10-K 1 d10k.htm FORM 10-K Form 10-K
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2010

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2010

 

Commission file number 1-16811

 

LOGO

 

(Exact name of registrant as specified in its charter)

 

Delaware   25-1897152
(State of Incorporation)   (I.R.S. Employer Identification No.)

 

600 Grant Street, Pittsburgh, PA 15219-2800

(Address of principal executive offices)

 

Tel. No. (412) 433-1121

 

Securities registered pursuant to Section 12 (b) of the Act:

 

 

 

Title of Each Class   Name of Exchange on which Registered

United States Steel Corporation
Common Stock, par value $1.00

 

 

New York Stock Exchange, Chicago Stock Exchange

 

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes     ü     No             

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes              No     ü    

 

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    ü     No             

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

  Yes     ü     No             

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§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.     ü    

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      ü       Accelerated filer              

Non-accelerated filer              

(Do not check if a smaller reporting company)

  Smaller reporting company              

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes             No     ü    

 

Aggregate market value of Common Stock held by non-affiliates as of June 30, 2010 (the last business day of the registrant’s most recently completed second fiscal quarter): $5.5 billion. The amount shown is based on the closing price of the registrant’s Common Stock on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are “affiliates” within the meaning of Rule 405 under the Securities Act of 1933.

 

There were 143,758,823 shares of United States Steel Corporation Common Stock outstanding as of February 17, 2011.

 

Documents Incorporated By Reference:

 

Portions of the Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated into Part III.


Table of Contents

INDEX

 

  

FORWARD-LOOKING STATEMENTS

     3   

PART I

  
  

Item 1.

  

BUSINESS

     4   
  

Item 1A.

  

RISK FACTORS

     29   
  

Item 1B.

  

UNRESOLVED STAFF COMMENTS

     39   
  

Item 2.

  

PROPERTIES

     40   
  

Item 3.

  

LEGAL PROCEEDINGS

     41   

PART II

  
  

Item 5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     53   
  

Item 6.

  

SELECTED FINANCIAL DATA

     54   
  

Item 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     55   
  

Item 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     84   
  

Item 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     F-1   
  

Item 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     87   
  

Item 9A.

  

CONTROLS AND PROCEDURES

     87   
  

Item 9B.

  

OTHER INFORMATION

     87   

PART III

  
  

Item 10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     88   
  

Item 11.

  

EXECUTIVE COMPENSATION

     88   
  

Item 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     89   
  

Item 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     89   
  

Item 14.

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     89   

PART IV

  
  

Item 15.

  

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     90   

SIGNATURES

     97   

GLOSSARY OF CERTAIN DEFINED TERMS

     98   

SUPPLEMENTARY DATA
DISCLOSURES ABOUT FORWARD-LOOKING STATEMENTS

     99   

TOTAL NUMBER OF PAGES

     101   

 

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FORWARD-LOOKING STATEMENTS

 

Certain sections of the Annual Report of United States Steel Corporation (U. S. Steel) on Form 10-K, particularly Item 1. Business, Item 1A. Risk Factors, 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 U. S. Steel. 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 U. S. Steel, see “Item 1A. Risk Factors” and “Supplementary Data – Disclosures About Forward-Looking Statements.” References in this Annual Report on Form 10-K to “U. S. Steel,” “the Company,” “we,” “us” and “our” refer to U. S. Steel and its consolidated subsidiaries, unless otherwise indicated by the context.

 

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PART I

 

Item 1. BUSINESS

 

U. S. Steel is an integrated steel producer of flat-rolled and tubular products with major production operations in North America and Europe. An integrated producer uses iron ore and coke as primary raw materials for steel production. U. S. Steel has annual raw steel production capability of 31.7 million net tons (tons) (24.3 million tons in North America and 7.4 million tons in Europe). According to World Steel Association’s latest published statistics, we were the eleventh largest steel producer in the world in 2009. U. S. Steel is also engaged in other business activities consisting primarily of transportation services (railroad and barge operations) and real estate operations.

 

The global economic recession that began in 2008 greatly affected U. S. Steel and many of the markets that we serve. The impact of the economic recovery has been uneven. Some markets, such as automotive, have had significant improvement from the depths of the recession, although not yet reaching pre-recession levels, while other markets, such as construction, have shown very little improvement. For further discussion, see “Business Strategy,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity” and “Supplementary Data – Disclosures About Forward-Looking Statements.”

 

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LOGO

 

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Segments

 

U. S. Steel has three reportable operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE) and Tubular Products (Tubular). The results of several operating segments that do not constitute reportable segments are combined and disclosed in the Other Businesses category.

 

The Flat-rolled segment includes the operating results of U. S. Steel’s North American integrated steel mills and equity investees involved in the production of slabs, rounds, strip mill plates, sheets and tin mill products, as well as all iron ore and coke production facilities in the United States and Canada. These operations primarily serve North American customers in the service center, conversion, transportation (including automotive), construction, container, and appliance and electrical markets. The steel rounds and a portion of the hot-rolled sheets produced by Flat-rolled are supplied to the Tubular segment.

 

Flat-rolled has annual raw steel production capability of 24.3 million tons. Raw steel production was 18.4 million tons in 2010, 11.7 million tons in 2009 and 19.2 million tons in 2008. Raw steel production averaged 76 percent of capability in 2010, 48 percent of capability in 2009 and 79 percent of capability in 2008.

 

The USSE segment includes the operating results of U. S. Steel Košice (USSK), U. S. Steel’s integrated steel mill and coke production facilities in Slovakia; U. S. Steel Serbia (USSS), U. S. Steel’s integrated steel mill and other facilities in Serbia; and an equity investee located in Europe. USSE primarily serves customers in the European construction, service center, conversion, container, transportation (including automotive), appliance and electrical, and oil, gas and petrochemical markets. USSE produces and sells slabs, sheet, strip mill plate, tin mill products and spiral welded pipe, as well as heating radiators and refractory ceramic materials.

 

USSE has annual raw steel production capability of 7.4 million tons. USSE’s raw steel production was 6.1 million tons in 2010, 5.1 million tons in 2009 and 6.4 million tons in 2008. USSE’s raw steel production averaged 82 percent of capability in 2010, 69 percent of capability in 2009 and 87 percent of capability in 2008.

 

The Tubular segment includes the operating results of U. S. Steel’s tubular production facilities, primarily in the United States, and equity investees in the United States and Brazil. These operations produce and sell seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serve customers in the oil, gas and petrochemical markets. Tubular’s annual production capability is 2.8 million tons.

 

All other U. S. Steel businesses not included in reportable segments are reflected in Other Businesses. These businesses include transportation services (railroad and barge operations) and real estate operations.

 

For further information, see Note 3 to the Financial Statements.

 

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Financial and Operational Highlights

 

Net Sales

 

LOGO

 

  (a) Includes the former Lone Star facilities from the date of acquisition on June 14, 2007 and USSC from the date of acquisition on October 31, 2007.

 

Net Sales by Segment

 

(Dollars in millions, excluding intersegment sales)   2010            2009            2008  

Flat-rolled

  $ 10,848        $ 6,814        $ 13,789   

USSE

    3,989          2,944          5,487   

Tubular

    2,403          1,216          4,251   
                           

Total sales from reportable segments

    17,240          10,974          23,527   

Other Businesses

    134          74          227   
                           

Net sales

  $ 17,374              $ 11,048              $ 23,754   

 

(Loss) Income from Operations by Segment(a)

 

    Year Ended December 31,  
(Dollars in Millions)   2010            2009            2008  

Flat-rolled

  $ (312     $ (1,438     $ 1,390   

USSE

    (33       (208       491   

Tubular

    349          57          1,207   
                           

Total (loss) income from reportable segments

    4          (1,589       3,088   

Other Businesses

    52          (2       77   
                           

Reportable segments and Other Businesses income (loss) from operations

    56          (1,591       3,165   

Retiree benefit expenses

    (173       (134       (22

Other items not allocated to segments:

         

Federal excise tax refund

             34            

Litigation reserve

             45          (45

Net gain on the sale of assets

    6          97            

Environmental remediation charge

             (49       (23

Workforce reduction charges

             (86         

Deferred gain recognition

                      150   

Labor agreement signing payments

                      (105

Asset impairment charge

                      (28

Flat-rolled inventory transition effects

                      (23
                           

Total (loss) income from operations

  $ (111           $ (1,684           $ 3,069   
(a) See Note 3 to the Financial Statements for reconciliations and other disclosures required by Accounting Standards Codification Topic 280.

 

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(Loss) Income from Operations (IFO)

 

LOGO

 

  (a) Includes the former Lone Star facilities from the date of acquisition on June 14, 2007 and USSC from the date of acquisition on October 31, 2007.

 

Steel Shipments

 

LOGO

 

  (a) Includes the former Lone Star facilities from the date of acquisition on June 14, 2007 and USSC from the date of acquisition on October 31, 2007.

 

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Steel Shipments by Product and Segment

 

LOGO

 

The following table does not include shipments to end customers by joint ventures and other equity investees of U. S. Steel, but instead reflects the shipments of substrate materials, primarily hot-rolled and cold-rolled sheets, to those entities.

 

(Thousands of Tons)

 

    Flat-rolled           USSE           Tubular           Total  

Product – 2010

             

Hot-rolled Sheets

    4,963          2,191                   7,154   

Cold-rolled Sheets

    4,340          752                   5,092   

Coated Sheets

    2,893          878                   3,771   

Tin Mill Products

    1,340          583                   1,923   

Oil country tubular goods (OCTG)

                      1,103          1,103   

Standard and line pipe

             9          360          369   

Semi-finished, Bars and Plates

    1,765          982                   2,747   

Other

             69          88          157   
                                     

TOTAL

    15,301          5,464          1,551          22,316   
                                     

Memo: Intersegment Shipments from

             

Flat-rolled to Tubular

             

Hot-rolled sheets

    895               

Rounds

    706               

Product – 2009

             

Hot-rolled Sheets

    3,173          1,896                   5,069   

Cold-rolled Sheets

    3,152          655                   3,807   

Coated Sheets

    1,882          793                   2,675   

Tin Mill Products

    1,253          534                   1,787   

Oil country tubular goods (OCTG)

                      420          420   

Standard and line pipe

             5          155          160   

Semi-finished, Bars and Plates

    401          498                   899   

Other

             82          82          164   
                                     

TOTAL

    9,861          4,463          657          14,981   
                                     

Memo: Intersegment Shipments from

             

Flat-rolled to Tubular

             

Hot-rolled sheets

    117               

Rounds

    376               

Product – 2008

             

Hot-rolled Sheets

    6,474          2,142                   8,616   

Cold-rolled Sheets

    4,489          1,195                   5,684   

Coated Sheets

    3,554          733                   4,287   

Tin Mill Products

    1,387          605                   1,992   

Oil country tubular goods (OCTG)

                      1,292          1,292   

Standard and line pipe

             9          480          489   

Semi-finished, Bars and Plates

    941          867                   1,808   

Other

             100          180          280   
                                     

TOTAL

    16,845          5,651          1,952          24,448   
                                     

Memo: Intersegment Shipments from

             

Flat-rolled to Tubular

             

Hot-rolled sheets

    1,108               

Rounds

    768               

 

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Steel Shipments by Market and Segment

 

LOGO

 

The following table does not include shipments to end customers by joint ventures and other equity investees of U. S. Steel. Shipments of materials to these entities are included in the “Further Conversion – Joint Ventures” market classification. No single customer accounted for more than 10 percent of gross annual revenues.

 

(Thousands of Tons)

 

     Flat-rolled     USSE     Tubular     Total  

Major Market – 2010

       

Steel Service Centers

    3,214        1,106               4,320   

Further Conversion – Trade Customers

    4,243        676        13        4,932   

– Joint Ventures

    1,835                      1,835   

Transportation (Including Automotive)

    2,136        629        3        2,768   

Construction and Construction Products

    821        1,764        38        2,623   

Containers

    1,398        586               1,984   

Appliances and Electrical Equipment

    703        319               1,022   

Oil, Gas and Petrochemicals

           11        1,438        1,449   

Exports from the United States

    687               59        746   

All Other

    264        373               637   
                               

TOTAL

    15,301        5,464        1,551        22,316   
                               

Major Market – 2009

       

Steel Service Centers

    1,998        882        1        2,881   

Further Conversion – Trade Customers

    2,203        461        11        2,675   

– Joint Ventures

    1,283                      1,283   

Transportation (Including Automotive)

    1,258        387        4        1,649   

Construction and Construction Products

    653        1,615        22        2,290   

Containers

    1,296        517               1,813   

Appliances and Electrical Equipment

    755        248               1,003   

Oil, Gas and Petrochemicals

           17        551        568   

Exports from the United States

    322               68        390   

All Other

    93        336               429   
                               

TOTAL

    9,861        4,463        657        14,981   
                               

Major Market – 2008

       

Steel Service Centers

    3,871        1,239        16        5,126   

Further Conversion – Trade Customers

    3,368        546        34        3,948   

– Joint Ventures

    1,770                      1,770   

Transportation (Including Automotive)

    2,550        590        8        3,148   

Construction and Construction Products

    1,333        1,745               3,078   

Containers

    1,421        615               2,036   

Appliances and Electrical Equipment

    1,115        503               1,618   

Oil, Gas and Petrochemicals

           9        1,737        1,746   

Exports from the United States

    808               118        926   

All Other

    609        404        39        1,052   
                               

TOTAL

    16,845        5,651        1,952        24,448   
                               

 

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Business Strategy

 

Over the long term, our strategy is to be forward-looking, grow responsibly, generate a competitive return on capital and meet our financial and stakeholder obligations. We remain committed to being a world leader in safety and environmental stewardship; improving our quality, cost competitiveness and customer service; and attracting, developing and retaining a diverse workforce with the talent and skills needed for our long-term success.

 

During 2010, the six-year trends for our global rate of recordable injuries, our global days away from work rate and our global severity rate showed improvement of 44 percent, 51 percent and 81 percent respectively, as shown in the following graphs.

 

LOGO

  LOGO

 

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LOGO

 

Our commercial focus is to provide value-added steel products, including advanced high strength steel and coated sheets for the automotive and appliance industries, electrical steel sheets for the manufacture of motors and electrical equipment, galvanized and Galvalume® sheets for the construction and automotive industries, tin mill products for the container industry and oil country tubular goods for the oil and gas industry, including providing high quality steel to the developing North American shale oil and gas market. In addition, our European operations concentrate on being a dependable source of high-quality steel to meet the needs of the developing central European markets.

 

We are committed to developing new steel products and uses for steel. In connection with this commitment we have research centers in Pittsburgh, Pennsylvania, and Košice, Slovakia. We also have an automotive center in Troy, Michigan and in 2011 we plan to complete construction of an innovation and technology center for Tubular products in Houston, Texas. The focus of these centers is to develop new products and to work with our customers to serve their needs. Recent examples include development of advanced high strength steels, including Dual-Ten® and TRIP steels that provide high strength while significantly reducing the weight of the structure that the steels are used in and PATRIOT TC® tubular connections to meet our customers needs in deep well applications such as Marcellus shale.

 

With regard to capital investments, we remain focused on a number of key projects of long-term strategic importance in each of our three business segments. We have accelerated several projects in the United States and Europe to improve our coke self-sufficiency. Engineering and construction of a technologically and environmentally advanced battery at the Mon Valley Works’ Clairton Plant is underway with completion expected in 2013. We are constructing a two module carbon alloy facility at our Gary Works which utilizes an environmentally compliant, energy efficient and flexible production technology with a projected capacity of 500,000 tons per year with completion expected in 2012. We have received the necessary air permits for up to 1 million tons of such capacity. We are also constructing blast furnace coal injection facilities in Europe, which we expect to come on line in 2011 at which time all five blast furnaces in Europe will have access to pulverized coal, a lower cost source of carbon than coke. In order to more efficiently serve our tubular product customers’ increased focus on North American shale resources, construction of a new quench and temper line is underway at our Lorain Tubular Operations in Ohio and is expected to be completed in 2011. In an effort to increase our participation in the automotive market as vehicle emission and safety requirements become more stringent, PRO-TEC Coating Company, our joint venture in Ohio with Kobe Steel, Ltd., has a new automotive continuous annealing line under

 

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construction that is expected to be completed in 2013. We are also continuing our efforts to implement an enterprise resource planning (ERP) system to replace outdated systems and to help us operate more efficiently. The completion of the ERP project is expected to provide further opportunities to streamline, standardize and centralize business processes in order to maximize cost effectiveness, efficiency and control across our global operations.

 

We are committed to reducing emissions as well as our carbon footprint. We have implemented a program to investigate, share and create innovative and best practice solutions throughout U. S. Steel to manage and reduce energy intensity and CO2 emissions. We are also committed to investing in technology to move the steelmaking process in an even more environmentally responsible direction by investing in low emission technologies. In addition to the environmentally compliant projects noted above, we entered into a 15 year coke supply agreement with Gateway Energy & Coke Company, LLC in connection with its heat recovery coke plant located at Granite City Works which began operations in the fourth quarter of 2009.

 

We continue to assess North American and international expansion and divestment opportunities and carefully weigh them in light of changing global steel and financial market conditions and long-term value considerations. We may consider 100 percent acquisition opportunities, joint ventures and other arrangements. In addition, if business conditions warrant, we may consider restructuring our current facilities, or we may consider the construction of new facilities to produce steel from scrap and iron bearing feedstocks, such as direct reduced iron.

 

The foregoing statements regarding capital projects, emissions reductions and expected benefits from the implementation of the ERP project are forward-looking statements. Factors that may affect our capital spending and the projects include: (i) levels of cash flow from operations; (ii) general economic conditions; (iii) business conditions; (iv) cost and availability of capital; (v) receipt of necessary permits; and (vi) unforeseen hazards such as contractor performance, material shortages, weather conditions, explosions or fires. Predictions regarding benefits resulting from the implementation of the ERP project are subject to uncertainties. We may not be able to successfully implement the ERP project without experiencing difficulties. In addition, the expected benefits of implementing the ERP project might not be realized or the costs of implementation might outweigh the benefits realized. Actual results could differ materially from those expressed in these forward-looking statements.

 

Our financial strategy is to maintain or enhance our liquidity, maintain a solid balance sheet, focus capital investments on key projects of long-term strategic importance and position ourselves for success in the longer term. During 2010, we completed an offering of $600 million of senior notes, amended our Receivables Purchase Agreement to increase the maximum amount of receivables eligible for sale from $500 million to $525 million while extending its maturity until 2013 and entered into a 200 million three-year revolving unsecured credit facility to replace USSK’s three-year 200 million credit facility dated July 2, 2008. We voluntarily contributed $140 million to the main defined benefit pension plan. We refinanced $89 million of Environmental Revenue Bonds (ERBs) extending their maturity date from 2011 to 2026 and entered into a loan agreement in connection with the issuance and sale by the Lorain County Port Authority of $70 million of Lorain County Port Authority Recovery Zone Facility Revenue Bonds with a maturity date of 2040 to finance a significant portion of the strategic capital project noted above at our Lorain Tubular Operation in Ohio. We maintained our strong liquidity position and ended the year with total liquidity of $2.1 billion.

 

Steel Industry Background and Competition

 

The global steel industry is cyclical, highly competitive and has historically been characterized by overcapacity.

 

We believe that U. S. Steel is currently the eleventh largest steel producer in the world, the largest integrated steel producer headquartered in North America, one of the largest integrated flat-rolled producers in Central Europe and the largest tubular producer in North America. U. S. Steel competes with many North American and international steel producers. Competitors include integrated producers which, like U. S. Steel, use iron ore and coke as primary raw materials for steel production, and electric arc furnace production (EAF), which primarily uses steel scrap and other iron-bearing feedstocks as raw materials. In addition, other products, such as plastics and composites, compete with steel in some applications.

 

 

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EAF production typically requires lower capital expenditures for construction of facilities and may have lower total employment costs; however, these competitive advantages may be minimized or eliminated by the cost of scrap when scrap prices are high. Some mini-mills utilize thin slab casting technology to produce flat-rolled products and are increasingly able to compete directly with integrated producers of flat-rolled products, who are generally able to manufacture a broader range of products. U. S. Steel provides defined benefit pension and other postretirement benefits to approximately 129,000 retirees and their beneficiaries. Producers using EAFs and most of our other competitors do not have comparable retiree obligations.

 

International competitors may have lower labor costs than U.S. producers and some are owned, controlled or subsidized by their governments, allowing their production and pricing decisions to be influenced by political, social and economic policy considerations, as well as prevailing market conditions.

 

Through our wholly owned operations and our share of joint ventures, we have adequate iron ore pellet production to cover a significant portion of our North American needs and have secured the remaining iron ore pellets through contracts. We are also currently about 80 percent self sufficient for coke in North America at normal operating levels through our own coke production facilities and a long-term coke supply agreement. We also have multi-year contracts for most of our required coking coal. Our relatively balanced raw materials position in North America and limited dependence on purchased steel scrap have helped mitigate the volatility of our production costs.

 

Coke production in North America has declined over the last several years mainly due to the closure of one coke battery at Gary Works in 2005 and three coke batteries at the Clairton Plant in 2009. Improving our coke self sufficiency is an important strategic objective. During 2010, we began construction of a technologically and environmentally advanced battery at the Clairton Plant of Mon Valley Works and construction of coke substitute carbon alloy facilities at Gary Works.

 

Demand for flat-rolled products is influenced by a wide variety of factors, including but not limited to macro-economic drivers, the supply-demand balance, inventories, imports and exports, currency fluctuations, and the demand from flat-rolled consuming markets. The largest drivers of North American consumption have historically been the automotive and construction markets which make up more than 50 percent of total sheet consumption. Other sheet consuming industries include appliance, converter, container, tin, energy, electrical equipment, agricultural, domestic and commercial equipment and industrial machinery.

 

USSE conducts business primarily in Europe. Like our domestic operations, USSE is affected by the cyclical nature of demand for steel products and the sensitivity of that demand to worldwide general economic conditions. We are subject to market conditions in those areas which are influenced by many of the same factors that affect U.S. markets, as well as matters specific to international markets such as quotas, tariffs and other protectionist measures.

 

Demand for oil country tubular goods depends on several factors, most notably the number of oil and natural gas wells being drilled, completed and re-worked, the depth and drilling conditions of these wells and the drilling techniques utilized. The level of these activities depends primarily on the demand for natural gas and oil and the expectation of future prices of these commodities. Demand for our tubular products is also affected by the continuing development of shale oil and gas resources, the level of inventories maintained by manufacturers, distributors, and end users and by the level of imports in the markets we serve.

 

Steel imports to the United States accounted for an estimated 22 percent of the U.S. steel market in 2010, 22 percent in 2009 and 24 percent in 2008. Increases in future levels of imported steel could reduce future market prices and demand levels for steel produced in our North American facilities.

 

Imports of flat-rolled steel to Canada accounted for an estimated 39 percent of the Canadian market for flat-rolled steel products in 2010, 35 percent in 2009 and 24 percent in 2008.

 

Many of these imports have violated U.S. or Canadian trade laws. Under these laws, duties can be imposed against dumped products, which are products sold at a price that is below that producer’s sales price in its home market or at a price that is lower than its cost of production. Countervailing duties can be imposed against products that benefited from foreign government financial assistance for the benefit of the production,

 

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manufacture, or exportation of the product. For many years, U. S. Steel, other producers, customers and the United Steelworkers (USW) have sought the imposition of duties and in many cases have been successful. Such duties are generally subject to review every five years and we actively participate in such review proceedings.

 

In April 2009, U. S. Steel, Maverick Tube Corporation, TMK Ipsco, V&M Star LP, Evraz, Rocky Mountain Steel, Wheatland Tube Corporation and the USW filed anti-dumping and countervailing duty (subsidy) petitions regarding certain oil country tubular goods (OCTG) from China. As a result of investigations conducted by the Department of Commerce (DOC) and International Trade Commission (ITC), countervailing duties ranging from 10.49% to 15.78% were imposed on these products in January 2010 and anti-dumping duties ranging from 32.07% to 99.14% were imposed in May 2010.

 

In September 2009, U. S. Steel, V&M Star LP, TMK IPSCO and the USW joined in bringing anti-dumping and countervailing duty petitions against certain seamless carbon and alloy steel standard, line and pressure pipe from China. As a result of these actions, countervailing duties ranging from 13.66% to 56.67% and anti-dumping duties ranging from 50.01% to 98.74% were imposed against the import of these products in November 2010.

 

In March 2010, the DOC and ITC initiated five-year (sunset) reviews of antidumping orders against hot-rolled carbon steel flat products from Brazil and Japan, a countervailing duty order against hot-rolled carbon steel flat products from Brazil, and a suspension agreement concerning hot-rolled carbon steel flat products from Russia. In expedited reviews of the Brazilian, Japanese and Russian cases, the DOC issued preliminary determinations, on July 30, 2010, that revocation of the orders and agreement would likely lead to continued or resumed dumping at rates of 17.70% to 184.56%. In a full review of the Brazilian countervailing duty order, the DOC issued its final determination on November 29, 2010, of the likelihood of a resumed subsidy, but at a rate of zero percent. The ITC’s injury investigation will be concluded with a decision in May 2011.

 

On October 12, 2010, the Canadian International Trade Tribunal (CITT) issued a Notice of Expiry of the Canadian antidumping orders against hot-rolled carbon and alloy steel sheet and strip from Brazil, China, Taiwan, India, South Africa and Ukraine. The CITT issued its decision on December 1, 2010 to initiate an expiry review that will determine whether the orders will be extended for an additional five years beyond August 15, 2011.

 

Total imports of flat-rolled carbon steel products (excluding quarto plates and wide flats) to the EU27 (the 27 countries currently comprising the European Union (EU)) were 14 percent of the EU market in 2010, 15 percent in 2009 and 19 percent in 2008. Imported steel to the EU market coupled with declining demand starting late in 2008 contributed to record levels of inventory, all of which resulted in weakening market prices in late 2008 and early 2009.

 

We expect to continue to experience competition from imports and will continue to closely monitor imports of products in which we have an interest. Additional complaints may be filed if unfairly traded imports adversely impact, or threaten to adversely impact, financial results.

 

U. S. Steel’s 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 believes that our major North American and many European integrated steel competitors are confronted by substantially similar environmental conditions and thus does not believe that our 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, some foreign steel producers (particularly in developing economies such as China) and producers of materials which compete with steel, all of 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. U. S. Steel is also responsible for remediation costs related to our prior disposal of environmentally sensitive materials. Many of our competitors have fewer historical liabilities. For further information, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

 

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Many nations have adopted or are considering regulation of carbon dioxide (CO2) emissions. The integrated steel process involves a series of chemical reactions involving carbon that create CO2 emissions. This distinguishes integrated steel producers from mini-mills and many other industries where CO2 generation is generally linked to energy usage. In the United States, the Environmental Protection Agency (EPA) has published rules for regulating greenhouse gas emissions for certain facilities and has implemented various reporting requirements. In the last Congress, legislation was passed in the House of Representatives and introduced in the Senate. We do not know what action, if any, may be taken by the new Congress. The EU has established greenhouse gas regulations and Canada has published details of a regulatory framework for greenhouse gas emissions. Such regulations may entail substantial costs for emission allowances, restriction of production, and higher prices for coking coal, natural gas and electricity generated by carbon-based systems. Some foreign nations such as China and India are not aggressively pursuing regulation of CO2 and integrated steel producers in such countries may achieve a competitive advantage over U. S. Steel. For further information, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

 

U. S. Steel is subject to foreign currency exchange risks as a result of its European and Canadian operations. USSE’s revenues are primarily in euros and its costs are primarily in U.S. dollars and euros. U. S. Steel Canada’s (USSC’s) revenues and costs are denominated in both Canadian and U.S. dollars. In addition, international cash requirements have been and in the future may be funded by intercompany loans, creating intercompany monetary assets and liabilities in currencies other than the functional currencies of the entities involved, which can impact income when they are remeasured at the end of each period. A $1.6 billion U.S. dollar-denominated intercompany loan from a U.S. subsidiary to a European subsidiary was the primary exposure at December 31, 2010.

 

Facilities and Locations

 

Flat-rolled

 

Except for the Fairfield pipe mill, the operating results of all the facilities within U. S. Steel’s integrated steel mills in North America are included in Flat-rolled. These facilities include Gary Works, Great Lakes Works, Mon Valley Works, Granite City Works, Lake Erie Works, Fairfield Works and Hamilton Works. The operating results of U. S. Steel’s coke and iron ore pellet operations and many equity investees in North America are also included in Flat-rolled.

 

Gary Works, located in Gary, Indiana, has annual raw steel production capability of 7.5 million tons. Gary Works has three coke batteries, four blast furnaces, six steelmaking vessels, a vacuum degassing unit and four continuous slab casters. Gary Works generally consumes all the coke it produces and sells coke by-products. Finishing facilities include a hot strip mill, two pickling lines, two cold reduction mills, three temper mills, a double cold reduction line, four annealing facilities and two tin coating lines. Principal products include hot-rolled, cold-rolled and coated sheets and tin mill products. Gary Works also produces strip mill plate in coil. The Midwest Plant and East Chicago Tin are operated as part of Gary Works.

 

The Midwest Plant, located in Portage, Indiana, processes hot-rolled bands and produces tin mill products and hot dip galvanized, cold-rolled and electrical lamination sheets. Midwest facilities include a pickling line, two cold reduction mills, two temper mills, a double cold reduction mill, two annealing facilities, two hot dip galvanizing lines, a tin coating line and a tin-free steel line.

 

East Chicago Tin is located in East Chicago, Indiana and produces tin mill products. Facilities include a pickling line, a cold reduction mill, two annealing facilities, a temper mill, a tin coating line and a tin-free steel line.

 

Great Lakes Works, located in Ecorse and River Rouge, Michigan, has annual raw steel production capability of 3.8 million tons. Great Lakes facilities include three blast furnaces, two steelmaking vessels, a vacuum degassing unit, two slab casters, a hot strip mill, a pickling line, a tandem cold reduction mill, three annealing facilities, a temper mill, a recoil and inspection line, an electrolytic galvanizing line and a hot dip galvanizing line. Principal products include hot-rolled, cold-rolled and coated sheets.

