-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kk5NwOLOX8gOOrbSBPxFQK2+nZC8cjrqxIeHORjqrFXTgImEvs5UL+PJJV7oXwbx vdcsz9l0VK2QeLcjhfBMEw== 0000899243-02-000577.txt : 20020415 0000899243-02-000577.hdr.sgml : 20020415 ACCESSION NUMBER: 0000899243-02-000577 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARATHON OIL CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05153 FILM NUMBER: 02572128 BUSINESS ADDRESS: STREET 1: P O BOX 3128 CITY: HOUSTON STATE: TX ZIP: 77253-3128 BUSINESS PHONE: 7136296600 FORMER COMPANY: FORMER CONFORMED NAME: USX CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 10-K 1 d10k.txt FORM 10-K FOR YEAR ENDED 12/31/2001 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 Commission file number 1-5153 Marathon Oil Corporation (Exact name of registrant as specified in its charter) Delaware 25-0996816 (State of Incorporation) (I.R.S. Employer Identification No.) 5555 San Felipe Road, Houston, TX 77056-2723 (Address of principal executive offices) Tel. No. (713) 629-6600 Securities registered pursuant to Section 12(b) of the Act:* - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Title of Each Class - ------------------------------------------------------------------------------- Common Stock, par value $1.00 6.75% Convertible Quarterly Income Preferred Securities (Initial Rights to Purchase Series A Junior Liquidation Amount $50 per Preferred Stock (Currently Traded Security)**(b) with Common Stock) 7% Guaranteed Notes Due 2002 of Marathon Oil Company(c) 6.50% Cumulative Convertible Preferred (Liquidation Preference $50.00 per share)(a) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Aggregate market value of Common Stock held by non-affiliates as of January 31, 2002: $9 billion. The amount shown is based on the closing prices of the registrant's Common Stock on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are "affiliates" within the meaning of Rule 405 under the Securities Act of 1933. There were 309,518,016 shares of Marathon Oil Corporation Common Stock outstanding as of January 31, 2002. Documents Incorporated By Reference: Portions of the registrant's proxy statement relating to its 2002 annual meeting of stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, are incorporated by reference to the extent set forth in Part III, Items 10-13 of this report. - ------- * These securities are listed on the New York Stock Exchange. In addition, the Common Stock is listed on the Chicago Stock Exchange and the Pacific Exchange. ** Issued by USX Capital Trust I. (a) These securities were converted into the right to receive cash of $50 and are no longer outstanding. A certification and notice of termination of registration was filed with the SEC in January 2002. (b) These securities were redeemed and are no longer outstanding. A certification and notice of termination of registration was filed with the SEC in January 2002. (c) The obligations of Marathon Oil Company, a wholly owned subsidiary of the registrant, have been guaranteed by the registrant. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- MARATHON OIL CORPORATION Unless the context otherwise indicates, references in this Form 10-K to "Marathon," "we," or "us" are references to Marathon Oil Corporation, its wholly owned and majority owned subsidiaries, and its ownership interest in equity affiliates (corporate entities, partnerships, limited liability companies and other ventures, in which Marathon exerts significant influence by virtue of its ownership interest, typically between 20 and 50 percent). TABLE OF CONTENTS PART I Item 1. and 2. Business and Properties................................. 3 Item 3. Legal Proceedings....................................... 26 Item 4. Submission of Matters to a Vote of Security Holders..... 28 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................... 28 Item 6. Selected Financial Data................................. 29 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 30 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................................. 45 Item 8. Financial Statements and Supplementary Data............. F-1 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................... 48 PART III Item 10. Directors and Executive Officers of The Registrant...... 48 Item 11. Management Remuneration................................. 48 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................ 48 Item 13. Certain Relationships and Related Transactions.......... 48 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 49 SIGNATURES............................................................... 56 GLOSSARY OF CERTAIN DEFINED TERMS........................................ 57
Disclosures Regarding Forward-Looking Statements This annual report on Form 10-K, particularly Item 1. and Item 2. Business and Properties, Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, include forward- looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or "projects" or variations of these words, suggesting that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. Forward-looking statements with respect to Marathon may include, but are not limited to, levels of revenues, gross margins, income from operations, net income or earnings per share; levels of capital, exploration, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital, exploration or maintenance projects; volumes of production, sales, throughput or shipments of liquid hydrocarbons, natural gas and refined products; levels of worldwide prices of liquid hydrocarbons, natural gas and refined products; levels of reserves, proved or otherwise, of liquid hydrocarbons or natural gas; the acquisition or divestiture of assets; the effect of restructuring or reorganization of business components; the potential effect of judicial proceedings on the business and financial condition; and the anticipated effects of actions of third parties such as competitors, or federal, state or local regulatory authorities. The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Marathon's expectations as to revenues, margins and income are based upon assumptions as to future prices and volumes of liquid hydrocarbons, natural gas and refined products. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world's major oil and gas producing areas, including OPEC member countries. Any substantial decline in such prices could have a material adverse effect on Marathon's results of operations. A decline in such prices could also adversely affect the quantity of liquid hydrocarbons and natural gas that can be economically produced and the amount of capital available for exploration and development. Marathon uses commodity-based and foreign currency derivative instruments such as futures, forwards, swaps, and options to manage exposure to price fluctuations. While commodity-based derivative instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. Levels of hedging activity vary among oil industry competitors and could affect Marathon's competitive position with respect to those competitors. Liquidity Factors Marathon's ability to finance its future business requirements through internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources is affected by the performance of its operations (as measured by various factors, including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by Marathon's outstanding debt and credit ratings by investor services. Factors Affecting Exploration and Production Operations Projected production levels for liquid hydrocarbons and natural gas are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, production decline rates for mature fields, reserve replacement rates, drilling rig availability and geological and operating considerations. These assumptions may prove to be inaccurate. Exploration and production operations are subject to various hazards, including acts of war or terrorist acts and the governmental or military response thereto, explosions, fires and uncontrollable flows of oil and gas. Offshore production and marine operations in areas such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the Celtic Sea, offshore Nova Scotia and offshore 2 West Africa are also subject to severe weather conditions such as hurricanes or violent storms or other hazards. Development of new production properties in countries outside the United States may require protracted negotiations with host governments and are frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. Factors Affecting Refining, Marketing and Transportation Operations Marathon conducts domestic refining, marketing and transportation operations primarily through its 62 percent owned consolidated subsidiary, Marathon Ashland Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest, Southeast, Ohio River Valley and the upper Great Plains. The profitability of these operations depends largely on the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. MAP is a purchaser of crude oil in order to satisfy its refinery throughput requirements. As a result, its overall profitability could be adversely affected by rising crude oil and other feedstock prices which are not recovered in the marketplace. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products. Gross margins on merchandise sold at retail outlets tend to moderate the volatility experienced in the retail sale of gasoline and diesel fuel. Environmental regulations, particularly the 1990 Amendments to the Clean Air Act, have imposed (and are expected to continue to impose) increasingly stringent and costly requirements on refining and marketing operations which may have an adverse effect on margins. Refining, marketing and transportation operations are subject to business interruptions due to unforeseen events such as explosions, fires, crude oil or refined product spills, inclement weather or labor disputes. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions. Technology Factors Longer-term projections of corporate strategy, including the viability, timing or expenditures required for capital projects, can be affected by changes in technology, especially innovations in processes used in the exploration, production or refining of hydrocarbons. While specific future changes are difficult to project, recent innovations affecting the oil industry include the development of three-dimensional seismic imaging and deep-water and horizontal drilling capabilities. PART I Item 1. and 2. Business and Properties General Marathon Oil Corporation was originally organized in 2001 as USX HoldCo, Inc., a wholly owned subsidiary of USX Corporation ("Old USX"). As a result of a reorganization completed in July 2001, USX HoldCo, Inc. (1) became the parent entity of the consolidated enterprise (the former USX Corporation was merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to USX Corporation. In connection with the Separation discussed below, USX Corporation (formerly USX HoldCo, Inc.) changed its name to Marathon Oil Corporation. The accompanying consolidated financial statements reflect Marathon Oil Corporation and its subsidiaries as the continuation of the consolidated enterprise. In this Form 10-K, all references to "United States Steel" mean United States Steel Corporation, its predecessors (including, where applicable, the U.S. Steel Group of USX Corporation) and its subsidiaries. Prior to December 31, 2001, Marathon had two outstanding classes of common stock: USX-Marathon Group common stock ("Marathon Stock"), which was intended to reflect the performance of Marathon's energy business, and USX-U. S. Steel Group common stock ("Steel Stock"), which was intended to reflect the performance of Marathon's steel business. As described further in Note 2 to the Financial Statements, on December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation ("United States Steel") to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis ("the Separation"). In connection with the Separation, Marathon's certificate of incorporation was amended on December 31, 2001 and, from that date, Marathon has only one class of common stock authorized. Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned subsidiary Marathon Ashland Petroleum LLC ("MAP"); and other energy related businesses. 