss) before extraordinary losses
- basic..................................... $ (.33) $ .48 $ 4.05 $ 5.24 $ 3.00
- diluted................................... (.33) .48 3.92 4.88 2.97
Net income (loss) - basic..................... (.33) .40 4.05 5.24 2.98
- diluted................... (.33) .40 3.92 4.88 2.95
Dividends paid................................. 1.00 1.00 1.00 1.00 1.00
Common stockholders' equity.................... 21.58 23.23 23.66 20.56 18.37
- ------------------------------------------------------------------------------------------------------------------
Balance Sheet Data - December 31:
Capital expenditures - for year................ $ 244 $ 287 $ 310 $ 261 $ 337
Total assets................................... 8,711 7,525 6,749 6,694 6,580
Capitalization:
Notes payable............................... $ 70 $ - $ 13 $ 13 $ 18
Total long-term debt........................ 2,375 915 476 510 1,087
Preferred stock of subsidiary............... 66 66 66 66 64
Trust Preferred Securities.................. 183 183 182 182 -
Preferred stock............................. 2 3 3 3 7
Common stockholders' equity................. 1,917 2,053 2,090 1,779 1,559
-------- -------- ------- ------- --------
Total capitalization..................... $ 4,613 $ 3,220 $ 2,830 $ 2,553 $ 2,735
- ------------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss), net gains on
disposal of assets, gain on investee stock offering and other income
(loss).
52
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Indexes to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures About
Market Risk of USX Consolidated, the Marathon Group and the U. S. Steel Group
are presented immediately preceding pages U-1, M-1 and S-1, respectively.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Indexes to Financial Statements, Supplementary Data, Management's
Discussion and Analysis, and Quantitative and Qualitative Disclosures About
Market Risk for USX Consolidated, the Marathon Group and the U. S. Steel Group
are presented immediately preceding pages U-1, M-1 and S-1, respectively.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
53
USX
Index to Consolidated Financial Statements, Supplementary
Data, Management's Discussion and Analysis, and Quantitative
and Qualitative Disclosures About Market Risk
Page
----
Management's Report...................................................... U-1
Audited Consolidated Financial Statements:
Report of Independent Accountants....................................... U-1
Consolidated Statement of Operations.................................... U-2
Consolidated Balance Sheet.............................................. U-4
Consolidated Statement of Cash Flows.................................... U-5
Consolidated Statement of Stockholders' Equity.......................... U-6
Notes to Consolidated Financial Statements.............................. U-8
Selected Quarterly Financial Data........................................ U-29
Principal Unconsolidated Affiliates...................................... U-30
Supplementary Information................................................ U-30
Five-Year Operating Summary -- Marathon Group............................ U-35
Five-Year Operating Summary -- U. S. Steel Group......................... U-37
Five-Year Financial Summary.............................................. U-38
Management's Discussion and Analysis..................................... U-39
Quantitative and Qualitative Disclosures About Market Risk............... U-60
THIS PAGE IS INTENTIONALLY LEFT BLANK
Management's Report
The accompanying consolidated financial statements of USX
Corporation and Subsidiary Companies (USX) are the responsibility
of and have been prepared by USX in conformity with accounting
principles generally accepted in the United States. They
necessarily include some amounts that are based on best judgments
and estimates. The consolidated financial information displayed in
other sections of this report is consistent with these consolidated
financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the consolidated financial statements, USX's
independent accountants, who are elected by the stockholders,
review and test the internal accounting controls selectively to
establish a basis of reliance thereon in determining the nature,
extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area
of financial reporting and internal accounting control through its
Audit Committee. This Committee, composed solely of nonmanagement
directors, regularly meets (jointly and separately) with the
independent accountants, management and internal auditors to
monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated
financial statements.
Thomas J. Usher Robert M. Hernandez Larry G. Schultz
Chairman, Board of Directors & Vice Chairman & Vice President-
Chief Executive Officer Chief Financial Officer Accounting
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying consolidated financial statements
appearing on pages U-2 through U-28 present fairly, in all material
respects, the financial position of USX Corporation and its
subsidiaries at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of USX's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits
of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 7, 2001
U-1
Consolidated Statement of Operations
(Dollars in millions) 2000 1999 1998
--------------------------------------------------------------------------------------
Revenues and other income:
Revenues (Note 6) $40,500 $29,068 $27,629
Dividend and investee income (loss) 94 (20) 96
Net gains (losses) on disposal of assets (Note 27) (739) 21 82
Gain on ownership change in
Marathon Ashland Petroleum LLC (Note 3) 12 17 245
Other income 47 33 25
------- ------- -------
Total revenues and other income 39,914 29,119 28,077
------- ------- -------
Costs and expenses:
Cost of revenues (excludes items shown below) 31,056 21,679 20,211
Selling, general and administrative expenses 402 203 304
Depreciation, depletion and amortization 1,605 1,254 1,224
Taxes other than income taxes 4,861 4,433 4,241
Exploration expenses 238 238 313
Inventory market valuation charges (credits) (Note 15) - (551) 267
------- ------- -------
Total costs and expenses 38,162 27,256 26,560
------- ------- -------
Income from operations 1,752 1,863 1,517
Net interest and other financial costs (Note 6) 341 362 279
Minority interest in income of
Marathon Ashland Petroleum LLC (Note 3) 498 447 249
------- ------- -------
Income before income taxes and extraordinary losses 913 1,054 989
Provision for income taxes (Note 11) 502 349 315
------- ------- -------
Income before extraordinary losses 411 705 674
Extraordinary losses (Note 7) - 7 -
------- ------- -------
Net income 411 698 674
Dividends on preferred stock 8 9 9
------- ------- -------
Net income applicable to common stocks $ 403 $ 689 $ 665
--------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
U-2
Income Per Common Share
(Dollars in millions, except per share data) 2000 1999 1998
---------------------------------------------------------------------
Applicable to Marathon Stock:
Net income $ 432 $ 654 $ 310
Per Share Data:
Basic 1.39 2.11 1.06
Diluted 1.39 2.11 1.05
---------------------------------------------------------------------
Applicable to Steel Stock:
Income (loss) before extraordinary losses $ (29) $ 42 $ 355
Extraordinary losses - 7 -
----- ----- -----
Net income (loss) $ (29) $ 35 $ 355
Per Share Data
Basic:
Income (loss) before extraordinary losses $(.33) $ .48 $4.05
Extraordinary losses - .08 -
----- ----- -----
Net income (loss) $(.33) $ .40 $4.05
Diluted:
Income (loss) before extraordinary losses $(.33) $ .48 $3.92
Extraordinary losses - .08 -
----- ----- -----
Net income (loss) $(.33) $ .40 $3.92
---------------------------------------------------------------------
See Note 20, for a description and computation of income per common
share.
The accompanying notes are an integral part of these consolidated
financial statements.
U-3
Consolidated Balance Sheet
(Dollars in millions) December 31 2000 1999
-------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 559 $ 133
Receivables, less allowance for doubtful accounts
of $60 and $12 2,888 2,367
Receivables subject to a security interest (Note 14) 350 350
Inventories (Note 15) 2,813 2,627
Deferred income tax benefits (Note 11) 261 303
Assets held for sale (Note 27) 330 84
Other current assets 131 92
------- -------
Total current assets 7,332 5,956
Investments and long-term receivables, less reserves of
$28 and $3 (Note 12) 801 1,237
Property, plant and equipment - net (Note 21) 12,114 12,809
Prepaid pensions (Note 9) 2,879 2,629
Other noncurrent assets 275 300
------- -------
Total assets $23,401 $22,931
-------------------------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Notes payable (Note 13) $ 150 $ -
Accounts payable 3,774 3,409
Payroll and benefits payable 432 468
Accrued taxes 281 283
Accrued interest 108 107
Long-term debt due within one year (Note 14) 287 61
------- -------
Total current liabilities 5,032 4,328
Long-term debt (Note 14) 4,173 4,222
Deferred income taxes (Note 11) 2,020 1,839
Employee benefits (Note 9) 2,415 2,809
Deferred credits and other liabilities 724 691
Preferred stock of subsidiary (Note 22) 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (Note 22) 183 183
Minority interest in Marathon Ashland Petroleum LLC (Note 3) 1,840 1,753
Stockholders' Equity (Details on pages U-6 and U-7)
Preferred stock (Note 23) -
6.50% Cumulative Convertible issued - 2,413,487 shares and
2,715,287 shares ($121 and $136 liquidation preference, respectively) 2 3
Common stocks:
Marathon Stock issued - 312,165,978 shares and 311,767,181 shares
(par value $1 per share, authorized 550,000,000 shares) 312 312
Steel Stock issued - 88,767,395 shares and 88,397,714 shares
(par value $1 per share, authorized 200,000,000 shares) 89 88
Securities exchangeable solely into Marathon Stock -
issued - 281,148 shares and 288,621 shares (Note 3) - -
Treasury common stock, at cost -
Marathon Stock - 3,899,714 shares and -0- shares (104) -
Additional paid-in capital 4,676 4,673
Deferred compensation (8) -
Retained earnings 1,847 1,807
Accumulated other comprehensive income (loss) (50) (27)
------- -------
Total stockholders' equity 6,764 6,856
------- -------
Total liabilities and stockholders' equity $23,401 $22,931
-------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
U-4
Consolidated Statement of Cash Flows
(Dollars in millions) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income $ 411 $ 698 $ 674
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary losses - 7 -
Minority interest in income of
Marathon Ashland Petroleum LLC 498 447 249
Depreciation, depletion and amortization 1,605 1,254 1,224
Exploratory dry well costs 86 109 186
Inventory market valuation charges (credits) - (551) 267
Pensions and other postretirement benefits (778) (220) (181)
Deferred income taxes 149 212 184
Gain on ownership change in
Marathon Ashland Petroleum LLC (12) (17) (245)
Net (gains) losses on disposal of assets 739 (21) (82)
Changes in: Current receivables - sold - (320) (30)
- operating turnover (375) (988) 451
Inventories (46) (77) (6)
Current accounts payable and accrued expenses 182 1,251 (497)
All other - net 72 152 (172)
------- ------- -------
Net cash provided from operating activities 2,531 1,936 2,022
------- ------- -------
Investing activities:
Capital expenditures (1,669) (1,665) (1,580)
Acquisitions - U.S. Steel Kosice s.r.o., net of cash acquired of $59 (10) - -
- Tarragon Oil and Gas Limited - - (686)
Disposal of assets 560 366 86
Restricted cash - withdrawals 273 60 241
- deposits (270) (61) (67)
Investees - investments (100) (74) (115)
- loans and advances (16) (70) (104)
- returns and repayments 10 1 71
All other - net 29 (25) (4)
------- ------- -------
Net cash used in investing activities (1,193) (1,468) (2,158)
------- ------- -------
Financing activities:
Commercial paper and revolving credit arrangements - net 62 (381) 724
Other debt - borrowings 273 810 1,036
- repayments (339) (242) (1,445)
Common stock - issued - 89 668
- repurchased (105) - (195)
Treasury common stock reissued 1 - -
Preferred stock repurchased (12) (2) (8)
Dividends paid (371) (354) (342)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (420) (400) (211)
------- ------- -------
Net cash provided from (used in) financing activities (911) (480) 227
------- ------- -------
Effect of exchange rate changes on cash (1) (1) 1
------- ------- -------
Net increase (decrease) in cash and cash equivalents 426 (13) 92
Cash and cash equivalents at beginning of year 133 146 54
------- ------- -------
Cash and cash equivalents at end of year $ 559 $ 133 $ 146
----------------------------------------------------------------------------------------------------------
See Note 16, for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated
financial statements.
U-5
Consolidated Statement of Stockholders' Equity
USX has two classes of common stock: USX - Marathon Group Common
Stock (Marathon Stock) and USX - U. S. Steel Group Common Stock
(Steel Stock), which are intended to reflect the performance of the
Marathon and U. S. Steel Groups, respectively. (See Note 8, for a
description of the two Groups.) During 1998, USX issued 878,074
Exchangeable Shares (exchangeable solely into Marathon Stock)
related to the purchase of Tarragon Oil and Gas Limited. (See Note
3.)
On all matters where the holders of Marathon Stock and Steel
Stock vote together as a single class, Marathon Stock has one vote
per share and Steel Stock has a fluctuating vote per share based on
the relative market value of a share of Steel Stock to the market
value of a share of Marathon Stock. In the event of a disposition
of all or substantially all the properties and assets of the U. S.
Steel Group, USX must either distribute the net proceeds to the
holders of the Steel Stock as a special dividend or in redemption
of the stock, or exchange the Steel Stock for the Marathon Stock.
In the event of liquidation of USX, the holders of the Marathon
Stock and Steel Stock will share in the funds remaining for common
stockholders based on the relative market capitalization of the
respective Marathon Stock and Steel Stock to the aggregate market
capitalization of both classes of common stock.
Dollars in millions Shares in thousands
------------------------------- -------------------------------
2000 1999 1998 2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
Preferred stock (Note 23) -
6.50% Cumulative Convertible:
Balance at beginning of year $ 3 $ 3 $ 3 2,715 2,768 2,962
Repurchased (1) - - (302) (53) (194)
----- ----- ----- ------- ------- -------
Balance at end of year $ 2 $ 3 $ 3 2,413 2,715 2,768
---------------------------------------------------------------------------------------------------------------------
Common stocks:
Marathon Stock:
Balance at beginning of year $ 312 $ 308 $ 289 311,767 308,459 288,786
Issued in public offering - - 17 - 67 17,000
Issued for:
Employee stock plans - 3 2 391 2,903 2,236
Dividend Reinvestment and
Direct Stock Purchase Plan - - - - 120 66
Exchangeable Shares - 1 - 8 218 371
----- ----- ----- ------- ------- -------
Balance at end of year $ 312 $ 312 $ 308 312,166 311,767 308,459
---------------------------------------------------------------------------------------------------------------------
Steel Stock:
Balance at beginning of year $ 88 $ 88 $ 86 88,398 88,336 86,578
Issued for:
Employee stock plans 1 - 2 369 62 1,733
Dividend Reinvestment and
Direct Stock Purchase Plan - - - - - 25
----- ----- ----- ------- ------- -------
Balance at end of year $ 89 $ 88 $ 88 88,767 88,398 88,336
---------------------------------------------------------------------------------------------------------------------
Securities exchangeable solely into
Marathon Stock:
Balance at beginning of year $ - $ 1 $ - 289 507 -
Issued to acquire Tarragon stock - - 1 - - 878
Exchanged for Marathon Stock - (1) - (8) (218) (371)
----- ----- ----- ------- ------- -------
Balance at end of year $ - $ - $ 1 281 289 507
---------------------------------------------------------------------------------------------------------------------
Treasury common stock, at cost -
Marathon Stock:
Balance at beginning of year $ - $ - $ - - - -
Repurchased (105) - - (3,957) - -
Reissued for:
Employee stock plans 1 - - 43 - -
Non-employee Board of Directors
deferred compensation plan - - - 14 - -
----- ----- ----- ------- ------- -------
Balance at end of year $(104) $ - $ - (3,900) - -
---------------------------------------------------------------------------------------------------------------------
(Table continued on next page)
U-6
Stockholders' Equity Comprehensive Income
---------------------------- -----------------------
(Dollars in millions) 2000 1999 1998 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year $4,673 $4,587 $3,924
Marathon Stock issued 9 92 598
Steel Stock issued 5 2 57
Exchangeable Shares:
Issued - - 28
Exchanged for Marathon Stock - (6) (12)
Repurchase of 6.50% preferred stock (11) (2) (8)
------ ------ ------
Balance at end of year $4,676 $4,673 $4,587
----------------------------------------------------------------------------------------
Deferred compensation (Note 17) $ (8) $ - $ (1)
----------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year $1,807 $1,467 $1,138
Net income 411 698 674 $ 411 $ 698 $ 674
Dividends on preferred stock (8) (9) (9)
Dividends on Marathon Stock
(per share: $.88 in 2000 and
$.84 in 1999 and 1998) (274) (261) (248)
Dividends on Steel Stock
(per share $1.00) (89) (88) (88)
------ ------ ------
Balance at end of year $1,847 $1,807 $1,467
----------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss):
Minimum pension liability adjustments:
Balance at beginning of year $ (10) $ (37) $ (32)
Changes during year, net of taxes/(a)/ (11) 27 (5) (11) 27 (5)
------ ------ ------
Balance at end of year (21) (10) (37)
------ ------ ------
Foreign currency translation adjustments:
Balance at beginning of year $ (17) $ (11) $ (8)
Changes during year, net of taxes/(a)/ (12) (6) (3) (12) (6) (3)
------ ------ ------
Balance at end of year (29) (17) (11)
------ ------ ------
Unrealized holding losses on investments:
Balance at beginning of year $ - $ - $ 3
Changes during year, net of taxes/(a)/ - (1) 2 - (1) 2
Reclassification adjustment included in net income - 1 (5) - 1 (5)
------ ------ ------
Balance at end of year - - -
----------------------------------------------------------------------------------------
Total balances at end of year $ (50) $ (27) $ (48)
----------------------------------------------------------------------------------------------------------------------
Total comprehensive income/(b)/ $ 388 $ 719 $ 663
----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $6,764 $6,856 $6,405
----------------------------------------------------------------------------------------
/(a)/ Related income tax provision (credit): 2000 1999 1998
------ ------ ------
Minimum pension liability adjustments $ 4 $ (13) $ 3
Foreign currency translation adjustments (4) 3 4
Unrealized holding gains on investments - - 2
/(b)/ Total comprehensive income (loss) by Group:
Marathon Group $ 419 $ 660 $ 306
U. S. Steel Group (31) 59 357
------ ------ ------
Total $ 388 $ 719 $ 663
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
U-7
Notes to Consolidated Financial Statements
1. Summary of Principal Accounting Policies
Principles applied in consolidation - The consolidated financial
statements include the accounts of USX Corporation and the
majority-owned subsidiaries which it controls (USX).
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly owned gas processing
plants are consolidated on a pro rata basis.
Investments in entities over which USX has significant
influence are accounted for using the equity method of accounting
and are carried at USX's share of net assets plus loans and
advances.
Investments in companies whose stock is publicly traded are
carried generally at market value. The difference between the cost
of these investments and market value is recorded in other
comprehensive income (net of tax). Investments in companies whose
stock has no readily determinable fair value are carried at cost.
Dividend and investee income includes USX's proportionate share
of income from equity method investments and dividend income from
other investments. Dividend income is recognized when dividend
payments are received.
Gains or losses from a change in ownership of a consolidated
subsidiary or an unconsolidated investee are recognized in the
period of change.
Use of estimates - Generally accepted accounting principles require
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant items
subject to such estimates and assumptions include the carrying
value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; environmental
liabilities; liabilities for potential tax deficiencies and
potential litigation claims and settlements; and assets and
obligations related to employee benefits. Additionally, certain
estimated liabilities are recorded when management commits to a
plan to close an operating facility or to exit a business activity.
Actual results could differ from the estimates and assumptions
used.
Revenue recognition - Revenues are recognized generally when
products are shipped or services are provided to customers, the
sales price is fixed and determinable, and collectibility is
reasonably assured. Costs associated with revenues, including
shipping and other transportation costs, are recorded in cost of
revenues. Matching buy/sell transactions settled in cash are
recorded in both revenues and cost of revenues as separate sales
and purchase transactions, with no net effect on income. USX
follows the sales method of accounting for gas production
imbalances and would recognize a liability if the existing proved
reserves were not adequate to cover the current imbalance
situation.
Cash and cash equivalents - Cash and cash equivalents include cash
on hand and on deposit and investments in highly liquid debt
instruments with maturities generally of three months or less.
Inventories - Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
Derivative instruments - USX uses commodity-based and foreign
currency derivative instruments to manage its exposure to price
risk. Management is authorized to use futures, forwards, swaps and
options related to the purchase, production or sale of crude oil,
natural gas, refined products, nonferrous metals and electricity.
While USX's risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also
encompass strategies which assume price risk.
U-8
Commodity-Based Hedging Transactions - For transactions that
qualify for hedge accounting, the resulting gains or losses are
deferred and subsequently recognized in income from operations,
as a component of revenues or cost of revenues, in the same
period as the underlying physical transaction. To qualify for
hedge accounting, derivative positions cannot remain open if
the underlying physical market risk has been removed. If such
derivative positions remain in place, they would be marked-to-
market and accounted for as trading or other activities.
Recorded deferred gains or losses are reflected within other
current and noncurrent assets or accounts payable and deferred
credits and other liabilities, as appropriate.
Commodity-Based Trading and Other Activities - Derivative
instruments used for trading and other activities are
marked-to-market and the resulting gains or losses are
recognized in the current period within income from operations.
This category also includes the use of derivative instruments
that have no offsetting underlying physical market risk.
Foreign Currency Transactions - USX uses forward exchange
contracts to manage currency risks. Gains or losses related to
firm commitments are deferred and recognized concurrent with
the underlying transaction. All other gains or losses are
recognized in income in the current period as revenues, cost of
revenues, interest income or expense, or other income, as
appropriate. Forward exchange contracts are recorded as
receivables or payables, as appropriate.
Exploration and development - USX follows the successful efforts
method of accounting for oil and gas exploration and development.
Long-lived assets - Except for oil and gas producing properties,
depreciation is generally computed on the straight-line method
based upon estimated lives of assets. USX's method of computing
depreciation for domestic steel producing assets modifies straight-
line depreciation based on the level of production. The
modification factors range from a minimum of 85% at a production
level below 81% of capability, to a maximum of 105% for a 100%
production level. No modification is made at the 95% production
level, considered the normal long-range level.
Depreciation and depletion of oil and gas producing properties
are computed using predetermined rates based upon estimated proved
oil and gas reserves applied on a units-of-production method.
Depletion of mineral properties, other than oil and gas, is
based on rates which are expected to amortize cost over the
estimated tonnage of minerals to be removed.
USX evaluates impairment of its oil and gas producing assets
primarily on a field-by-field basis using undiscounted cash flows
based on total proved reserves. Other assets are evaluated on an
individual asset basis or by logical groupings of assets. Assets
deemed to be impaired are written down to their fair value,
including any related goodwill, using discounted future cash flows
and, if available, comparable market values.
When long-lived assets depreciated on an individual basis are
sold or otherwise disposed of, any gains or losses are reflected in
income. Gains on disposal of long-lived assets are recognized when
earned, which is generally at the time of closing. If a loss on
disposal is expected, such losses are recognized when long-lived
assets are reclassified as assets held for sale. Proceeds from
disposal of long-lived assets depreciated on a group basis are
credited to accumulated depreciation, depletion and amortization
with no immediate effect on income.
Major maintenance activities - USX incurs planned major maintenance
costs primarily for refinery turnarounds in the Marathon Group and
blast furnace relines in the U. S. Steel Group. Costs associated
with refinery turnarounds are expensed in the same annual period as
incurred; however, estimated annual turnaround costs are recognized
in income throughout the year on a pro rata basis. Costs associated
with blast furnace relines are separately capitalized in property,
plant and equipment. Such costs are amortized over their estimated
useful life, which is generally the period until the next scheduled
reline.
Environmental liabilities - USX provides for remediation costs and
penalties when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. Generally,
the timing of remediation accruals coincides with completion of a
feasibility study or the commitment to a formal plan of action.
Remediation liabilities are accrued based on estimates of known
environmental exposure and are discounted in certain instances. If
recoveries of remediation costs from third parties are probable, a
receivable is recorded. Estimated abandonment and dismantlement
costs of offshore production platforms are accrued based on
production of estimated proved oil and gas reserves.
Postemployment benefits - USX recognizes an obligation to provide
postemployment benefits, primarily for disability-related claims
covering indemnity and medical payments. The obligation for these
claims and the related periodic costs are measured using actuarial
techniques and assumptions, including an appropriate discount rate,
analogous to the required methodology for measuring pension and
other postretirement benefit obligations. Actuarial gains and
losses are deferred and amortized over future periods.
U-9
Insurance - USX is insured for catastrophic casualty and certain
property and business interruption exposures, as well as those
risks required to be insured by law or contract. Costs resulting
from noninsured losses are charged against income upon occurrence.
Reclassifications - Certain reclassifications of prior years' data
have been made to conform to 2000 classifications.
________________________________________________________________________________
2. New Accounting Standards
In the fourth quarter of 2000, USX adopted the following accounting
pronouncements primarily related to the classification of items in
the financial statements. The adoption of these new pronouncements
had no net effect on the financial position or results of
operations of USX, although they required reclassifications of
certain amounts in the financial statements, including all prior
periods presented.
. In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue
Recognition in Financial Statements," which summarizes the SEC
staff's interpretations of generally accepted accounting
principles related to revenue recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) issued EITF Consensus No.
99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent," which addresses whether certain items should be
reported as a reduction of revenue or as a component of both
revenues and cost of revenues, and EITF Consensus No. 00-10
"Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping
goods to customers.
. In September 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 140). SFAS 140
revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and
requires certain disclosures. USX adopted certain recognition
and reclassification provisions of SFAS 140, which were
effective for fiscal years ending after December 15, 2000. The
remaining provisions of SFAS 140 are effective after March 31,
2001.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133),
which later was amended by SFAS Nos. 137 and 138. This Standard
requires recognition of all derivatives as either assets or
liabilities at fair value. Changes in fair value will be reflected
in either current period net income or other comprehensive income,
depending on the designation of the derivative instrument. USX may
elect not to designate a derivative instrument as a hedge even if
the strategy would be expected to qualify for hedge accounting
treatment. The adoption of SFAS No. 133 will change the timing of
recognition for derivative gains and losses as compared to previous
accounting standards.
USX will adopt the Standard effective January 1, 2001. The
transition adjustment resulting from the adoption of SFAS No. 133
will be reported as a cumulative effect of a change in accounting
principle. The unfavorable cumulative effect on net income, net of
tax, is expected to approximate $9 million. The unfavorable
cumulative effect on other comprehensive income, net of tax, will
approximate $7 million. The amounts reported as other comprehensive
income will be reflected in net income when the anticipated
physical transactions are consummated. It is not possible to
estimate the effect that this Standard will have on future results
of operations.
________________________________________________________________________________
3. Business Combinations
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o.
(USSK), which is located in the Slovak Republic. USSK was formed in
June 2000 to hold the steel operations and related assets of VSZ
a.s. (VSZ), a diversified Slovak corporation. The cash purchase
price was $69 million. Additional payments to VSZ of not less than
$25 million and up to $75 million are contingent upon the future
performance of USSK. Additionally, $325 million of debt was
included with the acquisition. The acquisition was accounted for
under the purchase method of accounting. The 2000 results of
operations include the operations of USSK from the date of
acquisition.
Prior to this transaction, USX and VSZ were equal partners in VSZ
U. S. Steel s.r.o. (VSZUSS), a tin mill products manufacturer. The
assets of USSK included VSZ's interest in VSZUSS. The acquisition
of the remaining interest in VSZUSS was accounted for under the
purchase method of accounting. Previously, USX had accounted for
its investment in VSZUSS under the equity method of accounting.
U-10
VSZ did not provide historical carve-out financial information
for its steel activities prepared in accordance with generally
accepted accounting principles in the United States. USX was unable
to fully determine the effects of transfer pricing, intercompany
eliminations and expense allocations in order to prepare such
carve-out information from Slovak statutory reports and VSZ
internal records. USX broadly estimates that the unaudited pro
forma effect on its 2000 and 1999 revenues, giving effect to the
acquisition as if it had been consummated at the beginning of those
periods, would have been to increase revenues in each period by
approximately $1 billion. USX cannot determine the unaudited pro
forma effect on its 2000 and 1999 net income. In any event,
historical pro forma information is not necessarily indicative of
future results of operations.
In August 1998, Marathon Oil Company (Marathon) acquired
Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas
exploration and production company. Securityholders of Tarragon
received, at their election, Cdn$14.25 for each Tarragon share, or
the economic equivalent in Exchangeable Shares of an indirect
Canadian subsidiary of Marathon, which are exchangeable solely on a
one-for-one basis into Marathon Stock. The purchase price included
cash payments of $686 million, issuance of 878,074 Exchangeable
Shares valued at $29 million and the assumption of $345 million in
debt.
The Exchangeable Shares are exchangeable at the option of the
holder at any time and automatically redeemable on August 11, 2003
(and, in certain circumstances, as early as August 11, 2001). The
holders of Exchangeable Shares are entitled to receive declared
dividends equivalent to dividends declared from time to time by USX
on Marathon Stock.
USX accounted for the acquisition using the purchase method of
accounting. The 1998 results of operations include the operations
of Marathon Canada Limited, formerly known as Tarragon, commencing
August 12, 1998.
During 1997, Marathon and Ashland Inc. (Ashland) agreed to
combine the major elements of their refining, marketing and
transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland Petroleum
LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland in exchange
for a 38% interest in MAP. The acquisition was accounted for under
the purchase method of accounting. The purchase price was
determined to be $1.9 billion, based upon an external valuation.
The change in Marathon's ownership interest in MAP resulted in a
gain of $245 million in 1998. In accordance with MAP closing
agreements, Marathon and Ashland have made capital contributions to
MAP for environmental improvements. The closing agreements
stipulate that ownership interests in MAP will not be adjusted as a
result of such contributions. Accordingly, Marathon recognized a
gain on ownership change of $12 million in 2000 and $17 million in
1999.
In connection with the formation of MAP, Marathon and Ashland
entered into a Limited Liability Company Agreement dated January 1,
1998 (the LLC Agreement). The LLC Agreement provides for an initial
term of MAP expiring on December 31, 2022 (25 years from its
formation). The term will automatically be extended for ten-year
periods, unless a termination notice is given by either party.
Also in connection with the formation of MAP, the parties
entered into a Put/Call, Registration Rights and Standstill
Agreement (the Put/Call Agreement). The Put/Call Agreement provides
that at any time after December 31, 2004, Ashland will have the
right to sell to Marathon all of Ashland's ownership interest in
MAP, for an amount in cash and/or Marathon or USX debt or equity
securities equal to the product of 85% (90% if equity securities
are used) of the fair market value of MAP at that time, multiplied
by Ashland's percentage interest in MAP. Payment could be made at
closing, or at Marathon's option, in three equal annual
installments, the first of which would be payable at closing. At
any time after December 31, 2004, Marathon will have the right to
purchase all of Ashland's ownership interests in MAP, for an amount
in cash equal to the product of 115% of the fair market value of
MAP at that time, multiplied by Ashland's percentage interest in
MAP.
________________________________________________________________________________
4. Transactions Between MAP and Ashland
At December 31, 2000 and 1999, MAP had current receivables from
Ashland of $35 million and $26 million, respectively, and current
payables to Ashland of $2 million.
MAP has a $190 million revolving credit agreement with Ashland.
Interest on borrowings is based on defined short-term market rates.
At December 31, 2000 and 1999, there were no borrowings against
this facility.
During 2000, 1999 and 1998, MAP's sales to Ashland, consisting
primarily of petroleum products, were $285 million, $198 million
and $190 million, respectively, and MAP's purchases of products and
services from Ashland were $26 million, $22 million and $47
million, respectively. These transactions were conducted under
terms comparable to those with unrelated parties.
U-11
________________________________________________________________________________
5. Discontinued Operations
Effective October 31, 1997, USX sold its stock in Delhi Gas
Pipeline Corporation and other subsidiaries of USX that comprised
all of the Delhi Group. USX elected to use the net proceeds of $195
million, or $20.60 per share, to redeem all shares of Delhi Stock.
The net proceeds were distributed to the Delhi shareholders on
January 26, 1998. After the redemption, 50,000,000 shares of Delhi
Stock remain authorized but unissued.
________________________________________________________________________________
6. Other Items
(In millions) 2000 1999 1998
----------------------------------------------------------------------------
Net interest and other financial costs
Interest and other financial income:
Interest income $ 29 $ 16 $ 35
Other 5 (13) 4
----- ----- -----
Total 34 3 39
----- ----- -----
Interest and other financial costs:
Interest incurred 328 326 325
Less interest capitalized 19 26 46
----- ----- -----
Net interest 309 300 279
Interest on tax issues 17 20 21
Financial costs on trust preferred securities 13 13 13
Financial costs on preferred stock of subsidiary 22 22 22
Amortization of discounts 3 3 6
Expenses on sales of accounts receivable - 15 21
Adjustment to settlement value of indexed debt - (13) (44)
Other 11 5 -
----- ----- -----
Total 375 365 318
----- ----- -----
Net interest and other financial costs $ 341 $ 362 $ 279
----------------------------------------------------------------------------
Foreign currency transactions
For 2000, 1999 and 1998, the aggregate foreign currency
transaction gains (losses) included in determining net income
were $37 million, $(12) million and $13 million, respectively.
Consumer excise taxes
Included in revenues and costs and expenses for 2000, 1999 and
1998 were $4,344 million, $3,973 million and $3,824 million,
respectively, representing consumer excise taxes on petroleum
products and merchandise.
________________________________________________________________________________
7. Extraordinary Losses
In 1999, USX irrevocably deposited with a trustee the entire 5.5
million common shares it owned in RTI International Metals, Inc.
(RTI). The deposit of the shares resulted in the satisfaction of
USX's obligation under its 6 3/4% Exchangeable Notes (indexed
debt) due February 1, 2000. Under the terms of the indenture, the
trustee exchanged one RTI share for each note at maturity. All
shares were required for satisfaction of the indexed debt;
therefore, none reverted back to USX.
As a result of the above transaction, USX recorded in 1999 an
extraordinary loss of $5 million, net of a $3 million income tax
benefit, representing prepaid interest expense and the write-off of
unamortized debt issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value of the
investment in RTI and the carrying value of the indexed debt, which
is included in net gains (losses) on disposal of assets. Since
USX's investment in RTI was attributed to the U. S. Steel Group,
the indexed debt was also attributed to the U. S. Steel Group.
In 1999, Republic Technologies International, LLC, an equity
investee of USX, recorded an extraordinary loss related to the
early extinguishment of debt. As a result, USX recorded an
extraordinary loss of $2 million, net of a $1 million income tax
benefit, representing its share of the extraordinary loss.
U-12
________________________________________________________________________________
8. Group and Segment Information
USX has two classes of common stock: Marathon Stock and Steel Stock, which are
intended to reflect the performance of the Marathon Group and the U. S. Steel
Group, respectively. A description of each group and its products and services
is as follows:
Marathon Group - The Marathon Group includes Marathon Oil Company and certain
other subsidiaries of USX. Marathon Group revenues as a percentage of total
consolidated USX revenues were 85% in 2000, 81% in 1999 and 77% in 1998.
U. S. Steel Group - The U. S. Steel Group consists of U. S. Steel, the largest
domestic integrated steel producer and U. S. Steel operations in the Slovak
Republic. U. S. Steel Group revenues as a percentage of total consolidated USX
revenues were 15% in 2000, 19% in 1999 and 23% in 1998.
Group Operations:
Income Net
From Income Capital
(In millions) Year Revenues Operations (Loss) Expenditures Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Marathon Group 2000 $34,487 $1,648 $ 432 $ 1,425 $15,232
1999 23,590 1,713 654 1,378 15,674
1998 21,274 938 310 1,270 14,544
- -----------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group 2000 6,090 104 (21) 244 8,711
1999 5,536 150 44 287 7,525
1998 6,378 579 364 310 6,749
- -----------------------------------------------------------------------------------------------------------------------------------
Eliminations 2000 (77) - - - (542)
1999 (58) - - - (268)
1998 (23) - - - (160)
- -----------------------------------------------------------------------------------------------------------------------------------
Total USX 2000 $40,500 $1,752 $ 411 $ 1,669 $23,401
Corporation 1999 29,068 1,863 698 1,665 22,931
1998 27,629 1,517 674 1,580 21,133
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues by Product:
(In millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Marathon Group
Refined products $22,514 $15,181 $12,852
Merchandise 2,441 2,194 1,941
Liquid hydrocarbons 6,856 4,587 5,023
Natural gas 2,518 1,429 1,187
Transportation and other products 158 199 271
- -----------------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group
Sheet and semi-finished steel products $ 3,288 $ 3,433 $ 3,598
Tubular, plate and tin mill products 1,731 1,140 1,546
Raw materials (coal, coke and iron ore) 626 549 744
Other/(a)/ 445 414 490
- -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-products,
engineering and consulting services, real estate development and resource
management.
Operating Segments:
USX's reportable operating segments are business units within the Marathon and
U. S. Steel Groups, each providing their own unique products and services. Each
operating segment is independently managed and requires different technology and
marketing strategies. Segment income represents income from operations allocable
to operating segments. The following items included in income from operations
are not allocated to operating segments:
. Gain on ownership change in MAP
. Net pension credits associated with the U. S. Steel Group's pension plan
assets and liabilities
. Certain costs related to former U. S. Steel Group business activities
. Certain general and administrative costs related to all Marathon Group
operating segments in excess of amounts billed to MAP under service
contracts and amounts charged out to operating segments under Marathon's
shared services procedures
. USX corporate general and administrative costs. These costs primarily
consist of employment costs including pension effects, professional
services, facilities and other related costs associated with corporate
activities.
. Inventory market valuation adjustments
. Certain other items not allocated to operating segments for business
performance reporting purposes (see (a) in reconcilement table on page U-
15)
U-13
The Marathon Group's operations consist of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces crude
oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and petroleum
products, primarily in the Midwest and southeastern United States through MAP;
and 3) Other Energy Related Businesses (OERB). Other Energy Related Businesses
is an aggregation of two segments which fall below the quantitative reporting
thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets
and transports its own and third-party natural gas and crude oil in the United
States; and 2) Power Generation - develops, constructs and operates independent
electric power projects worldwide. The U. S. Steel Group consists of two
reportable operating segments: 1) Domestic Steel and 2) U. S. Steel Kosice
(USSK). Domestic Steel includes the United States operations of U. S. Steel,
while USSK includes the U. S. Steel Kosice operations in the Slovak Republic.
Domestic Steel is engaged in the domestic production and sale of steel mill
products, coke and taconite pellets; the management of mineral resources; coal
mining; engineering and consulting services; and real estate development and
management. USSK is engaged in the production and sale of steel mill products
and coke and primarily serves European markets.
Information on assets by segment is not provided as it is not reviewed by the
chief operating decision maker.
Total Total
Marathon Domestic U. S. Steel
(In millions) E&P RM&T OERB Segments Steel USSK Segments Total
- -----------------------------------------------------------------------------------------------------------------------------------
2000
Revenues and other income:
Customer $4,184 $28,693 $1,550 $34,427 $5,981 $92 $6,073 $40,500
Intersegment/(a)/ 412 83 78 573 - - - 573
Intergroup/(a)/ 30 1 29 60 17 - 17 77
Equity in earnings (losses) of
unconsolidated investees 47 22 15 84 (8) - (8) 76
Other 21 50 12 83 50 - 50 133
------ ------- ------ ------- ------ ---- ------ -------
Total revenues and other income $4,694 $28,849 $1,684 $35,227 $6,040 $92 $6,132 $41,359
====== ======= ====== ======= ====== ==== ====== =======
Segment income $1,535 $ 1,273 $ 38 $ 2,846 $ 23 $ 2 $ 25 $ 2,871
Significant noncash items included
in segment income - depreciation,
depletion and amortization/(b)/ 723 315 3 1,041 285 4 289 1,330
Capital expenditures/(c)/ 742 656 2 1,400 239 5 244 1,644
- -----------------------------------------------------------------------------------------------------------------------------------
1999
Revenues and other income:
Customer $2,856 $19,962 $ 731 $23,549 $5,519 $ - $5,519 $29,068
Intersegment/(a)/ 202 47 40 289 - - - 289
Intergroup/(a)/ 19 - 22 41 17 - 17 58
Equity in earnings (losses) of
unconsolidated investees (2) 17 26 41 (43) - (43) (2)
Other 30 50 15 95 46 - 46 141
------ ------- ------ ------- ------ ---- ------ -------
Total revenues and other income $3,105 $20,076 $ 834 $24,015 $5,539 $ - $5,539 $29,554
====== ======= ====== ======= ====== ==== ====== =======
Segment income $ 618 $ 611 $ 61 $ 1,290 $ 91 $ - $ 91 $ 1,381
Significant noncash items included
in segment income - depreciation,
depletion and amortization/(b)/ 638 280 5 923 304 - 304 1,227
Capital expenditures/(c)/ 744 612 4 1,360 286 - 286 1,646
- -----------------------------------------------------------------------------------------------------------------------------------
1998
Revenues and other income:
Customer $1,905 $19,018 $ 306 $21,229 $6,374 $ - $6,374 $27,603
Intersegment/(a)/ 144 10 17 171 - - - 171
Intergroup/(a)/ 13 - 7 20 2 - 2 22
Equity in earnings of
unconsolidated investees 2 12 14 28 46 - 46 74
Other 26 40 11 77 55 - 55 132
------ ------- ------ ------- ------ ---- ------ -------
Total revenues and other income $2,090 $19,080 $ 355 $21,525 $6,477 $ - $6,477 $28,002
====== ======= ====== ======= ====== ==== ====== =======
Segment income $ 278 $ 896 $ 33 $ 1,207 $ 517 $ - $ 517 $ 1,724
Significant noncash items included
in segment income - depreciation,
depletion and amortization/(b)/ 581 272 6 859 283 - 283 1,142
Capital expenditures/(c)/ 839 410 8 1,257 305 - 305 1,562
- -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Intersegment and intergroup revenues and transfers were conducted under
terms comparable to those with unrelated parties.
/(b)/ Differences between segment totals and consolidated totals represent
amounts included in administrative expenses, international and domestic
oil and gas property impairments and impairment of coal assets.
/(c)/ Differences between segment totals and consolidated totals represent
amounts related to corporate administrative activities.
U-14
The following schedules reconcile segment amounts to amounts reported in the
Groups' financial statements:
Marathon Group U. S. Steel Group
--------------------------------- ------------------------------
(In millions) 2000 1999 1998 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues and Other Income:
Revenues and other income of
reportable segments $35,227 $24,015 $21,525 $6,132 $5,539 $6,477
Items not allocated to segments:
Joint venture formation charges (931) - - - - -
Gain on ownership change in MAP 12 17 245 - - -
Losses on certain equity investments - - - - (69) -
Other 124 (36) 24 - - -
Elimination of intersegment revenues (573) (289) (171) - - -
------- ------- ------- ------ ------ ------
Total Group revenues and other income $33,859 $23,707 $21,623 $6,132 5,470 $6,477
======= ======= ======= ====== ====== ======
Income:
Income for reportable segments $ 2,846 $ 1,290 $ 1,207 $ 25 $ 91 $ 517
Items not allocated to segments:
Joint venture formation charges (931) - - - - -
Gain on ownership change in MAP 12 17 245 - - -
Administrative expenses (136) (108) (106) (25) (17) (24)
Net pension credits - - - 266 228 186
Costs related to former business activities - - - (91) (83) (100)
Inventory market valuation adjustments - 551 (267) - - -
Other/(a)/ (143) (37) (141) (71) (69) -
------- ------- ------- ------ ------ ------
Total Group income from operations $ 1,648 $ 1,713 $ 938 $ 104 $ 150 $ 579
- -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents in 2000, for the Marathon Group, certain oil and gas property
impairments, net gains on certain asset sales and reorganization charges
and for the U. S. Steel Group, impairment of coal assets. Represents in
1999, for the Marathon Group, primarily certain oil and gas property
impairments, costs of a voluntary early retirement program and net losses
on certain asset sales and, for the U. S. Steel Group, certain losses
related to investments in equity investees. Represents in 1998, certain
international oil and gas property impairments, certain suspended
exploration well write-offs, a gas contract settlement and MAP transition
charges.
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)/
- ---------------------------------------------------------------------------------------------------------------------------
Marathon Group:
United States 2000 $32,239 $ - $32,239 $ 6,711
1999 22,716 - 22,716 7,555
1998 20,837 - 20,837 7,659
Canada 2000 856 899 1,755 940
1999 426 521 947 1,112
1998 209 368 577 1,094
United Kingdom 2000 567 - 567 1,698
1999 459 - 459 1,581
1998 462 - 462 1,739
Other Foreign Countries 2000 197 188 385 310
1999 106 88 194 735
1998 115 52 167 468
Eliminations 2000 - (1,087) (1,087) -
1999 - (609) (609) -
1998 - (420) (420) -
Total Marathon Group 2000 $33,859 $ - $33,859 $ 9,659
1999 23,707 - 23,707 10,983
1998 21,623 - 21,623 10,960
- ---------------------------------------------------------------------------------------------------------------------------
U. S. Steel Group:
United States 2000 $ 6,027 $ - $ 6,027 $ 2,745
1999 5,452 - 5,452 2,889
1998 6,460 - 6,460 3,043
Foreign Countries 2000 105 - 105 386
1999 18 - 18 63
1998 17 - 17 69
Total U. S. Steel Group 2000 $ 6,132 $ - $ 6,132 $ 3,131
1999 5,470 - 5,470 2,952
1998 6,477 - 6,477 3,112
- ---------------------------------------------------------------------------------------------------------------------------
Eliminations 2000 $ (77) $ - $ (77) $ -
1999 (58) - (58) -
1998 (23) - (23) -
- ---------------------------------------------------------------------------------------------------------------------------
Total USX Corporation 2000 $39,914 $ - $39,914 $12,790
1999 29,119 - 29,119 13,935
1998 28,077 - 28,077 14,072
- ---------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments.
U-15
________________________________________________________________________________
9. Pensions and Other Postretirement Benefits
USX has noncontributory defined benefit pension plans covering
substantially all U.S. employees. Benefits under these plans are
primarily based upon years of service and final average pensionable
earnings, or a minimum benefit based upon years of service,
whichever is greater. In addition, pension benefits based upon a
percent of total career pensionable earnings cover certain
participating salaried employees.
USX also has defined benefit retiree health care and life
insurance plans (other benefits) covering most U.S. employees upon
their retirement. Health care benefits are provided through
comprehensive hospital, surgical and major medical benefit
provisions or through health maintenance organizations, both
subject to various cost sharing features. Life insurance benefits
are provided to certain nonunion and union represented retiree
beneficiaries primarily based on employees' annual base salary at
retirement. For most U.S. union retirees, benefits are provided for
the most part based on fixed amounts negotiated in labor contracts
with the appropriate unions.
Pension Benefits Other Benefits
--------------------- -----------------------
(In millions) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at January 1 $ 7,584 $ 8,629 $ 2,374 $ 2,710
Service cost 128 152 26 32
Interest cost 572 540 184 169
Plan amendments 6 399/(a)/ 1 (30)
Actuarial (gains) losses 551 (1,019) 306 (333)
Plan mergers and acquisitions - 56 - 11
Settlements, curtailments and termination benefits (99) (329) 22 -
Benefits paid (883) (844) (189) (185)
-------- -------- -------- --------
Benefit obligations at December 31 $ 7,859 $ 7,584 $ 2,724 $ 2,374
------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1 $ 11,305 $ 11,574 $ 281 $ 265
Actual return on plan assets 131 865 26 20
Plan merger and acquisitions (1) 38 - 1
Employer contributions 1 2 576/(b)/ 34
Trustee distributions/(c)/ (34) (30) - -
Settlements paid (134) (306) - -
Benefits paid from plan assets (877) (838) (41) (39)
-------- -------- -------- --------
Fair value of plan assets at December 31 $ 10,391 $ 11,305 $ 842 $ 281
------------------------------------------------------------------------------------------------------------
Funded status of plans at December 31 $ 2,532/(d)/ $ 3,721/(d)/ $ (1,882) $ (2,093)
Unrecognized net gain from transition (20) (95) - -
Unrecognized prior service costs (credits) 778 880 (47) (53)
Unrecognized net actuarial gains (499) (1,945) (126) (458)
Additional minimum liability/(e)/ (38) (24) - -
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ 2,753 $ 2,537 $ (2,055) $ (2,604)
------------------------------------------------------------------------------------------------------------
/(a)/ Results primarily from a five-year labor contract with the United Steelworkers of America ratified in August
1999.
/(b)/ Includes for the U. S. Steel Group, contributions of $530 million to a Voluntary Employee Benefit Association
trust, comprised of $30 million in contractual requirements and an elective contribution of $500 million. Also
includes for the U. S. Steel Group, a $30 million elective contribution to the non-union retiree life insurance
trust.
/(c)/ Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of
the Internal Revenue Code.
/(d)/ Includes several plans that have accumulated
benefit obligations in excess of plan assets:
Aggregate accumulated benefit obligations $ (74) $ (53)
Aggregate projected benefit obligations (92) (76)
Aggregate plan assets - -
/(e)/ Additional minimum liability recorded
was offset by the following:
Intangible asset $ 6 $ 9
-------- --------
Accumulated other comprehensive income
(losses):
Beginning of year $ (10) $ (37)
Change during year (net of tax) (11) 27
-------- --------
Balance at end of year $ (21) $ (10)
------------------------------------------------------------------------------------------------------------
U-16
Pension Benefits Other Benefits
------------------------------ ----------------------------------
(In millions) 2000 1999 1998 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost (credit)
Service cost $ 128 $ 152 $ 119 $ 26 $ 32 $ 27
Interest cost 572 540 544 184 169 172
Expected return on plan assets (958) (895) (876) (24) (21) (21)
Amortization - net transition gain (71) (72) (74) - - -
- prior service costs (credits) 102 87 75 (6) (4) 1
- actuarial (gains) losses (53) 7 6 (26) (5) (13)
Multiemployer and other USX plans 5 5 6 9/(a)/ 7/(a)/ 13/(a)/
Settlement and termination (gains) losses 32/(b)/ (42)/(b)/ 10/(b)/ 21/(b)/ - -
------- ------- ------ ------ ----- -----
Net periodic benefit cost (credit) $ (243) $ (218) $ (190) $ 184 $ 178 $ 179
----------------------------------------------------------------------------------------------------------------------
/(a)/ Represents payments to a multiemployer health care benefit
plan created by the Coal Industry Retiree Health Benefit Act
of 1992 based on assigned beneficiaries receiving benefits.
The present value of this unrecognized obligation is broadly
estimated to be $84 million, including the effects of future
medical inflation, and this amount could increase if
additional beneficiaries are assigned.
/(b)/ Relates primarily to voluntary early retirement programs.
Pension Benefits Other Benefits
------------------ --------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------
Weighted average actuarial assumptions
at December 31:
Discount rate 7.5% 8.0% 7.5% 8.0%
Expected annual return on plan assets 9.0% 8.6% 8.5% 8.5%
Increase in compensation rate 4.1% 4.1% 4.1% 4.1%
----------------------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.6% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
2001. The rate was assumed to decrease gradually to 5% in 2006 for
the U. S. Steel Group and in 2007 for the Marathon Group and remain
at that level thereafter.
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 $ 25 $ (21)
Effect on other postretirement benefit obligations 248 (209)
----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10. Leases
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
Capital Operating
(In millions) Leases Leases
----------------------------------------------------------------------------------------------------------------------
2001 $ 12 $ 173
2002 12 139
2003 12 98
2004 12 87
2005 12 141
Later years 89 173
Sublease rentals - (80)
----- -----
Total minimum lease payments 149 $ 731
=====
Less imputed interest costs 54
-----
Present value of net minimum lease payments
included in long-term debt $ 95
----------------------------------------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------
Minimum rental $ 288 $ 273 $ 288
Contingent rental 30 29 29
Sublease rentals (19) (19) (14)
----- ----- ---------
Net rental expense $ 299 $ 283 $ 303
----------------------------------------------------------------------------------------------------------------------
USX leases a wide variety of facilities and equipment under
operating leases, including land and building space, office
equipment, production facilities and transportation equipment. Most
long-term leases include renewal options and, in certain leases,
purchase options. In the event of a change in control of USX, as
defined in the agreements, or certain other circumstances,
operating lease obligations totaling $104 million may be declared
immediately due and payable.
U-17
- --------------------------------------------------------------------------------
11. Income Taxes
Provisions (credits) for income taxes were:
2000 1999 1998
--------------------------- --------------------------- ----------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
--------------------------------------------------------------------------------------------------------------------
Federal $257 $ 196 $453 $107 $ 257 $ 364 $102 $ 168 $ 270
State and local 41 3 44 4 1 5 33 18 51
Foreign 55 (50) 5 26 (46) (20) (4) (2) (6)
---- ----- ---- ---- ----- ----- ---- ----- -----
Total $353 $ 149 $502 $137 $ 212 $ 349 $131 $ 184 $ 315
--------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total
provisions follows:
(In millions) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ 320 $ 369 $ 346
Effects of foreign operations:
Impairment of deferred tax benefits 235 - -
Adjustments to foreign valuation allowances (30) - -
All other, including foreign tax credits (35) (20) (37)
State and local income taxes after federal income tax effects 29 3 33
Credits other than foreign tax credits (10) (10) (12)
Excess percentage depletion (3) (7) (11)
Effects of partially owned companies (5) (5) (4)
Dispositions of subsidiary investments - 7 -
Adjustment of prior years' federal income taxes (6) 4 (5)
Other 7 8 5
-------- -------- ----------
Total provisions $ 502 $ 349 $ 315
----------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the
following:
(In millions) December 31 2000 1999
---------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Minimum tax credit carryforwards $ 39 $ 131
State tax loss carryforwards (expiring in 2001 through 2020) 125 122
Foreign tax loss carryforwards (portion of which expire in 2001 through 2015) 269 408
Employee benefits 1,028 1,204
Expected federal benefit for:
Crediting certain foreign deferred income taxes 315 530
Deducting state deferred income taxes 36 36
Receivables, payables and debt 93 82
Contingency and other accruals 226 202
Investments in foreign subsidiaries 39 52
Other 62 45
Valuation allowances:
Federal - (30)
State (50) (52)
Foreign (252) (282)
------- -------
Total deferred tax assets/(a)/ 1,930 2,448
------- -------
Deferred tax liabilities:
Property, plant and equipment 1,890 2,365
Prepaid pensions 1,165 1,048
Inventory 335 340
Investments in subsidiaries and equity investees 52 76
Other 221 155
------- -------
Total deferred tax liabilities 3,663 3,984
------- -------
Net deferred tax liabilities $ 1,733 $ 1,536
---------------------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of its deferred tax assets. In addition,
the ability to realize the benefit of foreign tax credits is
based upon certain assumptions concerning future operating
conditions (particularly as related to prevailing oil
prices), income generated from foreign sources and USX's tax
profile in the years that such credits may be claimed.
During 2000, the amount of net deferred tax assets expected
to be realized was reduced as a result of the change in the
amount and timing of future foreign source income due to the
exchange of Marathon's interest in Sakhalin Energy
Investment Company Ltd. (Sakhalin Energy) for other oil and
gas producing interests. Additionally, gross deferred tax
assets and the associated valuation allowance were reduced
by a change in management's intent regarding the permanent
reinvestment of the earnings from certain foreign
subsidiaries.
The consolidated tax returns of USX for the years 1990
through 1997 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision for
income taxes and interest which may become payable for years not
yet settled.
Pretax income (loss) included $245 million, $63 million
and $(75) million attributable to foreign sources in 2000, 1999 and
1998, respectively.
U-18
Undistributed earnings of certain consolidated foreign
subsidiaries at December 31, 2000, amounted to $223 million. No
provision for deferred U.S. income taxes has been made for these
subsidiaries because USX intends to permanently reinvest such
earnings in those foreign operations. If such earnings were not
permanently reinvested, a deferred tax liability of $78 million
would have been required.
- --------------------------------------------------------------------------------
12. Investments and Long-Term Receivables
(In millions) December 31 2000 1999
-------------------------------------------------------------------------------------------------
Equity method investments $ 575 $1,055
Other investments 101 71
Receivables due after one year 59 57
Deposits of restricted cash 19 22
Other 47 32
------ ------
Total $ 801 $1,237
-------------------------------------------------------------------------------------------------
Summarized financial information of investees accounted for
by the equity method of accounting follows:
(In millions) 2000 1999 1998
-------------------------------------------------------------------------------------------------
Income data - year:
Revenues and other income $3,901 $3,449 $3,510
Operating income 286 95 324
Net income (loss) (43) (74) 176
-------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $1,239 $1,382
Noncurrent assets 3,443 5,008
Current liabilities 1,427 1,481
Noncurrent liabilities 1,957 2,317
-------------------------------------------------------------------------------------------------
USX acquired a 25% interest in VSZ during 2000. VSZ does not
provide its shareholders with financial statements prepared in
accordance with generally accepted accounting principles in the
United States (USGAAP). Although shares of VSZ are traded on the
Bratislava Stock Exchange, those securities do not have a readily
determinable fair value as defined under USGAAP. Accordingly, USX
accounts for its investment in VSZ under the cost method of
accounting.
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing assets
of USS/Kobe Steel Company (USS/Kobe) with companies controlled by
Blackstone Capital Partners II. The combined entity was named
Republic Technologies International, LLC and is a wholly owned
subsidiary of Republic Technologies International Holdings, LLC
(Republic). As a result of this transaction, USX recorded $47
million in charges related to the impairment of the carrying value
of its investment in USS/Kobe and costs related to the formation of
Republic. These charges were included in dividend and investee
income (loss) in 1999. In addition, USX made a $15 million equity
investment in Republic. USX owned 50% of USS/Kobe and now owns 16%
of Republic. USX accounts for its investment in Republic under the
equity method of accounting. The seamless pipe business of USS/Kobe
was excluded from this transaction. That business, now known as
Lorain Tubular Company, LLC, became a wholly owned subsidiary of
USX at the close of business on December 31, 1999.
Dividends and partnership distributions received from equity
investees were $56 million in 2000, $46 million in 1999 and $42
million in 1998.
USX purchases from equity investees totaled $627 million, $411
million and $395 million in 2000, 1999 and 1998, respectively. USX
sales to equity investees totaled $986 million, $853 million and
$747 million in 2000, 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
13. Short-Term Debt
In November 2000, USX entered into a $451 million 364-day revolving
credit agreement, which terminates in November 2001. Interest is
based on defined short-term market rates. During the term of the
agreement, USX is obligated to pay a variable facility fee on total
commitments, which at December 31, 2000 was .10%. At December 31,
2000, there were no borrowings against this facility. USX has a
short-term line of credit totaling $150 million, bearing interest
at a defined short-term market rate, which at December 31, 2000 was
7.10%. At December 31, 2000, USX had borrowed $150 million against
this facility. Certain other banks provide short-term lines of
credit totaling $150 million which require a .125% fee or
maintenance of compensating balances of 3%. At December 31, 2000,
there were no borrowings against these facilities.