 

Mon Valley Works consists of the Edgar Thomson Plant, located in Braddock, Pennsylvania; the Irvin Plant, located in West Mifflin, Pennsylvania; the Fairless Plant, located in Fairless Hills, Pennsylvania; and the Clairton Plant, located in Clairton, Pennsylvania. Mon Valley Works has annual raw steel production capability of 2.9 million

 

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tons. Facilities at the Edgar Thomson Plant include two blast furnaces, two steelmaking vessels, a vacuum degassing unit and a slab caster. Irvin Plant facilities include a hot strip mill, two pickling lines, a cold reduction mill, three annealing facilities, a temper mill and two hot dip galvanizing lines. The Fairless Plant operates a hot dip galvanizing line. Principal products from Mon Valley Works include hot-rolled, cold-rolled and coated sheets, as well as coke and coke by-products produced at the Clairton Plant.

 

The Clairton Plant is comprised of nine coke batteries. Almost all of the coke produced is consumed by U. S. Steel facilities or swapped with other domestic steel producers. Coke by-products are sold to the chemicals and raw materials industries.

 

Granite City Works, located in Granite City, Illinois, has annual raw steel production capability of 2.8 million tons. Granite City’s facilities include two coke batteries, two blast furnaces, two steelmaking vessels, two slab casters, a hot strip mill, a pickling line, a tandem cold reduction mill, a hot dip galvanizing line and a hot dip galvanizing/Galvalume® line. Granite City Works generally consumes all the coke it produces and sells coke by-products. Principal products include hot-rolled and coated sheets. Gateway Energy & Coke Company, LLC (Gateway) has constructed a coke plant to supply Granite City Works, which began operating in October 2009. We own and operate a cogeneration facility that utilizes by-products from the Gateway coke plant to generate heat and power.

 

Lake Erie Works, located in Nanticoke, Ontario, has annual raw steel production capability of 2.6 million tons. Lake Erie Works facilities include a coke battery, a blast furnace, two steelmaking vessels, a slab caster, a hot strip mill and three pickling lines. The pickling lines were acquired on August 29, 2008 and are included in Flat-rolled results as of that date. Principal products include slabs and hot-rolled sheets.

 

Fairfield Works, located in Fairfield, Alabama, has annual raw steel production capability of 2.4 million tons. Fairfield Works facilities included in Flat-rolled are a blast furnace, three steelmaking vessels, a vacuum degassing unit, a slab caster, a rounds caster, a hot strip mill, a pickling line, a cold reduction mill, two temper/skin pass mills, a hot dip galvanizing line and a hot dip galvanizing/Galvalume® line. Principal products include hot-rolled, cold-rolled and coated sheets, and steel rounds for Tubular.

 

Hamilton Works, located in Hamilton, Ontario, has annual raw steel production capability of 2.3 million tons. Hamilton Works facilities include a coke battery, a blast furnace, three steelmaking vessels, a slab caster, a combination slab/bloom caster, a bar mill and bloom and billet mills, a pickling line, a cold reduction mill and two hot dip galvanizing lines and a galvanizing/galvannealing line. Principal products include slabs and cold-rolled and coated sheets. On November 12, 2010, USSC sold the bar mill and bloom and billet mills for C$41 million (approximately $41 million). See Note 6 to the Financial Statements for further details.

 

U. S. Steel owns a Research and Technology Center located in Munhall, Pennsylvania where we carry out a wide range of applied research, development and technical support functions.

 

U. S. Steel also owns an automotive technical center in Troy, Michigan. This facility brings automotive sales, service, distribution and logistics services, product technology and applications research into one location. Much of U. S. Steel’s work in developing new grades of steel to meet the demands of automakers for high-strength, light-weight and formable materials is carried out at this location.

 

We have iron ore pellet operations located at Mt. Iron (Minntac) and Keewatin (Keetac), Minnesota with annual iron ore pellet production capability of 22.4 million tons. During 2010, 2009 and 2008, these operations produced 20.0 million, 8.5 million and 21.2 million net tons of iron ore pellets, respectively.

 

U. S. Steel has a 14.7 percent ownership interest in Hibbing Taconite Company (Hibbing), which is based in Hibbing, Minnesota. Hibbing’s rated annual production capability is 9.1 million tons of iron ore pellets, of which our share is about 1.3 million tons, reflecting our ownership interest. Our share of 2010, 2009 and 2008 production was 1.0 million, 0.3 million and 1.4 million tons, respectively.

 

We have a 15 percent ownership interest in Tilden Mining Company (Tilden), which is based in Ishpeming, Michigan. Tilden’s rated annual production capability is 8.7 million tons of iron ore pellets, of which our share is about 1.3 million tons, reflecting our ownership interest. Our share of 2009 production was a minimal amount and our share of 2010 and 2008 production was 1.4 million and 1.2 million tons, respectively.

 

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U. S. Steel participates in a number of additional joint ventures that are included in Flat-rolled, most of which are conducted through subsidiaries or other separate legal entities. All of these joint ventures are accounted for under the equity method. The significant joint ventures and other investments are described below. For information regarding joint ventures and other investments, see Note 11 to the Financial Statements.

 

U. S. Steel and POSCO of South Korea participate in a 50-50 joint venture, USS-POSCO Industries (USS-POSCO), located in Pittsburg, California. The joint venture markets sheet and tin mill products, principally in the western United States. USS-POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel from hot bands principally provided by U. S. Steel and POSCO, which each provide about 50 percent of its requirements. USS-POSCO’s annual production capability is approximately 1.5 million tons.

 

U. S. Steel and Kobe Steel, Ltd. of Japan participate in a 50-50 joint venture, PRO-TEC Coating Company (PRO-TEC). PRO-TEC owns and operates two hot dip galvanizing lines in Leipsic, Ohio, which primarily serve the automotive industry. PRO-TEC’s annual production capability is approximately 1.2 million tons. U. S. Steel supplies PRO-TEC with all of its requirements of cold-rolled sheets and markets all of its products. PRO-TEC is constructing a $400 million continuous annealling line at the facility, with a projected operating capability of 500,000 tons. When completed, this will allow us to increase our participation in the automotive market as vehicle emission and safety requirements become more stringent.

 

U. S. Steel and Severstal North America, Inc. participate in Double Eagle Steel Coating Company (DESCO), a 50-50 joint venture which operates an electrogalvanizing facility located in Dearborn, Michigan. The facility coats sheet steel with free zinc or zinc alloy coatings, primarily for use in the automotive industry. DESCO processes steel supplied by each partner and each partner markets the steel it has processed by DESCO. DESCO’s annual production capability is approximately 870,000 tons.

 

U. S. Steel and ArcelorMittal participate in the Double G Coatings Company, L.P. 50-50 joint venture (Double G), a hot dip galvanizing and Galvalume® facility located near Jackson, Mississippi, which primarily serves the construction industry. Double G processes steel supplied by each partner and each partner markets the steel it has processed by Double G. Double G’s annual production capability is approximately 315,000 tons.

 

U. S. Steel and Worthington Industries, Inc. (Worthington Industries) participate in Worthington Specialty Processing (Worthington), a joint venture with locations in Jackson, Canton and Taylor, Michigan in which U. S. Steel has a 49 percent interest. Worthington slits, cuts to length and presses blanks from steel coils to desired specifications. Worthington’s annual production capability is approximately 890,000 tons.

 

USSC and ArcelorMittal Dofasco, Inc. participate in Baycoat Limited Partnership (Baycoat), a 50-50 joint venture located in Hamilton, Ontario. Baycoat applies a variety of paint finishes to flat-rolled steel coils. Baycoat’s annual production capability is approximately 280,000 tons.

 

D.C. Chrome Limited, a 50-50 joint venture between USSC and The Court Group of Companies Limited, operates a plant in Stony Creek, Ontario which textures and chromium plates work rolls for Hamilton Works and for other customers, and grinds and chromes steel shafts used in manlifts.

 

Chrome Deposit Corporation (CDC), a 50-50 joint venture between U. S. Steel and Court Holdings, reconditions finishing work rolls, which require grinding, chrome plating and/or texturing. The rolls are used on rolling mills to provide superior finishes on steel sheets. CDC has seven locations across the United States, with all locations near major steel mills.

 

Feralloy Processing Company (FPC), a joint venture between U. S. Steel and Feralloy Corporation, converts coiled hot strip mill plate into sheared and flattened plates for shipment to customers. U. S. Steel has a 49 percent interest. The plant, located in Portage, Indiana, has a temper mill linked to a cut-to-length leveling line. The line provides stress-free, leveled product with a superior surface finish. FPC provides processing services to the joint venture partners and other steel consumers and service centers. FPC’s annual production capability is approximately 275,000 tons.

 

U. S. Steel, along with Feralloy Mexico, S.R.L. de C.V. and Mitsui & Co. (USA), Inc., participates in a joint venture, Acero Prime, S.R.L. de CV (Acero Prime). U. S. Steel has a 40 percent interest. Acero Prime has facilities in San

 

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Luis Potosi and Ramos Arizpe, Mexico. Acero Prime provides slitting, warehousing and logistical services. Acero Prime’s annual slitting capability is approximately 385,000 tons.

 

USSE

 

USSE consists of USSK and its subsidiaries, USSS and an equity investee located in Europe.

 

USSK operates an integrated facility in Košice, Slovakia, which has annual raw steel production capability of 5.0 million tons. This facility has two coke batteries, three blast furnaces, four steelmaking vessels, a vacuum degassing unit, two dual strand casters, a hot strip mill, two pickling lines, two cold reduction mills, three annealing facilities, a temper mill, a temper/double cold reduction mill, three hot dip galvanizing lines, two tin coating lines, three dynamo lines, a color coating line and two spiral welded pipe mills. Principal products include hot-rolled, cold-rolled and coated sheets, tin mill products and spiral welded pipe. USSK also has facilities for manufacturing heating radiators and refractory ceramic materials.

 

In addition, USSK has a research laboratory which, in conjunction with our Research and Technology Center, supports efforts in cokemaking, electrical steels, design and instrumentation, and ecology.

 

USSS has an integrated plant in Smederevo, Serbia which has annual raw steel production capability of 2.4 million tons. Facilities at this plant include two blast furnaces, three steelmaking vessels, two slab casters, a hot strip mill, two pickling lines, a cold reduction mill, two annealing facilities, a temper mill and a temper/double cold reduction mill. Other facilities include a tin mill in Šabac with one tin coating line, a limestone mine in Kučevo and a river port in Smederevo, all located in Serbia. Principal products include hot-rolled and cold-rolled sheets and tin mill products.

 

Tubular

 

Tubular manufactures seamless and welded oil country tubular goods (OCTG), standard and line pipe and mechanical tubing.

 

Seamless products are produced on a mill located at Fairfield Works in Fairfield, Alabama, and on two mills located in Lorain, Ohio. The Fairfield mill has annual production capability of 750,000 tons and has been supplied with steel rounds exclusively from Fairfield Works. The Fairfield mill has the capability to produce outer diameter (O.D.) sizes from 4.5 to 9.875 inches and has quench and temper, hydrotester, threading and coupling and inspection capabilities. The Lorain mills have combined annual production capability of 780,000 tons and has used steel rounds supplied by Fairfield Works and external sources. Lorain #3 Mill has the capability to produce O.D. sizes from 10.125 to 26 inches and has quench and temper, hydrotester, cutoff and inspection capabilities. Lorain #4 Mill has the capability to produce O.D. sizes from 1.9 to 4.5 inches and has cut to length capabilities and uses Tubular Services in Houston for finishing. In December 2010, we announced that we will construct a quench and temper line at our Lorain Tubular Operations.

 

Texas Operations manufactures welded OCTG, standard and line pipe and mechanical tubing products. Texas Operations #1 Mill has the capability to produce O.D. sizes from 7 to 16 inches. Texas Operations #2 Mill has the capability to produce O.D. sizes from 1.088 to 7.15 inches. Both mills have quench and temper, hydrotester, threading and coupling and inspection capabilities. Bellville Operations, which was temporarily idled in January 2009, manufactures welded tubular products primarily for OCTG. Bellville Operations has the capability to produce O.D. sizes from 2.375 to 4.5 inches and has limited hydrotester and cutoff capabilities. Texas Operations and Bellville Operations have combined annual production capability of 1.0 million tons and has used hot-rolled products from Flat-rolled’s facilities.

 

Welded products are also produced at a mill located in McKeesport, Pennsylvania, which is operated by a third party operator. The McKeesport mill has annual production capability of 315,000 tons and processes hot-rolled bands from Mon Valley Works and other U. S. Steel locations. This mill has the capability to produce, hydrotest, cut to length and inspect O.D. sizes from 8.625 to 20 inches.

 

Wheeling Machine Products supplies couplings used to connect individual sections of oilfield casing and tubing. It produces sizes ranging from 2.375 to 20 inches at two locations: Pine Bluff, Arkansas, and Hughes Springs, Texas.

 

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Tubular Processing Services, located in Houston, Texas, provides thermal treating and end-finishing services for oilfield production tubing. Tubular Threading and Inspection Services, also located in Houston, Texas, provides threading, inspection and storage services to the OCTG market.

 

Fintube Technologies (Fintube), located in Tulsa, Oklahoma and Monterrey, Mexico, manufactures specialty tubular products used in heat recovery technology applications. Fintube has a welded tube production mill, finning operations and an engineered products division. On September 1, 2010, U. S. Steel sold the majority of the operating assets of Fintube for $22 million. See Note 6 to the Financial Statements for further details.

 

U. S. Steel also has a 50 percent ownership interest in Apolo Tubulars S.A. (Apolo), a Brazilian supplier of welded casing, tubing, line pipe and other tubular products. Apolo’s annual production capability is approximately 150,000 tons.

 

In April 2007, U. S. Steel, POSCO and SeAH Steel Corporation, a Korean manufacturer of tubular products, formed United Spiral Pipe LLC to design, engineer and construct a manufacturing facility with annual production capability of 300,000 tons of spiral welded tubular products. U. S. Steel and POSCO each hold a 35-percent ownership interest in the joint venture, with the remaining 30-percent ownership interest being held by SeAH. The facility was commissioned in late 2009 and began operations in early 2010.

 

We plan to complete construction of an innovation and technology center for Tubular products in Houston, Texas in 2011.

 

Other Businesses

 

U. S. Steel’s Other Businesses include transportation services (railroad and barge operations) and real estate operations.

 

On January 31, 2009, we completed the sale of a majority of the operating assets of Elgin, Joliet and Eastern Railway Company (EJ&E) to a subsidiary of Canadian National Railway Company. Proceeds from the sale were approximately $300 million and U. S. Steel recorded a net gain of approximately $97 million, net of a $10 million pension curtailment loss, in the first quarter of 2009. The retained portion of EJ&E has been renamed Gary Railway Company. See Note 6 to the Financial Statements for further details.

 

In addition to Gary Railway Company in Indiana, U. S. Steel owns Lake Terminal Railroad Company in Ohio; Union Railroad Company and McKeesport Connecting Railroad Company in Pennsylvania; Birmingham Southern Railroad Company, Fairfield Southern Company, Inc., Mobile River Terminal Company and Warrior and Gulf Navigation Company, all located in Alabama; Delray Connecting Railroad Company in Michigan and Texas & Northern Railroad Company in Texas; all of which comprise U. S. Steel’s transportation business. On December 21, 2010, U. S. Steel sold the majority of the operating assets of Mobile River Terminal Company Inc. and certain assets of Warrior and Gulf Navigation Company for approximately $35 million. See Note 6 to the Financial Statements for further details.

 

U. S. Steel owns, develops and manages various real estate assets, which include approximately 200,000 acres of surface rights primarily in Alabama, Illinois, Maryland, Michigan, Minnesota and Pennsylvania. In addition, U. S. Steel participates in joint ventures that are developing real estate projects in Alabama, Maryland and Illinois. U. S. Steel also owns approximately 4,000 acres of land in Ontario, Canada, which could potentially be sold or developed.

 

Raw Materials and Energy

 

As an integrated producer, U. S. Steel’s primary raw materials are iron units in the form of iron ore pellets and sinter ore, carbon units in the form of coal and coke (which is produced from coking coal) and steel scrap. U. S. Steel’s raw materials supply strategy consists of acquiring and expanding captive sources of these primary raw materials and entering into multi-year supply contracts.

 

The amounts of such raw materials needed to produce a ton of steel will fluctuate based upon the specifications of the final steel products, the quality of raw materials and, to a lesser extent, differences among steel producing equipment. In broad terms, U. S. Steel estimates that it consumes about 1.4 tons of coal to produce one ton of

 

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coke and that it consumes approximately 0.4 tons of coke, 0.2 tons of steel scrap (40 percent of which is internally generated) and 1.3 tons of iron ore pellets to produce one ton of raw steel. At normal operating levels, we also consume approximately 5 mmbtu’s of natural gas per ton shipped. While we believe that these estimates are useful for planning purposes, substantial variations occur. They are presented in order to give a general sense of raw material and energy consumption related to steel production.

 

Iron Ore

LOGO

The iron ore facilities at Minntac and Keetac contain an estimated 732 million short tons of recoverable reserves and our share of recoverable reserves at the Hibbing and Tilden joint ventures is 63 million short tons. Recoverable reserves are defined as the tons of product that can be used internally or delivered to a customer after considering mining and beneficiation or preparation losses. Minntac and Keetac’s annual capability and our share of annual capability for the Hibbing and Tilden joint ventures total 25 million tons.

 

Through our wholly owned operations and our share of joint ventures, we have adequate iron ore pellet production to cover a significant portion of our North American needs and have secured the remaining iron ore pellets through contracts.

 

USSE purchases substantially all of its iron ore requirements from outside sources, but has also received iron ore from U. S. Steel’s iron ore facilities in North America. We believe that supplies of iron ore adequate to meet USSE’s needs are available at competitive market prices. The main sources of iron ore for USSE are mining companies in Russia and Ukraine.

 

Coking Coal

 

All of U. S. Steel’s coal requirements for our cokemaking facilities are purchased from outside sources. U. S. Steel has entered into multi-year contracts for a significant portion of Flat-rolled’s coking coal requirements. Prices for these North American contracts for 2011 are set at what we believe are competitive market prices. Prices in subsequent years will be negotiated within set collars around a base price or on an annual basis at prevailing market prices.

 

In Europe, U. S. Steel has entered into contracts for most of USSE’s coking coal requirements for 2011. Prices for these European contracts are negotiated at defined intervals (no less than quarterly) with regional suppliers.

 

We believe that supplies of coking coal adequate to meet our needs are available from outside sources at competitive market prices. The main sources of coking coal for Flat-rolled are the United States and Canada; and for USSE include Poland, the Czech Republic, the United States, Canada, Russia and Ukraine.

 

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Coke

 

LOGO

In North America, the Flat-rolled segment operates cokemaking facilities at the Clairton Plant of Mon Valley Works, Gary Works, Granite City Works, Hamilton Works and Lake Erie Works. In Europe, the USSE segment operates cokemaking facilities at USSK. Blast furnace injection of coal, natural gas and self-generated coke oven gas is also used at certain Flat-rolled and USSE facilities to reduce coke usage. The increase in coke production in 2008 was mainly due to the inclusion of production at Lake Erie Works and Hamilton Works for the entire year following the USSC acquisition in 2007. The decrease in coke production in 2009 resulted from the temporary idling of cokemaking facilities at the Clairton Plant, Granite City Works, Hamilton Works and Lake Erie Works for part of the year as well as the shut down of three coke batteries at the Clairton Plant. In 2010, we restarted the facilities that were idled in 2009, resulting in an increase in coke production. Over the next five years, as some of our North American coke batteries approach the end of their expected useful lives, our production capability is likely to decrease absent additional investment in coke or coke substitute production facilities. We have taken a number of steps to ensure long-term access to high quality coke for our blast furnaces. We have restarted engineering and construction of a technologically and environmentally advanced battery at the Clairton Plant, with production capability of approximately 960,000 tons. We entered into a 15 year coke supply agreement with Gateway Energy & Coke Company, LLC (Gateway) in connection with its 650,000 ton per year heat recovery coke plant which began operating in the fourth quarter of 2009 and is located at Granite City Works. Also, we have begun construction of a carbon alloy facility at Gary Works which will utilize state-of-the-art technology to produce a carbon alloy material that will be used as a coke substitute and we continue to evaluate plans to construct additional carbon alloy facilities. The carbon alloy facility is expected to have production capability of approximately 500,000 tons per year.

 

With Flat-rolled’s current cokemaking facilities and the Gateway long-term supply agreement, it has the capability to supply approximately 80 percent of its annual coke requirements at normal operating levels. During 2011, we will purchase additional coke on the open market, of which we anticipate approximately half will be supplied domestically with the remainder supplied by imports, potentially at higher costs. To the extent that it is necessary or appropriate considering existing needs and/or applicable transportation costs, coke is purchased from or swapped with suppliers or other end-users.

 

USSE’s cokemaking facilities currently have the capability to supply approximately 50% of its annual coke requirements at normal operating levels. The remainder of USSE’s needs is purchased from outside sources. The main sources of coke for USSE in 2011 are expected to be Poland, Ukraine, Russia, Bosnia, Hungary and the Czech Republic.

 

Steel Scrap and Other Materials

 

We believe that supplies of steel scrap and other alloying and coating materials required to fulfill the requirements for Flat-rolled and USSE are available from outside sources at competitive market prices. Generally, approximately 40 percent of our steel scrap requirements are internally generated through normal operations.

 

Limestone

 

All of Flat-rolled’s limestone requirements are purchased from outside sources. We believe that supplies of limestone adequate to meet Flat-rolled’s needs are readily available from outside sources at competitive market prices.

 

The majority of USSE’s limestone requirements are purchased from outside sources with a portion of USSS’s raw limestone requirements coming from its mine in Kučevo, Serbia. We believe that supplies of limestone adequate to meet USSE’s needs are available from outside sources at competitive market prices.

 

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Zinc and Tin

 

We believe that supplies of zinc and tin required to fulfill the requirements for Flat-rolled and USSE are available from outside sources at competitive market prices. We routinely execute fixed-price forward physical purchase contracts for a portion of our expected business needs in order to manage our exposure to the volatility of the zinc and tin markets.

 

Natural Gas

 

All of U. S. Steel’s natural gas requirements are purchased from outside sources.

 

We believe that supplies adequate to meet Flat-rolled’s needs are available at competitive market prices. In order to partially manage our exposure to natural gas price increases as it relates to customers with fixed priced contracts as well as electricity costs from a generating facility located at one of our facilities, we routinely execute fixed-price forward physical purchase contracts for natural gas. About 70 percent of our natural gas purchases in Flat-rolled are based on bids solicited on a monthly basis from various vendors; the remainder is made daily or with term agreements or with fixed-price forward physical purchase contracts.

 

We believe that supplies adequate to meet USSE’s needs are normally available at competitive market prices. However, both USSK and USSS experienced a supply curtailment of more than ten days in January 2009 related to Russia’s suspension of natural gas shipments to Europe. The supply from Russia and the transmission through Ukraine and the associated political tension may impact supply availability.

 

Both Flat-rolled and USSE use self-generated coke oven and blast furnace gas to reduce consumption of natural gas.

 

Industrial Gases

 

U. S. Steel purchases its industrial gas requirements under long-term contracts with various suppliers.

 

Commercial Sales of Product

 

U. S. Steel characterizes sales as contract if sold pursuant to an agreement with defined volume and pricing and a duration of longer than three months, and as spot if sold without a defined volume and pricing agreement. In 2010 approximately 65 percent, 35 percent and 9 percent of sales by Flat-rolled, USSE and Tubular, respectively, were contract sales. Some contract pricing agreements include fixed price while others are adjusted periodically based upon published prices of steel products or cost components. U. S. Steel does not consider sales backlog to be a meaningful measure since volume commitments in most contracts are based on each customer’s specific periodic requirements.

 

Environmental Matters

 

U. S. Steel maintains a comprehensive environmental policy. The Executive Environmental Committee, which is comprised of U. S. Steel officers, meets regularly to review environmental issues and compliance. Both the Board of Directors and the Corporate Governance and Public Policy Committee receive regular updates on environmental matters. The Compensation and Organization Committee has made annual improvement one of four performance measures for short-term incentive compensation. Also, U. S. Steel, largely through the American Iron and Steel Institute, the Canadian Steel Producers Association, the World Steel Association and European Confederation of Iron and Steel Industries (Eurofer), is involved in the promotion of cost effective environmental strategies through the development of appropriate air, water, waste and climate change laws and regulations at the local, state, national and international levels.

 

U. S. Steel’s businesses in the United States 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

 

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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 U. S. Steel operates have similar laws dealing with the same matters. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for these environmental laws have not yet been promulgated and in certain instances are undergoing revision. These environmental laws and regulations, particularly the CAA, could result in substantially increased capital, operating and compliance costs.

 

USSC is subject to the environmental laws of Canada, which are comparable to environmental standards in the United States. Environmental regulation in Canada is an area of shared responsibility between the federal government and the provincial governments, which in turn delegate certain matters to municipal governments. Federal environmental statutes include the federal Canadian Environmental Protection Act, 1999 and the Fisheries Act. Various provincial statutes regulate environmental matters such as the release and remediation of hazardous substances; waste storage, treatment and disposal; and air emissions. As in the United States, Canadian environmental laws (federal, provincial and local) are undergoing revisions and becoming more stringent.

 

USSK is subject to the environmental laws of Slovakia and the EU. A related law of the EU commonly known as Registration, Evaluation, Authorisation and Restriction of Chemicals, Regulation 1907/2006 (REACH) requires the registration of certain substances that are produced in the EU or imported into the EU. USSK currently expects to be able to continue its businesses under REACH without material change. USSK has completed all notifications required by the EU’s CLP Regulation, a classification and labeling law.

 

USSS is subject to the environmental laws of Serbia. Under the terms of the acquisition in 2003, USSS is responsible for only those costs and liabilities associated with environmental events occurring subsequent to the completion of an environmental baseline study in June 2004, which was submitted to the Government of Serbia.

 

U. S. Steel has incurred and will continue to incur substantial capital, operating and maintenance and remediation expenditures as a result of environmental laws and regulations which in recent years have been mainly for process changes in order to meet CAA obligations and similar obligations in Europe and Canada. In the future, compliance with carbon dioxide (CO2) emission requirements may include substantial costs for emission allowances, restriction of production and higher prices for coking coal, natural gas and electricity generated by carbon based systems. Since it is difficult to predict what requirements will ultimately be imposed in the United States and Canada, it is difficult to estimate the likely impact on U. S. Steel, but it could be substantial. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of U. S. Steel’s products and services, operating results will be reduced. U. S. Steel believes that our major North American and many European integrated steel competitors are confronted with substantially similar conditions and thus does not believe that its relative position with regard to such competitors will be materially affected by the impact of environmental laws and regulations. However, if the final requirements do not recognize the fact that the integrated steel process involves a series of chemical reactions involving carbon that create CO2 emissions, our competitive position relative to mini mills will be adversely impacted and our competitive position regarding producers in developing nations, such as China and India, will be harmed unless such nations require comensurate reductions in CO2 emissions. Competing materials such as plastics may not be similarly impacted. 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. U. S. Steel is also responsible for remediation costs related to former and present operating locations and disposal of environmentally sensitive materials. Many of our competitors, including North American producers, or their successors, that have been the subject of bankruptcy relief have no or substantially lower liabilities for such matters.

 

Greenhouse Gas Emissions Regulation

 

The current and potential regulation of greenhouse gas emissions remains a significant issue for the steel industry, particularly for integrated steel producers such as U. S. Steel. The regulation of CO2 emissions has either become law or is being considered by legislative bodies of many nations, including countries where we have operating facilities. In the United States, the EPA has published rules for regulating greenhouse gas emissions for certain facilities and has implemented various reporting requirements as further described below. In the last Congress, legislation was passed in the House of Representatives and introduced in the Senate. We do not know what

 

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action, if any, may be taken by the new Congress. The EU has established greenhouse gas regulations while in Canada, a regulatory framework for greenhouse gas emissions has been published, details of which are discussed below. International negotiations to supplement and eventually replace the 1997 Kyoto Protocol are ongoing.

 

The U.S. EPA has classified CO2 as a harmful gas. Under this premise, it has implemented a new greenhouse gas emission inventory and reporting requirement for all facilities emitting 25,000 metric tons or more per year of carbon dioxide equivalent greenhouse gases (CO2e). The regulation requires facilities to collect information on CO2e and report emissions to the EPA by March 31, 2011, covering the 2010 calendar year. Most domestic U. S. Steel facilities are required to comply with the new reporting requirements and U. S. Steel has implemented monitoring plans to meet this requirement.

 

On May 13, 2010 the EPA published its final Greenhouse Gas Tailoring Rule establishing a mechanism for regulating greenhouse gas emissions from facilities through the CAA’s Prevention of Significant Deterioration (PSD) permitting process. Starting January 2, 2011, new projects that increase greenhouse gas emissions by more than 75,000 tons per year, will have new PSD requirements based on best available control technology (BACT), but only if the project also significantly increases emissions of at least one non-greenhouse gas pollutant. Only existing sources with Title V permits or new sources obtaining Title V permits for non-greenhouse gas pollutants will also be required to address greenhouse gas emissions. Starting July 1, 2011 new sources not already subject to Title V requirements that emit over 100,000 tons per year of greenhouse gas emissions, or modifications to existing permits that increase greenhouse gas emissions by more than 75,000 tons per year, will be subject to PSD and Title V requirements. On November 17, 2010 the EPA issued its “PSD and Title V Permitting Guidance for Greenhouse Gases” and “Available and Emerging Technologies for Reducing Greenhouse Gas Emissions from the Iron and Steel Industry.” Through this guidance, the EPA intends to help state and local air permitting authorities identify greenhouse gas reduction options under the CAA. U. S. Steel is currently evaluating the cost of compliance with these regulations.

 

The European Commission (EC) has created an Emissions Trading System (ETS). Under the ETS, the EC establishes CO2 emissions limits for every EU member state and approves grants of CO2 emission allowances to individual emitting facilities pursuant to national allocation plans that are proposed by each of the member states. The allowances can be bought and sold by emitting facilities to cover the quantities of CO2 they emit in their operations.

 

In July 2008, Slovakia granted USSK CO2 emission allowances as part of the national allocation plan for the 2008 to 2012 trading period (NAP II) approved by the European Commission. Based on actual carbon emissions to date, we believe that USSK will have sufficient allowances for the NAP II period without purchasing additional allowances. USSK entered into transactions to sell and swap a portion of our emissions allowances and recognized gains related to these transactions of approximately $7 million and $36 million in the years ended December 2010 and 2009, respectively.

 

In December 2010, an amendment to the Slovak income tax law was adopted that includes a provision for an 80 percent tax on excess emission allowances registered in 2011 and 2012. The amount of this tax will vary with USSK’s production levels and the implementing regulations that may be issued.