3 The Separation Marathon was originally organized in 2001 as USX HoldCo, Inc. ("USX HoldCo") to become a holding company for the two principal businesses of the former parent company, Old USX: . the steel production and sale business, the steel mill products, coke, taconite pellets and coal transportation business and other steel- related businesses comprising the U.S. Steel Group; and . the oil and gas exploration and production and other energy businesses conducted by Marathon Oil Company, an Ohio corporation, and other subsidiaries comprising the Marathon Group. In a series of transactions (the "Holding Company Reorganization") Old USX completed on July 2, 2001: . USX HoldCo became the holding company for Marathon Oil Company and United States Steel LLC; . Old USX was merged with and into United States Steel LLC; . USX HoldCo assumed a substantial part of the outstanding indebtedness, obligations under various capital and operating leases and guarantee obligations and other contingent liabilities of Old USX; and . USX HoldCo changed its name to USX Corporation. On December 31, 2001, pursuant to an Agreement and Plan of Reorganization dated as of July 31, 2001 ("Reorganization Agreement") Marathon completed the Separation transaction, in which: . United States Steel LLC converted into a Delaware corporation named United States Steel Corporation and became a separate, publicly traded company; and . USX HoldCo, then known as USX Corporation, changed its name to Marathon Oil Corporation. Marathon and its subsidiaries are continuing the energy business that comprised the Marathon Group of Old USX. Assumption of Indebtedness and Other Obligations by United States Steel Prior to the Separation, Old USX, and then Marathon, managed most of its financial activities on a centralized, consolidated basis and, in its financial statements, attributed amounts that related primarily to the following items to the Marathon Group and the U.S. Steel Group on the basis of their cash flows for the applicable periods and the initial capital structure for each group: . invested cash; . short-term and long-term debt, including convertible debt, and related net interest and other financing costs; and . preferred stock and related dividends. The following items, however, were specifically attributed to and reflected in their entirety in the financial statements of the group to which they related: . leases; . collateralized financings; . indexed debt instruments; . financial activities of consolidated entities that were not wholly owned subsidiaries; and . transactions that related to securities convertible solely into common stock that tracked the performance of the Marathon Group or the U.S. Steel Group. These attributions were for accounting purposes only and did not reflect the legal ownership of cash or the legal obligations to pay and discharge debt or other obligations. In connection with the Separation: . United States Steel and its subsidiaries incurred indebtedness to third parties and assumed various obligations from Marathon in an aggregate amount approximately equal to all the net amounts attributed to the U. S. Steel Group immediately prior to the Separation, both absolute and contingent, less the amount of a $900 million value transfer (the "Value Transfer"); and 4 . Marathon and its subsidiaries remained responsible for all the liabilities attributed to the Marathon Group, both absolute and contingent, plus $900 million. These arrangements require a post-Separation cash settlement between Marathon and United States Steel following the audit of the balance sheets for both the Marathon Group and the U. S. Steel Group as of December 31, 2001, in order to ensure that the Value Transfer was $900 million. As a result of its assumption of various items of indebtedness and other obligations from its former parent entity in the Holding Company Reorganization, Marathon remained obligated after the Separation for the following items of indebtedness and other obligations that were attributed to the U.S. Steel Group in accordance with the provisions of the Reorganization Agreement (amounts as of December 31, 2001): . approximately $470 million of obligations under industrial revenue bonds related to environmental projects for current and former U. S. Steel Group facilities, with maturities ranging from 2009 through 2033; . approximately $84 million of sale-leaseback financing obligations under a lease for equipment at United States Steel's Fairfield Works facility, with the lease term extending to 2012, subject to extensions; . approximately $138 million in obligations relating to various lease arrangements accounted for as operating leases and various guarantee arrangements, all of which were assumed by United States Steel; and . other guarantees referred to under "Relationship Between Marathon and United States Steel After the Separation - Financial Matters Agreement" on page 7. As contemplated by the Reorganization Agreement, Marathon and United States Steel entered into a financial matters agreement to reflect United States Steel's agreement to assume and discharge all Marathon's principal repayment, interest payment and other payment obligations under the industrial revenue bonds, the capital lease arrangement and the guarantees associated with the other lease and similar obligations referred to above. In addition, the financial matters agreement requires United States Steel to use commercially reasonable efforts to have Marathon released from its obligations under the other guarantees referred to above. The financial matters agreement also provides that on or before the tenth anniversary of the Separation, United States Steel will provide for Marathon's discharge from any remaining liability under any of the assumed industrial revenue bonds. United States Steel may accomplish that discharge by refinancing or, to the extent not refinanced, paying Marathon an amount equal to the remaining principal amount of, all accrued and unpaid debt service outstanding on, and any premium required to immediately retire, the then outstanding industrial revenue bonds. Only $1.8 million of the industrial revenue bonds are scheduled to mature in the period extending through 2012. For additional information relating to the financial matters agreement, see "Relationship Between Marathon and United States Steel After the Separation - Financial Matters Agreement" on page 7. Effects on Historical Relationship Historically, the U.S. Steel Group has funded its negative operating cash flow with cash supplied by Marathon, a portion of which was reflected as a payment under the tax allocation policy and the remainder of which was represented by increased amounts of debt attributed by Marathon. As a stand- alone company, United States Steel will need to fund any of its negative operating cash flow from external sources, and adequate sources may be unavailable or the cost of such funding may adversely impact United States Steel. As discussed below, the financial matters agreement does not contain any financial covenants, and United States Steel is free to incur additional debt and grant mortgages on or security interests in its property and sell or transfer assets without Marathon's consent. United States Steel is more highly leveraged than Marathon, has a noninvestment grade credit rating and has granted security interests in some of its assets, including its accounts receivable and inventory. Additionally, United States Steel's operations are capital intensive. United States Steel's business also requires substantial expenditures for routine maintenance. The steel business is highly competitive and a large number of industry participants have sought protection under bankruptcy laws in recent periods. Relationship Between Marathon and United States Steel After the Separation As a result of the Separation, Marathon and United States Steel are separate companies, and neither has any ownership interest in the other. Thomas J. Usher is chairman of the board of both companies, and four of the remaining nine members of Marathon's board of directors are also directors of United States Steel. 