U-19
MAP has a $100 million short-term revolving credit facility
that terminates in July 2001. Interest is based on defined short-
term market rates. During the term of the agreement, MAP is
required to pay a variable facility fee on total commitments, which
at December 31, 2000 was .11%. At December 31, 2000, there were no
borrowings against this facility.
USSK has a short-term $50 million credit facility that expires
in November 2001. The facility, which is non-recourse to USX, bears
interest on prevailing short-term market rates plus 1%. USSK is
obligated to pay a .25% commitment fee on undrawn amounts. At
December 31, 2000, there were no borrowings against this facility.
- --------------------------------------------------------------------------------
14. Long-Term Debt
Interest December 31
(In millions) Rates - % Maturity 2000 1999
-----------------------------------------------------------------------------------------------------------
USX Corporation:
Revolving credit facility/(a)/ 2005 $ 300 $ 300
Commercial paper/(a)/ 7.68 77 165
Notes payable 6 13/20 - 9 4/5 2001 - 2023 2,505 2,525
Obligations relating to Industrial Development and
Environmental Improvement Bonds and Notes/(b)/ 4 1/4 - 6 7/8 2009 - 2033 494 494
Receivables facility/(c)/ 2004 350 350
All other obligations, including sale-leaseback
financing and capital leases 2001 - 2012 88 92
Consolidated subsidiaries:
Revolving credit facilities/(d)/ 2001 - 2003 - -
USSK loan facility/(e)/ 8 1/2 2010 325 -
Guaranteed Notes 7 2002 135 135
Guaranteed Loan/(f)/ 9 1/20 2001 - 2006 199 223
Notes payable 8 1/2 2001 1 1
All other obligations, including capital leases 2001 - 2011 11 26
------ ------
Total/(g)(h)/ 4,485 4,311
Less unamortized discount 25 28
Less amount due within one year 287 61
------ ------
Long-term debt due after one year $4,173 $4,222
-----------------------------------------------------------------------------------------------------------
/(a)/ In November 2000, USX entered into a $1,354 million 5-year
revolving credit agreement, terminating in November 2005,
which in conjunction with a $451 million 364-day revolving
credit agreement, terminating in December 2001, replaced the
prior $2,350 million facility. Interest on the facility is
based on defined short-term market rates. During the term of
the agreement, USX is obligated to pay a variable facility
fee on total commitments, which at December 31, 2000 was
.125%. At December 31, 2000, $300 million had been borrowed
against this facility. The commercial paper is supported by
the unused and available credit on the 5-year facility and,
accordingly, is classified as long-term debt.
/(b)/ At December 31, 2000, USX had outstanding obligations
relating to Environmental Improvement Bonds in the amount of
$141 million, which were supported by letter of credit
arrangements that could become short-term obligations under
certain circumstances.
/(c)/ In December 1999, USX entered into an agreement under which
the U. S. Steel Group participates in a program to sell an
undivided interest in certain accounts receivable. A
previous program expired in October 1999 and was accounted
for as a transfer of receivables. The new program is
accounted for as a secured borrowing. Payments are collected
from sold accounts receivable and invested in new accounts
receivable for the purchaser and a yield, based on short-
term market rates, is transferred to the purchaser. If the
U. S. Steel Group does not have sufficient eligible
receivables to reinvest for the purchaser, the size of the
program is reduced accordingly. The purchaser has a security
interest in a pool of receivables to secure USX's
obligations under the program. If the receivables facility
is not renewed annually, the balance outstanding of such
facility could be refinanced by the 5-year facility
discussed in (a), or another long-term debt source; and
therefore, is classified as long-term debt. The amounts sold
under the previous receivables programs averaged $291
million and $347 million for the years 1999 and 1998,
respectively.
/(d)/ MAP has a $400 million revolving credit facility that
terminates in July 2003. Interest is based on defined short-
term market rates. During the term of the agreement, MAP is
required to pay a variable facility fee on total
commitments, which at December 31, 2000 was .125%. At
December 31, 2000, the unused and available credit was $352
million, which reflects reductions for outstanding letters
of credit. In the event that MAP defaults on indebtedness
(as defined in the agreement) in excess of $100 million, USX
has guaranteed the payment of any outstanding obligations.
/(e)/ USSK has a loan facility with a group of financial
institutions aggregating $325 million. The loan, which is
non-recourse to USX, bears interest at a fixed rate of 8.5%
per annum. The loan is subject to annual repayments of $20
million beginning in 2003, with the balance due in 2010.
Mandatory prepayments of the loan may be required based upon
a cash flow formula or a change in control of USX.
/(f)/ The Guaranteed Loan was used to fund a portion of the costs
in connection with the development of the East Brae Field
and the SAGE pipeline in the North Sea. A portion of
proceeds from a long-term gas sales contract is dedicated to
loan service under certain circumstances. Prepayment of the
loan may be required under certain situations, including
events impairing the security interest.
/(g)/ Required payments of long-term debt for the years 2002-2005
are $209 million, $207 million, $710 million and $440
million, respectively.
/(h)/ In the event of a change in control of USX, as defined in
the related agreements, debt obligations totaling $3,614
million may be declared immediately due and payable. The
principal obligations subject to such a provision are Notes
payable -$2,505 million; USSK loan facility - $325 million;
and Guaranteed Loan - $199 million. In such event, USX may
also be required to either repurchase the leased Fairfield
slab caster for $100 million or provide a letter of credit
to secure the remaining obligation.
U-20
- --------------------------------------------------------------------------------
15. Inventories
(In millions) December 31 2000 1999
-------------------------------------------------------------------------------------------------------
Raw materials $ 915 $ 830
Semi-finished products 429 392
Finished products 1,279 1,239
Supplies and sundry items 190 166
------ ------
Total (at cost) 2,813 2,627
Less inventory market valuation reserve - -
------ ------
Net inventory carrying value $2,813 $2,627
-------------------------------------------------------------------------------------------------------
At December 31, 2000 and 1999, the LIFO method accounted for
92% and 91%, respectively, of total inventory value. Current
acquisition costs were estimated to exceed the above inventory
values at December 31 by approximately $880 million and $570
million in 2000 and 1999, respectively. Cost of revenues was
reduced and income from operations was increased by $17 million in
2000 as a result of liquidations of LIFO inventories.
The inventory market valuation reserve reflects the extent that
the recorded LIFO cost basis of crude oil and refined products
inventories exceeds net realizable value. The reserve is decreased
to reflect increases in market prices and inventory turnover and
increased to reflect decreases in market prices. Changes in the
inventory market valuation reserve result in noncash charges or
credits to costs and expenses. During 2000, there were no charges
or credits to costs and expenses.
- --------------------------------------------------------------------------------
16. Supplemental Cash Flow Information
(In millions) 2000 1999 1998
-------------------------------------------------------------------------------------------------------
Cash used in operating activities included:
Interest and other financial costs paid
(net of amount capitalized) $ (341) $ (366) $ (336)
Income taxes paid (387) (98) (183)
-------------------------------------------------------------------------------------------------------
Commercial paper and revolving credit arrangements - net:
Commercial paper - issued $ 3,362 $ 6,282 $ -
- repayments (3,450) (6,117) -
Credit agreements - borrowings 437 5,529 17,486
- repayments (437) (5,980) (16,817)
Other credit arrangements - net 150 (95) 55
------- ------- --------
Total $ 62 $ (381) $ 724
-------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Common stock issued for dividend reinvestment and
employee stock plans $ 15 $ 6 $ 5
Marathon Stock issued for Exchangeable Shares - 7 11
Investee preferred stock received in conversion of investee loan - 142 -
Disposal of assets:
Exchange of Sakhalin Energy investment 410 - -
Deposit of RTI common shares in satisfaction of indexed debt - 56 -
Interest in USS/Kobe contributed to Republic - 40 -
Other - notes or common stock received 20 20 2
Business combinations:
Acquisition of USSK:
Liabilities assumed 568 - -
Contingent consideration payable at present value 21 - -
Investee liabilities consolidated in step acquisition 3 - -
Acquisition of Tarragon:
Exchangeable Shares issued - - 29
Liabilities assumed - - 433
Acquisition of Ashland RM&T net assets:
38% interest in MAP - - 1,900
Liabilities assumed - - 1,038
Other acquisitions:
Liabilities assumed - 42 -
Investee liabilities consolidated in step acquisition - 26 -
-------------------------------------------------------------------------------------------------------
U-21
________________________________________________________________________________
17. Stock-Based Compensation Plans
The 1990 Stock Plan, as amended and restated, authorizes the
Compensation Committee of the Board of Directors to grant
restricted stock, stock options and stock appreciation rights to
key management employees. Such employees are generally granted
awards of the class of common stock intended to reflect the
performance of the group(s) to which their work relates. Up to .5
percent of the outstanding Marathon Stock and .8 percent of the
outstanding Steel Stock, as determined on December 31 of the
preceding year, are available for grants during each calendar year
the 1990 Plan is in effect. In addition, awarded shares that do not
result in shares being issued are available for subsequent grant,
and any ungranted shares from prior years' annual allocations are
available for subsequent grant during the years the 1990 Plan is in
effect. As of December 31, 2000, 8,519,302 Marathon Stock shares
and 2,108,128 Steel Stock shares were available for grants in 2001.
Restricted stock represents stock granted for such
consideration, if any, as determined by the Compensation Committee,
subject to provisions for forfeiture and restricting transfer.
Those restrictions may be removed as conditions such as
performance, continuous service and other criteria are met.
Restricted stock is issued at the market price per share at the
date of grant and vests over service periods that range from one to
five years.
Deferred compensation is charged to stockholders' equity when
the restricted stock is granted and subsequently adjusted for
changes in the market value of the underlying stock. The deferred
compensation is expensed over the balance of the vesting period and
adjusted if conditions of the restricted stock grant are not met.
The following table presents information on restricted stock
grants:
Marathon Stock Steel Stock
----------------------------- -----------------------------
2000 1999 1998 2000 1999 1998
-----------------------------------------------------------------------------------------------
Number of shares granted 410,025 28,798 25,378 305,725 18,272 17,742
Weighted-average grant-date
fair value per share $ 25.50 $ 29.38 $ 34.00 $ 23.00 $ 28.22 $ 37.28
-----------------------------------------------------------------------------------------------
Stock options represent the right to purchase shares of
Marathon Stock or Steel Stock at the market value of the stock at
date of grant. Certain options contain the right to receive cash
and/or common stock equal to the excess of the fair market value of
shares of common stock, as determined in accordance with the plan,
over the option price of shares. Most stock options vest after a
one-year service period and all expire 10 years from the date they
are granted.
The following is a summary of stock option activity:
Marathon Stock Steel Stock
------------------------ ----------------------
Shares Price/(a)/ Shares Price/(a)/
-------------------------------------------------------------------------------
Balance December 31, 1997 3,694,865 $24.81 1,633,100 $34.35
Granted 987,535 34.00 611,515 37.28
Exercised (594,260) 27.61 (230,805) 32.00
Canceled (13,200) 27.22 (21,240) 35.89
--------- ---------
Balance December 31, 1998 4,074,940 26.62 1,992,570 35.50
Granted 1,005,000 29.38 656,400 28.22
Exercised (176,160) 27.27 (2,580) 24.92
Canceled (121,055) 30.19 (20,005) 38.51
--------- ---------
Balance December 31, 1999 4,782,725 27.08 2,626,385 33.67
Granted 1,799,880 25.18 915,470 23.00
Exercised (58,870) 23.11 (400) 24.30
Canceled (410,115) 28.06 (62,955) 38.19
--------- ---------
Balance December 31, 2000 6,113,620 26.50 3,478,500 30.78
-------------------------------------------------------------------------------
/(a)/ Weighted-average exercise price
The weighted-average grant-date fair value per option for the
Marathon Stock was $7.51 in 2000, $8.89 in 1999 and $10.43 in 1998.
For the Steel Stock such amounts were $6.63 in 2000, $6.95 in 1999
and $8.29 in 1998.
The following table represents stock options at December 31,
2000:
Outstanding Exercisable
---------------------------------------------- -------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of of Shares Remaining Average of Shares Average
Exercise Under Contractual Exercise Under Exercise
Prices Option Life Price Option Price
--------------------------------------------------------------------------------------------------------------------
Marathon Stock $ 17.00-23.44 1,947,290 4.5 years $21.03 1,647,290 $20.60
25.38-26.47 1,512,905 8.6 25.53 135,225 25.38
29.38-34.00 2,653,425 7.5 31.06 2,653,425 31.06
--------- ---------
Total 6,113,620 4,435,940
--------- ---------
Steel Stock $ 23.00-28.22 1,592,305 8.8 years $25.17 678,135 $28.10
31.69-34.44 1,050,920 5.2 32.53 1,050,920 32.53
37.28-44.19 835,275 6.0 39.26 835,275 39.26
--------- ---------
Total 3,478,500 2,564,330
--------------------------------------------------------------------------------------------------------------------
U-22
Actual stock-based compensation expense (credit) was $6 million
in 2000 and $(3) million in 1999 and 1998. Incremental compensation
expense, as determined under a fair value model, was not material
($.02 or less per share for all years presented). Therefore, pro
forma net income and earnings per share data have been omitted.
USX has a deferred compensation plan for non-employee directors
of its Board of Directors. The plan permits participants to defer
some or all of their annual retainers in the form of common stock
units or cash and it requires new directors to defer at least half
of their annual retainer in the form of common stock units. Common
stock units are book entry units equal in value to a share of
Marathon Stock or Steel Stock. Deferred stock benefits are
distributed in shares of common stock within five business days
after a participant leaves the Board of Directors. During 2000,
14,242 shares of Marathon Stock and 4,872 shares of Steel Stock
were issued and during 1999, 10,541 shares of Marathon Stock and
3,798 shares of Steel Stock were issued. During 1998, no shares of
common stock were issued.
________________________________________________________________________________
18. Dividends
In accordance with the USX Certificate, dividends on the Marathon
Stock and Steel Stock are limited to the legally available funds of
USX. Net losses of any Group, as well as dividends and
distributions on any class of USX Common Stock or series of
preferred stock and repurchases of any class of USX Common Stock or
series of preferred stock at prices in excess of par or stated
value, will reduce the funds of USX legally available for payment
of dividends on all classes of Common Stock. Subject to this
limitation, the Board of Directors intends to declare and pay
dividends on the Marathon Stock and Steel Stock based on the
financial condition and results of operations of the related group,
although it has no obligation under Delaware law to do so. In
making its dividend decisions with respect to each of the Marathon
Stock and Steel Stock, the Board of Directors considers, among
other things, the long-term earnings and cash flow capabilities of
the related group as well as the dividend policies of similar
publicly traded companies.
Dividends on the Steel Stock are further limited to the
Available Steel Dividend Amount. At December 31, 2000, the
Available Steel Dividend Amount was at least $3,161 million. The
Available Steel Dividend Amount will be increased or decreased, as
appropriate, to reflect U. S. Steel Group net income, dividends,
repurchases or issuances with respect to the Steel Stock and
preferred stock attributed to the U. S. Steel Group and certain
other items.
________________________________________________________________________________
19. Stockholder Rights Plan
On September 28, 1999, USX's Board of Directors adopted a new
Stockholder Rights Plan and declared a dividend distribution of one
right for each outstanding share of Marathon Stock and Steel Stock
(referred to together as "Voting Stock") to stockholders of record
on October 9, 1999. Each right becomes exercisable, at a price of
$110, after any person or group has acquired, obtained the right to
acquire or made a tender or exchange offer for 15% or more of the
outstanding voting power represented by the outstanding Voting
Stock, except pursuant to a qualifying all-cash tender offer for
all outstanding shares of Voting Stock which results in the offeror
owning shares of Voting Stock representing a majority of the voting
power (other than Voting Stock beneficially owned by the offeror
immediately prior to the offer). Each right entitles the holder,
other than the acquiring person or group, to purchase one one-
hundredth of a share of Series A Junior Preferred Stock or, upon
the acquisition by any person of 15% or more of the outstanding
voting power represented by the outstanding Voting Stock, Marathon
Stock or Steel Stock (or, in certain circumstances, other property)
having a market value of twice the exercise price. After a person
or group acquires 15% or more of the outstanding voting power, if
USX engages in a merger or other business combination where it is
not the surviving corporation or where it is the surviving
corporation and the Voting Stock is changed or exchanged, or if 50%
or more of USX's assets, earnings power or cash flow are sold or
transferred, each right entitles the holder to purchase common
stock of the acquiring entity having a market value of twice the
exercise price. The rights and the exercise price are subject to
adjustment. The rights will expire on October 9, 2009, unless such
date is extended or the rights are earlier redeemed by USX for one
cent per right at any time prior to the point they become
exercisable. Under certain circumstances, the Board of Directors
has the option to exchange one share of the respective class of
Voting Stock for each exercisable right.
U-23
- --------------------------------------------------------------------------------
20. Income Per Common Share
The method of calculating net income (loss) per share for the
Marathon Stock and the Steel Stock reflects the USX Board of
Directors' intent that the separately reported earnings and surplus
of the Marathon Group and the U. S. Steel Group, as determined
consistent with the USX Certificate, are available for payment of
dividends on the respective classes of stock, although legally
available funds and liquidation preferences of these classes of
stock do not necessarily correspond with these amounts. The
financial statements of the Marathon Group and the U. S. Steel
Group, taken together, include all accounts which comprise the
corresponding consolidated financial statements of USX.
Basic net income (loss) per share is calculated by adjusting
net income for dividend requirements of preferred stock and is
based on the weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each case, the
effect is not antidilutive.
COMPUTATION OF INCOME PER SHARE
2000 1999 1998
------------------- --------------------- ------------------
Basic Diluted Basic Diluted Basic Diluted
------------------------------------------------------------------------------------------------------------------
Marathon Group
--------------
Net income (millions) $ 432 $ 432 $ 654 $ 654 $ 310 $ 310
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 311,531 311,531 309,696 309,696 292,876 292,876
Effect of dilutive securities -
Stock options - 230 - 314 - 559
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 311,531 311,761 309,696 310,010 292,876 293,435
======== ======== ======== ======== ======== ========
Net income per share $ 1.39 $ 1.39 $ 2.11 $ 2.11 $ 1.06 $ 1.05
------------------------------------------------------------------------------------------------------------------
U. S. Steel Group
-----------------
Net income (loss) (millions):
Income (loss) before extraordinary losses $ (21) $ (21) $ 51 $ 51 $ 364 $ 364
Dividends on preferred stock 8 8 9 9 9 -
Extraordinary losses - - 7 7 - -
-------- -------- -------- -------- -------- --------
Net income (loss) applicable to Steel Stock (29) (29) 35 35 355 364
Effect of dilutive securities -
Trust preferred securities - - - - - 8
-------- -------- -------- -------- -------- --------
Net income (loss) assuming conversions $ (29) $ (29) $ 35 $ 35 $ 355 $ 372
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,613 88,613 88,392 88,392 87,508 87,508
Effect of dilutive securities:
Trust preferred securities - - - - - 4,256
Preferred stock - - - - - 3,143
Stock options - - - 4 - 36
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 88,613 88,613 88,392 88,396 87,508 94,943
======== ======== ======== ======== ======== ========
Per share:
Income (loss) before extraordinary losses $ (.33) $ (.33) $ .48 $ .48 $ 4.05 $ 3.92
Extraordinary losses - - .08 .08 - -
-------- -------- -------- -------- -------- --------
Net income (loss) $ (.33) $ (.33) $ .40 $ .40 $ 4.05 $ 3.92
------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
21. Property, Plant and Equipment
(In millions) December 31 2000 1999
------------------------------------------------------------------------------------------------------------
Marathon Group $ 19,066 $ 20,860
U. S. Steel Group 9,270 8,748
-------- --------
Total 28,336 29,608
Less accumulated depreciation, depletion and amortization 16,222 16,799
-------- --------
Net $ 12,114 $ 12,809
------------------------------------------------------------------------------------------------------------
Property, plant and equipment includes gross assets acquired
under capital leases (including sale-leasebacks accounted for as
financings) of $106 million at December 31, 2000, and $125 million
at December 31, 1999; related amounts in accumulated depreciation,
depletion and amortization were $79 million and $81 million,
respectively.
During 2000, the U. S. Steel Group recorded $71 million of
impairments relating to coal assets located in West Virginia and
Alabama. The impairment was recorded as a result of a reassessment
of long-term prospects after adverse geological conditions were
encountered.
During 2000, the Marathon Group recorded $193 million of
impairments of certain E&P segment oil and gas properties,
primarily located in Canada. The impairments were recorded due to
reserve revisions as a result of production performance and
disappointing drilling results.
These impairment charges are included in depreciation,
depletion and amortization.
U-24
________________________________________________________________________________
22. Preferred Stock of Subsidiary and Trust Preferred Securities
USX Capital LLC, a wholly owned subsidiary of USX, sold 10,000,000
shares (carrying value of $250 million) of 8-3/4% Cumulative
Monthly Income Preferred Shares (MIPS) (liquidation preference of
$25 per share) in 1994. Proceeds of the issue were loaned to USX.
USX has the right under the loan agreement to extend interest
payment periods for up to 18 months, and as a consequence, monthly
dividend payments on the MIPS can be deferred by USX Capital LLC
during any such interest payment period. In the event that USX
exercises this right, USX may not declare dividends on any share of
its preferred or common stocks. The MIPS are redeemable at the
option of USX Capital LLC and subject to the prior consent of USX,
in whole or in part from time to time, for $25 per share, and will
be redeemed from the proceeds of any repayment of the loan by USX.
In addition, upon final maturity of the loan, USX Capital LLC is
required to redeem the MIPS. The financial costs are included in
net interest and other financial costs.
In 1997, USX exchanged approximately 3.9 million 6.75%
Convertible Quarterly Income Preferred Securities (Trust Preferred
Securities) of USX Capital Trust I, a Delaware statutory business
trust (Trust), for an equivalent number of shares of its 6.50%
Cumulative Convertible Preferred Stock (6.50% Preferred Stock)
(Exchange). The Exchange resulted in the recording of Trust
Preferred Securities at a fair value of $182 million.
USX owns all of the common securities of the Trust, which was
formed for the purpose of the Exchange. (The Trust Common
Securities and the Trust Preferred Securities are together referred
to as the Trust Securities.) The Trust Securities represent
undivided beneficial ownership interests in the assets of the
Trust, which consist solely of USX 6.75% Convertible Junior
Subordinated Debentures maturing March 31, 2037 (Debentures),
having an aggregate principal amount equal to the aggregate initial
liquidation amount ($50.00 per security and $203 million in total)
of the Trust Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make quarterly
distributions and to pay redemption and liquidation amounts on the
Trust Preferred Securities. The quarterly distributions, which
accumulate at the rate of 6.75% per annum on the Trust Preferred
Securities and the accretion from fair value to the initial
liquidation amount, are charged to income and included in net
interest and other financial costs.
Under the terms of the Debentures, USX has the right to defer
payment of interest for up to 20 consecutive quarters and, as a
consequence, monthly distributions on the Trust Preferred
Securities will be deferred during such period. If USX exercises
this right, then, subject to limited exceptions, it may not pay any
dividend or make any distribution with respect to any shares of its
capital stock.
The Trust Preferred Securities are convertible at any time
prior to the close of business on March 31, 2037 (unless such right
is terminated earlier under certain circumstances) at the option of
the holder, into shares of Steel Stock at a conversion price of
$46.25 per share of Steel Stock (equivalent to a conversion ratio
of 1.081 shares of Steel Stock for each Trust Preferred Security),
subject to adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time at
the option of USX, at a premium of 101.95% of the initial
liquidation amount through March 31, 2001, and thereafter,
declining annually to the initial liquidation amount on April 1,
2003, and thereafter. They are mandatorily redeemable at March 31,
2037, or earlier under certain circumstances.
Payments related to quarterly distributions and to the payment
of redemption and liquidation amounts on the Trust Preferred
Securities by the Trust are guaranteed by USX on a subordinated
basis. In addition, USX unconditionally guarantees the Trust's
Debentures. The obligations of USX under the Debentures, and the
related indenture, trust agreement and guarantee constitute a full
and unconditional guarantee by USX of the Trust's obligations under
the Trust Preferred Securities.
________________________________________________________________________________
23. Preferred Stock
USX is authorized to issue 40,000,000 shares of preferred stock,
without par value -
6.50% Cumulative Convertible Preferred Stock (6.50% Preferred
Stock) - As of December 31, 2000, 2,413,487 shares (stated value of
$1.00 per share; liquidation preference of $50.00 per share) were
outstanding. The 6.50% Preferred Stock is convertible at any time,
at the option of the holder, into shares of Steel Stock at a
conversion price of $46.125 per share of Steel Stock, subject to
adjustment in certain circumstances. This stock is redeemable at
USX's sole option, at a price of $50.975 per share beginning April
1, 2000, and thereafter at prices declining annually on each April
1 to an amount equal to $50.00 per share on and after April 1,
2003.
U-25
________________________________________________________________________________
24. Derivative Instruments
USX remains at risk for possible changes in the market value of derivative
instruments; however, such risk should be mitigated by price changes in the
underlying hedged item. USX is also exposed to credit risk in the event of
nonperformance by counterparties. The credit-worthiness of counterparties is
subject to continuing review, including the use of master netting agreements to
the extent practical, and full performance is anticipated.
The following table sets forth quantitative information by class of derivative
instrument for derivative instruments categorized as trading or other than
trading:
Recognized
Fair Carrying Trading Recorded
Value Amount Gain or Deferred Aggregate
Assets Assets (Loss) for Gain or Contract
(In millions) (Liabilities)/(a)(b)/ (Liabilities) the Year (Loss) Values/(c)/
- ----------------------------------------------------------------------------------------------------------------
December 31, 2000:
Exchange-traded commodity futures:
Trading $ - $ - $ (19) $ - $ -
Other than trading - - - 7 897
Exchange-traded commodity options:
Trading - - - - -
Other than trading (6)/(d)/ (6) - (1) 971
OTC commodity swaps/(e)/:
Trading - - - - -
Other than trading 35/(f)/ 35 - 25 426
OTC commodity options:
Trading - - - - -
Other than trading (52)/(g)/ (52) - (40) 94
------- ------- ------- ------ -------
Total commodities $ (23) $ (23) $ (19) $ (9) $ 2,388
======= ======= ======= ====== =======
Forward exchange contracts/(h)/:
- receivable $ 14 $ 14 $ - $ - $ 14
- ----------------------------------------------------------------------------------------------------------------
December 31, 1999:
Exchange-traded commodity futures:
Trading $ - $ - $ 4 $ - $ 8
Other than trading - - - 28 344
Exchange-traded commodity options:
Trading - - 4 - 179
Other than trading (6)/(d)/ (6) - (10) 1,262
OTC commodity swaps:
Trading - - - - -
Other than trading 6/(f)/ 6 - 5 193
OTC commodity options:
Trading - - - - -
Other than trading 4/(g)/ 4 - 5 238
------- ------- ------- ------ -------
Total commodities $ 4 $ 4 $ 8 $ 28 $ 2,224
======= ======= ======= ====== =======
Forward exchange contracts:
- receivable $ 52 $ 52 $ - $ - $ 51
- ----------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the
forward exchange contract. The exchange-traded futures contracts and
certain option contracts do not have a corresponding fair value since
changes in the market prices are settled on a daily basis.
/(b)/ The aggregate average fair value of all trading activities for 2000 and
1999 was $(5) million and $3 million, respectively. Detail by class of
instrument was not available.
/(c)/ Contract or notional amounts do not quantify risk exposure, but are used
in the calculation of cash settlements under the contracts. The contract
or notional amounts do not reflect the extent to which positions may
offset one another.
/(d)/ Includes fair values as of December 31, 2000 and 1999, for assets of $10
million and $11 million and for liabilities of $(16) million and $(17)
million, respectively.
/(e)/ The OTC swap arrangements vary in duration with certain contracts
extending into 2008.
/(f)/ Includes fair values as of December 31, 2000 and 1999, for assets of $84
million and $11 million and for liabilities of $(49) million and $(5)
million, respectively.
/(g)/ Includes fair values as of December 31, 2000 and 1999, for assets of $1
million and $5 million and for liabilities of $(53) million and $(1)
million, respectively.
/(h)/ The forward exchange contracts relating to USX's foreign operations have
various maturities ending in March 2001.
U-26
- --------------------------------------------------------------------------------
25. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table
summarizes financial instruments, excluding derivative financial
instruments disclosed in Note 24, by individual balance sheet
account:
2000 1999
------------------ ---------------------
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
----------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 559 $ 559 $ 133 $ 133
Receivables 3,238 3,238 2,717 2,717
Investments and long-term receivables 211 147 190 134
------ ------ ------ ------
Total financial assets $4,008 $3,944 $3,040 $2,984
----------------------------------------------------------------------------------------------------------------------
Financial liabilities:
Notes payable $ 150 $ 150 $ - $ -
Accounts payable 3,774 3,774 3,409 3,409
Accrued interest 108 108 107 107
Long-term debt (including amounts due within one year) 4,549 4,365 4,278 4,176
Preferred stock of subsidiary and trust
preferred securities 357 433 408 433
------ ------ ------ ------
Total financial liabilities $8,938 $8,830 $8,202 $8,125
----------------------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current
assets or liabilities approximates carrying value due to the short-
term maturity of the instruments. Fair value of investments and
long-term receivables was based on discounted cash flows or other
specific instrument analysis. Certain foreign cost method
investments are excluded from investments and long-term receivables
because the fair value is not readily determinable. USX is subject
to market risk and liquidity risk related to its investments;
however, these risks are not readily quantifiable. Fair value of
preferred stock of subsidiary and trust preferred securities was
based on market prices. Fair value of long-term debt instruments
was based on market prices where available or current borrowing
rates available for financings with similar terms and maturities.
USX's only unrecognized financial instruments are financial
guarantees and commitments to extend credit. It is not practicable
to estimate the fair value of these forms of financial instrument
obligations because there are no quoted market prices for
transactions which are similar in nature. For details relating to
financial guarantees, see Note 26.
- --------------------------------------------------------------------------------
26. Contingencies and Commitments
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving a
variety of matters, including laws and regulations relating to the
environment. Certain of these matters are discussed below. The
ultimate resolution of these contingencies could, individually or
in the aggregate, be material to the consolidated financial
statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that
these contingencies could be resolved unfavorably.
Environmental matters -
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and
require responsible parties to undertake remediation of hazardous
waste disposal sites. Penalties may be imposed for noncompliance.
At December 31, 2000 and 1999, accrued liabilities for remediation
totaled $212 million and $170 million, respectively. It is not
presently possible to estimate the ultimate amount of all
remediation costs that might be incurred or the penalties that may
be imposed. Receivables for recoverable costs from certain states,
under programs to assist companies in cleanup efforts related to
underground storage tanks at retail marketing outlets, were $57
million at December 31, 2000, and $52 million at December 31, 1999.
For a number of years, USX has made substantial capital
expenditures to bring existing facilities into compliance with
various laws relating to the environment. In 2000 and 1999, such
capital expenditures totaled $91 million and $78 million,
respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of
specific regulatory requirements.
At December 31, 2000 and 1999, accrued liabilities for
platform abandonment and dismantlement totaled $162 million and
$152 million, respectively.
U-27
Guarantees -
Guarantees of the liabilities of unconsolidated entities by
USX and its consolidated subsidiaries totaled $82 million at
December 31, 2000, and $219 million at December 31, 1999. In the
event that any defaults of guaranteed liabilities occur, USX has
access to its interest in the assets of most of the investees to
reduce potential losses resulting from these guarantees. As of
December 31, 2000, the largest guarantee for a single such entity
was $59 million.
At December 31, 2000 and 1999, USX's pro rata share of
obligations of LOOP LLC and various pipeline investees secured by
throughput and deficiency agreements totaled $119 million and $146
million, respectively. Under the agreements, USX is required to
advance funds if the investees are unable to service debt. Any such
advances are prepayments of future transportation charges.
Commitments -
At December 31, 2000 and 1999, contract commitments to acquire
property, plant and equipment and long-term investments totaled
$663 million and $568 million, respectively.
USSK has a commitment to the Slovak government for a capital
improvements program of $700 million, subject to certain
conditions, over a period commencing with the acquisition date and
ending on December 31, 2010. USSK is required to report
periodically to the Slovak government on its status toward meeting
this commitment. The first reporting period ends on December 31,
2003.
USX entered into a 15-year take-or-pay arrangement in 1993,
which requires USX to accept pulverized coal each month or pay a
minimum monthly charge of approximately $1 million. Charges for
deliveries of pulverized coal totaled $23 million in 2000, 1999 and
1998. If USX elects to terminate the contract early, a maximum
termination payment of $96 million, which declines over the
duration of the agreement, may be required.
USX is a party to a 15-year transportation services agreement
with a natural gas transmission company. The contract requires USX
to pay minimum annual demand charges of approximately $5 million
starting in December 2000 and concluding in 2015. The payments are
required even if the transportation facility is not utilized.
Demand charges paid in 2000 were less than $1 million.
- --------------------------------------------------------------------------------
27. Joint Venture Formation
In December 2000, Marathon and Kinder Morgan Energy Partners, L.P.
signed a definitive agreement to form a joint venture combining
certain of their oil and gas producing activities in the U.S.
Permian Basin, including Marathon's interest in the Yates Field.
This transaction will allow Marathon to expand its interests in the
Permian Basin and will improve access to materials for use in
enhanced recovery techniques in the Yates Field. The joint venture
named MKM Partners L.P., commenced operations in January 2001 and
will be accounted for under the equity method of accounting.
As a result of the agreement to form this joint venture,
Marathon recognized a pretax charge of $931 million in the fourth
quarter 2000, which is included in net gains (losses) on disposal
of assets, and reclassified the remaining book value associated
with the Yates Field from property, plant and equipment to assets
held for sale. Upon completion of this transaction in January 2001,
the book value will be transferred from assets held for sale to
investments and long-term receivables.
- --------------------------------------------------------------------------------
28. Subsequent Event - Business Combination
On February 7, 2001, Marathon acquired 87% of the outstanding
common stock of Pennaco Energy Inc., a natural gas producer.
Marathon plans to acquire the remaining Pennaco shares through a
merger in which each share of Pennaco common stock, not purchased
in the offer and not held by stockholders who have properly
exercised dissenters rights under Delaware law, will be converted
into the right to receive the tender offer price in cash, without
interest. The purchase price is expected to approximate $500
million. The acquisition will be accounted for using the purchase
method of accounting.
U-28
Selected Quarterly Financial Data (Unaudited)
2000
--------------------------------------------------------------
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- -----------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues/(a)/ $ 10,293 $ 10,607 $ 10,293 $ 9,307
Other income (loss) (837) 72 57 122
-------- --------- --------- --------
Total 9,456 10,679 10,350 9,429
Income (loss) from operations (625) 789 972 616
Includes:
Joint venture
formation charges (931) - - -
Inventory market
valuation credits - - - -
Income (loss) before
extraordinary losses (449) 140 423 297
Net income (loss) (449) 140 423 297
- -----------------------------------------------------------------------------------------------------------
Marathon Stock data:
- --------------------
Net income (loss) $ (310) $ 121 $ 367 $ 254
Per share - basic and diluted (1.00) .38 1.18 .81
Dividends paid per share .23 .23 .21 .21
Price range of Marathon Stock/(b)/:
- Low 25-1/4 23-1/2 22-13/16 20-11/16
- High 30-3/8 29-5/8 29-3/16 27-1/2
- -----------------------------------------------------------------------------------------------------------
Steel Stock data:
- -----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ (141) $ 17 $ 54 $ 41
- Per share: basic (1.59) .19 .62 .45
diluted (1.59) .19 .62 .45
Dividends paid per share .25 .25 .25 .25
Price range of Steel Stock/(b)/:
- Low 12-11/16 14-7/8 18-1/4 20-5/8
- High 18-5/16 19-11/16 26-7/8 32-15/16
- -----------------------------------------------------------------------------------------------------------
1999
--------------------------------------------------------------
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- -----------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues/(a)/ $ 8,725 $ 7,713 $ 6,649 $ 5,981
Other income (loss) 53 (13) 35 (24)
-------- --------- --------- --------
Total 8,778 7,700 6,684 5,957
Income (loss) from operations 425 535 502 401
Includes:
Joint venture
formation charges - - - -
Inventory market
valuation credits - 136 66 349
Income (loss) before
extraordinary losses 205 201 189 110
Net income (loss) 205 199 189 105
- -----------------------------------------------------------------------------------------------------------
Marathon Stock data:
- --------------------
Net income (loss) $ 171 $ 230 $ 134 $ 119
Per share - basic and diluted .55 .74 .43 .38
Dividends paid per share .21 .21 .21 .21
Price range of Marathon Stock/(b)/:
- Low 23-5/8 28-1/2 25-13/16 19-5/8
- High 30-5/8 33-7/8 32-3/4 31-3/8
- -----------------------------------------------------------------------------------------------------------
Steel Stock data:
- -----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ 32 $ (31) $ 52 $ (11)
- Per share: basic .35 (.35) .60 (.13)
diluted .35 (.35) .59 (.13)
Dividends paid per share .25 .25 .25 .25
Price range of Steel Stock/(b)/:
- Low 21-3/4 24-9/16 23-1/2 22-1/4
- High 33 30-1/16 34-1/4 29-1/8
- -----------------------------------------------------------------------------------------------------------
/(a)/ Certain items have been reclassified between revenues and cost of
revenues, primarily to give effect to new accounting standards as
disclosed in Note 2 of the Notes to Consolidated Financial Statements.
Amounts reclassified in the first, second and third quarters of 2000 were
$(65) million, $(138) million and $(14) million, respectively, and for the
first, second, third and fourth quarters of 1999 were $(97) million, $(82)
million, $(113) million and $(172) million, respectively.
/(b)/ Composite tape.
U-29
Principal Unconsolidated Investees (Unaudited)
December 31, 2000
Company Country Ownership Activity
- -----------------------------------------------------------------------------------------------------------------
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Double Eagle Steel Coating Company United States 50% Steel Processing
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50% /(a)/ Pipeline & Storage Facilities
LOOP LLC United States 47% /(a)/ Offshore Oil Port
Manta Ray Offshore Gathering 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
Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation
PRO-TEC Coating Company United States 50% Steel Processing
Republic Technologies International, LLC United States 16% Steel Products
Transtar, Inc. United States 46% Transportation
USS-POSCO Industries United States 50% Steel Processing
Worthington Specialty Processing United States 50% Steel Processing
- -----------------------------------------------------------------------------------------------------------------
/(a)/ Represents the ownership of MAP.
Supplementary Information on Mineral Reserves (Unaudited)
Mineral Reserves (other than oil and gas)
Reserves at December 31/(a)/ Production
-------------------------------------- ------------------------------------
(Million tons) 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Iron/(b)/ 709.8 726.1 738.6 754.8 716.3 16.3 14.3 15.8 16.8 15.1
Coal/(c)/ 786.6 787.4 789.7 798.8 859.5 5.5 6.2 7.3 7.5 7.1
- -------------------------------------------------------------------------------------------------------------------------
/(a)/ Commercially recoverable reserves include demonstrated (measured and
indicated) quantities which are expressed in recoverable net product tons.
/(b)/ Iron ore reserves decreased in 2000, 1999 and 1998 due to production,
lease activity and engineering revisions. The increase in 1997 resulted
from lease exchanges of 55.3 million tons.
/(c)/ Coal reserves decreased due to production, lease activity and engineering
revisions, and additionally in 1997 due to a 53.2 million ton lease
termination.
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
United Other Equity
(In millions) December 31 States Europe Intl. Consolidated Investees Total
- ----------------------------------------------------------------------------------------------------------------------------
2000
Capitalized costs:
Proved properties $ 5,752 $ 4,739 $ 1,373 $ 11,864 $ 226 $ 12,090
Unproved properties 343 124 180 647 2 649
-------- -------- -------- --------- --------- ---------
Total 6,095 4,863 1,553 12,511 228 12,739
-------- -------- -------- --------- --------- ---------
Accumulated depreciation,
depletion and amortization:
Proved properties 3,435 3,074 420 6,929 170 7,099
Unproved properties 107 - 13 120 1 121
-------- -------- -------- --------- --------- ---------
Total 3,542 3,074 433 7,049 171 7,220
-------- -------- -------- --------- --------- ---------
Net capitalized costs $ 2,553 $ 1,789 $ 1,120 $ 5,462 $ 57 $ 5,519
- ----------------------------------------------------------------------------------------------------------------------------
1999
Capitalized costs:
Proved properties $ 8,270 $ 4,465 $ 1,270 $ 14,005 $ 612 $ 14,617
Unproved properties 349 55 187 591 123 714
-------- -------- -------- --------- --------- ---------
Total 8,619 4,520 1,457 14,596 735 15,331
-------- -------- -------- --------- --------- ---------
Accumulated depreciation,
depletion and amortization:
Proved properties 5,019 2,859 136 8,014 169 8,183
Unproved properties 78 - 6 84 - 84
-------- -------- -------- --------- --------- ---------
Total 5,097 2,859 142 8,098 169 8,267
-------- -------- -------- --------- --------- ---------
Net capitalized costs $ 3,522 $ 1,661 $ 1,315 $ 6,498 $ 566 $ 7,064
- ----------------------------------------------------------------------------------------------------------------------------
U-30
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) continued
Results of Operations for Oil and Gas Producing Activities, Excluding
Corporate Overhead and Interest Costs/(a)/
United Other Equity
(In millions) States Europe Intl. Consolidated Investees Total
----------------------------------------------------------------------------------------------------------------------------
2000: Revenues:
Sales $ 783 $ 579 $ 310 $ 1,672 $ 145 $ 1,817
Transfers 1,337 - 188 1,525 - 1,525
Other revenues/(b)/ (875) 10 55 (810) - (810)
-------- -------- -------- --------- --------- ---------
Total revenues 1,245 589 553 2,387 145 2,532
Expenses:
Production costs (371) (111) (133) (615) (34) (649)
Shipping and handling costs/(c)/ (72) - - (72) - (72)
Exploration expenses (125) (37) (74) (236) (6) (242)
Reorganization costs (45) (12) (10) (67) - (67)
Depreciation, depletion
and amortization (380) (175) (122) (677) (27) (704)
Impairments (5) - (188) (193) - (193)
Other expenses (33) (3) (15) (51) - (51)
-------- -------- -------- --------- --------- ---------
Total expenses (1,031) (338) (542) (1,911) (67) (1,978)
Other production-related
earnings (losses)/(d)/ 4 (21) 4 (13) 1 (12)
-------- -------- -------- --------- --------- ---------
Results before income taxes 218 230 15 463 79 542
Income taxes (credits)/(e)/ 70 62 (1) 131 27 158
-------- -------- -------- --------- --------- ---------
Results of operations $ 148 $ 168 $ 16 $ 332 $ 52 $ 384
----------------------------------------------------------------------------------------------------------------------------
1999: Revenues:
Sales $ 547 $ 431 $ 200 $ 1,178 $ 33 $ 1,211
Transfers 882 - 88 970 - 970
Other revenues/(b)/ 4 - (2) 2 - 2
-------- -------- -------- --------- --------- ---------
Total revenues 1,433 431 286 2,150 33 2,183
Expenses:
Production costs (322) (137) (99) (558) (25) (583)
Shipping and handling costs/(c)/ (77) - - (77) - (77)
Exploration expenses (134) (42) (51) (227) (4) (231)
Depreciation, depletion
and amortization (362) (143) (99) (604) (13) (617)
Impairments (16) - - (16) - (16)
Other expenses (28) (7) (15) (50) - (50)
-------- -------- -------- --------- --------- ---------
Total expenses (939) (329) (264) (1,532) (42) (1,574)
Other production-related
earnings (losses)/(d)/ 1 4 4 9 1 10
-------- -------- -------- --------- --------- ---------
Results before income taxes 495 106 26 627 (8) 619
Income taxes (credits) 168 33 (7) 194 (3) 191
-------- -------- -------- --------- --------- ---------
Results of operations $ 327 $ 73 $ 33 $ 433 $ (5) $ 428
----------------------------------------------------------------------------------------------------------------------------
1998: Revenues:
Sales $ 542 $ 454 $ 71 $ 1,067 $ 28 $ 1,095
Transfers 536 - 51 587 - 587
Other revenues/(b)/ 43 - - 43 - 43
-------- -------- -------- --------- --------- ----------
Total revenues 1,121 454 122 1,697 28 1,725
Expenses:
Production costs (295) (153) (57) (505) (8) (513)
Shipping and handling costs/(c)/ (67) - - (67) - (67)
Exploration expenses (165) (23) (49) (237) (5) (242)
Depreciation, depletion
and amortization (339) (150) (58) (547) (8) (555)
Impairments/(f)/ (14) (22) (47) (83) - (83)
Other expenses (37) (3) (11) (51) - (51)
-------- -------- -------- --------- --------- ---------
Total expenses (917) (351) (222) (1,490) (21) (1,511)
Other production-related
earnings (losses)/(d)/ 1 15 3 19 1 20
-------- -------- -------- --------- --------- ---------
Results before income taxes 205 118 (97) 226 8 234
Income taxes (credits) 61 22 (28) 55 3 58
-------- -------- -------- --------- --------- ---------
Results of operations $ 144 $ 96 $ (69) $ 171 $ 5 $ 176
----------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes the results of using derivative instruments to manage
commodity and foreign currency risks.
/(b)/ Includes net gains (losses) on asset dispositions and contract
settlements.
/(c)/ Represents a reclassification of shipping and handling costs
previously reported as a reduction from oil and gas revenues.
/(d)/ Includes revenues, net of associated costs, from third-party
activities that are an integral part of USX's production operations
which may include the processing and/or transportation of third-party
production, and the purchase and subsequent resale of gas utilized in
reservoir management.
/(e)/ Excludes net valuation allowance tax charges of $205 million.
/(f)/ Includes suspended exploration well write-offs.
U-31
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) continued
Costs Incurred for Property Acquisition, Exploration and Development -
Including Capital Expenditures
United Other Equity
(In millions) States Europe Intl. Consolidated Investees Total
------------------------------------------------------------------------------------------------------------------------------
2000: Property acquisition:
Proved $ 128 $ - $ 12 $ 140 $ - $ 140
Unproved (5)/(a)/ - 10 5 - 5
Exploration 161 33 93 287 2 289
Development 288 42 103 433 77 510
-----------------------------------------------------------------------------------------------------------------------------
1999: Property acquisition:
Proved $ 20 $ - $ 10 $ 30 $ - $ 30
Unproved 26 12 107 145 - 145
Exploration 141 47 64 252 8 260
Development 232 34 117 383 84 467
-----------------------------------------------------------------------------------------------------------------------------
1998: Property acquisition:
Proved $ 3 $ 3 $1,051 $1,057 $ - $1,057
Unproved 82 - 57 139 - 139
Exploration 217 39 75 331 11 342
Development 431 39 46 516 165 681
------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes proceeds of $25 million realized from the reduction of
mineral interests.
Estimated Quantities of Proved Oil and Gas Reserves
The following estimates of net reserves have been determined by
deducting royalties of various kinds from USX's gross reserves. The reserve
estimates are believed to be reasonable and consistent with presently known
physical data concerning size and character of the reservoirs and are
subject to change as additional knowledge concerning the reservoirs becomes
available. The estimates include only such reserves as can reasonably be
classified as proved; they do not include reserves which may be found by
extension of proved areas or reserves recoverable by secondary or tertiary
recovery methods unless these methods are in operation and are showing
successful results. Undeveloped reserves consist of reserves to be
recovered from future wells on undrilled acreage or from existing wells
where relatively major expenditures will be required to realize production.
USX did not have any quantities of oil and gas reserves subject to long-
term supply agreements with foreign governments or authorities in which USX
acts as producer.
United Other Equity
(Millions of barrels) States Europe Intl. Consolidated Investees Total
------------------------------------------------------------------------------------------------------------------------
Liquid Hydrocarbons
Proved developed and
undeveloped reserves:
Beginning of year - 1998 590 161 26 777 82 859
Purchase of reserves in place 1 - 156 157 - 157
Revisions of previous estimates (1) (28) 1 (28) (2) (30)
Improved recovery 3 - - 3 - 3
Extensions, discoveries and
other additions 10 4 18 32 - 32
Production (49) (15) (7) (71) - (71)
Sales of reserves in place (5) - - (5) - (5)
------ ------ ------ ----- ----- -----
End of year - 1998 549 122 194 865 80 945
Purchase of reserves in place 14 - 7 21 - 21
Revisions of previous estimates 2 (20) - (18) (3) (21)
Improved recovery 11 - 1 12 - 12
Extensions, discoveries and
other additions 9 - 5 14 - 14
Production (53) (12) (11) (76) - (76)
Sales of reserves in place (12) - (9) (21) - (21)
------ ------ ------ ----- ----- -----
End of year - 1999 520 90 187 797 77 874
Purchase of reserves in place 27 - - 27 - 27
Exchange of interest/(a)/ 6 60 - 66 (73) (7)
Revisions of previous estimates (4) (35) (21) (60) - (60)
Improved recovery 7 - - 7 - 7
Extensions, discoveries and
other additions 15 3 1 19 - 19
Production (48) (10) (13) (71) (4) (75)
Sales of reserves in place (65) - (3) (68) - (68)
------ ------ ------ ----- ----- -----
End of year - 2000 458 108 151 717 - 717
------------------------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1998 486 161 12 659 - 659
End of year - 1998 489 119 67 675 - 675
End of year - 1999 476 90 72 638 69 707
End of year - 2000 414 74 57 545 - 545
------------------------------------------------------------------------------------------------------------------------
/(a)/ Reserves represent the exchange of an equity interest in Sakhalin
Energy Investment Company Ltd. for certain interests in the UK
Atlantic Margin area and the Gulf of Mexico.
U-32
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 - 1998 2,232 1,048 23 3,303 111 3,414
Purchase of reserves in place 10 - 782 792 - 792
Revisions of previous estimates (16) 10 (1) (7) 5 (2)
Improved recovery - - - - - -
Extensions, discoveries and
other additions 238 32 55 325 5 330
Production (272) (124) (29) (425) (11) (436)
Sales of reserves in place (29) - - (29) - (29)
------- ------ ----- ------ ------ ------
End of year - 1998 2,163 966 830 3,959 110 4,069
Purchase of reserves in place 5 - 11 16 - 16
Revisions of previous estimates (83) (81) (3) (167) 13 (154)
Improved recovery 8 - 2 10 - 10
Extensions, discoveries and
other additions 281 - 94 375 13 388
Production (275) (111) (59) (445) (13) (458)
Sales of reserves in place (42) - (42) (84) - (84)
------- ------ ----- ------ ------ ------
End of year - 1999 2,057 774 833 3,664 123 3,787
Purchase of reserves in place 114 - 15 129 - 129
Exchange of interest/(a)/ 14 31 - 45 - 45
Revisions of previous estimates (154) (114) (347) (615) (26) (641)
Improved recovery - - - - - -
Extensions, discoveries and
other additions 217 35 38 290 2 292
Production (268) (112) (52) (432) (10) (442)
Sales of reserves in place (66) - (10) (76) - (76)
------- ------ ----- ------ ------ ------
End of year - 2000 1,914 614 477 3,005 89 3,094
----------------------------------------------------------------------------------------------------------------------------
Proved developed reserves:
Beginning of year - 1998 1,702 1,024 19 2,745 78 2,823
End of year - 1998 1,678 909 534 3,121 76 3,197
End of year - 1999 1,550 741 497 2,788 65 2,853
End of year - 2000 1,421 563 381 2,365 52 2,417
----------------------------------------------------------------------------------------------------------------------------
/(a)/ Reserves represent the exchange of an equity interest in Sakhalin
Energy Investment Company Ltd. for certain interests in the UK
Atlantic Margin area and the Gulf of Mexico.
Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Gas Reserves
Estimated discounted future net cash flows and changes therein were
determined in accordance with Statement of Financial Accounting Standards
No. 69. Certain information concerning the assumptions used in computing
the valuation of proved reserves and their inherent limitations are
discussed below. USX believes such information is essential for a proper
understanding and assessment of the data presented.
Future cash inflows are computed by applying year-end prices of oil
and gas relating to USX's proved reserves to the year-end quantities of
those reserves. Future price changes are considered only to the extent
provided by contractual arrangements in existence at year-end.
The assumptions used to compute the proved reserve valuation do not
necessarily reflect USX's expectations of actual revenues to be derived
from those reserves nor their present worth. Assigning monetary values to
the estimated quantities of reserves, described on the preceding page, does
not reduce the subjective and ever-changing nature of such reserve
estimates.
Additional subjectivity occurs when determining present values because
the rate of producing the reserves must be estimated. In addition to
uncertainties inherent in predicting the future, variations from the
expected production rate also could result directly or indirectly from
factors outside of USX's control, such as unintentional delays in
development, environmental concerns, changes in prices or regulatory
controls.
The reserve valuation assumes that all reserves will be disposed of by
production. However, if reserves are sold in place or subjected to
participation by foreign governments, additional economic considerations
also could affect the amount of cash eventually realized.
Future development and production costs, including abandonment and
dismantlement costs, are computed by estimating the expenditures to be
incurred in developing and producing the proved oil and gas reserves at the
end of the year, based on year-end costs and assuming continuation of
existing economic conditions.
Future income tax expenses are computed by applying the appropriate
year-end statutory tax rates, with consideration of future tax rates
already legislated, to the future pretax net cash flows relating to USX's
proved oil and gas reserves. Permanent differences in oil and gas related
tax credits and allowances are recognized.
Discount was derived by using a discount rate of 10 percent a year to
reflect the timing of the future net cash flows relating to proved oil and
gas reserves.
U-33
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, 2000:
Future cash inflows $ 25,052 $ 4,571 $ 6,704 $ 36,327 $ 313 $ 36,640
Future production costs (5,689) (1,662) (1,156) (8,507) (125) (8,632)
Future development costs (638) (185) (309) (1,132) (26) (1,158)
Future income tax expenses (6,290) (677) (2,102) (9,069) (76) (9,145)
-------- ------- ------- -------- ------- --------
Future net cash flows 12,435 2,047 3,137 17,619 86 17,705
10% annual discount for
estimated timing of cash flows (5,403) (486) (1,524) (7,413) (19) (7,432)
-------- ------- ------- -------- ------- --------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 7,032 $ 1,561 $ 1,613 $ 10,206 $ 67 $ 10,273
----------------------------------------------------------------------------------------------------------------------
December 31, 1999:
Future cash inflows $ 15,393 $ 4,426 $ 5,242 $ 25,061 $ 2,154 $ 27,215
Future production costs (4,646) (1,864) (1,107) (7,617) (850) (8,467)
Future development costs (445) (86) (315) (846) (88) (934)
Future income tax expenses (3,102) (987) (1,581) (5,670) (328) (5,998)
-------- ------- ------- -------- ------- --------
Future net cash flows 7,200 1,489 2,239 10,928 888 11,816
10% annual discount for
estimated timing of cash flows (3,371) (374) (862) (4,607) (372) (4,979)
-------- ------- ------- -------- ------- --------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 3,829 $ 1,115 $ 1,377 $ 6,321 $ 516 $ 6,837
----------------------------------------------------------------------------------------------------------------------
December 31, 1998:
Future cash inflows $ 8,442 $ 3,850 $ 2,686 $ 14,978 $ 1,036 $ 16,014
Future production costs (3,731) (2,240) (950) (6,921) (586) (7,507)
Future development costs (559) (130) (323) (1,012) (124) (1,136)
Future income tax expenses (816) (630) (542) (1,988) (45) (2,033)
-------- ------- ------- -------- ------- --------
Future net cash flows 3,336 850 871 5,057 281 5,338
10% annual discount for
estimated timing of cash flows (1,462) (256) (392) (2,110) (136) (2,246)
-------- ------- ------- -------- ------- --------
Standardized measure of
discounted future net cash
flows relating to proved oil
and gas reserves $ 1,874 $ 594 $ 479 $ 2,947 $ 145 $ 3,092
----------------------------------------------------------------------------------------------------------------------
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) 2000 1999 1998 2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
Sales and transfers of
oil and gas produced,
net of production costs $(2,508) $(1,516) $(1,125) $ (111) $ (8) $ (20) $(2,619) $(1,524) $(1,145)
Net changes in prices and
production costs related
to future production 6,820 5,891 (3,579) 12 484 (372) 6,832 6,375 (3,951)
Extensions, discoveries and
improved recovery, less
related costs 1,472 566 284 3 9 4 1,475 575 288
Development costs incurred
during the period 433 383 516 77 84 165 510 467 681
Changes in estimated future
development costs (273) (69) (285) (22) (52) (100) (295) (121) (385)
Revisions of previous
quantity estimates (1,899) (346) (110) (43) (8) (2) (1,942) (354) (112)
Net changes in purchases
and sales of minerals in place 380 68 637 - - - 380 68 637
Net change in exchanges of
reserves in place 755 - - (547) - - 208 - -
Accretion of discount 843 382 623 62 18 39 905 400 662
Net change in income taxes (1,969) (1,995) 825 90 (117) 57 (1,879) (2,112) 882
Other (169) 10 401 30 (39) 102 (139) (29) 503
--------------------------------------------------------------------------------------------------------------------------------
Net change for the year 3,885 3,374 (1,813) (449) 371 (127) 3,436 3,745 (1,940)
Beginning of year 6,321 2,947 4,760 516 145 272 6,837 3,092 5,032
--------------------------------------------------------------------------------------------------------------------------------
End of year $10,206 $ 6,321 $ 2,947 $ 67 $ 516 $ 145 $10,273 $ 6,837 $ 3,092
--------------------------------------------------------------------------------------------------------------------------------
U-34
Five-Year Operating Summary - Marathon Group
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Net Liquid Hydrocarbon Production (thousands of barrels per day)
United States (by region)
Alaska - - - - 8
Gulf Coast 62 74 55 29 30
Southern 5 5 6 8 9
Central 4 4 4 5 4
Mid-Continent 34 38 44 46 45
Rocky Mountain 26 24 26 27 26
---------------------------------------------
Total United States 131 145 135 115 122
---------------------------------------------
International
Canada 19 17 6 - -
Egypt 1 5 8 8 8
Gabon 16 9 5 - -
Norway - - 1 2 3
United Kingdom 29 31 41 39 48
---------------------------------------------
Total International 65 62 61 49 59
---------------------------------------------
Consolidated 196 207 196 164 181
Equity investee/(a)/ 11 1 - - -
---------------------------------------------
Total 207 208 196 164 181
Natural gas liquids included in above 22 19 17 17 17
- ------------------------------------------------------------------------------------------------------------------------
Net Natural Gas Production (millions of cubic feet per day)
United States (by region)
Alaska 160 148 144 151 145
Gulf Coast 88 107 84 78 88
Southern 147 178 208 189 161
Central 156 134 117 119 109
Mid-Continent 133 129 125 125 122
Rocky Mountain 47 59 66 60 51
---------------------------------------------
Total United States 731 755 744 722 676
---------------------------------------------
International
Canada 143 150 65 - -
Egypt - 13 16 11 13
Ireland 115 132 168 228 259
Norway - 26 27 54 87
United Kingdom - equity 212 168 165 130 140
- other/(b)/ 11 16 23 32 32
---------------------------------------------
Total International 481 505 464 455 531
---------------------------------------------
Consolidated 1,212 1,260 1,208 1,177 1,207
Equity investee/(c)/ 29 36 33 42 45
---------------------------------------------
Total 1,241 1,296 1,241 1,219 1,252
- ------------------------------------------------------------------------------------------------------------------------
Average Sales Prices
Liquid Hydrocarbons (dollars per barrel)/(d)(e)/
United States $ 25.11 $15.44 $10.42 $16.88 $18.58
International 26.54 16.90 12.24 18.77 20.34
Natural Gas (dollars per thousand cubic feet)/(d)(e)/
United States $ 3.30 $1.90 $1.79 $2.20 $2.09
International 2.76 1.90 1.94 2.00 1.97
- ------------------------------------------------------------------------------------------------------------------------
Net Proved Reserves at year-end (developed and undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 458 520 549 590 570
International 259 277 316 187 203
---------------------------------------------
Consolidated 717 797 865 777 773
Equity investee/(a)/ - 77 80 82 -
---------------------------------------------
Total 717 874 945 859 773
Developed reserves as % of total net reserves 76% 81% 71% 77% 80%
- ------------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
United States 1,914 2,057 2,163 2,232 2,251
International 1,091 1,607 1,796 1,071 1,199
---------------------------------------------
Consolidated 3,005 3,664 3,959 3,303 3,450
Equity investee/(c)/ 89 123 110 111 132
---------------------------------------------
Total 3,094 3,787 4,069 3,414 3,582
Developed reserves as % of total net reserves 78% 75% 79% 83% 83%
- ------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents Marathon's equity interest in Sakhalin Energy Investment
Company Ltd. and CLAM Petroleum B.V.