 

On April 26, 2007, Canada’s federal government announced an Action Plan to Reduce Greenhouse Gases and Air Pollution (the Plan). The Plan would set mandatory reduction targets on all major greenhouse gas producing industries to achieve an absolute reduction of 150 megatonnes in greenhouse gas emissions from 2006 levels by 2020. On March 10, 2008, Canada’s federal government published details of its Regulatory Framework for Industrial Greenhouse Gas Emissions (the Framework). The Plan and the Framework provide that facilities existing in 2004 will be required to cut their greenhouse gas emissions intensity by 18 percent below their 2006 baseline by 2010, with a further two percent reduction in each following year. The Framework provided that newer and future facilities would be subject to phased in two percent annual emissions intensity reduction obligations and clean fuel standards. Companies will be able to choose the most cost-effective way to meet their targets from a range of options which include carbon trading, offsets and credit for early action (between 1992 and 2006). The Framework effectively exempts fixed process emissions of CO2, which could exclude certain iron and steel producing CO2 emissions from mandatory reductions. More recently, the federal government has indicated that while it remains committed to reducing Canada’s total greenhouse gas emissions by 17 percent from 2005 levels

 

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by 2020, this target is subject to adjustment to remain consistent with the U.S. At this point, it is unclear when Canadian federal regulations on greenhouse gas emissions will be developed and whether they will reflect aspects of the approach set out in the Plan and the Framework. The federal government has indicated that it is working in collaboration with the provinces towards the development of a cap-and-trade system that will ultimately be aligned with the emerging cap-and-trade program in the United States. On June 12, 2009, Canada’s federal government released for comment two draft guides related to the establishment of an Offset System in Canada. These draft documents propose rules and provide guidance on the requirements and processes to create offset credits and the requirements and processes to verify the eligible greenhouse gas reductions achieved from an offset project. Canada’s federal government has stated that, once in place, the Offset System will compliment the proposed cap-and-trade system and help in generating greenhouse gas emissions reductions across the country. If greenhouse gas cap-and-trade legislation becomes law in Canada, it could have economic and operational consequences for U. S. Steel. It is impossible to estimate the timing or impact of these or other future government action on U. S. Steel.

 

In December 2007, the Ontario government announced its own Action Plan on Climate Change (the Ontario Action Plan). The Ontario Action Plan targets reductions in Ontario greenhouse gas emissions of six percent below 1990 levels by 2014, 15 percent below 1990 levels by 2020 and 80 percent below 1990 levels by 2050. In December 2008, Ontario launched a consultation process towards the development of a cap-and-trade system and in May 2009, the Ontario government released a discussion paper regarding cap-and-trade. The Ontario government has amended the Environmental Protection Act in order to provide the regulatory authority to set-up a greenhouse gas cap-and-trade system; however, such a system has not yet been developed. The Ontario government also passed a Greenhouse Gas Emissions Reporting Regulation (the Regulation) on December 1, 2009. The Regulation is intended to provide the foundation for Ontario to implement a cap-and-trade program for greenhouse gases. The Regulation requires facilities that emit more than 25,000 tons of CO2e or more per year to annually report their emissions, starting with 2010 emissions. The Ontario government has indicated that it plans to develop a cap-and-trade system that aligns with other systems being developed in North America, including in the United States.

 

For further information, see “Item 1A. Risk Factors,” Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

 

Air

 

The CAA imposes stringent limits on air emissions with a federally mandated operating permit program and civil and criminal enforcement sanctions. The CAA requires, among other things, the regulation of hazardous air pollutants through the development and promulgation of Maximum Achievable Control Technology (MACT) Standards. The EPA has developed various industry-specific MACT standards pursuant to this requirement. The CAA requires EPA to promulgate regulations establishing emission standards for each category of Hazardous Air Pollutants. EPA must also conduct risk assessments on each source category that is already subject to MACT standards and determine if additional standards are needed to reduce residual risks.

 

The principal impact of the MACT standards on U. S. Steel operations includes those that are specific to cokemaking, ironmaking, steelmaking and iron ore processing.

 

The emission limitations for ironmaking and steelmaking sources could become more stringent if EPA’s residual risk analysis indicates that additional controls are necessary. EPA is required to complete this residual risk analysis by 2011. The Iron and Steel MACT is subject to a legal challenge by Sierra Club. In June 2010, the United States Court of Appeals for the District of Columbia Circuit granted EPA’s motion for voluntary remand of the Iron and Steel MACT. EPA is in the process of generating an information collection request to develop the revised MACT. The impact of this risk analysis and any subsequent changes cannot be estimated at this time.

 

U. S. Steel’s cokemaking facilities are subject to two categories of MACT standards. The first category applies to pushing and quenching. EPA is required to make a risk-based determination for pushing and quenching emissions and determine whether additional emissions reductions are necessary from this process by 2011. EPA has yet to publish or propose any residual risk standards from these operations; therefore, the impact cannot be estimated at this time. The second category of MACT standards applying to coke facilities applies to emissions from charging,

 

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coke oven battery tops and coke oven doors. With regard to these standards, U. S. Steel chose to install more stringent controls than MACT on some of its batteries, called Lowest Achievable Emissions Reductions (LAER). Such LAER batteries are not required to comply with certain residual risk standards until 2020. Because the scope of these anticipated changes are distant and relatively uncertain, the magnitude of the impact of these anticipated changes cannot be estimated at this time.

 

U. S. Steel’s iron ore processing operations are subject to the Taconite Iron Ore Processing MACT standards. These standards may change if EPA revises the MACT standards in response to a petition filed by an environmental advocacy group. In addition, EPA will make a risk-based determination for taconite iron ore processing and determine whether additional emissions reductions are necessary from this process by 2011. EPA has yet to publish or propose any residual risk standards from these operations; therefore, the impact of any changes cannot be estimated at this time.

 

The CAA also requires the EPA to develop and implement National Ambient Air Quality Standards (NAAQS) for criteria pollutants, which include, among others, particulate matter and ozone. In 1997, EPA established 24-hour and annual standards for fine particles that are less than 2.5 micrometers in size and in 2006, EPA tightened the 24-hour standard but retained the annual standard. These standards were challenged and the U.S. Court of Appeals for the District of Columbia, in American Farm Bureau Federation and National Pork Producers Council et al. v. EPA, 559 F. 3rd 512 (D.C. Cir. 2009), remanded the annual standards to the EPA for further consideration but allowed the 2006 24-hour standard to remain in effect.

 

States were required to demonstrate compliance with the 1997 fine particle standard by April 2010, unless EPA granted the state or local jurisdiction an extension. Extensions may be granted through April 2015. Many states and jurisdictions in which U. S. Steel operates received a five year extension, requiring that the area demonstrate compliance by April 2015. In addition, the annual standard could change based upon the remand noted above. If the standard is changed, states will be required to modify their state implementation plans (SIPs) to meet the new standard.

 

On December 22, 2008, EPA designated areas in which U. S. Steel operates as “nonattainment” and “unclassified/attainment” for the 2006 fine particle standard. SIPs for the 2006 24-hour standard are due December 14, 2012, with attainment demonstrations with the 2006 standard expected to be made by 2014 or 2019, with extensions.

 

It is anticipated that EPA’s fine particle programs could result in significant costs to U. S. Steel. While the SIPs for the 1997 (current) annual standard were due in April 2008, many states and local agencies in which U. S. Steel facilities are located have not yet or are just now proposing SIPs. U. S. Steel is currently reviewing these drafts and proposed SIPs, but the impacts of the anticipated regulations cannot be determined at this time. Furthermore, it is impossible to estimate the magnitude of any costs associated with the SIPs for the 2006 24-hour standard or the remand of the annual standard since the state and federal agencies are still developing regulations for the programs and implementation for the 2006 24-hour standard. Demonstrating attainment with the 2006 24-hour standard is not expected until sometime between 2014 and 2019 and no new standard or associated timeline has been established for the annual standard.

 

Effective May 2008, EPA lowered its ground level ozone air quality standards, which could affect sources of nitrogen oxide and volatile organic compounds, including coke plants, and iron and steel facilities. However, in response to a legal challenge of the May 2008 ground level ozone NAAQS, EPA has proposed to lower the NAAQS from what was promulgated in May 2008. EPA has stated it will promulgate a final rule with a lower NAAQS for ozone by July 2011. EPA is required to issue final designations of attainment, nonattainment and unclassifiable areas no later than March 2011 for the standard promulgated in May 2008. In addition, EPA will need to again designate areas pursuant to any standard promulgated in July 2011. The designations would be two years (with up to one year extension) from the date of promulgation of the new standard. States must submit SIPs outlining how they will reduce pollution to meet the standards by a date that is no later than three years after EPA’s final designations. If EPA issues designations in 2011 as it has indicated, these plans would be due no later than 2014. States are required to meet the standards by deadlines that may vary based on the severity of the problem in the area. It is anticipated that the ozone NAAQS revisions could result in significant costs to U. S. Steel; however, it is impossible to estimate the magnitude of these costs at this time since the implementation dates are unknown and distant.

 

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For additional information regarding significant enforcement actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

 

Water

 

U. S. Steel maintains discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA, and conducts our operations to be in compliance with such permits. For additional information regarding enforcement actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

 

Solid Waste

 

U. S. Steel continues to seek methods to minimize the generation of hazardous wastes in our 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.” For additional information regarding significant enforcement actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

 

Remediation

 

A significant portion of U. S. Steel’s currently identified environmental remediation projects relate to the remediation of former and present operating locations. A number of these locations were sold by U. S. Steel and are subject to cost-sharing and remediation provisions in the sales agreements. Projects include remediation of the Grand Calumet River, remediation of the former Geneva Works and the former Duluth Works and the closure of permitted hazardous and non-hazardous waste landfills.

 

U. S. Steel is also involved in a number of remedial actions under CERCLA, RCRA and other federal and state statutes, particularly third party waste disposal sites where disposal of U. S. Steel-generated material occurred and it is possible that additional sites will be identified that require remediation. For additional information regarding remedial actions, capital expenditures and costs of compliance, see “Item 3. Legal Proceedings – Environmental Proceedings” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Environmental Matters, Litigation and Contingencies.”

 

Property, Plant and Equipment Additions

 

For property, plant and equipment additions, including capital leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash Flows and Liquidity – Cash Flows” and Note 12 to the Financial Statements.

 

Employees

 

As of December 31, 2010, U. S. Steel had approximately 23,000 employees in North America and approximately 19,000 in Europe

 

Most hourly employees of U. S. Steel’s flat-rolled, tubular, cokemaking and iron ore pellet facilities in the United States are covered by collective bargaining agreements with the USW entered into effective September 1, 2008 (the 2008 CBAs) that expire in September 2012. The 2008 CBAs resulted in wage increases ranging from $0.65 to $1.00 per hour as of the effective date. Each subsequent September 1 thereafter during the contract term, employees will receive a four percent wage increase. The 2008 CBAs also require U. S. Steel to make annual $75 million contributions to a restricted account within our trust for retiree health care and life insurance during the contract period. In early 2009, we reached agreement with the USW to defer the 2009 contribution until 2012. In

 

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2010, we reached agreement with the USW to defer our 2010 contribution until 2014. Further, in accordance with an agreement with the USW, U. S. Steel has elected to use the $75 million contribution made in 2008 to pay current retiree healthcare and life insurance claims and will make up the contribution in 2013. The 2008 CBAs also provide for pension and other benefit enhancements for both current employees and retirees (see Notes 17 and 19 to the Financial Statements). At USSC the collective bargaining agreement with the USW covering employees at Lake Erie Works expires in April 2013. The collective bargaining agreement with the USW covering employees at Hamilton Works expired in July of 2010. A work stoppage commenced on November 7, 2010 and is continuing. All of the agreements in North America contain no-strike clauses. A small number of workers at some of our North American facilities and at our transportation operations are covered by agreements with the USW or other unions that have varying expiration dates.

 

In Europe, most represented employees at USSK are represented by the OZ Metalurg union and are covered by an agreement that expires in March 2012. Represented employees at USSS are covered by a collective bargaining agreement that expires in December 2012. Wage increases have been agreed to for all years for both USSE agreements.

 

Available Information

 

U. S. Steel’s Internet address is www.ussteel.com. We post our annual report on Form 10-K, our quarterly reports on Form 10-Q, our proxy statement and our interactive data files to our website as soon as reasonably practicable after such reports are filed with the Securities and Exchange Commission (SEC). We also post all press releases and earnings releases to our website.

 

All other filings with the SEC are available via a direct link on the U. S. Steel website to the SEC’s website, www.sec.gov.

 

Also available on the U. S. Steel website are U. S. Steel’s Corporate Governance Principles, our Code of Ethical Business Conduct and the charters of the Audit Committee, the Compensation & Organization Committee and the Corporate Governance & Public Policy Committee of the Board of Directors. These documents and the Annual Report on Form 10-K are also available in print to any shareholder who requests them. Such requests should be sent to the Office of the Corporate Secretary, United States Steel Corporation, 600 Grant Street, Pittsburgh, Pennsylvania 15219-2800 (telephone: 412-433-2998).

 

U. S. Steel does not intend to incorporate into this document the contents of any website or the documents referred to in the immediately preceeding paragraph.

 

Other Information

 

Information on net sales, depreciation, capital expenditures and income from operations by reportable segment and for Other Businesses and on net sales and assets by geographic area are set forth in Note 3 to the Financial Statements.

 

For significant operating data for U. S. Steel for each of the last five years, see “Five-Year Operating Summary (Unaudited)” on pages F-59 and F-60.

 

Item 1A. RISK FACTORS

 

Risk Factors Related to the Difficult Economic Conditions

 

All segments of our business continue to be impacted by the difficult economic conditions that began with the global economic recession in 2008 and such impacts have created certain new risks and have also affected the other risks set forth below. U. S. Steel cannot predict the duration of the difficult economic conditions and the trajectory of the recovery but both will have a significant impact on U. S. Steel.

 

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U. S. Steel and its end-product markets continue to be impacted by challenging economic conditions.

 

The global economic recession that began in 2008 resulted in significantly lower demand and prices across all of our segments and major markets.

 

     2010            2009            2008  

Average realized price: ($/net ton)

         

Flat-rolled

    675          651          780   

U. S. Steel Europe

    705          637          932   

Tubular

    1,494          1,755          2,041   

Steel Shipments:

         

Flat-rolled

    15,301          9,861          16,845   

U. S. Steel Europe

    5,464          4,463          5,651   

Tubular

    1,551          657          1,952   
                           

Total Steel Shipments

    22,316          14,981          24,448   

Raw Steel-Capability Utilization:

         

Flat-rolled

    76       48       79

U. S. Steel Europe

    82       69       87

Consolidated net (loss) income attributable to United States Steel Corporation

  $ (482     $ (1,401     $ 2,112   

Consolidated net (loss) income per diluted share attributable to United States Steel Corporation

  $ (3.36           $ (10.42           $ 17.96   

 

While some of our end customer markets supplied by our Flat-rolled and USSE segments, such as automotive, saw modest recoveries during 2010, others, such as construction, remain severely depressed. Oil and gas drilling activity remains below 2008 levels, which has resulted in lower customer demand for the products of our Tubular segment. Our operating levels and prices may remain at depressed levels until our customers’ demand increases. We face the additional risk of further declines if economic conditions worsen.

 

China and certain other steel markets were affected less by the global recession and rebounded more quickly in some cases to and even beyond 2008 levels. As a result, steel production serving these markets has increased, which has caused prices for iron ore, metallurgical coal and other raw materials to increase. This development has and will continue to cause our costs to increase regardless of the state of recovery in our end markets.

 

U. S. Steel may need to substantially increase working capital as market conditions and order levels continue to improve.

 

As business conditions have started to recover, our working capital requirements have increased and any future increases may require us to draw upon our credit facilities. In general, availability under our 2007 five-year $750 million revolving credit facility, which was amended and restated in 2009, (Amended Credit Agreement) is limited to a monthly borrowing base of certain eligible domestic inventory and availability under our Receivables Purchase Agreement (RPA) is limited to eligible receivables. Any borrowings would increase our cost, and we may not have sufficient eligible inventory and receivables to borrow the amounts we need. In addition, if availability under the Amended Credit Agreement falls below the greater of 15 percent of the total aggregate commitments and $112.5 million, we would also be subject to a fixed charge coverage ratio covenant. The USSS 20 million credit facility and overdraft facility of up to 1 billion Serbian dinars (which together totaled approximately $39 million at December 31, 2010) also contain a borrowing base limit based upon inventory values.

 

U. S. Steel may face increased risks of customer and supplier defaults.

 

There is an increased risk of insolvency and other credit related issues of our customers and suppliers, including their need to increase working capital as their businesses improve. We believe some of our customers and suppliers may not have sufficient credit available to them, which could delay payments from customers, result in increased customer defaults and cause our suppliers to delay filling, or to be unable to fill, our needs.

 

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U. S. Steel’s joint ventures and other equity investees are also being affected by ongoing challenging economic conditions.

 

U. S. Steel’s joint ventures and other equity affiliates are also engaged in the production of steelmaking raw materials and finishing of flat-rolled and tubular products. As such, they face many of the same issues we do. Since these entities are smaller than U. S. Steel, they may have fewer resources available to them to respond to ongoing challenging economic conditions.

 

Risk Factors Concerning the Steel Industry

 

Steel consumption is highly cyclical, and worldwide overcapacity in the steel industry and the availability of alternative products have resulted in intense competition, which may have an adverse effect on profitability and cash flow, especially during periods of economic weakness.

 

Steel consumption is highly cyclical and generally follows economic and industrial conditions both worldwide and in regional markets. The steel industry has historically been characterized by excess global supply, which has led to substantial price decreases during periods of economic weakness. Substitute materials are increasingly available for many steel products, which further reduces demand for steel.

 

Rapidly growing supply in China and other developing economies may grow faster than real demand in those economies, which may result in additional excess worldwide capacity and falling steel prices.

 

Over the last several years, steel consumption in China and other developing economies has increased at a rapid pace. Steel companies have responded by rapidly increasing steel production capability in those countries and published reports state that further capacity increases are likely. Steel production capability, especially in China, now appears to be well in excess of China’s home market demand. Because China is now the largest worldwide steel producer by a significant margin, any excess Chinese supply could have a major impact on world steel trade and prices if this excess and subsidized production is exported to other markets. Since the Chinese steel industry is largely government owned, it has not been as adversely impacted by the ongoing difficult economic conditions, and it can make production and sales decisions for non-market reasons.

 

Increased imports of steel products into North America and Europe could negatively affect steel prices and demand levels and reduce our profitability.

 

Steel imports to the United States accounted for an estimated 22 percent of the domestic steel market in 2010, 22 percent in 2009 and 24 percent in 2008. Foreign competitors may have lower labor costs, and some are owned, controlled or subsidized by their governments, which allows their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions.

 

Imports of tubular products to the United States increased significantly beginning in 2008. Oil country tubular goods (OCTG) imports accounted for a large share of the growth, as they have more than doubled over 2007 levels. Imports of OCTG from China registered the most dramatic increase as they grew from 900 thousand tons in 2007 to nearly 2.3 million tons in 2008. The U.S. market experienced a surge in tubular imports in the second half of 2008 that resulted in record OCTG inventories by the end of the year, which affected demand in 2009. Chinese imports of seamless standard line and pressure pipe increased by more than 290 percent in the three months after the filing of antidumping and countervailing duty petitions in September 2009, as compared to the three months prior to the filing.

 

Imports of flat-rolled steel to Canada accounted for an estimated 39 percent of the Canadian market for flat-rolled steel products in 2010, 35 percent in 2009 and 24 percent in 2008.

 

Total imports of flat-rolled carbon steel products to the EU27 (the 27 countries currently comprising the EU) were 14 percent of the EU market in 2010, 15 percent in 2009 and 19 percent in 2008.

 

Increases in future levels of imported steel to North America and Europe could reduce future market prices and demand levels for steel products produced in those markets.

 

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Imports into the United States, Canada and the EU have often violated the international trade laws of these jurisdictions. While in some cases U. S. Steel and others have been successful in obtaining relief under these laws, in other circumstances relief has not been received. When received, such relief is generally subject to automatic or discretionary recision or reduction. There can be no assurance that any such relief will be obtained or continued in the future or that such relief as obtained will be adequate.

 

Limited availability of raw materials and energy may constrain operating levels and reduce profit margins.

 

U. S. Steel and other steel producers have periodically been faced with problems in obtaining sufficient raw materials and energy in a timely manner due to delays or defaults by suppliers, shortages or transportation problems (such as shortages of barges, ocean vessels, rail cars or trucks, or disruption of rail lines, waterways or natural gas transmission lines), resulting in production curtailments. We do not produce enough coke to meet our global requirements and our coke production capability is likely to decline over the next several years given that some of our existing coke batteries in the United States are approaching the end of their useful lives. As a result, we may be further exposed to risks concerning pricing and availability of coke from third parties. USSE purchases substantially all of its iron ore and coking coal requirements from outside sources. USSE is also dependent upon availability of natural gas produced in Russia and transported through Ukraine. USSE experienced natural gas supply curtailments during Russia’s suspension of natural gas shipments to Europe in January 2009, resulting in steel production curtailments, escalated costs and reduced profit margins. Any future curtailments and escalated costs may further reduce profit margins.

 

Environmental compliance and remediation could result in substantially increased capital requirements and operating costs.

 

Steel producers in the United States are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Environmental laws and regulations, particularly the Clean Air Act, could result in substantially increased capital, operating and compliance costs.

 

International environmental requirements vary. While standards in the EU, Canada and Japan are generally comparable to U.S. standards, other nations, particularly China, have substantially lesser requirements that may give competitors in such nations a competitive advantage.

 

Greenhouse gas policies could negatively affect our results of operations and cash flows.

 

The integrated steel process involves a series of chemical reactions involving carbon that create CO2. This distinguishes integrated steel producers from mini-mills and many other industries where CO2 generation is generally linked to energy usage. In the United States, the Environmental Protection Agency (EPA) has published rules for regulating greenhouse gas emissions for certain facilities and has implemented various reporting requirements. In the last Congress, legislation was passed in the House of Representatives and introduced in the Senate. We do not know what action, if any, may be taken by the new Congress. The EU has established greenhouse gas regulations and Canada has published details of a regulatory framework for greenhouse gas emissions. For a discussion of these, see “PART I – Business – Environmental Matters.” We cannot predict the final requirements that may be adopted in the United States and Canada, or the form of future actions that may be taken by the EU; however, such limitations could entail substantial costs for emission allowances restriction of production and higher prices for coking coal, natural gas and electricity generated by carbon based systems, which could have a negative effect on results of operations and cash flows. Since mini-mill production does not involve the same chemical reactions as integrated production, mini-mills may have a competitive advantage. Also, since China and many other developing nations have not instituted greenhouse gas regulations, and since past international agreements such as the Kyoto Protocol provided exemptions and lesser standards for developing nations, we may also be at a competitive disadvantage with certain foreign steel producers. Many of our customers in the United States, Canada and Europe may experience similar impacts, which could result in decreased demand for our products.

 

 

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Risk Factors Concerning U. S. Steel Legacy Obligations

 

Our retiree health care and retiree life insurance plan costs, most of which are unfunded obligations, and our pension plan costs in North America are higher than those of many of our competitors. These plans create a competitive disadvantage and negatively affect our results of operations and cash flows.

 

We maintain retiree health care and life insurance and defined benefit pension plans covering most of our North American employees and former employees upon their retirement. As of December 31, 2010, approximately 129,000 current employees, retirees and beneficiaries are participating in the plans to receive pension and/or medical benefits. At December 31, 2010, on an accounting basis, U. S. Steel’s retiree medical and life insurance plans were underfunded by $2.9 billion and our pension plans were underfunded by $2.0 billion.

 

Most of our employee benefits are subject to collective bargaining agreements with unionized workforces and will be subject to future negotiations. Minimum contributions to domestic qualified pension plans are controlled under ERISA and other government regulations. Minimum contributions to U. S. Steel Canada (USSC) pension plans are governed by an agreement entered into by Stelco Inc. (Stelco) and the Province of Ontario that U. S. Steel assumed in conjunction with the acquisition of Stelco. This agreement requires defined annual contributions until the earlier of full solvency funding for the four main plans or until December 31, 2015, when minimum funding requirements for the plans resume under the provincial pension legislation. Substantial cash contributions may be required to fund these benefit plans.

 

U. S. Steel contributes to a multiemployer plan domestically for USW-represented employees formerly employed by National Steel and represented employees hired after May 2003 called the Steelworkers Pension Trust (SPT). We have legal and contractual requirements for future funding of this plan, which may have a negative effect on our cash flows. The collective bargaining agreements with the USW entered into effective September 1, 2008 (the 2008 CBAs) increased our required contributions to this plan from $1.80 to $2.65 per hour. In addition, funding requirements for participants could increase as a result of any underfunding of this plan.

 

The turmoil in financial markets during 2008 led to significant declines in the value of equity investments that are held by the trusts under our pension plans and the trust to pay for retiree health care and life insurance benefits. While some of these losses were recovered in 2009 and 2010, the 2008 losses have contributed to the underfunded position at December 31, 2010. We may be required or may choose to make substantial contributions to these plans.

 

Despite the global recession, domestic health care costs continue to increase each year, and could accelerate due to inflationary pressures on the overall health care trend rates. These pressures may in part stem from requirements legislated by the Patient Protection and Affordable Care Act enacted in 2010. This will adversely impact our results of operations and cash flow.

 

Many domestic and international competitors do not provide retiree health care and life insurance or defined benefit pension plans, and other international competitors operate in jurisdictions with government sponsored retirement and health care plans that may offer them a cost advantage. Benefit obligations under our plans are not tied to operating rates; therefore, our costs are not expected to decline as a result of the continuing difficult economic conditions or any other future economic downturns.

 

We have higher environmental remediation costs than our competitors. This creates a competitive disadvantage and negatively affects our results of operations and cash flows.

 

U. S. Steel is involved in numerous remediation projects at currently operating facilities, facilities that have been closed or sold to unrelated parties and other sites where material generated by U. S. Steel was deposited. In addition, there are numerous other former operating or disposal sites that could become the subject of remediation. For example, we recorded a charge of $49 million in 2009 in connection with the expanded scope of remediation at our former Geneva Works bringing the total liability for this site to $66 million as of December 31, 2010.

 

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Environmental remediation costs and related cash requirements of many of our competitors may be substantially less than ours. Many international competitors do not face similar laws in the jurisdictions where they operate. Many U.S. competitors have substantially shorter operating histories than we do, resulting in less exposure for environmental remediation. Competitors that have obtained relief under bankruptcy laws may have been released from certain environmental obligations that existed prior to the bankruptcy filing.

 

Other Risk Factors Applicable to U. S. Steel

 

Unplanned equipment outages and other unforeseen disruptions may reduce our results of operations.

 

Our steel production depends on the operation of critical structures and pieces of equipment, such as blast furnaces, casters, hot strip mills and various structures and operations that support them. It is possible that we could experience prolonged periods of reduced production and increased maintenance and repair costs due to equipment failures at our facilities or those of our key suppliers. For example, we experienced a structural failure at Gary Works in 2010 that disrupted operations for several weeks. It is also possible that operations may be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, accidents and severe weather conditions. We are also exposed to similar risks involving major customers and suppliers such as force majeure events of raw materials suppliers that have occurred and may occur in the future. Production at USSE was curtailed in January 2009 due to the suspension of natural gas deliveries to Europe from Russia transported through Ukraine and we remain vulnerable to this risk. Availability of raw materials and delivery of products to customers could be affected by logistical disruptions (such as shortages of barges, ocean vessels, rail cars or trucks, or unavailability of rail lines or of locks on the Great Lakes or other bodies of water). To the extent that lost production could not be compensated for at unaffected facilities and depending on the length of the outage, our sales and our unit production costs could be adversely affected.

 

We may be adversely impacted by volatility in prices for raw materials, energy, and steel.

 

In 2010, approximately 65 percent of U. S. Steel’s Flat-rolled segment sales in the United States are based on sales contracts with volume commitments and durations of at least one quarter, while lesser percentages of Tubular and USSE segment sales are made pursuant to such contacts. These contracts generally have a fixed price or a price that will fluctuate with changes in a defined index and do not always have firm volume commitments. During periods of rapid escalation of raw materials, energy and other costs such as was experienced in 2008 and 2010, U. S. Steel may not be able to recover these cost increases from customers with existing fixed price agreements. Conversely, some purchase contracts require annual commitments and in periods of rapid decline, such as 2009, U. S. Steel may be faced with having agreed to purchase raw materials and energy at prices that are above the then current market price or in greater volumes than required. If steel prices decline, our profit margins on market-based indexed contracts and spot business will be reduced.

 

Declines in the production levels of our major customers could have an adverse effect on our financial position, results of operations and cash flow.

 

Our Flat-rolled and USSE segments sell to the automotive, service center, converter, appliance and construction-related industries, all of which have been significantly impacted by the ongoing difficult economic conditions. Low demand from customers in these key markets may adversely affect our results of operations.

 

The terms of our indebtedness contain provisions that may limit our flexibility.

 

The Amended Credit Agreement is secured by a lien on a majority of our domestic inventory and certain of our accounts receivable and includes a fixed charge coverage ratio covenant that applies when availability under the Amended Credit Agreement is less than $112.5 million. Because the Amended Credit Agreement was undrawn throughout 2010, this covenant was not applicable, but based on the four quarters ended December 31, 2010, we would not have met this covenant. The value or levels of inventory may decrease or we may not be able to meet this covenant in the future, and either or both of these situations would limit our ability to borrow under the Amended Credit Agreement. We also amended our Receivables Purchase Agreement during 2010 to increase the maximum amount of receivables eligible for sale to $525 million. Reductions in accounts receivable would limit our ability to sell receivables.

 

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In general, availability under the Amended Credit Agreement is limited to a monthly borrowing base for certain eligible domestic inventory. Inventory reductions could limit availability to less than the potential $750 million. If availability under the Amended Credit Agreement falls below the greater of 15 percent of the total aggregate commitments and $112.5 million, we would also be subject to a fixed charge coverage ratio covenant. The USSS 20 million credit facility and overdraft facility of up to 1 billion Serbian dinars (which together totaled approximately $39 million at December 31, 2010) also contain a borrowing base limit based upon inventory values. This may be a particular problem as market conditions and order levels continue to improve and U. S. Steel needs the liquidity to rebuild working capital. We have granted the lenders under the Amended Credit Agreement a secured position in our most liquid assets, which may be a detriment to other creditors.