5 In connection with the Separation and pursuant to the Plan of Reorganization, Marathon and United States Steel have entered into a series of agreements governing their relationship subsequent to the Separation and providing for the allocation of tax and certain other liabilities and obligations arising from periods prior to the Separation. Set forth below is a description of the material terms of those agreements. Tax Sharing Agreement Marathon and United States Steel have a tax sharing agreement that applies to each of their consolidated tax reporting groups. Provisions of this agreement include the following: . for any taxable period, or any portion of any taxable period, ended on or before December 31, 2001, unpaid tax sharing payments will be made between Marathon and United States Steel generally in accordance with the general tax sharing principles in effect prior to the Separation; . no tax sharing payments will be made with respect to taxable periods, or portions thereof, beginning after December 31, 2001; and . provisions relating to the tax and related liabilities, if any, that result from the Separation ceasing to qualify as a tax-free transaction and limitations on post-Separation activities that might jeopardize the tax-free status of the Separation. Under the general tax sharing principles in effect prior to the Separation: . the taxes payable by each of the Marathon Group and the U.S. Steel Group were determined as if each of them had filed its own consolidated, combined or unitary tax return; and . the U.S. Steel Group would receive the benefit, in the form of tax sharing payments by the parent corporation, of the tax attributes, consisting principally of net operating losses and various credits, that its business generated and the parent used on a consolidated basis to reduce its taxes otherwise payable. In accordance with the tax sharing agreement, at the time of the Separation, Marathon made a preliminary settlement with United States Steel of approximately $440 million as the net tax sharing payments owed to it for the year ended December 31, 2001 under the pre-Separation tax sharing principles. The tax sharing agreement also addresses the handling of tax audits and contests and other matters respecting taxable periods, or portions of taxable periods, ended prior to December 31, 2001. In the tax sharing agreement, each of Marathon and United States Steel promised the other party that it: . would not, prior to January 1, 2004, take various actions or enter into various transactions that might, under section 355 of the Internal Revenue Code of 1986, jeopardize the tax-free status of the Separation; and . would be responsible for, and indemnify and hold the other party harmless from and against, any tax and related liability, such as interest and penalties, that results from the Separation ceasing to qualify as tax-free because of its taking of any such action or entering into any such transaction. The proscribed actions and transactions include: . the liquidation of Marathon or United States Steel; and . the sale by Marathon or United States Steel of its assets, except in the ordinary course of business. In case a taxing authority seeks to collect a tax liability from one party which the tax sharing agreement has allocated to the other party, the other party has agreed in the sharing agreement to indemnify the first party against that liability. Even if the Separation otherwise qualifies for tax-free treatment under section 355 of the Internal Revenue Code, the Separation may become taxable to Marathon under section 355(e) of the Internal Revenue Code if capital stock representing a 50 percent or greater interest in either Marathon or United States Steel is acquired, directly or indirectly, as part of a plan or series of related transactions that include the Separation. For this purpose, a "50 percent or greater interest" means capital stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of capital stock. To minimize this risk, both Marathon and United States Steel agreed in the tax sharing agreement that they would not enter into any transactions or make any change in their equity structures that could cause the 6 Separation to be treated as part of a plan or series of related transactions to which those provisions of section 355(e) of the Internal Revenue Code may apply. If an acquisition occurs that results in the Separation being taxable under section 355(e) of the Internal Revenue Code, the agreement provides that the resulting corporate tax liability will be borne by the party involved in that acquisition transaction. Although the tax sharing agreement allocates tax liabilities relating to taxable periods ending on or prior to the Separation, each of Marathon and United States Steel, as members of the same consolidated tax reporting group during any portion of a taxable period ended on or prior to the date of the Separation, is jointly and severally liable under the Internal Revenue Code for the federal income tax liability of the entire consolidated tax reporting group for that year. To address the possibility that the taxing authorities may seek to collect all or part of a tax liability from one party where the tax sharing agreement allocates that liability to the other party, the agreement includes indemnification provisions that would entitle the party from whom the taxing authorities are seeking collection to obtain indemnification from the other party, to the extent the agreement allocates that liability to that other party. Marathon can provide no assurance, however, that United States Steel will be able to meet its indemnification obligations, if any, to Marathon that may arise under the tax sharing agreement. Transition Services Agreement Marathon and United States Steel have a transition services agreement that will govern the