/(b)/ Represents gas acquired for injection and subsequent resale.
/(c)/ Represents Marathon's equity interest in CLAM Petroleum B.V.
/(d)/ Prices exclude gains/losses from hedging activities.
/(e)/ Prices exclude equity investees and purchase/resale gas.
U-35
Five-Year Operating Summary - Marathon Group continued
2000/(a)/ 1999/(a)/ 1998/(a)/ 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Refinery Operations (thousands of barrels per day)
In-use crude oil capacity at year-end 935 935 935 575 570
Refinery runs - crude oil refined 900 888 894 525 511
- other charge and blend stocks 141 139 127 99 96
In-use crude oil capacity utilization rate 96% 95% 96% 92% 90%
- -----------------------------------------------------------------------------------------------------------------------------------
Source of Crude Processed (thousands of barrels per day)
United States 400 349 317 202 229
Canada 102 92 98 24 18
Middle East and Africa 346 363 394 241 193
Other International 52 84 85 58 73
------------------------------------------------------
Total 900 888 894 525 513
- -----------------------------------------------------------------------------------------------------------------------------------
Refined Product Yields (thousands of barrels per day)
Gasoline 552 566 545 353 345
Distillates 278 261 270 154 155
Propane 20 22 21 13 13
Feedstocks and special products 74 66 64 36 35
Heavy fuel oil 43 43 49 35 30
Asphalt 74 69 68 39 36
------------------------------------------------------
Total 1,041 1,027 1,017 630 614
- -----------------------------------------------------------------------------------------------------------------------------------
Refined Products Yields (% breakdown)
Gasoline 53% 55% 54% 56% 56%
Distillates 27 25 27 24 25
Other products 20 20 19 20 19
------------------------------------------------------
Total 100% 100% 100% 100% 100%
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Refined Product Sales Volumes (thousands of barrels per day)
Gasoline 746 714 671 452 468
Distillates 352 331 318 198 192
Propane 21 23 21 12 12
Feedstocks and special products 69 66 67 40 37
Heavy fuel oil 43 43 49 34 31
Asphalt 75 74 72 39 35
------------------------------------------------------
Total 1,306 1,251 1,198 775 775
Matching buy/sell volumes included in above 52 45 39 51 71
- -----------------------------------------------------------------------------------------------------------------------------------
Refined Products Sales Volumes by Class of Trade
(as a % of total sales volumes)
Wholesale - independent private-brand
marketers and consumers 65% 66% 65% 61% 62%
Marathon and Ashland brand jobbers and dealers 12 11 11 13 13
Speedway SuperAmerica retail outlets 23 23 24 26 25
------------------------------------------------------
Total 100% 100% 100% 100% 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Refined Products (dollars per barrel)
Average sales price $38.24 $24.59 $20.65 $26.38 $27.43
Average cost of crude oil throughput 29.07 18.66 13.02 19.00 21.94
- -----------------------------------------------------------------------------------------------------------------------------------
Petroleum Inventories at year-end (thousands of barrels)
Crude oil, raw materials and natural gas liquids 33,720 34,255 35,630 19,351 20,047
Refined products 34,386 32,853 32,334 20,598 21,283
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Refined Product Marketing
Outlets at year-end
MAP operated terminals 91 93 88 51 51
Retail - Marathon and Ashland brand outlets 3,728 3,482 3,117 2,465 2,392
- Speedway SuperAmerica outlets 2,242 2,433 2,257 1,544 1,592
- -----------------------------------------------------------------------------------------------------------------------------------
Pipelines (miles of common carrier pipelines)/(b)/
Crude Oil - gathering lines 419 557 2,827 1,003 1,052
- trunklines 4,623 4,720 4,859 2,665 2,665
Products - trunklines 2,834 2,856 2,861 2,310 2,310
------------------------------------------------------
Total 7,876 8,133 10,547 5,978 6,027
- -----------------------------------------------------------------------------------------------------------------------------------
Pipeline Barrels Handled (millions)/(c)/
Crude Oil - gathering lines 22.7 30.4 47.8 43.9 43.2
- trunklines 563.6 545.7 571.9 369.6 378.7
Products - trunklines 329.7 331.9 329.7 262.4 274.8
------------------------------------------------------
Total 916.0 908.0 949.4 675.9 696.7
- -----------------------------------------------------------------------------------------------------------------------------------
River Operations
Barges - owned/leased 158 169 169 - -
Boats - owned/leased 6 8 8 - -
- -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ 1998-2000 statistics include 100% of MAP and should be considered when
compared to prior periods.
/(b)/ Pipelines for downstream operations also include non-common carrier,
leased and equity investees.
/(c)/ Pipeline barrels handled on owned common carrier pipelines, excluding
equity investees.
U-36
Five-Year Operating Summary - U. S. Steel Group
(Thousands of net tons, unless otherwise noted) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------
Raw Steel Production
Gary, IN 6,610 7,102 6,468 7,428 6,840
Mon Valley, PA 2,683 2,821 2,594 2,561 2,746
Fairfield, AL 2,069 2,109 2,152 2,361 1,862
Kosice, Slovak Republic 382 - - - -
-------------------------------------------------------
Total 11,744 12,032 11,214 12,350 11,448
-----------------------------------------------------------------------------------------------------------------
Raw Steel Capability
Domestic Steel 12,800 12,800 12,800 12,800 12,800
U. S. Steel Kosice/(a)/ 467 - - - -
-------------------------------------------------------
Total 13,267 12,800 12,800 12,800 12,800
Total production as % of total capability 88.5 94.0 87.6 96.5 89.4
-----------------------------------------------------------------------------------------------------------------
Hot Metal Production
Domestic Steel 9,904 10,344 9,743 10,591 9,716
U. S. Steel Kosice 340 - - - -
-------------------------------------------------------
Total 10,244 10,344 9,743 10,591 9,716
-----------------------------------------------------------------------------------------------------------------
Coke Production
Domestic Steel/(b)/ 5,003 4,619 4,835 5,757 6,777
U. S. Steel Kosice 188 - - - -
-------------------------------------------------------
Total 5,191 4,619 4,835 5,757 6,777
-----------------------------------------------------------------------------------------------------------------
Iron Ore Pellets - Minntac, MN
Shipments 15,020 15,025 15,446 16,403 14,962
-----------------------------------------------------------------------------------------------------------------
Coal Production 6,195 6,632 8,150 7,528 7,283
-----------------------------------------------------------------------------------------------------------------
Coal Shipments 6,779 6,924 7,670 7,811 7,117
-----------------------------------------------------------------------------------------------------------------
Steel Shipments by Product - Domestic Steel
Sheet and semi-finished steel products 7,409 8,114 7,608 8,170 8,677
Tubular, plate and tin mill products 3,347 2,515 3,078 3,473 2,695
-------------------------------------------------------
Total 10,756 10,629 10,686 11,643 11,372
Total as % of domestic steel industry 9.8 10.0 10.5 10.9 11.3
-----------------------------------------------------------------------------------------------------------------
Steel Shipments by Product - U. S. Steel Kosice
Sheet and semi-finished steel products 207 - - - -
Tubular, plate and tin mill products 110 - - - -
-------------------------------------------------------
Total 317 - - - -
-----------------------------------------------------------------------------------------------------------------
Steel Shipments by Market - Domestic Steel
Steel service centers 2,315 2,456 2,563 2,746 2,831
Transportation 1,466 1,505 1,785 1,758 1,721
Further conversion:
Joint ventures 1,771 1,818 1,473 1,568 1,542
Trade customers 1,174 1,633 1,140 1,378 1,227
Containers 702 738 794 856 874
Construction 936 844 987 994 865
Oil, gas and petrochemicals 973 363 509 810 746
Export 544 321 382 453 493
All other 875 951 1,053 1,080 1,073
-------------------------------------------------------
Total 10,756 10,629 10,686 11,643 11,372
-----------------------------------------------------------------------------------------------------------------
Average Steel Price Per Ton
Domestic Steel $ 450 $ 420 $ 469 $ 479 $ 467
U. S. Steel Kosice 269 - - - -
-------------------------------------------------------------------------------------------------------------------
/(a)/ Represents the operations of U. S. Steel Kosice s.r.o., following the
acquisition of the steelmaking operations and related assets of VSZ
a.s. on November 24, 2000.
/(b)/ The reduction in coke production after 1996 reflected U. S. Steel's
entry into a strategic partnership with two limited partners on June
1, 1997, to acquire an interest in three coke batteries at its
Clairton (Pa.) Works.
U-37
Five-Year Financial Summary
(Dollars in millions, except as noted) 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------
Statement of Operations
Revenues and other income/(a)/ $ 39,914 $ 29,119 $28,077 $22,824 $ 22,938
Income from operations 1,752 1,863 1,517 1,705 1,779
Includes:
Joint venture formation charges (931) - - - -
Inventory market valuation (charges) credits - 551 (267) (284) 209
Gain on ownership change in MAP 12 17 245 - -
Income from continuing operations $ 411 $ 705 $ 674 $ 908 $ 946
Income from discontinued operations - - - 80 6
Extraordinary losses - (7) - - (9)
------------------------------------------------------------
Net Income $ 411 $ 698 $ 674 $ 988 $ 943
----------------------------------------------------------------------------------------------------------------------------
Applicable to Marathon Stock
Income before extraordinary loss $ 432 $ 654 $ 310 $ 456 $ 671
Income before extraordinary loss
per share - basic (in dollars) 1.39 2.11 1.06 1.59 2.33
- diluted (in dollars) 1.39 2.11 1.05 1.58 2.31
Net income 432 654 310 456 664
Net income per share - basic (in dollars) 1.39 2.11 1.06 1.59 2.31
- diluted (in dollars) 1.39 2.11 1.05 1.58 2.29
Dividends paid per share (in dollars) .88 .84 .84 .76 .70
----------------------------------------------------------------------------------------------------------------------------
Applicable to Steel Stock
Income (loss) before extraordinary losses $ (29) $ 42 $ 355 $ 449 $ 253
Income (loss) before extraordinary losses
per share - basic (in dollars) (.33) .48 4.05 5.24 3.00
- diluted (in dollars) (.33) .48 3.92 4.88 2.97
Net income (loss) (29) 35 355 449 251
Net income (loss) per share - basic (in dollars) (.33) .40 4.05 5.24 2.98
- diluted (in dollars) (.33) .40 3.92 4.88 2.95
Dividends paid per share (in dollars) 1.00 1.00 1.00 1.00 1.00
-----------------------------------------------------------------------------------------------------------------------------
Balance Sheet Position at year-end
Cash and cash equivalents $ 559 $ 133 $ 146 $ 54 $ 55
Total assets 23,401 22,931 21,133 17,284 16,980
Capitalization:
Notes payable $ 150 $ - $ 145 $ 121 $ 81
Total long-term debt 4,460 4,283 3,991 3,403 4,212
Preferred stock of subsidiary and
trust preferred securities 433 433 432 432 250
Minority interest in MAP 1,840 1,753 1,590 - -
Redeemable Delhi Stock - - - 195 -
Preferred stock 2 3 3 3 7
Common stockholders' equity 6,762 6,853 6,402 5,397 5,015
------------------------------------------------------------
Total capitalization $ 13,647 $ 13,325 $12,563 $ 9,551 $ 9,565
----------------------------------------------------------------------------------------------------------------------------
% of total debt to capitalization/(b)/ 36.9 35.4 36.4 41.4 47.5
----------------------------------------------------------------------------------------------------------------------------
Cash Flow Data
Net cash from operating activities $ 2,531 $ 1,936 $ 2,022 $ 1,464 $ 1,655
Capital expenditures 1,669 1,665 1,580 1,373 1,168
Disposal of assets 560 366 86 481 443
Dividends paid 371 354 342 316 307
----------------------------------------------------------------------------------------------------------------------------
Employee Data
Total employment costs/(c)(d)/ $ 2,692 $ 2,582 $ 2,372 $ 2,289 $ 2,179
Average number of employees/(c)(d)/ 52,459 52,596 44,860 41,620 41,553
Number of pensioners at year-end/(d)/ 97,594 100,504/(e)/ 95,429 97,051 99,713
----------------------------------------------------------------------------------------------------------------------------
/(a)/ 1996-1999 reclassified to conform to 2000 classifications.
/(b)/ Total debt represents the sum of notes payable, total long-term debt
and preferred stock of subsidiary and trust preferred securities.
/(c)/ Includes U. S. Steel Kosice s.r.o. from date of acquisition in 2000
and excludes the Delhi Companies sold in 1997.
/(d)/ 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.
/(e)/ Includes approximately 8,000 surviving spouse beneficiaries added to
the U. S. Steel pension plan in 1999.
U-38
Management's Discussion and Analysis
USX Corporation ("USX") is a diversified company engaged
primarily in the energy business through its Marathon Group, and
in the steel business through its U. S. Steel Group.
Effective October 31, 1997, USX sold Delhi Gas Pipeline
Corporation and other subsidiaries of USX that comprised all of
the USX - Delhi Group ("Delhi Companies"). On January 26, 1998,
USX used the $195 million net proceeds from the sale to redeem
all of the 9.45 million outstanding shares of USX - Delhi Group
Common Stock. For additional information, see Note 5 to the USX
Consolidated Financial Statements.
On January 1, 1998, Marathon Oil Company ("Marathon")
transferred certain refining, marketing and transportation
("RM&T") net assets to Marathon Ashland Petroleum LLC ("MAP"), a
new consolidated subsidiary. Also on January 1, 1998, Marathon
acquired certain RM&T net assets from Ashland Inc. ("Ashland") in
exchange for a 38 percent interest in MAP. Financial measures
such as revenues, income from operations and capital expenditures
in 2000, 1999 and 1998 include 100 percent of MAP and are not
comparable to prior period amounts. Net income and related per
share amounts for 2000, 1999 and 1998 are net of minority
interest. For further discussion of MAP, see Note 3 to the USX
Consolidated Financial Statements.
On August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited ("Tarragon"), a Canadian oil and gas exploration and
production company. The purchase price included $686 million in
cash payments, the assumption of $345 million in debt and the
issuance of Exchangeable Shares of an indirect Canadian
subsidiary of Marathon valued at $29 million. The Exchangeable
Shares are exchangeable at any time on a one-for-one basis for
shares of USX -Marathon Group Common Stock ("Marathon Stock"). On
November 4, 1998, USX sold 17 million shares of Marathon Stock.
The proceeds to USX of $528 million were used to reduce
indebtedness incurred to fund the Tarragon acquisition. Financial
measures such as revenues, income from operations and capital
expenditures include operations of Marathon Canada Limited,
formerly known as Tarragon, commencing August 12, 1998. For
further discussion of Tarragon, see Note 3 to the USX
Consolidated Financial Statements.
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o.
("USSK"), which held the steel operations and related assets of
VSZ a.s. ("VSZ"), located in the Slovak Republic. The 2000
results include USSK operations after the acquisition date. For
further discussion of USSK, see Note 3 to the USX Consolidated
Financial Statements.
Management's Discussion and Analysis of USX Consolidated
Financial Statements provides certain information about the
Marathon and U. S. Steel Groups, particularly in Management's
Discussion and Analysis of Operations by Group. More expansive
Group information is provided in Management's Discussion and
Analysis of the Marathon Group and U. S. Steel Group, which are
included in the USX 2000 Form 10-K. Management's Discussion and
Analysis should be read in conjunction with the USX Consolidated
Financial Statements and Notes to the USX Consolidated Financial
Statements.
Certain sections of Management's Discussion and Analysis
include forward-looking statements concerning trends or events
potentially affecting USX. These statements typically contain
words such as "anticipates", "believes", "estimates", "expects"
or similar words indicating that future outcomes are uncertain.
In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors,
though not necessarily all such factors, that could cause future
outcomes to differ materially from those set forth in the
forward-looking statements. For additional risk factors affecting
the businesses of USX, see Supplementary Data - Disclosures About
Forward-Looking Statements in the USX 2000 Form 10-K.
U-39
Management's Discussion and Analysis continued
Management's Discussion and Analysis of Income
Revenues and Other Income for each of the last three years
are summarized in the following table:
(Dollars in millions) 2000 1999 1998
------------------------------------------------------------------------------------------------
Revenues and other income/(a)/
Marathon Group $33,859 $23,707 $21,623
U. S. Steel Group 6,132 5,470 6,477
Eliminations (77) (58) (23)
------- ------- -------
Total USX Corporation revenues and other income 39,914 29,119 28,077
Less:
Consumer excise taxes on petroleum products and merchandise/(b)/ 4,344 3,973 3,824
------- ------- -------
Revenues and other income adjusted to exclude above item $35,570 $25,146 $24,253
------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss),
gain on ownership change in MAP, net gains (losses) on
disposal of assets and other income.
/(b)/ Included in both revenues and costs and expenses for the
Marathon Group and USX Consolidated, resulting in no effect
on income.
Adjusted revenues and other income increased by $10,424
million in 2000 compared with 1999, reflecting a 43 percent
increase for the Marathon Group and a 12 percent increase for the
U. S. Steel Group. Adjusted revenues and other income increased by
$893 million in 1999 compared with 1998, reflecting a 10 percent
increase for the Marathon Group, partially offset by a 16 percent
decrease for the U. S. Steel Group. For further discussion, see
Management's Discussion and Analysis of Operations by Group,
herein.
Income from operations for each of the last three years are
summarized in the following table:
(Dollars in millions) 2000 1999 1998
------------------------------------------------------------------------------------------------
Reportable segments
Marathon Group
Exploration & production $ 1,535 $ 618 $ 278
Refining, marketing & transportation 1,273 611 896
Other energy related businesses 38 61 33
------- ------ ------
Income for reportable segments - Marathon Group 2,846 1,290 1,207
U. S. Steel Group
Domestic Steel 23 91 517
U. S. Steel Kosice 2 - -
------- ------ ------
Income for reportable segments - U. S. Steel Group 25 91 517
------- ------ ------
Income for reportable segments - USX Corporation 2,871 1,381 1,724
Items not allocated to reportable segments:
Marathon Group (1,198) 423 (269)
U. S. Steel Group 79 59 62
------- ------ ------
Total income from operations - USX Corporation $ 1,752 $1,863 $1,517
------------------------------------------------------------------------------------------------
Income from operations decreased $111 million in 2000
compared with 1999 and increased $346 million in 1999 compared with
1998. The decrease in 2000, despite higher income from reportable
segments for the Marathon Group, was primarily due to special
charges at Marathon, in particular a noncash adjustment related to
the formation of a joint venture with Kinder Morgan Energy
Partners, L.P. In addition, income from operations for the U. S.
Steel Group declined in 2000 due primarily to higher costs related
to energy and inefficient operating levels, lower income from raw
materials operations, particularly coal operations, and lower sheet
shipments resulting from high levels of imports that continued in
2000. For further discussion, see Management's Discussion and
Analysis of Operations by Group, herein.
U-40
Management's Discussion and Analysis continued
Net interest and other financial costs for each of the last
three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------
Interest and other financial income $ 34 $ 3 $ 39
Interest and other financial costs 375 365 318
----- ----- -----
Net interest and other financial costs 341 362 279
Less:
Favorable adjustment to
carrying value of indexed debt/(a)/ - (13) (44)
------ ----- -----
Net interest and other financial costs
adjusted to exclude above item $ 341 $ 375 $ 323
-----------------------------------------------------------------
/(a)/ In December 1996, USX issued $117 million in aggregate
principal amount of 6-3/4% Notes Due February 1, 2000
("indexed debt"), mandatorily exchangeable at maturity for
common stock of RTI International Metals, Inc. ("RTI") or
for the equivalent amount of cash, at USX's option. The
carrying value of indexed debt was adjusted quarterly to
settlement value based on changes in the value of RTI
common stock. Any resulting adjustment was charged or
credited to income and included in interest and other
financial costs. In 1999, USX irrevocably deposited with a
trustee the RTI common stock resulting in satisfaction of
USX's obligation. For further information see Note 7 to the
USX Consolidated Financial Statements.
Excluding the effect of the adjustment to the carrying
value of indexed debt, net interest and other financial costs
decreased by $34 million in 2000 as compared with 1999, and
increased by $52 million in 1999 as compared with 1998. The
decrease in 2000 was primarily due to higher interest income. The
increase in 1999 was primarily due to lower interest income and
increased financial costs as a result of higher average debt
levels. For additional information, see Note 6 to the USX
Consolidated Financial Statements.
The provision for income taxes was $502 million in 2000,
compared with $349 million in 1999 and $315 million in 1998. The
2000 provision included a $235 million one-time, noncash deferred
tax charge for the Marathon Group as a result of the change in
the amount and timing of future foreign source income due to the
exchange of its interest in Sakhalin Energy Investment Company
Ltd. for oil and gas producing interests. The 1999 provision
included a $23 million favorable adjustment to deferred taxes for
the Marathon Group related to the outcome of a United States Tax
Court case. The 1998 income tax provision included $33 million of
favorable income tax accrual adjustments relating to foreign
operations. For reconciliation of the federal statutory rate to
total provisions on income from continuing operations, see Note
11 to the USX Consolidated Financial Statements.
Extraordinary loss of $7 million, net of income tax
benefit, in 1999 included a $5 million loss resulting from the
satisfaction of the indexed debt and a $2 million loss for USX's
share of Republic Technologies International, LLC's extraordinary
loss related to the early extinguishment of debt. For additional
information, see Note 7 to the USX Consolidated Financial
Statements.
Net income was $411 million in 2000, $698 million in 1999
and $674 million in 1998. Excluding the gain on change of
ownership in MAP in 2000, 1999 and 1998 and adjustments to the
inventory market valuation reserve in 1999 and 1998, net income
decreased by $69 million in 2000 compared with 1999, and
decreased by $152 million in 1999 compared with 1998.
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets increased by $1,376 million from year-end
1999, primarily reflecting increased cash and cash equivalents,
receivables, inventories and assets held for sale. Receivables
primarily increased as a result of higher commodity prices. Cash
and cash equivalents increased primarily due to an increase in
cash held by certain foreign subsidiaries. Inventories increased
by $186 million largely due to increases at the U. S. Steel
Group, in particular the acquisition of USSK. Assets held for
sale increased mainly due to the reclassification of the Yates
field from property, plant and equipment.
U-41
Management's Discussion and Analysis continued
Current liabilities increased by $704 million from year-end
1999, primarily due to an increase in accounts payable reflecting
higher year-end commodity prices for the Marathon Group and the
acquisition of USSK for the U. S. Steel Group. In addition, notes
payable increased and, because of the reclassification of long-
term debt to short-term, short-term debt also increased.
Investments and long-term receivables decreased by $436
million from year-end 1999, primarily due to the exchange of
Marathon's interest in Sakhalin Energy Investment Company Ltd.
Net property, plant and equipment decreased by $695 million
from year-end 1999, primarily due to depreciation, asset
impairments and sales, and reclassifications to assets held for
sale, partially offset by property additions, including USSK.
Total long-term debt and notes payable increased by $327
million from year-end 1999, primarily due to $325 million of debt
related to the acquisition of USSK, which is nonrecourse to USX.
Debt attributed to the U. S. Steel Group increased, while debt
attributed to the Marathon Group decreased.
Stockholders' equity decreased by $92 million from year-end
1999 mainly reflecting net income of $411 million offset by
dividends declared and Marathon Stock repurchases of $105
million. In July 2000, the USX Board of Directors authorized
spending up to $450 million to repurchase shares of Marathon
Stock. This repurchase program will continue from time to time as
the Corporation's financial condition and market conditions
warrant.
Net cash provided from operating activities was $2,531
million in 2000, $1,936 million in 1999 and $2,022 million in
1998. Cash provided from operating activities in 2000 included a
$500 million elective contribution to a Voluntary Employee
Benefit Association Trust ("VEBA"), a trust established by
contract in 1994 covering United Steelworkers of America
retirees' health care and life insurance benefits and a $30
million elective contribution to a non-union retiree life
insurance trust. Cash provided from operating activities in 1999
included a payment of $320 million resulting from the expiration
of a program to sell U. S. Steel Group's accounts receivable.
Excluding the effects of these items, cash provided from
operating activities increased $805 million in 2000 compared with
1999 primarily due to increased cash provided from operations at
the Marathon Group partially offset by increased income tax
payments. Cash provided from operating activities in 1998
included proceeds of $38 million for the insurance litigation
settlement pertaining to the 1995 Gary Works #8 blast furnace
explosion and the payment of $30 million for the repurchase of
sold accounts receivable. Excluding the effects of these
adjustments, cash provided from operating activities increased by
$242 million in 1999 compared with 1998 primarily due to
favorable working capital changes.
Capital expenditures for each of the last three years are
summarized in the following table:
(Dollars in millions) 2000 1999 1998
------------------------------------------------------------------------
Marathon Group
Exploration & production
Domestic $ 516 $ 356 $ 652
International 226 388 187
Refining, marketing & transportation 656 612 410
Other 27 22 21
------ ------ ------
Subtotal Marathon Group 1,425 1,378 1,270
U. S. Steel Group 244 287 310
------ ------ ------
Total USX Corporation capital expenditures $1,669 $1,665 $1,580
------------------------------------------------------------------------
Domestic exploration and production capital expenditures for
the Marathon Group in 2000 mainly included the completion of the
Viosca Knoll Block 786 (Petronius) development in the Gulf of
Mexico, various producing property acquisitions, and natural gas
developments in East Texas and other gas basins throughout the
western United States. International exploration and production
projects included the completion of the Tchatamba West
development, located offshore Gabon, and continued oil and
natural gas developments in Canada. Refining, marketing and
transportation capital expenditures by MAP primarily consisted of
refinery modifications, including the initiation of the delayed
coker unit project at the Garyville refinery, and upgrades and
expansions of retail marketing outlets.
U-42
Management's Discussion and Analysis continued
Capital expenditures for the U. S. Steel Group in 2000
included exercising an early buyout option of a lease for
approximately half of the Gary Works No. 2 Slab Caster, the
continued replacement of coke battery thruwalls at Gary Works,
installation of the remaining two coilers at Gary's hot strip
mill, a blast furnace stove replacement at Gary Works and the
continuation of an upgrade to the Mon Valley cold reduction mill.
Capital expenditures in 2001 are expected to be
approximately $1.9 billion. Expenditures for the Marathon Group
are expected to be approximately $1.5 billion. Domestic
exploration and production projects planned for 2001 will focus
on gas projects and include various producing property
acquisitions. Planned capital expenditures in 2001 do not include
the capital requirements related to the acquisition of Pennaco
Energy, Inc. ("Pennaco"). International exploration and
production projects include the continued development of the
Foinaven area in the U.K. Atlantic Margin and continued oil and
natural gas developments in Canada. Refining, marketing and
transportation spending by MAP will primarily consist of refinery
improvements, including the completion of the delayed coker unit
project at the Garyville refinery, upgrades and expansions of
retail marketing outlets, and expansion and enhancement of
logistics systems. Other Marathon spending will include funds for
development and installation of SAP software, which is an
enterprise resource planning system that will allow the
integration of processes among business units and with outside
enterprises.
Capital expenditures for the U. S. Steel Group in 2001 are
expected to be approximately $425 million. Planned projects
include exercising an early buyout option of a lease for the
balance of the Gary Works No. 2 Slab Caster, work on the No. 3
blast furnace at Mon Valley Works, work on the No. 2 stove at the
No. 6 blast furnace at Gary Works, the completion of the
replacement of coke battery thruwalls at Gary Works, the
completion of an upgrade to the Mon Valley cold reduction mill,
mobile equipment purchases, systems development projects, and
projects at USSK, including the completion of the tin mill
upgrade.
Contract commitments to acquire property, plant and
equipment and long-term investments at December 31, 2000, totaled
$663 million compared with $568 million at December 31, 1999.
Investments in investees of $100 million in 2000 mainly
reflected Marathon Group development spending for the Sakhalin II
project in Russia and U. S. Steel Group investment in stock of
VSZ in which USX now holds a 25 percent interest.
The above statements with respect to capital expenditures
are forward-looking statements reflecting management's best
estimates based on information currently available. To the extent
this information proves to be inaccurate, the timing and levels
of future expenditures could differ materially from those
included in the forward-looking statements. Factors that could
cause future capital expenditures to differ materially include
changes in industry supply and demand, general economic
conditions, the availability of business opportunities and levels
of cash flow from operations for each of the Groups. The timing
of completion or cost of particular capital projects could be
affected by unforeseen hazards such as weather conditions,
explosions or fires.
Proceeds from disposal of assets were $560 million in 2000,
compared with $366 million in 1999 and $86 million in 1998.
Proceeds in 2000 primarily reflected Marathon's Sakhalin
exchange, sales of interest in the Angus/Stellaria development in
the Gulf of Mexico, the sale of non-core Speedway SuperAmerica
stores and other domestic production properties. Proceeds in 1999
primarily reflected the sales of Scurlock Permian LLC, over 150
non-strategic domestic and international production properties
and Carnegie Natural Gas Company and affiliated subsidiaries, all
of which were attributed to the Marathon Group.
The net change in restricted cash was a net withdrawal of $3
million in 2000, compared with a net deposit of $1 million in
1999 and a net withdrawal of $174 million in 1998. The $174
million net withdrawal in 1998 was primarily the result of
redeeming all of the outstanding shares of USX - Delhi Group
Common Stock with the $195 million of net proceeds from the sale
of the Delhi Companies.
Repayments of loans and advances to investees were $10
million in 2000 compared with $1 million in 1999 and $71 million
in 1998. In 1998, Sakhalin Energy Investment Company Ltd. repaid
advances made by Marathon in connection with the Sakhalin II
project.
U-43
Management's Discussion and Analysis continued
Net cash changes related to financial obligations (the net
of commercial paper and revolving credit arrangements, debt
borrowings and repayments on the Consolidated Statement of Cash
Flows) decreased $4 million in 2000, compared with an increase of
$187 million in 1999 and an increase of $315 million in 1998. The
decrease in 2000 reflects the net effects of net cash provided
from operating activities, net cash used in investing activities,
distributions to minority shareholder of MAP, dividends paid and
a stock repurchase program for Marathon Group. The increase in
1999 reflects the net effects of net cash provided from operating
activities, net cash used in investing activities, distributions
to minority shareholder of MAP and dividends paid. The increase
in 1998 was primarily the result of borrowings against revolving
credit agreements to fund the acquisition of Tarragon.
Significant additions to long-term debt for each of the
last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------
Aggregate principal amounts of:
6.65% Notes due 2006 $ - $ 300 $ -
6.85% Notes due 2008 - - 400
U. S. Steel receivables facility - 350 -
USSK loan facility/(a)/ 325 - -
Environmental bonds and capital leases/(b)/ - 37 280
----- ----- -----
Total $ 325 $ 687 $ 680
-----------------------------------------------------------------
/(a)/ The USSK loan facility is nonrecourse to USX.
/(b)/ Issued to refinance an equivalent amount of environmental
improvement refunding bonds.
In the event of a change in control of USX, debt and lease
obligations totaling $3,818 million at year-end 2000 may be
declared immediately due and payable or required to be
collateralized. See Notes 10 and 14 to the USX Consolidated
Financial Statements.
Marathon Stock repurchased was $105 million in 2000. In
July 2000, the USX Board of Directors authorized spending up to
$450 million to repurchase shares of Marathon Stock. This
repurchase program will continue from time to time as the
Corporation's financial condition and market conditions warrant.
Dividends paid increased $17 million in 2000 compared with
1999 and increased $12 million in 1999 compared with 1998. The
increase in 2000 was due primarily to a two-cents-per-share
increase in the quarterly Marathon Stock dividend effective with
dividends paid in the third quarter 2000.
Benefit Plan Activity
In 2000, USX contributed $530 million to a VEBA, including
a $500 million elective contribution, and $30 million to a non-
union retiree life insurance trust. In 1999, USX contributed $20
million to a VEBA.
Debt and Preferred Stock Ratings
In May 2000, Standard & Poor's Corp. upgraded USX's and
Marathon's senior debt to BBB, which continues the investment
grade rating. At the same time, USX's subordinated debt was
upgraded to BBB- and preferred stock was upgraded to BB+. Also in
May 2000, Moody's Investors Services, Inc., upgraded USX's and
Marathon's senior debt to the investment grade rating of Baa1,
USX's subordinated debt to Baa2 and USX's preferred stock to
baa3. Fitch IBCA Duff & Phelps currently rates USX's senior notes
as investment grade at BBB and USX's subordinated debt as BBB-.
In December 2000, Standard & Poor's Corp. advised that they had
put USX on "Credit Watch Developing" status and Fitch IBCA, Duff
& Phelps advised that they had put USX on "Rating Watch-Evolving"
status. Both moves were in response to USX's announced structure
study.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market
Risk for discussion of derivative instruments and associated
market risk.
U-44
Management's Discussion and Analysis continued
Liquidity
In December 2000, USX entered into a $1,354 million five-
year revolving credit agreement, terminating in November 2005,
and a $451 million 364-day facility, which together replaced the
prior $2,350 million facility. At December 31, 2000, USX had $300
million of borrowings against its $1,354 million long-term
revolving credit agreements and commercial paper borrowings of
$77 million. Also, USX had a short-term line of credit totaling
$150 million which was fully drawn at December 31, 2000. There
were no borrowings against MAP or USSK revolving credit
agreements at December 31, 2000.
USX had a total of $1,678 million available at December 31,
2000 under existing shelf registration statements filed with the
Securities and Exchange Commission. These allow USX to offer and
issue unsecured debt securities, common and preferred stock and
warrants in one or more separate offerings on terms to be
determined at the time of sale.
USX management believes that its short-term and long-term
liquidity is adequate to satisfy its obligations as of December
31, 2000, and to complete currently authorized capital spending
programs. Future requirements for USX's business needs, including
the funding of capital expenditures, debt maturities for the
years 2001, 2002 and 2003, and any amounts that may ultimately be
paid in connection with contingencies (which are discussed in
Note 26 to the USX Consolidated Financial Statements), are
expected to be financed by a combination of internally generated
funds, proceeds from the sale of stock, borrowings or other
external financing sources. However, on November 30, 2000, USX
announced that the USX Board of Directors had authorized
management to retain financial, tax and legal advisors to perform
an in-depth study of the corporation's targeted stock structure.
Until the study is complete, USX management believes it will be
more difficult to access traditional debt and equity markets.
Although USX management believes that it will not be necessary to
access financial markets during this time frame, nontraditional
sources should be available to provide adequate liquidity, if
necessary.
USX management's opinion concerning liquidity and USX's
ability to avail itself in the future of the financing options
mentioned in the above forward-looking statements are based on
currently available information. To the extent that this
information proves to be inaccurate, future availability of
financing may be adversely affected. Factors that affect the
availability of financing include the performance of each Group
(as indicated by levels of cash provided from operating
activities and other measures), the results of the announced
structure study, the state of the debt and equity markets,
investor perceptions of past performance and expectations
regarding future actions and performance, the overall U.S.
financial climate, and, in particular, with respect to
borrowings, levels of USX's outstanding debt and credit ratings
by rating agencies. For a summary of short-term and long-term
debt, see Notes 13 and 14 to the USX Consolidated Financial
Statements.
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies
USX has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures
as a result of environmental laws and regulations. To the extent
these expenditures, as with all costs, are not ultimately
reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic
competitors of the U. S. Steel Group and substantially all the
competitors of the Marathon Group are subject to similar
environmental laws and regulations. However, the specific impact
on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities,
marketing areas, production processes and the specific products
and services it provides.
In addition, USX expects to incur capital expenditures to
meet environmental standards under the Slovak Republic's
environmental laws for the U. S. Steel Group's USSK operation.
U-45
Management's Discussion and Analysis continued
The following table summarizes USX's environmental
expenditures for each of the last three years/(a)/:
(Dollars in millions) 2000 1999 1998
---------------------------------------------------------
Capital
Marathon Group $ 73 $ 46 $ 83
U. S. Steel Group 18 32 49
----- ----- -----
Total capital $ 91 $ 78 $ 132
---------------------------------------------------------
Compliance
Operating & maintenance
Marathon Group $ 139 $ 117 $ 126
U. S. Steel Group 194 199 198
----- ----- -----
Total operating & maintenance 333 316 324
Remediation/(b)/
Marathon Group 30 25 10
U. S. Steel Group 18 22 19
----- ----- -----
Total remediation 48 47 29
Total compliance $ 381 $ 363 $ 353
---------------------------------------------------------
/(a)/ Amounts for the Marathon Group are calculated based on
American Petroleum Institute survey guidelines and include
100% of MAP. Amounts for the U. S. Steel Group are based on
previously established U.S. Department of Commerce survey
guidelines.
/(b)/ Amounts do not include noncash provisions recorded for
environmental remediation, but include spending charged
against remediation reserves, net of recoveries where
permissible.
USX's environmental capital expenditures accounted for 5%,
5% and 8% of total consolidated capital expenditures in 2000,
1999 and 1998, respectively.
USX's environmental compliance expenditures averaged 1% of
total consolidated costs in each of 2000, 1999 and 1998.
Remediation spending primarily reflected ongoing clean-up costs
for soil and groundwater contamination associated with
underground storage tanks and piping at retail gasoline stations,
and remediation activities at former and present operating
locations.
The Resource Conservation and Recovery Act ("RCRA")
establishes standards for the management of solid and hazardous
wastes. Besides affecting current waste disposal practices, RCRA
also addresses the environmental effects of certain past waste
disposal operations, the recycling of wastes and the regulation
of storage tanks.
A significant portion of USX's currently identified
environmental remediation projects relate to the remediation of
former and present operating locations. These projects include
remediation of contaminated sediments in a river that receives
discharges from the Gary Works and the closure of permitted
hazardous and non-hazardous waste landfills.
USX has been notified that it is a potentially responsible
party ("PRP") at 38 waste sites under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA")
as of December 31, 2000. In addition, there are 23 sites where
USX has received information requests or other indications that
USX may be a PRP under CERCLA but where sufficient information is
not presently available to confirm the existence of liability.
There are also 144 additional sites, excluding retail gasoline
stations, where remediation is being sought under other
environmental statutes, both federal and state, or where private
parties are seeking remediation through discussions or
litigation. Of these sites, 15 were associated with properties
conveyed to MAP by Ashland for which Ashland has retained
liability for all costs associated with remediation. At many of
these sites, USX is one of a number of parties involved and the
total cost of remediation, as well as USX's share thereof, is
frequently dependent upon the outcome of investigations and
remedial studies. USX accrues for environmental remediation
activities when the responsibility to remediate is probable and
the amount of associated costs is reasonably determinable. As
environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required.
See Note 26 to the USX Consolidated Financial Statements.
U-46
Management's Discussion and Analysis continued
New Tier II Fuels regulations were proposed in late 1999.
The gasoline rules, which were finalized by the U.S.
Environmental Protection Agency ("EPA") in February 2000, and the
diesel fuel rule, which was finalized in January 2001, require
substantially reduced sulfur levels. The combined capital cost to
achieve compliance with the gasoline and diesel regulations could
amount to approximately $700 million between 2003 and 2005. This
is a forward-looking statement and can only be a broad-based
estimate due to the ongoing evolution of regulatory requirements.
Some factors (among others) that could potentially affect
gasoline and diesel fuel compliance costs include obtaining the
necessary construction and environmental permits, operating
considerations, and unforeseen hazards such as weather
conditions.
In October 1998, the National Enforcement Investigations
Center and Region V of the EPA conducted a multi-media inspection
of MAP's Detroit refinery. Subsequently, in November 1998, Region
V conducted a multi-media inspection of MAP's Robinson refinery.
These inspections covered compliance with the Clean Air Act (New
Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous
Air Pollutants for Benzene), the Clean Water Act (permit
exceedances for the Waste Water Treatment Plant), reporting
obligations under the Emergency Planning and Community Right to
Know Act and the handling of process waste. MAP has been advised,
in ongoing discussions with the EPA, as to certain compliance
issues regarding MAP's Detroit and Robinson refineries. Thus far,
MAP has been served with two Notices of Violation ("NOV") and
three Findings of Violation in connection with the multi-media
inspection at its Detroit refinery. The Detroit notices allege
violations of the Michigan State Air Pollution Regulations, the
EPA New Source Performance Standards and National Emission
Standards for Hazardous Air Pollutants for Benzene. On March 6,
2000, MAP received its first NOV arising out of the multi-media
inspection of the Robinson refinery conducted in November 1998.
The NOV is for alleged Resource Conservation and Recovery Act
(hazardous waste) violations.
MAP has responded to information requests from the EPA
regarding New Source Review ("NSR") compliance at its Garyville
and Texas City refineries. In addition, the scope of the EPA's
1998 multi-media inspections of the Detroit and Robinson
refineries included NSR compliance. NSR requires new major
stationary sources and major modifications at existing major
stationary sources to obtain permits, perform air quality
analysis and install stringent air pollution control equipment at
affected facilities. The current EPA initiative appears to target
many items that the industry has historically considered routine
repair, replacement and maintenance or other activity exempted
from the NSR requirements. MAP is engaged in ongoing discussions
with the EPA on these issues concerning all of MAP's refineries.
While MAP has not been notified of any formal findings or
violations resulting from either the information requests or
inspections regarding NSR compliance, MAP has been informed
during discussions with the EPA of potential non-compliance
concerns of the EPA based on these inspections and other
information identified by the EPA. Recently, discussions with the
EPA have included commitment to some specific control
technologies and implementation schedules, but not penalties. In
addition, MAP anticipates that some or all of the non-NSR related
issues arising from the multi-media inspections may also be
resolved as part of the current discussions with the EPA. A
negotiated resolution with the EPA could result in increased
environmental capital expenditures in future years, in addition
to as yet, undetermined penalties.
During 1999 an EPA advisory panel on oxygenate use in
gasoline issued recommendations to the EPA, calling for the
improved protection of drinking water from methyl tertiary butyl
ether ("MTBE") impacts, a substantial reduction in the use of
MTBE, and action by Congress to remove the oxygenate requirements
for reformulated gasoline under the Clean Air Act. The panel
reviewed public health and environmental issues that have been
raised by the use of MTBE in gasoline, and specifically by the
discovery of MTBE in water supplies. State and federal
environmental regulatory agencies could implement the majority of
the recommendations, while some would require Congressional
legislative action. California has acted to ban MTBE use by
December 31, 2002 and has requested a waiver from the EPA of
California state oxygenate requirements. In addition, a number of
states have passed laws which limit or require the phase out of
MTBE in gasoline, including states in MAP's marketing area
U-47
Management's Discussion and Analysis continued
such as Michigan and Minnesota. Many other states are considering
bills which require similar limitations or the phase out of MTBE.
MAP has a non-material investment in MTBE units at its
Robinson, Catlettsburg and Detroit refineries. Approximately
seven percent of MAP's refinery gasoline production includes
MTBE. Potential phase-outs or restrictions on the use of MTBE
would not be expected to have a material impact on MAP and its
operations, although it is not possible to reach any conclusions
until further federal or state actions, if any, are taken.
In October 1996, USX was notified by the Indiana Department
of Environmental Management ("IDEM") acting as lead trustee, that
IDEM and the U. S. Department of the Interior had concluded a
preliminary investigation of potential injuries to natural
resources related to releases of hazardous substances from
various municipal and industrial sources along the east branch of
the Grand Calumet River and Indiana Harbor Canal. The public
trustees completed a pre-assessment screen pursuant to federal
regulations and have determined to perform an NRD Assessment. USX
was identified as a PRP along with 15 other companies owning
property along the river and harbor canal. USX and eight other
PRPs have formed a joint defense group. The trustees notified the
public of their plan for assessment and later adopted the plan.
In 2000, the trustees concluded their assessment of sediment
injuries, which includes a technical review of environmental
conditions. The PRP joint defense group is discussing settlement
opportunities with the trustees and the EPA.
In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint
venture between USX and Kobe Steel, Ltd. ("Kobe"), was the
subject of a multi-media audit by the EPA that included an air,
water and hazardous waste compliance review. USS/Kobe and the EPA
entered into a tolling agreement pending issuance of the final
audit and commenced settlement negotiations in July 1999. In
August 1999, the steelmaking and bar producing operations of
USS/Kobe were combined with companies controlled by Blackstone
Capital Partners II to form Republic Technologies International,
LLC ("Republic"). The tubular operations of USS/Kobe were
transferred to a newly formed entity, Lorain Tubular Company, LLC
("Lorain Tubular"), which operated as a joint venture between USX
and Kobe until December 31, 1999 when USX purchased all of Kobe's
interest in Lorain Tubular. Republic and Lorain Tubular are
continuing negotiations with the EPA. Most of the matters raised
by the EPA relate to Republic's facilities; however, air
discharges from Lorain Tubular's #3 seamless pipe mill have also
been cited. Lorain Tubular will be responsible for matters
relating to its facilities. The final report and citations from
the EPA have not been issued.
In 1998, USX entered into a consent decree with the EPA
which resolved alleged violations of the Clean Water Act National
Pollution Discharge Elimination System ("NPDES") permit at Gary
Works and provides for a sediment remediation project for a
section of the Grand Calumet River that runs through Gary Works.
Contemporaneously, USX entered into a consent decree with the
public trustees which resolves potential liability for natural
resource damages on the same section of the Grand Calumet River.
In 1999, USX paid civil penalties of $2.9 million for the alleged
water act violations and $0.5 million in natural resource damages
assessment costs. In addition, USX will pay the public trustees
$1 million at the end of the remediation project for future
monitoring costs and USX is obligated to purchase and restore
several parcels of property that have been or will be conveyed to
the trustees. During the negotiations leading up to the
settlement with EPA, capital improvements were made to upgrade
plant systems to comply with the NPDES requirements. The sediment
remediation project is an approved final interim measure under
the corrective action program for Gary Works and is expected to
cost approximately $36.4 million over the next five years.
Estimated remediation and monitoring costs for this project have
been accrued.
In February 1999, the U.S. Department of Justice and EPA
issued a letter demanding a cash payment of approximately $4
million to resolve a Finding of Violation issued in 1997 alleging
improper sampling of benzene waste streams at Gary Coke. On
September 18, 2000, a Consent Decree was entered which required
USX to pay a civil penalty of $587,000 and to replace PCB
transformers as a Supplemental Environmental Program at a cost of
approximately $2.2 million. Payment of the civil penalty was made
on October 13, 2000.
U-48
Management's Discussion and Analysis continued
New or expanded environmental requirements, which could
increase USX's environmental costs, may arise in the future. USX
intends to comply with all legal requirements regarding the
environment, but since many of them are not fixed or presently
determinable (even under existing legislation) and may be
affected by future legislation, it is not possible to predict
accurately the ultimate cost of compliance, including remediation
costs which may be incurred and penalties which may be imposed.
However, based on presently available information, and existing
laws and regulations as currently implemented, USX does not
anticipate that environmental compliance expenditures (including
operating and maintenance and remediation) will materially
increase in 2001. USX expects environmental capital expenditures
in 2001 to be approximately $120 million, or approximately 5% of
total estimated consolidated capital expenditures. Predictions
beyond 2001 can only be broad-based estimates which have varied,
and will continue to vary, due to the ongoing evolution of
specific regulatory requirements, the possible imposition of more
stringent requirements and the availability of new technologies,
among other matters. Based upon currently identified projects,
USX anticipates that environmental capital expenditures in 2002
will total approximately $143 million; however, actual
expenditures may vary as the number and scope of environmental
projects are revised as a result of improved technology or
changes in regulatory requirements, and could increase if
additional projects are identified or additional requirements are
imposed.
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments involving
a variety of matters. The ultimate resolution of these
contingencies could, individually or in the aggregate, be
material to the consolidated financial statements. However,
management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies
could be resolved unfavorably.
Outlook
For Outlook, see Management's Discussion and Analysis for
the Marathon Group and the U. S. Steel Group, herein.
Accounting Standards
In the fourth quarter of 2000, USX adopted the following
accounting pronouncements primarily related to the classification
of items in the financial statements. The adoption of these new
pronouncements had no net effect on the financial position or
results of operations of USX, although they required
reclassifications of certain amounts in the financial statements,
including all prior periods presented.
. In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No.
101 ("SAB 101") "Revenue Recognition in Financial
Statements," which summarizes the SEC staff's
interpretations of generally accepted accounting
principles related to revenue recognition and
classification.
. In 2000, the Emerging Issues Task Force of the
Financial Accounting Standards Board ("EITF") issued
EITF consensus No. 99-19 "Reporting Revenue Gross as a
Principal versus Net as an Agent," which addresses
whether certain items should be reported as a reduction
of revenue or as a component of both revenues and cost
of revenues, and EITF Consensus No. 00-10 "Accounting
for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for
shipping goods to customers.
. In September 2000, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 140"). SFAS 140 revises the
standards for accounting for securitizations and other
transfers of financial assets and collateral and
requires certain disclosures. USX adopted certain
recognition and reclassification provisions of SFAS
140, which were effective for fiscal years ending after
December 15, 2000. The remaining provisions of SFAS 140
are effective after March 31, 2001.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), which later was amended by SFAS Nos. 137 and
138. This Standard requires
U-49
Management's Discussion and Analysis continued
recognition of all derivatives as either assets or liabilities at
fair value. Changes in fair value will be reflected in either
current period net income or other comprehensive income,
depending on the designation of the derivative instrument. USX
may elect not to designate a derivative instrument as a hedge
even if the strategy would be expected to qualify for hedge
accounting treatment. The adoption of SFAS No. 133 will change
the timing of recognition for derivative gains and losses as
compared to previous accounting standards.
USX will adopt the Standard effective January 1, 2001. The
transition adjustment resulting from adoption of SFAS No. 133
will be reported as a cumulative effect of a change in accounting
principle. The unfavorable cumulative effect on net income, net
of tax, is expected to approximate $9 million. The unfavorable
cumulative effect on other comprehensive income, net of tax, will
approximate $7 million. The amounts reported as other
comprehensive income will be reflected in net income when the
anticipated physical transactions are consummated. It is not
possible to estimate the effect that this Standard will have on
future results of operations.
Management's Discussion and Analysis by Group
The Marathon Group
The Marathon Group includes Marathon Oil Company
("Marathon") and certain other subsidiaries of USX Corporation
("USX"), which are engaged in worldwide exploration and
production of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products primarily
through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent
by Marathon; and other energy related businesses. The
Management's Discussion and Analysis should be read in
conjunction with the Marathon Group's Financial Statements and
Notes to Financial Statements.
The Marathon Group's 2000 financial performance was
primarily affected by the strong recovery in worldwide liquid
hydrocarbon and natural gas prices and stronger refining margins.
During 2000, Marathon focused on the acquisition of assets with a
strong strategic fit, the disposal of non-core properties, and
workforce reductions through a voluntary early retirement
program.
Revenues and Other Income for each of the last three years
are summarized in the following table:
(Dollars in millions) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
Exploration & production ("E&P") $ 4,694 $ 3,105 $ 2,090
Refining, marketing & transportation ("RM&T")/(a)/ 28,849 20,076 19,080
Other energy related businesses/(b)/ 1,684 834 355
------- ------- -------
Revenues and other income of reportable segments 35,227 24,015 21,525
Revenues and other income not allocated to segments:
Joint venture formation charges/(c)/ (931) - -
Gain on ownership change in MAP 12 17 245
Other/(d)/ 124 (36) 24
Elimination of intersegment revenues (573) (289) (171)
------- ------- -------
Total Group revenues and other income $33,859 $23,707 $21,623
======= ======= =======
Items included in both revenues and costs and expenses, resulting in no effect on
income:
Consumer excise taxes on petroleum
products and merchandise $ 4,344 $ 3,973 $ 3,824
------------------------------------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP.
/(b)/ Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
/(c)/ Represents a pretax charge related to the joint venture
formation between Marathon and Kinder Morgan Energy
Partners, L.P.
/(d)/ Represents net gains/(losses) on certain asset sales.
E&P segment revenues increased by $1,589 million in 2000
from 1999 following an increase of $1,015 million in 1999 from
1998. The increase in 2000 was primarily due to higher worldwide
liquid hydrocarbon and natural gas prices, partially offset by
lower domestic liquid hydrocarbon and
U-50
Management's Discussion and Analysis continued
worldwide natural gas production. The increase in 1999 was
primarily due to higher worldwide liquid hydrocarbon prices,
increased domestic liquid hydrocarbon production and higher E&P
crude oil buy/sell volumes.
RM&T segment revenues increased by $8,773 million in 2000
from 1999 following an increase of $996 million in 1999 from
1998. The increase in 2000 primarily reflected higher refined
product prices and increased refined product sales volumes. The
increase in 1999 was mainly due to higher refined product prices,
increased volumes of refined product sales and higher merchandise
sales, partially offset by reduced crude oil sales revenues
following the sale of Scurlock Permian LLC.
Other energy related businesses segment revenues increased
by $850 million in 2000 from 1999 following an increase of $479
million in 1999 from 1998. The increase in 2000 reflected higher
natural gas and crude oil resale activity accompanied by higher
crude oil and natural gas prices. The increase in 1999 was
primarily due to increased crude oil and natural gas purchase and
resale activity.
For additional discussion of revenues, see Note 10 to the
Marathon Group Financial Statements.
Income from operations for each of the last three years is
summarized in the following table:
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------------------------
E&P
Domestic $1,115 $ 494 $ 190
International 420 124 88
------ ------ ------
Income of E&P reportable segment 1,535 618 278
RM&T/(a)/ 1,273 611 896
Other energy related businesses 38 61 33
------ ------ ------
Income for reportable segments 2,846 1,290 1,207
Items not allocated to reportable segments:
Joint venture formation charges/(b)/ (931) - -
Administrative expenses/(c)/ (136) (108) (106)
IMV reserve adjustment/(d)/ - 551 (267)
Gain on ownership change & transition charges - MAP/(e)/ 12 17 223
Impairment of oil and gas properties, assets held for sale,
and gas contract settlement/(f)/ (197) (16) (119)
Gain/(loss) on disposal of assets/(g)/ 124 (36) -
Reorganization charges including pension settlement
(loss)/gain & benefit accruals/(h)/ (70) 15 -
------ ------ ------
Total income from operations $1,648 $1,713 $ 938
-----------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP.
/(b)/ Represents a pretax charge related to the joint venture
formation between Marathon and Kinder Morgan Energy
Partners, L.P.
/(c)/ Includes the portion of the Marathon Group's administrative
costs not charged to the operating segments and the portion
of USX corporate general and administrative costs allocated
to the Marathon Group.
/(d)/ The inventory market valuation ("IMV") reserve reflects the
extent to which the recorded LIFO cost basis of crude oil
and refined products inventories exceeds net realizable
value. For additional discussion of the IMV, see Note 20 to
the Marathon Group Financial Statements.
/(e)/ The gain on ownership change and one-time transition
charges in 1998 relate to the formation of MAP. For
additional discussion of the gain on ownership change in
MAP, see Note 5 to the Marathon Group Financial Statements.
/(f)/ Represents in 2000, an impairment of certain oil and gas
properties, primarily in Canada, and assets held for sale.