 

The Amended Credit Agreement, our Senior Convertible Notes issued in 2009 and our $2.2 billion of Senior Notes issued in 2007 and 2010 also contain covenants restricting our ability to create liens and engage in sale-leasebacks. Additionally, the repayment of amounts outstanding under the Amended Credit Agreement and repurchase of the Senior Convertible Notes and Senior Notes is required upon a change of control under specified circumstances, as well as other customary provisions. The Amended Credit Agreement, the Senior Convertible Notes and the RPA have provisions that certain defaults under a material debt obligation could cause a default under the Amended Credit Agreement or the Senior Convertible Notes or termination of the RPA. These terms may affect our liquidity, our ability to operate our business and may limit our ability to take advantage of potential business opportunities.

 

Under the terms of the separation from Marathon Oil Corporation (Marathon), we are required to provide for the discharge of their obligations under $196 million of environmental revenue bonds.

 

Under the terms of the separation from Marathon, we are obligated to provide for the discharge of Marathon from any liability under $196 million of environmental revenue bonds by December 31, 2011. If we are not able to arrange for the refinancing of these bonds as our sole obligation, we will be required to pay $198 million, which includes $2 million of call premiums, to call the bonds no later than December 31, 2011. There is no assurance that we will be able to arrange such refinancing or of the terms thereof.

 

Rating agencies may downgrade our credit ratings, which would make it more difficult for us to raise capital and would increase our financial costs.

 

Any downgrades in our credit ratings may make raising capital more difficult, may increase the cost and affect the terms of future borrowings, may affect the terms under which we purchase goods and services and may limit our ability to take advantage of potential business opportunities.

 

“Change in control” clauses in our financial and labor agreements grant the other parties to those agreements rights to accelerate obligations and to terminate or extend our labor agreements.

 

Upon the occurrence of “change in control” events specified in our Senior Notes, Amended Credit Agreement, Senior Convertible Notes and various other contracts and leases, the holders of our indebtedness may require us to immediately repurchase or repay that debt on less than favorable terms. Additionally, the 2008 CBAs give the USW the right to either terminate or extend the collective bargaining agreements for an additional four years. Among other things, these provisions may make a takeover of U. S. Steel more difficult.

 

A “change of control” is generally defined to include any of the following: (a) the acquisition by a person or group of at least 35 percent of our common stock, (b) a merger in which holders of our common stock own less than a majority of the equity in the resulting entity, or (c) replacement of a majority of the members of our Board of Directors by persons who were not nominated by our current directors.

 

Our operations expose us to uncertainties and risks in the countries in which we operate, which could negatively affect our results of operations and cash flows.

 

Our U.S. operations are subject to economic conditions and political factors in the United States, which if changed could negatively affect our results of operations and cash flow. Political factors include, but are not limited to, taxation, inflation, increased regulation, limitations on exports of energy and raw materials, and trade remedies.

 

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Actions taken by the U.S. government could affect our results of operations and cash flow. For example, President Obama’s administration has proposed significant changes to U.S. tax law, such as the elimination of the last-in first-out (LIFO) inventory costing method, which could negatively affect our profitability and cash flow if they are enacted

 

USSK, located in Slovakia, USSS, located in Serbia, and USSC, located in Canada, constitute 39 percent of our global raw steel production capability. All of them are subject to economic conditions and political factors in the countries in which they are located, and USSK is additionally subject to economic conditions and political factors associated with the EU and the euro currency. Changes in any of these economic conditions or political factors could negatively affect our results of operations and cash flow. Political factors include, but are not limited to, taxation, nationalization, inflation, government instability, civil unrest, increased regulation and quotas, tariffs and other protectionist measures.

 

Any future foreign acquisitions or expansions could expose us to similar risks.

 

We are subject to significant foreign currency risks, which could negatively impact our profitability and cash flows.

 

Our foreign operations accounted for approximately 34 percent of our net sales in 2010. The financial condition and results of operations of USSK, USSS and USSC are reported in various foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our financial statements. The appreciation of the U.S. dollar against these foreign currencies could have a negative impact on our consolidated results of operations.

 

In addition, international cash requirements have been and in the future may be funded by intercompany loans, creating intercompany monetary assets and liabilities in currencies other than the functional currencies of the entities involved, which can have a non-cash impact on income when they are remeasured at the end of each period. A $1.6 billion U.S. dollar-denominated intercompany loan from a U.S. subsidiary to a European subsidiary was the primary exposure at December 31, 2010.

 

Any future foreign acquisitions or expansions may increase such risks.

 

Our business requires substantial expenditures for debt service, obligations, capital investment, operating leases and maintenance that we may be unable to fund.

 

With $3.7 billion of debt outstanding as of December 31, 2010, we have significant debt service requirements.

 

Our operations are capital intensive. For the five-year period ended December 31, 2010, total capital expenditures were $3.2 billion. At December 31, 2010, our contractual commitments to acquire property, plant and equipment totaled $667 million and we were obligated to make aggregate lease payments of $170 million under operating leases.

 

In addition to capital expenditures and lease payments, we spend significant amounts for maintenance of raw material, steelmaking and steel-finishing facilities.

 

As of December 31, 2010, we had contingent obligations consisting of indemnity obligations under active surety bonds, trusts and letters of credit totaling approximately $164 million and contractual purchase commitments, including “take or pay” arrangements, totalling approximately $12.4 billion.

 

Our business may not generate sufficient operating cash flow or external financing sources may not be available in amounts sufficient, to enable us to service or refinance our indebtedness or to fund other liquidity needs. The limitations under our Amended Credit Agreement and RPA, described above, may limit our availability to draw upon these facilities. We intend to indefinitely reinvest undistributed foreign earnings outside the United States; however, if we need to repatriate funds in the future to satisfy our liquidity needs, the tax consequences would reduce income and cash flow.

 

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U. S. Steel is exposed to uninsured losses.

 

Our insurance coverage against catastrophic casualty and business interruption exposures contains certain common exclusions, substantial deductibles and self insured retentions.

 

Our collective bargaining agreements may limit our flexibility.

 

Most hourly employees of U. S. Steel’s flat-rolled, tubular, cokemaking and iron ore pellet facilities in the United States are covered by the 2008 CBAs, which expire in September 2012. These agreements contain provisions that prohibit us from pursuing any North American transaction involving steel or steel-related assets without the consent of the USW, grant the USW a right to bid on any sale of one or more facilities covered by the 2008 CBAs, require us to make reasonable and necessary capital expenditures to maintain the competitive status of our domestic facilities and require mandatory pre-funding of a trust for retiree health care and life insurance. These agreements also restrict our ability to trade, sell or use foreign-produced coke and iron ore in North America, and further require that the ratio of non-USW employees to USW employees at our domestic facilities not exceed one to five.

 

While other domestic integrated unionized steel producers have similar requirements in their agreements with the USW, non-union producers are not subject to such requirements.

 

We are at risk of labor stoppages.

 

The collective bargaining agreement at the Hamilton Works expired in July 2010 and there has been a work stoppage since November 7, 2010. We are also at risk for work stoppages at other locations as their collective bargaining agreements expire or if unauthorized job actions occur.

 

There are risks associated with past acquisitions, as well as any acquisitions we may make in the future.

 

Our acquisitions of Lone Star Technologies, Inc. (Lone Star) and Stelco, Inc. (Stelco) created goodwill on our balance sheet which totaled $1.8 billion as of December 31, 2010, and which exposes us to the risk of future impairment charges. Our Flat-rolled reporting unit was allocated goodwill from the Stelco and Lone Star acquisitions in 2007 and our Texas Operations reporting unit, which is part of our Tubular operating segment, was allocated goodwill from the Lone Star acquisition. Goodwill is tested for impairment at the reporting unit level annually in the third quarter and whenever events or circumstances indicate that the carrying value may not be recoverable. The evaluation of impairment involves comparing the estimated fair value of the associated reporting unit to its carrying value, including goodwill. Fair value is determined based on consideration of the income, market and cost approaches as applicable in accordance with the guidance in Accounting Standards Codification (ASC) Topic 820.

 

If business conditions deteriorate or other factors have an adverse effect on our estimates of discounted future cash flows or compound annual growth rate, future tests of goodwill impairment may result in an impairment charge. The assumptions used will have a large impact on the conclusions reached in future tests. As of December 31, 2010, the Flat-rolled and Texas Operations reporting units have $922 million and $834 million of goodwill, respectively. The 2010 annual goodwill impairment test showed that the estimated fair values of our Flat-rolled and Texas Operations reporting units exceeded their carrying values by approximately $2.0 billion and $400 million, respectively. A 100 basis point increase in the discount rate, a critical assumption in which even a minor change can have a significant impact on the estimated fair value of the reporting unit, would decrease the fair value of the Flat-rolled and Texas Operations reporting units by approximately $1.5 billion and $260 million, respectively.

 

The Lone Star acquisition increased our tubular production capacity by more than 50 percent and the Stelco acquisition increased our North American steelmaking capability by 25 percent, thereby increasing our exposure to cyclical downturns in historically cyclical industries such as oil and gas, service center, conversion, automotive, construction and appliance.

 

The success of any future acquisitions will depend substantially on the accuracy of our analysis concerning such businesses and our ability to complete such acquisitions on favorable terms, to finance such acquisitions and to integrate the acquired operations successfully with existing operations. If we are unable to integrate new

 

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operations successfully, our financial results and business reputation could suffer. Our acquisitions in 2007 involved purchase prices significantly higher than the prices we paid for our acquisitions in 2003. Such prices will make it more difficult to achieve adequate financial returns. Additional risks associated with acquisitions are the diversion of management’s attention from other business concerns, the potential loss of key employees and customers of the acquired companies, the possible assumption of unknown liabilities, potential disputes with the sellers, and the inherent risks in entering markets or lines of business in which we have limited or no prior experience. International acquisitions may present unique challenges and increase the Company’s exposure to the risks associated with foreign operations and countries. Antitrust and other laws in foreign jurisdictions may prevent us from completing acquisitions.

 

There are risks associated with existing and potential accounting and tax requirements.

 

We do not recognize a tax benefit for pre-tax losses in jurisdictions where we have recorded a full valuation allowance for accounting purposes. As a result, the pre-tax losses associated with USSS and USSC do not provide any tax benefit for accounting purposes. Significant changes in the mix of pre-tax results among the jurisdictions in which we operate could have a material impact on our effective tax rate. Similarly, our use of intercompany loans has and in the future may have significant impacts on our financial statements as a result of foreign currency accounting remeasurement effects. Potential future accounting changes could negatively affect our profitability and cash flow. Even if the impacts are non cash they may materially impact perceptions and judgments about us by rating agencies and investors. Changes in tax law, such as the elimination of the LIFO method of accounting for inventories, could also negatively affect our profitability and cash flow.

 

We may be subject to litigation, the resolution of which could negatively affect our profitability and cash flow in a particular period.

 

Our profitability or cash flow in a particular period could be affected by an adverse ruling in any litigation currently pending in the courts or by litigation that may be filed against us in the future. For information regarding our current significant legal proceedings, see Item 3. Legal Proceedings.

 

Provisions of Delaware Law, our governing documents and our rights plan may make a takeover of U. S. Steel more difficult.

 

Certain provisions of Delaware law, our certificate of incorporation and by-laws and our rights plan could make more difficult or delay our acquisition by means of a tender offer, a proxy contest or otherwise and the removal of incumbent directors. These provisions are intended to discourage certain types of coercive takeover practices and inadequate takeover bids, even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

We may suffer employment losses, which could negatively affect our future performance.

 

Approximately 570 of U. S. Steel’s North American-based non-represented employees retired in 2009 as part of a voluntary early retirement program and a significant number of those remaining are or will be eligible for retirement over the next several years.

 

Over the last few years we had intensified our recruitment, training and retention efforts so that we may continue to optimally staff our operations, but we instituted a freeze on hiring in early 2009 in response to the global economic recession. If we are unable to hire sufficient qualified replacements for those leaving, our future performance may be adversely impacted. With respect to our represented employees, we may be adversely impacted by the loss of employees who retired or obtained other employment during the time they were laid off or subject to a work stoppage such as currently exists at Hamilton Works.

 

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We may experience difficulties implementing our enterprise resource planning (ERP) system.

 

We continue to deploy an ERP system at our various locations to help us operate more efficiently. This is a complex project, which is expected to be implemented in several phases over the next few years. We may not be able to successfully implement the ERP program without experiencing difficulties. In addition, the expected benefits of implementing the ERP system may not be realized or the costs of implementation may outweigh the realized benefits. We modified the implementation schedule in early 2009 to reduce near-term costs. This action will delay the realization of benefits from this project and may add to final project costs.

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

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Item 2. PROPERTIES

 

The following tables list U. S. Steel’s main properties, their locations and their products and services:

 

North American Operations

Property

 

Location

 

Products and Services

Gary Works

  Gary, Indiana   Slabs; Sheets; Tin mill; Strip mill plate; Coke

Midwest Plant

  Portage, Indiana   Sheets; Tin mill

East Chicago Tin

  East Chicago, Indiana   Tin mill

Great Lakes Works

  Ecorse and River Rouge, Michigan   Slabs; Sheets

Mon Valley Works

   

Irvin Plant

  West Mifflin, Pennsylvania   Sheets

Edgar Thomson Plant

  Braddock, Pennsylvania   Slabs

Fairless Plant

  Fairless Hills, Pennsylvania   Galvanized sheets

Clairton Plant

  Clairton, Pennsylvania   Coke

Granite City Works

  Granite City, Illinois   Slabs; Sheets; Coke

Lake Erie Works

  Nanticoke, Ontario, Canada   Slabs; Sheets; Coke

Hamilton Works

  Hamilton, Ontario, Canada   Slabs; Sheets; Coke

Fairfield Works

  Fairfield, Alabama   Slabs; Rounds; Sheets; Seamless Tubular

USS-POSCO Industries(a)

  Pittsburg, California   Sheets; Tin mill

PRO-TEC Coating Company(a)

  Leipsic, Ohio   Galvanized sheets

Double Eagle Steel Coating Company(a)

  Dearborn, Michigan   Galvanized sheets

Double G Coatings Company, L.P.(a)

  Jackson, Mississippi   Galvanized and Galvalume® sheets

Worthington Specialty Processing(a)

  Jackson, Canton and Taylor, Michigan   Steel processing

Feralloy Processing Company(a)

  Portage, Indiana   Steel processing

Chrome Deposit Corporation(a)

  Various   Roll processing

Acero Prime, S.R.L. de C.V.(a)

  San Luis Potosi and Ramos Arizpe, Mexico   Steel processing; Warehousing

Baycoat Limited Partnership(a)

  Hamilton, Ontario, Canada   Steel processing

D.C. Chrome Limited(a)

  Stony Creek, Ontario, Canada   Roll processing

Lorain Tubular Operations

  Lorain, Ohio   Seamless Tubular

Texas Operations

  Lone Star, Texas   Welded Tubular

Bellville Operations

  Bellville, Texas   Welded Tubular

Wheeling Machine Products

  Pine Bluff, Arkansas and Hughes Springs and Houston, Texas   Tubular couplings

Tubular Processing Services

  Houston, Texas   Tubular processing

Tubular Threading and Inspection Services

  Houston, Texas   Tubular threading, inspection and storage services

United Spiral Pipe, LLC(a)

  Pittsburg, California   Spiral Welded Tubular

Minntac iron ore operations

  Mt. Iron, Minnesota   Iron ore pellets

Keetac iron ore operations

  Keewatin, Minnesota   Iron ore pellets

Hibbing Taconite Company(a)

  Hibbing, Minnesota   Iron ore pellets

Tilden Mining Company(a)

  Ishpeming, Michigan   Iron ore pellets

Transtar

  Alabama, Indiana, Michigan, Ohio, Pennsylvania, Texas   Transportation services (railroad and barge operations)
(a) Equity investee

 

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Other Operations

Property

 

Location

 

Products and Services

U. S. Steel Košice

  Košice, Slovakia   Slabs; Sheets; Tin mill; Strip mill plate; Tubular; Coke; Radiators; Refractories

U. S. Steel Serbia

  Smederevo, Šabac and Kučevo, Serbia   Slabs; Sheets; Tin mill; Strip mill plate; Limestone

Apolo Tubulars S.A.(a)

  Lorena, Sao Paulo, Brazil   Welded Tubular
(a) Equity investee

 

U. S. Steel and its predecessors (including Lone Star and Stelco) have owned their properties for many years with no material adverse claims asserted. In the case of Great Lakes Works, Granite City Works, the Midwest Plant and Keetac iron ore operations acquired from National Steel in 2003; the Smederevo, Šabac and Kučevo, Serbia operations acquired by U. S. Steel in 2003; and the Lake Erie Works and Hamilton Works of U. S. Steel Canada acquired in 2007; U. S. Steel or its subsidiaries are the beneficiaries of bankruptcy laws and orders providing that properties are held free and clear of past liabilities. In addition, U. S. Steel or its predecessors obtained title insurance, local counsel opinions or similar protections when the major properties were initially acquired.

 

The slab caster facility at Fairfield, Alabama is subject to a lease. The final lease payment is due in December 2012 and the lease term expires in June 2013, subject to additional extensions. A coke battery at Clairton, Pennsylvania is subject to a lease through 2012, at which time title will pass to U. S. Steel. At the Midwest Plant in Indiana, U. S. Steel has a supply agreement for various utility services with a company which owns a cogeneration facility located on U. S. Steel property. The Midwest Plant agreement expires in 2013. The headquarters office space in Pittsburgh, Pennsylvania used by U. S. Steel is leased through 2018.

 

For property, plant and equipment additions, including capital leases, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash Flows and Liquidity – Cash Flows” and Note 12 to the Financial Statements.

 

Item 3. LEGAL PROCEEDINGS

 

U. S. Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. 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 financial statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.

 

General Litigation

 

In a series of lawsuits filed in federal court in the Northern District of Illinois beginning September 12, 2008, individual direct or indirect buyers of steel products have asserted that eight steel manufacturers, including U. S. Steel, conspired in violation of antitrust laws to restrict the domestic production of raw steel and thereby to fix, raise, maintain or stabilize the price of steel products in the United States. The cases are filed as class actions and claim treble damages for the period 2005 to present, but do not allege any damage amounts. U. S. Steel is vigorously defending these lawsuits and does not believe that it has any liability regarding these matters.

 

On July 17, 2009, the Attorney General of Canada initiated a proceeding under Section 40 of Canada’s Investment Canada Act by filing an application in the Canadian federal court that seeks to impose a financial penalty on U. S. Steel due to the Company’s alleged failure to comply with two of the 31 undertakings made by U. S. Steel to the Minister of Industry in connection with the 2007 acquisition of Stelco. The specific undertakings at issue concern production and employment levels anticipated at U. S. Steel Canada Inc. (USSC) assuming certain business conditions. In response to a previous written demand from the Minister with respect to this matter, the Company provided full disclosure regarding the operations at USSC and the impact that the sudden and severe

 

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world-wide economic downturn has had on the global steel sector and all of the Company’s North American operations, including operations at USSC. In accordance with the specific language of the undertakings at issue, the unprecedented economic downturn, the effects of which were beyond the control of the Company, expressly excuse any non-attainment of the production and employment levels targeted by the 2007 submission. The Company is vigorously defending the matter and believes that the action is without justification or authority.

 

Asbestos Litigation

 

As of December 31, 2010, U. S. Steel was a defendant in approximately 550 active cases involving approximately 3,090 plaintiffs. At December 31, 2009, U. S. Steel was a defendant in approximately 440 active cases involving approximately 3,040 plaintiffs. During 2010, settlements and dismissals resulted in the disposition of approximately 200 claims and U. S. Steel paid approximately $8 million in settlements. New filings added approximately 250 claims.

 

About 2,600, or approximately 84 percent, of these claims are currently pending in jurisdictions which permit filings with massive numbers of plaintiffs. Based upon U. S. Steel’s experience in such cases, it believes that the actual number of plaintiffs who ultimately assert claims against U. S. Steel will likely be a small fraction of the total number of plaintiffs. Most of the claims filed in 2010, 2009 and 2008 involve individual or small groups of claimants.

 

Historically, these claims against U. S. Steel fall into three major groups: (1) claims made by persons who allegedly were exposed to asbestos at U. S. Steel facilities (referred to as “premises claims”); (2) claims made by industrial workers allegedly exposed to products formerly manufactured by U. S. Steel; and (3) claims made under certain federal and general maritime laws by employees of former operations of U. S. Steel. The ultimate outcome of any claim depends upon a myriad of legal and factual issues, including whether the plaintiff can prove actual disease, if any; actual exposure, if any, to U. S. Steel products; the duration of exposure to asbestos, if any, on U. S. Steel’s premises and the plaintiff’s exposure to other sources of asbestos. In general, the only insurance available to U. S. Steel with respect to asbestos claims is excess casualty insurance, which has multi-million dollar self-insured retentions. To date, U. S. Steel has received minimal payments under these policies relating to asbestos claims.

 

These asbestos cases allege a variety of respiratory and other diseases based on alleged exposure to asbestos. U. S. Steel is currently a defendant in cases in which a total of approximately 230 plaintiffs allege that they are suffering from mesothelioma. The potential for damages against defendants may be greater in cases in which the plaintiffs can prove mesothelioma.

 

In many cases in which claims have been asserted against U. S. Steel, the plaintiffs have been unable to establish any causal relationship to U. S. Steel or our products or premises; however, with the decline in mass plaintiff cases the incidence of claimants actually alleging a claim against U. S. Steel is increasing. In addition, in many asbestos cases, the plaintiffs have been unable to demonstrate that they have suffered any identifiable injury or compensable loss at all; that any injuries that they have incurred did in fact result from alleged exposure to asbestos; or that such alleged exposure was in any way related to U. S. Steel or our products or premises.

 

In every asbestos case in which U. S. Steel is named as a party, the complaints are filed against numerous named defendants and generally do not contain allegations regarding specific monetary damages sought. To the extent that any specific amount of damages is sought, the amount applies to claims against all named defendants and in no case is there any allegation of monetary damages against U. S. Steel. Historically, approximately 89 percent of the cases against U. S. Steel did not specify any damage amount or stated that the damages sought exceeded the amount required to establish jurisdiction of the court in which the case was filed. (Jurisdictional amounts generally range from $25,000 to $75,000.) U. S. Steel does not consider the amount of damages alleged, if any, in a complaint to be relevant in assessing our potential exposure to asbestos liabilities.

 

U. S. Steel aggressively pursues grounds for the dismissal of U. S. Steel from pending cases and litigates cases to verdict where we believe litigation is appropriate. U. S. Steel also makes efforts to settle appropriate cases, especially mesothelioma cases, for reasonable, and frequently nominal, amounts.

 

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The following table shows activity with respect to asbestos litigation:

 

Year ended
December 31,
 

Opening
Number of

Claims

   

Claims

Dismissed,

Settled and
Resolved

    New Claims     Closing Number
of Claims
    Amounts Paid to
Resolve Claims
(in millions)
 

2008

    3,000        400        450        3,050      $ 13   

2009

    3,050        200        190        3,040      $ 7   

2010

    3,040        200        250        3,090      $ 8   

 

The amount U. S. Steel has accrued for pending asbestos claims is not material to U. S. Steel’s financial position. U. S. Steel does not accrue for unasserted asbestos claims because it is not possible to determine whether any loss is probable with respect to such claims or even to estimate the amount or range of any possible losses. The vast majority of pending claims against us allege so-called “premises” liability-based exposure on U. S. Steel’s current or former premises. These claims may be made by an indeterminable number of people such as truck drivers, railroad workers, salespersons, contractors and their employees, government inspectors, customers, visitors and even trespassers. In most cases, the claimant also was exposed to asbestos in non-U. S. Steel settings; the relative periods of exposure between U. S. Steel and non-U. S. Steel settings vary with each claimant; and the strength or weakness of the causal link between U. S. Steel exposure and any injury vary widely as do the nature and severity of the injury claimed.

 

It is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition, although the resolution of such matters could significantly impact results of operations for a particular period. Among the factors considered in reaching this conclusion are: (1) the generally declining trend in the number of claims; (2) that it has been many years since U. S. Steel employed maritime workers or manufactured or sold asbestos containing products; and (3) U. S. Steel’s history of trial outcomes, settlements and dismissals.

 

The foregoing statements of belief are forward-looking statements. 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 these forward-looking statements.

 

Environmental Proceedings

 

The following is a summary of the proceedings of U. S. Steel that were pending or contemplated as of December 31, 2010, under federal and state environmental laws. Except as described herein, it is not possible to accurately predict the ultimate outcome of these matters.

 

CERCLA Remediation Sites

 

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. Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, it is impossible to reasonably estimate U. S. Steel’s 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 what was stated in forward-looking statements.

 

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At December 31, 2010, U. S. Steel had been identified as a PRP at a total of 21 CERCLA sites where liability is not resolved. Based on currently available information, which is in many cases preliminary and incomplete, management believes that U. S. Steel’s liability for cleanup and remediation costs will be between $1 million and $5 million for 3 of these sites, will be between $100,000 and $1 million per site for 7 of these sites, and will be under $100,000 per site for 9 of these sites. At 2 other sites, management estimates U. S. Steel’s share in the future cleanup costs to be $33 million, although it is not possible to accurately predict the amount of final allocation of such costs. One site is known as the Municipal & Industrial Disposal Co. site in Elizabeth, Pennsylvania. In October 1991, the Pennsylvania Department of Environmental Resources placed the site on the Pennsylvania State Superfund list and began a Remedial Investigation, which was issued in 1997. U. S. Steel and the Pennsylvania Department of Environmental Protection (PADEP) signed a Consent Order and Agreement on August 30, 2002, under which U. S. Steel is responsible for remediation of this site. In 2003 the Consent Order and Agreement became final. U. S. Steel has completed the remedial design for this site and it is being reviewed by PADEP. The other site is the former Duluth Works, which was listed by the Minnesota Pollution Control Agency (MPCA) under the Minnesota Environmental Response and Liability Act on its Permanent List of Priorities. The U.S. Environmental Protection Agency (EPA) has included the Duluth Works site with the St. Louis River Interlake Duluth Tar site on EPA’s National Priorities List. The Duluth Works cleanup has proceeded since 1989. U. S. Steel has prepared a conceptual habitat enhancement plan (HEP) that includes measures to address contaminated sediments in the St. Louis River Estuary. MPCA (on behalf of EPA) has completed its second five-year review for the site. As a result, additional data collection will be required to address data gaps identified in the five-year review and corrective measures will be required to address the recently discovered areas of contamination on the upland property. Study, investigation and oversight costs along with implementation of corrective measures on the upland property and implementation of the HEP are currently estimated at $26 million.

 

In addition, there are 9 sites related to U. S. Steel where information requests have been received or there are other indications that U. S. Steel may be a PRP under CERCLA, but where sufficient information is not presently available to confirm the existence of liability or to make any judgment as to the amount thereof.

 

Other Remediation Activities

 

There are 42 additional sites where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Based on currently available information, which is in many cases preliminary and incomplete, management believes that liability for cleanup and remediation costs in connection with 12 of these sites will be under $100,000 per site, another 17 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 per site. As described below, costs for remediation, investigation, restoration or compensation are estimated to be in excess of $5 million per site at 3 sites. Potential costs associated with remediation at the remaining 3 sites are not presently determinable.

 

Gary Works

 

On January 26, 1998, pursuant to an action filed by the EPA in the United States District Court for the Northern District of Indiana titled United States of America v. USX, U. S. Steel entered into a consent decree with EPA which resolved alleged violations of the Clean Water Act National Pollutant 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. On March 4, 2010, EPA provided written confirmation that the project objectives of the sediment remediation project have been satisfied and, as such, the consent decree shall terminate upon a joint motion by U. S. Steel, EPA and the U.S. Department of Justice. As of December 31, 2010, project costs have amounted to $60.4 million. The Corrective Action Management Unit (CAMU), which received dredged materials from the Grand Calumet River, is expected to be used, following EPA approval, for containment of approved material from other corrective measures conducted at Gary Works pursuant to an Administrative Order on Consent (1998) for corrective action. Maintenance activities at the CAMU are anticipated to be an additional $567,000 through December 2011. In 1998, U. S. Steel also entered into a consent decree with the public trustees, which resolves liability for natural resource damages on the same section of the Grand Calumet River. U. S. Steel, following the Court’s termination of the Clean Water Act consent decree, will pay the public trustees $1.0 million for ecological monitoring costs. In addition, U. S. Steel is obligated to perform, and has initiated, ecological restoration in this section of the Grand Calumet River. The costs required to complete the

 

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ecological restoration work are estimated to be $615,000. In total, the accrued liability for the above projects based on the estimated remaining costs was approximately $2 million at December 31, 2010.

 

At Gary Works, U. S. Steel has agreed to close three hazardous waste disposal sites: D5, along with an adjacent solid waste disposal unit, Terminal Treatment Plant (TTP) Area; T2; and D2 combined with a portion of the Refuse Area, where a solid waste disposal unit overlaps with the hazardous waste disposal unit. The sites are located on plant property. U. S. Steel has submitted a closure plan to the Indiana Department of Environmental Management (IDEM) for D2 and the known tar areas of the Refuse Area. U. S. Steel has proposed that the remainder of the Refuse Area be addressed as a Solid Waste Management Unit (SWMU) under corrective action. In addition, U. S. Steel has submitted a revised closure plan for T2 and separate closure plans for D5 and the TTP Area. IDEM approved the closure plans for D5, T2 and TTP Area on October 15, 2009, December 1, 2009 and June 23, 2010, respectively. Implementation of the D5 and TTP Area plans began during the third quarter of 2010 and is scheduled to be completed by December 31, 2011. Implementation of the T2 plan is expected to begin in the first quarter of 2011. The related accrued liability for estimated costs to close each of the hazardous waste sites and perform groundwater monitoring prior to closure is $2 million for D5 and TTP, $4 million for T2 and $11 million for D2 including a portion of the Refuse Area, as of December 31, 2010.