provision of the following services until December 31, 2002: . common corporate support services; and . inter-unit computer services. Common corporate support services include services personnel at the former Pittsburgh corporate headquarters historically provided prior to the Separation. These include accounting, finance and financial management, government affairs, investor relations, public affairs and tax services. Most of these personnel now work for Marathon or United States Steel. Each company has agreed to provide these services to the other, to the extent it is able to do so and the other company cannot satisfy its own needs. Inter-unit computer services consist of computer and information technology services either company historically provided to the former Pittsburgh corporate headquarters or to the other company. A company providing common corporate support or inter-unit computer services under the transition services agreement will be entitled to recover the costs it incurs in providing those services. The transition services agreement also includes each company's grant to the other company and its subsidiaries of a nonexclusive, fully paid, worldwide license for their internal use only of the granting company's computer programs, software, source code and know-how that were utilized prior to the Separation or are utilized under the transition services agreement to provide common corporate support or inter-unit computer services to the other company and its subsidiaries. Financial Matters Agreement Marathon and United States Steel have a financial matters agreement that provides for United States Steel's assumption of the obligations under Marathon's outstanding industrial revenue bonds, the sale-leaseback financing arrangement and the lease and guarantee obligations referred to above under "The Separation--Assumption of Indebtedness and Other Obligations by United States Steel" on page 5. Under the financial matters agreement, United States Steel has assumed and agreed to discharge all Marathon's principal repayment, interest payment and other obligations under those industrial revenue bonds and lease and guarantee arrangements described above, including any amounts due on any default or acceleration of any of those obligations, other than any default caused by Marathon. The financial matters agreement also provides that, on or before the tenth anniversary of the Separation, United States Steel will provide for Marathon's discharge from any remaining liability under any of the assumed industrial revenue bonds. The financial matters agreement also requires United States Steel to use commercially reasonable efforts to have Marathon released from its obligations under a guarantee Marathon provided with respect to all United States Steel's obligations under a partnership agreement between United States Steel, as general partner, and General Electric Credit Corporation of Delaware and Southern Energy Clairton, LLC, as limited partners. 7 United States Steel may dissolve the partnership under certain circumstances including if it is required to fund accumulated cash shortfalls of the partnership in excess of $150 million. In addition to the normal commitments of a general partner, United States Steel has indemnified the limited partners for certain income tax exposures. As of December 31, 2001, United States Steel had no unpaid outstanding obligations to the limited partners. The financial matters agreement requires Marathon to use commercially reasonable efforts to take all necessary action or refrain from acting so as to assure compliance with all covenants and other obligations under the documents relating to the assumed obligations to avoid the occurrence of a default or the acceleration of the payment obligations under the assumed obligations. The agreement also obligates Marathon to use commercially reasonable efforts to obtain and maintain letters of credit and other liquidity arrangements required under the assumed obligations. United States Steel's obligations to Marathon under the financial matters agreement are general unsecured obligations which rank equal to United States Steel's accounts payable and other general unsecured obligations. The financial matters agreement does not contain any financial covenants, and United States Steel is free to incur additional debt, grant mortgages on or security interests in its property and sell or transfer assets without our consent. License Agreement Marathon and United States Steel have entered into a license agreement under which Marathon granted to United States Steel a nonexclusive, fully paid, worldwide license to use the "USX" name and various trade secrets, know- how and intellectual property rights previously used in connection with the business of both companies. The license agreement provides that United States Steel may use these rights solely in the conduct of its internal business. It also provides United States Steel with the right to sublicense these rights to any of its subsidiaries. The license agreement provides for a perpetual term, so long as United States Steel performs its obligations under the agreement. Insurance Assistance Agreement Marathon and United States Steel have an insurance assistance agreement, which provides for: . the division of responsibility for joint insurance arrangements; and . the entitlement to insurance claims and the allocation of deductibles with respect to claims associated with pre-Separation periods. Under the insurance assistance agreement: . Marathon is entitled to all rights in and to all claims and is solely liable for the payment of uninsured retentions and deductibles arising out of or relating to pre-Separation events or conditions exclusively associated with the business of the Marathon Group; . United States Steel is entitled to all rights in and to all claims and is solely liable for the payment of uninsured retentions and deductibles arising out of or relating to pre-Separation events or conditions exclusively associated with the business of the U. S. Steel Group; . Marathon is entitled to 65 percent and United States Steel is entitled to 35 percent of all rights in and to all claims, and Marathon and United States Steel are liable on the same percentage basis for the payment of uninsured retentions and deductibles, arising out of or relating to pre-Separation events or conditions and not related exclusively to either the Marathon Group or the U.S. Steel Group; and . the cost of extended reporting insurance for pre-Separation periods will be split between Marathon