Represents in 1999, an impairment of certain domestic
properties. Represents in 1998, a write-off of certain non-
revenue producing international investments and several
exploratory wells which had encountered hydrocarbons but
had been suspended pending further evaluation. It also
includes in 1998 a gain from the resolution of a contract
dispute with a purchaser of Marathon's natural gas
production from certain domestic properties.
/(g)/ The net gain in 2000 represents a gain on the disposition
of Angus/Stellaria, a gain on the Sakhalin exchange, a gain
on the sale of Speedway SuperAmerica LLC ("SSA") non-core
stores, and a loss on the sale of the Howard Glasscock
field. The net loss in 1999 represents a loss on the sale
of Scurlock Permian LLC, certain domestic production
properties, Carnegie Natural Gas Company and affiliated
subsidiaries and a gain on certain Egyptian properties.
/(h)/ Amounts in 2000 and 1999 represent pension settlement
gains/(losses) and various benefit accruals resulting from
retirement plan settlements, the voluntary early retirement
program, and reorganization charges.
U-51
Management's Discussion and Analysis continued
Income for reportable segments increased by $1,556 million
in 2000 from 1999, mainly due to higher worldwide liquid
hydrocarbon and natural gas prices, and higher refined product
margins, partially offset by decreased natural gas volumes.
Income for reportable segments increased by $83 million in 1999
from 1998, mainly due to higher worldwide liquid hydrocarbon
prices, partially offset by lower refined product margins. Income
from operations includes 100 percent of MAP beginning in 1998,
and results from Marathon Canada Limited (formerly known as
Tarragon) commencing August 12, 1998.
Average Volumes and Selling Prices
2000 1999 1998
----------------------------------------------------------------------------------------
(thousands of barrels per day)
Net liquids production/(a)/ - U.S. 131 145 135
- International/(b)/ 65 62 61
------ ------ ------
- Total consolidated 196 207 196
- Equity investees/(c)/ 11 1 -
------ ------ ------
- Worldwide 207 208 196
(millions of cubic feet per day)
Net natural gas production - U.S. 731 755 744
- International - equity 470 489 441
- International - other/(d)/ 11 16 23
------ ------ ------
- Total consolidated 1,212 1,260 1,208
- Equity investee/(e)/ 29 36 33
------ ------ ------
- Worldwide 1,241 1,296 1,241
----------------------------------------------------------------------------------------
(dollars per barrel)
Liquid hydrocarbons/(a)(f)/ - U.S. $25.11 $15.44 $10.42
- International 26.54 16.90 12.24
(dollars per mcf)
Natural gas/(f)/ - U.S. $ 3.30 $ 1.90 $ 1.79
- International - equity 2.76 1.90 1.94
(thousands of barrels per day)
Refined products sold/(g)/ 1,306 1,251 1,198
Matching buy/sell volumes included in above 52 45 39
----------------------------------------------------------------------------------------
/(a)/ Includes crude oil, condensate and natural gas liquids.
/(b)/ Represents equity tanker liftings, truck deliveries and
direct deliveries.
/(c)/ Represents Marathon's equity interest in Sakhalin Energy
Investment Company Ltd. ("Sakhalin Energy") and CLAM
Petroleum B.V. ("CLAM") for 2000 and 1999.
/(d)/ Represents gas acquired for injection and subsequent
resale.
/(e)/ Represents Marathon's equity interest in CLAM.
/(f)/ Prices exclude gains/losses from hedging activities, equity
investees and purchase/resale gas.
/(g)/ Refined products sold and matching buy/sell volumes include
100 percent of MAP.
Domestic E&P income increased by $621 million in 2000 from
1999 following an increase of $304 million in 1999 from 1998. The
increase in 2000 was primarily due to higher liquid hydrocarbon
and natural gas prices, partially offset by lower liquid
hydrocarbon and natural gas volumes due to natural field declines
and asset sales, and derivative losses from other than trading
activities.
The increase in 1999 was primarily due to higher liquid
hydrocarbon and natural gas prices, increased liquid hydrocarbon
volumes resulting from new production in the Gulf of Mexico and
lower exploration expense.
International E&P income increased by $296 million in 2000
from 1999 following an increase of $36 million in 1999 from 1998.
The increase in 2000 was mainly due to higher liquid hydrocarbon
and natural gas prices, higher liquid hydrocarbon liftings,
primarily in Russia and Gabon, and lower dry well expense,
partially offset by lower natural gas volumes.
The increase in 1999 was primarily due to higher liquid
hydrocarbon prices, partially offset by lower liquid hydrocarbon
and natural gas production in Europe and higher exploration
expense.
U-52
Management's Discussion and Analysis continued
RM&T segment income increased by $662 million in 2000 from 1999
following a decrease of $285 million in 1999 from 1998. The
increase in 2000 was primarily due to higher refined product
margins, partially offset by higher operating expenses for SSA,
higher administrative expenses including increased variable pay
plan costs, and higher transportation costs.
The decrease in 1999 was primarily due to lower refined product
margins, partially offset by recognized mark-to-market derivative
gains, increased refined product sales volumes, higher merchandise
sales at SSA and the realization of additional operating
efficiencies as a result of forming MAP.
Other energy related businesses segment income decreased by $23
million in 2000 from 1999 following an increase of $28 million in
1999 from 1998. The decrease in 2000 was primarily a result of
derivative losses from other than trading activities and lower
equity earnings as a result of decreased pipeline throughput. The
increase in 1999 was primarily due to higher equity earnings as a
result of increased pipeline throughput and a reversal of
abandonment accruals of $10 million in 1999.
Items not allocated to reportable segments: IMV reserve
adjustment - When U. S. Steel Corporation acquired Marathon Oil
Company in March 1982, crude oil and refined product prices were at
historically high levels. In applying the purchase method of
accounting, the Marathon Group's crude oil and refined product
inventories were revalued by reference to current prices at the
time of acquisition, and this became the new LIFO cost basis of the
inventories. Generally accepted accounting principles require that
inventories be carried at lower of cost or market. Accordingly, the
Marathon Group has established an IMV reserve to reduce the cost
basis of its inventories to net realizable value. Quarterly
adjustments to the IMV reserve result in noncash charges or credits
to income from operations.
When Marathon acquired the crude oil and refined product
inventories associated with Ashland's RM&T operations on January 1,
1998, the Marathon Group established a new LIFO cost basis for
those inventories. The acquisition cost of these inventories
lowered the overall average cost of the Marathon Group's combined
RM&T inventories. As a result, the price threshold at which an IMV
reserve will be recorded was also lowered.
These adjustments affect the comparability of financial results
from period to period as well as comparisons with other energy
companies, many of which do not have such adjustments. Therefore,
the Marathon Group reports separately the effects of the IMV
reserve adjustments on financial results. In management's opinion,
the effects of such adjustments should be considered separately
when evaluating operating performance.
In 1999, the IMV reserve adjustment resulted in a credit to
income from operations of $551 million compared to a charge of $267
million in 1998, or a change of $818 million. The favorable 1999
IMV reserve adjustment, which is almost entirely recorded by MAP,
was primarily due to the significant increase in refined product
prices experienced during 1999. For additional discussion of the
IMV reserve, see Note 20 to the Marathon Group Financial
Statements.
Joint venture formation charges represent a pretax charge of
$931 million in 2000 related to the joint venture formation between
Marathon and Kinder Morgan Energy Partners, L.P. The formation of
the joint venture included contribution of interests in the Yates
and SACROC assets. Marathon holds an 85 percent economic interest
in the combined entity which commenced operations in January 2001.
Impairment of oil and gas properties, assets held for sale, and
gas contract settlement includes in 2000, the impairments of
certain oil and gas properties primarily in Canada and assets held
for sale totaling $197 million. In 1999, the $16 million charge
relates to the impairment of certain domestic properties. In 1998,
the $119 million charge relates to a write-off of certain non-
revenue producing international investments and several exploratory
wells, partially offset by a gain from the resolution of a contract
dispute with a purchaser of Marathon's natural gas production from
certain domestic properties.
U-53
Management's Discussion and Analysis continued
Gain/(loss) on disposal of assets represents in 2000 a net gain
on the sale of Marathon's interest in the Angus/Stellaria
development in the Gulf of Mexico, a gain on the Sakhalin exchange,
a loss on the sale of the Howard Glasscock Field, and a gain on the
sale of non-core SSA stores. In 1999, the net loss represents
losses on the sale of Scurlock Permian LLC, certain domestic
production properties, Carnegie Natural Gas Company and affiliated
subsidiaries and a gain on certain Egyptian properties.
Reorganization charges including pension settlement (loss)/gain
and benefit accruals represent charges related to a reorganization
program initiated by Marathon for its upstream business during
2000.
Outlook for 2001 - Marathon Group
The outlook regarding the results of operations for the Marathon
Group's upstream segment is largely dependent upon future prices
and volumes of liquid hydrocarbons and natural gas. Prices have
historically been volatile and have frequently been affected by
unpredictable changes in supply and demand resulting from
fluctuations in worldwide economic activity and political
developments in the world's major oil and gas producing and
consuming areas. Any significant decline in prices could have a
material adverse effect on the Marathon Group's results of
operations. A prolonged decline in such prices could also adversely
affect the quantity of crude oil and natural gas reserves that can
be economically produced and the amount of capital available for
exploration and development.
At year-end 2000, Marathon revised its estimate of proved
developed and undeveloped oil and gas reserves downward by 167
million barrels of oil equivalent ("BOE"). These revisions were
principally in Canada, the North Sea and United States and are the
result of production performance and disappointing drilling
results.
BOE is a combined measure of worldwide liquid hydrocarbon and
natural gas production, measured in barrels per day and cubic feet
per day, respectively. For purposes of determining BOE, natural gas
volumes are converted to approximate liquid hydrocarbon barrels by
dividing the natural gas volumes expressed in thousands of cubic
feet ("mcf") by 6. The liquid hydrocarbon volume is added to the
barrel equivalent of gas volume to obtain BOE. Marathon intends to
disclose total production estimates on a BOE basis from this point
forward.
In 2001, worldwide production is expected to average 430,000 BOE
per day, split evenly between liquid hydrocarbons and natural gas,
including production from Marathon's share of equity investees and
future acquisitions.
On December 28, 2000, Marathon signed a definitive agreement to
form a joint venture with Kinder Morgan Energy Partners, L.P.,
which commenced operations in January 2001. The formation of the
joint venture included contribution of interests in the Yates and
SACROC assets. This transaction will allow Marathon to expand its
interests in the Permian Basin and will improve access to materials
for use in enhanced recovery techniques in the Yates Field.
Marathon holds an 85 percent economic interest in the combined
entity, which will be accounted for under the equity method of
accounting.
On December 22, 2000, Marathon announced its plans to acquire
Pennaco. This acquisition will enhance Marathon's presence in a
core area, the North American gas market, and will provide a
significant new reserve base that can be developed. The tender
offer expired on February 5, 2001 at 12:00 midnight, Eastern time.
Marathon acquired approximately 17.6 million shares of Pennaco
common stock which were validly tendered and not withdrawn in the
offer, representing approximately 87 percent of the outstanding
Pennaco shares.
Marathon plans to acquire the remaining Pennaco shares through a
merger in which each share of Pennaco common stock not purchased in
the offer and not held by stockholders who have properly exercised
dissenters rights under Delaware law will be converted into the
right to receive the tender offer price in cash, without interest.
U-54
Management's Discussion and Analysis continued
Marathon plans to drill six deepwater Gulf of Mexico exploratory
wells in 2001. To support this increased drilling activity,
Marathon has contracted two new deepwater rigs, capable of drilling
in water depths beyond 6,500 feet.
Other major upstream projects, which are currently underway or
under evaluation and are expected to improve future income streams,
include the Mississippi Canyon Block 348 in the Gulf of Mexico and
various North American natural gas fields. Also, Marathon expects
continued development in the Foinaven area in the U.K. Atlantic
Margin. Marathon acquired an interest in this location through the
exchange of its Sakhalin interests with Shell Oil in the fourth
quarter of 2000.
Marathon E&P is currently on target for achieving $150 million
in annual repeatable pre-tax operating efficiencies by year-end
2001. Marathon initiated a reorganization program for its upstream
business units which will contribute to an overall workforce
reduction of 24% compared to 1999 levels. In addition, regional
production offices in Lafayette, Louisiana and Tyler, Texas have
been closed along with the Petroleum Technology Center in
Littleton, Colorado.
The above discussion includes forward-looking statements with
respect to 2001 worldwide liquid hydrocarbon production and natural
gas volumes, the acquisition of Pennaco, commencement of upstream
projects, and the Gulf of Mexico drilling program. Some factors
that could potentially affect worldwide liquid hydrocarbon
production/gas volumes, upstream projects, and the drilling program
include: pricing, worldwide supply and demand for petroleum
products, amount of capital available for exploration and
development, regulatory constraints, reserve estimates, reserve
replacement rates, production decline rates of mature fields,
timing of commencing production from new wells, timing and results
of future development drilling, drilling rig availability, the
completion of the merger with Pennaco, future acquisitions of
producing properties, and other geological, operating and economic
considerations. In addition, development of new production
properties in countries outside the United States may require
protracted negotiations with host governments and is frequently
subject to political considerations, such as tax regulations, which
could adversely affect the timing and economics of projects. A
factor that could affect the Pennaco acquisition is successful
completion of the merger. These factors (among others) could cause
actual results to differ materially from those set forth in the
forward-looking statements.
Downstream income of the Marathon Group is largely dependent
upon refined product margins, which reflect the difference between
the selling prices of refined products and the cost of raw
materials refined and manufacturing costs. Refined product margins
have been historically volatile and vary with the level of economic
activity in the various marketing areas, the regulatory climate,
crude oil costs, manufacturing costs, logistical limitations and
the available supply of crude oil and refined products.
In 2000, MAP, CMS Energy Corporation, and TEPPCO Partners, L.P.
formed a limited liability company with equal ownership to operate
an interstate refined petroleum products pipeline extending from
the U.S. Gulf of Mexico to the Midwest. The new company plans to
build a 74-mile, 24-inch diameter pipeline connecting TEPPCO's
facility in Beaumont, Texas, with an existing 720-mile, 26-inch
diameter pipeline extending from Longville, Louisiana to Bourbon,
Illinois. In addition, a two million barrel terminal storage
facility will be constructed. The system will be called Centennial
Pipeline and will connect with existing MAP transportation assets
and other common carrier lines. Construction is expected to be
completed in the fourth quarter of 2001.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to
build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL
is a common carrier pipeline company and the pipeline will be an
interstate common carrier pipeline. The pipeline is expected to
initially move about 50,000 bpd of refined petroleum into the
central Ohio region. The pipeline is currently expected to be
operational in mid-2002. The startup of this pipeline is largely
dependent on obtaining the final regulatory approvals, obtaining
the necessary rights-of-way, of which approximately 95 percent have
been obtained to date, and completion of construction. ORPL is
still negotiating with a few landowners to obtain the remaining
rights-of-way. Where necessary, ORPL has filed condemnation actions
to acquire some rights-of-way. These actions are at various stages
of litigation and appeal with several recent decisions supporting
ORPL's use of eminent domain.
U-55
Management's Discussion and Analysis continued
MAP is constructing a delayed coker unit at its Garyville,
Louisiana refinery. This unit will allow for the use of heavier,
lower cost crude and reduce the production of heavy fuel oil. To
supply this new unit, MAP reached an agreement with P.M.I. Comercio
Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos
Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy
Mayan crude oil. This is a multi-year contract, which will begin
upon completion of the delayed coker unit which is scheduled in the
fall of 2001. In addition, a project to increase light product
output is underway at MAP's Robinson, Illinois refinery and is
expected to be completed in the second quarter of 2001.
MAP initiated a program for 2000 to dispose of approximately 270
non-core SSA retail outlets in the Midwest and Southeast. At the
end of this program through December 31, 2000, 159 stores, which
comprise about 7 percent of MAP's owned and operated SSA retail
network, had been sold. MAP will continue to sell additional SSA
stores as part of its ongoing store development process.
The above discussion includes forward-looking statements with
respect to pipeline and refinery improvement projects. Some factors
that could potentially cause actual results to differ materially
from present expectations include the price of petroleum products,
levels of cash flow from operations, obtaining the necessary
construction and environmental permits, unforeseen hazards such as
weather conditions, obtaining the necessary rights-of-way, outcome
of pending litigation, and regulatory approval constraints. These
factors (among others) could cause actual results to differ
materially from those set forth in the forward-looking statements.
The U. S. Steel Group
The U. S. Steel Group is engaged in the production and sale of
steel mill products, coke, and taconite pellets; the management of
mineral resources; coal mining; real estate development; and
engineering and consulting services. Certain business activities
are conducted through joint ventures and partially owned companies,
such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company
("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B
Partnership, and Republic Technologies International, LLC
("Republic"). On November 24, 2000, USX acquired U. S. Steel Kosice
s.r.o. ("USSK"), which held the steel and related assets of VSZ
a.s. ("VSZ"), headquartered in the Slovak Republic. Management's
Discussion and Analysis should be read in conjunction with the U.
S. Steel Group's Financial Statements and Notes to Financial
Statements.
Revenues and Other Income for each of the last three years are
summarized in the following table:
(Dollars in millions) 2000 1999 1998
--------------------------------------------------------------------
Revenues by product:
Sheet and semi-finished steel products $ 3,288 $ 3,433 $ 3,598
Tubular, plate, and tin mill products 1,731 1,140 1,546
Raw materials (coal, coke and iron ore) 626 549 744
Other/(a)/ 445 414 490
Income (loss) from investees (8) (89) 46
Net gains on disposal of assets 46 21 54
Other income (loss) 4 2 (1)
------- ------- -------
Total revenues and other income $ 6,132 $ 5,470 $ 6,477
--------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-
products, real estate development, resource management, and
engineering and consulting services.
Total revenues and other income increased by $662 million in
2000 from 1999 primarily due to the consolidation of Lorain Tubular
Company, LLC, ("Lorain Tubular") effective January 1, 2000, higher
average realized prices, particularly tubular product prices, and
lower losses from investees, which, in 1999, included a $47 million
charge for the impairment of U. S. Steel's investment in USS/Kobe
Steel Company. Total revenues and other income in 1999 decreased by
$1,007 million from 1998 primarily due to lower average realized
prices and lower income from investees.
U-56
Management's Discussion and Analysis continued
Income from operations for the U. S. Steel Group for the last
three years was:
(Dollars in millions) 2000 1999 1998
---------------------------------------------------------------------------------
Segment income for Domestic Steel/(a)/ $ 23 $ 91 $ 517
Segment income for U. S. Steel Kosice/(b)/ 2 - -
----- ----- -----
Income for reportable segments $ 25 $ 91 $ 517
Items not allocated to segments:
Net pension credits 266 228 186
Administrative expenses (25) (17) (24)
Costs related to former business activities/(c)/ (91) (83) (100)
Asset impairments - Coal (71) - -
Impairment of USX's investment in USS/Kobe and costs
related to formation of Republic - (47) -
Loss on investment in RTI stock used to satisfy indexed
debt obligations/(d)/ - (22) -
----- ----- -----
Total income from operations $ 104 $ 150 $ 579
---------------------------------------------------------------------------------
/(a)/ Includes income from the sale and domestic production of
steel mill products, coke and taconite pellets; the
management of mineral resources; coal mining; real estate
development and management; and engineering and consulting
services.
/(b)/ Includes the sale and production of steel products from
facilities primarily located in the Slovak Republic
commencing November 24, 2000. For further details, see Note 5
to the U. S. Steel Group Financial Statements.
/(c)/ Includes the portion of postretirement benefit costs and
certain other expenses principally attributable to former
business units of the U. S. Steel Group.
/(d)/ For further details, see Note 6 to the U. S. Steel Group
Financial Statements.
Segment income for Domestic Steel
Domestic Steel operations recorded segment income of $23 million
in 2000 versus segment income of $91 million in 1999, a decrease of
$68 million. The 2000 segment income included $36 million for
certain environmental and legal accruals, a $34 million charge to
establish reserves against notes and receivables from financially
distressed steel companies and a $10 million charge for USX's share
of Republic special charges. Results in 1999 included $17 million
in charges for certain environmental and legal accruals and $7
million in various non-recurring equity investee charges. Excluding
these items, the decrease in segment income for Domestic Steel was
primarily due to higher costs related to energy and inefficient
operating levels due to lower throughput, lower income from raw
materials operations, particularly coal operations and lower sheet
shipments resulting from high levels of imports that continued in
2000.
Segment income for Domestic Steel operations in 1999 decreased
$426 million from 1998. Results in 1998 included a net favorable
$30 million for an insurance litigation settlement and charges of
$10 million related to a voluntary workforce reduction plan.
Excluding these items, the decrease in segment income for Domestic
Steel was primarily due to lower average steel prices, lower income
from raw materials operations, a less favorable product mix and
lower income from investees.
Segment income for U. S. Steel Kosice
USSK segment income for the period following the November 24,
2000 acquisition was $2 million.
Items not allocated to segments: Net pension credits, which are
primarily noncash, totaled $266 million in 2000, $228 million in
1999 and $186 million in 1998. Net pension credits in 1999 included
$35 million for a one-time favorable pension settlement primarily
related to the voluntary early retirement program for salaried
employees. For additional information on pensions, see Note 12 to
the U. S. Steel Group Financial Statements.
Asset impairments - Coal, were for asset impairments at U. S.
Steel Mining's coal mines in Alabama and West Virginia in 2000
following a reassessment of long-term prospects after adverse
geological conditions were encountered.
In 1999, an impairment of USX's investment in USS/Kobe and costs
related to the formation of Republic totaled $47 million.
U-57
Management's Discussion and Analysis continued
Income from operations in 1999 also included a loss on
investment in RTI stock used to satisfy indexed debt obligations of
$22 million from the termination of ownership in RTI International
Metals, Inc. For further discussion, see Note 6 to the U. S. Steel
Group Financial Statements.
Outlook for 2001 - U. S. Steel Group
Domestic Steel's order book and prices remain soft due to
continued high import volumes (which in 2000 were second only to
record-year 1998 levels), a draw-down of inventories by spot
purchasers and increasing evidence that the growth in the domestic
economy is slowing. In addition to these factors, our plate
products business is being impacted by recently added domestic
capacity. Although domestic shipments for the first quarter of 2001
are projected to be somewhat better than fourth quarter 2000
levels, we expect that sheet and plate pricing, which declined
markedly in the fourth quarter, will continue to be depressed as a
result of the factors cited above. The tubular business, however,
remains strong. For the year 2001, domestic shipments are expected
to be approximately 11 million net tons, excluding any shipments
from the potential acquisition of LTV Corporation tin operations.
For the year 2001, USSK shipments are expected to be approximately
3.3 million to 3.6 million net tons.
High natural gas prices adversely affected our results in 2000
and are expected to persist for some time. The blast furnace idled
at Gary Works in July 2000 for a planned 10-day outage remained
down until late February 2001 due to business conditions. The U. S.
Steel Group has continued its cost reduction efforts, and has
recently requested from its current suppliers an immediate,
temporary eight percent price reduction from existing levels to
help weather this difficult period.
Several domestic competitors recently have filed for Chapter 11
bankruptcy protection. This provides them with certain competitive
advantages and further demonstrates the very difficult economic
circumstances faced by the domestic industry.
U. S. Steel Group's income from operations includes net pension
credits, which are primarily noncash, associated with all of U. S.
Steel's pension plans. Net pension credits were $266 million in
2000. At the end of 2000, U. S. Steel's main pension plans'
transition asset was fully amortized, decreasing the pension credit
by $69 million annually in future years for this component. In
addition, for the year 2001, low marketplace returns on trust
assets in the year 2000 and pending business combinations in the
current year are expected to further reduce net pension credits to
approximately $160 million. The above includes forward-looking
statements concerning net pension credits which can vary depending
upon the market performance of plan assets, changes in actuarial
assumptions regarding such factors as the selection of a discount
rate and rate of return on plan assets, changes in the amortization
levels of transition amounts or prior period service costs, plan
amendments affecting benefit payout levels, business combinations
and profile changes in the beneficiary populations being valued.
Changes in any of these factors could cause net pension credits to
change. To the extent net pension credits decline in the future,
income from operations would be adversely affected.
The U. S. Steel Group includes a 16 percent equity method
investment in Republic (through an ownership interest in Republic
Technologies International Holdings, LLC ("Republic Holdings"),
which is the sole owner of Republic). In the third quarter of 2000,
Republic announced that it had completed a financial restructuring
to improve its liquidity position. Republic raised approximately
$30 million in loans from certain of its direct and indirect equity
partners in exchange for notes of Republic and warrants to purchase
Class D common stock of Republic Technologies International, Inc.,
Republic's majority owner. The U. S. Steel Group's portion was
approximately $6 million and the U. S. Steel Group also agreed to
certain deferred payment terms into the year 2002, up to a maximum
of $30 million, with regard to Republic's obligations relating to
iron ore pellets supplied to Republic. In its Form 10-Q for the
period ended September 30, 2000, which was filed with the SEC on
October 31, 2000, Republic Holdings stated that "Notwithstanding
these efforts, [Republic Holdings] may need to obtain additional
financing to meet its cash flow requirements, including financing
from the sale of additional debt or equity securities." Republic
Holdings also stated "As a result of the factors mentioned above,
[Republic Holdings] is highly leveraged and could be considered a
risky investment."
U-58
Management's Discussion and Analysis continued
At December 31, 2000, the U. S. Steel Group's financial exposure
to Republic totaled approximately $131 million, consisting of
amounts owed by Republic to the U. S. Steel Group and debt
obligations assumed by Republic.
In early October 2000, the U. S. Steel Group announced an
agreement with LTV Corporation ("LTV") to purchase LTV's tin mill
products business, including its Indiana Harbor, Indiana tin
operations. This acquisition recently closed and was effective
March 1, 2001. Terms of this noncash transaction call for the U. S.
Steel Group to assume certain employee-related obligations of LTV.
The U. S. Steel Group intends to operate these facilities as an
ongoing business and tin mill employees at Indiana Harbor became
U. S. Steel Group employees. The U. S. Steel Group and LTV also
entered into 5-year agreements for LTV to supply the U. S. Steel
Group with pickled hot bands and for the U. S. Steel Group to
provide LTV with processing of cold rolled steel.
In October 2000, Transtar announced it had entered into a
Reorganization and Exchange Agreement with its two voting
shareholders. Upon closing, Transtar and certain of its
subsidiaries, namely, the Birmingham Southern Railroad Company; the
Elgin, Joliet and Eastern Railway Company; the Lake Terminal
Railroad Company; the McKeesport Connecting Railroad Company; the
Mobile River Terminal Company, Inc.; the Union Railroad Company;
the Warrior & Gulf Navigation Company; and Tracks Traffic and
Management Services, Inc. will become subsidiaries within the U. S.
Steel Group. The other shareholder, Transtar Holdings, L.P., an
affiliate of Blackstone Capital Partners L.P., will become the
owner of the other subsidiaries.
The preceding statements concerning anticipated steel demand,
steel pricing, and shipment levels are forward-looking and are
based upon assumptions as to future product prices and mix, and
levels of steel production capability, production and shipments.
These forward-looking statements can be affected by imports,
domestic and international economies, domestic production capacity,
the completion of the LTV and Transtar transactions, and customer
demand. In the event these assumptions prove to be inaccurate,
actual results may differ significantly from those presently
anticipated.
U-59
Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
USX uses commodity-based and foreign currency derivative
instruments to manage its price risk. Management has authorized the
use of futures, forwards, swaps and options to manage exposure to
price fluctuations related to the purchase, production or sale of
crude oil, natural gas, refined products, and nonferrous metals.
For transactions that qualify for hedge accounting, the resulting
gains or losses are deferred and subsequently recognized in income
from operations, in the same period as the underlying physical
transaction. Derivative instruments used for trading and other
activities are marked-to-market and the resulting gains or losses
are recognized in the current period in income from operations.
While USX's risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also
encompass strategies that assume price risk.
Management believes that use of derivative instruments along
with risk assessment procedures and internal controls does not
expose USX to material risk. The use of derivative instruments
could materially affect USX's results of operations in particular
quarterly or annual periods. However, management believes that use
of these instruments will not have a material adverse effect on
financial position or liquidity. For a summary of accounting
policies related to derivative instruments, see Note 1 to the USX
Consolidated Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, USX is exposed to market
risk or price fluctuations related to the purchase, production or
sale of crude oil, natural gas, refined products and steel
products. To a lesser extent, USX is exposed to the risk of price
fluctuations on coal, coke, natural gas liquids, petroleum
feedstocks and certain nonferrous metals used as raw materials.
USX's market risk strategy has generally been to obtain
competitive prices for its products and services and allow
operating results to reflect market price movements dictated by
supply and demand. However, USX uses fixed-price contracts and
derivative commodity instruments to manage a relatively small
portion of its commodity price risk. USX uses fixed-price contracts
for portions of its natural gas production to manage exposure to
fluctuations in natural gas prices. Certain derivative commodity
instruments have the effect of restoring the equity portion of
fixed-price sales of natural gas to variable market-based pricing.
These instruments are used as part of USX's overall risk management
programs.
U-60
Quantitative and Qualitative Disclosures
About Market Risk continued
Sensitivity analyses of the incremental effects on pretax
income of hypothetical 10% and 25% changes in commodity prices for
open derivative commodity instruments as of December 31, 2000 and
December 31, 1999, are provided for the Marathon Group in the
following table. While the U. S. Steel Group uses derivative
commodity instruments, its usage is immaterial to the results of
operations.
(Dollars in millions)
-----------------------------------------------------------------------------------
Incremental Decrease in
Pretax Income Assuming a
Hypothetical Price
Change of/(a)/
2000 1999
Derivative Commodity Instruments 10% 25% 10% 25%
-----------------------------------------------------------------------------------
Marathon Group/(b)(c)/:
Crude oil/(d)/
Trading $ - $ - /(e)/ $ 1.3 $ 7.7 /(e)/
Other than trading 9.1 27.2 /(e)/ 16.5 54.0 /(e)/
Natural gas/(d)/
Trading - - /(e)/ - - /(f)/
Other than trading 20.2 50.6 /(e)/ 4.7 16.8 /(f)/
Refined products/(d)/
Trading - - /(e)/ - - /(e)/
Other than trading 6.1 16.5 /(e)/ 8.4 23.8 /(e)/
-----------------------------------------------------------------------------------
/(a)/ Gains and losses on derivative commodity instruments are
generally offset by price changes in the underlying
commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated
incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open
contract position at December 31, 2000 and December 31,
1999. Marathon Group management evaluates their portfolio of
derivative commodity instruments on an ongoing basis and
adds or revises strategies to reflect anticipated market
conditions and changes in risk profiles. Changes to the
portfolio subsequent to December 31, 2000, would cause
future pretax income effects to differ from those presented
in the table.
/(b)/ The number of net open contracts varied throughout 2000,
from a low of 12,252 contracts at July 5, to a high of
34,554 contracts at October 25, and averaged 21,875 for the
year. The derivative commodity instruments used and hedging
positions taken also varied throughout 2000, and will
continue to vary in the future. Because of these variations
in the composition of the portfolio over time, the number of
open contracts, by itself, cannot be used to predict future
income effects.
/(c)/ The calculation of sensitivity amounts for basis swaps
assumes that the physical and paper indices are perfectly
correlated. Gains and losses on options are based on changes
in intrinsic value only.
/(d)/ The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which
would result in the largest incremental decrease in pretax
income when applied to the derivative commodity instruments
used to hedge that commodity.
/(e)/ Price increase.
/(f)/ Price decrease.
U-61
Quantitative and Qualitative Disclosures
About Market Risk continued
In total, Marathon's exploration and production operations
recorded net pretax other than trading activity losses of
approximately $34 million in 2000, gains of $3 million in 1999 and
losses of $3 million in 1998.
Marathon's refining, marketing and transportation operations
generally use derivative commodity instruments to lock-in costs of
certain crude oil and other feedstocks, to protect carrying values
of inventories and to protect margins on fixed-price sales of
refined products. Marathon's refining, marketing and transportation
operations recorded net pretax other than trading activity losses,
net of the 38% minority interest in MAP, of approximately $116
million in 2000, and net pretax other than trading activity gains,
net of the 38% minority interest in MAP, of $8 million in 1999 and
$28 million in 1998. Marathon's refining, marketing and
transportation operations used derivative instruments for trading
activities and recorded net pretax trading activity losses, net of
the 38% minority interest in MAP, of $11 million in 2000 and net
pretax trading activity gains, net of the 38% minority interest in
MAP, of $5 million in 1999.
The U. S. Steel Group uses OTC commodity swaps to manage
exposure to market risk related to the purchase of natural gas,
heating oil and certain nonferrous metals. The U. S. Steel Group
recorded net pretax other than trading activity gains of $2 million
in 2000, losses of $4 million in 1999 and losses of $6 million in
1998. These gains and losses were offset by changes in the realized
prices of the underlying hedged commodities.
For additional quantitative information relating to derivative
commodity instruments, including aggregate contract values and fair
values, where appropriate, see Note 24 to the USX Consolidated
Financial Statements.
USX is subject to basis risk, caused by factors that affect the
relationship between commodity futures prices reflected in
derivative commodity instruments and the cash market price of the
underlying commodity. Natural gas transaction prices are frequently
based on industry reference prices that may vary from prices
experienced in local markets. For example, New York Mercantile
Exchange ("NYMEX") contracts for natural gas are priced at
Louisiana's Henry Hub, while the underlying quantities of natural
gas may be produced and sold in the Western United States at prices
that do not move in strict correlation with NYMEX prices. To the
extent that commodity price changes in one region are not reflected
in other regions, derivative commodity instruments may no longer
provide the expected hedge, resulting in increased exposure to
basis risk. These regional price differences could yield favorable
or unfavorable results. OTC transactions are being used to manage
exposure to a portion of basis risk.
USX is subject to liquidity risk, caused by timing delays in
liquidating contract positions due to a potential inability to
identify a counterparty willing to accept an offsetting position.
Due to the large number of active participants, liquidity risk
exposure is relatively low for exchange-traded transactions.
U-62
Quantitative and Qualitative Disclosures
About Market Risk continued
Interest Rate Risk
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 2000 and 1999 interest rates on the fair value
of USX's non-derivative financial instruments, is provided in the
following table:
(Dollars in millions)
-------------------------------------------------------------------------------------------------
As of December 31, 2000 1999
Incremental Incremental
Increase in Increase in
Fair Fair Fair Fair
Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(c)/ Value/(b)/ Value/(c)/
-------------------------------------------------------------------------------------------------
Financial assets:
Investments and long-term receivables/(d)/ $ 211 $ - $ 190 $ -
Financial liabilities:
Long-term debt/(e)(f)/ $ 4,549 $ 166 $ 4,278 $ 164
Preferred stock of subsidiary/(g)/ 238 20 239 21
USX obligated mandatorily
redeemable convertible preferred
securitiesof a subsidiary trust/(g)/ 119 10 169 15
--------- --------- --------- ---------
Total liabilities $ 4,906 $ 196 $ 4,686 $ 200
-------------------------------------------------------------------------------------------------
/(a)/ Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the
instruments. Accordingly, these instruments are excluded
from the table.
/(b)/ See Note 25 to the USX Consolidated Financial Statements for
carrying value of instruments.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in
interest rates at December 31, 2000 and December 31, 1999,
on the fair value of USX's non-derivative financial
instruments. For financial liabilities, this assumes a 10%
decrease in the weighted average yield to maturity of USX's
long-term debt at December 31, 2000 and December 31, 1999.
/(d)/ For additional information, see Note 12 to the USX
Consolidated Financial Statements.
/(e)/ Includes amounts due within one year.
/(f)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms
and maturities. For additional information, see Note 14 to
the USX Consolidated Financial Statements.
/(g)/ See Note 22 to the USX Consolidated Financial Statements.
At December 31, 2000, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$166 million increase in the fair value of long-term debt assuming
a hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect
USX's results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
Foreign Currency Exchange Rate Risk
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities denominated
in currencies other than U.S. dollars, such as the Euro, the Slovak
koruna and the Canadian dollar. USX has not generally used
derivative instruments to manage this risk. However, USX has made
limited use of forward currency contracts to manage exposure to
certain currency price fluctuations. At December 31, 2000, USX had
open Canadian dollar forward purchase contracts with a total
carrying value of approximately $14 million compared to $52 million
at December 31, 1999. A 10% increase in the December 31, 2000,
Canadian dollar to U.S. dollar forward rate, would result in a
charge to income of approximately $1 million. Last year, a 10%
increase in the December 31, 1999, Canadian dollar to U.S. dollar
forward rate, would have resulted in a charge to income of $5
million.
U-63
Quantitative and Qualitative Disclosures
About Market Risk continued
Equity Price Risk
USX is subject to equity price risk and liquidity risk related
to its investment in VSZ, which is attributed to the U. S. Steel
Group. These risks are not readily quantifiable.
Safe Harbor
USX's quantitative and qualitative disclosures about market risk
include forward-looking statements with respect to management's
opinion about risks associated with USX's use of derivative
instruments. These statements are based on certain assumptions with
respect to market prices and industry supply of and demand for
crude oil, natural gas, refined products, steel products and
certain raw materials. To the extent that these assumptions prove
to be inaccurate, future outcomes with respect to USX's hedging
programs may differ materially from those discussed in the forward-
looking statements.
U-64
Marathon Group
Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis, and
Quantitative and Qualitative Disclosures About Market Risk
Page
----
Management's Report...................................................... M-1
Audited Financial Statements:
Report of Independent Accountants....................................... M-1
Statement of Operations................................................. M-2
Balance Sheet........................................................... M-3
Statement of Cash Flows................................................. M-4
Notes to Financial Statements........................................... M-5
Selected Quarterly Financial Data........................................ M-21
Principal Unconsolidated Affiliates...................................... M-21
Supplementary Information................................................ M-21
Five-Year Operating Summary.............................................. M-22
Five-Year Financial Summary.............................................. M-24
Management's Discussion and Analysis..................................... M-25
Quantitative and Qualitative Disclosures About Market Risk............... M-37
Management's Report
The accompanying financial statements of the Marathon Group are the
responsibility of and have been prepared by USX Corporation (USX) in conformity
with accounting principles generally accepted in the United States. They
necessarily include some amounts that are based on best judgments and estimates.
The Marathon Group financial information displayed in other sections of this
report is consistent with these financial statements.
USX seeks to assure the objectivity and integrity of its financial records
by careful selection of its managers, by organizational arrangements that
provide an appropriate division of responsibility and by communications programs
aimed at assuring that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded and that
financial records are reliable. Appropriate management monitors the system for
compliance, and the internal auditors independently measure its effectiveness
and recommend possible improvements thereto. In addition, as part of their audit
of the financial statements, USX's independent accountants, who are elected by
the stockholders, review and test the internal accounting controls selectively
to establish a basis of reliance thereon in determining the nature, extent and
timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee. This
Committee, composed solely of nonmanagement directors, regularly meets (jointly
and separately) with the independent accountants, management and internal
auditors to monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and group
financial statements.
Thomas J. Usher Robert M. Hernandez Larry G. Schultz
Chairman, Board of Directors & Vice Chairman & Vice President-
Chief Executive Officer Chief Financial Officer Accounting
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing on pages M-2
through M-20 present fairly, in all material respects, the financial position of
the Marathon Group at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of USX'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.
The Marathon Group is a business unit of USX Corporation (as described in
Note 1, page M-5); accordingly, the financial statements of the Marathon Group
should be read in connection with the consolidated financial statements of USX
Corporation.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 7, 2001
M-1
Statement of Operations
(Dollars in millions) 2000 1999 1998
- --------------------------------------------------------------------------------------
Revenues and other income:
Revenues (Note 6) $34,487 $23,590 $21,274
Dividend and investee income 102 69 50
Net gains (losses) on disposal of assets (Note 26) (785) - 28
Gain on ownership change in
Marathon Ashland Petroleum LLC (Note 5) 12 17 245
Other income 43 31 26
------- ------- -------
Total revenues and other income 33,859 23,707 21,623
------- ------- -------
Costs and expenses:
Cost of revenues (excludes items shown below) 25,477 16,653 14,630
Selling, general and administrative expenses 625 486 505
Depreciation, depletion and amortization 1,245 950 941
Taxes other than income taxes 4,626 4,218 4,029
Exploration expenses 238 238 313
Inventory market valuation charges (credits) (Note 20) - (551) 267
------- ------- -------
Total costs and expenses 32,211 21,994 20,685
------- ------- -------
Income from operations 1,648 1,713 938
Net interest and other financial costs (Note 6) 236 288 237
Minority interest in income of
Marathon Ashland Petroleum LLC (Note 5) 498 447 249
------- ------- -------
Income before income taxes 914 978 452
Provision for income taxes (Note 18) 482 324 142
------- ------- -------
Net income $ 432 $ 654 $ 310
- --------------------------------------------------------------------------------------
Income Per Common Share
2000 1999 1998
- --------------------------------------------------------------------------------------
Basic $ 1.39 $ 2.11 $ 1.06
Diluted 1.39 2.11 1.05
- --------------------------------------------------------------------------------------
See Note 7, for a description and computation of income per common share.
The accompanying notes are an integral part of these financial statements.
M-2
Balance Sheet
(Dollars in millions) December 31 2000 1999
- ----------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 340 $ 111
Receivables, less allowance for doubtful accounts
of $3 and $2 2,267 1,887
Inventories (Note 20) 1,867 1,884
Assets held for sale (Note 26) 330 84
Deferred income tax benefits (Note 18) 60 23
Other current assets 121 92
-------- --------
Total current assets 4,985 4,081
Investments and long-term receivables (Note 19) 362 762
Property, plant and equipment - net (Note 16) 9,375 10,293
Prepaid pensions (Note 14) 207 225
Other noncurrent assets 303 313
-------- --------
Total assets $ 15,232 $ 15,674
- -----------------------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Notes payable $ 80 $ -
Accounts payable 3,021 2,654
Income taxes payable (Note 23) 364 97
Payroll and benefits payable 230 146
Accrued taxes 108 107
Accrued interest 61 92
Long-term debt due within one year (Note 12) 148 48
-------- --------
Total current liabilities 4,012 3,144
Long-term debt (Note 12) 1,937 3,320
Deferred income taxes (Note 18) 1,354 1,495
Employee benefits (Note 14) 648 564
Deferred credits and other liabilities (Note 23) 412 414
Preferred stock of subsidiary (Note 9) 184 184
Minority interest in Marathon Ashland Petroleum LLC (Note 5) 1,840 1,753
Common Stockholders' Equity (Note 17) 4,845 4,800
-------- --------
Total liabilities and common stockholders' equity $ 15,232 $ 15,674
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
M-3
Statement of Cash Flows
(Dollars in millions) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income $ 432 $ 654 $ 310
Adjustments to reconcile to net cash provided
from operating activities:
Minority interest in income of
Marathon Ashland Petroleum LLC 498 447 249
Depreciation, depletion and amortization 1,245 950 941
Exploratory dry well costs 86 109 186
Inventory market valuation charges (credits) - (551) 267
Pensions and other postretirement benefits 69 36 34
Deferred income taxes (240) 105 26
Gain on ownership change in
Marathon Ashland Petroleum LLC (12) (17) (245)
Net (gains) losses on disposal of assets 785 - (28)
Changes in: Current receivables (377) (844) 240
Inventories 17 (63) (13)
Current accounts payable and accrued expenses 717 1,106 (233)
All other - net (62) 84 (92)
------- ------- -------
Net cash provided from operating activities 3,158 2,016 1,642
------- ------- -------
Investing activities:
Capital expenditures (1,425) (1,378) (1,270)
Acquisition of Tarragon Oil and Gas Limited - - (686)
Disposal of assets 539 356 65
Restricted cash - withdrawals 271 45 11
- deposits (268) (44) (32)
Investees - investments (65) (59) (42)
- loans and advances (6) (70) (103)
- returns and repayments 10 1 71
All other - net 21 (25) (18)
------- ------- -------
Net cash used in investing activities (923) (1,174) (2,004)
------- ------- -------
Financing activities (Note 9):
Increase (decrease) in Marathon
Group's portion of
USX consolidated debt (1,200) (296) 329
Specifically attributed debt:
Borrowings 273 141 366
Repayments (279) (144) (389)
Marathon Stock - issued - 89 613
- repurchased (105) - -
Treasury common stock reissued 1 - -
Dividends paid (274) (257) (246)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (420) (400) (211)
------- ------- -------
Net cash provided from (used in) financing activities (2,004) (867) 462
------- ------- -------
Effect of exchange rate changes on cash (2) (1) 1
------- ------- -------
Net increase (decrease) in cash and cash equivalents 229 (26) 101
Cash and cash equivalents at beginning of year 111 137 36
------- ------- -------
Cash and cash equivalents at end of year $ 340 $ 111 $ 137
- ---------------------------------------------------------------------------------------------------------------------
See Note 13 for supplemental cash flow information.
The accompanying notes are an integral part of these financial statements.
M-4
Notes to Financial Statements
1. Basis of Presentation
USX Corporation (USX) has two classes of common stock: USX -
Marathon Group Common Stock (Marathon Stock) and USX - U. S.
Steel Group Common Stock (Steel Stock), which are intended to
reflect the performance of the Marathon Group and the U. S. Steel
Group, respectively.
The financial statements of the Marathon Group include the
financial position, results of operations and cash flows for the
businesses of Marathon Oil Company (Marathon) and certain other
subsidiaries of USX, and a portion of the corporate assets and
liabilities and related transactions which are not separately
identified with ongoing operating units of USX. The Marathon
Group financial statements are prepared using the amounts
included in the USX consolidated financial statements. For a
description of the Marathon Group's operating segments, see Note
10.
Although the financial statements of the Marathon Group and
the U. S. Steel Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of
USX attributed to each such Group, such attribution of assets,
liabilities (including contingent liabilities) and stockholders'
equity between the Marathon Group and the U. S. Steel Group for
the purpose of preparing their respective financial statements
does not affect legal title to such assets or responsibility for
such liabilities. Holders of Marathon Stock and Steel Stock are
holders of common stock of USX and continue to be subject to all
the risks associated with an investment in USX and all of its
businesses and liabilities. Financial impacts arising from one
Group that affect the overall cost of USX's capital could affect
the results of operations and financial condition of the other
Group. In addition, net losses of either Group, as well as
dividends and distributions on any class of USX Common Stock or
series of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in excess of
par or stated value, will reduce the funds of USX legally
available for payment of dividends on both classes of Common
Stock. Accordingly, the USX consolidated financial information
should be read in connection with the Marathon Group financial
information.
- --------------------------------------------------------------------------------
2. Summary of Principal Accounting Policies
Principles applied in consolidation - These financial
statements include the accounts of the businesses comprising the
Marathon Group. The Marathon Group and the U. S. Steel Group
financial statements, taken together, comprise all of the
accounts included in the USX consolidated financial statements.
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 the Marathon Group has
significant influence are accounted for using the equity method
of accounting and are carried at the Marathon Group's share of
net assets plus loans and advances.
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 the Marathon Group's
proportionate share of income from equity method investments and
dividend income from other investments. Dividend income is
recognized when dividend payments are received.
Gains or losses from a change in ownership of a consolidated
subsidiary or an unconsolidated investee are recognized in the
period of change.
Use of estimates - Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant
items subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for
receivables, inventories and deferred income tax assets;
environmental liabilities; liabilities for potential tax
deficiencies and potential litigation claims and settlements; and
assets and obligations related to employee benefits.
Additionally, certain estimated liabilities are recorded when
management commits to a plan to close an operating facility or to
exit a business activity. Actual results could differ from the
estimates and assumptions used.
M-5
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. The
Marathon Group 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 - The Marathon Group uses commodity-based
and foreign currency derivative instruments to manage its
exposure to price risk. Management is authorized to use futures,
forwards, swaps and options related to the purchase, production
or sale of crude oil, natural gas, refined products and
electricity. While the Marathon Group's risk management
activities generally reduce market risk exposure due to
unfavorable commodity price changes for raw material purchases
and products sold, such activities can also encompass strategies
which assume price risk.
Commodity-Based Hedging Transactions - For transactions that
qualify for hedge accounting, the resulting gains or losses
are deferred and subsequently recognized in income from
operations, as a component of revenues or cost of revenues,
in the same period as the underlying physical transaction.
To qualify for hedge accounting, derivative positions cannot
remain open if the underlying physical market risk has been
removed. If such derivative positions remain in place, they
would be marked-to-market and accounted for as trading or
other activities. Recorded deferred gains or losses are
reflected within other current and noncurrent assets or
accounts payable and deferred credits and other liabilities,
as appropriate.
Commodity-Based Trading and Other Activities - Derivative
instruments used for trading and other activities are
marked-to-market and the resulting gains or losses are
recognized in the current period within income from
operations. This category also includes the use of
derivative instruments that have no offsetting underlying
physical market risk.
Foreign Currency Transactions - The Marathon Group uses
forward exchange contracts to manage currency risks. Gains
or losses related to firm commitments are deferred and
recognized concurrent with the underlying transaction. All
other gains or losses are recognized in income in the
current period as revenues, cost of revenues, interest
income or expense, or other income, as appropriate. Forward
exchange contracts are recorded as receivables or payables,
as appropriate.
Exploration and development - The Marathon Group follows the
successful efforts method of accounting for oil and gas
exploration and development.
Long-lived assets - Depreciation and depletion of oil and gas
producing properties are computed using predetermined rates based
upon estimated proved oil and gas reserves applied on a units-of-
production method. Other items of property, plant and equipment
are depreciated principally by the straight-line method.
The Marathon Group evaluates impairment of its oil and gas
producing assets primarily on a field-by-field basis using
undiscounted cash flows based on total proved reserves. Other
assets are evaluated on an individual asset basis or by logical
groupings of assets. Assets deemed to be impaired are written
down to their fair value, including any related goodwill, using
discounted future cash flows and, if available, comparable market
values.
When long-lived assets depreciated on an individual basis
are sold or otherwise disposed of, any gains or losses are
reflected in income. Gains on disposal of long-lived assets are
recognized when earned, which is generally at the time of
closing. If a loss on disposal is expected, such losses are
recognized when long-lived assets are reclassified as assets held
for sale. Proceeds from disposal of long-lived assets depreciated
on a group basis are credited to accumulated depreciation,
depletion and amortization with no immediate effect on income.
M-6
Major maintenance activities - The Marathon Group 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 - The Marathon Group 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.
Insurance - The Marathon Group is insured for catastrophic
casualty and certain property and business interruption
exposures, as well as those risks required to be insured by law
or contract. Costs resulting from noninsured losses are charged
against income upon occurrence.
Reclassifications - Certain reclassifications of prior years'
data have been made to conform to 2000 classifications.
- --------------------------------------------------------------------------------
3. New Accounting Standards
In the fourth quarter of 2000, USX adopted the following
accounting pronouncements primarily related to the classification
of items in the statement of operations. The adoption of these
new pronouncements had no net effect on the financial position or
results of operations of the Marathon Group, although they
required reclassifications of certain amounts in the statement of
operations, including all prior periods presented.
. In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin No.
101 (SAB 101) "Revenue Recognition in Financial
Statements," which summarizes the SEC staff's
interpretations of generally accepted accounting
principles related to revenue recognition and
classification.
. In 2000, the Emerging Issues Task Force of the
Financial Accounting Standards Board (EITF) issued EITF
Consensus No. 99-19 "Reporting Revenue Gross as a
Principal versus Net as an Agent," which addresses
whether certain items should be reported as a reduction
of revenue or as a component of both revenues and cost
of revenues, and EITF Consensus No. 00-10 "Accounting
for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for
shipping goods to customers.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133), which later was amended by SFAS Nos. 137 and 138.
This Standard requires recognition of all derivatives as either
assets or liabilities at fair value. Changes in fair value will
be reflected in either current period net income or other
comprehensive income, depending on the designation of the
derivative instrument. The Marathon Group may elect not to
designate a derivative instrument as a hedge even if the strategy
would be expected to qualify for hedge accounting treatment. The
adoption of SFAS No. 133 will change the timing of recognition
for derivative gains and losses as compared to previous
accounting standards.
The Marathon Group will adopt the Standard effective January
1, 2001. The transition adjustment resulting from the adoption of
SFAS No. 133 will be reported as a cumulative effect of a change
in accounting principle. The unfavorable cumulative effect on net
income, net of tax, is expected to approximate $9 million. The
unfavorable cumulative effect on other comprehensive income, net
of tax, will approximate $7 million. The amounts reported as
other comprehensive income will be reflected in net income when
the anticipated physical transactions are consummated. It is not
possible to estimate the effect that this Standard will have on
future results of operations.
M-7
- --------------------------------------------------------------------------------
4. Corporate Activities
Financial activities - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the Marathon Group and the U. S. Steel Group based
upon the cash flows of each group for the periods presented and
the initial capital structure of each group. Most financing
transactions are attributed to and reflected in the financial
statements of all groups. See Note 9, for the Marathon Group's
portion of USX's financial activities attributed to all groups.
However, transactions such as leases, certain collaterized
financings, certain indexed debt instruments, financial
activities of consolidated entities which are less than wholly
owned by USX and transactions related to securities convertible
solely into any one class of common stock are or will be
specifically attributed to and reflected in their entirety in the
financial statements of the group to which they relate.
Corporate general and administrative costs - Corporate general
and administrative costs are allocated to the Marathon Group and
the U. S. Steel Group based upon utilization or other methods
management believes to be reasonable and which consider certain
measures of business activities, such as employment, investments
and revenues. The costs allocated to the Marathon Group were $36
million in 2000, $26 million in 1999 and $28 million in 1998, and
primarily consist of employment costs including pension effects,
professional services, facilities and other related costs
associated with corporate activities.
Income taxes - All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal
income taxes and the related payments or refunds of tax are
determined on a consolidated basis. The consolidated provision
and the related tax payments or refunds have been reflected in
the Marathon Group and the U. S. Steel Group financial statements
in accordance with USX's tax allocation policy. In general, such
policy provides that the consolidated tax provision and related
tax payments or refunds are allocated between the Marathon Group
and the U. S. Steel Group for group financial statement purposes,
based principally upon the financial income, taxable income,
credits, preferences and other amounts directly related to the
respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the
groups on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the
extent that one of the groups is allocated a consolidated tax
attribute which, as a result of expiration or otherwise, is not
ultimately utilized on the consolidated tax return, the prior
years' allocation of such attribute is adjusted such that the
effect of the expiration is borne by the group that generated the
attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback year,
the prior years' allocation of such consolidated tax effects is
adjusted in a subsequent year to the extent necessary to allocate
the tax benefits to the group that would have realized the tax
benefits on a separate return basis. As a result, the allocated
group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the groups had
filed separate tax returns.
- --------------------------------------------------------------------------------
5. Business Combinations
In August 1998, Marathon acquired Tarragon Oil and Gas Limited
(Tarragon), a Canadian oil and gas exploration and production
company. Securityholders of Tarragon received, at their election,
Cdn$14.25 for each Tarragon share, or the economic equivalent in
Exchangeable Shares of an indirect Canadian subsidiary of
Marathon, which are exchangeable solely on a one-for-one basis
into Marathon Stock. The purchase price included cash payments of
$686 million, issuance of 878,074 Exchangeable Shares valued at
$29 million and the assumption of $345 million in debt.
The Exchangeable Shares are exchangeable at the option of
the holder at any time and automatically redeemable on August 11,
2003 (and, in certain circumstances, as early as August 11,
2001). The holders of Exchangeable Shares are entitled to receive
declared dividends equivalent to dividends declared from time to
time by USX on Marathon Stock.
USX accounted for the acquisition using the purchase method
of accounting. The 1998 results of operations include the
operations of Marathon Canada Limited, formerly known as
Tarragon, commencing August 12, 1998.
M-8
During 1997, Marathon and Ashland Inc. (Ashland) agreed to
combine the major elements of their refining, marketing and
transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland Petroleum
LLC (MAP), a new consolidated subsidiary. Also on January 1,
1998, Marathon acquired certain RM&T net assets from Ashland in
exchange for a 38% interest in MAP. The acquisition was accounted
for under the purchase method of accounting. The purchase price
was determined to be $1.9 billion, based upon an external
valuation. The change in Marathon's ownership interest in MAP
resulted in a gain of $245 million in 1998. In accordance with
MAP closing agreements, Marathon and Ashland have made capital
contributions to MAP for environmental improvements. The closing
agreements stipulate that ownership interests in MAP will not be
adjusted as a result of such contributions. Accordingly, Marathon
recognized a gain on ownership change of $12 million in 2000 and
$17 million in 1999.
In connection with the formation of MAP, Marathon and
Ashland entered into a Limited Liability Company Agreement dated
January 1, 1998 (the LLC Agreement). The LLC Agreement provides
for an initial term of MAP expiring on December 31, 2022 (25
years from its formation). The term will automatically be
extended for ten-year periods, unless a termination notice is
given by either party.
Also in connection with the formation of MAP, the parties
entered into a Put/Call, Registration Rights and Standstill
Agreement (the Put/Call Agreement). The Put/Call Agreement
provides that at any time after December 31, 2004, Ashland will
have the right to sell to Marathon all of Ashland's ownership
interest in MAP, for an amount in cash and/or Marathon or USX
debt or equity securities equal to the product of 85% (90% if
equity securities are used) of the fair market value of MAP at
that time, multiplied by Ashland's percentage interest in MAP.
Payment could be made at closing, or at Marathon's option, in
three equal annual installments, the first of which would be
payable at closing. At any time after December 31, 2004, Marathon
will have the right to purchase all of Ashland's ownership
interests in MAP, for an amount in cash equal to the product of
115% of the fair market value of MAP at that time, multiplied by
Ashland's percentage interest in MAP.
- --------------------------------------------------------------------------------
6. Other Items
(In millions) 2000 1999 1998
----------------------------------------------------------------------------
Net interest and other financial costs
Interest and other financial income/(a)/:
Interest income $ 26 $ 15 $ 30
Other (2) (13) 4
----- ----- -----
Total 24 2 34
----- ----- -----
Interest and other financial costs/(a)/:
Interest incurred 240 281 285
Less interest capitalized 16 20 40
----- ----- -----
Net interest 224 261 245
Interest on tax issues 6 5 5
Financial costs on preferred stock of subsidiary 17 17 17
Amortization of discounts 2 2 4
Other 11 5 -
----- ----- -----
Total 260 290 271
----- ----- -----
Net interest and other financial costs/(a)/ $ 236 $ 288 $ 237
----------------------------------------------------------------------------
/(a)/ See Note 4, for discussion of USX net interest and other financial
costs attributable to the Marathon Group.