 

On October 23, 1998, EPA issued a final Administrative Order on Consent addressing Corrective Action for SWMUs throughout Gary Works. This order requires U. S. Steel to perform a Resource Conservation and Recovery Act (RCRA) Facility Investigation (RFI), a Corrective Measure Study (CMS) and Corrective Measure Implementation at Gary Works. Reports of field investigation findings for Phase I work plans have been submitted to EPA. Through December 31, 2010, U. S. Steel had spent $29.7 million for corrective action studies, Vessel Slip Turning Basin interim measures and other corrective actions. U. S. Steel received approval on a proposal to the EPA for a facility wide perimeter groundwater monitoring program and a sampling and analysis plan (SAP) for several SWMUs in the Solid Waste Management Areas east of the Vessel Slip Turning Basin. USS has also received a partial approval on a second SAP for a portion of the sediments behind the East Breakwall. Implementation of these programs continued during the fourth quarter of 2010. U. S. Steel will develop a proposal for a corrective measure to address impacted sediments in the West Grand Calumet Lagoon. For groundwater remediation, U. S. Steel has begun operation of a full scale groundwater treatment system approved by EPA as a Self-Implementing Stabilization Measure to address benzene impacted groundwater east of the vessel slip, and continues to operate a seasonal groundwater treatment system near the coke plant. The accrued liability for the proposed corrective action study related items, the West Grand Calumet Lagoon and groundwater remediation is approximately $18 million. U. S. Steel has submitted a proposal to EPA seeking approval to implement corrective measures necessary to address soil contamination at Gary Works. U. S. Steel estimates the minimum cost of the corrective measures for soil contamination to be approximately $3 million. Closure costs for the CAMU are estimated to be an additional $6 million. Until the remaining Phase I work and Phase II field investigations are completed, it is impossible to assess what additional expenditures will be necessary for Corrective Action projects at Gary Works. In total, the accrued liability for all of the above projects was approximately $27 million as of December 31, 2010, based on the estimated remaining costs.

 

On November 26, 2007, IDEM issued a Notice of Violation (NOV) alleging three pushing violations and one door violation on the No. 2 Battery that were to have occurred on July 11, 2007. On December 20, 2007, IDEM made a verbal penalty demand of $123,000 to resolve these alleged violations. U. S. Steel provided written responses to the NOVs. Negotiations regarding these NOVs are ongoing.

 

On October 3, 2007, November 26, 2007, March 2, 2008 and March 18, 2008, IDEM issued NOVs alleging opacity limitation violations from the coke plant and Blast Furnaces Nos. 4 and 8. To date, no penalty demand has been made by IDEM regarding these NOVs. U. S. Steel is currently negotiating resolution of these NOVs with IDEM.

 

On July 3, 2008, EPA Region V issued a Notice of Violation/Finding of Violation (NOV/FOV) alleging violations resulting from a multi-media inspection conducted in May 2007 and subsequent information collection requests pursuant to Section 114 of the Clean Air Act. These alleged violations include those currently being prosecuted by IDEM that are identified above. Other alleged violations include the reline of No. 4 Blast Furnace in 1990 without a New Source Review/Prevention of Significant Deterioration permit, and opacity limit excursions from hot iron transfer cars, slag skimming, slag pits, and the blast furnace casting house. The NOV/FOV also alleges violations relating to hydrochloric acid pickling, blast furnace relief valves and blast furnace flares. While a penalty demand is

 

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expected, EPA Region V has not yet made such a demand. Since issuing the NOV/FOV, EPA Region V has issued additional Section 114 information requests to Gary Works. U. S. Steel has responded to the requests and is currently negotiating resolution of the NOV/FOV and other request issues with EPA Region V and IDEM. EPA has indicated that it has referred the matter to the Department of Justice.

 

On February 18, 2009, U. S. Steel received a letter from IDEM alleging that Gary Works was culpable for an ambient air quality exceedance for PM10 at the IITRI Monitoring Site. U. S. Steel responded to the letter on March 13, 2009. U. S. Steel met with IDEM on April 28, 2009 to resolve the issue. If Gary Works is determined to be culpable, U. S. Steel may be required to install and maintain two additional on-site PM10 monitoring stations per the December 2006 Air Agreed Order. In November 2010, U. S. Steel and IDEM amended the December 2006 Air Agreed Order to resolve the alleged ambient air quality PM10 exceedance matter. The resolution requires U. S. Steel to continue monitoring PM10 at the IITRI monitor through December 31, 2011; implement specific best management practices at the Sinter Plant storage piles; and to complete a Supplemental Environmental Project consisting of the installation of a compressed natural gas fueling station and adding at least seven CNG vehicles to its fleet by September 30, 2011, at a capital expenditure of approximately $490,000, which excludes the costs associated with the seven vehicles.

 

On April 13, 2009, Gary Works received an NOV from EPA Region 5 for alleged violations for New Source Review for reline of No. 13/14 during 2004-2005. U. S. Steel continues to meet with IDEM and EPA to negotiate resolution of the NOV. EPA has indicated that it has referred the matter to the Department of Justice.

 

Mon Valley Works

 

On March 17, 2008, U. S. Steel entered a Consent Order and Agreement (COA) with the Allegheny County Health Department (ACHD) to resolve alleged opacity limitation and pushing and traveling violations from older coke oven batteries at its Clairton Plant and to resolve alleged opacity violations from its Edgar Thomson Plant. The COA required U. S. Steel to pay a civil penalty of $301,800 to resolve past alleged violations addressed by the COA. U. S. Steel paid the civil penalty on March 25, 2008. The COA requires U. S. Steel to conduct interim repairs on existing batteries and make improvements at the Ladle Metallurgical Facility and Steelmaking Shop at the Edgar Thomson Plant. The March 2008 COA also requires that Batteries 7, 8 and 9 be shutdown by January 24, 2013 and Batteries 1, 2 and 3 be shutdown by August 11, 2015. On August 17, 2010, U. S. Steel entered into a Memorandum of Understanding (MOU) with ACHD that would require U. S. Steel to install two new Low Emissions Quench Towers to replace existing towers and to bring Batters 1, 2 and 3 into compliance and eliminate the requirement to shut them down. On September 30, 2010, U. S. Steel and ACHD amended the March 17, 2008 COA reflecting this change and Batteries 1, 2, and 3 are no longer required to be shutdown by August 2015, but U. S. Steel must certify compliance for these batteries by December 31, 2013. Batteries 7 through 9 were shutdown in April 2009. We are repairing existing Batteries 19 and 20 and we continue to make improvements on Batteries 1, 2 and 3 while we construct the new C Battery at the Clairton Plant. The costs of improvements at Batteries 1, 2 and 3 cannot be estimated at this time. In addition, as part of the September 2010 Amendment to the March 2008 COA, U. S. Steel is required to install and operate two new low emission quench towers at Clairton by December 31, 2013. U. S. Steel anticipates that the capital expenditures related to the construction of these two new low emission quench towers to be approximately $60 million. U. S. Steel is also completing upgrades at its Edgar Thomson Plant that would reduce emissions.

 

On September 3, 2009, U. S. Steel’s Mon Valley Clairton Plant incurred a catastrophic failure of its Desulfurization Plant. Because of this event, the Clairton, Edgar Thomson, and Irvin plants exceeded their sulfur limit for air emissions when burning coke oven gas. The Desulfurization Plant was inoperable from September 3, 2009 through early January 2010. On March 25, 2010, the ACHD issued an NOV and a Settlement Offer for the Statement of Violation for the Clairton Plant for the last three quarters of 2009, which included alleged violations attributable to the outage of the Desulfurization Plant. The NOV was settled in the second quarter of 2010 without admission of liability with a penalty payment of $61,225.

 

On October 8, 2009, Mon Valley Clairton Plant received an NOV from ACHD alleging that the Clairton Plant was culpable for hydrogen sulfide (H2S) Pennsylvania ambient air quality standard exceedances. The NOV requires U. S. Steel to submit a plan with milestones to reduce and minimize fugitive emissions of coke oven gas from the coke producing operations at Clairton including identification of coke oven gas emission sources and method of

 

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improved emission prevention and control. While U. S. Steel appealed the NOV on October 16, 2009, U. S. Steel submitted an Action Plan to ACHD that was required by the NOV. U. S. Steel and ACHD have performed H2S modeling and are in the process of evaluating all potential sources of H2S in the area. U. S. Steel and ACHD continue to meet and discuss resolution.

 

Midwest Plant

 

A former disposal area located on the east side of the Midwest Plant was designated a SWMU (East Side SWMU) by IDEM before U. S. Steel acquired this plant from National Steel Corporation. After the acquisition, U. S. Steel conducted further investigations of the East Side SWMU. As a result, U. S. Steel has submitted a Closure Plan to IDEM recommending consolidation and “in-place” closure of the East Side SWMU. IDEM approved the Closure Plan in January 2010. Implementation of the Closure Plan began during the third quarter of 2010. The remaining cost to close the East Side SWMU is expected to be approximately $1 million and was recorded as an accrued liability as of December 31, 2010.

 

Fairless Plant

 

In January 1992, U. S. Steel commenced negotiations with EPA regarding the terms of an Administrative Order on consent, pursuant to RCRA, under which U. S. Steel would perform an RFI and a CMS at our Fairless Plant. A Phase I RFI report was submitted during the third quarter of 1997. A Phase II/III RFI will be submitted following EPA approval of the Phase I report. While the RFI/CMS will determine whether there is a need for, and the scope of, any remedial activities at the Fairless Plant, U. S. Steel continues to maintain interim measures at the Fairless Plant and has completed investigation activities on specific parcels. No remedial activities are contemplated as a result of the investigations of these parcels. The cost to U. S. Steel to continue to maintain the interim measures and develop a Phase II/III RFI Work Plan is estimated to be $546,000. It is reasonably possible that additional costs of as much as $25 to $45 million may be incurred at this site in combination with four other projects. See Note 27 to the Financial Statements “Contingencies and Commitments – Environmental Matters – Remediation Projects – Projects with Ongoing Study and Scope Development.”

 

Fairfield Works

 

A consent decree was signed by U. S. Steel, EPA and the U.S. Department of Justice (DOJ) and filed with the United States District Court for the Northern District of Alabama (United States of America v. USX Corporation) on December 11, 1997. In accordance with the consent decree, U. S. Steel paid a civil penalty of $1 million, completed two supplemental environmental projects at a cost of $1.75 million and initiated a RCRA corrective action program at the Fairfield Works facility. The Alabama Department of Environmental Management (ADEM) with the approval of EPA assumed primary responsibility for regulation and oversight of the RCRA corrective action program at Fairfield Works. ADEM is currently reviewing the Phase II RFI work plan. The remaining cost to develop and implement the Phase II RFI work plan is estimated to be $702,000. U. S. Steel completed the investigation and remediation of the Lower Opossum Creek which was performed under a joint agreement with Beazer, Inc. In 2006, U. S. Steel completed the remediation of Upper Opossum Creek at a cost of $2.95 million, with a remaining contingency of $18,000. In January 1999, ADEM included the former Ensley facility site in Fairfield Corrective Action. In 2007, U. S. Steel completed the remediation of approximately two acres of land at the former Ensley coke plant. As of December 31, 2010, costs to complete the remediation of this area have amounted to $1.3 million. An additional $49,000 remains accrued for project contingencies at Ensley with an additional $65,000 accrued for an environmental assessment of contiguous properties. In total, the accrued liability for the projects described above was approximately $1 million as of December 31, 2010, based on estimated remaining costs. It is reasonably possible that additional costs of as much as $25 to $45 million may be incurred at this site in combination with four other projects. See Note 27 to the Financial Statements “Contingencies and Commitments – Environmental Matters – Remediation Projects – Projects with Ongoing Study and Scope Development.”

 

Lorain Tubular Operations

 

In September 2006, U. S. Steel received a letter from the Ohio Environmental Protection Agency (Ohio EPA) inviting U. S. Steel to enter into discussions about RCRA Corrective Action at Lorain Tubular Operations. Those discussions resulted in the identification of ten SWMUs and three Areas of Concern (AOC) requiring further investigation and evaluation. In addition, U. S. Steel notified Ohio EPA in August 2009 of an additional SWMU

 

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based upon its’ field observations and a preliminary assessment. A Phase I RFI on the identified SWMUs and AOCs is complete and under review by Ohio EPA. As of December 31, 2010, U. S. Steel has spent $574,000 on studies at this site. Costs to complete additional studies are estimated to be $416,000. It is reasonably possible that additional costs of as much as $25 to $45 million may be incurred at this site in combination with four other projects. See Note 27 to the Financial Statements “Contingencies and Commitments – Environmental Matters – Remediation Projects – Projects with Ongoing Study and Scope Development.”

 

On November 16, 2010, OEPA issued an NOV to USS Lorain Tubular for allegedly not submitting a complete and timely NOx RACT study, as required by OEPA RACT rules. While OEPA has not made a penalty demand to date, OEPA has alleged that a complete NOx RACT study was required to be submitted by December 22, 2008, but it did not receive U. S. Steel’s until July 24, 2009. To comply with OEPA NOx RACT rules, U. S. Steel will install ultra low NOx burners on the No. 4 seamless rotary furnace at an estimated capital expenditure of $3 million. U. S. Steel will commence construction on the ultra low NOx burners in mid-2011, with completion of the project in early 2012.

 

Great Lakes Works

 

On January 6, 2006, U. S. Steel received a proposed administrative consent order from the Michigan Department of Environmental Quality (MDEQ) that alleged violations of NPDES permits at the Great Lakes Works facility. On February 13, 2007, MDEQ and U. S. Steel agreed to a revised Administrative Consent Order (the Order) that resolves this matter. As required by the Order, U. S. Steel has paid a civil penalty of $300,000 and has reimbursed MDEQ $50,000 in costs. The Order identifies certain compliance actions that address the alleged violations. U. S. Steel has completed work on most of these compliance actions, and has initiated work on the others. One of the compliance actions addresses three river basins along the Detroit River and U. S. Steel has completed the corrective measure necessary to remove historical basin sediments from these areas. As of December 31, 2010, $1.8 million has been spent on the project. In addition, $161,000 remains accrued for possible additional requirements to obtain MDEQ approval. Work to modify the Cold Mill Wastewater Treatment Plant by rehabilitating four clarifiers, two wastewater conveyance pipelines, and the computer control system has been completed.

 

On October 5, 2009, after an inspection of Great Lakes Works and receiving responses to its 114 Request, as part of EPA Region V’s regional enforcement initiative, U. S. Steel received an NOV/FOV from EPA Region V alleging that Great Lakes Works violated casthouse roof monitor and baghouse opacity limits; slag pit opacity limits; Basic Oxygen Process roof monitor opacity limits; and certain permit recordkeeping and parametric monitoring requirements. Great Lakes Works has met with EPA regarding the alleged violations and continues to negotiate resolution of the matter. EPA advised U. S. Steel that it has referred the matter to the DOJ.

 

Granite City Works

 

U. S. Steel received two NOVs, dated February 20, 2004 and March 25, 2004, for air violations at the coke batteries, the blast furnace and the steel shop at our Granite City Works facility. All of the issues have been resolved except for an issue relating to air emissions that occurs when coke is pushed out of the ovens, for which a compliance plan has been submitted to the Illinois Environmental Protection Agency (IEPA). IEPA referred the two NOVs to the Illinois Attorney General’s Office for enforcement. On September 14, 2005, the Illinois Attorney General filed a complaint in the Madison County Circuit Court, titled People of the State of Illinois ex. rel. Lisa Madigan vs. United States Steel Corporation, which included the issues raised in the two NOVs. In December 2006, IEPA added to its complaint by adding a release of coke oven gas in February 2006. In October 2007, the Court entered a Second Supplemental Complaint in which IEPA added alleged violations regarding excessive opacity emissions from the blast furnace, and incorrect sulfur dioxide (SO2) emission factors regarding blast furnace gas emissions. On December 18, 2007, U. S. Steel entered into a Consent Order with the Illinois Attorney General and IEPA that resolved the Complaint, as supplemented. The Order required that U. S. Steel: (1) pay a penalty of $300,000, which U. S. Steel paid on January 10, 2008; (2) demonstrate compliance with Coke Oven Pushing Operations in accordance with the compliance schedule provided in the Order; (3) comply with the basic oxygen furnace (BOF) opacity emissions in accordance with the schedule provided in the Order; and (4) submit to IEPA a revised permit application with the correct SO2 emission factors, which U. S. Steel submitted in January 2008. In December 2009, U. S. Steel and the Illinois Attorney General, by order of the Court, modified the Consent Order to establish a March 31, 2011 deadline for U. S. Steel to demonstrate compliance with existing standards at the BOF.

 

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At Granite City Works, U. S. Steel and Gateway Energy & Coke Company, LLC (Gateway), a subsidiary of SunCoke Energy, Inc., have agreed with two environmental advocacy groups to establish an Environmental Trust Fund (Trust), which requires the permittees (U. S. Steel and Gateway) to collectively deposit $1.0 million by September 30th of each year, beginning September 30, 2008 and ending September 30, 2012. The capital contributions and all net income of the Trust are to be used for the purposes of promoting energy efficiency, greenhouse gas reductions and PM2.5 emission reduction, to be implemented in the community, including the Granite City municipality, local schools, parks and library districts. To date, U. S. Steel and Gateway have paid the first three of five installments towards the fund.

 

On February 2, 2009, U. S. Steel received an NOV from IEPA alleging approximately 16 separate violations. Specifically, IEPA alleged that Granite City Works: inappropriately charged a battery while off the collecting mains because of (1) damaged coke guides on one occasion and (2) derailment of the pushing control system on two occasions; failed to perform some monthly and quarterly inspections required by Iron & Steel Maximum Achievable Control Technology (MACT) standards or Coke MACT standards; failed to initiate repairs within 30 days after recording that the baffles on the quench tower were damaged on the monthly inspection report; failed to adequately wash the baffles on the quench tower per the MACT standard; inappropriately used the emergency pour station at the BOP during routine, non-emergency maintenance; failed to sufficiently apply a wetting agent to the slag from BF-A to minimize fugitive emissions while loading trucks and failed to update and properly implement its Fugitive Dust Program. Resolution of the issues identified in the NOV continues to be negotiated with IEPA. On November 16, 2009, Granite City Works received a notice of intent to pursue legal action regarding the alleged violations from IEPA. U. S. Steel last met with IEPA on December 8, 2009 to discuss resolution.

 

On March 17, 2009, U. S. Steel received an NOV from IEPA alleging the following at Granite City Works: door leaks from B Battery; volatile organic compounds from pressure relief valves from gas blanketing tank; coke by products process unit and information (lacking); failure to report retagging project for benzene in service equipment; and failure to maintain records for benzene in service equipment repairs. IEPA has not made a penalty demand to date. Resolution of the issues identified in the NOV continues to be negotiated with IEPA. On November 16, 2009, Granite City Works received a notice of intent to pursue legal action regarding the alleged violations from IEPA. U. S. Steel last met with IEPA on December 8, 2009 to discuss resolution and the issue has been referred to the Attorney General for resolution.

 

In late January 2009, Granite City Works exceeded its natural gas usage and corresponding emission limits for 2008 at designated combustion units, including boilers and ladle drying. A notification letter was submitted to IEPA by U. S. Steel on January 30, 2009. Per U. S. Steel’s January 30, 2009 correspondence, U. S. Steel provided a Compliance Plan regarding fuel use and fuel balance to IEPA on February 28, 2009. IEPA has not responded to the self-reported violations or made any penalty demand.

 

On October 5, 2009, U. S. Steel received an NOV/FOV from EPA Region V alleging that Granite City Works: failed to apply for and obtain a Prevention of Signficant Deterioration/New Source Review permit for the 1994 B Blast Furnace reline (while the furnace was owned by National Steel Corporation); exceeded BOP roof monitor opacity limits, exceeded blast furnace casthouse roof monitor opacity limits; and failed to complete certain permit recordkeeping and parameteric monitoring requirements. Granite City Works has met with EPA regarding the alleged violations and continues to negotiate resolution of the matter. EPA advised U. S. Steel that it has referred the matter to the Department of Justice.

 

On July 1, 2010, U. S. Steel entered into a Memorandum of Understanding (MOU) with the Illinois EPA that requires the Granite City Works to achieve reductions in emissions of particulate matter. U. S. Steel will evaluate and install appropriate controls to achieve this purpose. To complete the obligations pursant to the MOU, U. S. Steel anticipates incurring a capital expenditure of approximately $30 million to install additional pollution controls at the Basic Oxygen Furnace.

 

On August 19, 2010, U. S. Steel notified the Illinois EPA (IEPA) that it could not certify compliance with air emission requirements for the coke plant with regards to coke doors and the coke scrubber car. U. S. Steel submitted compliance plans indicating that it would make repairs to the coke oven doors, certify compliance by February 28, 2011, evaluate the heating system and scrubber car by November 30, 2010 and update the compliance plan after the results of the evaluation are known. On November 8, 2010, U. S. Steel received a

 

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Violation Notice from the IEPA alleging violations for coke oven door leaks and non-compliance for coke scrubber car. To date, no penalty demand has been made by IEPA regarding this matter. U. S. Steel and IEPA plan to meet to discuss resolution of the Violation Notice during the first quarter of 2011. U. S. Steel has completed its self-imposed obligations pursuant to the schedule it submitted to IEPA and plans to certify compliance by February 28, 2011.

 

To comply with the Illinois State NOx RACT rule, U. S. Steel will install Flue Gas Recirculation and Continuous Emission Monitors on Boilers 11 and 12 at Granite City Works, at a capital expenditure of approximately $3 million. U. S. Steel will also install a NOx continuous emissions monitor for the slab reheat furnaces at a capital expenditure of approximately $1 million.

 

Geneva Works

 

At U. S. Steel’s former Geneva Works, liability for environmental remediation, including the closure of three hazardous waste impoundments and facility-wide corrective action, has been allocated between U. S. Steel and the current property owner pursuant to an asset sales agreement and a permit issued by the Utah Department of Environmental Quality. U. S. Steel has developed and implemented several different work plans and as of December 31, 2010, U. S. Steel has spent $17.1 million to complete remediation on certain areas of the site. Having completed the investigation on a majority of the remaining areas identified in the permit, U. S. Steel has determined that the most effective means to address the remaining impacted material is to manage those materials in a previously approved on-site Corrective Action Management Unit (CAMU). U. S. Steel has recorded a liability of $66 million as of December 31, 2010, for our estimated share of the remaining costs of remediation, including the construction, waste management, closure and post closure of a CAMU.

 

USS-POSCO Industries (UPI)

 

At UPI, a joint venture between subsidaries of U. S. Steel and POSCO Industries, corrective measures have been implemented for the majority of the former SWMUs. Prior to the formation of UPI, U. S. Steel owned and operated the Pittsburg, California facility and retained responsibility for the existing environmental conditions. Seven SWMUs remain at the facility, five of which require further remediation. Two SWMUs may not require further action pending a No Further Action decision by the California Department of Toxic Substances Control (DTSC). Of the five SWMUs requiring remediation, investigatory work has been completed at a coal tar pitch impacted soils area and a remedial workplan has been submitted to DTSC. U. S. Steel has also completed the investigation of the impacted groundwater SWMU at the former wire mill and expects an engineered remedial design plan to be ready for submission to the agency in 2011. Investigation of the three remaining SWMUs within the facility where arsenic impacted soils and groundwater have been delineated are ongoing and discussions with the DTSC regarding possible future corrective measures for these three SWMUs are in progress. While it is likely that corrective measures will be required at these SWMUs, it is not possible at this time to define a scope or estimate costs for what may be required by DTSC. It is reasonably possible that additional costs of as much as $25 to $45 million may be incurred at this site in combination with four other projects. See Note 27 to the Financial Statements “Contingencies and Commitments – Environmental Matters – Remediation Projects – Projects with Ongoing Study and Scope Development.”

 

Other

 

On December 20, 2002, U. S. Steel received a letter from the Kansas Department of Health & Environment (KDHE) requesting U. S. Steel’s cooperation in cleaning up the National Zinc site located in Cherryvale, Kansas, a former zinc smelter operated by Edgar Zinc from 1898 to 1931. In April 2003, U. S. Steel and Salomon Smith Barney Holdings, Inc. (SSB) entered into a consent order to conduct an investigation and develop remediation alternatives. Implementation of the preferred remedy was essentially completed in late 2007. The respondents are finalizing the Removal Action Summary report by addressing some minor site maintenance issues, deed restrictions and operating and maintenance plans for approval by KDHE. U. S. Steel and SSB continue to work with KDHE to address site maintenance issues. At December 31, 2010, an accrual of $174,000 remains available for these project contingencies.

 

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On January 23, 2006, KDHE sent a letter to U. S. Steel requesting that U. S. Steel address a former zinc smelter site in Girard, Kansas. U. S. Steel completed a site investigation and submitted a Corrective Action Study (CAS) necessary to address the impacted soils at this site. KDHE approved the CAS on November 17, 2009. On September 13, 2010, KDHE issued a Corrective Action Decision based upon U. S. Steel’s recommended remedial measure. In addition, a Consent Agreement and Final Order, through which the remediation will be conducted, was signed by U. S. Steel on December 21, 2010, and is now awaiting execution by KDHE. As of December 31, 2010, U. S. Steel has an accrued liability of $1 million to conduct the remedial measure as proposed in the CAS.

 

In January of 2004, U. S. Steel received notice of a claim from the Texas Commission on Environmental Quality (TCEQ) and notice of claims from citizens of a cap failure at the Dayton Landfill. U. S. Steel, Lubrizol and ExxonMobil are the largest PRPs at the site and agreed to equally share costs for investigating the site. U. S. Steel’s allocated share has been adjusted to approximately 16 percent. The Remedial Action Plan for the site was approved by TCEQ in June 2009. On December 10, 2009, pursuant to the Texas Solid Waste Disposal Act, U. S. Steel, Lubrizol and ExxonMobil filed a contribution/cost of recovery action against approximately 50 parties. Settlement negotiations are pending. Implementation of remedial measures is expected to begin in the first quarter of 2011 The accrued liability for U. S. Steel’s share to implement the remedial measure with long term monitoring was approximately $2 million as of December 31, 2010.

 

The Canadian and Ontario governments have identified a sediment deposit, commonly referred to as Randle’s Reef, in Hamilton Harbor near USSC’s Hamilton Works for remediation, for which the regulatory agencies estimate expenditures of approximately C$105 million (approximately $105 million). The national and provincial governments have each allocated C$30 million (approximately $30 million) for this project and they have stated that they will be looking for local sources, including industry, to fund C$30 million (approximately $30 million). USSC has committed C$7 million (approximately $7 million) as its contribution. Funding sources for the balance of the estimated project cost remain to be identified and additional contributions are being sought.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

Not applicable.

 

EXECUTIVE OFFICERS OF THE REGISTRANT

 

The executive officers of U. S. Steel and their ages as of February 1, 2011, are as follows:

 

Name

  Age    

Title

  Executive Officer
Since

George F. Babcoke

    54      Senior Vice President – European Operations & Global Operations Services   March 1, 2008

James D. Garraux

    58      General Counsel & Senior Vice President – Corporate Affairs   February 1, 2007

Gretchen R. Haggerty

    55      Executive Vice President & Chief Financial Officer   December 31, 2001

David H. Lohr

    57      Senior Vice President – Strategic Planning, Business Services & Administration   June 1, 2008

John P. Surma

    56      Chairman of the Board of Directors and Chief Executive Officer   December 31, 2001

Susan M. Suver

    51      Vice President – Human Resources   November 1, 2007

Gregory A. Zovko

    49      Vice President & Controller   April 1, 2009

 

All of the executive officers mentioned above have held responsible management or professional positions with U. S. Steel or our subsidiaries for more than the past five years, with the exception of Ms. Suver. Prior to joining U. S. Steel, Ms. Suver served as corporate vice president, Global Human Resources for Arrow Electronics, Inc.

 

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(Arrow), a $12 billion global provider of industrial and commercial electronic components and computer products. She joined Arrow in 2001 as vice president, Global Organizational Development. Prior to that, she served as vice president, Organization Effectiveness and Communication for Phelps Dodge Corporation.

 

Messrs. Garraux and Surma and Ms. Haggerty will hold office until the annual election of executive officers by the Board of Directors following the next Annual Meeting of Stockholders, or until his or her earlier resignation, retirement or removal. Messrs. Babcoke, Lohr, and Zovko and Ms. Suver will hold office until their resignation, retirement or removal.

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Common Stock Information

 

The principal market on which U. S. Steel common stock is traded is the New York Stock Exchange. U. S. Steel common stock is also traded on the Chicago Stock Exchange. Information concerning the high and low sales price for the common stock as reported in the consolidated transaction reporting system and the frequency and amount of dividends paid during the last two years is set forth in “Selected Quarterly Financial Data (Unaudited)” on page F-57.

 

As of January 31, 2011, there were 19,134 registered holders of U. S. Steel common stock.

 

The Board of Directors intends to declare and pay dividends on U. S. Steel common stock based on the financial condition and results of operations of U. S. Steel, although it has no obligation under Delaware law or the U. S. Steel Certificate of Incorporation to do so. Dividends are declared by U. S. Steel on a quarterly basis. For all four quarters in 2010, the dividend declared per share of U. S. Steel common stock was $.05. For the first quarter of 2009, the dividend declared per share of U. S. Steel common stock was $.30 and for the second, third and fourth quarters of 2009, the dividend declared was $.05. Dividends on U. S. Steel common stock are limited to legally available funds.

 

Shareholder Return Performance

 

The graph below compares the yearly change in cumulative total shareholder return of our common stock with the cumulative total return of the Standard & Poor’s (S&P’s) 500 Stock Index and the S&P Steel Index. The S&P Steel Index is comprised of U. S. Steel, Nucor Corporation, Allegheny Technologies Incorporated and Worthington Industries, Inc.