and United States Steel on a 65 percent-35 percent basis, respectively, if both companies elect to purchase the same extended reporting insurance. Exploration and Production Oil and Natural Gas Exploration and Development Marathon is currently conducting exploration and development activities in 11 countries, including its January 2002 acquisition of interests in Equatorial Guinea, West Africa. Principal exploration activities are in the United States, the United Kingdom, Angola, Canada, and Norway. Principal development activities are in the 8 United States, the United Kingdom, Canada, Equatorial Guinea, Gabon, Ireland, the Netherlands and Norway. Marathon is also pursuing opportunities in North and West Africa, the Middle East, Southeast Asia and the Commonwealth of Independent States. The following table sets forth, by geographic area, the number of net productive and dry development and exploratory wells completed in each of the last three years (references to "net" wells or production indicate Marathon's ownership interest or share, as the context requires): Net Productive and Dry Wells Completed(a)
2001 2000 1999 - ---------------------------------------------------- United States(b) Development(c) - Oil 10 23 11 - Gas 751 109 54 - Dry 3 2 1 --- --- --- Total 764 134 66 Exploratory(d) - Oil 2 2 5 - Gas 9 6 9 - Dry 6 5 13 --- --- --- Total 17 13 27 --- --- --- Total United States 781 147 93 International(e) Development(c) - Oil 1 12 42 - Gas 54 111 55 - Dry 5 5 11 --- --- --- Total 60 128 108 Exploratory(d) - Oil 0 4 2 - Gas 16 26 14 - Dry 5 14 16 --- --- --- Total 21 44 32 Total International 81 172 140 --- --- --- Total Worldwide 862 319 233 - ----------------------------------------------------
(a) Includes the number of wells completed during the applicable year regardless of the year in which drilling was initiated. Does not include any wells where drilling operations were continuing or were temporarily suspended as of the end of the applicable year. A dry well is a well found to be incapable of producing hydrocarbons in sufficient quantities to justify completion. A productive well is an exploratory or development well that is not a dry well. (b) Includes Marathon's equity interest in MKM Partners L.P. ("MKM"). Also includes Marathon's ownership of Pennaco Energy Company ("Pennaco"), acquired in February 2001. Pennaco is a coal bed methane exploration and production company with a very active drilling program. (c) Indicates wells drilled in the proved area of an oil or gas reservoir. (d) Includes both wildcat and delineation wells. (e) Includes Marathon's equity interest in CLAM Petroleum B.V. ("CLAM") and in 2000 and 1999 Marathon's equity interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"). United States In the United States during 2001, Marathon drilled 26 gross (19 net) wildcat and delineation ("exploratory") wells of which 20 gross (12 net) wells encountered hydrocarbons. Of these 20 wells, 2 gross (1 net) wells were temporarily suspended, and will be reported in the Net Productive and Dry Wells Completed table in Marathon's future reports when completed. Marathon's principal domestic exploratory and development activities in 2001 were in the U.S. Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma, Texas and Wyoming. Exploration expenditures in the United States during the three-year period ended December 31, 2001, including Marathon's 85 percent equity interest in MKM's exploration expenditures, totaled $492 million, of which $190 million was incurred in 2001. Development expenditures in the United States during the three-year period ended December 31, 2001, including Marathon's 85 percent equity interest in MKM's development expenditures, totaled $887 million, of which $367 million was incurred in 2001. 9 The following is a summary of recent, significant exploration and development activity in the United States including discussion, as deemed appropriate, of completed wells, wells being drilled and wells under evaluation. Gulf of Mexico - The Gulf of Mexico ("Gulf") continues to be a core area for Marathon with the potential to add new reserves and increase production. At the end of 2001, Marathon had interests in 145 blocks in the Gulf, including 110 in the deepwater area. In 2002, Marathon plans to drill, or complete drilling operations on, three or four deepwater wells, including appraisal of the Ozona Deep discovery. Marathon's 2001 Gulf exploration drilling program was delayed due to the cancellation of the contract for the Cajun Express drilling rig in early July 2001. Of the two wells originally scheduled to be drilled with this rig, the Flathead prospect was delayed until December 2001, and resumption of drilling operations on the Redwood prospect were delayed until January 2002. The Flathead prospect, located in Walker Ridge Block 30, was plugged back to a shallower depth and temporarily abandoned. After further evaluations, Marathon will consider possible options to reenter and sidetrack this well. Marathon holds a 100 percent interest in Block 30. The Redwood prospect, located in Green Canyon Block 1001, completed drilling operations in 2002 and was abandoned as a dry hole. Marathon held a 75 percent interest in Block 1001. Marathon held an 8.25 percent interest in the Timber Wolf prospect, located in Mississippi Canyon 555, which was temporarily abandoned pending further evaluation. Additionally, Marathon participated in the drilling of two other Gulf prospects in 2001. The Paris Carver prospect, located in Green Canyon Block 601, did not encounter hydrocarbons and was abandoned. Marathon holds a 50 percent interest in Block 601. The Ozona Deep prospect, located in Garden Banks Block 515 resulted in a deepwater discovery. The well was drilled to a total measured depth of 26,352 feet and encountered approximately 345 feet of net pay in two primary intervals. Further appraisal drilling is expected to be conducted during 2002 to determine a plan of development. Marathon is operator and has a 68 percent working interest. The Camden Hills field, located in the deepwater Gulf on Mississippi Canyon Block 348 in approximately 7,200 feet of water, was discovered in August 1999 and confirmed by a subsequent well in January 2000. Development is being achieved with the sharing of infrastructure that will service two other fields in the area. The Canyon Express natural gas gathering system will link three gas fields, including Camden Hills, to a host processing platform named Canyon Station. Completion of the discovery well is underway, and installation