----------------------------------------------------------------------------
Foreign currency transactions
For 2000, 1999 and 1998, the aggregate foreign currency
transaction gains (losses) included in determining net income
were $30 million, $(12) million and $13 million, respectively.
Consumer excise taxes
Included in revenues and costs and expenses for 2000, 1999 and
1998 were $4,344 million, $3,973 million and $3,824 million,
respectively, representing consumer excise taxes on petroleum
products and merchandise.
- --------------------------------------------------------------------------------
7. Income Per Common Share
The method of calculating net income per share for the Marathon
Stock and the Steel Stock reflects the USX Board of Directors'
intent that the separately reported earnings and surplus of the
Marathon Group and the U. S. Steel Group, as determined
consistent with the USX Restated Certificate of Incorporation,
are available for payment of dividends to the respective classes
of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily
correspond with these amounts.
M-9
Basic net income per share is based on the weighted average
number of common shares outstanding. Diluted net income per share
assumes exercise of stock options, provided the effect is not
antidilutive.
2000 1999 1998
------------------ ------------------ ------------------
Computation of Income Per Share Basic Diluted Basic Diluted Basic Diluted
------------------------------- -------- -------- -------- -------- -------- --------
Net income (millions) $ 432 $ 432 $ 654 $ 654 $ 310 $ 310
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 311,531 311,531 309,696 309,696 292,876 292,876
Effect of dilutive securities -
Stock options - 230 - 314 - 559
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 311,531 311,761 309,696 310,010 292,876 293,435
======== ======== ======== ======== ======== ========
Net income per share $ 1.39 $ 1.39 $ 2.11 $ 2.11 $ 1.06 $ 1.05
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
8. Transactions Between MAP and Ashland
At December 31, 2000 and 1999, MAP had current receivables from
Ashland of $35 million and $26 million, respectively, and current
payables to Ashland of $2 million.
MAP has a $190 million revolving credit agreement with
Ashland. Interest on borrowings is based on defined short-term
market rates. At December 31, 2000 and 1999, there were no
borrowings against this facility.
During 2000, 1999 and 1998, MAP's sales to Ashland,
consisting primarily of petroleum products, were $285 million,
$198 million and $190 million, respectively, and MAP's purchases
of products and services from Ashland were $26 million, $22
million and $47 million, respectively. These transactions were
conducted under terms comparable to those with unrelated parties.
- --------------------------------------------------------------------------------
9. Financial Activities Attributed to Groups
The following is the portion of USX financial activities
attributed to the Marathon Group. These amounts exclude amounts
specifically attributed to the Marathon Group.
Marathon Group Consolidated USX/(a)/
------------------ ----------------------
(In millions) December 31 2000 1999 2000 1999
------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 193 $ 8 $ 364 $ 9
Other noncurrent assets 4 7 7 8
------ ------ ------ ------
Total assets $ 197 $ 15 $ 371 $ 17
------------------------------------------------------------------------------------------------
Notes payable $ 80 $ - $ 150 $ -
Accrued interest 50 82 95 95
Long-term debt due within one year (Note 12) 147 47 277 54
Long-term debt (Note 12) 1,930 3,305 3,734 3,771
Preferred stock of subsidiary 184 184 250 250
------ ------ ------ ------
Total liabilities $2,391 $3,618 $4,506 $4,170
------------------------------------------------------------------------------------------------
Marathon Group/(b)/ Consolidated USX
-------------------- --------------------
(In millions) 2000 1999 1998 2000 1999 1998
------------------------------------------------------------------------------------------------
Net interest and other financial costs (Note 6) $250 $295 $295 $309 $334 $324
------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 14 and 22, respectively, to the USX
consolidated financial statements.
/(b)/ The Marathon Group's net interest and other financial
costs reflect weighted average effects of all financial
activities attributed to all groups.
- --------------------------------------------------------------------------------
10. Segment Information
The Marathon Group'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) 2000 1999 1998
-----------------------------------------------------------------
Refined products $22,514 $15,181 $12,852
Merchandise 2,441 2,194 1,941
Liquid hydrocarbons 6,856 4,587 5,023
Natural gas 2,518 1,429 1,187
Transportation and other products 158 199 271
-----------------------------------------------------------------
M-10
Segment income represents income from operations allocable to operating
segments. USX 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 Group operating segments in excess of amounts billed to
MAP under service contracts and amounts charged out to operating segments under
Marathon's shared services procedures also are not allocated to operating
segments. Additionally, the following items are not allocated to operating
segments: inventory market valuation adjustments, gain on ownership change in
MAP and certain other items not allocated to operating segments for business
performance reporting purposes (see (a) in reconcilement table on page M-12).
Information on assets by segment is not provided as it is not reviewed by
the chief operating decision maker.
Refining, Other
Exploration Marketing Energy
and and Related
(In millions) Production Transportation Businesses Total
- -----------------------------------------------------------------------------------------------------------------------
2000
Revenues and other income:
Customer $ 4,184 $ 28,693 $ 1,550 $34,427
Intersegment/(a)/ 412 83 78 573
Intergroup/(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 $ 4,694 $ 28,849 $ 1,684 $35,227
=========== ============ ========== =======
Segment income $ 1,535 $ 1,273 $ 38 $ 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 $ 2,856 $ 19,962 $ 731 $23,549
Intersegment/(a)/ 202 47 40 289
Intergroup/(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 $ 3,105 $ 20,076 $ 834 $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
- -----------------------------------------------------------------------------------------------------------------------
1998
Revenues and other income:
Customer $ 1,905 $ 19,018 $ 306 $21,229
Intersegment/(a)/ 144 10 17 171
Intergroup/(a)/ 13 - 7 20
Equity in earnings of unconsolidated investees 2 12 14 28
Other 26 40 11 77
----------- ------------ ---------- -------
Total revenues and other income $ 2,090 $ 19,080 $ 355 $21,525
=========== ============ ========== =======
Segment income $ 278 $ 896 $ 33 $ 1,207
Significant noncash items included in segment income -
Depreciation, depletion and amortization/(b)/ 581 272 6 859
Capital expenditures/(c)/ 839 410 8 1,257
- -----------------------------------------------------------------------------------------------------------------------
/(a)/ Intersegment and intergroup revenues and transfers were conducted under
terms comparable to those with unrelated parties.
/(b)/ Differences between segment totals and group totals represent amounts
included in administrative expenses and international and domestic oil and
gas property impairments.
/(c)/ Differences between segment totals and group totals represent amounts
related to corporate administrative activities.
M-11
The following schedules reconcile segment amounts to amounts reported in
the Marathon Group financial statements:
(In millions) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Revenues and Other Income:
Revenues and other income of reportable segments $35,227 $24,015 $21,525
Items not allocated to segments:
Joint venture formation charges (931) - -
Gain on ownership change in MAP 12 17 245
Other 124 (36) 24
Elimination of intersegment revenues (573) (289) (171)
------- ------- -------
Total Group revenues and other income $33,859 $23,707 $21,623
======= ======= =======
Income:
Income for reportable segments $ 2,846 $ 1,290 $ 1,207
Items not allocated to segments:
Joint venture formation charges (931) - -
Gain on ownership change in MAP 12 17 245
Administrative expenses (136) (108) (106)
Inventory market valuation adjustments - 551 (267)
Other/(a)/ (143) (37) (141)
------- ------- -------
Total Group income from operations $ 1,648 $ 1,713 $ 938
- ---------------------------------------------------------------------------------------------------
/(a)/ Represents in 2000, certain oil and gas property impairments, net gains on
certain asset sales and reorganization charges. Represents in 1999,
primarily certain domestic oil and gas property impairments, net losses on
certain asset sales and costs of a voluntary early retirement program.
Represents in 1998, certain international oil and gas property
impairments, certain suspended exploration well write-offs, a gas contract
settlement and MAP transition charges.
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 2000 $32,239 $ - $32,239 $ 6,711
1999 22,716 - 22,716 7,555
1998 20,837 - 20,837 7,659
Canada 2000 856 899 1,755 940
1999 426 521 947 1,112
1998 209 368 577 1,094
United Kingdom 2000 567 - 567 1,698
1999 459 - 459 1,581
1998 462 - 462 1,739
Other Foreign Countries 2000 197 188 385 310
1999 106 88 194 735
1998 115 52 167 468
Eliminations 2000 - (1,087) (1,087) -
1999 - (609) (609) -
1998 - (420) (420) -
Total 2000 $33,859 $ - $33,859 $ 9,659
1999 23,707 - 23,707 10,983
1998 21,623 - 21,623 10,960
- ---------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments.
- --------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------
2001 $ 1 $ 94
2002 1 83
2003 1 58
2004 1 50
2005 1 112
Later years 5 109
Sublease rentals - (18)
------- --------
Total minimum lease payments 10 $ 488
------- ========
Less imputed interest costs 3
-------
Present value of net minimum lease payments
included in long-term debt $ 7
------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 2000 1999 1998
------------------------------------------------------------------------------------
Minimum rental $ 156 $ 149 $ 157
Contingent rental 13 11 10
Sublease rentals (13) (13) (7)
----- ----- ------
Net rental expense $ 156 $ 147 $ 160
------------------------------------------------------------------------------------
M-12
The Marathon Group leases a wide variety of facilities and
equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other
circumstances, operating lease obligations totaling $104 million
may be declared immediately due and payable.
- --------------------------------------------------------------------------------
12. Long-Term Debt
The Marathon Group's portion of USX's consolidated long-term debt
is as follows:
Marathon Group Consolidated USX/(a)/
-------------------- ---------------------
(In millions) December 31 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
Specifically attributed debt/(b)/:
Receivables facility $ - $ - $ 350 $ 350
Sale-leaseback financing and capital leases 7 15 95 107
Other 1 1 4 1
------ ------ ------ ------
Total 8 16 449 458
Less amount due within one year 1 1 10 7
------ ------ ------ ------
Total specifically attributed long-term debt $ 7 $ 15 $ 439 $ 451
------------------------------------------------------------------------------------------------------
Debt attributed to groups/(c)/ $2,090 $3,375 $4,036 $3,852
Less unamortized discount 13 23 25 27
Less amount due within one year 147 47 277 54
------ ------ ------ ------
Total long-term debt attributed to groups $1,930 $3,305 $3,734 $3,771
------------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 148 $ 48 $ 287 $ 61
Total long-term debt due after one year 1,937 3,320 4,173 4,222
------------------------------------------------------------------------------------------------------
/(a)/ See Note 14, to the USX consolidated financial statements
for details of interest rates, maturities and other terms
of long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the Marathon Group and the
U. S. Steel Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based
on their respective cash flows (Notes 4, 9 and 13).
- --------------------------------------------------------------------------------
13. Supplemental Cash Flow Information
(In millions) 2000 1999 1998
-------------------------------------------------------------------------------------------------------------
Cash used in operating activities included:
Interest and other financial costs paid (net of amount capitalized) $ (270) $ (289) $ (260)
Income taxes paid, including settlements with the
U. S. Steel Group (468) (101) (154)
-------------------------------------------------------------------------------------------------------------
USX debt attributed to all groups - net:
Commercial paper - issued $ 3,362 $ 6,282 $ -
- repayments (3,450) (6,117) -
Credit agreements - borrowings 437 5,529 17,486
- repayments (437) (5,980) (16,817)
Other credit arrangements - net 150 (95) 55
Other debt - borrowings - 319 671
- repayments (54) (87) (1,053)
-------- -------- --------
Total $ 8 $ (149) $ 342
-------------------------------------------------------------------------------------------------------------
Marathon Group activity $ (1,200) $ (296) $ 329
U. S. Steel Group activity 1,208 147 13
-------- -------- --------
Total $ 8 $ (149) $ 342
-------------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Marathon Stock issued for dividend reinvestment and
employee stock plans $ 10 $ 4 $ 3
Marathon Stock issued for Exchangeable Shares - 7 11
Investee preferred stock received in conversion of investee loan - 142 -
Disposal of assets:
Exchange of Sakhalin Energy Investment Company Ltd. 410 - -
Notes received 6 19 -
Business combinations:
Acquisition of Tarragon:
Exchangeable Shares issued - - 29
Liabilities assumed - - 433
Acquisition of Ashland RM&T net assets:
38% interest in MAP - - 1,900
Liabilities assumed - - 1,038
Other acquisitions - liabilities assumed - 16 -
-------------------------------------------------------------------------------------------------------------
M-13
- --------------------------------------------------------------------------------
14. Pensions and Other Postretirement Benefits
The Marathon Group 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.
The Marathon Group 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 Benefits Other Benefits
--------------------- ----------------------
(In millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at January 1 $ 868 $ 1,080 $ 478 $ 597
Service cost 52 65 14 17
Interest cost 67 67 37 36
Plan amendments 6 18 1 (44)
Actuarial (gains) losses 121 (197) 46 (108)
Plan merger and acquisition - 14 - 4
Settlements, curtailments and termination benefits (99) (122) 22 -
Benefits paid (77) (57) (23) (24)
------- -------- -------- --------
Benefit obligations at December 31 $ 938 $ 868 $ 575 $ 478
--------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1 $ 1,310 $ 1,331
Actual return on plan assets (8) 136
Plan merger and acquisition - 12
Employer contributions 1 2
Trustee distributions/(a)/ (18) (16)
Settlements paid (134) (99)
Benefits paid from plan assets (72) (56)
------- --------
Fair value of plan assets at December 31 $ 1,079 $ 1,310
--------------------------------------------------------------------------------------------------------
Funded status of plans at December 31 $ 141/(b)/ $ 442 /(b)/ $ (575) $ (478)
Unrecognized net gain from transition (18) (26) - -
Unrecognized prior service costs (credits) 59 63 (59) (72)
Unrecognized actuarial (gains) losses (37) (306) 115 68
Additional minimum liability (19) (8) - -
------- -------- -------- --------
Prepaid (accrued) benefit cost $ 126 $ 165 $ (519) $ (482)
--------------------------------------------------------------------------------------------------------
/(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:
Aggregate accumulated benefit obligations $ (34) $ (24)
Aggregate projected benefit obligations (43) (37)
Aggregate plan assets - -
--------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
----------------------------- -------------------------
(In millions) 2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost (credit)
Service cost $ 52 $ 65 $ 48 $ 14 $ 17 $ 12
Interest cost 67 67 57 37 36 31
Expected return on plan assets (117) (114) (107) - - -
Amortization - net transition gain (4) (5) (5) - - -
- prior service costs (credits) 4 4 3 (10) (8) (3)
- actuarial (gains) losses (9) 1 - 3 7 3
Multiemployer and other plans 5 5 5 - - -
Settlement and termination (gain) loss 32/(a)/ (7)/(a)/ - 21/(a)/ - -
----- ----- ----- ----- ----- -----
Net periodic benefit cost $ 30 $ 16 $ 1 $ 65 $ 52 $ 43
--------------------------------------------------------------------------------------------------------
/(a)/ Includes voluntary early retirement programs.
Pension Benefits Other Benefits
--------------------- ----------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
Weighted average actuarial assumptions
at December 31:
Discount rate 7.5% 8.0% 7.5% 8.0%
Expected annual return on plan assets 9.5% 9.5% n/a n/a
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
--------------------------------------------------------------------------------------------------------
M-14
For measurement purposes, an 8% annual rate of increase in
the per capita cost of covered health care benefits was assumed
for 2001. The rate was assumed to decrease gradually to 5% for
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 71 (58)
--------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. Dividends
In accordance with the USX Restated Certificate of Incorporation,
dividends on the Marathon Stock and Steel Stock are limited to
the legally available funds of USX. Net losses of either Group,
as well as dividends and distributions on any class of USX Common
Stock or series of preferred stock and repurchases of any class
of USX Common Stock or series of preferred stock at prices in
excess of par or stated value, will reduce the funds of USX
legally available for payment of dividends on both classes of
Common Stock. Subject to this limitation, the Board of Directors
intends to declare and pay dividends on the Marathon Stock based
on the financial condition and results of operations of the
Marathon Group, although it has no obligation under Delaware law
to do so. In making its dividend decisions with respect to
Marathon Stock, the Board of Directors considers among other
things, the long-term earnings and cash flow capabilities of the
Marathon Group as well as the dividend policies of similar
publicly traded energy companies.
- --------------------------------------------------------------------------------
16. Property, Plant and Equipment
(In millions) December 31 2000 1999
--------------------------------------------------------------------------------------------------------
Production $ 12,266 $ 14,568
Refining 2,800 2,439
Marketing 2,286 2,197
Transportation 1,402 1,374
Other 312 282
--------- ---------
Total 19,066 20,860
Less accumulated depreciation, depletion and amortization 9,691 10,567
--------- ---------
Net $ 9,375 $ 10,293
--------------------------------------------------------------------------------------------------------
Property, plant and equipment at December 31, 2000 and 1999,
includes gross assets acquired under capital leases of $8 million
and $20 million, respectively, with no related amounts in
accumulated depreciation, depletion and amortization.
During 2000, the Marathon Group recorded $193 million of
impairments of certain E&P segment oil and gas properties,
primarily located in Canada. The impairments were recorded due to
reserve revisions as a result of production performance and
disappointing drilling results. The charge is included in
depreciation, depletion and amortization.
- --------------------------------------------------------------------------------
17. Common Stockholders' Equity
(In millions, except per share data) 2000 1999 1998
--------------------------------------------------------------------------------------------------------
Balance at beginning of year $4,800 $4,312 $3,618
Net income 432 654 310
Marathon Stock - issued 9 96 617
- repurchased (105) - -
Treasury stock reissued 1 - -
Exchangeable Shares - issued - - 29
- exchanged for Marathon Stock - (7) (12)
Dividends on Marathon Stock
(per share $.88 in 2000 and $.84 in 1999 and 1998) (274) (261) (248)
Deferred compensation (5) - 2
Accumulated other comprehensive income (loss)/(a)/:
Foreign currency translation adjustments 1 (1) 2
Minimum pension liability adjustments (Note 14) (14) 7 (3)
Unrealized holding losses on investments - - (3)
------ ------ ------
Balance at end of year $4,845 $4,800 $4,312
- -----------------------------------------------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements
relative to the annual activity of these adjustments and
losses. Total comprehensive income for the Marathon Group
for the years 2000, 1999 and 1998 was $419 million, $660
million and $306 million, respectively.
M-15
- --------------------------------------------------------------------------------
18. Income Taxes
Income tax provisions and related assets and liabilities
attributed to the Marathon Group are determined in accordance
with the USX group tax allocation policy (Note 4).
Provisions (credits) for income taxes were:
2000 1999 1998
------------------------------ ---------------------------- ----------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
- -----------------------------------------------------------------------------------------------------------------------
Federal $ 614 $ (144) $ 470 $ 191 $ 158 $ 349 $ 83 $ 19 $ 102
State and local 53 (46) 7 3 (7) (4) 30 9 39
Foreign 55 (50) 5 25 (46) (21) 3 (2) 1
------ ------ ------ ------- ------ ------ ------ ------ ------
Total $ 722 $ (240) $ 482 $ 219 $ 105 $ 324 $ 116 $ 26 $ 142
- -----------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to
total provisions follows:
(In millions) 2000 1999 1998
--------------------------------------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ 320 $ 342 $ 158
Effects of foreign operations:
Impairment of deferred tax benefits 235 - -
Adjustments to foreign valuation allowances (30) - -
All other, including foreign tax credits (30) (18) (26)
State and local income taxes after federal income tax effects 5 (3) 25
Credits other than foreign tax credits (7) (7) (9)
Effects of partially owned companies (5) (5) (4)
Dispositions of subsidiary investments - 7 -
Adjustment of prior years' federal income taxes (11) 4 (5)
Other 5 4 3
------- ------- -------
Total provisions $ 482 $ 324 $ 142
--------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the
following:
(In millions) December 31 2000 1999
--------------------------------------------------------------------------------------------------------
Deferred tax assets:
State tax loss carryforwards (expiring in 2001 through 2020) $ 70 $ 57
Foreign tax loss carryforwards (portion of which expire in 2001 through 2015) 269 408
Employee benefits 246 206
Receivables, payables and debt 41 14
Expected federal benefit for:
Crediting certain foreign deferred income taxes 315 530
Deducting state deferred income taxes 20 36
Contingency and other accruals 155 150
Investments in foreign subsidiaries 39 52
Investments in subsidiaries and equity investees 30 20
Other 60 34
Valuation allowances:
Federal - (30)
State (16) (11)
Foreign (252) (282)
-------- --------
Total deferred tax assets/(a)/ 977 1,184
-------- --------
Deferred tax liabilities:
Property, plant and equipment 1,642 2,091
Inventory 320 324
Prepaid pensions 119 127
Other 160 111
-------- --------
Total deferred tax liabilities 2,241 2,653
-------- --------
Net deferred tax liabilities $ 1,264 1,469
--------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of the Marathon Group's deferred tax
assets. In addition, the ability to realize the benefit of
foreign tax credits is based upon certain assumptions
concerning future operating conditions (particularly as
related to prevailing oil prices), income generated from
foreign sources and USX's tax profile in the years that
such credits may be claimed. During 2000, the amount of net
deferred tax assets expected to be realized was reduced as
a result of the change in the amount and timing of future
foreign source income due to the exchange of Marathon's
interest in Sakhalin Energy Investment Company Ltd. for
other oil and gas producing interests. Additionally, gross
deferred tax assets and the associated valuation allowance
were reduced by a change in management's intent regarding
the permanent reinvestment of the earnings from certain
foreign subsidiaries.
The consolidated tax returns of USX for the years 1990
through 1997 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision
for income taxes and interest which may become payable for years
not yet settled.
M-16
Pretax income (loss) included $237 million, $66 million and
$(75) million attributable to foreign sources in 2000, 1999 and
1998, respectively.
Undistributed earnings of certain consolidated foreign
subsidiaries at December 31, 2000, amounted to $205 million. No
provision for deferred U.S. income taxes has been made for these
subsidiaries because the Marathon Group intends to permanently
reinvest such earnings in those foreign operations. If such
earnings were not permanently reinvested, a deferred tax
liability of $72 million would have been required.
- --------------------------------------------------------------------------------
19. Investments and Long-Term Receivables
(In millions) December 31 2000 1999
---------------------------------------------------------------------------------------------
Equity method investments $ 250 $ 658
Other investments 34 32
Receivables due after one year 54 46
Deposits of restricted cash 16 20
Other 8 6
------ ------
Total $ 362 $ 762
---------------------------------------------------------------------------------------------
Summarized financial information of investees accounted for
by the equity method of accounting follows:
(In millions) 2000 1999 1998
---------------------------------------------------------------------------------------------
Income data - year:
Revenues and other income $ 417 $ 422 $ 347
Operating income 174 152 132
Net income 123 119 79
---------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 328 $ 387
Noncurrent assets 1,247 2,606
Current liabilities 256 300
Noncurrent liabilities 650 1,066
---------------------------------------------------------------------------------------------
Dividends and partnership distributions received from equity
investees were $46 million in 2000, $44 million in 1999 and $23
million in 1998.
Marathon Group purchases from equity investees totaled $61
million, $50 million and $64 million in 2000, 1999 and 1998,
respectively. Marathon Group revenues for sales to USX equity
investees were $28 million in 2000 and $22 million in 1999 and
1998.
- --------------------------------------------------------------------------------
20. Inventories
(In millions) December 31 2000 1999
---------------------------------------------------------------------------------------------
Crude oil and natural gas liquids $ 701 $ 729
Refined products and merchandise 1,069 1,046
Supplies and sundry items 97 109
--------- ---------
Total (at cost) 1,867 1,884
Less inventory market valuation reserve - -
--------- ---------
Net inventory carrying value $ 1,867 $ 1,884
---------------------------------------------------------------------------------------------
Inventories of crude oil and refined products are valued by
the LIFO method. The LIFO method accounted for 92% and 90% of
total inventory value at December 31, 2000 and 1999,
respectively. Current acquisition costs were estimated to exceed
the above inventory values at December 31, by approximately $500
million and $200 million in 2000 and 1999, respectively. Cost of
revenues was reduced and income from operations was increased by
$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.
- --------------------------------------------------------------------------------
21. Stock-Based Compensation Plans and Stockholder Rights Plan
USX Stock-Based Compensation Plans and Stockholder Rights
Plan are discussed in Note 17, and Note 19, respectively, to the
USX consolidated financial statements.
The Marathon Group's actual stock-based compensation expense
(credit) was $5 million in 2000, $(4) million in 1999 and $(3)
million in 1998. Incremental compensation expense, as determined
under a fair value model, was not material ($.02 or less per
share for all years presented). Therefore, pro forma net income
and earnings per share data have been omitted.
M-17
- --------------------------------------------------------------------------------
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 24, by individual balance
sheet account. As described in Note 4, the Marathon Group's
specifically attributed financial instruments and the Marathon
Group's portion of USX's financial instruments attributed to all
groups are as follows:
2000 1999
---------------- ---------------
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
---------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 340 $ 340 $ 111 $ 111
Receivables 2,267 2,267 1,887 1,887
Investments and long-term receivables 171 107 166 109
------ ------ ------ ------
Total financial assets $2,778 $2,714 $2,164 $2,107
---------------------------------------------------------------------------------------------
Financial liabilities:
Notes payable $ 80 $ 80 $ - $ -
Accounts payable (including intergroup payables) 3,385 3,385 2,751 2,751
Accrued interest 61 61 92 92
Long-term debt (including amounts due within one year) 2,174 2,078 3,443 3,353
Preferred stock of subsidiary 175 184 176 184
------ ------ ------ ------
Total financial liabilities $5,875 $5,788 $6,462 $6,380
---------------------------------------------------------------------------------------------
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.
The Marathon Group'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 25.
- --------------------------------------------------------------------------------
23. Intergroup Transactions
Revenues and purchases - Marathon Group revenues for sales to the
U. S. Steel Group totaled $60 million, $41 million and $21
million in 2000, 1999 and 1998, respectively. Marathon Group
purchases from the U. S. Steel Group totaled $17 million in both
2000 and 1999 and $2 million in 1998. At December 31, 2000 and
1999, Marathon Group receivables included $1 million and $5
million, respectively, related to transactions with the U. S.
Steel Group. At December 31, 2000 and 1999, Marathon Group
accounts payable included $2 million related to transactions with
the U. S. Steel Group. These transactions were conducted under
terms comparable to those with unrelated parties.
Income taxes receivable from/payable to the U. S. Steel
Group - At December 31, 2000 and 1999, amounts receivable or
payable for income taxes were included in the balance sheet as
follows:
(In millions) December 31 2000 1999
---------------------------------------------------------------------------------------------
Current:
Receivables $ 4 $ 1
Income taxes payable 364 97
Noncurrent:
Deferred credits and other liabilities 97 97
---------------------------------------------------------------------------------------------
These amounts have been determined in accordance with the
tax allocation policy described in Note 4. Amounts classified as
current are settled in cash in the year succeeding that in which
such amounts are accrued. Noncurrent amounts represent estimates
of intergroup tax effects of certain issues for years that are
still under various stages of audit and administrative review.
Such tax effects are not settled between the groups until the
audit of those respective tax years is closed. The amounts
ultimately settled for open tax years will be different than
recorded noncurrent amounts based on the final resolution of all
of the audit issues for those years.
M-18
- --------------------------------------------------------------------------------
24. Derivative Instruments
The Marathon Group 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. The
Marathon Group is also exposed to credit risk in the event of
nonperformance by counterparties. The credit-worthiness of
counterparties is subject to continuing review, including the use
of master netting agreements to the extent practical, and full
performance is anticipated.
The following table sets forth quantitative information by
class of derivative instrument:
Recognized
Fair Carrying Trading Recorded
Value Amount Gain or Deferred Aggregate
Assets Assets (Loss) for Gain or Contract
(In millions) (Liabilities)/(a)(b)/ (Liabilities) the Year (Loss) Values/(c)/
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 2000:
Exchange-traded commodity futures:
Trading $ - $ - $ (19) $ - $ -
Other than trading - - - 7 897
Exchange-traded commodity options:
Trading - - - - -
Other than trading (6)/(d)/ (6) - (1) 971
OTC commodity swaps/(e)/:
Trading - - - - -
Other than trading 35 /(f)/ 35 - 25 408
OTC commodity options:
Trading - - - - -
Other than trading (52)/(g)/ (52) - (40) 94
------------ ------------ ---------- -------- ---------
Total commodities $ (23) $ (23) $ (19) $ (9) $ 2,370
============ ============ ========== ======== =========
Forward exchange contracts/(h)/:
- receivable $ 14 $ 14 $ - $ - $ 14
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1999:
Exchange-traded commodity futures:
Trading $ - $ - $ 4 $ - $ 8
Other than trading - - - 28 344
Exchange-traded commodity options:
Trading - - 4 - 179
Other than trading (6)/(d)/ (6) - (10) 1,262
OTC commodity swaps:
Trading - - - - -
Other than trading 3 /(f)/ 3 - 2 156
OTC commodity options:
Trading - - - - -
Other than trading 4 /(g)/ 4 - 5 238
------------ ------------ ---------- -------- ---------
Total commodities $ 1 $ 1 $ 8 $ 25 $ 2,187
============ ============ ========== ======== =========
Forward exchange contracts:
- receivable $ 52 $ 52 $ - $ - $ 51
- ------------------------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the
forward exchange contract. The exchange-traded futures contracts and
certain option contracts do not have a corresponding fair value since
changes in the market prices are settled on a daily basis.
/(b)/ The aggregate average fair value of all trading activities for the years
2000 and 1999 were $(5) million and $3 million, respectively. Detail by
class of instrument was not available.
/(c)/ Contract or notional amounts do not quantify risk exposure, but are used
in the calculation of cash settlements under the contracts. The contract
or notional amounts do not reflect the extent to which positions may
offset one another.
/(d)/ Includes fair values as of December 31, 2000 and 1999, for assets of $10
million and $11 million and for liabilities of $(16) million and $(17)
million, respectively.
/(e)/ The OTC swap arrangements vary in duration with certain contracts
extending into 2008.
/(f)/ Includes fair values as of December 31, 2000 and 1999, for assets of $84
million and $8 million and for liabilities of $(49) million and $(5)
million, respectively.
/(g)/ Includes fair values as of December 31, 2000 and 1999, for assets of $1
million and $5 million and for liabilities of $(53) million and $(1)
million, respectively.
/(h)/ The forward exchange contracts relating to USX's foreign operations have
various maturities ending in March 2001.
- --------------------------------------------------------------------------------
25. Contingencies and Commitments
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating
to the Marathon Group involving a variety of matters, including
laws and regulations relating to the environment. Certain of
these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be
material to the Marathon Group financial statements. However,
management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies
could be resolved unfavorably to the Marathon Group.
M-19
Environmental matters -
The Marathon Group is subject to federal, state, local and
foreign laws and regulations relating to the environment. These
laws generally provide for control of pollutants released into
the environment and require responsible parties to undertake
remediation of hazardous waste disposal sites. Penalties may be
imposed for noncompliance. At December 31, 2000 and 1999, accrued
liabilities for remediation totaled $75 million and $69 million,
respectively. It is not presently possible to estimate the
ultimate amount of all remediation costs that might be incurred
or the penalties that may be imposed. Receivables for recoverable
costs from certain states, under programs to assist companies in
cleanup efforts related to underground storage tanks at retail
marketing outlets, were $57 million at December 31, 2000, and $52
million at December 31, 1999.
For a number of years, the Marathon Group has made
substantial capital expenditures to bring existing facilities
into compliance with various laws relating to the environment. In
2000 and 1999, such capital expenditures totaled $73 million and
$46 million, respectively. The Marathon Group anticipates making
additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of
the continuing evolution of specific regulatory requirements.
At December 31, 2000 and 1999, accrued liabilities for
platform abandonment and dismantlement totaled $162 million and
$152 million, respectively.
Guarantees -
Guarantees by USX and its consolidated subsidiaries of the
liabilities of unconsolidated entities of the Marathon Group
totaled $131 million at December 31, 1999. There were no
guarantees at December 31, 2000.
At December 31, 2000 and 1999, the Marathon Group's pro rata
share of obligations of LOOP LLC and various pipeline investees
secured by throughput and deficiency agreements totaled $119
million and $146 million, respectively. Under the agreements, the
Marathon Group is required to advance funds if the investees are
unable to service debt. Any such advances are prepayments of
future transportation charges.
Commitments -
At December 31, 2000 and 1999, the Marathon Group's contract
commitments to acquire property, plant and equipment and long-
term investments totaled $457 million and $485 million,
respectively.
The Marathon Group is a party to a 15-year transportation
services agreement with a natural gas transmission company. The
contract requires the Marathon Group to pay minimum annual demand
charges of approximately $5 million starting in December 2000 and
concluding in 2015. The payments are required even if the
transportation facility is not utilized. Demand charges paid in
2000 were less than $1 million.
- --------------------------------------------------------------------------------
26. Joint Venture Formation
In December 2000, Marathon and Kinder Morgan Energy Partners,
L.P. signed a definitive agreement to form a joint venture
combining certain of their oil and gas producing activities in
the U.S. Permian Basin, including Marathon's interest in the
Yates Field. This transaction will allow Marathon to expand its
interests in the Permian Basin and will improve access to
materials for use in enhanced recovery techniques in the Yates
Field. The joint venture named MKM Partners L.P., commenced
operations in January 2001 and will be accounted for under the
equity method of accounting.
As a result of the agreement to form this joint venture,
Marathon recognized a pretax charge of $931 million in the fourth
quarter 2000, which is included in net gains (losses) on disposal
of assets, and reclassified the remaining book value associated
with the Yates Field from property, plant and equipment to assets
held for sale. Upon completion of this transaction in January
2001, the book value will be transferred from assets held for
sale to investments and long-term receivables.
- --------------------------------------------------------------------------------
27. Subsequent Event - Business Combination
On February 7, 2001, Marathon acquired 87% of the outstanding
common stock of Pennaco Energy Inc., a natural gas producer.
Marathon plans to acquire the remaining Pennaco shares through a
merger in which each share of Pennaco common stock, not purchased
in the offer and not held by stockholders who have properly
exercised dissenters rights under Delaware law, will be converted
into the right to receive the tender offer price in cash, without
interest. The purchase price is expected to approximate $500
million. The acquisition will be accounted for using the purchase
method of accounting.
M-20
Selected Quarterly Financial Data (Unaudited)
2000 1999
---------------------------------------------- -----------------------------------------------
(In millions, except per 4th 3rd 2nd 1st 4th 3rd 2nd 1st
share data) Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues/(a)/ $ 8,899 $9,169 $ 8,680 $7,739 $7,250 $6,312 $5,324 $ 4,704
Other income (loss) (833) 59 30 116 45 27 34 11
------- ------- ------- ------- ------- ------- ------- --------
Total 8,066 9,228 8,710 7,855 7,295 6,339 5,358 4,715
Income (loss) from operations (466) 729 860 525 350 561 399 403
Includes:
Joint venture
formation charges (931) - - - - - - -
Inventory market
valuation credits - - - - - 136 66 349
Net income (loss) (310) 121 367 254 171 230 134 119
- ---------------------------------------------------------------------------------------------------------------------------------
Marathon Stock data:
- --------------------
Net income (loss) per share -
Basic and diluted $ (1.00) $ .38 $ 1.18 $ .81 $ .55 $ .74 $ .43 $ .38
Dividends paid per share .23 .23 .21 .21 .21 .21 .21 .21
Price range of Marathon
Stock/(b)/:
- Low 25-1/4 23-1/2 22-13/16 20-11/16 23-5/8 28-1/2 25-13/16 19-5/8
- High 30-3/8 29-5/8 29-3/16 27-1/2 30-5/8 33-7/8 32-3/4 31-3/8
- ----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Certain items have been reclassified between revenues and cost of
revenues, primarily to give effect to new accounting standards as
disclosed in Note 3 of the Notes to Financial Statements. Amounts
reclassified in the first, second and third quarters of 2000 were $(106)
million, $(183) million and $(59) million, respectively, and for the
first, second, third and fourth quarters of 1999 were $(136) million,
$(123) million, $(151) million and $(210) million, respectively.
/(b)/ Composite tape.
Principal Unconsolidated Investees (Unaudited)
December 31, 2000
Company Country Ownership Activity
- ----------------------------------------------------------------------------------------------------------------
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50% /(a)/ Pipeline & Storage Facilities
LOOP LLC United States 47% /(a)/ Offshore Oil Port
Manta Ray Offshore Gathering 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
Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation
- ----------------------------------------------------------------------------------------------------------------
/(a)/ Represents the ownership of MAP.
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Oil and Gas Producing Activities relating to the Marathon Group, pages U-30
through U-34.
M-21
Five-Year Operating Summary
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Net Liquid Hydrocarbon Production (thousands of barrels per day)
United States (by region)
Alaska - - - - 8
Gulf Coast 62 74 55 29 30
Southern 5 5 6 8 9
Central 4 4 4 5 4
Mid-Continent 34 38 44 46 45
Rocky Mountain 26 24 26 27 26
-----------------------------------------------
Total United States 131 145 135 115 122
-----------------------------------------------
International
Canada 19 17 6 - -
Egypt 1 5 8 8 8
Gabon 16 9 5 - -
Norway - - 1 2 3
United Kingdom 29 31 41 39 48
-----------------------------------------------
Total International 65 62 61 49 59
-----------------------------------------------
Consolidated 196 207 196 164 181
Equity investee/(a)/ 11 1 - - -
-----------------------------------------------
Total 207 208 196 164 181
Natural gas liquids included in above 22 19 17 17 17
- ----------------------------------------------------------------------------------------------------------------------------
Net Natural Gas Production (millions of cubic feet per day)
United States (by region)
Alaska 160 148 144 151 145
Gulf Coast 88 107 84 78 88
Southern 147 178 208 189 161
Central 156 134 117 119 109
Mid-Continent 133 129 125 125 122
Rocky Mountain 47 59 66 60 51
-----------------------------------------------
Total United States 731 755 744 722 676
-----------------------------------------------
International
Canada 143 150 65 - -
Egypt - 13 16 11 13
Ireland 115 132 168 228 259
Norway - 26 27 54 87
United Kingdom - equity 212 168 165 130 140
- other/(b)/ 11 16 23 32 32
-----------------------------------------------
Total International 481 505 464 455 531
-----------------------------------------------
Consolidated 1,212 1,260 1,208 1,177 1,207
Equity investee/(c)/ 29 36 33 42 45
-----------------------------------------------
Total 1,241 1,296 1,241 1,219 1,252
- ----------------------------------------------------------------------------------------------------------------------------
Average Sales Prices
Liquid Hydrocarbons (dollars per barrel)/(d)(e)/
United States $25.11 $15.44 $10.42 $16.88 $18.58
International 26.54 16.90 12.24 18.77 20.34
Natural Gas (dollars per thousand cubic feet)/(d)(e)/
United States $ 3.30 $ 1.90 $ 1.79 $ 2.20 $ 2.09
International 2.76 1.90 1.94 2.00 1.97
- ----------------------------------------------------------------------------------------------------------------------------
Net Proved Reserves at year-end (developed and undeveloped)
Liquid Hydrocarbons (millions of barrels)
United States 458 520 549 590 570
International 259 277 316 187 203
-----------------------------------------------
Consolidated 717 797 865 777 773
Equity investee/(a)/ - 77 80 82 -
-----------------------------------------------
Total 717 874 945 859 773
Developed reserves as % of total net reserves 76% 81% 71% 77% 80%
- ----------------------------------------------------------------------------------------------------------------------------
Natural Gas (billions of cubic feet)
United States 1,914 2,057 2,163 2,232 2,251
International 1,091 1,607 1,796 1,071 1,199
-----------------------------------------------
Consolidated 3,005 3,664 3,959 3,303 3,450
Equity investee/(c)/ 89 123 110 111 132
-----------------------------------------------
Total 3,094 3,787 4,069 3,414 3,582
Developed reserves as % of total net reserves 78% 75% 79% 83% 83%
- ----------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents Marathon's equity interest in Sakhalin Energy Investment
Company Ltd. and CLAM Petroleum B.V.
/(b)/ Represents gas acquired for injection and subsequent resale.
/(c)/ Represents Marathon's equity interest in CLAM Petroleum B.V.
/(d)/ Prices exclude gains/losses from hedging activities.
/(e)/ Prices exclude equity investees and purchase/resale gas.
M-22
Five-Year Operating Summary continued
2000/(a)/ 1999/(a)/ 1998/(a)/ 1997 1996
---------------------------------------------------------------------------------------------------------------------------
U.S. Refinery Operations (thousands of barrels per day)
In-use crude oil capacity at year-end 935 935 935 575 570
Refinery runs - crude oil refined 900 888 894 525 511
- other charge and blend stocks 141 139 127 99 96
In-use crude oil capacity utilization rate 96% 95% 96% 92% 90%
---------------------------------------------------------------------------------------------------------------------------
Source of Crude Processed (thousands of barrels per day)
United States 400 349 317 202 229
Canada 102 92 98 24 18
Middle East and Africa 346 363 394 241 193
Other International 52 84 85 58 73
--------------------------------------------------
Total 900 888 894 525 513
---------------------------------------------------------------------------------------------------------------------------
Refined Product Yields (thousands of barrels per day)
Gasoline 552 566 545 353 345
Distillates 278 261 270 154 155
Propane 20 22 21 13 13
Feedstocks and special products 74 66 64 36 35
Heavy fuel oil 43 43 49 35 30
Asphalt 74 69 68 39 36
--------------------------------------------------
Total 1,041 1,027 1,017 630 614
---------------------------------------------------------------------------------------------------------------------------
Refined Products Yields (% breakdown)
Gasoline 53% 55% 54% 56% 56%
Distillates 27 25 27 24 25
Other products 20 20 19 20 19
--------------------------------------------------
Total 100% 100% 100% 100% 100%
---------------------------------------------------------------------------------------------------------------------------
U.S. Refined Product Sales Volumes (thousands of barrels per day)
Gasoline 746 714 671 452 468
Distillates 352 331 318 198 192
Propane 21 23 21 12 12
Feedstocks and special products 69 66 67 40 37
Heavy fuel oil 43 43 49 34 31
Asphalt 75 74 72 39 35
--------------------------------------------------
Total 1,306 1,251 1,198 775 775
Matching buy/sell volumes included in above 52 45 39 51 71
---------------------------------------------------------------------------------------------------------------------------
Refined Products Sales Volumes by Class of Trade
(as a % of total sales volumes)
Wholesale - independent private-brand
marketers and consumers 65% 66% 65% 61% 62%
Marathon and Ashland brand jobbers and dealers 12 11 11 13 13
Speedway SuperAmerica retail outlets 23 23 24 26 25
--------------------------------------------------
Total 100% 100% 100% 100% 100%
---------------------------------------------------------------------------------------------------------------------------
Refined Products (dollars per barrel)
Average sales price $ 38.24 $ 24.59 $ 20.65 $ 26.38 $ 27.43
Average cost of crude oil throughput 29.07 18.66 13.02 19.00 21.94
---------------------------------------------------------------------------------------------------------------------------
Petroleum Inventories at year-end (thousands of barrels)
Crude oil, raw materials and natural gas liquids 33,720 34,255 35,630 19,351 20,047
Refined products 34,386 32,853 32,334 20,598 21,283
---------------------------------------------------------------------------------------------------------------------------
U.S. Refined Product Marketing Outlets at year-end
MAP operated terminals 91 93 88 51 51
Retail - Marathon and Ashland brand outlets 3,728 3,482 3,117 2,465 2,392
- Speedway SuperAmerica outlets 2,242 2,433 2,257 1,544 1,592
---------------------------------------------------------------------------------------------------------------------------
Pipelines (miles of common carrier pipelines)/(b)/
Crude Oil - gathering lines 419 557 2,827 1,003 1,052
- trunklines 4,623 4,720 4,859 2,665 2,665
Products - trunklines 2,834 2,856 2,861 2,310 2,310
--------------------------------------------------
Total 7,876 8,133 10,547 5,978 6,027
---------------------------------------------------------------------------------------------------------------------------
Pipeline Barrels Handled (millions)/(c)/
Crude Oil - gathering lines 22.7 30.4 47.8 43.9 43.2
- trunklines 563.6 545.7 571.9 369.6 378.7
Products - trunklines 329.7 331.9 329.7 262.4 274.8
--------------------------------------------------
Total 916.0 908.0 949.4 675.9 696.7
---------------------------------------------------------------------------------------------------------------------------
River Operations
Barges - owned/leased 158 169 169 - -
Boats - owned/leased 6 8 8 - -
---------------------------------------------------------------------------------------------------------------------------
/(a)/ 1998-2000 statistics include 100% of MAP and should be considered
when compared to prior periods.
/(b)/ Pipelines for downstream operations also include non-common
carrier, leased and equity investees.
/(c)/ Pipeline barrels handled on owned common carrier pipelines,
excluding equity investees.
M-23
Five-Year Financial Summary
(Dollars in millions, except as noted) 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
Revenues and Other Income
Revenues by product:
Refined products $22,514 $15,181 $12,852 $10,300 $10,437
Merchandise 2,441 2,194 1,941 1,099 1,051
Liquid hydrocarbons 6,856 4,587 5,023 2,755 3,166
Natural gas 2,518 1,429 1,187 1,368 1,222
Transportation and other products 158 199 271 167 180
Gain on ownership change in MAP 12 17 245 - -
Other/(a)/ (640) 100 104 86 97
-----------------------------------------------
Total revenues and other income/(b)/ $33,859 $23,707 $21,623 $15,775 $16,153
---------------------------------------------------------------------------------------------------------------------
Income From Operations
Exploration and production (E&P)
Domestic $ 1,115 $ 494 $ 190 $ 500 $ 547
International 420 124 88 273 353
-----------------------------------------------
Income for E&P reportable segment 1,535 618 278 773 900
Refining, marketing and transportation 1,273 611 896 563 249
Other energy related businesses 38 61 33 48 57
-----------------------------------------------
Income for reportable segments 2,846 1,290 1,207 1,384 1,206
Items not allocated to reportable segments:
Administrative expenses (136) (108) (106) (168) (133)
Joint venture formation charges (931) - - - -
Inventory market valuation adjustments - 551 (267) (284) 209
Gain on ownership change & transition
charges - MAP 12 17 223 - -
Int'l. & domestic oil & gas impairments &
gas contract settlement (197) (16) (119) - -
Other items 54 (21) - - 14
-----------------------------------------------
Income from operations 1,648 1,713 938 932 1,296
Minority interest in income of MAP 498 447 249 - -
Net interest and other financial costs 236 288 237 260 305
Provision for income taxes 482 324 142 216 320
-----------------------------------------------
Income Before Extraordinary Loss $ 432 $ 654 $ 310 $ 456 $ 671
Per common share - basic (in dollars) 1.39 2.11 1.06 1.59 2.33
- diluted (in dollars) 1.39 2.11 1.05 1.58 2.31
---------------------------------------------------------------------------------------------------------------------
Net Income $ 432 $ 654 $ 310 $ 456 $ 664
Per common share - basic (in dollars) 1.39 2.11 1.06 1.59 2.31
- diluted (in dollars) 1.39 2.11 1.05 1.58 2.29
---------------------------------------------------------------------------------------------------------------------
Balance Sheet Position at year-end
Current assets $ 4,985 $ 4,081 $ 2,976 $ 2,018 $ 2,046
Net property, plant and equipment 9,375 10,293 10,429 7,566 7,298
Total assets 15,232 15,674 14,544 10,565 10,151
Short-term debt 228 48 191 525 323
Other current liabilities 3,784 3,096 2,419 1,737 1,819
Long-term debt 1,937 3,320 3,456 2,476 2,642
Minority interest in MAP 1,840 1,753 1,590 - -
Common stockholders' equity 4,845 4,800 4,312 3,618 3,340
Per share (in dollars) 15.70 15.38 13.95 12.53 11.62
---------------------------------------------------------------------------------------------------------------------
Cash Flow Data
Net cash from operating activities $ 3,158 $ 2,016 $ 1,642 $ 1,246 $ 1,503
Capital expenditures 1,425 1,378 1,270 1,038 751
Disposal of assets 539 356 65 60 282
Dividends paid 274 257 246 219 201
---------------------------------------------------------------------------------------------------------------------
Employee Data/(c)/
Marathon Group:
Total employment costs $ 1,474 $ 1,421 $ 1,054 $ 854 $ 790
Average number of employees 31,515 33,086 24,344 20,695 20,461
Number of pensioners at year-end 3,255 3,402 3,378 3,099 3,203
Speedway SuperAmerica LLC (SSA):
(Included in Marathon Group totals)
Total employment costs $ 489 $ 452 $ 283 $ 263 $ 241
Average number of employees 21,649 22,801 12,831 12,816 12,474
Number of pensioners at year-end 211 209 212 215 207
---------------------------------------------------------------------------------------------------------------------
Stockholder Data at year-end
Number of common shares
outstanding (in millions) 308.3 311.8 308.5 288.8 287.5
Registered shareholders (in thousands) 65.0 71.4 77.3 84.0 92.1
Market price of common stock $27.750 $24.688 $30.125 $33.750 $23.875
---------------------------------------------------------------------------------------------------------------------
/(a)/ Includes dividend and investee income, net gains (losses) on disposal
of assets and other income.
/(b)/ 1996-1999 reclassified to conform to 2000 classifications.
/(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.
M-24
Management's Discussion and Analysis
The Marathon Group includes Marathon Oil Company ("Marathon") and
certain other subsidiaries of USX Corporation ("USX"), which are engaged in
worldwide exploration and production of crude oil and natural gas; domestic
refining, marketing and transportation of petroleum products primarily
through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by
Marathon; and other energy related businesses. The Management's Discussion
and Analysis should be read in conjunction with the Marathon Group's
Financial Statements and Notes to Financial Statements.
The Marathon Group's 2000 financial performance was primarily affected
by the strong recovery in worldwide liquid hydrocarbon and natural gas
prices and stronger refining margins. During 2000, Marathon focused on the
acquisition of assets with a strong strategic fit, the disposal of non-core
properties, and workforce reductions through a voluntary early retirement
program.
Certain sections of Management's Discussion and Analysis include
forward-looking statements concerning trends or events potentially
affecting the businesses of the Marathon Group. These statements typically
contain words such as "anticipates", "believes", "estimates", "expects",
"targets" or similar words indicating that future outcomes are uncertain.
In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily
all such factors, that could cause future outcomes to differ materially
from those set forth in forward-looking statements. For additional risk
factors affecting the businesses of the Marathon Group, see Supplementary
Data - Disclosures About Forward-Looking Statements in USX's 2000 Form 10-
K.
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) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Exploration & production ("E&P") $ 4,694 $ 3,105 $ 2,090
Refining, marketing & transportation ("RM&T")/(a)/ 28,849 20,076 19,080
Other energy related businesses/(b)/ 1,684 834 355
------- ------- -------
Revenues and other income of reportable segments 35,227 24,015 21,525
Revenues and other income not allocated to segments:
Joint venture formation charges/(c)/ (931) - -
Gain on ownership change in MAP 12 17 245
Other/(d)/ 124 (36) 24
Elimination of intersegment revenues (573) (289) (171)
------- ------- -------
Total Group revenues and other income $33,859 $23,707 $21,623
======= ======= =======
Items included in both revenues and costs and expenses, resulting in no effect on income:
Consumer excise taxes on petroleum products and merchandise $ 4,344 $ 3,973 $ 3,824
---------------------------------------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP.
/(b)/ Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
/(c)/ Represents a pretax charge related to the joint venture formation
between Marathon and Kinder Morgan Energy Partners, L.P.
/(d)/ Represents net gains/(losses) on certain asset sales.
E&P segment revenues increased by $1,589 million in 2000 from 1999
following an increase of $1,015 million in 1999 from 1998. The increase in
2000 was primarily due to higher worldwide liquid hydrocarbon and natural
gas prices, partially offset by lower domestic liquid hydrocarbon and
worldwide natural gas production. The increase in 1999 was primarily due
to higher worldwide liquid hydrocarbon prices, increased domestic liquid
hydrocarbon production and higher E&P crude oil buy/sell volumes.
RM&T segment revenues increased by $8,773 million in 2000 from 1999
following an increase of $996 million in 1999 from 1998. The increase in
2000 primarily reflected higher refined product prices and increased
refined product sales volumes. The increase in 1999 was mainly due to
higher refined
M-25
Management's Discussion and Analysis continued
product prices, increased volumes of refined product sales and higher
merchandise sales, partially offset by reduced crude oil sales revenues
following the sale of Scurlock Permian LLC.
Other energy related businesses segment revenues increased by $850
million in 2000 from 1999 following an increase of $479 million in 1999
from 1998. The increase in 2000 reflected higher natural gas and crude oil
resale activity accompanied by higher crude oil and natural gas prices. The
increase in 1999 was primarily due to increased crude oil and natural gas
purchase and resale activity.
For additional discussion of revenues, see Note 10 to the Marathon
Group Financial Statements.
Income from operations for each of the last three years is summarized
in the following table:
(Dollars in millions) 2000 1999 1998
------------------------------------------------------------------------------------------------
E&P
Domestic $1,115 $ 494 $ 190
International 420 124 88
------ ------ ------
Income of E&P reportable segment 1,535 618 278
RM&T/(a)/ 1,273 611 896
Other energy related businesses 38 61 33
------ ------ ------
Income for reportable segments 2,846 1,290 1,207
Items not allocated to reportable segments:
Joint venture formation charges/(b)/ (931) - -
Administrative expenses/(c)/ (136) (108) (106)
IMV reserve adjustment/(d)/ - 551 (267)
Gain on ownership change & transition charges - MAP/(e)/ 12 17 223
Impairment of oil and gas properties, assets held for sale,
and gas contract settlement/(f)/ (197) (16) (119)
Gain/(loss) on disposal of assets/(g)/ 124 (36) -
Reorganization charges including pension settlement
(loss)/gain & benefit accruals/(h)/ (70) 15 -
------ ------ ------
Total income from operations $1,648 $1,713 $ 938
------------------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP.
/(b)/ Represents a pretax charge related to the joint venture formation
between Marathon and Kinder Morgan Energy Partners, L.P.
/(c)/ Includes the portion of the Marathon Group's administrative costs not
charged to the operating segments and the portion of USX corporate
general and administrative costs allocated to the Marathon Group.
/(d)/ The inventory market valuation ("IMV") reserve reflects the extent to
which the recorded LIFO cost basis of crude oil and refined products
inventories exceeds net realizable value. For additional discussion
of the IMV, see Note 20 to the Marathon Group Financial Statements.
/(e)/ The gain on ownership change and one-time transition charges in 1998
relate to the formation of MAP. For additional discussion of the gain
on ownership change in MAP, see Note 5 to the Marathon Group
Financial Statements.
/(f)/ Represents in 2000, an impairment of certain oil and gas properties,
primarily in Canada, and assets held for sale. Represents in 1999, an
impairment of certain domestic properties. Represents in 1998, a
write-off of certain non-revenue producing international investments
and several exploratory wells which had encountered hydrocarbons but
had been suspended pending further evaluation. It also includes in
1998 a gain from the resolution of a contract dispute with a
purchaser of Marathon's natural gas production from certain domestic
properties.
/(g)/ The net gain in 2000 represents a gain on the disposition of
Angus/Stellaria, a gain on the Sakhalin exchange, a gain on the sale
of Speedway SuperAmerica LLC ("SSA") non-core stores, and a loss on
the sale of the Howard Glasscock field. The net loss in 1999
represents a loss on the sale of Scurlock Permian LLC, certain
domestic production properties, Carnegie Natural Gas Company and
affiliated subsidiaries and a gain on certain Egyptian properties.
/(h)/ Amounts in 2000 and 1999 represent pension settlement gains/(losses)
and various benefit accruals resulting from retirement plan
settlements, the voluntary early retirement program, and
reorganization charges.
M-26
Management's Discussion and Analysis continued
Income for reportable segments increased by $1,556 million in 2000
from 1999, mainly due to higher worldwide liquid hydrocarbon and natural
gas prices, and higher refined product margins, partially offset by
decreased natural gas volumes. Income for reportable segments increased by
$83 million in 1999 from 1998, mainly due to higher worldwide liquid
hydrocarbon prices, partially offset by lower refined product margins.
Income from operations includes 100 percent of MAP beginning in 1998, and
results from Marathon Canada Limited (formerly known as Tarragon)
commencing August 12, 1998.
Average Volumes and Selling Prices
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
(thousands of barrels per day)
Net liquids production/(a)/ - U.S. 131 145 135
- International/(b)/ 65 62 61
------ ------ ------
- Total consolidated 196 207 196
- Equity investees/(c)/ 11 1 -
------ ------ ------
- Worldwide 207 208 196
(millions of cubic feet per day)
Net natural gas production - U.S. 731 755 744
- International - equity 470 489 441
- International - other/(d)/ 11 16 23
------ ------ ------
- Total consolidated 1,212 1,260 1,208
- Equity investee/(e)/ 29 36 33
------ ------ ------
- Worldwide 1,241 1,296 1,241
-----------------------------------------------------------------------------------------------------------
(dollars per barrel)
Liquid hydrocarbons/(a)(f)/ - U.S. $25.11 $15.44 $10.42
- International 26.54 16.90 12.24
(dollars per mcf)
Natural gas/(f)/ - U.S. $ 3.30 $ 1.90 $ 1.79
- International - equity 2.76 1.90 1.94
(thousands of barrels per day)
Refined products sold/(g)/ 1,306 1,251 1,198
Matching buy/sell volumes included in above 52 45 39
-----------------------------------------------------------------------------------------------------------
/(a)/ Includes crude oil, condensate and natural gas liquids.
/(b)/ Represents equity tanker liftings, truck deliveries and direct
deliveries.