 

LOGO

 

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Recent Sales of Unregistered Securities

 

U. S. Steel had no sales of unregistered securities during the period covered by this report.

 

Item 6. SELECTED FINANCIAL DATA

 

Dollars in millions (except per share data)                                                               
    2010           2009           2008           2007(a)           2006  

Statement of Operations Data:

                 

Net sales(b)

  $ 17,374        $ 11,048        $ 23,754        $ 16,873        $ 15,715   

(Loss) income from operations(c)

    (111       (1,684       3,069          1,213          1,785   

Net (loss) income attributable to United States Steel Corporation(c)

    (482       (1,401       2,112          879          1,374   

Per Common Share Data:

                 

Net (loss) income attributable to United States Steel Corporation(d) – basic

    (3.36       (10.42       18.04          7.44          11.88   

– diluted

    (3.36       (10.42       17.96          7.40          11.18   

Dividends per share declared and paid

    0.20          0.45          1.10          0.80          0.60   

Balance Sheet Data – December 31:

                 

Total assets

  $ 15,350        $ 15,422        $ 16,087        $ 15,632        $ 10,586   

Capitalization:

                 

Debt(e)

  $ 3,733        $ 3,364        $ 3,145        $ 3,257        $ 1,025   

United States Steel Corporation stockholders’ equity

    3,851          4,676          4,895          5,531          4,365   
                                               

Total capitalization

  $ 7,584              $ 8,040              $ 8,040              $ 8,788              $ 5,390   
(a) Includes Lone Star facilities from the date of acquisition on June 14, 2007 and USSC from the date of acquisition on October 31, 2007.
(b) For discussion of changes between the years 2010, 2009 and 2008, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The increase in net sales from 2007 to 2008 primarily resulted from higher average realized prices and increased shipments, primarily due to the inclusion of USSC and Lone Star for all of 2008. The increase in net sales from 2006 to 2007 primarily resulted from higher average realized prices for flat-rolled products in the U.S. and Europe (including favorable foreign currency effects) and higher shipments of flat-rolled and tubular products in the U.S.
(c) For discussion of changes between the years 2010, 2009 and 2008, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The increase from 2007 to 2008 mainly resulted from higher prices and shipments for both Flat-rolled and Tubular, due in part to the inclusion of the results for facilities acquired from Lone Star and Stelco for the entire year for 2008. This increase was partially offset by higher costs for raw materials and energy as well as higher accruals for profit-based payments. The decrease from 2006 to 2007 mainly resulted from higher raw materials and outage-related costs in the U.S. and Europe, increased maintenance costs in the U.S., lower average realized prices for tubular products in the U.S. and unfavorable inventory transition effects related to inventory acquired from Lone Star and Stelco. These were partially offset by higher prices for flat-rolled products in the U.S. and Europe.
(d) See Note 8 to the Financial Statements for the basis of calculating earnings per share.
(e) For discussion of changes between the years 2010 and 2009 see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The increase from 2008 to 2009 was mainly due to our public offering in May 2009 of $863 million principal amount of Senior Convertible Notes due 2014, partially offset by the repayment of $655 million outstanding under our three-year term loan due October 2010 and five-year term loan due May 2012. The increase from 2006 to 2007 primarily resulted from new debt issued to fund the acquisitions of USSC and Lone Star.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the Financial Statements and related notes that appear elsewhere in this document.

 

Certain sections of Management’s Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of U. S. Steel. These statements typically contain words such as “anticipates,” “believes,” “estimates,” “expects” or similar words indicating that future outcomes are not known with certainty and are 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 discussion of risk factors affecting the businesses of U. S. Steel see “Item 1A – Risk Factors” and “Supplementary Data – Disclosures About Forward-Looking Statements.”

 

Overview

 

U. S. Steel, the eleventh largest steel producer in the world and the largest integrated steel producer headquartered in North America, has a broad and diverse mix of products and customers. U. S. Steel uses iron ore, coal, coke, steel scrap, zinc, tin and other metallic additions to produce a wide range of flat-rolled and tubular steel products, concentrating on value-added steel products for customers with demanding technical applications in the automotive, appliance, container, industrial machinery, construction and oil, gas and petrochemical industries. In addition to our facilities in the United States, U. S. Steel has significant operations in Canada through U. S. Steel Canada (USSC) and in Europe through U. S. Steel Košice (USSK), located in Slovakia, and U. S. Steel Serbia (USSS), located in Serbia. U. S. Steel’s financial results are primarily determined by the combined effects of shipment volume, selling prices, production costs and product mix. While the operating results of our various businesses are affected by a number of business-specific factors (see “Item 1. Business – Steel Industry Background and Competition”), the primary drivers for U. S. Steel are general economic conditions in North America, Europe and, to a lesser extent, other steel-consuming regions; the levels of worldwide steel production and consumption; pension and other benefits costs; and raw material (iron ore, coal, coke, steel scrap, zinc, tin and other metallic additions) and energy (natural gas and electricity) costs.

 

Following several years of strong performance, the steel industry and U. S. Steel were quickly and severely affected in the latter part of 2008 by the global recession. In response to these economic conditions, our strategy has been to enhance or maintain our liquidity, maintain a solid balance sheet, focus capital investments on key projects of long-term strategic importance and position ourselves for success in the longer term. In late 2008 and early 2009, we idled all or portions of numerous steel making, finishing, raw materials and tubular operations in the U.S., Canada and Europe and operated our remaining facilities at reduced levels to match our customers’ lower demand requirements. In response to the gradual economic recovery that appears to be underway in North America and Europe, in the first half of 2010 we restarted all of our operations that were temporarily idled. Our Hamilton Works iron and steelmaking facilities are idled as a result of a labor stoppage that occurred on November 7, 2010 and is continuing. We continue to monitor the impact of the economic situation on our customers and to adjust our operations to efficiently meet their requirements. Our raw steel capability utilization rate in 2010 was 76% for Flat-rolled operations and 82% for USSE operations.

 

U. S. Steel’s long-term success depends on our ability to earn a competitive return on capital employed by implementing our strategy to be a world leader in safety and environmental performance; to continue to increase our value-added product mix; to further expand our global business platform; to maintain a strong capital structure, balance sheet and liquidity position; to continue to improve our reliability and cost competitiveness; and to attract and retain a diverse and talented workforce. For a fuller description of our strategy, see “Item 1. Business Description – Business Strategy.” Some of the other key issues which are impacting the global steel industry, including U. S. Steel, are the level of unfunded pension and other benefits obligations; the degree of industry consolidation; the impact of production and consumption of steel in China and other developing countries; and the levels of steel imports into the markets we serve.

 

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Critical Accounting Estimates

 

Management’s discussion and analysis of U. S. Steel’s financial condition and results of operations is based upon U. S. Steel’s financial statements, which have been prepared in accordance with accounting standards generally accepted in the United States. The preparation of these financial statements requires 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 amount of revenues and expenses during the year. Management regularly evaluates these estimates, including those related to employee benefits liabilities and assets held in trust relating to such liabilities; the carrying value of property, plant and equipment; goodwill and intangible assets; valuation allowances for receivables, inventories and deferred income tax assets; liabilities for deferred income taxes, potential tax deficiencies, environmental obligations and potential litigation claims and settlements. Management’s estimates are based on historical experience, current business and market conditions, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from current expectations under different assumptions or conditions.

 

Management believes that the following are the more significant judgments and estimates used in the preparation of the financial statements.

 

Inventories – Inventories are carried at the lower of cost or market.

 

LIFO (last-in, first-out) is the predominant method of inventory costing for inventories in the United States and FIFO (first-in, first-out) is the predominant method used in Canada and Europe. The LIFO method of inventory costing was used for 48 percent and 49 percent of consolidated inventories at December 31, 2010 and December 31, 2009, respectively. Changes in U.S. GAAP rules or tax law, such as the elimination of the LIFO method of accounting for inventories, could negatively affect our profitability and cash flow.

 

Equity Method Investments – Investments in entities over which U. S. Steel has significant influence are accounted for using the equity method of accounting and are carried at U. S. Steel’s share of net assets plus loans, advances and our share of earnings less distributions. Differences in the basis of the investment and the underlying net asset value of the investee, if any, are amortized into earnings over the remaining useful life of the associated assets.

 

Income from investees includes U. S. Steel’s share of income from equity method investments, which is generally recorded a month in arrears, except for significant and unusual items which are recorded in the period of occurrence. Gains or losses from changes in ownership of unconsolidated investees are recognized in the period of change. Intercompany profits and losses on transactions with equity investees have been eliminated in consolidation subject to lower of cost or market inventory adjustments.

 

U. S. Steel evaluates impairment of its equity method investments whenever circumstances indicate that a decline in value below carrying value is other than temporary. Under these circumstances, we would adjust the investment down to its estimated fair value, which then becomes its new carrying value.

 

Pensions and Other Benefits – The recording of net periodic benefit costs for defined benefit pensions and other benefits is based on, among other things, assumptions of the expected annual return on plan assets, discount rate, escalation or other changes in retiree health care costs and plan participation levels. Changes in the assumptions or differences between actual and expected changes in the present value of liabilities or assets of U. S. Steel’s plans could cause net periodic benefit costs to increase or decrease materially from year to year as discussed below.

 

U. S. Steel’s investment strategy for its U.S. pension and other benefits plan assets provides for a diversified mix of large and mid-cap equities, high quality bonds and selected smaller investments in private equities, investment trusts, timber and mineral interests. For its U.S. pension plans, U. S. Steel has a target allocation for plan assets of 60 percent equities with the balance primarily invested in corporate bonds and government-backed bonds and Treasury bills. For the Other Benefit plans, the target allocation for plan assets is 65 percent equities. U. S. Steel

 

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also believes that returns on equities over the long term will be higher than returns from fixed-income securities as actual historical returns from U. S. Steel’s trusts have shown. Returns on bonds tend to offset some of the shorter-term volatility of stocks. Both equity and fixed-income investments are made across a broad range of industries and companies to provide protection against the impact of volatility in any single industry as well as company specific developments. U. S. Steel is currently using an 8.00 percent assumed rate of return for purposes of the expected return on assets for the development of net periodic cost for the main defined benefit pension plan and Other Benefits. This rate was chosen by taking into account the intended asset mix and the historical premiums that fixed-income and equity investments have yielded above government bonds. Actual returns since the inception of the plans have exceeded this 8.00 percent rate and while 2008 annual returns were below this level, 2009 and 2010 have returned to this level and it is U. S. Steel’s expectation that future periods will approximate this rate. For Canadian defined benefit pension plans, U. S. Steel’s investment strategy is similar to its strategy for U.S. plans, whereby the Company seeks a diversified mix of large and mid-cap equities, high quality corporate and government bonds and selected smaller investments with a target allocation for plan assets of 65 percent equities. A 7.50 percent rate of return is being used for the development of net periodic costs in 2011 which is lower than the U.S. pension plan assumption as subcategories within the asset mix are from a more limited investment universe and, as a result, have a lower expected return.

 

At December 31, 2010, U. S. Steel decreased the discount rate used to measure both domestic pension and other benefits obligations to 5.0 percent from 5.5 percent. The discount rate reflects the current rate at which we estimate the pension and other benefits liabilities could be effectively settled at the measurement date. In setting the domestic rates, we utilize several AAA and AA corporate bond indices as an indication of interest rate movements and levels, and we also look to an internally calculated rate determined by matching our expected benefit payments to payments from a stream of AA or higher rated zero coupon corporate bonds theoretically available in the marketplace. For Canadian benefit plans, a discount rate was selected through a similar review process using Canadian bond rates and indices and at December 31, 2010, U. S. Steel decreased the discount rate to 5.0 percent from 6.0 percent for its Canadian-based pension and other benefits.

 

U. S. Steel reviews its own actual historical rate experience and expectations of future insurance trends to determine the escalation of per capita health care costs under U. S. Steel’s insurance plans. About two thirds of our costs for the domestic USW participants’ retiree health benefits in the Company’s main domestic insurance plan are limited to a per capita dollar maximum calculation based on 2006 base year actual costs incurred under the main U. S. Steel insurance plan for USW participants (the “cost cap”) that was negotiated in 2003. The effective date of the cost cap was deferred under the 2008 CBA until 2013. After 2013, the company’s costs for a majority of USW retirees and their beneficiaries are expected to remain fixed with the application of the cost cap and as a result, the cost impact of health care escalation on the Company is projected to be limited for this group (See Footnote 19 to the Financial Statements). For measurement of its domestic retiree medical plans where health care cost escalation is applicable, U. S. Steel has assumed an initial escalation rate of 8.0 percent for 2011. This rate is assumed to decrease gradually to an ultimate rate of 5.0 percent in 2016 and remain at that level thereafter. For measurement of its Canadian retiree medical plans, U. S. Steel has assumed an initial escalation rate of 6.3 percent for 2011. This rate is assumed to decrease gradually to an ultimate rate of 5.0 percent in 2014 and remain at that level thereafter.

 

Net periodic pension cost, including multiemployer plans, is expected to total approximately $430 million in 2011 compared to $276 million in 2010. The increase in expected expense in 2011 is primarily related to lower expected asset returns and higher amortization of actuarial losses caused by a lower market-related value of assets from the recognition of remaining equity losses from 2008. Total other benefits costs in 2011 are expected to be approximately $160 million, compared to $152 million in 2010.

 

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A sensitivity analysis of the projected incremental effect of a hypothetical  1/2 percentage point change in the significant assumptions used in the pension and other benefits calculations is provided in the following table:

 

    Hypothetical Rate
Increase (Decrease)
 
(In millions of dollars)       1/2%             (1/2%)      

Expected return on plan assets

   

Incremental increase (decrease) in:

   

Net periodic pension cost for 2011

  $ (48   $ 48   

Discount rate

   

Incremental increase (decrease) in:

   

Net periodic pension & other benefits costs for 2011

  $ (34   $ 35   

Pension & other benefits liabilities at December 31, 2010

  $ (668   $ 725   

Health care cost escalation trend rates

   

Incremental increase (decrease) in:

   

Service and interest cost components for 2011

  $ 16      $ (14

 

Changes in the assumptions for expected annual return on plan assets and the discount rate do not impact the funding calculations used to derive minimum funding requirements for the pension plans. For further cash flow discussion see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition, Cash Flows and Liquidity – Liquidity.”

 

Goodwill and identifiable intangible assets – Goodwill represents the excess of the cost over the fair value of acquired identifiable tangible and intangible assets and liabilities assumed from businesses acquired. Goodwill is tested for impairment at the reporting unit level annually in the third quarter and whenever events or circumstances indicate that the carrying value may not be recoverable. The evaluation of impairment involves comparing the estimated fair value of the associated reporting unit to its carrying value, including goodwill.

 

We have two reporting units that have a significant amount of goodwill. Our Flat-rolled reporting unit was allocated goodwill from the Stelco, Inc. (Stelco) and Lone Star Technologies, Inc. (Lone Star) acquisitions in 2007. These amounts reflect the benefits we expect the Flat-rolled reporting unit to realize from expanding our flexibility in meeting our customers’ needs and running our Flat-rolled facilities at higher operating rates to source our semi-finished product needs. Our Texas Operations reporting unit, which is part of our Tubular operating segment, was allocated goodwill from the Lone Star acquisition, reflecting the benefits we expect the reporting unit to realize from the expansion of our tubular operations.

 

U. S. Steel completed its annual goodwill impairment test during the third quarter of 2010 and determined that there was no goodwill impairment for either reporting unit. Fair value was determined in accordance with the guidance in Accounting Standards Codification (ASC) Topic 820 on fair value, which requires consideration of the income, market and cost approaches as applicable.

 

For the 2010 annual goodwill impairment test, U. S. Steel used fair values estimated under the income approach and the market approach. U. S. Steel did not utilize the cost approach as relevant data was not available.

 

The income approach is based upon projected future cash flows discounted to present value using factors that consider the timing and risk associated with the future cash flows. Fair value for the Flat-rolled and Texas Operations reporting units was estimated using probability weighted scenarios of future cash flow projections based on management’s long range estimates of market conditions over a multiple year horizon. A three percent perpetual growth rate was used to arrive at an estimated future terminal value. A discount rate of 10.5 percent was used for both reporting units, which was based upon the cost of capital of other comparable steel companies, which we view as the most likely market participants, as of the date of our goodwill impairment test.

 

The market approach is based upon an analysis of valuation metrics for companies comparable to our reporting units. Fair value for the Flat-rolled and Texas Operations reporting units was estimated using an appropriate valuation multiple based on this analysis, estimated normalized earnings and an estimated control premium.

 

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In order to validate the reasonableness of the estimated fair values of our reporting units, a reconciliation of the aggregate fair values of all reporting units to market capitalization, using a reasonable control premium, was performed as of the valuation date. We further validated the reasonableness of the estimated fair values of our reporting units using other valuation metrics that included data from U. S. Steel’s historical transactions as well as published industry analyst reports.

 

The estimates of fair value of a reporting unit under the income approach are determined based on a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions, including assumptions about the timing and amount of future cash flows, growth rates and discount rates. If business conditions deteriorate or other factors have an adverse effect on our estimates of discounted future cash flows or assumed growth rates, or if we experience a sustained decline in our market capitalization, future tests of goodwill impairment may result in an impairment charge.

 

As of December 31, 2010, the Flat-rolled and Texas Operations reporting units have $922 million and $834 million of goodwill, respectively. After weighting the income and market approaches, the 2010 annual goodwill impairment test showed that the estimated fair values of our Flat-rolled and Texas Operations reporting units exceeded their carrying values by approximately $2 billion and $400 million, respectively. A 100 basis point increase in the discount rate, a critical assumption in which even a minor change can have a significant impact on the estimated fair value of the reporting unit, would decrease the fair value of the Flat-rolled and Texas Operations reporting units by approximately $1.5 billion and $260 million, respectively, but would still not result in a goodwill impairment charge.

 

U. S. Steel has determined that certain acquired intangible assets have indefinite useful lives. These assets are reviewed for impairment annually and whenever events or circumstances indicate that the carrying value may not be recoverable.

 

Identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives and are reviewed for impairment whenever events or circumstances indicate that the carrying value may not be recoverable.

 

Long-lived assets – U. S. Steel evaluates long-lived assets, including property, plant and equipment and finite-lived intangible assets for impairment whenever changes in circumstances indicate that the carrying amounts of those productive assets exceed their projected undiscounted cash flows. We evaluate the impairment of long-lived assets at the asset group level.

 

Taxes U. S. Steel records a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. A full valuation allowance is recorded for both our Canadian and Serbian deferred tax assets primarily due to cumulative losses in these jurisdictions in recent years. Accordingly, losses in Canada and Serbia do not generate a tax benefit for accounting purposes. In the event that U. S. Steel determines that it would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset valuation allowance would increase income in the period such determination was made. Likewise, should U. S. Steel determine that it would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the valuation allowance for deferred tax assets would be charged to income in the period such determination was made. U. S. Steel expects to generate future taxable income to realize the benefits of our net deferred tax assets.

 

U. S. Steel makes no provision for deferred U.S. income taxes on undistributed foreign earnings because as of December 31, 2010, it remained management’s intention to continue to indefinitely reinvest such earnings in foreign operations. See Note 10 to the Financial Statements. Undistributed foreign earnings at December 31, 2010 amounted to approximately $2,937 million. If such earnings were not indefinitely reinvested, a U.S. deferred tax liability of approximately $880 million would have been required.

 

U. S. Steel records liabilities for potential tax deficiencies. These liabilities are based on management’s judgment of the risk of loss for items that have been or may be challenged by taxing authorities. In the event that U. S. Steel were to determine that tax-related items would not be considered deficiencies or that items previously not considered to be potential deficiencies could be considered potential tax deficiencies (as a result of an audit, court case, tax ruling or other authoritative tax position), an adjustment to the liability would be recorded through income in the period such determination was made.

 

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Environmental RemediationU. S. Steel provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Remediation liabilities are accrued based on estimates of known environmental exposures and are discounted in certain instances. U. S. Steel regularly monitors the progress of environmental remediation. Should studies indicate that the cost of remediation is to be more than previously estimated, an additional accrual would be recorded in the period in which such determination was made. As of December 31, 2010, the total accrual for environmental remediation was $198 million, excluding liabilities related to asset retirement obligations. Due to uncertainties inherent in remediation projects, it is possible that total remediation costs for active matters may exceed the accrued liability by as much as 15 to 30 percent.

 

Segments

 

U. S. Steel has three reportable operating segments: Flat-rolled Products (Flat-rolled), U. S. Steel Europe (USSE) and Tubular Products (Tubular). The results of several operating segments that do not constitute reportable segments are combined and disclosed in the Other Businesses category.

 

Effective with the fourth quarter of 2008, the operating results of our iron ore operations, which were previously included in Other Businesses, are included in the Flat-rolled segment. The iron ore operations are managed as part of our Flat-rolled segment, which consumes almost all of our iron ore production. Prior periods have been restated to reflect this change.

 

The Flat-rolled segment includes the operating results of U. S. Steel’s North American integrated steel mills and equity investees involved in the production of slabs, rounds, strip mill plates, sheets and tin mill products, as well as all iron ore and coke production facilities in the United States and Canada. These operations primarily serve North American customers in the service center, conversion, transportation (including automotive), construction, container, and appliance and electrical markets. The steel rounds and a portion of the hot-rolled sheets produced by Flat-rolled are supplied to the Tubular segment.

 

Flat-rolled has annual raw steel production capability of 24.3 million tons. Raw steel production was 18.4 million tons in 2010, 11.7 million tons in 2009 and 19.2 million tons in 2008. Raw steel production averaged 76 percent of capability in 2010, 48 percent of capability in 2009 and 79 percent of capability in 2008.

 

The USSE segment includes the operating results of USSK, U. S. Steel’s integrated steel mill and coke and other production facilities in Slovakia; USSS, U. S. Steel’s integrated steel mill and other facilities in Serbia; and an equity investee located in Europe. USSE primarily serves customers in the European construction, service center, conversion, container, transportation (including automotive), appliance and electrical, and oil, gas and petrochemical markets. USSE produces and sells slabs, sheet, strip mill plate, tin mill products and spiral welded pipe, as well as heating radiators and refractory ceramic materials.

 

USSE has annual raw steel production capability of 7.4 million tons. USSE’s raw steel production was 6.1 million tons in 2010, 5.1 million tons in 2009 and 6.4 million tons in 2008. USSE’s raw steel production averaged 82 percent of capability in 2010, 69 percent of capability in 2009 and 87 percent of capability in 2008.

 

The Tubular segment includes the operating results of U. S. Steel’s tubular production facilities, primarily in the United States, and equity investees in the United States and Brazil. These operations produce and sell seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe and mechanical tubing and primarily serve customers in the oil, gas and petrochemical markets. Tubular’s annual production capability is 2.8 million tons.

 

All other U. S. Steel businesses not included in reportable segments are reflected in Other Businesses. These businesses include transportation services (railroad and barge operations) and real estate operations.

 

For further information, see Note 3 to the Financial Statements.

 

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Net Sales

 

LOGO

 

  (a) includes Lone Star facilities from the date of acquisition on June 14, 2007 and USSC from the date of acquisition on October 31, 2007.

 

Net Sales by Segment

 

(Dollars in millions, excluding intersegment sales)   2010            2009            2008  

Flat-rolled

  $ 10,848        $ 6,814        $ 13,789   

USSE

    3,989          2,944          5,487   

Tubular

    2,403          1,216          4,251   
                           

Total sales from reportable segments

    17,240          10,974          23,527   

Other Businesses

    134          74          227   
                           

Net sales

  $ 17,374              $ 11,048              $ 23,754   

 

Management’s analysis of the percentage change in net sales for U. S. Steel’s reportable business segments is set forth in the following tables:

 

Year Ended December 31, 2010 versus Year Ended December 31, 2009

 

     Steel Products(a)                          
  Volume            Price            Mix            FX(b)            Coke &
Other
                  Net Change  

Flat-rolled

    44       12       1       1       1           59

USSE

    22       22       -3       -7       1           35

Tubular

    128             -36             4                             2                     98
  (a) Excludes intersegment sales
  (b) Foreign currency translation effects

 

The increase in sales for the Flat-rolled segment primarily reflected increased shipments (up 5.4 million net tons) and higher average realized prices (up $24 per net ton). The increase in sales for the European segment was primarily due to increased shipments (up 1.0 million net tons) and higher average realized euro-based prices (up 74 per net ton) partially offset by unfavorable changes in foreign currency translation impacts and a lower value-added product mix. The increase in sales for the Tubular segment resulted primarily from increased shipments (up 894 thousand net tons) partially offset by lower average realized prices (down $261 per net ton).

 

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Year Ended December 31, 2009 versus Year Ended December 31, 2008

 

     Steel Products(a)                          
  Volume            Price            Mix            FX(b)           

Coke &

Other

                  Net
Change
 

Flat-rolled

    -40       -8       0       -1       -2           -51

USSE

    -20       -20       -1       -3       -2           -46

Tubular

    -63             -5             1             0             -4                     -71
  (a) Excludes intersegment sales
  (b) Foreign currency translation effects

 

The decrease in sales for the Flat-rolled segment primarily reflected decreased shipments (down 7.0 million net tons) and lower average realized prices (down $129 per net ton). The decrease in sales for the European segment was primarily due to decreased shipments (down 1.2 million net tons) and lower average realized euro-based transaction prices (down $295 per net ton including foreign currency translation effects). The decrease in sales for the Tubular segment resulted primarily from decreased shipments (down 1.3 million net tons) and lower average realized prices (down $286 per net ton).

 

Operating Expenses

 

Union profit-sharing payments

 

    Year Ended December 31  
(Dollars in millions)       2010                    2009                    2008      

Allocated to segment results

  $ 28              $              $ 237   

 

Profit-based payment amounts per the agreements with the USW are calculated and paid on a quarterly basis as a percentage of consolidated income from operations (as defined in the agreements) based on 7.5 percent of profit between $10 and $50 per ton and 10 percent of profit above $50 per ton. Profit-based amounts used to reduce retiree medical premiums are derived from the same initial profit calculation as the profit sharing payments (see Note 19 to the Financial Statements).

 

The amounts above represent amounts paid as profit sharing to active USW-represented employees (excluding employees of USSC) and are included in cost of sales on the statement of operations. Results for the year ended December 31, 2010 and 2008 include costs related to profit-based payments, which are included in cost of sales on the statement of operations. Results for the year ended December 31, 2009 did not include any costs for profit-based payments to employees represented by the USW because the base threshold of operating income agreed to in the 2008 CBAs was not met.

 

Pension and other benefits costs

 

Defined benefit and multiemployer pension plan costs totaled $276 million during 2010, $271 million during 2009 and $78 million in 2008. Excluding $80 million in charges related to the 2009 voluntary early retirement programs (VERPs) and curtailment losses in connection with the sale of a majority of the operating assets of Elgin, Joliet and Eastern Railway Company (EJ&E), net periodic pension expense in 2010 was $85 million higher than in 2009 primarily due to a decline in the market-related value of pension plan assets and higher amortization of unrecognized losses, both of which related to pension plan asset losses experienced in 2008. In addition to the $80 million in charges discussed above, the increase in expense from 2008 to 2009 mainly reflected the decreased funded status of the main U. S. Steel pension plan and the effects of the benefit enhancements encompassed by the 2008 CBAs. (See Note 19 to the Financial Statements.)

 

Costs related to defined contribution plans totaled $22 million during 2010, $25 million during 2009 and $35 million during 2008. Costs in 2009 included $13 million for VERP-related benefits under these plans.

 

Other benefits costs, which are included in income from operations, totaled $152 million in 2010, $191 million in 2009 and $149 million in 2008. The decrease in expense from 2009 to 2010 was primarily due to favorable 2009 claims experience on our retiree medical plans which impacts 2010 expense and the absence of $13 million of

 

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termination charges related to the VERPs. Excluding these termination charges, the increase in 2009 expense compared to 2008 expense was primarily due to impacts of the benefit enhancements encompassed by the 2008 CBAs partially offset by lower costs at USSC as a result of favorable claims experience.

 

For additional information on pensions and other benefits, see Note 19 to the Financial Statements.

 

Nonretirement postemployment benefits

 

U. S. Steel incurred costs of and paid approximately $85 million during the year ended December 31, 2009 related to employee costs for supplemental unemployment benefits, salary continuance and continuation of health care benefits and life insurance coverage for employees associated with the temporary idling of certain facilities and reduced production at others. U. S. Steel recorded immaterial charges during the year ended December 31, 2010 related to these benefits

 

Selling, general and administrative expenses

 

Selling, general and administrative expenses were $610 million in 2010, $618 million in 2009 and $625 million in 2008. Pension and other benefits costs included in selling, general and administrative expenses totaled $190 million in 2010, $164 million in 2009 and $47 million in 2008.

 

Depreciation, depletion and amortization

 

Depreciation, depletion and amortization expenses were $658 million in 2010, $661 million in 2009 and $605 million in 2008. The increase in 2009 was primarily related to the fact that effective January 1, 2009 we eliminated the use of the modified straight-line method, which was previously used for certain steel-producing assets in the United States.

 

The modification factors previously applied to straight-line calculations ranged from a minimum of 85 percent at a production level below 81 percent of capability, to a maximum of 105 percent for a 100 percent production level. No modification was made at the 95 percent production level. Applying modification factors decreased depreciation expense, when compared to a straight-line calculation, by $58 million for the year ended December 31, 2008.

 

(Loss) Income from Operations(a)

 

    Year Ended December 31,  
(Dollars in Millions)   2010            2009            2008  

Flat-rolled

  $ (312     $ (1,438     $ 1,390   

USSE

    (33       (208       491   

Tubular

    349          57          1,207   
                           

Total income (loss) from reportable segments

    4          (1,589       3,088   

Other Businesses

    52          (2       77   
                           

Reportable segments and Other Businesses income (loss) from operations

    56          (1,591       3,165   

Retiree benefit expenses

    (173       (134       (22

Other items not allocated to segments:

         

Federal excise tax refund

             34            

Litigation reserve

             45          (45

Net gain on the sale of assets

    6          97            

Environmental remediation charge

             (49       (23

Workforce reduction charges

             (86         

Deferred gain recognition

                      150   

Labor agreement signing payments

                      (105

Asset impairment charge

                      (28

Flat-rolled inventory transition effects

                      (23
                           

Total (loss) income from operations

  $ (111           $ (1,684           $ 3,069   
  (a) See Note 3 to the Financial Statements for reconciliations and other disclosures required by Accounting Standards Codification Topic 280.

 

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Segment results for Flat-rolled

(Includes USSC from the date of acquisition on October 31, 2007)

 

LOGO

 

The Flat-rolled segment generated a loss of $312 million for the year ended December 31, 2010, compared to a loss of $1,438 million for the year ended December 31, 2009. The significant improvement resulted mainly from net favorable changes in commercial effects (approximately $780 million), the impact of operating efficiencies due to increased capability utilization from 48% in 2009 to 76% in 2010 (approximately $420 million), reduced energy costs (approximately $230 million), favorable changes from increased steel substrate sales to our Tubular segment (approximately $100 million) and the absence of layoff benefit and natural gas purchase contract mark-to-market charges recorded in 2009 as a result of plant idlings (approximately $90 million). These improvements were partially offset by higher raw material costs (approximately $390 million) and increased costs for facility repair and maintenance due to more extensive structural inspection and repair activities in 2010 (approximately $105 million).

 

The decrease in Flat-rolled’s segment income in 2009 compared to 2008 resulted mainly from unfavorable changes in commercial effects (approximately $2,450 million), lower income from reduced steel substrate sales to our Tubular segment (approximately $400 million), operating inefficiencies related to idled facilities (approximately $360 million), facility restart costs (approximately $70 million) and lower income from equity investments (approximately $190 million). These were partially offset by lower raw material and natural gas costs (approximately $370 million) and the absence of accruals for profit-based payments (approximately $300 million).

 

Capability utilization increased significantly from 2009 to 2010 as our raw steel production increased to meet increasing customer demand. Capability utilization was adversely affected in late 2008 and 2009 as we reduced production levels to correspond with significantly lower customer order rates by temporarily idling certain facilities and cutting back production at others.