of the Canyon Express pipeline began in January 2002 after a three-month delay in obtaining permits. Despite the delays, first gas production continues to be targeted for mid-2002. Marathon is operator of the Camden Hills field with a 50.03 percent interest. Alaska - During 2001, Marathon completed successful drilling operations on six wells in Alaska. Included in this program were two exploration wells related to the recently announced natural gas discovery on the Ninilchik Unit on the Kenai Peninsula, approximately 35 miles south of Kenai, Alaska. Proved remaining reserves at year-end 2001 are approximately 19 billion net cubic feet ("bcf") of natural gas. One well is scheduled for drilling in 2002, with additional drilling anticipated during 2003 to further delineate the upside potential of the structure. Marathon is operator of the Ninilchik Unit with a 60 percent interest. Marathon and a co-venturer have formed the Kenai Kachemak Pipeline Company, LLC, to transport natural gas from the Ninilchik Unit and other potential southern Kenai Peninsula gas prospects for sales into the existing Cook Inlet natural gas infrastructure. Initial production from the Ninilchik Field is planned for early 2004 commensurate with completion of pipeline construction. Marathon announced first natural gas production from its 100 percent owned Wolf Lake Field in November 2001. The Wolf Lake Field is located within the Kenai National Wildlife Refuge approximately 12 miles northeast of Soldotna, Alaska. Ultimate development at the Wolf Lake Field may require up to six natural gas wells at three sites. One well is expected to be drilled in 2002. New Mexico - In 2001, nine development wells were completed in the Indian Basin field to take advantage of Marathon's earlier expansion of the Indian Basin gas plant. Focus continued this year in the eastern area of the field which accounted for seven of the new wells. These wells extended last year's record gross production of 160 million cubic feet per day ("mmcfd") to 180 mmcfd from Marathon-operated wells. These new wells, combined with several recompletions of existing gas wells, more than doubled oil production from the field to 6,500 gross barrels of liquid hydrocarbons a day ("bpd"). In 2002, six new well completions and several recompletions are planned in the east Indian Basin area targeting both oil and gas. Oklahoma - Marathon's 2001 Southern Anadarko Basin exploration efforts focused on a continued Western Oklahoma Granite Wash program, as well as the Cement field Springer/Sycamore play. Exploration drilling efforts resulted in seven successful discoveries. The acquisition of approximately 250 square miles of 3-D seismic data has helped in identifying seven exploration projects (five Granite Wash, two Cement) that are scheduled to be drilled in 2002. 10 Marathon continued to develop the 1998 Granite Wash discovery by drilling 16 development wells in 2001. Current production rates from the Granite Wash play are approximately 24 net mmcfd and 1,300 net bpd. In 2002, current plans are to drill, or participate in the drilling of, 14 additional Granite Wash development wells. Marathon drilled, or participated in the drilling of, 13 development wells in the Carter Knox field in 2001. Most of this activity focused on completing the development plan associated with properties acquired in 2000. Drilling activity continued in the Cement field where efforts focused on continued Springer/Sycamore development. Six development wells were drilled in 2001, resulting in current production rates of 24 net mmcfd, a 60 percent increase over 2000 levels. In 2002, Marathon expects to drill, or participate in the drilling of, eight additional development wells. Texas - In West Texas, Marathon formed a joint venture with Kinder Morgan Energy Partners, L.P. ("Kinder Morgan"), which commenced operations in January 2001. The formation of the joint venture included contribution of interests in the Yates and SACROC assets. Marathon and Kinder Morgan have equal voting rights and control is shared equally by both partners. As such, the joint venture is accounted for on the equity method of accounting in which Marathon recognizes its 85 percent share of earnings from the partnership. This transaction has allowed Marathon to expand its interests in the Permian Basin and has improved access to materials for use in enhanced recovery techniques in the Yates field. Wyoming - On February 9, 2001, Marathon completed the acquisition of Pennaco Energy Company ("Pennaco"), creating a new core area of coal bed methane production in the Powder River Basin of Wyoming. Pennaco controls more than 400,000 net acres in northeast Wyoming and southeast Montana and is the third largest operator in this very active play. Marathon was successful in retaining the Pennaco expertise in coal bed methane operations and, as a result, was able to execute a significant 2001 drilling program of approximately 660 net wells, which exceeded previous Pennaco annual records. For 2001, annualized production rates averaged 47 net mmcfd, with the December rate reaching 59 net mmcfd. Proved remaining reserves at year-end 2001 are approximately 256 net bcf of natural gas. International Outside the United States during 2001, Marathon drilled 31 gross (18 net) exploratory wells in 6 countries. Of these 31 wells, 22 gross (14 net) wells encountered hydrocarbons, of which 1 gross well was temporarily suspended. Marathon's expenditures for international oil and natural gas exploration activities, including Marathon's 50 percent equity interest in CLAM's exploration expenditures and former 37.5 percent equity interest in Sakhalin Energy's exploration expenditures, during the three-year period ended December 31, 2001, totaled $338 million, of which $91 million was incurred in 2001. Marathon's international development expenditures, including its proportionate share of CLAM and Sakhalin Energy's development expenditures, during the three-year period ended December 31, 2001, totaled $722 million, of which $265 million was incurred in 2001. On January 3, 2002, Marathon announced the completed acquisition of interests in Equatorial Guinea, West Africa. Through this transaction, Marathon acquired a 52.4 percent interest in, and operatorship of, the offshore Alba Block, which contains the currently producing Alba gas field as well as undeveloped oil and gas discoveries and several possible exploration prospects; a 37.6 percent interest in the adjacent offshore Block D; a 52.4 percent interest in a condensate separation facility