/(c)/ Represents Marathon's equity interest in Sakhalin Energy Investment
Company Ltd. ("Sakhalin Energy") and CLAM Petroleum B.V. ("CLAM") for
2000 and 1999.
/(d)/ Represents gas acquired for injection and subsequent resale.
/(e)/ Represents Marathon's equity interest in CLAM.
/(f)/ Prices exclude gains/losses from hedging activities, equity investees
and purchase/resale gas.
/(g)/ Refined products sold and matching buy/sell volumes include 100
percent of MAP.
Domestic E&P income increased by $621 million in 2000 from 1999
following an increase of $304 million in 1999 from 1998. The increase in
2000 was primarily due to higher liquid hydrocarbon and natural gas prices,
partially offset by lower liquid hydrocarbon and natural gas volumes due to
natural field declines and asset sales, and derivative losses from other
than trading activities.
The increase in 1999 was primarily due to higher liquid hydrocarbon
and natural gas prices, increased liquid hydrocarbon volumes resulting from
new production in the Gulf of Mexico and lower exploration expense.
International E&P income increased by $296 million in 2000 from 1999
following an increase of $36 million in 1999 from 1998. The increase in
2000 was mainly due to higher liquid hydrocarbon and natural gas prices,
higher liquid hydrocarbon liftings, primarily in Russia and Gabon, and
lower dry well expense, partially offset by lower natural gas volumes.
The increase in 1999 was primarily due to higher liquid hydrocarbon
prices, partially offset by lower liquid hydrocarbon and natural gas
production in Europe and higher exploration expense.
M-27
Management's Discussion and Analysis continued
RM&T segment income increased by $662 million in 2000 from 1999
following a decrease of $285 million in 1999 from 1998. The increase in
2000 was primarily due to higher refined product margins, partially offset
by higher operating expenses for SSA, higher administrative expenses
including increased variable pay plan costs, and higher transportation
costs.
The decrease in 1999 was primarily due to lower refined product
margins, partially offset by recognized mark-to-market derivative gains,
increased refined product sales volumes, higher merchandise sales at SSA
and the realization of additional operating efficiencies as a result of
forming MAP.
Other energy related businesses segment income decreased by $23
million in 2000 from 1999 following an increase of $28 million in 1999 from
1998. The decrease in 2000 was primarily a result of derivative losses from
other than trading activities and lower equity earnings as a result of
decreased pipeline throughput. The increase in 1999 was primarily due to
higher equity earnings as a result of increased pipeline throughput and a
reversal of abandonment accruals of $10 million in 1999.
Items not allocated to reportable segments: IMV reserve adjustment -
When U. S. Steel Corporation acquired Marathon Oil Company in March 1982,
crude oil and refined product prices were at historically high levels. In
applying the purchase method of accounting, the Marathon Group's crude oil
and refined product inventories were revalued by reference to current
prices at the time of acquisition, and this became the new LIFO cost basis
of the inventories. Generally accepted accounting principles require that
inventories be carried at lower of cost or market. Accordingly, the
Marathon Group has established an IMV reserve to reduce the cost basis of
its inventories to net realizable value. Quarterly adjustments to the IMV
reserve result in noncash charges or credits to income from operations.
When Marathon acquired the crude oil and refined product inventories
associated with Ashland's RM&T operations on January 1, 1998, the Marathon
Group established a new LIFO cost basis for those inventories. The
acquisition cost of these inventories lowered the overall average cost of
the Marathon Group's combined RM&T inventories. As a result, the price
threshold at which an IMV reserve will be recorded was also lowered.
These adjustments affect the comparability of financial results from
period to period as well as comparisons with other energy companies, many
of which do not have such adjustments. Therefore, the Marathon Group
reports separately the effects of the IMV reserve adjustments on financial
results. In management's opinion, the effects of such adjustments should be
considered separately when evaluating operating performance.
In 1999, the IMV reserve adjustment resulted in a credit to income
from operations of $551 million compared to a charge of $267 million in
1998, or a change of $818 million. The favorable 1999 IMV reserve
adjustment, which is almost entirely recorded by MAP, was primarily due to
the significant increase in refined product prices experienced during 1999.
For additional discussion of the IMV reserve, see Note 20 to the Marathon
Group Financial Statements.
Joint venture formation charges represent a pretax charge of $931
million in 2000 related to the joint venture formation between Marathon and
Kinder Morgan Energy Partners, L.P. The formation of the joint venture
included contribution of interests in the Yates and SACROC assets. Marathon
holds an 85 percent economic interest in the combined entity which
commenced operations in January 2001.
Impairment of oil and gas properties, assets held for sale, and gas
contract settlement includes in 2000, the impairments of certain oil and
gas properties primarily in Canada and assets held for sale totaling $197
million. In 1999, the $16 million charge relates to the impairment of
certain domestic properties. In 1998, the $119 million charge relates to a
write-off of certain non-revenue producing international investments and
several exploratory wells, partially offset by a gain from the resolution
of a contract dispute with a purchaser of Marathon's natural gas production
from certain domestic properties.
Gain/(loss) on disposal of assets represents in 2000 a net gain on the
sale of Marathon's interest in the Angus/Stellaria development in the Gulf
of Mexico, a gain on the Sakhalin exchange, a loss on the sale of the
Howard Glasscock Field, and a gain on the sale of non-core SSA stores. In
1999,
M-28
Management's Discussion and Analysis continued
the net loss represents losses on the sale of Scurlock Permian LLC, certain
domestic production properties, Carnegie Natural Gas Company and affiliated
subsidiaries and a gain on certain Egyptian properties.
Reorganization charges including pension settlement (loss)/gain and
benefit accruals represent charges related to a reorganization program
initiated by Marathon for its upstream business during 2000.
Net interest and other financial costs decreased by $52 million in
2000 from 1999, following an increase of $51 million in 1999 from 1998. The
decrease in 2000 was primarily due to lower average debt levels and
increased interest income. The increase in 1999 was primarily due to lower
interest income and lower capitalized interest on upstream projects. For
additional details, see Note 6 to the Marathon Group Financial Statements.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased by $51 million in 2000 from 1999,
primarily due to much higher RM&T segment income and the absence of the
favorable 1999 IMV reserve adjustment, as discussed above.
The provision for income taxes of $482 million in 2000 included a $235
million one-time, noncash deferred tax charge 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. for other
oil and gas producing interests. The 1999 income tax provision included a
$23 million favorable adjustment to deferred federal income taxes related
to the outcome of a United States Tax Court case. For additional discussion
of income taxes, see Note 18 to the Marathon Group Financial Statements.
Net income decreased by $222 million in 2000 from 1999, following an
increase of $344 million in 1999 from 1998, primarily reflecting the
factors discussed above.
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets increased $904 million from year-end 1999, primarily
due to an increase in cash, receivables, and assets held for sale. The
increase in assets held for sale was mainly due to the reclassification of
the Yates field from property, plant, and equipment. The receivables
increase was mainly due to higher year-end commodity prices.
Current liabilities increased $868 million from year-end 1999,
primarily due to an increase in accounts payable due to higher year-end
commodity prices and the recording of an intergroup income tax payable.
Investments and long-term receivables decreased $400 million from
year-end 1999, primarily due to the exchange of Marathon's interest in
Sakhalin Energy Investment Company Ltd.
Net property, plant and equipment decreased $918 million from year-end
1999, primarily due to the impairment and reclassification of assets held
for sale, the impairment of reserves, and the sale of certain domestic
production properties. This was partially offset by increases from
properties received from the Sakhalin exchange. Net property, plant and
equipment for each of the last three years is summarized in the following
table:
(Dollars in millions) 2000 1999 1998
--------------------------------------------------------------------
E&P
Domestic $2,229 $ 3,435 $ 3,688
International 2,924 2,987 3,027
------ ------- -------
Total E&P 5,153 6,422 6,715
RM&T/(a)/ 4,035 3,712 3,517
Other/(b)/ 187 159 197
------ ------- -------
Total $9,375 $10,293 $10,429
--------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP.
/(b)/ Includes other energy related businesses and other
miscellaneous corporate net property, plant and equipment.
Total long-term debt and notes payable at December 31, 2000 were
$2,165 million, a decrease of $1,203 million from year-end 1999. This
decrease in debt is mainly due to higher cash flow provided from operating
activities. Most of the debt is a direct obligation of, or is guaranteed
by, USX.
M-29
Management's Discussion and Analysis continued
Stockholders' equity increased $45 million from year-end 1999, mainly
reflecting net income of $432 million offset by dividends declared of $274
million and Marathon Stock repurchases of $105 million. In July 2000, the USX
Board of Directors authorized spending up to $450 million to repurchase shares
of Marathon Stock. This repurchase program will continue from time to time as
the Corporation's financial condition and market conditions warrant.
Net cash provided from operating activities totaled $3,158 million in 2000,
compared with $2,016 million in 1999 and $1,642 million in 1998. Net cash from
operating activities increased $1,142 million in 2000 from 1999 and increased
$374 million in 1999 from 1998. The increase in 2000 mainly reflects the
favorable effects of improved net income (excluding noncash items) and net
favorable working capital changes, including an increased allocation for income
tax payments and an income tax settlement with the Steel Group in accordance
with the group tax allocation policy. The increase in 1999 mainly reflected
favorable working capital changes.
Capital expenditures for each of the last three years are summarized in the
following table:
Dollars in millions) 2000 1999 1998
- ----------------------------------------------------------------------------
E&P
Domestic $ 516 $ 356 $ 652
International/(a)/ 226 388 187
------ ------ ------
Total E&P 742 744 839
RM&T/(b)/ 656 612 410
Other/(c)/ 27 22 21
------ ------ ------
Total $1,425 $1,378 $1,270
- -----------------------------------------------------------------------------
/(a)/ Amount for 1998 excludes the Tarragon acquisition.
/(b)/ Amounts include 100 percent of MAP.
/(c)/ Includes other energy related businesses and other miscellaneous
corporate capital expenditures.
During 2000, domestic E&P capital spending mainly included the completion
of the Viosca Knoll Block 786 (Petronius) development in the Gulf of Mexico,
various producing property acquisitions, and natural gas developments in East
Texas and other gas basins throughout the western United States. International
E&P projects included the completion of the Tchatamba West development, located
offshore Gabon, and continued oil and natural gas developments in Canada. RM&T
spending by MAP primarily consisted of refinery modifications, including the
initiation of the delayed coker unit project at the Garyville refinery, and
upgrades and expansions of retail marketing outlets. Contract commitments for
property, plant and equipment acquisitions and long-term investments at year-end
2000 were $457 million, compared with $485 million at year-end 1999.
Capital expenditures in 2001 are expected to be approximately $1.5 billion,
which is consistent with 2000 levels. Domestic E&P projects planned for 2001
will focus on gas projects and include various producing property acquisitions.
Planned capital expenditures in 2001 do not include the capital requirements
related to the acquisition of Pennaco Energy, Inc. ("Pennaco"). International
E&P projects include the continued development of the Foinaven area in the U.K.
Atlantic Margin and continued oil and natural gas developments in Canada. RM&T
spending by MAP will primarily consist of refinery improvements, including the
completion of the delayed coker unit project at the Garyville refinery, upgrades
and expansions of retail marketing outlets, and expansion and enhancement of
logistics systems. Other Marathon spending will include funds for development
and installation of SAP software, which is an enterprise resource planning
system that will allow the integration of processes among business units and
with outside enterprises.
Investments in investees were $65 million in 2000, compared with $59
million in 1999. The amounts in both periods mainly reflected development
spending for the Sakhalin II project in Russia.
Loans and advances to investees were $6 million in 2000, compared with $70
million in 1999. Cash outflows in both periods primarily reflected funding
provided to equity investees for capital projects. In 2000, the cash outflow was
primarily related to the Centennial Pipeline project, and in 1999, the outflow
was primarily related to the Sakhalin II project.
M-30
Management's Discussion and Analysis continued
Repayments of loans and advances to investees were $10 million
in 2000, compared with $1 million in 1999. The 2000 amount
primarily was a result of repayments by a foreign power subsidiary
of advances made by Marathon.
The above statements with respect to future capital expenditures
and investments are forward-looking statements, reflecting
management's best estimates, based on information currently
available. To the extent this information proves to be inaccurate,
the timing and levels of future spending could differ materially
from those included in the forward-looking statements. Factors that
could cause future capital expenditures to differ materially from
present expectations include price volatility, worldwide supply and
demand for petroleum products, general worldwide economic
conditions, levels of cash flow from operations, available business
opportunities, unforeseen hazards such as weather conditions,
and/or delays in obtaining government or partner approvals.
The acquisition of Tarragon Oil and Gas Limited in 1998 included
cash payments of $686 million. For further discussion of Tarragon,
see Note 5 to the Marathon Group Financial Statements.
Cash from disposal of assets was $539 million in 2000, compared
with $356 million in 1999 and $65 million in 1998. 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. Proceeds in 1998 were mainly
from the sales of domestic production properties and equipment.
The net change in restricted cash was a net withdrawal of $3
million in 2000 compared to a net withdrawal of $1 million in 1999.
Restricted cash in both periods primarily reflected the net effects
of cash deposited and withdrawn from domestic production property
dispositions and acquisitions.
Net cash changes related to financial obligations, which consist
of the Marathon Group's portion of USX debt and preferred stock of
a subsidiary attributed to both groups, as well as debt
specifically attributed to the Marathon Group, decreased by $1,206
million in 2000. Financial obligations decreased primarily because
cash from operating activities and asset sales exceeded capital
expenditures, distributions to the minority shareholder of MAP and
dividend payments. For further details, see Management's Discussion
and Analysis of USX Consolidated Financial Condition, Cash Flows
and Liquidity.
Marathon Stock repurchased was $105 million in 2000. In July
2000, the USX Board of Directors authorized spending up to $450
million to repurchase shares of Marathon Stock. This repurchase
program will continue from time to time as the Corporation's
financial condition and market conditions warrant.
Distributions to minority shareholder of MAP were $420 million
in 2000, compared with $400 million in 1999. The 1999 amount
included a distribution of $103 million in the first quarter 1999,
which related to fourth quarter 1998 MAP activity.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk
for a discussion of derivative instruments and associated market
risk.
Liquidity
For discussion of USX's liquidity and capital resources, see
Management's Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies
The Marathon Group has incurred and will continue to incur
substantial capital, operating and maintenance, and remediation
expenditures as a result of environmental laws and regulations. To
the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of the Marathon Group's products
and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors
are subject to similar environmental laws and
M-31
Management's Discussion and Analysis continued
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 Group environmental expenditures for each of the last three
years were/(a)/:
(Dollars in millions) 2000 1999 1998
---------------------------------------------------------------------------
Capital $ 73 $ 46 $ 83 /(b)/
Compliance
Operating & maintenance 139 117 126
Remediation/(c)/ 30 25 10
----- ----- -----
Total $ 242 $ 188 $ 219
---------------------------------------------------------------------------
/(a)/ Amounts are determined based on American Petroleum Institute survey
guidelines and include 100 percent of MAP.
/(b)/ Reclassified to conform to 1999 classifications.
/(c)/ These amounts include spending charged against remediation reserves,
net of recoveries, where permissible, but do not include noncash
provisions recorded for environmental remediation.
The Marathon Group's environmental capital expenditures accounted for
five percent of total capital expenditures in 2000, three percent in 1999,
and seven percent in 1998 (excluding the acquisition of Tarragon).
During 1998 through 2000, compliance expenditures represented one
percent of the Marathon Group'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.
USX has been notified that it is a potentially responsible party
("PRP") at 13 waste sites related to the Marathon Group under the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") as of December 31, 2000. In addition, there are 6 sites related
to the Marathon Group where USX has received information requests or other
indications that USX may be a PRP under CERCLA but where sufficient
information is not presently available to confirm the existence of
liability.
There are also 115 additional sites, excluding retail marketing
outlets, related to the Marathon Group where remediation is being sought
under other environmental statutes, both federal and state, or where
private parties are seeking remediation through discussions or litigation.
Of these sites, 15 were associated with properties conveyed to MAP by
Ashland for which Ashland has retained liability for all costs associated
with remediation.
At many of these sites, USX is one of a number of parties involved and
the total cost of remediation, as well as USX's share thereof, is
frequently dependent upon the outcome of investigations and remedial
studies. The Marathon Group accrues for environmental remediation
activities when the responsibility to remediate is probable and the amount
of associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as additional
remediation obligations arise, charges in excess of those previously
accrued may be required. See Note 25 to the Marathon Group Financial
Statements.
New or expanded environmental requirements, which could increase the
Marathon Group's environmental costs, may arise in the future. USX intends
to comply with all legal requirements regarding the environment, but since
many of them are not fixed or presently determinable (even under existing
legislation) and may be affected by future legislation, it is not possible
to predict accurately the ultimate cost of compliance, including
remediation costs which may be incurred and penalties which may be imposed.
However, based on presently available information, and existing laws and
regulations as currently implemented, the Marathon Group does not
anticipate that environmental compliance expenditures (including operating
and maintenance and remediation) will materially increase in 2001. The
Marathon Group's environmental capital expenditures are expected to be
approximately $100 million in 2001. Predictions beyond 2001 can only be
broad-based estimates which have varied, and will continue to vary, due to
the ongoing evolution of specific regulatory requirements, the possible
imposition of more stringent requirements and the availability of new
M-32
Management's Discussion and Analysis continued
technologies, among other matters. Based upon currently identified
projects, the Marathon Group anticipates that environmental capital
expenditures will be approximately $92 million in 2002; however, actual
expenditures may vary as the number and scope of environmental projects are
revised as a result of improved technology or changes in regulatory
requirements and could increase if additional projects are identified or
additional requirements are imposed.
New Tier II Fuels regulations were proposed in late 1999. The gasoline
rules, which were finalized by the U.S. Environmental Protection Agency
("EPA") in February 2000, and the diesel fuel rule which was finalized in
January 2001, require substantially reduced sulfur levels. The combined
capital cost to achieve compliance with the gasoline and diesel regulations
could amount to approximately $700 million between 2003 and 2005. This is a
forward-looking statement and can only be a broad-based estimate due to the
ongoing evolution of regulatory requirements. Some factors (among others)
that could potentially affect gasoline and diesel fuel compliance costs
include obtaining the necessary construction and environmental permits,
operating considerations, and unforeseen hazards such as weather
conditions.
In October 1998, the National Enforcement Investigations Center and
Region V of the EPA conducted a multi-media inspection of MAP's Detroit
refinery. Subsequently, in November 1998, Region V conducted a multi-media
inspection of MAP's Robinson refinery. These inspections covered compliance
with the Clean Air Act (New Source Performance Standards, Prevention of
Significant Deterioration, and the National Emission Standards for
Hazardous Air Pollutants for Benzene), the Clean Water Act (permit
exceedances for the Waste Water Treatment Plant), reporting obligations
under the Emergency Planning and Community Right to Know Act and the
handling of process waste. MAP has been advised, in ongoing discussions
with the EPA, as to certain compliance issues regarding MAP's Detroit and
Robinson refineries. Thus far, MAP has been served with two Notices of
Violation ("NOV") and three Findings of Violation in connection with the
multi-media inspections at its Detroit refinery. The Detroit notices allege
violations of the Michigan State Air Pollution Regulations, the EPA New
Source Performance Standards and National Emission Standards for Hazardous
Air Pollutants for Benzene. On March 6, 2000, MAP received its first NOV
arising out of the multi-media inspection of the Robinson refinery
conducted in November 1998. The NOV is for alleged Resource Conservation
and Recovery Act (hazardous waste) violations.
MAP has responded to information requests from the EPA regarding New
Source Review ("NSR") compliance at its Garyville and Texas City
refineries. In addition, the scope of the EPA's 1998 multi-media
inspections of the Detroit and Robinson refineries included NSR compliance.
NSR requires new major stationary sources and major modifications at
existing major stationary sources to obtain permits, perform air quality
analysis and install stringent air pollution control equipment at affected
facilities. The current EPA initiative appears to target many items that
the industry has historically considered routine repair, replacement and
maintenance or other activity exempted from the NSR requirements. MAP is
engaged in ongoing discussions with the EPA on these issues concerning all
of MAP's refineries.
While MAP has not been notified of any formal findings or violations
resulting from either the information requests or inspections regarding NSR
compliance, MAP has been informed during discussions with the EPA of
potential non-compliance concerns of the EPA based on these inspections and
other information identified by the EPA. Recently, discussions with the EPA
have included commitment to some specific control technologies and
implementation schedules, but not penalties. In addition, MAP anticipates
that some or all of the non-NSR related issues arising from the multi-media
inspections may also be resolved as part of the current discussions with
the EPA. A negotiated resolution with the EPA could result in increased
environmental capital expenditures in future years, in addition to as yet,
undetermined penalties.
During 1999 an EPA advisory panel on oxygenate use in gasoline issued
recommendations to the EPA, calling for the improved protection of drinking
water from methyl tertiary butyl ether ("MTBE") impacts, a substantial
reduction in the use of MTBE, and action by Congress to remove the
oxygenate requirements for reformulated gasoline under the Clean Air Act.
The panel reviewed public health and environmental issues that have been
raised by the use of MTBE in gasoline, and specifically by the discovery of
MTBE in water supplies. State and federal environmental regulatory agencies
could implement the majority of the recommendations, while some would
require Congressional legislative action. California has acted to ban MTBE
use by December 31, 2002 and has requested a waiver from
M-33
Management's Discussion and Analysis continued
the EPA of California state oxygenate requirements. In addition, a number
of states have passed laws which limit or require the phase out of MTBE in
gasoline, including states in MAP's marketing area such as Michigan and
Minnesota. Many other states are considering bills which require similar
limitations or the phase out of MTBE.
MAP has a non-material investment in MTBE units at its Robinson,
Catlettsburg and Detroit refineries. Approximately seven percent of MAP's
refinery gasoline production includes MTBE. Potential phase-outs or
restrictions on the use of MTBE would not be expected to have a material
impact on MAP and its operations, although it is not possible to reach any
conclusions until further federal or state actions, if any, are taken.
USX is the subject of, or party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to
the environment, certain of which are discussed in Note 25 to the Marathon
Group Financial Statements. The ultimate resolution of these contingencies
could, individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
Management's Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
Outlook
The outlook regarding the results of operations for the Marathon
Group's upstream segment is largely dependent upon future prices and
volumes of liquid hydrocarbons and natural gas. Prices have historically
been volatile and have frequently been affected by unpredictable changes in
supply and demand resulting from fluctuations in worldwide economic
activity and political developments in the world's major oil and gas
producing and consuming areas. Any significant decline in prices could have
a material adverse effect on the Marathon Group's results of operations. A
prolonged decline in such prices could also adversely affect the quantity
of crude oil and natural gas reserves that can be economically produced and
the amount of capital available for exploration and development.
At year-end 2000, Marathon revised its estimate of proved developed
and undeveloped oil and gas reserves downward by 167 million barrels of oil
equivalent ("BOE"). These revisions were principally in Canada, the North
Sea and United States and are the result of production performance and
disappointing drilling results.
BOE is a combined measure of worldwide liquid hydrocarbon and natural
gas production, measured in barrels per day and cubic feet per day,
respectively. For purposes of determining BOE, natural gas volumes are
converted to approximate liquid hydrocarbon barrels by dividing the natural
gas volumes expressed in thousands of cubic feet ("mcf") by 6. The liquid
hydrocarbon volume is added to the barrel equivalent of gas volume to
obtain BOE. Marathon intends to disclose total production estimates on a
BOE basis from this point forward.
In 2001, worldwide production is expected to average 430,000 BOE per
day, split evenly between liquid hydrocarbons and natural gas, including
production from Marathon's share of investees and future acquisitions.
On December 28, 2000, Marathon signed a definitive agreement to form a
joint venture with Kinder Morgan Energy Partners, L.P., which commenced
operations in January 2001. The formation of the joint venture included
contribution of interests in the Yates and SACROC assets. This transaction
will allow Marathon to expand its interests in the Permian Basin and will
improve access to materials for use in enhanced recovery techniques in the
Yates Field. Marathon holds an 85 percent economic interest in the combined
entity, which will be accounted for under the equity method of accounting.
On December 22, 2000, Marathon announced its plans to acquire Pennaco.
This acquisition will enhance Marathon's presence in a core area, the North
American gas market, and will provide an opportunity for possible new
reserves to be developed. The tender offer expired on February 5, 2001 at
12:00 midnight, Eastern time. Marathon acquired approximately 17.6 million
shares of Pennaco common stock which were validly tendered and not
withdrawn in the offer, representing approximately 87 percent of the
outstanding Pennaco shares.
M-34
Management's Discussion and Analysis continued
Marathon plans to acquire the remaining Pennaco shares through a
merger in which each share of Pennaco common stock, not purchased in the
offer and not held by stockholders who have properly exercised dissenters
rights under Delaware law, will be converted into the right to receive the
tender offer price in cash, without interest.
Marathon plans to drill six deepwater Gulf of Mexico exploratory wells
in 2001. To support this increased drilling activity, Marathon has
contracted two new deepwater rigs, capable of drilling in water depths
beyond 6,500 feet.
Other major upstream projects, which are currently underway or under
evaluation and are expected to improve future income streams, include the
Mississippi Canyon Block 348 in the Gulf of Mexico and various North
American natural gas fields. Also, Marathon expects continued development
in the Foinaven area in the U.K. Atlantic Margin. Marathon acquired an
interest in this location through the exchange of its Sakhalin interests
with Shell Oil in the fourth quarter of 2000
Marathon E&P is currently on target for achieving $150 million in
annual repeatable pre-tax operating efficiencies by year-end 2001. Marathon
initiated a reorganization program for its upstream business units which
will contribute to an overall workforce reduction of 24% compared to 1999
levels. In addition, regional production offices in Lafayette, Louisiana
and Tyler, Texas have been closed along with the Petroleum Technology
Center in Littleton, Colorado.
The above discussion includes forward-looking statements with respect
to 2001 worldwide liquid hydrocarbon production and natural gas volumes,
the acquisition of Pennaco, commencement of upstream projects, and the Gulf
of Mexico drilling program. Some factors that could potentially affect
worldwide liquid hydrocarbon production/gas volumes, upstream projects, and
the drilling program include: pricing, worldwide supply and demand for
petroleum products, amount of capital available for exploration and
development, regulatory constraints, reserve estimates, reserve replacement
rates, production decline rates of mature fields, timing of commencing
production from new wells, timing and results of future development
drilling, drilling rig availability, the completion of the merger with
Pennaco, future acquisitions of producing properties, and other geological,
operating and economic considerations. In addition, development of new
production properties in countries outside the United States may require
protracted negotiations with host governments and is frequently subject to
political considerations, such as tax regulations, which could adversely
affect the timing and economics of projects. A factor that could affect the
Pennaco acquisition is successful completion of the merger. These factors
(among others) could cause actual results to differ materially from those
set forth in the forward-looking statements.
Downstream income of the Marathon Group is largely dependent upon
refined product margins, which reflect the difference between the selling
prices of refined products and the cost of raw materials refined and
manufacturing costs. Refined product margins have been historically
volatile and vary with the level of economic activity in the various
marketing areas, the regulatory climate, crude oil costs, manufacturing
costs, logistical limitations and the available supply of crude oil and
refined products.
In 2000, MAP, CMS Energy Corporation, and TEPPCO Partners, L.P. formed
a limited liability company with equal ownership to operate an interstate
refined petroleum products pipeline extending from the U.S. Gulf of Mexico
to the Midwest. The new company plans to build a 74-mile, 24-inch diameter
pipeline connecting TEPPCO's facility in Beaumont, Texas, with an existing
720-mile, 26-inch diameter pipeline extending from Longville, Louisiana to
Bourbon, Illinois. In addition, a two million barrel terminal storage
facility will be constructed. The system will be called Centennial Pipeline
and will connect with existing MAP transportation assets and other common
carrier lines. Construction is expected to be completed in the fourth
quarter of 2001.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common
carrier pipeline company and the pipeline will be an interstate common
carrier pipeline. The pipeline is expected to initially move about 50,000
bpd of refined petroleum into the central Ohio region. The pipeline is
currently expected to be operational in mid-2002. The startup of this
pipeline is largely dependent on obtaining the final regulatory approvals,
obtaining the necessary rights-of-way, of which approximately 95 percent
have been obtained to date, and completion of construction. ORPL is still
negotiating with a few landowners to obtain the
M-35
Management's Discussion and Analysis continued
remaining rights-of-way. Where necessary, ORPL has filed condemnation
actions to acquire some rights-of-way. These actions are at various stages
of litigation and appeal with several recent decisions supporting ORPL's
use of eminent domain.
MAP is constructing a delayed coker unit at its Garyville, Louisiana
refinery. This unit will allow for the use of heavier, lower cost crude and
reduce the production of heavy fuel oil. To supply this new unit, MAP
reached an agreement with P.M.I. Comercio Internacional, S.A. de C.V.,
(PMI), an affiliate of Petroleos Mexicanos, (PEMEX), to purchase
approximately 90,000 bpd of heavy Mayan crude oil. This is a multi-year
contract, which will begin upon completion of the delayed coker unit which
is scheduled in the fall of 2001. In addition, a project to increase light
product output is underway at MAP's Robinson, Illinois refinery and is
expected to be completed in the second quarter of 2001.
MAP initiated a program for 2000 to dispose of approximately 270 non-
core SSA retail outlets in the Midwest and Southeast. At the end of this
program through December 31, 2000, 159 stores, which comprise about 7
percent of MAP's owned and operated SSA retail network, had been sold. MAP
will continue to sell additional SSA stores as part of its ongoing store
development process.
The above discussion includes forward-looking statements with respect
to pipeline and refinery improvement projects. Some factors that could
potentially cause actual results to differ materially from present
expectations include the price of petroleum products, levels of cash flow
from operations, obtaining the necessary construction and environmental
permits, unforeseen hazards such as weather conditions, obtaining the
necessary rights-of-way, outcome of pending litigation, and regulatory
approval constraints. These factors (among others) could cause actual
results to differ materially from those set forth in the forward-looking
statements.
Accounting Standards
In the fourth quarter of 2000, USX adopted the following accounting
pronouncements primarily related to the classification of items in the
statement of operations. The adoption of these new pronouncements had no
net effect on the financial position or results of operations of the
Marathon Group, although they required reclassifications of certain amounts
in the statement of operations, including all prior periods presented.
. In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue
Recognition in Financial Statements", which summarizes the SEC
staff's interpretations of generally accepted accounting
principles related to revenue recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) issued EITF Consensus No. 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent",
which addresses whether certain items should be reported as a
reduction of revenue or as a component of both revenues and cost
of revenues, and EITF Consensus No. 00-10 "Accounting for
Shipping and Handling Fees and Costs", which addresses the
classification of costs incurred for shipping goods to customers.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities: (SFAS No. 133), which later
was amended by SFAS Nos. 137 and 138. This Standard requires recognition of
all derivatives as either assets or liabilities at fair value. Changes in
fair value will be reflected in either current period net income or other
comprehensive income, depending on the designation of the derivative
instrument. The Marathon Group may elect not to designate a derivative
instrument as a hedge even if the strategy would be expected to qualify for
hedge accounting treatment. The adoption of SFAS No. 133 will change the
timing of recognition for derivative gains and losses as compared to
previous accounting standards.
The Marathon Group will adopt the Standard effective January 1, 2001.
The transition adjustment resulting from the adoption of SFAS No. 133 will
be reported as a cumulative effect of a change in accounting principle. The
unfavorable cumulative effect on net income, net of tax, is expected to
approximate $9 million. The unfavorable cumulative effect on other
comprehensive income, net of tax, will approximate $7 million. The amounts
reported as other comprehensive income will be reflected in net income when
the anticipated physical transactions are consummated. It is not possible
to estimate the effect that this Standard will have on future results of
operations.
M-36
Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
USX uses commodity-based and foreign currency derivative instruments
to manage its price risk. Management has authorized the use of futures,
forwards, swaps and options to manage exposure to price fluctuations
related to the purchase, production or sale of crude oil, natural gas,
refined products, and nonferrous metals. For transactions that qualify for
hedge accounting, the resulting gains or losses are deferred and
subsequently recognized in income from operations, in the same period as
the underlying physical transaction. Derivative instruments used for
trading and other activities are marked-to-market and the resulting gains
or losses are recognized in the current period in income from operations.
While USX's risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw material
purchases and products sold, such activities can also encompass strategies
that assume price risk.
Management believes that use of derivative instruments along with risk
assessment procedures and internal controls does not expose the Marathon
Group to material risk. The use of derivative instruments could materially
affect the Marathon Group'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 2 to the Marathon Group Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, the Marathon Group 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,
the Marathon Group is exposed to the risk of price fluctuations on natural
gas liquids and petroleum feedstocks used as raw materials.
The Marathon Group'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, the Marathon Group uses fixed-price contracts and derivative
commodity instruments to manage a relatively small portion of its commodity
price risk. The Marathon Group 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 the
Marathon Group's overall risk management programs.
M-37
Quantitative and Qualitative Disclosures About Market Risk continued
Sensitivity analyses of the incremental effects on pretax income
of hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of December 31, 2000 and December 31, 1999, are
provided in the following table:/(a)/
(Dollars in millions)
------------------------------------------------------------------------------------------
Incremental Decrease in
Pretax Income Assuming a
Hypothetical Price
Change of/(a)/
2000 1999
Derivative Commodity Instruments 10% 25% 10% 25%
-------------------------------------------------------------------------------------------
Marathon Group/(b)(c)/:
Crude oil/(d)/
Trading $ - $ - /(e)/ $ 1.3 $ 7.7 /(e)/
Other than trading 9.1 27.2 /(e)/ 16.5 54.0 /(e)/
Natural gas/(d)/
Trading - - /(e)/ - - /(f)/
Other than trading 20.2 50.6 /(e)/ 4.7 16.8 /(f)/
Refined products/(d)/
Trading - - /(e)/ - - /(e)/
Other than trading 6.1 16.5 /(e)/ 8.4 23.8 /(e)/
-------------------------------------------------------------------------------------------
/(a)/ Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts
reflect the estimated incremental effect on pretax income of
hypothetical 10% and 25% changes in closing commodity prices for each
open contract position at December 31, 2000 and December 31, 1999.
Marathon Group management evaluates their portfolio of derivative
commodity instruments on an ongoing basis and adds or revises
strategies to reflect anticipated market conditions and changes in
risk profiles. Changes to the portfolio subsequent to December 31,
2000, would cause future pretax income effects to differ from those
presented in the table.
/(b)/ The number of net open contracts varied throughout 2000, from a low
of 12,252 contracts at July 5, to a high of 34,554 contracts at
October 25, and averaged 21,875 for the year. The derivative
commodity instruments used and hedging positions taken also varied
throughout 2000, and will continue to vary in the future. Because of
these variations in the composition of the portfolio over time, the
number of open contracts, by itself, cannot be used to predict future
income effects.
/(c)/ The calculation of sensitivity amounts for basis swaps assumes that
the physical and paper indices are perfectly correlated. Gains and
losses on options are based on changes in intrinsic value only.
/(d)/ The direction of the price change used in calculating the sensitivity
amount for each commodity reflects that which would result in the
largest incremental decrease in pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
/(e)/ Price increase.
/(f)/ Price decrease.
In total, Marathon's exploration and production operations
recorded net pretax other than trading activity losses of approximately $34
million in 2000, gains of $3 million in 1999 and losses of $3 million in
1998.
Marathon's refining, marketing and transportation operations
generally use derivative commodity instruments to lock-in costs of certain
crude oil and other feedstocks, to protect carrying values of inventories
and to protect margins on fixed-price sales of refined products. Marathon's
refining, marketing and transportation operations recorded net pretax other
than trading activity losses, net of the 38% minority interest in MAP, of
approximately $116 million in 2000, and net pretax other than trading
activity gains, net of the 38% minority interest in MAP, of $8 million in
1999 and $28 million in 1998. Marathon's refining, marketing and
transportation operations used derivative instruments for trading
activities and recorded net pretax trading activity losses, net of the 38%
minority interest in MAP, of $11 million in 2000 and net pretax trading
activity gains, net of the 38% minority interest in MAP, of $5 million in
1999.
The Marathon Group 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
M-38
Quantitative and Qualitative Disclosures About Market Risk continued
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.
The Marathon Group is subject to liquidity risk, caused by timing
delays in liquidating contract positions due to a potential inability to
identify a counterparty willing to accept an offsetting position. Due to
the large number of active participants, liquidity risk exposure is
relatively low for exchange-traded transactions.
Interest Rate Risk
USX is subject to the effects of interest rate fluctuations on certain
of its non-derivative financial instruments. A sensitivity analysis of the
projected incremental effect of a hypothetical 10% decrease in year-end
2000 and 1999 interest rates on the fair value of the Marathon Group's
specifically attributed non-derivative financial instruments and the
Marathon Group's portion of USX's non-derivative financial instruments
attributed to both groups, is provided in the following table:
(Dollars in millions)
-----------------------------------------------------------------------------------------------
As of December 31, 2000 1999
Incremental Incremental
Increase in Increase in
Fair Fair Fair Fair
Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(c)/ Value/(b)/ Value/(c)/
-----------------------------------------------------------------------------------------------
Financial assets:
Investments and long-term receivables/(d)/ $ 171 $ - $ 166 $ -
Financial liabilities:
Long-term debt/(e)(f)/ $2,174 $ 86 $3,443 $144
Preferred stock of subsidiary/(g)/ 175 15 176 16
------ ---------- ---------- -----------
Total liabilities $2,349 $ 101 $3,619 $160
-----------------------------------------------------------------------------------------------
/(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 Marathon Group Financial Statements for carrying
value of instruments.
/(c)/ Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at December
31, 2000 and December 31, 1999, on the fair value of USX's non-
derivative financial instruments. For financial liabilities, this
assumes a 10% decrease in the weighted average yield to maturity of
USX's long-term debt at December 31, 2000 and December 31, 1999.
/(d)/ For additional information, see Note 19 to the Marathon Group
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 12 to the Marathon Group Financial
Statements.
/(g)/ See Note 22 to the USX Consolidated Financial Statements.
At December 31, 2000, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair value of
the portfolio is relatively sensitive to effects of interest rate
fluctuations. This sensitivity is illustrated by the $86 million increase
in the fair value of long-term debt assuming a hypothetical 10% decrease in
interest rates. However, USX's sensitivity to interest rate declines and
corresponding increases in the fair value of its debt portfolio would
unfavorably affect USX's results and cash flows only to the extent that USX
elected to repurchase or otherwise retire all or a portion of its fixed-
rate debt portfolio at prices above carrying value.
Foreign Currency Exchange Rate Risk
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for capital
expenditures and existing assets or liabilities denominated in currencies
other than U.S. dollars. USX has not generally used derivative instruments
to manage this risk. However, USX has made limited use of forward currency
contracts to manage exposure to certain currency price fluctuations. At
December 31, 2000, USX had open Canadian dollar forward purchase
M-39
Quantitative and Qualitative Disclosures About Market Risk continued
contracts with a total carrying value of approximately $14 million compared
to $52 million at December 31, 1999. A 10% increase in the December 31,
2000, Canadian dollar to U.S. dollar forward rate, would result in a charge
to income of approximately $1 million. Last year, a 10% increase in the
December 31, 1999, Canadian dollar to U.S. dollar forward rate, would have
resulted in a charge to income of $5 million. The entire amount of these
contracts is attributed to the Marathon Group.
Equity Price Risk
At December 31, 2000, the Marathon Group had no material exposure to
equity price risk.
Safe Harbor
The Marathon Group's quantitative and qualitative disclosures about
market risk include forward-looking statements with respect to management's
opinion about risks associated with the Marathon Group's use of derivative
instruments. These statements are based on certain assumptions with respect
to market prices and industry supply 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 the
Marathon Group's hedging programs may differ materially from those
discussed in the forward-looking statements.
M-40
U. S. Steel Group
Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis, and Quantitative and
Qualitative Disclosures About Market Risk
Page
----
Management's Report....................................................... S-1
Audited Financial Statements:
Report of Independent Accountants........................................ S-1
Statement of Operations.................................................. S-2
Balance Sheet............................................................ S-3
Statement of Cash Flows.................................................. S-4
Notes to Financial Statements............................................ S-5
Selected Quarterly Financial Data......................................... S-22
Principal Unconsolidated Affiliates....................................... S-22
Supplementary Information................................................. S-22
Five-Year Operating Summary............................................... S-23
Five-Year Financial Summary............................................... S-24
Management's Discussion and Analysis...................................... S-25
Quantitative and Qualitative Disclosures About Market Risk................ S-38
Management's Report
The accompanying financial statements of the U. S. Steel Group
are the responsibility of and have been prepared by USX
Corporation (USX) in conformity with accounting principles
generally accepted in the United States. They necessarily include
some amounts that are based on best judgments and estimates. The
U. S. Steel Group financial information displayed in other
sections of this report is consistent with these financial
statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division
of responsibility and by communications programs aimed at
assuring that its policies and methods are understood throughout
the organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and
the internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the financial statements, USX's independent
accountants, who are elected by the stockholders, review and test
the internal accounting controls selectively to establish a basis
of reliance thereon in determining the nature, extent and timing
of audit tests to be applied.
The Board of Directors pursues its oversight role in the
area of financial reporting and internal accounting control
through its Audit Committee. This Committee, composed solely of
nonmanagement directors, regularly meets (jointly and separately)
with the independent accountants, management and internal
auditors to monitor the proper discharge by each of its
responsibilities relative to internal accounting controls and the
consolidated and group financial statements.
Thomas J. Usher Robert M. Hernandez Larry G. Schultz
Chairman, Board of Directors & Vice Chairman & Vice President-
Chief Executive Officer Chief Financial Officer Accounting
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing
on pages S-2 through S-21 present fairly, in all material
respects, the financial position of the U. S. Steel Group at
December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of USX'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.
The U. S. Steel Group is a business unit of USX Corporation
(as described in Note 1, page S-5); accordingly, the financial
statements of the U. S. Steel Group should be read in connection
with the consolidated financial statements of USX Corporation.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 7, 2001
S-1
Statement of Operations
(Dollars in millions) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues $6,090 $5,536 $6,378
Income (loss) from investees (8) (89) 46
Net gains on disposal of assets 46 21 54
Other income (loss) 4 2 (1)
------ ------ ------
Total revenues and other income 6,132 5,470 6,477
------ ------ ------
Costs and expenses:
Cost of revenues (excludes items shown below) 5,656 5,084 5,604
Selling, general and administrative expenses (credits) (Note 12) (223) (283) (201)
Depreciation, depletion and amortization 360 304 283
Taxes other than income taxes 235 215 212
------ ------ ------
Total costs and expenses 6,028 5,320 5,898
------ ------ ------
Income from operations 104 150 579
Net interest and other financial costs (Note 7) 105 74 42
------ ------ ------
Income (loss) before income taxes and extraordinary losses (1) 76 537
Provision for income taxes (Note 15) 20 25 173
------ ------ ------
Income (loss) before extraordinary losses (21) 51 364
Extraordinary losses (Note 6) - 7 -
------ ------ ------
Net income (loss) (21) 44 364
Dividends on preferred stock 8 9 9
------ ------ ------
Net income (loss) applicable to Steel Stock $ (29) $ 35 $ 355
----------------------------------------------------------------------------------------------------------------
Income Per Common Share Applicable to Steel Stock
2000 1999 1998
----------------------------------------------------------------------------------------------------------------
Basic:
Income (loss) before extraordinary losses $ (.33) $ .48 $ 4.05
Extraordinary losses - .08 -
----- ----- ------
Net income (loss) $ (.33) $ .40 $ 4.05
Diluted:
Income (loss) before extraordinary losses $ (.33) $ .48 $ 3.92
Extraordinary losses - .08 -
----- ----- ------
Net income (loss) $ (.33) $ .40 $ 3.92
----------------------------------------------------------------------------------------------------------------
See Note 21, for a description and computation of income per
common share.
The accompanying notes are an integral part of these financial
statements.
S-2
Balance Sheet
(Dollars in millions) December 31 2000 1999
-------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 219 $ 22
Receivables, less allowance for doubtful accounts
of $57 and $10 627 488
Receivables subject to a security interest (Note 11) 350 350
Income taxes receivable (Note 13) 364 97
Inventories (Note 14) 946 743
Deferred income tax benefits (Note 15) 201 281
Other current assets 10 -
------- -------
Total current assets 2,717 1,981
Investments and long-term receivables,
less reserves of $28 and $3 (Notes 13 and 16) 536 572
Property, plant and equipment - net (Note 23) 2,739 2,516
Prepaid pensions (Note 12) 2,672 2,404
Other noncurrent assets 47 52
------- -------
Total assets $8,711 $7,525
-------------------------------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Notes payable $ 70 $ -
Accounts payable 760 757
Payroll and benefits payable 202 322
Accrued taxes 173 177
Accrued interest 47 15
Long-term debt due within one year (Note 11) 139 13
------- -------
Total current liabilities 1,391 1,284
Long-term debt (Note 11) 2,236 902
Deferred income taxes (Note 15) 666 348
Employee benefits (Note 12) 1,767 2,245
Deferred credits and other liabilities 483 441
Preferred stock of subsidiary (Note 10) 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior subordinated
convertible debentures of USX (Note 18) 183 183
Stockholders' Equity (Note 19)
Preferred stock 2 3
Common stockholders' equity 1,917 2,053
------- -------
Total stockholders' equity 1,919 2,056
------- -------
Total liabilities and stockholders' equity $ 8,711 $ 7,525
-------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
S-3
Statement of Cash Flows
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income (loss) $ (21) $ 44 $ 364
Adjustments to reconcile to net cash provided
from (used in) operating activities:
Extraordinary losses - 7 -
Depreciation, depletion and amortization 360 304 283
Pensions and other postretirement benefits (847) (256) (215)
Deferred income taxes 389 107 158
Net gains on disposal of assets (46) (21) (54)
Changes in: Current receivables- sold - (320) (30)
- operating turnover (263) (242) 232
Inventories (63) (14) 7
Current accounts payable and accrued expenses (262) 239 (285)
All other - net 126 72 (80)
------ ----------- -----------
Net cash provided from (used in) operating activities (627) (80) 380
------ ----------- -----------
Investing activities:
Capital expenditures (244) (287) (310)
Acquisition of U. S. Steel Kosice s.r.o., net of cash acquired of $59 (10) - -
Disposal of assets 21 10 21
Restricted cash - withdrawals 2 15 35
- deposits (2) (17) (35)
Investees - investments (35) (15) (73)
- loans and advances (10) - (1)
All other - net 8 - 14
------ ----------- -----------
Net cash used in investing activities (270) (294) (349)
------ ----------- -----------
Financing activities (Note 10):
Increase in U. S. Steel
Group's portion of USX consolidated debt
1,208 147 13
Specifically attributed debt:
Borrowings - 350 -
Repayments (6) (11) (4)
Steel Stock issued - - 55
Preferred stock repurchased (12) (2) (8)
Dividends paid (97) (97) (96)
------ ----------- -----------
Net cash provided from (used in) financing activities 1,093 387 (40)
------ ----------- -----------
Effect of exchange rate changes on cash 1 - -
------ ----------- -----------
Net increase (decrease) in cash and cash equivalents 197 13 (9)
Cash and cash equivalents at beginning of year 22 9 18
------ ----------- -----------
Cash and cash equivalents at end of year $ 219 $ 22 $ 9
-----------------------------------------------------------------------------------------------------------------
See Note 9, for supplemental cash flow information.
The accompanying notes are an integral part of these financial
statements.
S-4
Notes to Financial Statements
1. Basis of Presentation
USX Corporation (USX) has two classes of common stock: USX - U. S.
Steel Group Common Stock (Steel Stock) and USX - Marathon Group
Common Stock (Marathon Stock), which are intended to reflect the
performance of the U. S. Steel Group and the Marathon Group,
respectively.
The financial statements of the U. S. Steel Group include
the financial position, results of operations and cash flows for
all businesses of USX other than the businesses, assets and
liabilities included in the Marathon Group, and a portion of the
corporate assets and liabilities and related transactions which are
not separately identified with ongoing operating units of USX. The
U. S. Steel Group financial statements are prepared using the
amounts included in the USX consolidated financial statements. For
a description of the U. S. Steel Group's operating segments, see
Note 8.
Although the financial statements of the U. S. Steel Group
and the Marathon Group separately report the assets, liabilities
(including contingent liabilities) and stockholders' equity of USX
attributed to each such Group, such attribution of assets,
liabilities (including contingent liabilities) and stockholders'
equity between the U. S. Steel Group and the Marathon Group for the
purpose of preparing their respective financial statements does not
affect legal title to such assets or responsibility for such
liabilities. Holders of Steel Stock and Marathon Stock are holders
of common stock of USX, and continue to be subject to all the risks
associated with an investment in USX and all of its businesses and
liabilities. Financial impacts arising from one Group that affect
the overall cost of USX's capital could affect the results of
operations and financial condition of the other Group. In addition,
net losses of either Group, as well as dividends and distributions
on any class of USX Common Stock or series of preferred stock and
repurchases of any class of USX Common Stock or series of preferred
stock at prices in excess of par or stated value, will reduce the
funds of USX legally available for payment of dividends on both
classes of Common Stock. Accordingly, the USX consolidated
financial information should be read in connection with the U. S.
Steel Group financial information.
- --------------------------------------------------------------------------------
2. Summary of Principal Accounting Policies
Principles applied in consolidation - These financial statements
include the accounts of the U. S. Steel Group. The U. S. Steel
Group and the Marathon Group financial statements, taken together,
comprise all of the accounts included in the USX consolidated
financial statements.
Investments in entities over which the U. S. Steel Group has
significant influence are accounted for using the equity method of
accounting and are carried at the U. S. Steel Group's share of net
assets plus loans and advances.
Investments in companies whose stock is publicly traded are
carried generally at market value. The difference between the cost
of these investments and market value is recorded in other
comprehensive income (net of tax). Investments in companies whose
stock has no readily determinable fair value are carried at cost.
Income from investees includes the U. S. Steel Group's
proportionate share of income from equity method investments. Also,
gains or losses from a change in ownership of an unconsolidated
investee are recognized in the period of change.
Use of estimates - Generally accepted accounting principles require
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant items
subject to such estimates and assumptions include the carrying
value of long-lived assets; valuation allowances for receivables,
inventories and deferred income tax assets; environmental
liabilities; liabilities for potential tax deficiencies and
potential litigation claims and settlements; and assets and
obligations related to employee benefits. Additionally, certain
estimated liabilities are recorded when management commits to a
plan to close an operating facility or to exit a business activity.
Actual results could differ from the estimates and assumptions
used.
S-5
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.
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 - The U. S. Steel Group uses commodity-based
derivative instruments to manage its exposure to price risk.
Management is authorized to use futures, forwards, swaps and
options related to the purchase of natural gas, refined products
and nonferrous metals used in steel operations. Recorded deferred
gains or losses are reflected within other current and noncurrent
assets or accounts payable and deferred credits and other
liabilities, as appropriate.
Long-lived assets - Depreciation is generally computed using a
modified straight-line method based upon estimated lives of assets
and production levels. The modification factors for domestic steel
producing assets range from a minimum of 85% at a production level
below 81% of capability, to a maximum of 105% for a 100% production
level. No modification is made at the 95% production level,
considered the normal long-range level.
Depletion of mineral properties is based on rates which are
expected to amortize cost over the estimated tonnage of minerals to
be removed.
The U. S. Steel Group evaluates impairment of its long-
lived assets on an individual asset basis or by logical groupings
of assets. Assets deemed to be impaired are written down to their
fair value, including any related goodwill, using discounted future
cash flows and, if available, comparable market values.
When long-lived assets depreciated on an individual basis
are sold or otherwise disposed of, any gains or losses are
reflected in income. Gains on disposal of long-lived assets are
recognized when earned, which is generally at the time of closing.
If a loss on disposal is expected, such losses are recognized when
long-lived assets are reclassified as assets held for sale.
Proceeds from disposal of long-lived assets depreciated on a group
basis are credited to accumulated depreciation, depletion and
amortization with no immediate effect on income.
Major maintenance activities - The U. S. Steel Group incurs planned
major maintenance costs primarily for blast furnace relines. Such
costs are separately capitalized in property, plant and equipment
and are amortized over their estimated useful life, which is
generally the period until the next scheduled reline.
Environmental remediation - The U. S. Steel Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities are
accrued based on estimates of known environmental exposure and are
discounted in certain instances.
Postemployment benefits - The U. S. Steel Group recognizes an
obligation to provide postemployment benefits, primarily for
disability-related claims covering indemnity and medical payments
to certain employees. The obligation for these claims and the
related periodic costs are measured using actuarial techniques and
assumptions, including an appropriate discount rate, analogous to
the required methodology for measuring pension and other
postretirement benefit obligations. Actuarial gains and losses are
deferred and amortized over future periods.
Insurance - The U. S. Steel Group is insured for catastrophic
casualty and certain property and business interruption exposures,
as well as those risks required to be insured by law or contract.
Costs resulting from noninsured losses are charged against income
upon occurrence.
Reclassifications - Certain reclassifications of prior years' data
have been made to conform to 2000 classifications.
S-6
________________________________________________________________________________
3. New Accounting Standards
In the fourth quarter of 2000, USX adopted the following accounting
pronouncements primarily related to the classification of items in
the financial statements. The adoption of these new pronouncements
had no net effect on the financial position or results of
operations of the U. S. Steel Group, although they required
reclassifications of certain amounts in the financial statements,
including all prior periods presented.
. In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue
Recognition in Financial Statements," which summarizes the SEC
staff's interpretations of generally accepted accounting
principles related to revenue recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) issued EITF Consensus No.
99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent," which addresses whether certain items should be
reported as a reduction of revenue or as a component of both
revenues and cost of revenues, and EITF Consensus No. 00-10
"Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping
goods to customers.
. In September 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 140). SFAS 140
revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and
requires certain disclosures. USX adopted certain recognition
and reclassification provisions of SFAS 140, which were
effective for fiscal years ending after December 15, 2000. The
remaining provisions of SFAS 140 are effective after March 31,
2001.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (SFAS No. 133),
which later was amended by SFAS Nos. 137 and 138. This Standard
requires recognition of all derivatives as either assets or
liabilities at fair value. Changes in fair value will be reflected
in either current period net income or other comprehensive income,
depending on the designation of the derivative instrument. The
U. S. Steel Group may elect not to designate a derivative
instrument as a hedge even if the strategy would be expected to
qualify for hedge accounting treatment. The adoption of SFAS No.
133 will change the timing of recognition for derivative gains and
losses as compared to previous accounting standards.
The U. S. Steel Group will adopt the Standard effective January 1,
2001. The transition adjustment resulting from the adoption of SFAS
No. 133 will be reported as a cumulative effect of a change in
accounting principle. The transition adjustment for the U. S. Steel
Group is expected to be immaterial. The amounts reported as other
comprehensive income will be reflected in net income when the
anticipated physical transactions are consummated. It is not
possible to estimate the effect that this Standard will have on
future results of operations.
________________________________________________________________________________
4. Corporate Activities
Financial activities - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the U. S. Steel Group and the Marathon Group based
upon the cash flows of each group for the periods presented and the
initial capital structure of each group. Most financing
transactions are attributed to and reflected in the financial
statements of the groups. See Note 10, for the U. S. Steel Group's
portion of USX's financial activities attributed to the groups.
However, transactions such as leases, certain collateralized
financings, certain indexed debt instruments, financial activities
of consolidated entities which are less than wholly owned by USX
and transactions related to securities convertible solely into any
one class of common stock are or will be specifically attributed to
and reflected in their entirety in the financial statements of the
group to which they relate.
S-7
Corporate general and administrative costs - Corporate general and
administrative costs are allocated to the U. S. Steel Group and the
Marathon Group based upon utilization or other methods management
believes to be reasonable and which consider certain measures of
business activities, such as employment, investments and revenues.
The costs allocated to the U. S. Steel Group were $25 million in
2000, $17 million in 1999 and $24 million in 1998, and primarily
consist of employment costs including pension effects, professional
services, facilities and other related costs associated with
corporate activities.
Income taxes - All members of the USX affiliated group are included
in the consolidated United States federal income tax return filed
by USX. Accordingly, the provision for federal income taxes and the
related payments or refunds of tax are determined on a consolidated
basis. The consolidated provision and the related tax payments or
refunds have been reflected in the U. S. Steel Group and the
Marathon Group financial statements in accordance with USX's tax
allocation policy. In general, such policy provides that the
consolidated tax provision and related tax payments or refunds are
allocated between the U. S. Steel Group and the Marathon Group for
group financial statement purposes, based principally upon the
financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the groups
on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the extent
that one of the groups is allocated a consolidated tax attribute
which, as a result of expiration or otherwise, is not ultimately
utilized on the consolidated tax return, the prior years'
allocation of such attribute is adjusted such that the effect of
the expiration is borne by the group that generated the attribute.
Also, if a tax attribute cannot be utilized on a consolidated basis
in the year generated or in a carryback year, the prior years'
allocation of such consolidated tax effects is adjusted in a
subsequent year to the extent necessary to allocate the tax
benefits to the group that would have realized the tax benefits on
a separate return basis. As a result, the allocated group amounts
of taxes payable or refundable are not necessarily comparable to
those that would have resulted if the groups had filed separate tax
returns.
________________________________________________________________________________
5. Business Combination
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o.
(USSK), which is located in the Slovak Republic. USSK was formed in
June 2000 to hold the steel operations and related assets of VSZ
a.s. (VSZ), a diversified Slovak corporation. The cash purchase
price was $69 million. Additional payments to VSZ of not less than
$25 million and up to $75 million are contingent upon the future
performance of USSK. Additionally, $325 million of debt was
included with the acquisition. The acquisition was accounted for
under the purchase method of accounting. The 2000 results of
operations include the operations of USSK from the date of
acquisition.
Prior to this transaction, USX and VSZ were equal partners in
VSZ U. S. Steel s.r.o. (VSZUSS), a tin mill products manufacturer.
The assets of USSK included VSZ's interest in VSZUSS. The
acquisition of the remaining interest in VSZUSS was accounted for
under the purchase method of accounting. Previously, USX had
accounted for its investment in VSZUSS under the equity method of
accounting.