 

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Segment results for USSE

 

LOGO

 

The USSE segment generated a loss of $33 million for the year ended December 31, 2010 compared to a loss of $208 million for the year ended December 31, 2009. The improvement was primarily due to net favorable commercial effects (approximately $800 million) and reduced energy costs (approximately $25 million). These improvements were partially offset by higher raw material costs (approximately $570 million), increased spending (approximately $30 million), lower income from sales of emissions allowances (approximately $30 million) and unfavorable changes in foreign currency translation effects (approximately $20 million).

 

The USSE segment generated a loss of $208 million for the year ended December 31, 2009, compared to income of $491 million for the year ended December 31, 2008. The decrease was primarily due to unfavorable changes in commercial effects (approximately $1,300 million) and reduced operating efficiencies (approximately $135 million) partially offset by lower raw material costs (approximately $620 million), reduced facility repair and maintenance costs (approximately $60 million) and the absence of accruals for profit based payments (approximately $50 million).

 

Capability utilization increased significantly from 2009 to 2010 as our raw steel production increased to meet increasing customer demand. Capability utilization was adversely affected in late 2008 and 2009 as we reduced production levels to correspond with significantly lower customer order rates by temporarily idling certain facilities and cutting back production at others. Capability utilization in 2008 was adversely affected by the reline of the No. 1 blast furnace in Slovakia and by reduced operations late in the year to match declining customer demand.

 

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Segment results for Tubular

(Includes Lone Star facilities from the date of acquisition on June 14, 2007)

 

LOGO

 

The Tubular segment generated income of $349 million for the year ended December 31, 2010 compared to income of $57 million for the year ended December 31, 2009. The significant increase was primarily due to net favorable changes in commercial effects (approximately $240 million), decreased spending and increased operating efficiencies (approximately $90 million), the absence of layoff benefit charges recorded in 2009 (approximately $20 million) and reduced energy costs (approximately $20 million). These improvements were partially offset by increased costs for steel substrate (approximately $80 million).

 

The decrease in Tubular’s segment income in 2009 compared to 2008 was primarily due to unfavorable commercial effects (approximately $1,080 million), operating inefficiencies related to idled facilities and facilities operating at reduced production levels (approximately $35 million and $60 million, respectively) and write-downs of inventory (approximately $35 million). These were partially offset by lower costs of substrate steel purchases from the Flat-rolled segment (approximately $40 million) and the absence of accruals for profit based payments (approximately $55 million).

 

Results for Other Businesses

 

Other Businesses generated income of $52 million for 2010 compared to a loss of $2 million for 2009. The improvement is primarily due to a sale of land for $18 million by our real estate operations in 2010 and increased results at our transportation business in line with the general economic recovery.

 

Other Businesses generated a loss of $2 million for the year ended December 31, 2009, compared to income of $77 million for the year ended December 31, 2008. The decrease resulted from the impacts of the global recession and the absence of operating results of Elgin, Joliet and Eastern Railway Company (EJ&E), which was sold in the first quarter of 2009.

 

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Items not allocated to segments:

 

We recorded a $6 million pretax net gain on the sale of assets in 2010 related to the sale of transportation assets in Alabama, the sale of the bar mill and bloom and billet mill assets located at Hamilton Works and the sale of the majority of the operating assets of Fintube Technologies. We recorded a $97 million pretax net gain on sale of assets in 2009 as a result of the sale of a majority of the operating assets of EJ&E. The net gain included a pension curtailment loss of approximately $10 million.

 

Retiree benefit expenses increased from 2009 to 2010 due to a decline in the market-related value of pension plan assets and higher amortization of unrecognized losses, both of which related to pension plan asset losses experienced in 2008. Retiree benefit expenses increased significantly from 2008 to 2009 mainly due to the decreased funded status of the main U. S. Steel pension plan and the effects of the benefit enhancements encompassed by the 2008 CBAs.

 

During 2009, U. S. Steel received a federal excise tax refund of $34 million associated with the recovery of black lung excise taxes that were paid on coal export sales from 1990 to 1992.

 

A litigation reserve of $45 million involving a rate escalation provision in a U. S. Steel power supply contract was established in 2008 as a result of a court ruling and was subsequently reversed in 2009 as that decision was overturned.

 

We recorded a $49 million environmental remediation charge in 2009 in connection with the definition of an expanded scope of remediation at our former Geneva Works. We recorded a $23 million environmental remediation charge in 2008 as the scope of work became defined for an environmental project at a former operating location.

 

Workforce reduction charges of $86 million in 2009 reflected employee severance and net benefit charges related to a VERP offered in the first quarter of 2009 to certain non-represented employees in the United States.

 

We recognized a noncash deferred gain of $150 million in 2008 in connection with the termination of the Clairton 1314B Partnership, L.P. See Note 5 to the Financial Statements.

 

The 2008 CBAs provided for labor agreement signing payments of up to $6,000 per employee which resulted in a charge of $105 million in 2008.

 

An asset impairment charge of $28 million in 2008 resulted from our decision to exit the drawn-over-mandrel (DOM) tubular products business. The charge was taken principally to write down to fair value equipment associated with the DOM business.

 

Inventory transition effects of $23 million in 2008 reflected the charges for conforming certain inventories acquired from Lone Star to our unified business model, and the impact of selling inventory acquired from Lone Star and Stelco, which had been recorded at fair value.

 

Net Interest and Other Financial Costs

 

     Year Ended December 31,  
(Dollars in millions)       2010                    2009                    2008      

Interest and other financial costs

  $ 223        $ 179        $ 179   

Interest income

    (7       (10       (14

Foreign currency losses (gains)

    58          (8       (103

Net interest and other financial costs

  $ 274              $ 161              $ 62   

 

The unfavorable change in net interest and other financial costs from 2009 to 2010 was partially due to foreign currency losses in 2010 compared to foreign currency gains 2009 which primarily resulted from the accounting remeasurement effects of the Intercompany Loan partially offset by euro-U.S. dollar derivatives activity.

 

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Additionally, interest expense increased in 2010 due to the issuance of $600 million of Senior Notes in March 2010 and the issuance of $863 million 4.00% Senior Convertible Notes in May of 2009 partially offset by reduced interest expense on the USSK revolving credit facility due to repayments in 2010.

 

The unfavorable change in net interest and other financial costs from 2008 to 2009 was primarily due to lower foreign currency gains.

 

For additional information on U. S. Steel’s foreign currency exchange activity see Note 15 to the Financial Statements and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Exchange Rate Risk.”

 

Income Taxes

 

The income tax provision in 2010 was $97 million, compared to an income tax benefit of $439 million in 2009 and an income tax provision of $853 million in 2008. The 2010 effective tax rate differs from the statutory rate because losses in Canada and Serbia, which are jurisdictions where we have recorded full valuation allowances, do not generate a tax benefit for accounting purposes and because we had net foreign currency losses that are not recognized in any tax jurisdiction. These foreign currency losses relate to the accounting remeasurement effects on the outstanding balance of a U.S. dollar-denominated intercompany loan from a U.S. subsidiary to a European subsidiary. (See Item 7A. Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Exchange Rate Risk for further details.) Included in the 2010 tax provision is a net tax benefit of $39 million resulting from the conclusion of certain tax return examinations and the remeasurement of existing tax reserves, offset by a tax charge of $27 million as a result of the U.S. health care legislation enacted in the first quarter (see Note 19 to the Financial Statements). The tax benefit in 2009 is primarily related to the net loss for the period. The 2009 tax benefit was partially offset by $35 million of tax expense related to the net gain on the sale of EJ&E.

 

The net domestic deferred tax asset was $563 million at December 31, 2010 compared to $731 million at December 31, 2009. The decrease in the net deferred tax asset from 2009 to 2010 was primarily due to changes in the value of LIFO inventories for tax and financial accounting purposes (see Note 10 to the Financial Statements). A substantial amount of U. S. Steel’s domestic deferred tax assets relates to employee benefits that will become deductible for tax purposes over an extended period of time as cash contributions are made to employee benefit plans and retiree benefits are paid in the future. As a result of our cumulative historical earnings and available tax planning strategies, we continue to believe it is more likely than not that the deferred tax assets will be realized.

 

At December 31, 2010, the foreign deferred tax assets recorded were $77 million, net of established valuation allowances of $870 million. Net foreign deferred tax assets will fluctuate as the value of the U.S. dollar changes with respect to the euro, the Canadian dollar and the Serbian dinar. A full valuation allowance is recorded for both the Canadian and Serbian deferred tax assets primarily due to cumulative losses in these jurisdictions in recent years. If evidence changes and it becomes more likely than not that the Company will realize the deferred tax assets, the valuation allowance of $819 million for Canadian deferred tax assets and $39 million for Serbian deferred tax assets as of December 31, 2010, would be partially or fully reversed. Any reversals of these amounts would result in a decrease to tax expense.

 

For further information on income taxes see Note 10 to the Financial Statements.

 

Net income

 

Net loss in 2010 was $482 million compared to $1,401 million in 2009 and income of $2,112 million in 2008. The changes primarily reflected the factors discussed above.

 

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Financial Condition, Cash Flows and Liquidity

 

Financial Condition

 

Receivables at December 31, 2010 increased by $456 million from December 31, 2009 as shipment volumes and average realized prices increased in the fourth quarter of 2010 compared to the fourth quarter of 2009.

 

Inventories increased by $673 million from December 31, 2009 as a result of increased operating levels and higher raw materials costs during 2010.

 

Income tax receivable decreased by $39 million from December 31, 2009 primarily due to the receipt of the $214 million federal income tax refund reflected as a receivable on the balance sheet at December 31, 2009 related to the carryback of our 2009 losses to prior years, partially offset by the $175 million income tax receivable recorded at December 31, 2010 reflecting the additional federal income tax refund that we expect to receive as a result of the carryback of our 2010 losses as well as an expected refund of income taxes paid in 2010.

 

Total deferred income tax benefits decreased by $194 million from December 31, 2009 primarily due to changes in the value of LIFO inventories for tax and financial book purposes. See Note 10 to the Financial Statements.

 

Accounts payable increased by $347 million from December 31, 2009 primarily due to increased production levels in the fourth quarter of 2010 compared to the fourth quarter of 2009.

 

Payroll and benefits payable increased by $84 million from December 31, 2009. This primarily reflects the impact in 2009 of our agreement with the USW that permitted the use of a $75 million contribution made to an employee benefit trust in 2008. See Note 19 to the Financial Statements.

 

Short-term debt and current maturities of long-term debt increased by $197 million from December 31, 2009 primarily due to $196 million of environmental revenue bonds for which we are obligated to provide for the discharge of under the terms of the separation from Marathon Oil Corporation (See Note 16 to the Financial Statements).

 

Long-term debt increased from December 31, 2009 mainly due to the issuance of $600 million of 7.375% Senior Notes due April 1, 2020 and the issuance of $70 million of Recovery Zone Facility Bonds with a maturity date of 2040 partially offset by the repayment of the outstanding borrowings under USSK’s 200 million revolving unsecured credit facility and the reclassification to current for environmental revenue bonds. See “Liquidity.”

 

Employee benefits increased by $222 million and the accumulated other comprehensive loss increased by $340 million from December 31, 2009 to December 31, 2010 as the effect of a decrease in the discount rate was only partially offset by higher returns on plan assets. See Note 19 to the Financial Statements.

 

Cash Flows

 

Net cash used in operating activities was $379 million in 2010 compared to $61 million in 2009 and net cash provided by operating activities of $1,658 million in 2008. The unfavorable change for 2010 was primarily related to changes in working capital for the respective periods as we significantly reduced working capital in 2009 in line with business conditions at the time. In 2010, working capital increased in line with business conditions and was partially offset by improved operating results. The unfavorable change for 2009 was primarily related to a net loss of approximately $696 million after adjustments for noncash items in 2009 compared to income of approximately $2.6 billion after adjustments for noncash items in 2008. Additionally, the favorable working capital change in 2009 of approximately $1.5 billion mainly reflected lower inventory and receivables levels, partially offset by a decrease in accounts payable and other accrued liabilities. Net cash used in operating activities for 2010 and 2009 was increased and net cash provided by operating activities in 2008 was reduced by employee benefits payments as shown in the following table.

 

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Employee Benefits Payments

 

      Year Ended December 31,    
(Dollars in millions)   2010            2009            2008  

Voluntary contributions to main defined benefit pension plan

  $ 140        $ 140        $ 140   

Required contributions to other defined benefit pension plans

    81          79          73   

Other employee benefits payments not funded by trusts

    237          285          236   

Contributions to trusts for retiree health care and life insurance(a)

    –            12          228   

Payments to a multiemployer pension plan

    56          58          33   

Payments to pension plans not funded by trusts(b)

    20          84          29   
                           

Reductions in cash flows from operating activities

  $   534              $ 658              $   739   
  (a) Includes $143 million in 2008 for a company contribution to U. S. Steel’s trust for retiree health care and life insurance fulfilling the Company’s obligation under an agreement with the USW regarding benefits for certain former National Steel employees.
  (b) Includes one time payments of $13 million and $79 million in 2010 and 2009, respectively, related to early retirement programs.

 

U. S. Steel’s Board of Directors has authorized additional voluntary contributions of up to $300 million to U. S. Steel’s trusts for pensions and healthcare over the 2011 and 2012 time period.

 

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Capital expenditures for 2010 of $676 million consisted largely of various environmental, infrastructure and strategic projects. This compares to capital expenditures of $472 million for 2009 and $735 million for 2008.

 

LOGO   Flat-rolled capital expenditures of $499 million in 2010 included spending for implementation of an enterprise resource planning (ERP) system, the construction of carbon alloy facilities at Gary Works, blast furnace infrastructure projects, an environmentally advanced battery at the Clairton Plant, large mobile equipment purchases for iron ore operations and various other infrastructure, environmental and strategic projects. USSE expenditures of $120 million included spending for environmental projects and for blast furnace coal injection projects. Tubular capital expenditures of $45 million consisted primarily of spending for a quench and temper line at our Lorain Tubular operations in Ohio.
LOGO   Flat-rolled capital expenditures of $338 million in 2009 included spending development of an enterprise resource planning (ERP) system, non-discretionary environmental projects, maintenance on the No. 14 blast furnace at Gary Works and cokemaking projects at Granite City Works and the Clairton Plant, including the construction of a cogeneration facility at Granite City Works. USSE expenditures of $113 million included spending at USSK for the maintenance of the No.3 blast furnace, a coke oven gas desulphurization project and spending for development of the ERP system.
LOGO   Flat-rolled capital expenditures of $465 million in 2008 included spending for modernization of our cokemaking facilities, including expenditures for construction of a cogeneration facility at Granite City Works, development of an ERP system and replacement of open pit mining equipment at our iron ore operations. USSE expenditures of $210 million included spending at USSK for the reline of the No.1 blast furnace, for replacement of electrical power transformers and to upgrade a continuous caster, and spending for development of the ERP system.

 

Capital expenditures – variable interest entities for 2009 reflects spending for the construction of a non-recovery coke plant by Gateway Energy & Coke Company, LLC (Gateway), which will supply Granite City Works. This spending was consolidated in our financial results but was funded by Gateway and, therefore, was completely offset by distributions from noncontrolling interests in financing activities. The plant began operations in the fourth quarter of 2009. As of January 1, 2010, Gateway was deconsolidated from our financial statements on a

 

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prospective basis as a result of the adoption of updates to Accounting Standards Codification (ASC) Topic 810 related to improvements to financial reporting by enterprises involved with variable interest entities.

 

U. S. Steel’s contract commitments to acquire property, plant and equipment at December 31, 2010, totaled $667 million.

 

Capital expenditures for 2011 are expected to total approximately $990 million and remain focused largely on environmental and other strategic infrastructure projects. We have accelerated several projects in the United States and Europe to improve our coke self-sufficiency. Engineering and construction of a technologically and environmentally advanced battery at the Mon Valley Works’ Clairton Plant in Clairton, Pennsylvania is underway with completion expected in 2013. We are constructing a two module carbon alloy facility at our Gary Works in Indiana which utilizes an environmentally compliant, energy efficient and flexible production technology with a projected capacity of 500,000 tons per year with completion expected in 2012. We have received the necessary air permits for up to 1 million tons of such capacity. We are also constructing blast furnace coal injection facilities in Europe, which we expect to come on line in 2011 at which time all five blast furnaces in Europe will have access to pulverized coal, a lower cost source of carbon than coke. In order to more efficiently serve our tubular product customers’ increased focus on North American shale resources, construction on a new quench and temper line is underway at our Lorain Tubular Operations in Ohio and is expected to be completed in 2011. In an effort to increase our participation in the automotive market as vehicle emission and safety requirements become more stringent, PRO-TEC Coating Company, our joint venture in Ohio with Kobe Steel, Ltd., has a new automotive continuous annealing line under construction that is expected to be completed in 2013. We are also continuing our efforts to implement an enterprise resource planning (ERP) system to replace outdated systems and to help us operate more efficiently. The completion of the ERP project is expected to provide further opportunities to streamline, standardize and centralize business processes in order to maximize cost effectiveness, efficiency and control across our global operations.

 

The preceding statement concerning expected 2011 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, business conditions, availability of capital, ability to secure long-term funding, whether or not assets are purchased or financed by operating leases, receipt of necessary permits and unforeseen hazards such as contractor performance, material shortages, 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.

 

Acquisition of noncontrolling interests of Z-Line Company reflected the $24 million paid at closing.

 

Acquisition of noncontrolling interests of Clairton 1314B Partnership, L.P. reflected the $104 million paid at closing.

 

Acquisition of pickle lines reflected the $36 million paid at closing.

 

Disposal of assets in 2010 primarily reflects cash proceeds of approximately $60 million from the sale of U. S. Steel’s 44.6 percent interest in the Wabush Mines Joint Venture, approximately $35 million from the sale of the bar mill and bloom and billet mill assets location at Hamilton Works, approximately $35 million from the sale of transportation assets in Alabama, and approximately $22 million from the sale of a majority of the operating assets of Fintube. Disposal of assets in 2009 primarily reflects pre-tax cash proceeds of approximately $300 million from the sale of a majority of the operating assets of EJ&E and $36 million from the sale of emissions allowances by USSK.

 

Restricted cash in 2010 primarily reflects the issuance of $70 million of Recovery Zone Facility Bonds the proceeds of which were placed in escrow and restricted for the quench and temper line capital project at our Tubular operations in Lorain, Ohio. The proceeds become unrestricted as capital expenditures for this project are made. At December 31, 2010, $52 million of this restricted cash remained. Restricted cash in 2009 primarily reflected collateral required for financial assurance purposes.

 

Borrowings against revolving credit facilities in 2008 primarily reflected amounts drawn against a USSK 200 million three-year revolving credit facility, as well as borrowings against USSK’s 40 million credit facility.

 

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Repayments of revolving credit facilities in 2010 reflects USSK’s repayment of the outstanding borrowings under its 200 million unsecured revolving credit facility and repayment of current year borrowings under revolving credit facilities.

 

Issuance of long-term debt, net of financing costs in 2010 primarily reflects the issuance of $600 million of 7.375% Senior Notes due in 2020. U. S. Steel received net proceeds of $582 million after related discounts and other fees. Also in 2010, we issued $89 million of Environmental Revenue Bonds (ERBs) maturing in 2026 and $70 million of Recovery Zone Facility Bonds maturing in 2040. Issuance of long-term debt, net of financing costs in 2009 resulted primarily from our public offering in May of $863 million principal amount of Senior Convertible Notes due 2014. Also in 2009, we issued $129 million of ERBs, maturing from 2017 to 2030. See “Liquidity.”

 

Repayment of long-term debt in 2010 primarily reflects the refunding of $89 million of ERBs. Repayment of long-term debt in 2009 primarily reflected repayment of $655 million outstanding under our three-year term loan due October 2010 and five-year term loan due May 2012. Also in 2009, we completed the refunding of $129 million of Environmental Revenue Bonds. Repayment of long-term debt in 2008 primarily reflected payments on our term loans, including the early retirement of $300 million of our three-year term loan. See “Liquidity.”

 

Common stock issued in 2009 resulted from our public offering of 27 million common shares, which resulted in net proceeds of $661 million. See “Liquidity.”

 

Common stock repurchased in 2008 totaled 2.0 million shares.

 

Dividends paid

 

(In Dollars)          Dividends Paid per Share         
    U. S. Steel Common Stock  
    4th Qtr.     3rd Qtr.     2nd Qtr.     1st Qtr.  

2010

  $     0.05      $     0.05      $     0.05      $     0.05   

2009

  $ 0.05      $ 0.05      $ 0.05      $ 0.30   

2008

  $ 0.30      $ 0.30      $ 0.25      $ 0.25   

 

Liquidity

 

The following table summarizes U. S. Steel’s liquidity as of December 31, 2010:

 

(Dollars in millions)       

Cash and cash equivalents

  $ 578   

Amount available under $750 Million Credit Facility(a)

    638   

Amount available under Receivables Purchase Agreement

    525   

Amounts available under USSK credit facilities

    367   

Amounts available under USSS credit facilities

    39   
       

Total estimated liquidity

  $       2,147   
  (a) As of December 31, 2010, there were no amounts drawn on the Amended Credit Agreement and inventory levels supported the full $750 million capacity of the facility. Since availability under the Amended Credit Agreement was greater than $112.5 million, compliance with the fixed charge coverage ratio was not applicable. However, based on the most recent four quarters, as of December 31, 2010, we would not meet the fixed charge coverage ratio. Therefore, we reduced the availability in the above table to $637.5 million.  

 

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LOGO

 

(a) Excludes $20 million at both December 31, 2007 and 2006 of cash primarily related to the Clairton 1314B Partnership because it was not available for U. S. Steel’s use. On October 31, 2008, we acquired the equity interests in Clairton 1314B that we did not wholly own. Excludes $1 million of cash at December 31, 2008 related to our variable interest entities.

 

Over the last three years there have been substantial changes in our working capital. Cash was generated as business activity slowed during the recession and cash was consumed as working capital was rebuilt in 2010 as raw steel capability utilization rates increased from 2009 for both Flat-rolled and USSE operations. See the Consolidated Statements of Cash Flows within Item 8. Financial Statements and Supplementary Data for further details.

 

On March 16, 2010, U. S. Steel issued $600 million of 7.375% Senior Notes due 2020 (2020 Senior Notes). U. S. Steel received net proceeds of $582 million after fees of $13 million related to the underwriting discount and third party expenses. The 2020 Senior Notes contain covenants restricting our ability to create liens and engage in sale-leasebacks and requiring the purchase of the 2020 Senior Notes upon a change of control under specified circumstances, as well as other customary provisions. As of December 31, 2010, the principal amount outstanding under the 2020 Senior Notes was $600 million.

 

On June 12, 2009, U. S. Steel entered into an amendment and restatement of its $750 million Credit Agreement dated May 11, 2007 (Amended Credit Agreement) with a group of lenders and JPMorgan Chase Bank, N.A. as Administrative Agent and Collateral Agent (Agent). U. S. Steel simultaneously entered into a security agreement with the Agent (Security Agreement) providing for a security interest in the majority of its domestic inventory, certain accounts receivable and related collateral.

 

The Amended Credit Agreement established a borrowing base formula, which limits the amounts U. S. Steel can borrow to a certain percent of the value of certain domestic inventory less specified reserves. The Amended Credit Agreement contains a financial covenant requiring U. S. Steel to maintain a fixed charge coverage ratio (defined as consolidated EBITDA less certain capital expenditures and cash income tax expense to certain fixed charges) of at least 1.10 to 1.00 for the most recent four consecutive quarters when availability under the Amended Credit Agreement is less than the greater of 15 percent of the total aggregate commitments and $112.5 million. The Amended Credit Agreement included revised pricing and other customary terms and conditions, and will expire on May 11, 2012.

 

As of December 31, 2010, U. S. Steel has a Receivables Purchase Agreement (RPA) that provides liquidity and letters of credit depending upon the number of eligible domestic receivables generated by U. S. Steel. Domestic trade accounts receivables are sold, on a daily basis, without recourse, to U. S. Steel Receivables, LLC (USSR), a consolidated wholly owned special purpose entity. If U. S. Steel decides to access this facility, USSR then sells an undivided interest in these receivables to certain conduits. The conduits issue commercial paper to finance the purchase of their interest in the receivables and if any of them are unable to fund such purchases, two banks are

 

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committed to do so. U. S. Steel has agreed to continue servicing the sold receivables at market rates. Because U. S. Steel receives adequate compensation for these services, no servicing asset or liability has been recorded. On July 21, 2010, U. S. Steel and USSR entered into an amendment of the program documentation that increased the maximum amount of receivables eligible for sale to $525 million and extended the term until July 19, 2013.

 

The RPA may be terminated on the occurrence and failure to cure certain events, including, among others, failure by U. S. Steel to make payments under our material debt obligations and any failure to maintain certain ratios related to the collectability of the receivables. As of December 31, 2010, there were no receivable transfers under this facility and eligible accounts receivable supported $525 million of availability under the RPA.

 

On May 4, 2009, U. S. Steel completed a public offering of $863 million principal amount of Senior Convertible Notes due 2014 and 27,140,000 shares of its Common Stock. U. S. Steel received net proceeds of approximately $1.5 billion and used $655 million to repay all amounts outstanding under its three-year term loan due October 2010 and five-year term loan due May 2012. At December 31, 2010, the aggregate principal amount outstanding under the Senior Convertible Notes was $863 million.

 

On August 6, 2010, USSK entered into a 200 million (approximately $267 million at December 31, 2010) unsecured revolving credit facility which expires in August 2013. This facility replaced its three-year 200 million credit facility dated July 2, 2008.

 

On October 8, 2009, USSK amended its 40 million (approximately $53 million and $58 million at December 31, 2010 and 2009) unsecured revolving credit facility. The facility expires in October 2012.

 

On December 17, 2010, USSK entered into a 20 million (approximately $27 million at December 31, 2010) unsecured revolving credit facility to replace its 10 million facility that was scheduled to expire in January 2011. The facility expires in December 2015.

 

On December 16, 2009, USSK amended its 20 million (approximately $27 million and $29 million at December 31, 2010 and 2009) unsecured revolving credit facility. The facility expires in December 2012.

 

Each of these facilities bear interest at the applicable inter-bank offer rate plus a margin and they contain customary terms and conditions. USSK is the sole obligor on each of these facilities and is obligated to pay a commitment fee on the undrawn portion of the facilities.

 

At December 31, 2010, USSK had no borrowings against its 280 million total unsecured revolving credit facilities (which approximated $374 million) and the availability was approximately $367 million due to approximately $7 million of customs and other guarantees outstanding. At December 31, 2009, USSK had 200 million of borrowings against its 270 million of unsecured credit facilities (which approximated $389 million) and the availability was approximately $93 million due to approximately $8 million of customs and other guarantees and amounts outstanding.

 

Effective September 1, 2010, USSS replaced its former bank facilities with new facilities. The new facilities, which are the sole obligation of USSS and expire on August 31, 2011, consist of facilities for general corporate purposes of up to 20 million and an overdraft facility of up to 1 billion Serbian dinars (which together totaled approximately $39 million at December 31, 2010), subject in each case to a borrowing base calculation based upon the value of USSS’s finished and semi-finished inventory. At December 31, 2010, USSS had no borrowings under these facilities and its inventory values were sufficient to utilize the entire amount of the facilities.

 

We use surety bonds, trusts and letters of credit to provide financial assurance for certain transactions and business activities. The use of some forms of financial assurance and collateral have a negative impact on liquidity. U. S. Steel has committed $142 million of liquidity sources for financial assurance purposes as of December 31, 2010. Increases in these commitments which use collateral are reflected in restricted cash on the Consolidated Statement of Cash Flows.

 

At December 31, 2010, in the event of a change in control of U. S. Steel, debt obligations totaling $3,062 million, which includes the Senior Notes and the Senior Convertible Notes, may be declared immediately due and payable. In such event, U. S. Steel may also be required to either repurchase the leased Fairfield slab caster for $37 million or provide a letter of credit to secure the remaining obligation.

 

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In the event of a bankruptcy of Marathon Oil Corporation, obligations of $249 million relating to Environmental Revenue Bonds and two capital leases may be declared immediately due and payable.

 

The guarantees of the indebtedness of unconsolidated entities of U. S. Steel totaled $16 million at December 31, 2010. In the event that any default related to the guaranteed indebtedness occurs, U. S. Steel has access to its interest in the assets of the investee to reduce its potential losses under the guarantee.

 

U. S. Steel made voluntary contributions of $140 million to the main domestic defined benefit pension plan in both 2010 and 2009. U. S. Steel may also make voluntary contributions of similar amounts in 2011 or later periods in order to mitigate against potentially larger mandatory contributions in later years. The contributions actually required will be greatly influenced by the level of voluntary contributions, the performance of pension fund assets in the financial markets, the election of the use of existing credit balances in future periods and various other economic factors and actuarial assumptions that may come to influence the level of the funded position in future years.

 

The 2008 Collective Bargaining Agreements (see Note 17) require U. S. Steel to make annual $75 million contributions during the contract period to a restricted account within our trust for retiree health care and life insurance. This contribution is in addition to an annual $10 million required contribution to the same trust that continues from an earlier agreement. Under this earlier agreement, a $20 million contribution is required if the Company does not contribute at least $75 million to its main pension plan in the prior year. During 2008, the Company made $85 million in contributions to the trust under these agreements, as well as a $143 million contribution to cover some of the health and life benefits for certain retirees of National Steel Corporation. During the first quarter of 2009, the Company made a $10 million contribution to this trust. In April 2009, we reached agreement with the USW to defer the annual $75 million mandatory contributions due in 2009 and the $10 million contribution due in January 2010 until 2012. In November 2010, we reached agreement with the USW to defer the annual $75 million mandatory contributions due in 2010 and the $10 million contribution due in January 2011 until 2014. Further as part of the 2009 agreement, the USW agreed to permit us to use all or part of the $75 million contribution made in 2008 to pay current retiree health care and life insurance claims, subject to a make-up contribution in 2013. In 2010, we elected to use the $75 million contributed to the restricted account in 2008.