VSZ did not provide historical carve-out financial information
for its steel activities prepared in accordance with generally
accepted accounting principles in the United States. USX was unable
to fully determine the effects of transfer pricing, intercompany
eliminations and expense allocations in order to prepare such
carve-out information from Slovak statutory reports and VSZ
internal records. USX broadly estimates that the unaudited pro
forma effect on its 2000 and 1999 revenues, giving effect to the
acquisition as if it had been consummated at the beginning of those
periods, would have been to increase revenues in each period by
approximately $1 billion. USX cannot determine the unaudited pro
forma effect on its 2000 and 1999 net income. In any event,
historical pro forma information is not necessarily indicative of
future results of operations.
S-8
________________________________________________________________________________
6. Extraordinary Losses
In 1999, USX irrevocably deposited with a trustee the entire 5.5
million common shares it owned in RTI International Metals, Inc.
(RTI). The deposit of the shares resulted in the satisfaction of
USX's obligation under its 6 3/4% Exchangeable Notes (indexed debt)
due February 1, 2000. Under the terms of the indenture, the trustee
exchanged one RTI share for each note at maturity. All shares were
required for satisfaction of the indexed debt; therefore, none
reverted back to USX.
As a result of the above transaction, USX recorded in 1999 an
extraordinary loss of $5 million, net of a $3 million income tax
benefit, representing prepaid interest expense and the write-off of
unamortized debt issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value of the
investment in RTI and the carrying value of the indexed debt, which
is included in net gains on disposal of assets. Since USX's
investment in RTI was attributed to the U. S. Steel Group, the
indexed debt was also attributed to the U. S. Steel Group.
In 1999, Republic Technologies International, LLC, an equity
investee of USX, recorded an extraordinary loss related to the
early extinguishment of debt. As a result, the U. S. Steel Group
recorded an extraordinary loss of $2 million, net of a $1 million
income tax benefit, representing its share of the extraordinary
loss.
________________________________________________________________________________
7. Other Items
(In millions) 2000 1999 1998
----------------------------------------------------------------------------
Net interest and other financial costs
Interest and other financial income/(a)/:
Interest income $ 3 $ 1 $ 5
Other 7 - -
----- ----- -----
Total 10 1 5
----- ----- -----
Interest and other financial costs/(a)/:
Interest incurred 88 45 40
Less interest capitalized 3 6 6
----- ----- -----
Net interest 85 39 34
Interest on tax issues 11 15 16
Financial costs on trust preferred securities 13 13 13
Financial costs on preferred stock of subsidiary 5 5 5
Amortization of discounts 1 1 2
Expenses on sales of accounts receivable - 15 21
Adjustment to settlement value of indexed debt - (13) (44)
----- ----- -----
Total 115 75 47
----- ----- -----
Net interest and other financial costs/(a)/ $ 105 $ 74 $ 42
-------------------------------------------------------------------
/(a)/ See Note 4, for discussion of USX net interest and other
financial costs attributable to the U. S. Steel Group.
-------------------------------------------------------------------
Foreign currency transactions
For 2000, the aggregate foreign currency transaction gain
included in determining net income was $7 million. There were no
foreign currency transaction gains or losses in 1999 and 1998.
________________________________________________________________________________
8. Segment Information
The U. S. Steel Group consists of two reportable operating
segments: 1) Domestic Steel and 2) U. S. Steel Kosice (USSK).
Domestic Steel includes the United States operations of U. S.
Steel, while USSK includes the U. S. Steel Kosice operations in the
Slovak Republic. Domestic Steel is engaged in the domestic
production and sale of steel mill products, coke and taconite
pellets; the management of mineral resources; coal mining;
engineering and consulting services; and real estate development
and management. USSK is engaged in the production and sale of steel
mill products and coke and primarily serves European markets.
Segment income represents income from operations allocable to
both operating segments and does not include net interest and other
financial costs and provisions for income taxes. Additionally, the
following items are not allocated to operating segments:
. Net pension credits associated with pension plan assets and
liabilities
. Certain costs related to former U. S. Steel Group business
activities
. USX corporate general and administrative costs. These costs
primarily consist of employment costs including pension
effects, professional services, facilities and other
related costs associated with corporate activities.
. Certain other items not allocated to operating segments for
business performance reporting purposes (see reconcilement
schedule on S-10)
Information on assets by segment is not provided as it is not
reviewed by the chief operating decision maker.
S-9
The following represents the operations of the U. S.
Steel Group:
(In millions) Domestic Steel USSK Total
---------------------------------------------------------------------------------------
2000
Revenues and other income:
Customer $5,981 $92 $6,073
Intergroup/(a)/ 17 - 17
Equity in losses of unconsolidated investees (8) - (8)
Other 50 - 50
------ ---- ------
Total revenues and other income $6,040 $92 $6,132
====== ==== ======
Segment income $ 23 $ 2 $ 25
Significant noncash items included in segment income -
Depreciation, depletion and amortization/(b)/ 285 4 289
Capital expenditures 239 5 244
---------------------------------------------------------------------------------------
1999
Revenues and other income:
Customer $5,519 $ - $5,519
Intergroup/(a)/ 17 - 17
Equity in losses of unconsolidated investees (43) - (43)
Other 46 - 46
------ ---- ------
Total revenues and other income $5,539 $ - $5,539
====== ==== ======
Segment income $ 91 $ - $ 91
Significant noncash items included in segment income -
Depreciation, depletion and amortization 304 - 304
Capital expenditures/(c)/ 286 - 286
---------------------------------------------------------------------------------------
1998
Revenues and other income:
Customer $6,374 $ - $6,374
Intergroup/(a)/ 2 - 2
Equity in earnings of unconsolidated investees 46 - 46
Other 55 - 55
------ ---- ------
Total revenues and other income $6,477 $ - $6,477
====== ==== ======
Segment income $ 517 $ - $ 517
Significant noncash items included in segment income -
Depreciation, depletion and amortization 283 - 283
Capital expenditures/(c)/ 305 - 305
---------------------------------------------------------------------------------------
/(a)/ Intergroup revenues and transfers were conducted under terms
comparable to those with unrelated parties.
/(b)/ Difference between segment total and group total represents
amounts for impairment of coal assets.
/(c)/ Differences between segment total and group total represent
amounts related to corporate administrative activities.
The following schedules reconcile segment amounts to
amounts reported in the U. S. Steel Group's financial statements:
(In millions) 2000 1999 1998
-----------------------------------------------------------------------------------------------
Revenues and Other Income:
Revenues and other income of reportable segments $6,132 $5,539 $6,477
Items not allocated to segments:
Impairment and other costs related to an
investment in an equity investee - (47) -
Loss on investment in RTI stock used
to satisfy indexed debt obligations - (22) -
------ ------ ------
Total Group revenues and other income $6,132 $5,470 $6,477
====== ====== ======
Income:
Income for reportable segments $ 25 $ 91 $ 517
Items not allocated to segments:
Impairment of coal assets (71) - -
Impairment and other costs related to an
investment in an equity investee - (47) -
Loss on investment in RTI stock used
to satisfy indexed debt obligations - (22) -
Administrative expenses (25) (17) (24)
Net pension credits 266 228 186
Costs related to former businesses activities (91) (83) (100)
------ ------ ------
Total Group income from operations $ 104 $ 150 $ 579
-----------------------------------------------------------------------------------------------
S-10
Revenues by Product:
(In millions) 2000 1999 1998
-------------------------------------------------------------------------------
Sheet and semi-finished steel products $3,288 $3,433 $3,598
Tubular, plate and tin mill products 1,731 1,140 1,546
Raw materials (coal, coke and iron ore) 626 549 744
Other/(a)/ 445 414 490
-------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-
products, engineering and consulting services, real estate
development and resource management.
Geographic Area:
The information below summarizes the operations in different
geographic areas.
Revenues and Other Income
----------------------------------
Within Between
Geographic Geographic
(In millions) Year Areas Areas Total Assets/(a)/
----------------------------------------------------------------------------------------
United States 2000 $6,027 $ - $6,027 $2,745
1999 5,452 - 5,452 2,889
1998 6,460 - 6,460 3,043
Slovak Republic 2000 95 - 95 376
1999 3 - 3 60
1998 6 - 6 66
Other Foreign Countries 2000 10 - 10 10
1999 15 - 15 3
1998 11 - 11 3
Total 2000 $6,132 $ - $6,132 $3,131
1999 5,470 - 5,470 2,952
1998 6,477 - 6,477 3,112
----------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments.
________________________________________________________________________________
9. Supplemental Cash Flow Information
(In millions) 2000 1999 1998
---------------------------------------------------------------------------------------------------------
Cash provided from (used in) operating activities included:
Interest and other financial costs paid
(net of amount capitalized) $ (71) $ (77) $ (76)
Income taxes refunded (paid), including
settlements with the Marathon Group 81 3 (29)
---------------------------------------------------------------------------------------------------------
USX debt attributed to all groups - net:
Commercial paper:
Issued $ 3,362 $ 6,282 $ -
Repayments (3,450) (6,117) -
Credit agreements:
Borrowings 437 5,529 17,486
Repayments (437) (5,980) (16,817)
Other credit arrangements - net 150 (95) 55
Other debt:
Borrowings - 319 671
Repayments (54) (87) (1,053)
------- ------- --------
Total $ 8 $ (149) $ 342
---------------------------------------------------------------------------------------------------------
U. S. Steel Group activity $ 1,208 $ 147 $ 13
Marathon Group activity (1,200) (296) 329
------- ------- --------
Total $ 8 $ (149) $ 342
---------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Steel Stock issued for dividend reinvestment and
employee stock plans $ 5 $ 2 $ 2
Disposal of assets:
Deposit of RTI common shares in satisfaction of indexed debt - 56 -
Interest in USS/Kobe contributed to Republic - 40 -
Other disposals of assets - notes or common stock received 14 1 2
Business combinations:
Acquisition of USSK:
Liabilities assumed 568 - -
Contingent consideration payable at present value 21 - -
Investee liabilities consolidated in step acquisition 3 - -
Other acquisitions:
Liabilities assumed - 26 -
Investee liabilities consolidated in step acquisition - 26 -
---------------------------------------------------------------------------------------------------------
S-11
- --------------------------------------------------------------------------------
10. Financial Activities Attributed to Groups
The following is the portion of USX financial activities attributed
to the U. S. Steel Group. These amounts exclude amounts
specifically attributed to the U. S. Steel Group.
U. S. Steel Group Consolidated USX/(a)/
------------------------- ------------------------
(In millions) December 31 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 171 $ 1 $ 364 $ 9
Other noncurrent assets 3 1 7 8
------ ----- ------ --------
Total assets $ 174 $ 2 $ 371 $ 17
--------------------------------------------------------------------------------------------------------------
Notes payable $ 70 $ - $ 150 $ -
Accrued interest 45 13 95 95
Long-term debt due within one year (Note 11) 130 7 277 54
Long-term debt (Note 11) 1,804 466 3,734 3,771
Preferred stock of subsidiary 66 66 250 250
------ ----- ------ --------
Total liabilities $ 2,115 $ 552 $ 4,506 $ 4,170
--------------------------------------------------------------------------------------------------------------
U. S. Steel Group/(b)/ Consolidated USX
------------------ ----------------------
(In millions) 2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------------------------------------------------
Net interest and other financial costs (Note 7) $ 59 $ 39 $ 29 $ 309 $ 334 $ 324
--------------------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 14 and 22, respectively, to the USX
consolidated financial statements.
/(b)/ The U. S. Steel Group's net interest and other financial
costs reflect weighted average effects of all financial
activities attributed to all groups.
- -------------------------------------------------------------------------------
11. Long-Term Debt
The U. S. Steel Group's portion of USX's consolidated long-term
debt is as follows:
U. S. Steel Group Consolidated USX/(a)/
------------------ ---------------------
(In millions) December 31 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Specifically attributed debt/(b)/:
Receivables facility $ 350 $ 350 $ 350 $ 350
Sale-leaseback financing and capital leases 88 92 95 107
Other 3 - 4 1
------ ------ ------ ------
Total 441 442 449 458
Less amount due within one year 9 6 10 7
------ ------ ------ ------
Total specifically attributed long-term debt $ 432 $ 436 $ 439 $ 451
--------------------------------------------------------------------------------------------------------------------
Debt attributed to groups/(c)/ $1,946 $ 477 $4,036 $3,852
Less unamortized discount 12 4 25 27
Less amount due within one year 130 7 277 54
------ ------ ------ ------
Total long-term debt attributed to groups $1,804 $ 466 $3,734 $3,771
--------------------------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 139 $ 13 $ 287 $ 61
Total long-term debt due after one year 2,236 902 4,173 4,222
--------------------------------------------------------------------------------------------------------------------
/(a)/ See Note 14, to the USX consolidated financial statements
for details of interest rates, maturities and other terms of
long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the U. S. Steel Group and
the Marathon Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based
on their respective cash flows (Notes 4, 9 and 10).
S-12
- --------------------------------------------------------------------------------
12. Pensions and Other Postretirement Benefits
The U. S. Steel Group has noncontributory defined benefit pension
plans covering substantially all U.S. employees. Benefits under
these plans are based upon years of service and final average
pensionable earnings, or a minimum benefit based upon years of
service, whichever is greater. In addition, pension benefits are
also provided to most U.S. salaried employees based upon a percent
of total career pensionable earnings. Certain of these plans
provide benefits to USX corporate employees, and the related costs
or credits for such employees are allocated to all groups (Note 4).
The U. S. Steel Group also participates in multiemployer plans,
most of which are defined benefit plans associated with coal
operations.
The U. S. Steel Group also has defined benefit retiree
health care and life insurance plans (other benefits) covering most
U.S. employees upon their retirement. Health care benefits are
provided through comprehensive hospital, surgical and major medical
benefit provisions or through health maintenance organizations,
both subject to various cost sharing features. Life insurance
benefits are provided to nonunion retiree beneficiaries primarily
based on employees' annual base salary at retirement. These plans
provide benefits to USX corporate employees, and the related costs
for such employees are allocated to all groups (Note 4). For U.S.
union retirees, benefits are provided for the most part based on
fixed amounts negotiated in labor contracts with the appropriate
unions.
Pension Benefits Other Benefits
------------------------- ---------------------------
(In millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at January 1 $ 6,716 $ 7,549 $ 1,896 $ 2,113
Service cost 76 87 12 15
Interest cost 505 473 147 133
Plan amendments - 381/(a)/ - 14
Actuarial (gains) losses 430 (822) 260 (225)
Plan merger and acquisition - 42 - 7
Settlements, curtailments and termination benefits - (207) - -
Benefits paid (806) (787) (166) (161)
------- ------- -------- --------
Benefit obligations at December 31 $ 6,921 $ 6,716 $ 2,149 $ 1,896
--------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1 $ 9,995 $10,243 $ 281 $ 265
Actual return on plan assets 139 729 26 20
Acquisition (1) 26 - 1
Employer contributions - - 576/(b)/ 34
Trustee distributions/(c)/ (16) (14) - -
Settlements paid - (207) - -
Benefits paid from plan assets (805) (782) (41) (39)
------- ------- -------- --------
Fair value of plan assets at December 31 $ 9,312 $ 9,995 $ 842 $ 281
---------------------------------------------------------------------------------------------------------------------
Funded status of plans at December 31 $ 2,391/(d)/ $ 3,279/(d)/ $(1,307) $(1,615)
Unrecognized net gain from transition (2) (69) - -
Unrecognized prior service cost 719 817 12 19
Unrecognized actuarial gains (462) (1,639) (241) (526)
Additional minimum liability (19) (16) - -
------- ------- -------- --------
Prepaid (accrued) benefit cost $ 2,627 $ 2,372 $(1,536) $(2,122)
--------------------------------------------------------------------------------------------------------------------
/(a)/ Results primarily from a five-year labor contract with the
United Steelworkers of America ratified in August 1999.
/(b)/ Includes contributions of $530 million to a Voluntary
Employee Benefit Association trust, comprised of $30 million
in contractual requirements and an elective contribution of
$500 million. Also includes a $30 million elective
contribution to the non-union retiree life insurance trust.
/(c)/ Represents transfers of excess pension assets to fund
retiree health care benefits accounts under Section 420 of
the Internal Revenue Code.
/(d)/ Includes a plan that has accumulated benefit
obligations in excess of plan assets:
Aggregate accumulated benefit obligations $(40) $(29)
Aggregate projected benefit obligations (49) (39)
Aggregate plan assets - -
-------------------------------------------------------------------
S-13
Pension Benefits Other Benefits
--------------------------- ------------------------------
(In millions) 2000 1999 1998 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost (credit)
Service cost $ 76 $ 87 $ 71 $ 12 $ 15 $ 15
Interest cost 505 473 487 147 133 141
Expected return on plan assets (841) (781) (769) (24) (21) (21)
Amortization - net transition gain (67) (67) (69) - - -
- prior service costs 98 83 72 4 4 4
- actuarial (gains) losses (44) 6 6 (29) (12) (16)
Multiemployer and other plans - - 1 9/(a)/ 7/(a)/ 13/(a)/
Settlement and termination (gains) losses - (35)/(b)/ 10/(b)/ - - -
------ ----- ------ ----- ----- ------
Net periodic benefit cost (credit) $(273) $(234) $ (191) $ 119 $ 126 $ 136
-------------------------------------------------------------------------------------------------------------------
/(a)/ Represents payments to a multiemployer health care benefit
plan created by the Coal Industry Retiree Health Benefit Act
of 1992 based on assigned beneficiaries receiving benefits.
The present value of this unrecognized obligation is broadly
estimated to be $84 million, including the effects of future
medical inflation, and this amount could increase if
additional beneficiaries are assigned.
/(b)/ Relates primarily to the 1998 voluntary early retirement
program.
Pension Benefits Other Benefits
------------------ ----------------
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------
Weighted average actuarial assumptions
at December 31:
Discount rate 7.5% 8.0% 7.5% 8.0%
Expected annual return on plan assets 8.9% 8.5% 8.5% 8.5%
Increase in compensation rate 4.0% 4.0% 4.0% 4.0%
--------------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.5% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
2001. The rate was assumed to decrease gradually to 5% for 2006 and
remain at that level thereafter.
A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
1-Percentage- 1-Percentage-
(In millions) Point Increase Point Decrease
-----------------------------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 16 $ (14)
Effect on other postretirement benefit obligations 177 (151)
-----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13. Intergroup Transactions
Revenues and purchases - U. S. Steel Group revenues for sales to
the Marathon Group totaled $17 million in both 2000 and 1999 and $2
million in 1998. U. S. Steel Group purchases from the Marathon
Group totaled $60 million, $41 million and $21 million in 2000,
1999 and 1998, respectively. At December 31, 2000 and 1999, U. S.
Steel Group receivables included $2 million related to transactions
with the Marathon Group. At December 31, 2000 and 1999, U. S. Steel
Group accounts payable included $1 million and $5 million,
respectively, related to transactions with the Marathon Group.
These transactions were conducted under terms comparable to those
with unrelated parties.
Income taxes receivable from/payable to the Marathon Group - At
December 31, 2000 and 1999, amounts receivable or payable for
income taxes were included in the balance sheet as follows:
(In millions) December 31 2000 1999
--------------------------------------------------------------------------------------------------------------
Current:
Income tax receivable $ 364 $ 97
Accounts payable 4 1
Noncurrent:
Investments and long-term receivables 97 97
--------------------------------------------------------------------------------------------------------------
These amounts have been determined in accordance with the tax
allocation policy described in Note 4. Amounts classified as
current are settled in cash in the year succeeding that in which
such amounts are accrued. Noncurrent amounts represent estimates of
intergroup tax effects of certain issues for years that are still
under various stages of audit and administrative review. Such tax
effects are not settled between the groups until the audit of those
respective tax years is closed. The amounts ultimately settled for
open tax years will be different than recorded noncurrent amounts
based on the final resolution of all of the audit issues for those
years.
S-14
- --------------------------------------------------------------------------------
14. Inventories
(In millions) December 31 2000 1999
---------------------------------------------------------------------------------------------------------------
Raw materials $ 214 $ 101
Semi-finished products 429 392
Finished products 210 193
Supplies and sundry items 93 57
------ ------
Total $ 946 $ 743
---------------------------------------------------------------------------------------------------------------
At December 31, 2000 and 1999, respectively, the LIFO
method accounted for 91% and 93% of total inventory value.
Current acquisition costs were estimated to exceed the above
inventory values at December 31 by approximately $380 million
and $370 million in 2000 and 1999, respectively. Cost of
revenues was reduced and income from operations was increased
by $3 million in 2000 as a result of liquidations of LIFO
inventories.
- --------------------------------------------------------------------------------
15. Income Taxes
Income tax provisions and related assets and liabilities
attributed to the U. S. Steel Group are determined in
accordance with the USX group tax allocation policy (Note 4).
Provisions (credits) for income taxes were:
2000 1999 1998
---------------------------- --------------------------- --------------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
----------------------------------------------------------------------------------------------------------------
Federal (357) $ 340 $ (17) $ (84) $ 99 $ 15 $ 19 $ 149 $ 168
State and local (12) 49 37 1 8 9 3 9 12
Foreign - - - 1 - 1 (7) - (7)
------- ----- ----- ----- ----- ----- ----- ----- ------
Total $ (369) $ 389 $ 20 $ (82) $ 107 $ 25 $ 15 $ 158 $ 173
----------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to
total provisions follows:
(In millions) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ - $ 27 $ 188
Excess percentage depletion (3) (7) (11)
Effects of foreign operations, including foreign tax credits (5) (2) (11)
State and local income taxes after federal income tax effects 24 6 8
Credits other than foreign tax credits (3) (3) (3)
Adjustments of prior years' federal income taxes 5 - -
Other 2 4 2
----- ----- ------
Total provisions $ 20 $ 25 $ 173
------------------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the
following:
(In millions) December 31 2000 1999
------------------------------------------------------------------------------------------------------------------
Deferred tax assets: $ 39 $ 131
Minimum tax credit carryforwards 55 65
State tax loss carryforwards (expiring in 2001 through 2020) 782 998
Employee benefits 52 68
Receivables, payables and debt 16 -
Expected federal benefit for deducting state deferred income taxes 71 52
Contingency and other accruals 2 11
Other (34) (41)
Valuation allowances - state -------- ---------
983 1,284
Total deferred tax assets/(a)/ -------- ---------
Deferred tax liabilities: 248 274
Property, plant and equipment 1,046 921
Prepaid pensions 15 16
Inventory 82 96
Investments in subsidiaries and equity investees 61 44
Other -------- ---------
1,452 1,351
Total deferred tax liabilities -------- ---------
Net deferred tax liabilities $ 469 $ 67
------------------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income
to realize the benefit of the U. S. Steel Group's
deferred tax assets.
The consolidated tax returns of USX for the years 1990
through 1997 are under various stages of audit and
administrative review by the IRS. USX believes it has made
adequate provision for income taxes and interest which may
become payable for years not yet settled.
Pretax income in 2000 included $8 million attributable
to foreign sources.
S-15
Undistributed earnings of certain consolidated foreign
subsidiaries at December 31, 2000, amounted to $18 million. No
provision for deferred U.S. income taxes has been made for
these subsidiaries because the U. S. Steel Group intends to
permanently reinvest such earnings in those foreign
operations. If such earnings were not permanently reinvested,
a deferred tax liability of $6 million would have been
required.
- --------------------------------------------------------------------------------
16. Investments and Long-Term Receivables
(In millions) December 31 2000 1999
------------------------------------------------------------------------------------------------------------------
Equity method investments $ 325 $ 397
Other investments 67 39
Receivables due after one year 5 11
Income taxes receivable 97 97
Deposits of restricted cash 3 2
Other 39 26
------ ------
Total $ 536 $ 572
------------------------------------------------------------------------------------------------------------------
Summarized financial information of investees accounted
for by the equity method of accounting follows:
(In millions) 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
Income data - year:
Revenues and other income $ 3,484 $ 3,027 $ 3,163
Operating income (loss) 112 (57) 193
Net income (loss) (166) (193) 97
------------------------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 911 $ 995
Noncurrent assets 2,196 2,402
Current liabilities 1,171 1,181
Noncurrent liabilities 1,307 1,251
------------------------------------------------------------------------------------------------------------------
USX acquired a 25% interest in VSZ during 2000. VSZ
does not provide its shareholders with financial statements
prepared in accordance with generally accepted accounting
principles in the United States (USGAAP). Although shares of
VSZ are traded on the Bratislava Stock Exchange, those
securities do not have a readily determinable fair value as
defined under USGAAP. Accordingly, USX accounts for its
investment in VSZ under the cost method of accounting.
In 1999, USX and Kobe Steel, Ltd. (Kobe Steel)
completed a transaction that combined the steelmaking and bar
producing assets of USS/Kobe Steel Company (USS/Kobe) with
companies controlled by Blackstone Capital Partners II. The
combined entity was named Republic Technologies International,
LLC and is a wholly owned subsidiary of Republic Technologies
International Holdings, LLC (Republic). As a result of this
transaction, the U. S. Steel Group recorded $47 million in
charges related to the impairment of the carrying value of its
investment in USS/Kobe and costs related to the formation of
Republic. These charges were included in income (loss) from
investees in 1999. In addition, USX made a $15 million equity
investment in Republic. USX owned 50% of USS/Kobe and now owns
16% of Republic. USX accounts for its investment in Republic
under the equity method of accounting. The seamless pipe
business of USS/Kobe was excluded from this transaction. That
business, now known as Lorain Tubular Company, LLC, became a
wholly owned subsidiary of USX at the close of business on
December 31, 1999.
Dividends and partnership distributions received from
equity investees were $10 million in 2000, $2 million in 1999
and $19 million in 1998.
U. S. Steel Group purchases of transportation services
and semi-finished steel from equity investees totaled $566
million, $361 million and $331 million in 2000, 1999 and 1998,
respectively. At December 31, 2000 and 1999, U. S. Steel Group
payables to these investees totaled $66 million and $60
million, respectively. U. S. Steel Group revenues for steel
and raw material sales to equity investees totaled $958
million, $831 million and $725 million in 2000, 1999 and 1998,
respectively. At December 31, 2000 and 1999, U. S. Steel Group
receivables from these investees were $177 million. Generally,
these transactions were conducted under long-term, market-
based contractual arrangements.
S-16
- --------------------------------------------------------------------------------
17. Leases
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
Capital Operating
(In millions) Leases Leases
--------------------------------------------------------------------------------------------
2001 $ 11 $ 79
2002 11 56
2003 11 40
2004 11 37
2005 11 29
Later years 84 64
Sublease rentals - (62)
----- -----
Total minimum lease payments 139 $ 243
=====
Less imputed interest costs 51
-----
Present value of net minimum lease payments
included in long-term debt $ 88
--------------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 2000 1999 1998
--------------------------------------------------------------------------------------------
Minimum rental $ 132 $ 124 $ 131
Contingent rental 17 18 19
Sublease rentals (6) (6) (7)
----- ------ -----
Net rental expense $ 143 $ 136 $ 143
--------------------------------------------------------------------------------------------
The U. S. Steel Group leases a wide variety of facilities and
equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options.
- --------------------------------------------------------------------------------
18. Trust Preferred Securities
In 1997, USX exchanged approximately 3.9 million 6.75% Convertible
Quarterly Income Preferred Securities (Trust Preferred Securities)
of USX Capital Trust I, a Delaware statutory business trust
(Trust), for an equivalent number of shares of its 6.50% Cumulative
Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The
Exchange resulted in the recording of Trust Preferred Securities at
a fair value of $182 million.
USX owns all of the common securities of the Trust, which was
formed for the purpose of the Exchange. (The Trust Common
Securities and the Trust Preferred Securities are together referred
to as the Trust Securities.) The Trust Securities represent
undivided beneficial ownership interests in the assets of the
Trust, which consist solely of USX 6.75% Convertible Junior
Subordinated Debentures maturing March 31, 2037 (Debentures),
having an aggregate principal amount equal to the aggregate initial
liquidation amount ($50.00 per security and $203 million in total)
of the Trust Securities issued by the Trust. Interest and principal
payments on the Debentures will be used to make quarterly
distributions and to pay redemption and liquidation amounts on the
Trust Preferred Securities. The quarterly distributions, which
accumulate at the rate of 6.75% per annum on the Trust Preferred
Securities and the accretion from fair value to the initial
liquidation amount, are charged to income and included in net
interest and other financial costs.
Under the terms of the Debentures, USX has the right to defer
payment of interest for up to 20 consecutive quarters and, as a
consequence, monthly distributions on the Trust Preferred
Securities will be deferred during such period. If USX exercises
this right, then, subject to limited exceptions, it may not pay any
dividend or make any distribution with respect to any shares of its
capital stock.
S-17
The Trust Preferred Securities are convertible at any time
prior to the close of business on March 31, 2037 (unless such right
is terminated earlier under certain circumstances) at the option of
the holder, into shares of Steel Stock at a conversion price of
$46.25 per share of Steel Stock (equivalent to a conversion ratio
of 1.081 shares of Steel Stock for each Trust Preferred Security),
subject to adjustment in certain circumstances.
The Trust Preferred Securities may be redeemed at any time
at the option of USX, at a premium of 101.95% of the initial
liquidation amount through March 31, 2001, and thereafter,
declining annually to the initial liquidation amount on April 1,
2003, and thereafter. They are mandatorily redeemable at March 31,
2037, or earlier under certain circumstances.
Payments related to quarterly distributions and to the payment
of redemption and liquidation amounts on the Trust Preferred
Securities by the Trust are guaranteed by USX on a subordinated
basis. In addition, USX unconditionally guarantees the Trust's
Debentures. The obligations of USX under the Debentures, and the
related indenture, trust agreement and guarantee constitute a full
and unconditional guarantee by USX of the Trust's obligations under
the Trust Preferred Securities.
- -------------------------------------------------------------------------------
19. Stockholders' Equity
(In millions, except per share data) 2000 1999 1998
-----------------------------------------------------------------------------------------------
Preferred stock:
Balance at beginning of year $ 3 $ 3 $ 3
Repurchased (1) - -
------- ------- -------
Balance at end of year $ 2 $ 3 $ 3
-----------------------------------------------------------------------------------------------
Common stockholders' equity:
Balance at beginning of year $ 2,053 $ 2,090 $ 1,779
Net income (loss) (21) 44 364
Repurchase of 6.50% preferred stock (11) (2) (8)
Steel Stock issued 6 2 59
Dividends on preferred stock (8) (9) (9)
Dividends on Steel Stock (per share $1.00) (89) (88) (88)
Deferred compensation (3) 1 -
Accumulated other comprehensive income (loss)/(a)/:
Foreign currency translation adjustments (13) (5) (5)
Minimum pension liability adjustments (Note 12) 3 20 (2)
------- ------- -------
Balance at end of year $ 1,917 $ 2,053 $ 2,090
-----------------------------------------------------------------------------------------------
Total stockholders' equity $ 1,919 $ 2,056 $ 2,093
-----------------------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements
relative to the annual activity of these adjustments. Total
comprehensive income (loss) for the U. S. Steel Group for the
years 2000, 1999 and 1998 was $(31) million,$59 million and
$357 million, respectively.
- --------------------------------------------------------------------------------
20. Dividends
In accordance with the USX Restated Certificate of Incorporation,
dividends on the Steel Stock and Marathon Stock are limited to the
legally available funds of USX. Net losses of either Group, as well
as dividends and distributions on any class of USX Common Stock or
series of preferred stock and repurchases of any class of USX
Common Stock or series of preferred stock at prices in excess of
par or stated value, will reduce the funds of USX legally available
for payment of dividends on both classes of Common Stock. Subject
to this limitation, the Board of Directors intends to declare and
pay dividends on the Steel Stock based on the financial condition
and results of operations of the U. S. Steel Group, although it has
no obligation under Delaware law to do so. In making its dividend
decisions with respect to Steel Stock, the Board of Directors
considers, among other things, the long-term earnings and cash flow
capabilities of the U. S. Steel Group as well as the dividend
policies of similar publicly traded steel companies.
Dividends on the Steel Stock are further limited to the
Available Steel Dividend Amount. At December 31, 2000, the
Available Steel Dividend Amount was at least $3,161 million. The
Available Steel Dividend Amount will be increased or decreased, as
appropriate, to reflect U. S. Steel Group net income, dividends,
repurchases or issuances with respect to the Steel Stock and
preferred stock attributed to the U. S. Steel Group and certain
other items.
S-18
- --------------------------------------------------------------------------------
21. Income Per Common Share
The method of calculating net income (loss) per share for the Steel
Stock and the Marathon Stock reflects the USX Board of Directors'
intent that the separately reported earnings and surplus of the U.
S. Steel Group and the Marathon Group, as determined consistent
with the USX Restated Certificate of Incorporation, are available
for payment of dividends to the respective classes of stock,
although legally available funds and liquidation preferences of
these classes of stock do not necessarily correspond with these
amounts.
Basic net income (loss) per share is calculated by adjusting net
income for dividend requirements of preferred stock and is based on
the weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of
convertible securities for the applicable periods outstanding and
assumes exercise of stock options, provided in each case, the effect
is not antidilutive.
2000 1999 1998
------------------- ---------------- -----------------
Basic Diluted Basic Diluted Basic Diluted
------ ------- ------- ------- ------- -------
Computation of Income Per Share
-------------------------------
Net income (loss) (millions):
Income (loss) before extraordinary losses $ (21) $ (21) $ 51 $ 51 $ 364 $ 364
Dividends on preferred stock 8 8 9 9 9 -
Extraordinary losses - - 7 7 - -
------- ------- ------- ------- ------- -------
Net income (loss) applicable to Steel Stock (29) (29) 35 35 355 364
Effect of dilutive securities -
Trust preferred securities - - - - - 8
------- ------- ------- ------- ------- -------
Net income (loss) assuming conversions $ (29) $ (29) $ 35 $ 35 $ 355 $ 372
======= ======= ======= ======= ======= =======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,613 88,613 88,392 88,392 87,508 87,508
Effect of dilutive securities:
Trust preferred securities - - - - - 4,256
Preferred stock - - - - - 3,143
Stock options - - - 4 - 36
------- ------- ------- ------- ------- -------
Average common shares and dilutive effect 88,613 88,613 88,392 88,396 87,508 94,943
======= ======= ======= ======= ======= =======
Per share:
Income (loss) before extraordinary losses $ (.33) $ (.33) $ .48 $ .48 $ 4.05 $ 3.92
Extraordinary losses - - .08 .08 - -
------- ------- ------- ------- ------- -------
Net income (loss) $ (.33) $ (.33) $ .40 $ .40 $ 4.05 $ 3.92
======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
22. Stock-Based Compensation Plans and Stockholder Rights Plan
USX Stock-Based Compensation Plans and Stockholder Rights Plan
are discussed in Note 17, and Note 19, respectively, to the USX
consolidated financial statements.
The U. S. Steel Group's actual stock-based compensation expense
was $1 million in 2000 and 1999, and none in 1998. Incremental
compensation expense, as determined under a fair value model,
was not material ($.02 or less per share for all years
presented). Therefore, pro forma net income and earnings per
share data have been omitted.
- --------------------------------------------------------------------------------
23. Property, Plant and Equipment
(In millions) December 31 2000 1999
----------------------------------------------------------------------------------------------------
Land and depletable property $ 161 $ 152
Buildings 602 484
Machinery and equipment 8,409 8,007
Leased assets 98 105
-------- --------
Total 9,270 8,748
Less accumulated depreciation, depletion and amortization 6,531 6,232
-------- --------
Net $ 2,739 $ 2,516
-----------------------------------------------------------------------------------------------------
Amounts in accumulated depreciation, depletion and amortization
for assets acquired under capital leases (including sale-leasebacks
accounted for as financings) were $79 million and $81 million at
December 31, 2000 and 1999, respectively.
During 2000, the U. S. Steel Group recorded $71 million of
impairments relating to coal assets located in West Virginia and
Alabama. The impairment was recorded as a result of a reassessment
of long-term prospects after adverse geological conditions were
encountered. The charge is included in depreciation, depletion and
amortization.
S-19
- --------------------------------------------------------------------------------
24. Derivative Instruments
The U. S. Steel Group 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. The U.
S. Steel Group is also exposed to credit risk in the event of
nonperformance by counterparties. The credit-worthiness of
counterparties is subject to continuing review, including the use
of master netting agreements to the extent practical, and full
performance is anticipated.
The following table sets forth quantitative information by
class of derivative instrument:
Fair Carrying Recorded
Value Amount Deferred Aggregate
Assets Assets Gain or Contract
(In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values/(b)/
---------------------------------------------------------------------------------------------------------------
December 31, 2000:
OTC commodity swaps - other than trading/(c)/ $ - $ - $ - $ 18
---------------------------------------------------------------------------------------------------------------
December 31, 1999:
OTC commodity swaps - other than trading $ 3 $ 3 $ 3 $ 37
---------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts are based on exchange-traded index
prices and dealer quotes.
/(b)/ Contract or notional amounts do not quantify risk exposure,
but are used in the calculation of cash settlements under
the contracts.
/(c)/ The OTC swap arrangements vary in duration with certain
contracts extending into 2001.
- --------------------------------------------------------------------------------
25. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax
consequences of realization or settlement. The following table
summarizes financial instruments, excluding derivative financial
instruments disclosed in Note 24, by individual balance sheet
account. As described in Note 4, the U. S. Steel Group's
specifically attributed financial instruments and the U. S. Steel
Group's portion of USX's financial instruments attributed to all
groups are as follows:
2000 1999
------------------ ------------------
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
-----------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 219 $ 219 $ 22 $ 22
Receivables (including intergroup receivables) 1,341 1,341 935 935
Investments and long-term receivables 137 137 122 122
------ ------ ------ ------
Total financial assets $1,697 $1,697 $1,079 $1,079
----------------------------------------------------------------------------------------------------
Financial liabilities:
Notes payable $ 70 $ 70 $ - $ -
Accounts payable 760 760 739 739
Accrued interest 47 47 15 15
Long-term debt (including amounts due within one year) 2,375 2,287 835 823
Preferred stock of subsidiary and trust
preferred securities 182 249 232 249
------ ------ ------ ------
Total financial liabilities $3,434 $3,413 $1,821 $1,826
----------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current
assets or liabilities approximates carrying value due to the short-
term maturity of the instruments. Fair value of investments and
long-term receivables was based on discounted cash flows or other
specific instrument analysis. Certain foreign cost method
investments are excluded from investments and long-term receivables
because the fair value is not readily determinable. The U. S. Steel
Group is subject to market risk and liquidity risk related to its
investments; however, these risks are not readily quantifiable.
Fair value of preferred stock of subsidiary and trust preferred
securities was based on market prices. Fair value of long-term debt
instruments was based on market prices where available or current
borrowing rates available for financings with similar terms and
maturities.
Financial guarantees are the U. S. Steel Group's only
unrecognized financial instrument. It is not practicable to
estimate the fair value of this form of financial instrument
obligation because there are no quoted market prices for
transactions which are similar in nature. For details relating to
financial guarantees, see Note 26.
S-20
- --------------------------------------------------------------------------------
26. Contingencies and Commitments
USX is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating to
the U. S. Steel Group involving a variety of matters, including
laws and regulations relating to the environment. Certain of these
matters are discussed below. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material
to the U. S. Steel Group financial statements. However, management
believes that USX will remain a viable and competitive enterprise
even though it is possible that these contingencies could be
resolved unfavorably to the U. S. Steel Group.
Environmental matters -
The U. S. Steel Group is subject to federal, state, local and
foreign laws and regulations relating to the environment. These
laws generally provide for control of pollutants released into the
environment and require responsible parties to undertake
remediation of hazardous waste disposal sites. Penalties may be
imposed for noncompliance. Accrued liabilities for remediation
totaled $137 million and $101 million at December 31, 2000 and
1999, respectively. It is not presently possible to estimate the
ultimate amount of all remediation costs that might be incurred or
the penalties that may be imposed.
For a number of years, the U. S. Steel Group has made
substantial capital expenditures to bring existing facilities into
compliance with various laws relating to the environment. In 2000
and 1999, such capital expenditures totaled $18 million and $32
million, respectively. The U. S. Steel Group anticipates making
additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of
the continuing evolution of specific regulatory requirements.
Guarantees -
Guarantees by USX of the liabilities of unconsolidated entities
of the U. S. Steel Group totaled $82 million at December 31, 2000,
and $88 million at December 31, 1999. In the event that any
defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the investees to reduce potential U. S.
Steel Group losses resulting from these guarantees. As of December
31, 2000, the largest guarantee for a single such entity was $59
million.
Commitments -
At December 31, 2000 and 1999, the U. S. Steel Group's contract
commitments to acquire property, plant and equipment totaled $206
million and $83 million, respectively.
USSK has a commitment to the Slovak government for a capital
improvements program of $700 million, subject to certain
conditions, over a period commencing with the acquisition date and
ending on December 31, 2010. USSK is required to report
periodically to the Slovak government on its status toward meeting
this commitment. The first reporting period ends on December 31,
2003.
USX entered into a 15-year take-or-pay arrangement in 1993,
which requires the U. S. Steel Group to accept pulverized coal each
month or pay a minimum monthly charge of approximately $1 million.
Charges for deliveries of pulverized coal totaled $23 million in
2000, 1999 and 1998. If USX elects to terminate the contract early,
a maximum termination payment of $96 million, which declines over
the duration of the agreement, may be required.
S-21
Selected Quarterly Financial Data (Unaudited)
2000
---------------------------------------------------
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- -----------------------------------------------------------------------------------------
Revenues and other income:
Revenues/(a)/ $ 1,417 $ 1,462 $ 1,629 $ 1,582
Other income (loss) (4) 13 27 6
------- ------- ------- -------
Total 1,413 1,475 1,656 1,588
Income (loss)
from operations (159) 60 112 91
Income (loss) before
extraordinary losses (139) 19 56 43
Net income (loss) (139) 19 56 43
- -----------------------------------------------------------------------------------------
Steel Stock data:
- -----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ (141) $ 17 $ 54 $ 41
- Per share: basic (1.59) .19 .62 .45
diluted (1.59) .19 .62 .45
Dividends paid per share .25 .25 .25 .25
Price range of Steel Stock/(b)/:
- Low 12-11/16 14-7/8 18-1/4 20-5/8
- High 18-5/16 19-11/16 26-7/8 32-15/16
- -----------------------------------------------------------------------------------------------
1999
-------------------------------------------------------
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues/(a)/ $ 1,492 $ 1,415 $ 1,344 $ 1,285
Other income (loss) 8 (40) 1 (35)
------- ------- ------- -------
Total 1,500 1,375 1,345 1,250
Income (loss)
from operations 75 (26) 103 (2)
Income (loss) before
extraordinary losses 34 (29) 55 (9)
Net income (loss) 34 (31) 55 (14)
- ------------------------------------------------------------------------------------------------
Steel Stock data:
- -----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ 32 $ (31) $ 52 $ (11)
- Per share: basic .35 (.35) .60 (.13)
diluted .35 (.35) .59 (.13)
Dividends paid per share .25 .25 .25 .25
Price range of Steel Stock/(b)/:
- Low 21-3/ 4 24-9/16 23-1/2 22-1/4
- High 33 30-1/16 34-1/4 29-1/8
- ------------------------------------------------------------------------------------------------
/(a)/ Certain items have been reclassified between revenues and cost of
revenues, primarily to give effect to new accounting standards as
disclosed in Note 3 of the Notes to Financial Statements. Amounts
reclassified in the first, second and third quarters of 2000 were $41
million, $45 million and $45 million, respectively, and for the first,
second, third and fourth quarters of 1999 were $39 million, $41 million,
$38 million and $38 million, respectively.
/(b)/ Composite tape.
Principal Unconsolidated Investees (Unaudited)
December 31, 2000
Company Country Ownership Activity
- ---------------------------------------------------------------------------------------------------------
Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products
Double Eagle Steel Coating Company United States 50% Steel Processing
PRO-TEC Coating Company United States 50% Steel Processing
Republic Technologies International, LLC United States 16% Steel Products
Transtar, Inc. United States 46% Transportation
USS-POSCO Industries United States 50% Steel Processing
Worthington Specialty Processing United States 50% Steel Processing
- ---------------------------------------------------------------------------------------------------------
Supplementary Information on Mineral Reserves (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Mineral Reserves relating to the U. S. Steel Group, page U-30.
S-22
Five-Year Operating Summary
(Thousands of net tons, unless otherwise noted) 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------
Raw Steel Production
Gary, IN 6,610 7,102 6,468 7,428 6,840
Mon Valley, PA 2,683 2,821 2,594 2,561 2,746
Fairfield, AL 2,069 2,109 2,152 2,361 1,862
Kosice, Slovak Republic 382 - - - -
-------------------------------------------
Total 11,744 12,032 11,214 12,350 11,448
----------------------------------------------------------------------------------------------
Raw Steel Capability
Domestic Steel 12,800 12,800 12,800 12,800 12,800
U. S. Steel Kosice/(a)/ 467 - - - -
-------------------------------------------
Total 13,267 12,800 12,800 12,800 12,800
Total production as % of total capability 88.5 94.0 87.6 96.5 89.4
----------------------------------------------------------------------------------------------
Hot Metal Production
Domestic Steel 9,904 10,344 9,743 10,591 9,716
U. S. Steel Kosice 340 - - - -
-------------------------------------------
Total 10,244 10,344 9,743 10,591 9,716
----------------------------------------------------------------------------------------------
Coke Production
Domestic Steel/(b)/ 5,003 4,619 4,835 5,757 6,777
U. S. Steel Kosice 188 - - - -
-------------------------------------------
Total 5,191 4,619 4,835 5,757 6,777
----------------------------------------------------------------------------------------------
Iron Ore Pellets - Minntac, MN
Shipments 15,020 15,025 15,446 16,403 14,962
----------------------------------------------------------------------------------------------
Coal Production 6,195 6,632 8,150 7,528 7,283
----------------------------------------------------------------------------------------------
Coal Shipments 6,779 6,924 7,670 7,811 7,117
----------------------------------------------------------------------------------------------
Steel Shipments by Product - Domestic Steel
Sheet and semi-finished steel products 7,409 8,114 7,608 8,170 8,677
Tubular, plate and tin mill products 3,347 2,515 3,078 3,473 2,695
-------------------------------------------
Total 10,756 10,629 10,686 11,643 11,372
Total as % of domestic steel industry 9.8 10.0 10.5 10.9 11.3
----------------------------------------------------------------------------------------------
Steel Shipments by Product - U. S. Steel Kosice
Sheet and semi-finished steel products 207 - - - -
Tubular, plate and tin mill products 110 - - - -
-------------------------------------------
Total 317 - - - -
----------------------------------------------------------------------------------------------
Steel Shipments by Market - Domestic Steel
Steel service centers 2,315 2,456 2,563 2,746 2,831
Transportation 1,466 1,505 1,785 1,758 1,721
Further conversion:
Joint ventures 1,771 1,818 1,473 1,568 1,542
Trade customers 1,174 1,633 1,140 1,378 1,227
Containers 702 738 794 856 874
Construction 936 844 987 994 865
Oil, gas and petrochemicals 973 363 509 810 746
Export 544 321 382 453 493
All other 875 951 1,053 1,080 1,073
-------------------------------------------
Total 10,756 10,629 10,686 11,643 11,372
----------------------------------------------------------------------------------------------
Average Steel Price Per Ton
Domestic Steel $ 450 $ 420 $ 469 $ 479 $ 467
U. S. Steel Kosice 269 - - - -
----------------------------------------------------------------------------------------------
/(a)/ Represents the operations of U. S. Steel Kosice s.r.o., following the
acquisition of the steelmaking operations and related assets of VSZ
a.s. on November 24, 2000.
/(b)/ The reduction in coke production after 1996 reflected U. S. Steel's
entry into a strategic partnership with two limited partners on June
1, 1997, to acquire an interest in three coke batteries at its
Clairton (Pa.) Works.
S-23
Five-Year Financial Summary
(Dollars in millions, except as noted) 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
Revenues and Other Income
Revenues by product:
Sheet and semi-finished steel products $ 3,288 $ 3,433 $ 3,598 $ 3,923 $ 3,774
Tubular, plate and tin mill products 1,731 1,140 1,546 1,793 1,671
Raw materials (coal, coke and iron ore) 626 549 744 796 824
Other/(a)/ 445 414 490 517 466
Income (loss) from investees (8) (89) 46 69 66
Net gains on disposal of assets 46 21 54 57 16
Other income (loss) 4 2 (1) 1 55
------- ------- ------- ------- -------
Total revenues and other income/(b)/ $ 6,132 $ 5,470 $ 6,477 $ 7,156 $ 6,872
--------------------------------------------------------------------------------------------------------------------
Income From Operations
Segment income:
Domestic Steel/(b)/ $ 23 $ 91 $ 517 $ 787 $ 420
U. S. Steel Kosice 2 - - - -
Items not allocated to segments:
Net pension credits/(b)/ 266 228 186 144 158
Costs of former businesses (91) (83) (100) (125) (120)
Administrative expenses (25) (17) (24) (33) (28)
Other/(c)/ (71) (69) - - 53
------- ------- ------- -------- -------
Total income from operations 104 150 579 773 483
Net interest and other financial costs 105 74 42 87 116
Provision for income taxes 20 25 173 234 92
--------------------------------------------------------------------------------------------------------------------
Income (Loss) Before
Extraordinary Losses $ (21) $ 51 $ 364 $ 452 $ 275
Per common share - basic (in dollars) (.33) .48 4.05 5.24 3.00
- diluted (in dollars) (.33) .48 3.92 4.88 2.97
Net Income (Loss) $ (21) $ 44 $ 364 $ 452 $ 273
Per common share - basic (in dollars) (.33) .40 4.05 5.24 2.98
- diluted (in dollars) (.33) .40 3.92 4.88 2.95
--------------------------------------------------------------------------------------------------------------------
Balance Sheet Position at year-end
Current assets $ 2,717 $ 1,981 $ 1,275 $ 1,531 $ 1,428
Net property, plant and equipment 2,739 2,516 2,500 2,496 2,551
Total assets 8,711 7,525 6,749 6,694 6,580
Short-term debt 209 13 25 67 91
Other current liabilities 1,182 1,271 991 1,267 1,208
Long-term debt 2,236 902 464 456 1,014
Employee benefits 1,767 2,245 2,315 2,338 2,430
Trust preferred securities and
preferred stock of subsidiary 249 249 248 248 64
Common stockholders' equity 1,917 2,053 2,090 1,779 1,559
Per share (in dollars) 21.58 23.23 23.66 20.56 18.37
--------------------------------------------------------------------------------------------------------------------
Cash Flow Data
Net cash from operating activities $ (627) $ (80) $ 380 $ 476 $ 92
Capital expenditures 244 287 310 261 337
Disposal of assets 21 10 21 420 161
Dividends paid 97 97 96 96 104
--------------------------------------------------------------------------------------------------------------------
Employee Data
Total employment costs $ 1,197/(d)/ $ 1,148 $ 1,305 $ 1,417 $ 1,372
Average domestic employment cost
(dollars per hour) 28.70 28.35 30.42 31.56 30.35
Average number of domestic employees 19,353 19,266 20,267 20,683 20,831
Number of U. S. Steel Kosice s.r.o.
employees at year-end 16,244 - - - -
Number of pensioners at year-end 94,339 97,102/(e)/ 92,051 93,952 96,510
--------------------------------------------------------------------------------------------------------------------
Stockholder Data at year-end
Number of common shares
outstanding (in millions) 88.8 88.4 88.3 86.6 84.9
Registered shareholders (in thousands) 50.3 55.6 60.2 65.1 71.0
Market price of common stock $18.000 $33.000 $23.000 $31.250 $31.375
--------------------------------------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-products,
engineering and consulting services, real estate development and
resource management.
/(b)/ 1996-1999 reclassified to conform to 2000 classifications.
/(c)/ Includes impairment of coal assets in 2000, losses related to
investments in equity investees in 1999 and gain on investee stock
offering in 1996.
/(d)/ Includes U. S. Steel Kosice s.r.o. from date of acquisition.
/(e)/ Includes approximately 8,000 surviving spouse beneficiaries added to
the U. S. Steel pension plan in 1999.
S-24
Management's Discussion and Analysis
The U. S. Steel Group is engaged in the production and sale of
steel mill products, coke, and taconite pellets; the management of
mineral resources; coal mining; real estate development; and
engineering and consulting services. Certain business activities
are conducted through joint ventures and partially owned companies,
such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company
("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B
Partnership, and Republic Technologies International, LLC
("Republic"). On November 24, 2000, USX acquired U. S. Steel Kosice
s.r.o. ("USSK"), which held the steel and related assets of VSZ
a.s. ("VSZ"), headquartered in the Slovak Republic. Management's
Discussion and Analysis should be read in conjunction with the U.
S. Steel Group's Financial Statements and Notes to Financial
Statements.
Certain sections of Management's Discussion and Analysis include
forward-looking statements concerning trends or events potentially
affecting the businesses of the U. S. Steel Group. These statements
typically contain words such as "anticipates," "believes,"
"estimates," "expects" or similar words indicating that future
outcomes are not known with certainty and subject to risk factors
that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements
are accompanied by cautionary language identifying important
factors, though not necessarily all such factors, that could cause
future outcomes to differ materially from those set forth in
forward-looking statements. For additional risk factors affecting
the businesses of the U. S. Steel Group, see Supplementary Data -
Disclosures About Forward-Looking Information in USX Form 10-K.
Management's Discussion and Analysis of Income
Revenues and Other Income for each of the last three years are
summarized in the following table:
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------------------------
Revenues by product:
Sheet and semi-finished steel products $3,288 $3,433 $3,598
Tubular, plate, and tin mill products 1,731 1,140 1,546
Raw materials (coal, coke and iron ore) 626 549 744
Other/(a)/ 445 414 490
Income (loss) from investees (8) (89) 46
Net gains on disposal of assets 46 21 54
Other income (loss) 4 2 (1)
------ ------ ------
Total revenues and other income $6,132 $5,470 $6,477
-----------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-
products, real estate development, resource management, and
engineering and consulting services.
Total revenues and other income increased by $662 million in
2000 from 1999 primarily due to the consolidation of Lorain Tubular
Company, LLC, ("Lorain Tubular") effective January 1, 2000, higher
average realized prices, particularly tubular product prices, and
lower losses from investees, which, in 1999, included a $47 million
charge for the impairment of U. S. Steel's investment in USS/Kobe
Steel Company. Total revenues and other income in 1999 decreased by
$1,007 million from 1998 primarily due to lower average realized
prices and lower income from investees.
S-25
Management's Discussion and Analysis continued
Income from operations for the U. S. Steel Group for the last
three years was:
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------------------------------------
Segment income for Domestic Steel/(a)/ $ 23 $ 91 $ 517
Segment income for U. S. Steel Kosice/(b)/ 2 - -
----- ----- -----
Income for reportable segments $ 25 $ 91 $ 517
Items not allocated to segments:
Net pension credits 266 228 186
Administrative expenses (25) (17) (24)
Costs related to former business activities/(c)/ (91) (83) (100)
Asset impairments - Coal (71) - -
Impairment of USX's investment in USS/Kobe and costs
related to formation of Republic - (47) -
Loss on investment in RTI stock used to satisfy indexed
debt obligations/(d)/ - (22) -
----- ----- -----
Total income from operations $ 104 $ 150 $ 579
-----------------------------------------------------------------------------------------------------
/(a)/ Includes income from the sale and domestic production of
steel mill products, coke and taconite pellets; the
management of mineral resources; coal mining; real estate
development and management; and engineering and consulting
services.
/(b)/ Includes the sale and production of steel products from
facilities primarily located in the Slovak Republic
commencing November 24, 2000. For further details, see Note
5 to the U. S. Steel Group Financial Statements.
/(c)/ Includes the portion of postretirement benefit costs and
certain other expenses principally attributable to former
business units of the U. S. Steel Group.
/(d)/ For further details, see Note 6 to the U. S. Steel Group
Financial Statements.
Segment income for Domestic Steel
Domestic Steel operations recorded segment income of $23 million
in 2000 versus segment income of $91 million in 1999, a decrease of
$68 million. The 2000 segment income included $36 million for
certain environmental and legal accruals, a $34 million charge to
establish reserves against notes and receivables from financially
distressed steel companies and a $10 million charge for USX's share
of Republic special charges. Results in 1999 included $17 million
in charges for certain environmental and legal accruals and $7
million in various non-recurring investee charges. Excluding these
items, the decrease in segment income for Domestic Steel was
primarily due to higher costs related to energy and inefficient
operating levels due to lower throughput, lower income from raw
materials operations, particularly coal operations and lower sheet
shipments resulting from high levels of imports that continued in
2000.
Segment income for Domestic Steel operations in 1999 decreased
$426 million from 1998. Results in 1998 included a net favorable
$30 million for an insurance litigation settlement and charges of
$10 million related to a voluntary workforce reduction plan.
Excluding these items, the decrease in segment income for Domestic
Steel was primarily due to lower average steel prices, lower income
from raw materials operations, a less favorable product mix and
lower income from investees.
Segment income for U. S. Steel Kosice
USSK segment income for the period following the November 24,
2000 acquisition was $2 million.
Items not allocated to segments: Net pension credits, which are
primarily noncash, totaled $266 million in 2000, $228 million in
1999 and $186 million in 1998. Net pension credits in 1999 included
$35 million for a one-time favorable pension settlement primarily
related to the voluntary early retirement program for salaried
employees. For additional information on pensions, see Note 12 to
the U. S. Steel Group Financial Statements.
S-26
Management's Discussion and Analysis continued
Asset impairments - Coal, were for asset impairments at U. S.
Steel Mining's coal mines in Alabama and West Virginia in 2000
following a reassessment of long-term prospects after adverse
geological conditions were encountered.
In 1999, an impairment of USX's investment in USS/Kobe and costs
related to the formation of Republic totaled $47 million.
Income from operations in 1999 also included a loss on
investment in RTI stock used to satisfy indexed debt obligations of
$22 million from the termination of ownership in RTI International
Metals, Inc. For further discussion, see Note 6 to the U. S. Steel
Group Financial Statements.