 

In conjunction with the acquisition of Stelco, now USSC, U. S. Steel assumed the pension plan funding agreement (the Pension Agreement) that Stelco had entered into with the Superintendent of Financial Services of Ontario (the Province) on March 31, 2006 that covers USSC’s four main pension plans. The Pension Agreement requires minimum contributions of C$70 million (approximately $70 million) per year in 2011 through 2015 plus additional annual contributions for benefit improvements primarily related to union retiree indexing provisions. With the Lake Erie collective bargaining agreement settlement in 2010, retiree indexing provisions are no longer provided through the pension plan covering former Lake Erie Works represented employees. The Pension Agreement remains in effect with its defined annual contributions as noted above until the earlier of full solvency funding for the four main plans or until December 31, 2015, when minimum funding requirements for the plans resume under the provincial pension legislation. In its acquisition of Stelco on October 31, 2007, U. S. Steel assumed liability for a note issued to the Province of Ontario (Province Note). The face amount of the Province Note is C$150 million (approximately $150 million at December 31, 2010) and is payable on December 31, 2015. The Province Note is unsecured and is subject to a 75 percent discount if the solvency deficiencies in the four main USSC pension plans (see Note 19 to the Financial Statements) are eliminated on or before the maturity date.

 

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The following table summarizes U. S. Steel’s contractual obligations at December 31, 2010, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

(Dollars in millions)                                                               
                            Payments Due by Period  
Contractual Obligations   Total            2011            2012
through
2013
           2014
through
2015
           Beyond
2015
 

Long-term debt (including interest) and capital leases(a)

  $ 5,773        $ 441        $ 727        $ 1,330        $ 3,275   

Operating leases(b)

  $ 170          45          58          35          32   

Contractual purchase commitments(c)

  $ 12,427          5,943          2,711          752          3,021   

Capital commitments(d)

  $ 667          509          158                     

Environmental commitments(d)

  $ 198          18                            180 (e) 

Steelworkers Pension Trust

  $ 318 (f)        59          123          136 (f)        (f) 

Pensions(h)

  $ 605          94          165          148          198   

Other benefits(g)

  $ 2,045 (i)        440          885          720          (i) 

Unrecognized tax positions

  $ 115                                     115 (e) 
                                               

Total contractual obligations

  $ 22,318              $ 7,549              $ 4,827              $ 3,121              $ 6,821   
(a) See Note 16 to the Financial Statements.
(b) See Note 26 to the Financial Statements. Amounts exclude subleases.
(c) Reflects contractual purchase commitments under purchase orders and “take or pay” arrangements. “Take or pay” arrangements are primarily for purchases of gases and certain energy and utility services. Additionally, includes coke and steam purchase commitments related to a coke supply agreement with Gateway Energy & Coke Company LLC (See Note 18).
(d) See Note 27 to the Financial Statements.
(e) Timing of potential cash flows is not reasonably determinable.
(f) While it is difficult to make a prediction of cash requirements beyond the term of the 2008 collective bargaining agreements with the USW, which expire in 2012, projected amounts shown through 2015 assume that the current $2.65 contribution rate per hour will apply.
(g) Excludes profit-based payments that may be required through September 1, 2012, pursuant to the provisions of the 2008 collective bargaining agreements with the USW, as it is not possible to make an accurate prediction of payments that may be required.
(h) Amounts shown represent projected cash requirements for the USSC pension plans, most of which relates to a mandated schedule of fixed minimum payments of C$70 million (approximately $70 million) per year for the four main USSC pension plans that remains in effect until 2016. In 2016, minimum funding requirements under the Pension Benefits Act (PBA) will resume for the four main USSC plans. The amount shown beyond 2015 is an estimate for the minimum owed by all USSC plans under the PBA for the 2016 plan year. U.S. dollar equivalents of contributions are based on foreign exchange rates as of December 31, 2010.
(i) The amounts reflect corporate cash outlays expected for required contributions to benefit trusts and benefit payments expected to be paid from corporate trusts. Contributions include required amounts to the USW VEBA trust (See Note 17 to the Financial Statements). The accuracy of this forecast of future cash flows depends on various factors such as actual asset returns, the asset trust mix, medical health care escalation rates and company decisions or restrictions related to our trusts for retiree healthcare and life insurance that impact the timing of the use of trust assets. Projected amounts do not reflect optional draw downs from the USW VEBA trust if U. S. Steel decides to utilize certain options available under its agreements with the USW. Due to these factors, it is impossible to make a reliable prediction of cash requirements beyond five years and actual amounts experienced may differ materially from those shown.

 

Contingent lease payments have been excluded from the above table. Contingent lease payments relate to operating lease agreements that include a floating rental charge, which is associated to a variable component. Future contingent lease payments are not determinable to any degree of certainty. U. S. Steel’s annual incurred contingent lease expense is disclosed in Note 27 to the Financial Statements. Additionally, recorded liabilities related to deferred income taxes and other liabilities that may have an impact on liquidity and cash flow in future periods are excluded from the above table.

 

Pension obligations have been excluded from the above table except for the contributions required for USSC’s defined benefit pension plans. U. S. Steel’s Board of Directors has authorized voluntary contributions of up to $300 million to U. S. Steel’s trusts for pensions and other benefits over the time period ranging from 2011 through

 

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the end of 2012. U. S. Steel may make voluntary contributions from the authorized funding in 2011 or later periods to the main defined benefit pension plan in the United States in order to mitigate against potentially larger mandatory required contributions in later years. In addition to the USSC amounts included in the above table, U. S. Steel expects to make cash payments of $10 million to other pension plans not funded by trusts. The funded status of U. S. Steel’s pension plans is disclosed in Note 19 to the Financial Statements.

 

The following table summarizes U. S. Steel’s commercial commitments at December 31, 2010, and the effect such commitments could have on our liquidity and cash flows in future periods.

 

(Dollars in millions)                                                                        
                Scheduled Reductions by Period  
Commercial Commitments     Total                2011               
 
 
2012
through
2013
  
  
  
           
 
 
2014
through
2015
  
  
  
           
 
Beyond
2015
  
  

Standby letters of credit(a)

  $ 94        $ 82                          $ 12 (b) 

Surety bonds(a)

    18                                     18 (b) 

Funded Trusts(a)

    52                                     52 (b) 
                                               

Total commercial commitments

  $ 164              $ 82              $              $              $ 82   
(a)

Reflects a commitment or guarantee for which future cash outflow is not considered likely.

(b)

Timing of potential cash outflows is not determinable.

 

Our major cash requirements in 2011 are expected to be for capital expenditures, employee benefits and working capital requirements. We finished 2010 with $578 million of available cash. As business conditions have started to recover, our working capital requirements have increased and any future increases may require us to draw upon our credit facilities for necessary cash. Should we experience a significant increase in orders or an unexpected need for funds that cannot be met with available cash and our liquidity facilities, we may need to access the capital markets.

 

U. S. Steel management believes that U. S. Steel’s liquidity will be adequate to satisfy our obligations for the foreseeable future, including obligations to complete currently authorized capital spending programs. Future requirements for U. S. Steel’s business needs, including the funding of acquisitions and capital expenditures, scheduled debt maturities, contributions to employee benefit plans, and any amounts that may ultimately be paid in connection with contingencies, are expected to be financed by a combination of internally generated funds (including asset sales), proceeds from the sale of stock, borrowings, refinancings and other external financing sources.

 

Our opinion regarding liquidity is a forward-looking statement based upon currently available information. To the extent that operating cash flow is materially lower than recent levels or external financing sources are not available on terms competitive with those currently available, future liquidity may be adversely affected.

 

Debt and Senior Convertible Notes Ratings

 

There have been no changes to our ratings since September 30, 2010.

 

Off-Balance Sheet Arrangements

 

U. S. Steel has invested in several joint ventures that are reported as equity investments. Several of these investments involved a transfer of assets in exchange for an equity interest. In some cases, U. S. Steel has supply arrangements. In some cases, a portion of the labor force used by the investees is provided by U. S. Steel, the cost of which is reimbursed; however, failing reimbursement, U. S. Steel is ultimately responsible for the cost of these employees. The terms of these arrangements were a result of negotiations in arms-length transactions with the other joint venture participants, who are not affiliates of U. S. Steel.

 

In September 2003, U. S. Steel entered into a 10-year agreement for the supply of various utilities at the Midwest Plant in Indiana. The supplier owns a cogeneration facility consisting of two natural gas fired boilers that generate

 

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steam and hot water, a natural gas fired turbine generator and a steam turbine generator for production of electricity on land leased from U. S. Steel. The Midwest Plant’s employees perform the daily operating and maintenance duties and the Midwest Plant supplies natural gas to fuel the boilers and the turbine generator. U. S. Steel is obligated to purchase steam, hot water and electricity requirements (up to the facility’s capacity) at fixed prices throughout the term and pay annual capacity and operating and maintenance fees. U. S. Steel has no ownership interest in this facility.

 

In April 2004, U. S. Steel entered into a 10-year agreement for coal pulverization services at the Great Lakes facility, which was effective January 1, 2004. U. S. Steel has the right to purchase pulverization services on a requirements basis, subject to the capacity of the pulverized coal operations, at fixed prices that are annually adjusted for inflation. U. S. Steel has no ownership interest in this facility.

 

Other guarantees, indemnifications and take-or-pay arrangements are discussed in Notes 18 and 27 to the Financial Statements.

 

Derivative Instruments

 

See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for discussion of derivative instruments and associated market risk for U. S. Steel.

 

Environmental Matters, Litigation and Contingencies

 

U. S. Steel has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations and similar obligations in Europe and Canada, although ongoing compliance costs have also been significant. To the extent that these expenditures, as with all costs, are not ultimately reflected in the prices of our products and services, operating results will be reduced. U. S. Steel believes that our major North American, and many European, integrated steel competitors are confronted by substantially similar conditions and thus does not believe that our 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 our competitive position with regard to domestic mini-mills, some foreign steel producers (particularly in developing economies such as China) and producers of materials which compete with steel, all of which may not be required to incur 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. U. S. Steel is also responsible for remediation costs related to our prior disposal of environmentally sensitive materials. Many of our competitors do not have similar historical liabilities.

 

Our U.S. facilities are subject to the U.S. environmental standards, including the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act, as well as state and local laws and regulations.

 

USSC is subject to the environmental laws of Canada, which are comparable to environmental standards in the United States. Environmental regulation in Canada is an area of shared responsibility between the federal government and the provincial governments, which in turn delegate certain matters to municipal governments. Federal environmental statutes include the federal Canadian Environmental Protection Act, 1999 and the Fisheries Act. Various provincial statutes regulate environmental matters such as the release and remediation of hazardous substances; waste storage, treatment and disposal; and air emissions. As in the United States, Canadian environmental laws (federal, provincial and local) are undergoing revision and becoming more stringent.

 

The Canadian and Ontario governments have identified a sediment deposit, commonly referred to as Randle’s Reef, in Hamilton Harbor near USSC’s Hamilton Works for remediation, for which the regulatory agencies estimate expenditures of approximately C$105 million (approximately $105 million). The national and provincial governments have each allocated C$30 million (approximately $30 million) for this project and they have stated that they will be looking for local sources, including industry, to fund C$30 million (approximately $30 million). USSC has committed C$7 million (approximately $7 million) as its contribution. Funding sources for the balance of the estimated project cost remain to be identified and additional contributions are being sought.

 

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USSK is subject to the environmental laws of Slovakia and the European Union (EU). A related law of the EU commonly known as REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals, Regulation 1907/2006) requires the registration of certain substances that are produced in the EU or imported into the EU. USSK pre-registered various substances during the six-month pre-registration period that ended November 30, 2008, both on its own behalf and on behalf of U. S. Steel and certain of its subsidiaries that may be shipping products into the EU. USSK is compliant with REACH and intends to register its substances by the applicable deadlines to remain in compliance and be able to continue its businesses without material change.

 

USSS is subject to the environmental laws of Serbia. Under the terms of the acquisition in 2003, USSS is responsible for only those costs and liabilities associated with environmental events occurring subsequent to the completion of an environmental baseline study in June 2004, which was submitted to the Government of Serbia.

 

The current and potential regulation of greenhouse gas emissions remains a significant issue for the steel industry, particularly for integrated steel producers such as U. S. Steel. The regulation of carbon dioxide (CO2) emissions has either become law or is being considered by legislative bodies of many nations, including countries where we have operating facilities. The EU has established greenhouse gas regulations while in Canada, a regulatory framework for greenhouse gas emissions has been published. International negotiations to supplement and eventually replace the 1997 Kyoto Protocol are ongoing. These and other future government action on U. S. Steel could be significant. Such impacts may include substantial costs for emission allowances, restriction of production, and higher prices for coking coal, natural gas and electricty generated by carbon based systems.

 

U. S. Steel’s environmental expenditures:

 

(Dollars in millions)                                   
    2010           2009           2008  

North America:

         

Capital

  $ 69        $ 28        $ 44   

Compliance

         

Operating & maintenance

    325          294          409   

Remediation(a)

    30          19          27   
                           

Total North America

  $ 424        $ 341        $ 480   

USSE:

         

Capital

  $ 73        $ 67        $ 55   

Compliance

         

Operating & maintenance

    15          16          17   

Remediation(a)

    8          7          18   
                           

Total USSE

  $ 96        $ 90        $ 90   

Total U. S. Steel

  $ 520        $ 431        $ 570   
                           
                                         
  (a)

These amounts include spending charged against remediation reserves, net of recoveries where permissible, but do not include non-cash provisions recorded for environmental remediation.

 

U. S. Steel’s environmental capital expenditures accounted for 21 percent of total capital expenditures in 2010, 20 percent in 2009 and 11 percent in 2008.

 

Environmental compliance expenditures represented two percent of U. S. Steel’s total costs and expenses in 2010, three percent in 2009 and two percent in 2008. Remediation spending during 2008 through 2010 was mainly related to remediation activities at former and present operating locations.

 

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.

 

U. S. Steel is in the study phase of RCRA corrective action programs at our Fairless Plant and Lorain Tubular Operations. RCRA corrective action programs have been initiated at Gary Works, Fairfield Works and USS-POSCO Industries. Until the studies are completed at these facilities, U. S. Steel is unable to estimate the total cost of remediation activities that will be required.

 

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For discussion of other relevant environmental items see “Item 3. Legal Proceedings – Environmental Proceedings.”

 

The following table shows activity with respect to environmental remediation liabilities for the years ended December 31, 2010 and December 31, 2009. These amounts exclude liabilities related to asset retirement obligations accounted for in accordance with ASC Topic 410.

 

Environmental Remediation Liabilities

 

(Dollars in millions)   2010            2009  

Beginning Balance

  $ 203        $ 162   

Plus: Additions

    8          57   

Less: Payments

    (13       (16
                 

Ending Balance

  $ 198              $ 203   

 

New or expanded environmental requirements, which could increase U. S. Steel’s environmental costs, may arise in the future. U. S. Steel intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information and existing laws and regulations as currently implemented, U. S. Steel does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2011. U. S. Steel’s environmental capital expenditures are expected to be approximately $128 million in 2011, $29 million of which is related to projects at USSE. Predictions beyond 2011 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, U. S. Steel anticipates that environmental capital expenditures will be approximately $154 million in 2012, including $44 million for USSE; 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.

 

On July 17, 2009, the Attorney General of Canada initiated a proceeding under Section 40 of Canada’s Investment Canada Act by filing an application in the Canadian federal court that seeks to impose a financial penalty on U. S. Steel due to the Company’s alleged failure to comply with two of the 31 undertakings made by U. S. Steel to the Minister of Industry in connection with the 2007 acquisition of Stelco. The specific undertakings at issue concern production and employment levels anticipated at USSC assuming certain business conditions. In response to a previous written demand from the Minister with respect to this matter, the Company provided full disclosure regarding the operations at USSC and the impact that the sudden and severe world-wide economic downturn has had on the global steel sector and all of the Company’s North American operations, including operations at USSC. In accordance with the specific language of the undertakings at issue, the unprecedented economic downturn, the effects of which were beyond the control of the Company, expressly excuse any non-attainment of the production and employment levels targeted by the 2007 submission. The Company is vigorously defending the matter and believes that the action is without justification or authority.

 

As of December 31, 2010, U. S. Steel was a defendant in approximately 550 active asbestos cases involving approximately 3,090 plaintiffs. Almost 2,600, or approximately 84 percent, of these claims are currently pending in jurisdictions which permit filings with massive numbers of plaintiffs. Based upon U. S. Steel’s experience in such cases, it believes that the actual number of plaintiffs who ultimately assert claims against U. S. Steel will likely be a small fraction of the total number of plaintiffs.

 

It is not possible to predict the ultimate outcome of asbestos-related lawsuits, claims and proceedings due to the unpredictable nature of personal injury litigation. Despite this uncertainty, management believes that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial condition, although the resolution of such matters could significantly impact results of operations for a particular quarter. Among the

 

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factors considered in reaching this conclusion are: (1) that over the last several years, the total number of pending claims has declined; (2) that it has been many years since U. S. Steel employed maritime workers or manufactured or sold asbestos containing products; and (3) U. S. Steel’s history of trial outcomes, settlements and dismissals. For additional details concerning asbestos litigation see “Item 3. Legal Proceedings – Asbestos Litigation.”

 

In a series of lawsuits filed in federal court in the Northern District of Illinois beginning September 12, 2008, individual direct or indirect buyers of steel products have asserted that eight steel manufacturers, including U. S. Steel, conspired in violation of antitrust laws to restrict the domestic production of raw steel and thereby to fix, raise, maintain or stabilize the price of steel products in the United States. The cases are filed as class actions and claim treble damages for the period 2005 to present, but do not allege any damage amounts. U. S. Steel will vigorously defend these lawsuits and does not believe that it has any liability regarding these matters.

 

U. S. Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 27 to the Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Financial Statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to U. S. Steel.

 

The foregoing statements of belief are forward-looking statements. 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 these forward-looking statements.

 

Mine Safety

 

Our Minntac and Keetac iron ore pellet operations are subject to the reporting requirements in Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) that was enacted in July of 2010. Under the Act, we are required to disclose certain information about our mining operations, such as the number of certain types of violations and orders issued under the Federal Mine Safety and Health Act of 1977 by the Federal Mine Safety and Health Administration.

 

The following table provides the required information for any notification received by our iron ore operations regarding any reportable information during the year ended December 31, 2010.

 

Mine

(MSHA ID)

  Total # of
Significant
&
Substantial
violations
under Act
§104
    Total #
of
orders
under
Act
§104(b)
    Total # of
unwarrantable
failure
citations and
orders under
Act §104(d)
    Total # of
violations
under Act
§110(b)(2)
    Total #
of
orders
under
Act
§107(a)
   

Total dollar

value of
proposed
assessments
from MSHA

    Total #
of
mining
related
fatalities
    Received
written
notice
under
Act
§104(e)
(yes/no)?
    Total # of
Legal Actions
Pending
Before the
Federal Mine
Safety and
Health Review
Commission(a)
 

Mt. Iron

                 

(2100819, 2100820, 2100282)

    192        5        3        0        0      $ 886,989        0        no        68   

Keewatin

                 

(2103352)

    46        1        0        0        0      $ 139,755        0        no        6   

 

(a)

Includes all legal actions pending before the Federal Mine Safety and Health Review Commission, together with the Administrative Law Judges thereof, for each of our iron ore operations. All of the legal actions were initiated by us to contest citations, orders or proposed assessments issued by the Federal Mine Safety and Health administration, and if we are successful, may result in the reduction or dismissal of those citations, orders or assessments.

 

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Outlook for First Quarter 2011

 

We expect to report a modest improvement in our reportable segment loss in comparison to the fourth quarter 2010. Order rates for most customer groups and publicly reported spot market prices began to increase later in the fourth quarter and we remain cautiously optimistic that global economic conditions will continue to improve in the first quarter.

 

Flat-rolled results for first quarter 2011 are expected to improve compared to the fourth quarter 2010 as the benefits of increased average realized prices, shipments and production volumes are expected to be partially offset by higher raw materials costs, primarily for scrap and coal. Average realized prices are expected to increase from fourth quarter 2010 as we expect to begin realizing the benefits of increasing spot and some market-based contract prices throughout the first quarter. Increases in some of our index-based contract prices should be realized in the second quarter as higher published market price assessments enter the index calculations. Raw steel capability utilization is expected to increase from the fourth quarter of 2010 as all of our blast furnaces are expected to operate for the majority of the period except for Hamilton Works, which is subject to a labor dispute.

 

First quarter 2011 results for USSE are expected to improve compared to the fourth quarter 2010 as the benefits of increased shipments and production volumes are expected to be partially offset by higher raw materials costs. Euro-based transaction prices are expected to improve during the first quarter. Increases in some of our index-based contract prices should be realized in the second quarter as higher published market price assessments enter the index calculations. Our raw steel capability utilization rate is expected to increase in the first quarter 2011 as we have restarted a blast furnace at U. S. Steel Serbia that was idled during the fourth quarter. We expect all five blast furnaces to operate during the first quarter.

 

We expect our Tubular operations to remain profitable in the first quarter. We anticipate that shipments will improve slightly as customer inventory levels appear balanced and end users pursue their 2011 drilling programs. Average realized transaction prices are expected to be in line with fourth quarter levels as announced price increases begin to take effect throughout the quarter. Overall, compared to the fourth quarter, we expect lower results due to monthly increases for purchased rounds and hot-rolled bands that will not be fully realized in Tubular product prices in the quarter.

 

Total costs for pension and other benefits plans are expected to be approximately $590 million in 2011 compared to $428 million in 2010. Company payments for these plans in 2010 were $534 million, which included a voluntary contribution of $140 million to our main defined benefit pension plan. In 2011, we expect to make payments of approximately $575 million before considering any voluntary contributions to our main defined benefit pension plan.

 

Capital expenditures for 2011 are expected to total approximately $990 million and will remain largely focused on strategic projects primarily related to coke and coke substitute production, blast furnace coal injection in Europe and a quench and temper line at our Tubular operations in Lorain, Ohio, implementation of an enterprise resource planning system, non-discretionary environmental and other infrastructure projects.

 

Accounting Standards

 

See Note 2 to the Consolidated Financial Statements in Part II Item 8 of this Form 10-K.

 

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Management Opinion Concerning Derivative Instruments

 

U. S. Steel uses commodity-based and foreign currency derivative instruments to manage our market and exchange rate risk. Management has authorized the use of futures, forwards, swaps and options to manage exposure to price fluctuations related to the purchase of natural gas and nonferrous metals, and also certain business transactions denominated in foreign currencies. For future periods, U. S. Steel may elect to use hedge accounting for certain commodity or currency transactions. For those transactions, the impact of the effective portion of the hedging instrument will be recognized in other comprehensive income until the transaction is settled. Once the transaction is settled, the effect of the hedged item will be recognized in income. While U. S. Steel’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 the use of derivative instruments, along with risk assessment procedures and internal controls, does not expose U. S. Steel to material risk. The use of derivative instruments could materially affect U. S. Steel’s results of operations in particular quarterly or annual periods; however, management believes that the use of these instruments will not have a material adverse effect on our financial position or liquidity. For further information regarding derivative instruments see Notes 1 and 15 to the Financial Statements.

 

Foreign Currency Exchange Rate Risk

 

U. S. Steel, through USSE and USSC, is subject to the risk of price fluctuations due to the effects of exchange rates on revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than the U.S. dollar, particularly the euro, the Serbian dinar and the Canadian dollar. U. S. Steel historically has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. U. S. Steel has not elected to use hedge accounting for these contracts. Foreign currency derivative instruments have been marked-to-market and the resulting gains or losses recognized in the current period in net interest and other financial costs. At December 31, 2010 and December 31, 2009, U. S. Steel had open euro forward sales contracts for U.S. dollars (total notional value of approximately $398 million and $185 million, respectively). A 10 percent increase in the December 31, 2010 euro forward rates would result in a $41 million charge to income.

 

The fair value of our derivatives is determined using Level 2 inputs, which are defined as “significant other observable” inputs. The inputs used include quotes from counterparties that are corroborated with market sources.

 

In the first quarter of 2010, the outstanding balance of a U.S. dollar-denominated intercompany loan (Intercompany Loan) from a U.S. subsidiary to a European subsidiary was increased in connection with the repayment of outstanding borrowings under USSK’s 200 million unsecured credit facility. Volatility in the foreign currency markets could have significant implications for U. S. Steel as a result of foreign currency accounting remeasurement effects, primarily on the Intercompany Loan. As of December 31, 2010, the outstanding balance on the Intercompany Loan was $1.6 billion. A one percent change in the December 31, 2010 exchange rate of US$1.33 for each 1.00 would result in an approximately $16 million impact to the income statement due to remeasurement effects of the Intercompany Loan. We also utilize euro-U.S. dollar derivatives to mitigate our currency exposure at USSE. For additional information on U. S. Steel’s foreign currency exchange activity, see Note 15 to the financial statements.

 

Future foreign currency impacts will depend upon changes in currencies, the extent to which we engage in derivatives transactions and the balance of the Intercompany Loan. The amount and timing of such borrowings or repayments on the Intercompany Loan will depend upon profits and cash flows of our international operations, future international investments and financing activities, all of which will be impacted by market conditions, operating costs, shipments, prices and foreign exchange rates.

 

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Commodity Price Risk and Related Risks

 

In the normal course of our business, U. S. Steel is exposed to market risk or price fluctuations related to the purchase, production or sale of steel products. U. S. Steel is also exposed to price risk related to the purchase, production or sale of coal, coke, natural gas, steel scrap, iron ore and pellets, and zinc, tin and other nonferrous metals used as raw materials.

 

U. S. Steel’s market risk strategy has generally been to obtain competitive prices for our products and services and allow operating results to reflect market price movements dictated by supply and demand; however, U. S. Steel has made forward physical purchases to manage exposure to price risk related to the purchases of natural gas and certain non-ferrous metals used in the production process.

 

Historically, the forward physical purchase contracts for natural gas and nonferrous metals have qualified for the normal purchases and normal sales exemption in Accounting Standards Codification (ASC) Topic 815. However, due to reduced natural gas consumption in 2009, we net settled some of our excess natural gas purchase contracts for certain facilities. Therefore, the remaining contracts for natural gas at those facilities no longer met the exemption criteria and were therefore subject to mark-to-market accounting in 2009. See Note 15 for further details on U. S. Steel’s derivatives. During 2010, all natural gas purchase contracts qualified for the normal purchases and normal sales exemption under ASC Topic 815 and were not subject to mark-to-market accounting.

 

U. S. Steel held commodity contracts for natural gas that qualified for the normal purchases and normal sales exemption with a total notional value of approximately $20 million at December 31, 2010. Total commodity contracts for natural gas at December 31, 2010 represent approximately 5 percent of our expected North American natural gas requirements.

 

Interest Rate Risk

 

U. S. Steel is subject to the effects of interest rate fluctuations on certain of our non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10 percent increase/decrease in year-end 2010 and 2009 interest rates on the fair value of U. S. Steel’s non-derivative financial instruments is provided in the following table:

 

(Dollars in millions)                            
    2010     2009  
Non-Derivative Financial Instruments(a)   Fair Value(b)     Increase in
Fair  Value(c)
    Fair Value(b)     Increase in
Fair  Value(c)
 

Financial assets:

       

Investments and long-term receivables(d)

  $ 46      $ 0      $ 26      $ 0   

Financial liabilities:

       

Debt(e)(f)

  $     4,512      $     222      $     4,004      $     172   

 

  (a)

Fair values of cash and cash equivalents, current accounts and notes receivable, accounts payable, bank checks outstanding 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 23 to the Financial Statements for carrying value of instruments.

  (c)

Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10 percent decrease in interest rates at December 31, 2010 and 2009, on the fair value of U. S. Steel’s non-derivative financial instruments. For financial liabilities, this assumes a 10 percent decrease in the weighted average yield to maturity of U. S. Steel’s long-term debt at December 31, 2010, and December 31, 2009.

  (d)

Fair value is based on discounted cash flows. U. S. Steel is subject to market risk and liquidity risk related to its investments; however, these risks are not readily quantifiable.

  (e)

Excludes capital lease obligations.

  (f)

Fair value was determined using Level 2 inputs which were derived from quoted market prices and is based on the yield on public debt where available or current borrowing rates available for financings with similar terms and maturities.

 

U. S. Steel’s sensitivity to interest rate declines and corresponding increases in the fair value of our debt portfolio would unfavorably affect our results and cash flows only to the extent that we elected to repurchase or otherwise retire all or a portion of our fixed-rate debt portfolio at prices above carrying value.

 

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Safe Harbor

 

U. S. Steel’s quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management’s opinion about risks associated with U. S. Steel’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 U. S. Steel’s hedging programs may differ materially from those discussed in the forward-looking statements.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

LOGO

 

United States Steel Corporation

600 Grant Street

Pittsburgh, PA 15219-2800

 

 

MANAGEMENT’S REPORT TO STOCKHOLDERS

 

February 22, 2011

 

To the stockholders of United States Steel Corporation:

 

Financial Statements and Practices

 

The accompanying consolidated financial statements of United States Steel Corporation are the responsibility of and have been prepared by United States Steel Corporation in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on our best judgments and estimates. United States Steel Corporation financial information displayed in other sections of this report is consistent with these financial statements.

 

United States Steel Corporation seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communication programs aimed at assuring that its policies, procedures and methods are understood throughout the organization.

 

United States Steel Corporation has a comprehensive formalized system of internal controls designed to provide reasonable assurance that assets are safeguarded, that financial records are reliable and that information required to be disclosed in reports filed with or submitted to the Securities and Exchange Commission is recorded, processed, summarized and reported within the required time limits. Appropriate management monitors the system for compliance and evaluates it for effectiveness, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto.

 

The Board of Directors pursues its oversight role in the area of financial reporting and internal control over financial reporting through its Audit Committee. This Committee, composed solely of independent directors, regularly meets (jointly and separately) with the independent registered public accounting firm, management, internal audit and other executives to monitor the proper discharge by each of their responsibilities relative to internal control over financial reporting and United States Steel Corporation’s financial statements.

 

Internal Control Over Financial Reporting

 

United States Steel Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of United States Steel Corporation’s management, including the chief executive officer and chief financial officer, United States Steel Corporation conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

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LOGO

 

Based on this evaluation, United States Steel Corporation’s management concluded that United States Steel Corporation’s internal control over financial reporting was effective as of December 31, 2010.

 

The effectiveness of United States Steel Corporation’s internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

/S/    JOHN P. SURMA        

   

/S/    GRETCHEN R. HAGGERTY        

John P. Surma     Gretchen R. Haggerty
Chairman of the Board of Directors and
Chief Executive Officer
    Executive Vice President and
Chief Financial Officer

 

/S/    GREGORY A. ZOVKO        

Gregory A. Zovko
Vice President and Controller

 

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LOGO

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders of United States Steel Corporation

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of United States Steel Corporation and its subsidiaries (the Company) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report to Stockholders – Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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LOGO

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania

February 22, 2011

 

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UNITED STATES STEEL CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Year Ended December 31,  
(Dollars in millions, except per share amounts)     2010                2009                2008