Net interest and other financial costs for each of the last
three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998
------------------------------------------------------------------
Net interest and other financial costs $ 105 $ 74 $ 42
Less:
Favorable adjustment to
carrying value of Indexed Debt/(a)/ - 13 44
----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $ 105 $ 87 $ 86
-------------------------------------------------------------------
/(a)/ In December 1996, USX issued $117 million of 6-3/4%
Exchangeable Notes Due February 1, 2000 ("Indexed Debt")
indexed to the price of RTI common stock. The carrying value
of Indexed Debt was adjusted quarterly to settlement value,
based on changes in the value of RTI common stock. Any
resulting adjustment was credited to income and included in
interest and other financial costs. For further discussion of
Indexed Debt, see Note 6 to the U. S. Steel Group Financial
Statements.
Adjusted net interest and other financial costs increased $18
million in 2000 as compared with 1999, primarily due to higher
average debt levels. Adjusted net interest and other financial
costs were $87 million in 1999 as compared with $86 million in
1998.
The provision for income taxes in 2000 decreased compared to
1999 primarily due to a decline in income from operations, offset
by higher state income taxes as certain previously recorded state
tax benefits will not be utilized. The provision for income taxes
in 1999 decreased compared to 1998 due to a decline in income from
operations. For further discussion on income taxes, see Note 15 to
the U. S. Steel Group Financial Statements.
The extraordinary loss on extinguishment of debt of $7 million,
net of income tax benefit, in 1999 included a $5 million loss
resulting from the satisfaction of the indexed debt and a $2
million loss for U. S. Steel's share of Republic's extraordinary
loss related to the early extinguishment of debt. For additional
information, see Note 6 to the U. S. Steel Group Financial
Statements.
The U. S. Steel Group recorded a 2000 net loss of $21 million,
compared with net income of $44 million in 1999 and $364 million in
1998. Net income decreased $65 million in 2000 from 1999, and
decreased $320 million in 1999 from 1998. The decreases in net
income primarily reflect the factors discussed above.
S-27
Management's Discussion and Analysis continued
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets at year-end 2000 increased $736 million from
year-end 1999 primarily due to an increase in cash and cash
equivalents, a larger inter-group income tax receivable, and
increased trade receivables and inventories resulting from the
acquisition of USSK.
Net property, plant and equipment at year-end 2000 increased
$223 million from year-end 1999 primarily due to the acquisition of
USSK.
Current liabilities in 2000 increased $107 million from 1999
primarily due to increased notes payable and increased debt due
within one year, partially offset by a decrease in payroll and
benefits payable.
Total long-term debt and notes payable at December 31, 2000 of
$2,445 million was $1,530 million higher than year-end 1999. USX
debt attributed to the U. S. Steel Group increased partially due to
a $500 million elective contribution to a Voluntary Employee
Benefit Association ("VEBA"), a trust established by contract in
1994 covering United Steelworkers of America retirees' health care
and life insurance benefits, and the acquisition of USSK. Excluding
the impact of these items, the increase in debt was primarily due
to lower cash flow provided from operating activities partially
offset by reduced capital expenditures. For further discussion of
the VEBA contribution, see Note 12 to the U. S. Steel Group
Financial Statements. Most of the debt is a direct obligation of,
or is guaranteed by, USX.
Employee benefits at December 31, 2000 decreased $478 million
primarily due to the $500 million elective contribution to a VEBA.
Net cash used in operating activities in 2000 was $627 million
and reflected the $500 million elective contribution to a VEBA and
a $30 million elective contribution to a non-union retiree life
insurance trust, partially offset by an income tax settlement with
the Marathon Group in accordance with the group tax allocation
policy. Net cash used in operating activities was $80 million in
1999 including a net payment of $320 million upon the expiration of
the accounts receivable program. Excluding these non-recurring
items in both years, net cash provided from operating activities
decreased $434 million in 2000 due mainly to decreased
profitability and an increase in working capital.
Net cash provided from operating activities was $380 million in
1998 and included proceeds of $38 million for the insurance
litigation settlement pertaining to the 1995 Gary Works No. 8 blast
furnace explosion and the payment of $30 million for the repurchase
of sold accounts receivable, partially offset by an income tax
settlement with the Marathon Group in accordance with the group tax
allocation policy. Excluding these non-recurring items in both
years, net cash provided from operating activities decreased $110
million in 1999 due mainly to decreased profitability.
Capital expenditures in 2000 included exercising an early buyout
option of a lease for approximately half of the Gary Works No. 2
Slab Caster; the continued replacement of coke battery thruwalls at
Gary Works; installation of the remaining two coilers at Gary's hot
strip mill; a blast furnace stove replacement at Gary Works; and
the continuation of an upgrade to the Mon Valley cold reduction
mill. Capital expenditures in 1999 included the completion of the
new 64" pickle line at Mon Valley Works; the replacement of one
coiler at the Gary hot strip mill; an upgrade to the Mon Valley
S-28
Management's Discussion and Analysis continued
cold reduction mill; replacement of coke battery thruwalls at Gary
Works; several projects at Gary Works allowing for production of
specialized high strength steels, primarily for the automotive
market; and completion of the conversion of the Fairfield pipemill
to use rounds instead of square blooms. Contract commitments for
capital expenditures at year-end 2000 were $206 million, compared
with $83 million at year-end 1999.
Capital expenditures for 2001 are expected to be approximately
$425 million including exercising an early buyout option of a lease
for the balance of the Gary Works No. 2 Slab Caster; work on the
No. 3 blast furnace at Mon Valley Works; work on the No. 2 stove at
the No. 6 blast furnace at Gary Works; the completion of the
replacement of coke battery thruwalls at Gary Works; the completion
of an upgrade to the Mon Valley cold reduction mill; mobile
equipment purchases; systems development project; and projects at
USSK, including the completion of the tin mill upgrade.
The preceding statement concerning expected 2001 capital
expenditures is a forward-looking statement. This forward-looking
statement is based on assumptions, which can be affected by (among
other things) levels of cash flow from operations, general economic
conditions, whether or not assets are purchased or financed by
operating leases, unforeseen hazards such as weather conditions,
explosions or fires, which could delay the timing of completion of
particular capital projects. Accordingly, actual results may differ
materially from current expectations in the forward-looking
statement.
Investments in investees in 2000 of $35 million largely
reflected an investment in stock of VSZ in which USX now holds a 25
percent interest. Investments in investees in 1999 of $15 million
was an investment in Republic. Investments in investees in 1998 of
$73 million mainly reflects funding for entry into a joint venture
in the Slovak Republic with VSZ.
The acquisition of U. S. Steel Kosice s.r.o. totaled $10 million
in 2000 which reflected a $69 million purchase price net of cash
acquired in the transaction of $59 million.
Net cash changes related to financial obligations increased by
$1,202 million, $486 million and $9 million in 2000, 1999 and 1998,
respectively. Financial obligations consist of the U. S. Steel
Group's portion of USX debt and preferred stock of a subsidiary
attributed to both groups as well as debt and financing agreements
specifically attributed to the U. S. Steel Group. The increase in
2000 primarily reflected the net effects of cash used in operating
activities, including a VEBA contribution, cash used in investing
activities, dividend payments and preferred stock repurchases. The
increase in 1999 primarily reflected the net effects of cash used
in operating and investing activities and dividend payments. For a
discussion of USX financing activities attributed to both groups,
see Management's Discussion and Analysis of USX Consolidated
Financial Condition, Cash Flows and Liquidity.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk
for discussion of derivative instruments and associated market risk
for U. S. Steel Group.
Liquidity
For discussion of USX's liquidity and capital resources, see
Management's Discussion and Analysis of USX Consolidated Financial
Condition, Cash Flows and Liquidity.
S-29
Management's Discussion and Analysis continued
Management's Discussion and Analysis of Environmental Matters, Litigation and
Contingencies
The U. S. Steel Group has incurred and will continue to incur
substantial capital, operating and maintenance, and remediation
expenditures as a result of environmental laws and regulations. In
recent years, these expenditures have been mainly for process
changes in order to meet Clean Air Act obligations, although
ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected
in the prices of the U. S. Steel Group's products and services,
operating results will be adversely affected. The U. S. Steel Group
believes that all of its domestic competitors are subject to
similar environmental laws and regulations. However, the specific
impact on each competitor may vary depending on a number of
factors, including the age and location of its operating
facilities, marketing areas, production processes and the specific
products and services it provides. To the extent that competitors
are not required to undertake equivalent costs in their operations,
the competitive position of the U. S. Steel Group could be
adversely affected.
In addition, the U. S. Steel Group expects to incur capital
expenditures to meet environmental standards under the Slovak
Republic's environmental laws for its USSK operation.
The U. S. Steel Group's environmental expenditures for the last
three years were/(a)/:
(Dollars in millions) 2000 1999 1998
---------------------------------------------------------------
Capital $ 18 $ 32 $ 49
Compliance
Operating & maintenance 194 199 198
Remediation/(b)/ 18 22 19
----- ----- -----
Total U. S. Steel Group $ 230 $ 253 $ 266
---------------------------------------------------------------
/(a)/ Based on previously established U. S. Department of
Commerce survey guidelines.
/(b)/ These amounts include spending charged against remediation
reserves, net of recoveries where permissible, but do not
include noncash provisions recorded for environmental
remediation.
The U. S. Steel Group's environmental capital expenditures
accounted for 7%, 11% and 16% of total capital expenditures in
2000, 1999 and 1998, respectively.
Compliance expenditures represented 4% of the U. S. Steel
Group's total costs and expenses in 2000, 1999 and 1998.
Remediation spending during 1998 to 2000 was mainly related to
remediation activities at former and present operating locations.
These projects include remediation of contaminated sediments in a
river that receives discharges from the Gary Works and the closure
of permitted hazardous and non-hazardous waste landfills.
The Resource Conservation and Recovery Act ("RCRA") establishes
standards for the management of solid and hazardous wastes. Besides
affecting current waste disposal practices, RCRA also addresses the
environmental effects of certain past waste disposal operations,
the recycling of wastes and the regulation of storage tanks.
The U. S. Steel Group is in the study phase of RCRA corrective
action programs at its Fairless Works and its former Geneva Works.
A RCRA corrective action program has been initiated at its Gary
Works and its Fairfield Works. Until the studies are completed at
these facilities, USX is unable to estimate the total cost of
remediation activities that will be required.
S-30
Management's Discussion and Analysis continued
USX has been notified that it is a potential responsible party
(``PRP'') at 25 waste sites related to the U. S. Steel Group under
the Comprehensive Environmental Response, Compensation and
Liability Act (``CERCLA'') as of December 31, 2000. In addition,
there are 17 sites related to the U. S. Steel Group where USX has
received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not
presently available to confirm the existence of liability or make
any judgment as to the amount thereof. There are also 29 additional
sites related to the U. S. Steel Group where remediation is being
sought under other environmental statutes, both federal and state,
or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a
number of parties involved and the total cost of remediation, as
well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. The U. S. Steel
Group accrues for environmental remediation activities when the
responsibility to remediate is probable and the amount of
associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of
those previously accrued may be required. See Note 26 to the U. S.
Steel Group Financial Statements.
In October 1996, USX was notified by the Indiana Department of
Environmental Management ("IDEM") acting as lead trustee, that IDEM
and the U. S. Department of the Interior had concluded a
preliminary investigation of potential injuries to natural
resources related to releases of hazardous substances from various
municipal and industrial sources along the east branch of the Grand
Calumet River and Indiana Harbor Canal. The public trustees
completed a pre-assessment screen pursuant to federal regulations
and have determined to perform a Natural Resource Damages
Assessment. USX was identified as a PRP along with 15 other
companies owning property along the river and harbor canal. USX and
eight other PRPs have formed a joint defense group. The trustees
notified the public of their plan for assessment and later adopted
the plan. In 2000, the trustees concluded their assessment of
sediment injuries, which includes a technical review of
environmental conditions. The PRP joint defense group is discussing
settlement opportunities with the trustees and the U.S.
Environmental Protection Agency ("EPA").
In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture
between USX and Kobe Steel, Ltd. ("Kobe"), was the subject of a
multi-media audit by the EPA that included an air, water and
hazardous waste compliance review. USS/Kobe and the EPA entered
into a tolling agreement pending issuance of the final audit and
commenced settlement negotiations in July 1999. In August 1999, the
steelmaking and bar producing operations of USS/Kobe were combined
with companies controlled by Blackstone Capital Partners II to form
Republic. The tubular operations of USS/Kobe were transferred to a
newly formed entity, Lorain Tubular Company, LLC ("Lorain
Tubular"), which operated as a joint venture between USX and Kobe
until December 31, 1999 when USX purchased all of Kobe's interest
in Lorain Tubular. Republic and Lorain Tubular are continuing
negotiations with the EPA. Most of the matters raised by the EPA
relate to Republic's facilities; however, air discharges from
Lorain Tubular's #3 seamless pipe mill have also been cited. Lorain
Tubular will be responsible for matters relating to its facilities.
The final report and citations from the EPA have not been issued.
S-31
Management's Discussion and Analysis continued
In 1998, USX entered into a consent decree with the EPA which
resolved alleged violations of the Clean Water Act National
Pollution Discharge Elimination System ("NPDES") permit at Gary
Works and provides for a sediment remediation project for a section
of the Grand Calumet River that runs through Gary Works.
Contemporaneously, USX entered into a consent decree with the
public trustees which resolves potential liability for natural
resource damages on the same section of the Grand Calumet River. In
1999, USX paid civil penalties of $2.9 million for the alleged
water act violations and $0.5 million in natural resource damages
assessment costs. In addition, USX will pay the public trustees $1
million at the end of the remediation project for future monitoring
costs and USX is obligated to purchase and restore several parcels
of property that have been or will be conveyed to the trustees.
During the negotiations leading up to the settlement with EPA,
capital improvements were made to upgrade plant systems to comply
with the NPDES requirements. The sediment remediation project is an
approved final interim measure under the corrective action program
for Gary Works and is expected to cost approximately $36.4 million
over the next five years. Estimated remediation and monitoring
costs for this project have been accrued.
In February 1999, the U.S. Department of Justice and EPA issued
a letter demanding a cash payment of approximately $4 million to
resolve a Finding of Violation issued in 1997 alleging improper
sampling of benzene waste streams at Gary Coke. On September 18,
2000, a Consent Decree was entered which required USX to pay a
civil penalty of $587,000 and to replace PCB transformers as a
Supplemental Environmental Program at a cost of approximately $2.2
million. Payment of the civil penalty was made on October 13, 2000.
New or expanded environmental requirements, which could increase
the U. S. Steel Group's environmental costs, may arise in the
future. USX intends to comply with all legal requirements regarding
the environment, but since many of them are not fixed or presently
determinable (even under existing legislation) and may be affected
by future legislation, it is not possible to predict accurately the
ultimate cost of compliance, including remediation costs which may
be incurred and penalties which may be imposed. However, based on
presently available information, and existing laws and regulations
as currently implemented, the U. S. Steel Group does not anticipate
that environmental compliance expenditures (including operating and
maintenance and remediation) will materially increase in 2001. The
U. S. Steel Group's capital expenditures for environmental are
expected to be approximately $20 million in 2001 and are expected
to be spent on projects primarily at Gary Works and USSK.
Predictions beyond 2001 can only be broad-based estimates which
have varied, and will continue to vary, due to the ongoing
evolution of specific regulatory requirements, the possible
imposition of more stringent requirements and the availability of
new technologies to remediate sites, among other matters. Based
upon currently identified projects, the U. S. Steel Group
anticipates that environmental capital expenditures will be
approximately $51 million in 2002; however, actual expenditures may
vary as the number and scope of environmental projects are revised
as a result of improved technology or changes in regulatory
requirements and could increase if additional projects are
identified or additional requirements are imposed.
S-32
Management's Discussion and Analysis continued
USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to
the U. S. Steel Group involving a variety of matters, including
laws and regulations relating to the environment, certain of which
are discussed in Note 26 to the U. S. Steel Group Financial
Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel
Group Financial Statements. However, management believes that USX
will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably to
the U. S. Steel Group.
Management's Discussion and Analysis of Operations
Despite a strong start, 2000 turned out to be a difficult year
for the domestic steel industry. Steel imports to the United States
accounted for an estimated 27%, 26% and 30% of the domestic steel
market for 2000, 1999 and 1998, respectively. In 2000, steel
imports of pipe increased 37% and imports of hot rolled sheets
increased 19%, compared to 1999.
For the U. S. Steel Group in 2000, domestic sheet and semi-
finished product shipments decreased 9% compared to 1999. In
addition, higher natural gas prices increased production cost by
approximately $70 million over 1999. Nevertheless, average realized
steel prices were 7.1% higher in 2000 versus 1999 due primarily to
a strong tubular market and a better product mix from including
Lorain Tubular shipments, effective January 1, 2000. However, sheet
prices deteriorated during the second half of the year to fourth
quarter levels which were among the lowest in the last 20 years. By
year-end, several competitors had filed for Chapter 11 bankruptcy,
adding more uncertainty to already weak steel markets.
Total steel shipments were 11.1 million tons in 2000, 10.6
million tons in 1999, and 10.7 million tons in 1998. Domestic Steel
shipments comprised approximately 9.8% of the domestic steel market
in 2000. Domestic Steel shipments were negatively affected by high
import levels in 1998, 1999 and 2000 and by weak tubular markets in
1999 and 1998. Exports accounted for approximately 5% of Domestic
Steel shipments in 2000, 3% in 1999 and 4% in 1998.
Domestic raw steel production was 11.4 million tons in 2000,
compared with 12.0 million tons in 1999 and 11.2 million tons in
1998. Domestic raw steel production averaged 89% of capability in
2000, compared with 94% of capability in 1999 and 88% of capability
in 1998. In 2000, domestic raw steel production was negatively
impacted by a planned reline at Gary Works No. 4 blast furnace in
July 2000. Because of market conditions, U. S. Steel Group limited
its domestic production by keeping the Gary Works No. 4 blast
furnace out of service through year-end 2000. In 1998, domestic raw
steel production was negatively affected by a planned reline at
Gary Works No. 6 blast furnace, an unplanned blast furnace outage
at the Gary Works No. 13 blast furnace, and the idling of certain
facilities as a result of the increase in imports. Because of
market conditions, U. S. Steel Group curtailed its domestic
production by keeping the Gary Works No. 6 blast furnace out of
service until February 1999, after a scheduled reline was completed
in mid-August 1998. In addition, domestic raw steel production was
cut back at Mon Valley Works and Fairfield Works during 1998. U. S.
Steel's stated annual domestic raw steel production capability was
12.8 million tons in 2000, 1999 and 1998. USSK's stated annual raw
steel production capability for 2000 was 4.5 million net tons.
After the acquisition, raw steel production at USSK in 2000
averaged 82% of capability.
S-33
Management's discussion and Analysis continued
On November 13, 2000, U. S. Steel Group joined with eight other
producers and the Independent Steelworkers Union to file trade
cases against hot-rolled carbon steel flat products from 11
countries (Argentina, India, Indonesia, Kazakhstan, the
Netherlands, the People's Republic of China, Romania, South Africa,
Taiwan, Thailand and Ukraine). Three days later, the USWA also
entered the cases as a petitioner. Antidumping ("AD") cases were
filed against all the countries and countervailing duty ("CVD")
cases were filed against Argentina, India, Indonesia, South Africa,
and Thailand. On December 28, 2000, the U.S. International Trade
Commission ("ITC") made a preliminary determination that there is a
reasonable indication that the domestic industry is being
materially injured by the imports in question. As a result, both
the ITC and U.S. Department of Commerce ("Commerce") will continue
their investigations in these cases.
U. S. Steel Group believes that the remedies provided by U.S.
law to private litigants are insufficient to correct the widespread
dumping and subsidy abuses that currently characterize steel
imports into our country. U. S. Steel Group, nevertheless, intends
to file additional AD and CVD petitions against unfairly traded
imports that adversely impact, or threaten to adversely impact, the
results of the U. S. Steel Group and is urging the U.S. government
to take additional steps.
On July 3, 2000, Commerce and the ITC initiated mandatory five-
year "sunset" reviews of AD orders issued in 1995 against seamless
pipe from Argentina, Brazil, Germany and Italy and oil country
tubular goods ("OCTG") from Argentina, Italy, Japan, Mexico and
South Korea. The reviews also encompass the 1995 CVD orders against
the same two products from Italy. The "sunset" review procedures
require that an order must be revoked after five years unless
Commerce and the ITC determine that, if the orders would be
discontinued, dumping or a countervailable subsidy would be likely
to continue or recur and material injury to the domestic industry
would be likely to continue or recur. Of the 11 orders, 8 are the
subject of expedited review at Commerce because there was no
response, inadequate response, or waiver of participation by the
respondent parties. Therefore, at Commerce, only three of the
orders (AD: OCTG from Mexico; and CVD: OCTG and seamless pipe from
Italy) are the subject of a full review. The ITC is conducting full
reviews of all the cases, despite the fact that responses by some
of the respondent countries were inadequate.
The U. S. Steel Group depreciates domestic steel assets by
modifying straight-line depreciation based on the level of
production. Depreciation charges for 2000, 1999, and 1998 were 94%,
99%, and 93%, respectively, of straight-line depreciation based on
production levels for each of the years. See Note 2 to the U. S.
Steel Group Financial Statements.
Outlook for 2001
Domestic Steel's order book and prices remain soft due to
continued high import volumes (which in 2000 were second only to
record-year 1998 levels), a draw-down of inventories by spot
purchasers and increasing evidence that the growth in the domestic
economy is slowing. In addition to these factors, our plate
products business is being impacted by recently added domestic
capacity. Although domestic shipments for the first quarter of 2001
are projected to be somewhat better than fourth quarter 2000
levels, we expect that sheet and plate pricing, which declined
markedly in the fourth quarter, will continue to be depressed as a
result of the factors cited above. The tubular business, however,
remains strong. For the year 2001, domestic shipments are expected
to be approximately 11 million net tons, excluding any shipments
from the potential acquisition of LTV Corporation tin operations.
For the year 2001, USSK shipments are expected to be approximately
3.3 million to 3.6 million net tons.
S-34
Management's discussion and Analysis continued
High natural gas prices adversely affected our results in 2000
and are expected to persist for some time. The blast furnace idled
at Gary Works in July 2000 for a planned 10-day outage remained
down until late February 2001 due to business conditions. The U. S.
Steel Group has continued its cost reduction efforts, and has
recently requested from its current suppliers an immediate,
temporary eight percent price reduction from existing levels to
help weather this difficult period.
Several domestic competitors recently have filed for Chapter 11
bankruptcy protection. This provides them with certain competitive
advantages and further demonstrates the very difficult economic
circumstances faced by the domestic industry.
U. S. Steel Group's income from operations includes net pension
credits, which are primarily noncash, associated with all of U. S.
Steel's pension plans. Net pension credits were $266 million in
2000. At the end of 2000, U. S. Steel's main pension plans'
transition asset was fully amortized, decreasing the pension credit
by $69 million annually in future years for this component. In
addition, for the year 2001, low marketplace returns on trust
assets in the year 2000 and pending business combinations in the
current year are expected to further reduce net pension credits to
approximately $160 million. The above includes forward-looking
statements concerning net pension credits which can vary depending
upon the market performance of plan assets, changes in actuarial
assumptions regarding such factors as the selection of a discount
rate and rate of return on plan assets, changes in the amortization
levels of transition amounts or prior period service costs, plan
amendments affecting benefit payout levels, business combinations
and profile changes in the beneficiary populations being valued.
Changes in any of these factors could cause net pension credits to
change. To the extent net pension credits decline in the future,
income from operations would be adversely affected.
The U. S. Steel Group includes a 16 percent equity method
investment in Republic (through an ownership interest in Republic
Technologies International Holdings, LLC ("Republic Holdings"),
which is the sole owner of Republic). In the third quarter of 2000,
Republic announced that it had completed a financial restructuring
to improve its liquidity position. Republic raised approximately
$30 million in loans from certain of its direct and indirect equity
partners in exchange for notes of Republic and warrants to purchase
Class D common stock of Republic Technologies International, Inc.,
Republic's majority owner. The U. S. Steel Group's portion was
approximately $6 million and the U. S. Steel Group also agreed to
certain deferred payment terms into the year 2002, up to a maximum
of $30 million, with regard to Republic's obligations relating to
iron ore pellets supplied to Republic. In its Form 10-Q for the
period ended September 30, 2000, which was filed with the SEC on
October 31, 2000, Republic Holdings stated that "Notwithstanding
these efforts, [Republic Holdings] may need to obtain additional
financing to meet its cash flow requirements, including financing
from the sale of additional debt or equity securities." Republic
Holdings also stated "As a result of the factors mentioned above,
[Republic Holdings] is highly leveraged and could be considered a
risky investment."
At December 31, 2000, the U. S. Steel Group's financial exposure
to Republic totaled approximately $131 million, consisting of
amounts owed by Republic to the U. S. Steel Group and debt
obligations assumed by Republic.
S-35
Management's discussion and Analysis continued
In early October 2000, the U. S. Steel Group announced an
agreement with LTV Corporation ("LTV") to purchase LTV's tin mill
products business, including its Indiana Harbor, Indiana tin
operations. This acquisition recently closed and was effective
March 1, 2001. Terms of this noncash transaction call for the U. S.
Steel Group to assume certain employee-related obligations of LTV.
The U. S. Steel Group intends to operate these facilities as an
ongoing business and tin mill employees at Indiana Harbor became U.
S. Steel Group employees. The U. S. Steel Group and LTV also
entered into 5-year agreements for LTV to supply the U. S. Steel
Group with pickled hot bands and for the U. S. Steel Group to
provide LTV with processing of cold rolled steel.
In October 2000, Transtar announced it had entered into a
Reorganization and Exchange Agreement with its two voting
shareholders. Upon closing, Transtar and certain of its
subsidiaries, namely, the Birmingham Southern Railroad Company; the
Elgin, Joliet and Eastern Railway Company; the Lake Terminal
Railroad Company; the McKeesport Connecting Railroad Company; the
Mobile River Terminal Company, Inc.; the Union Railroad Company;
the Warrior & Gulf Navigation Company; and Tracks Traffic and
Management Services, Inc., will become subsidiaries within the U.
S. Steel Group. The other shareholder, Transtar Holdings, L.P., an
affiliate of Blackstone Capital Partners L.P., will become the
owner of the other subsidiaries.
The preceding statements concerning anticipated steel demand,
steel pricing, and shipment levels are forward-looking and are
based upon assumptions as to future product prices and mix, and
levels of steel production capability, production and shipments.
These forward-looking statements can be affected by imports,
domestic and international economies, domestic production capacity,
the completion of the LTV and Transtar transactions, and customer
demand. In the event these assumptions prove to be inaccurate,
actual results may differ significantly from those presently
anticipated.
Accounting Standards
In the fourth quarter of 2000, USX adopted the following
accounting pronouncements primarily related to the classification
of items in the financial statements. The adoption of these new
pronouncements had no net effect on the financial position or
results of operations of USX, although they required
reclassifications of certain amounts in the financial statements,
including all prior periods presented.
. In December 1999, the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101")
"Revenue Recognition in Financial Statements," which
summarizes the SEC staff's interpretations of generally
accepted accounting principles related to revenue recognition
and classification.
. In 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board ("EITF") issued EITF consensus No.
99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent", which addresses whether certain items should be
reported as a reduction of revenue or as a component of both
revenues and cost of revenues, and EITF Consensus No. 00-10
"Accounting for Shipping and Handling Fees and Costs," which
addresses the classification of costs incurred for shipping
goods to customers.
S-36
Management's discussion and Analysis continued
. In September 2000, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140
revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and
requires certain disclosures. USX adopted certain recognition
and reclassification provisions of SFAS 140, which were
effective for fiscal years ending after December 15, 2000. The
remaining provisions of SFAS 140 are effective after March 31,
2001.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), which later was amended by SFAS Nos. 137 and 138. This
Standard requires recognition of all derivatives as either assets
or liabilities at fair value. Changes in fair value will be
reflected in either current period net income or other
comprehensive income, depending on the designation of the
derivative instrument. The U. S. Steel Group may elect not to
designate a derivative instrument as a hedge even if the strategy
would be expected to qualify for hedge accounting treatment. The
adoption of SFAS No. 133 will change the timing of recognition for
derivative gains and losses as compared to previous accounting
standards.
The U. S. Steel Group will adopt the Standard effective January
1, 2001. The transition adjustment resulting from adoption of SFAS
No. 133 will be reported as a cumulative effect of a change in
accounting principle. The transition adjustment for the U. S. Steel
Group is expected to be immaterial. The amounts reported as other
comprehensive income will be reflected in net income when the
anticipated physical transactions are consummated. It is not
possible to estimate the effect that this Standard will have on
future results of operations.
S-37
Quantitative and Qualitative Disclosures About Market Risk
Management Opinion Concerning Derivative Instruments
USX uses commodity-based and foreign currency derivative
instruments to manage its price risk. Management has authorized the
use of futures, forwards, swaps and options to manage exposure to
price fluctuations related to the purchase, production or sale of
crude oil, natural gas, refined products, and nonferrous metals.
For transactions that qualify for hedge accounting, the resulting
gains or losses are deferred and subsequently recognized in income
from operations, in the same period as the underlying physical
transaction. Derivative instruments used for trading and other
activities are marked-to-market and the resulting gains or losses
are recognized in the current period in income from operations.
While USX's risk management activities generally reduce market risk
exposure due to unfavorable commodity price changes for raw
material purchases and products sold, such activities can also
encompass strategies that assume price risk.
Management believes that use of derivative instruments along
with risk assessment procedures and internal controls does not
expose the U. S. Steel Group to material risk. The use of
derivative instruments could materially affect the U. S. Steel
Group'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 2 to the U. S. Steel Group
Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, the U. S. Steel Group is
exposed to market risk or price fluctuations related to the
purchase, production or sale of steel products. To a lesser extent,
the U. S. Steel Group is exposed to price risk related to the
purchase, production or sale of coal and coke and the purchase of
natural gas, steel scrap and certain nonferrous metals used as raw
materials.
The U. S. Steel Group'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, the U. S. Steel Group uses
derivative commodity instruments (primarily over-the-counter
commodity swaps) to manage exposure to fluctuations in the purchase
price of natural gas, heating oil and certain nonferrous metals.
The use of these instruments has not been significant in relation
to the U. S. Steel Group's overall business activity.
The U. S. Steel Group recorded net pretax other than trading
activity gains of $2 million in 2000, losses of $4 million in 1999
and losses of $6 million in 1998. These gains and losses were
offset by changes in the realized prices of the underlying hedged
commodities. For additional quantitative information relating to
derivative commodity instruments, including aggregate contract
values and fair values, where appropriate, see Note 24 to the U. S.
Steel Group Financial Statements.
S-38
Quantitative and Qualitative Disclosures
About Market Risk continued
Interest Rate Risk
USX is subject to the effects of interest rate fluctuations on
certain of its non-derivative financial instruments. A sensitivity
analysis of the projected incremental effect of a hypothetical 10%
decrease in year-end 2000 and 1999 interest rates on the fair value
of the U. S. Steel Group's specifically attributed non-derivative
financial instruments and the U. S. Steel Group's portion of USX's
non-derivative financial instruments attributed to both groups, is
provided in the following table:
(Dollars in millions)
-----------------------------------------------------------------------------------------------
As of December 31, 2000 1999
Incremental Incremental
Increase in Increase in
Fair Fair Fair Fair
Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(c)/ Value/(b)/ Value/(c)/
-----------------------------------------------------------------------------------------------
Financial assets:
Investments and long-term receivables/(d)/ $ 137 $ - $ 122 $ -
Financial liabilities:
Long-term debt/(e)(f)/ $ 2,375 $ 80 $ 835 $ 20
Preferred stock of subsidiary/(g)/ 63 5 63 5
USX obligated mandatorily
redeemable convertible preferred
securities of a subsidiary trust/(g)/ 119 10 169 15
-------- ------- ------ -----
Total liabilities $ 2,557 $ 95 $1,067 $ 40
/(a)/ Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate
carrying value and are relatively insensitive to changes in
interest rates due to the short-term maturity of the
instruments. Accordingly, these instruments are excluded from
the table.
/(b)/ See Note 25 to the U. S. Steel Group Financial Statements
for carrying value of instruments.
/(c)/ Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest
rates at December 31, 2000 and December 31, 1999, on the fair
value of USX's non-derivative financial instruments. For
financial liabilities, this assumes a 10% decrease in the
weighted average yield to maturity of USX's long-term debt at
December 31, 2000 and December 31, 1999.
/(d)/ For additional information, see Note 16 to the U. S. Steel
Group Consolidated Financial Statements.
/(e)/ Includes amounts due within one year.
/(f)/ Fair value was based on market prices where available, or
current borrowing rates for financings with similar terms and
maturities. For additional information, see Note 11 to the U.
S. Steel Group Financial Statements.
/(g)/ See Note 22 to the USX Consolidated Financial Statements.
At December 31, 2000, USX's portfolio of long-term debt was
comprised primarily of fixed-rate instruments. Therefore, the fair
value of the portfolio is relatively sensitive to effects of
interest rate fluctuations. This sensitivity is illustrated by the
$80 million increase in the fair value of long-term debt assuming a
hypothetical 10% decrease in interest rates. However, USX's
sensitivity to interest rate declines and corresponding increases
in the fair value of its debt portfolio would unfavorably affect
USX's results and cash flows only to the extent that USX elected to
repurchase or otherwise retire all or a portion of its fixed-rate
debt portfolio at prices above carrying value.
S-39
Quantitative and Qualitative Disclosures
About Market Risk continued
Foreign Currency Exchange Rate Risk
USX is subject to the risk of price fluctuations related to
anticipated revenues and operating costs, firm commitments for
capital expenditures and existing assets or liabilities denominated
in currencies other than U.S. dollars, in particular the Euro and
Slovak koruna. USX has not generally used derivative instruments to
manage this risk. However, USX has made limited use of forward
currency contracts to manage exposure to certain currency price
fluctuations. At December 31, 2000, the U. S. Steel Group had no
open forward currency contracts.
Equity Price Risk
USX is subject to equity price risk and liquidity risk related
to its investment in VSZ, which is attributed to the U. S. Steel
Group. These risks are not readily quantifiable.
Safe Harbor
The U. S. Steel Group's quantitative and qualitative disclosures
about market risk include forward-looking statements with respect
to management's opinion about risks associated with the U. S. Steel
Group's use of derivative instruments. These statements are based
on certain assumptions with respect to market prices and industry
supply of and demand for steel products and certain raw materials.
To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to the U. S. Steel Group's hedging programs
may differ materially from those discussed in the forward-looking
statements.
S-40
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of USX required by this item is
incorporated by reference to the material appearing under the heading "Election
of Directors"in USX's Proxy Statement dated March 12, 2001, for the 2001 Annual
Meeting of Stockholders.
The executive officers of USX or its subsidiaries and their ages as of
February 1, 2001, are as follows:
USX - Corporate
Albert G. Adkins............... 53 Comptroller
Albert E. Ferrara, Jr.......... 52 Vice President-Strategic Planning
Edward F. Guna................. 52 Vice President & Treasurer
Robert M. Hernandez............ 56 Vice Chairman & Chief Financial Officer
Kenneth L. Matheny............. 53 Vice President-Investor Relations
Dan D. Sandman................. 52 General Counsel, Secretary and Senior
Vice President-Human Resources & Public
Affairs
Larry G. Schultz............... 51 Vice President-Accounting
Terrence D. Straub............. 55 Vice President-Governmental Affairs
Thomas J. Usher................ 58 Chairman of the Board & Chief Executive
Officer
USX - Marathon Group
Philip G. Behrman.............. 50 Senior Vice President-Worldwide
Exploration-Marathon Oil Company
Clarence P. Cazalot, Jr........ 50 Vice Chairman-USX Corporation and
President-Marathon Oil Company
J. Louis Frank................. 64 Executive Vice President
G. David Golder................ 53 Senior Vice President-Commercialization
and Development-Marathon Oil Company
Steven B. Hinchman............. 52 Senior Vice President-Production
Operations
Steven J. Lowden............... 41 Senior Vice President-Business
Development-Marathon Oil Company
John T. Mills.................. 53 Senior Vice President-Finance &
Administration-Marathon Oil Company
William F. Schwind, Jr......... 56 General Counsel & Secretary-Marathon
Oil Company
USX - U. S. Steel Group
Charles G. Carson, III......... 58 Vice President-Environmental Affairs
Roy G. Dorrance................ 55 Executive Vice President
Charles C. Gedeon.............. 60 Executive Vice President-Raw Materials
& Diversified Businesses
Gretchen R. Haggerty........... 45 Vice President-Accounting & Finance
Bruce A. Haines................ 56 Vice President-Technology & Management
Services
J. Paul Kadlic................. 59 Executive Vice President-Sheet Products
James D. Garraux............... 48 Vice President-Employee Relations
Stephan K. Todd................ 55 General Counsel
Paul J. Wilhelm................ 58 Vice Chairman-USX Corporation and
President-U. S. Steel Group
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 USX or its subsidiaries for more than the past five
years.
54
Item 11. MANAGEMENT REMUNERATION
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in USX's Proxy
Statement dated March 12, 2001, for the 2001 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 USX's
Proxy Statement dated March 12, 2001, for the 2001 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 USX's Proxy Statement
dated March 12, 2001, for the 2001 Annual Meeting of Stockholders.
55
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
Financial Statements filed as part of this report are listed on
the Index to Financial Statements, Supplementary Data,
Management's Discussion and Analysis, and Quantitative and
Qualitative Disclosures About Market Risk of USX Consolidated, the
Marathon Group and the U. S. Steel Group, immediately preceding
pages U-1, M-1 and S-1, respectively.
2. Financial Statement Schedules and Supplementary Data
Financial Statement Schedules are omitted because they are not
applicable or the required information is contained in the
applicable financial statements or notes thereto.
Supplementary Data -
Summarized Financial Information of Marathon Oil Company is
provided on page 63. Disclosures About Forward-Looking
Statements are provided beginning on page 64.
B. Reports on Form 8-K
Form 8-K dated October 19, 2000, reporting under Item 5. Other
Events and Regulation FD Disclosure, that the Marathon Group
Earnings Release reported that Marathon has signed a definitive
agreement with Shell to transfer its 37.5 percent interest in
Sakhalin Energy Investment Company Ltd. The increased likelihood
of closing this transaction triggered a one-time, noncash deferred
tax charge of $235 million in the third quarter.
Form 8-K dated November 22, 2000, reporting under Item 9.
Regulation FD Disclosure, the press release titled "U. S. Steel
Group Experiencing Coal Production Problems at Two Mines".
Form 8-K dated November 29, 2000, reporting under Item 9.
Regulation FD Disclosure, the press releases titled "Surma Named
President of Marathon Ashland Petroleum LLC"and "Marathon
Announces new Executive Vice President".
Form 8-K dated November 30, 2000, reporting under Item 9.
Regulation FD Disclosure, the press release titled "USX to Retain
Advisors to Study its Capital Structure".
Form 8-K dated November 30, 2000, reporting under Item 9.
Regulation FD Disclosure, the press release titled "Marathon
Reviews Progress of Upstream and Downstream Businesses".
Form 8-K dated December 6, 2000, reporting under Item 9.
Regulation FD Disclosure, the press release titled "Marathon
Sakhalin Limited and Shell Sakhalin Holdings B.V. complete
exchange agreement".
Form 8-K dated December 28, 2000, reporting under Item 9.
Regulation FD Disclosure, the press release titled "Marathon and
Kinder Morgan agree to form Permian Basin joint venture".
Form 8-K dated December 28, 2000, reporting under Item 9.
Regulation FD Disclosure, that in December 2000, USX-U. S. Steel
Group made a voluntary $500 million contribution to the Voluntary
Employee Benefit Association (VEBA), which was established as part
of the 1994 agreement with the United Steelworkers of America to
pay retiree health care and life insurance benefits for
steelworker retirees.
Form 8-K dated December 29, 2000, reporting under Item 9.
Regulation FD Disclosure, the press release titled "Marathon Oil
to Acquire Pennaco Energy".
Form 8-K dated January 24, 2001, reporting under Item 9.
Regulation FD Disclosure, the USX-Marathon Group and USX-U. S.
Steel Group Earnings Releases".
56
Form 8-K dated February 27, 2001, reporting under Item 5. Other
Events, the filing of the audited Financial Statements and
Supplementary Data for the fiscal year ended December 31, 2000,
reports of independent accountants.
C. Exhibits
Exhibit No.
2. Plan of Acquisition, Reorganization, Arrangement
Liquidation or Succession
None
3. Articles of Incorporation and By-Laws
(a) USX Restated Certificate of
Incorporation dated May 1, 1999............. Incorporated by reference to Exhibit 3.1 to the USX Report on
Form 10-Q for the quarter ended June 30, 1999.
(b) USX By-Laws, effective
as of May 1, 1999........................... Incorporated by reference to Exhibit 3.2 to the USX Report on
Form 10-Q for the quarter ended June 30, 1999.
4. Instruments Defining the Rights of Security Holders,
Including Indentures
(a) Five-Year Credit Agreement dated
as of November 30, 2000.....................
(b) Rights Agreement, dated as of
September 28, 1999, between USX Corporation
and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent..................... Incorporated by reference to Exhibit 4 to
USX's Form 8-K filed on September 28, 1999.
(c) Pursuant to 17 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 USX. USX hereby agrees
to furnish a copy of any such instrument to
the Commission upon its request.
57
10. Material Contracts
(a) USX 1990 Stock Plan,
As Amended April 28, 1998................... Incorporated by reference to Annex II to the
USX Proxy Statement dated March 9, 1998.
(b) USX Annual Incentive Compensation
Plan, As Amended July 25, 2000..............
(c) USX Senior Executive Officer Annual
Incentive Compensation Plan,
As Amended April 28, 1998................... Incorporated by reference to Annex I to the
USX Proxy Statement dated March 9, 1998.
(d) Marathon Oil Company Annual Incentive
Compensation Plan, As Amended
November 23, 1999........................... Incorporated by reference to Exhibit 10(d) of
USX Form 10-K for the year ended
December 31, 1999.
(e) USX Executive Management
Supplemental Pension Program,
As Amended January 1, 1999.................. Incorporated by reference to Exhibit 10(e) of
USX Form 10-K for the year ended
December 31, 1999.
(f) USX Supplemental Thrift Program,
As Amended January 1, 1999.................. Incorporated by reference to Exhibit 10(f) of
USX Form 10-K for the year ended
December 31, 1999.
(g) Amended and Restated Limited
Liability Company Agreement of
Marathon Ashland Petroleum LLC,
dated as of December 31, 1998............... Incorporated by reference to Exhibit 10(h) of
USX Form 10-Q for the quarter ended
June 30, 1999.
(h) Amendment No. 1 dated as of
December 31, 1998 to the 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 Form 8-K dated January 1, 1998, and Exhibit 10(i) of USX
Form 10-Q for the quarter ended June 30, 1999.
(i) Form of Severance Agreements between
the Corporation and Various Officers........ Incorporated by reference to Exhibit 10 of
USX Form 10-Q for the quarter ended
September 30, 1999.
(j) USX Deferred Compensation Plan
For Non-Employee Directors
Amended as of January 1, 1998...............
58
(k) Agreement between Marathon
Oil Company and Clarence P. Cazalot, Jr.,
executed February 28, 2000.................. Incorporated by reference to Exhibit 10(k) of
USX Form 10-K for the year ended
December 31, 1999.
(l) USX Non-Officer Restricted Stock Plan,
effective January 30, 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
59
SIGNATURES
Pursuant to the requirements of the Securities 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 12, 2001.
USX CORPORATION
By /s/ Larry G. Schultz
-----------------------------------------
Larry G. Schultz
Vice President - Accounting
Signature Title
--------- -----
Chairman of the Board &
/s/ Thomas J. Usher Chief Executive Officer and Director
- ----------------------------------------
Thomas J. Usher
/s/ Robert M. Hernandez Vice Chairman & Chief Financial
- ---------------------------------------- Officer and Director
Robert M. Hernandez
/s/ Larry G. Schultz Vice President - Accounting
- ----------------------------------------
Larry G. Schultz
/s/ Neil A. Armstrong Director
- ----------------------------------------
Neil A. Armstrong
/s/ Clarence P. Cazalot, Jr. Vice Chairman and Director
- ----------------------------------------
Clarence P. Cazalot, Jr.
/s/ J. Gary Cooper Director
- ----------------------------------------
J. Gary Cooper
/s/ Charles A. Corry Director
- ----------------------------------------
Charles A. Corry
/s/ Shirley Ann Jackson Director
- ----------------------------------------
Shirley Ann Jackson
/s/ Charles R. Lee Director
- ----------------------------------------
Charles R. Lee
/s/ Paul E. Lego Director
- ----------------------------------------
Paul E. Lego
/s/ John F. McGillicuddy Director
- ----------------------------------------
John F. McGillicuddy
/s/ Seth E. Schofield Director
- ----------------------------------------
Seth E. Schofield
/s/ John W. Snow Director
- ----------------------------------------
John W. Snow
/s/ Paul J. Wilhelm Vice Chairman and Director
- ----------------------------------------
Paul J. Wilhelm
/s/ Douglas C. Yearley Director
- ----------------------------------------
Douglas C. Yearley
60
GLOSSARY OF CERTAIN DEFINED TERMS
The following definitions apply to terms used in this document:
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
Clairton Partnership.............. Clairton 1314B Partnership, L.P.
CLAM.............................. CLAM Petroleum B.V.
CWA............................... Clean Water Act
DD&A.............................. depreciation, depletion and amortization
Delhi Companies................... Delhi Gas Pipeline Company and other
subsidiaries of USX that comprised all of
the Delhi Group
Delhi Stock....................... USX-Delhi Group Common Stock
DESCO............................. Double Eagle Steel Coating Company
DOE............................... Department of Energy
DOJ............................... U.S. Department of Justice
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
Kobe.............................. Kobe Steel Ltd.
LNG............................... liquefied natural gas
MACT.............................. Maximum Achievable Control Technology
MAP............................... Marathon Ashland Petroleum LLC
MTBE.............................. Methyl tertiary butyl ether
Marathon.......................... Marathon Oil Company
Marathon Power.................... Marathon Power Company, Ltd.
Marathon Stock.................... USX-Marathon Group Common Stock
mcf............................... thousand cubic feet
Minntac........................... U. S. Steel's iron ore operations at Mt.
Iron, Minn.
MIPS.............................. 8-3/4% Cumulative Monthly Income Preferred
Stock
mmcfd............................. million cubic feet per day
NOV............................... Notice of Violation
OPA-90............................ Oil Pollution Act of 1990
PaDER............................. Pennsylvania Department of Environmental
Resources
Petronius......................... Viosca Knoll Block 786
POSCO............................. Pohang Iron & Steel Co., Ltd.
PRO-TEC........................... PRO-TEC Coating Company, a USX and Kobe
joint venture.
PRP............................... potentially responsible party
RCRA.............................. Resource Conservation and Recovery Act
RFI............................... RCRA Facility Investigation
RI/FS............................. Remedial Investigation and Feasibility Study
RM&T.............................. refining, marketing and transportation
RTI............................... RTI International Metals, Inc. (formerly RMI
Titanium Company)
Republic.......................... Republic Technologies International, LLC
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
Tarragon.......................... Tarragon Oil and Gas Limited
Trust Preferred Securities........ 6.75% Convertible Quarterly Income Preferred
Securities of USX Capital Trust I
61
GLOSSARY OF CERTAIN DEFINED TERMS (CONTINUED)
The following definitions apply to terms used in this document:
upstream.......................... exploration and production operations
USS-POSCO ........................ USS-POSCO Industries, USX and Pohang Iron &
Steel Co., Ltd., joint venture.
USS/Kobe ......................... USX and Kobe Steel Ltd. joint venture.
USSK.............................. U. S. Steel Kosice s.r.o.
USTs.............................. underground storage tanks
VSZ............................... VSZ a.s.
VSZ U. S. Steel s. r.o............ U. S. Steel and VSZ a.s. joint venture in
Kosice, Slovakia
62
Supplementary Data
Summarized Financial Information of Marathon Oil Company
Included below is the summarized financial information of Marathon Oil
Company, a wholly owned subsidiary of USX Corporation.
Year Ended December 31
-------------------------------------
(In millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Income Data:
Revenues and other income/(a)/....................... $ 33,859 $ 23,689 $ 21,596
Income from operations............................... 1,685 1,749 964
Net income........................................... 396 640 281
December 31
-----------------------
2000 1999
- ----------------------------------------------------------------------------------------
Balance Sheet Data:
Assets:
Current assets.................................... $ 7,397 $ 6,045
Noncurrent assets................................. 10,135 11,489
--------- --------
Total assets................................... $ 17,532 $ 17,534
========= ========
Liabilities and stockholder's equity:
Current liabilities............................... $ 3,951 $ 3,288
Noncurrent liabilities............................ 8,110 9,250
Preferred stock of subsidiary..................... 9 10
Minority interest in Marathon Ashland
Petroleum LLC 1,840 1,753
Stockholder's equity.............................. 3,622 3,233
--------- --------
Total liabilities and stockholder's equity..... $ 17,532 $ 17,534
- ---------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income, gain on ownership
change in MAP, net gains (losses) on disposal of assets and other income.
63
Supplementary Data
Disclosures About Forward-Looking Statements
USX includes forward-looking statements concerning trends, market
forces, commitments, material events or other contingencies potentially
affecting USX or the businesses of its Marathon Group or U. S. Steel Group in
reports filed with the Securities and Exchange Commission, external documents or
oral presentations. In order to take advantage of "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, USX is filing the
following cautionary language identifying important factors (though not
necessarily all such factors) that could cause actual outcomes to differ
materially from information set forth in forward-looking statements made by, or
on behalf of, USX, its representatives and its individual Groups.
Cautionary Language Concerning Forward-Looking Statements
USX
Forward-looking statements with respect to USX may include, but are not
limited to, comments about general business strategies, financing decisions or
corporate structure. The following discussion is intended to identify important
factors (though not necessarily all such factors) that could cause future
outcomes to differ materially from those set forth in forward-looking
statements.
Liquidity Factors
USX'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 each of its
Groups (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 USX's outstanding debt and credit ratings by investor services. On November
30, 2000, USX announced that the USX Board of Directors had authorized
management to retain financial, tax and legal advisors to perform an in-depth
study of the corporation's targeted stock structure. Until the study is
complete, USX management believes it will be more difficult to access
traditional debt and equity markets. To the extent that USX Management's
assumptions concerning these factors prove to be inaccurate, USX's liquidity
position could be materially adversely affected.
Other Factors
Holders of USX-Marathon Group Common Stock or USX-U. S. Steel Group
Common Stock are holders of common stock of USX and are subject to all the risks
associated with an investment in USX and all of its businesses and liabilities.
Financial impacts, arising from either of the groups, which affect the overall
cost of USX's capital could affect the results of operations and financial
condition of all groups.
For further discussion of certain of the factors described herein, see
Item 1. Business, Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Item 7A. Quantitative and Qualitative
Information About Market Risk.
USX - Marathon Group
Forward-looking statements with respect to the Marathon Group 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.
64
Forward-looking 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. The following discussion is intended to identify important factors
(though not necessarily all such factors) that could cause future outcomes to
differ materially from those set forth in forward-looking statements with
respect to the Marathon Group.
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.
The Marathon Group 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 the Marathon
Group's competitive position with respect to those competitors.
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 explosions, fires and uncontrollable flows of oil and gas.
Offshore production and marine operations in areas such as the Gulf of Mexico,
the U.K. North Sea, the U.K. Atlantic Margin and 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 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.
65
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.
Other Factors
Holders of USX-Marathon Group Common Stock are holders of common stock
of USX and are subject to all the risks associated with an investment in USX and
all of its businesses and liabilities. Financial impacts, arising from either of
the groups, which affect the overall cost of USX's capital could affect the
results of operations and financial condition of both groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the Marathon Group, see Item 1.
Business, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
USX - U. S. Steel Group
Forward-looking statements with respect to the U. S. Steel Group may
include, but are not limited to, projections of levels of revenues, income from
operations or income from operations per ton, net income or earnings per share;
levels of capital, environmental or maintenance expenditures; the success or
timing of completion of ongoing or anticipated capital or maintenance projects;
levels of raw steel production capability, prices, production, shipments, or
labor and raw material costs; the acquisition, idling, shutdown or divestiture
of assets or businesses; the effect of restructuring or reorganization of
business components; the effect of potential judicial proceedings on the
business and financial condition; and the effects of actions of third parties
such as competitors, or foreign, federal, state or local regulatory authorities.
Forward-looking 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. The following discussion is intended to identify important factors
(though not necessarily all such factors) that could cause future outcomes to
differ materially from those set forth in forward-looking statements with
respect to the U. S. Steel Group.
Market Factors
The U. S. Steel Group's expectations as to levels of production and
revenues, gross margins, income from operations and income from operations per
ton are based upon assumptions as to future product prices and mix, and levels
of raw steel production capability, production and shipments. These assumptions
may prove to be inaccurate.
The steel industry is characterized by excess world supply which has
restricted the ability of U. S. Steel and the industry to raise prices during
periods of economic growth and resist price decreases during economic
contraction.
Domestic flat-rolled steel supply has increased in recent years with
the completion and start-up of minimills that are less expensive to build than
integrated facilities, and are typically staffed by non-unionized work forces
with lower base labor costs and more flexible work rules. Through the use of
thin slab casting technology, minimill competitors are increasingly able to
compete directly with integrated producers of higher value-added products. Such
competition could adversely affect the U. S. Steel Group's future product prices
and shipment levels.
66
USSK does business primarily in Central Europe and is subject to market
conditions in this area which are similar to domestic factors, including excess
world supply, and also can be influenced by matters peculiar to international
marketing such as tariffs. In addition, this subsidiary is also subject to
foreign currency fluctuations which may affect results.
The domestic steel industry has, in the past, been adversely affected
by unfairly traded imports. Steel imports to the United States accounted for an
estimated 27%, 26% and 30% of the domestic steel market in 2000, 1999 and 1998,
respectively. Foreign competitors typically have lower labor costs, and are
often owned, controlled or subsidized by their governments, allowing their
production and pricing decisions to be influenced by political and economic
policy considerations as well as prevailing market conditions. Increases in
levels of imported steel could adversely affect future market prices and demand
levels for domestic steel.
The U. S. Steel Group also competes in many markets with producers of
substitutes for steel products, including aluminum, cement, composites, glass,
plastics and wood. The emergence of additional substitutes for steel products
could adversely affect future prices and demand for steel products.
The businesses of the U. S. Steel Group are aligned with cyclical
industries such as the automotive, appliance, containers, construction and
energy industries. As a result, future downturns in the U.S. economy or any of
these industries could adversely affect the profitability of the U. S. Steel
Group.
Operating and Cost Factors
The operations of the U. S. Steel Group are subject to planned and
unplanned outages due to maintenance, equipment malfunctions or work stoppages;
and various hazards, including explosions, fires and severe weather conditions,
which could disrupt operations or the availability of raw materials, resulting
in reduced production volumes and increased production costs.
Labor costs for the U. S. Steel Group are affected by collective
bargaining agreements. U. S. Steel Group entered into a five year contract with
the United Steel Workers of America, effective August 1, 1999, covering
approximately 14,500 employees. The contract provided for increases in hourly
wages phased over the term of the agreement beginning in 2000 as well as pension
and benefit improvements for active and retired employees and spouses that will
result in higher labor and benefit costs for the U.S. Steel Group each year
throughout the term of the contract. In addition, most USSK employees are
represented by OZ Metalurg, which on February 16, 2001 signed a Collective Labor
Agreement with USSK which, for nonwage issues, covers the years 2001 to 2004 and
covers all 2001 wage issues. Wage issues for the remainder of the term of the
Collective Labor Agreement are expected to be renegotiated annually. The
agreement includes improvements in the employees' social and wage benefits and
work conditions. To the extent that increased costs are not recoverable through
the sales prices of products, future income from operations would be adversely
affected.
Income from operations for the U. S. Steel Group includes periodic
pension credits (which are primarily noncash). The resulting net pension credits
totaled $266 million, $228 million and $186 million in 2000, 1999 and 1998,
respectively. Future net pension credits can be volatile dependent upon the
future marketplace performance of plan assets, changes in actuarial assumptions
regarding such factors as a selection of a discount rate and rate of return on
assets, changes in the amortization levels of transition amounts or prior period
service costs, plan amendments affecting benefit payout levels, business
combinations and profile changes in the beneficiary populations being valued.
Changes in any of these factors could cause net pension credits to change. To
the extent that these credits decline in the future, income from operations
would be adversely affected.
The U. S. Steel Group provides health care and life insurance benefits
to most employees upon retirement. Most of these benefits have not been
prefunded. The accrued liability for such benefits as of December 31, 2000, was
$1,538 million. To the extent that competitors do not provide similar benefits,
or have been relieved of obligations to provide such benefits following
bankruptcy reorganization, the competitive position of the U. S. Steel Group may
be adversely affected, depending on future costs of health care.
67
Legal and Environmental Factors
The profitability of the U. S. Steel Group's operations could be
affected by a number of contingencies, including legal actions. The ultimate
resolution of these contingencies could, individually or in the aggregate, be
material to the U. S. Steel Group financial statements.
The businesses of the U. S. Steel Group are subject to numerous
environmental laws. Certain current and former U. S. Steel Group operating
facilities have been in operation for many years and could require significant
future accruals and expenditures to meet existing and future requirements under
these laws. To the extent that competitors are not required to undertake
equivalent costs in their operations, the competitive position of the U. S.
Steel Group could be adversely affected.
Other Factors
Holders of USX-U. S. Steel Group Common Stock are holders of common
stock of USX and are subject to all the risks associated with an investment in
USX and all of its businesses and liabilities. Financial impacts, arising from
either of the groups, which affect the overall cost of USX's capital, could
affect the results of operations and financial condition of both groups.
For further discussion of certain of the factors described herein, and
their potential effects on the businesses of the U.S. Steel Group, see Item 1.
Business, Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.
68