onshore Bioko Island; a 45 percent interest in a joint venture onshore methanol production plant; and a 43.2 percent interest in an onshore Liquefied Petroleum Gas ("LPG") processing plant. The acquisition will provide an estimated 250 million barrels of oil equivalent ("BOE") to Marathon's proved reserves in 2002. The following is a summary of recent, significant exploration and development activity outside the United States including discussion, as deemed appropriate, of completed wells, wells being drilled and wells under evaluation. United Kingdom - Marathon has interests in 34 blocks in the United Kingdom ("U.K.") and other areas offshore of the U.K. In 2000, Marathon acquired an interest in the BP-operated Foinaven development in the U.K. Atlantic Margin. Marathon's interest is 28 percent in the main Foinaven field (T34), 20 percent in the deeper T35 Foinaven field and 47 percent in the East Foinaven field. First production was achieved in September 2001 from the East Foinaven field, which is estimated to have proved net remaining reserves at year-end 2001 of approximately 14 million barrels of liquid hydrocarbons. The satellite field is produced via subsea completions that flow into the existing floating production, storage and offloading ("FPSO") vessel. A third production well is planned at East Foinaven in 2003. Infill drilling in the main Foinaven field was successful in 2001 with one 11 sidetrack, one water injector and two new producers being brought on line. Infill drilling of two additional production wells is expected to continue through spring 2002. Fluid handling upgrades on the FPSO in 2001 have allowed record daily production levels for the field of 132,300 gross bpd. As an interest owner in Foinaven, Marathon also has an 11.465 percent working interest in the West of Shetland gas evacuation line. The line, which is installed and ready for commissioning, will take gas from fields in the West of Shetlands area to the BP-operated Magnus platform for injection and enhanced oil recovery purposes. Gas from the Foinaven field, which is currently injected for disposal, will be sold to the Magnus group, with sales expected to commence in early 2002 upon completion of work by the Magnus group. Marathon is continuing its development of the Brae area in the U.K. North Sea where it is the operator and owns a 41.6 percent interest in the South, Central and North Brae fields and a 38.5 percent interest in the East Brae field. Marathon's share in the West Brae/Sedgwick joint development increased from 28.1 percent to 41.6 percent in September 2001 when the limit on Sedgwick's share of production from the development was reached. During 2001, Marathon participated in a successful Brae area well that was drilled to a deeper exploration target. The well was completed as a gas and condensate producer from the Brae B platform in June 2001. Well performance continues to be monitored to assess upside potential. Angola - In May 1999, Marathon was awarded interests in Blocks 31 and 32 offshore Angola. The blocks, which are located approximately 90 miles northwest of Luanda in water depths between 5,400 and 9,200 feet, are adjacent to Blocks 15, 17 and 18, where major discoveries by others have been made. Marathon presently holds a 10 percent working interest in Blocks 31 and 32, which are operated by co-venturers. Surveys of 3-D seismic data have been acquired over both blocks and advanced processing and interpretation of this data continues. One unsuccessful exploration well was drilled on Block 31 in 2001. Two additional wells in Block 31 are scheduled to begin drilling in the second and third quarters of 2002. The initial exploration well in Block 32 is expected to be drilled during the second half of 2002. Canada - In November 2001, Marathon was awarded two additional offshore Nova Scotia deepwater exploration licenses, with an effective date of January 1, 2002. Marathon has a 100 and 50 percent interest in exploration licenses ("EL") 2410 and 2411, respectively. This brings Marathon's total offshore Nova Scotia exploration license acreage to 1.9 million acres, positioning Marathon as a major player in the developing deepwater Atlantic Canada Gas Province. One shallow-water well was drilled in 2001 in EL 2376 (Southampton), which did not encounter hydrocarbons in commercial quantities. It is anticipated that one deepwater well will be completed in EL 2377 (Annapolis) in 2002. In Western Canada, Marathon anticipates drilling six wells in three exploration plays during 2002. Three wells will test the Milo pinnacle reef play, two wells will test the thrust Debolt foothills play, and one well will test a Southern Alberta tight gas sand play. Five of these wells are expected to be completed late first quarter 2002. Denmark - In June 1998, Marathon acquired one block in Denmark. A 3-D seismic program was completed in 1999, and evaluation of the data continues in 2002. Gabon - In fourth quarter 2001, activities commenced to develop the Azile reservoir of the Tchatamba South field. One existing well is planned for recompletion, and facilities will be added to process the crude oil, which has a higher sulfur content than the existing production. First production from the Azile reservoir is planned for December 2002. Marathon is operator of the Tchatamba South, West and Marin fields in Gabon, with a 56.25 percent working interest. Ireland - The Southwest Kinsale field was converted to a gas storage field in 2001. The Southwest Kinsale field, located in the Celtic Sea 30 miles south of Cork, was brought on line in 1999 through a single subsea well tied back to the Kinsale Head field's Bravo platform. In April 2001, gas injection commenced through this existing well and, by October 2001, two additional wells were drilled and tied back to the existing infrastructure. This gas storage facility, which is the first in Ireland, was fully operational in October 2001. Marathon has a 100 percent interest in this field. During 2001, a Petroleum Lease was issued for the Corrib field in the Slyne Trough License 2/93, located 40 miles off the west coast of Ireland. An additional appraisal well was drilled in the field in 2001, bringing the total number of wells drilled and suspended as producers in the Corrib field to five. Development work on the terminal, offshore pipelines, and subsea well equipment will continue during 2002. First gas production is expected at the beginning of 2004. Marathon has an 18.5 percent interest in the Corrib field. Norway - In 2000, Marathon participated in a project to modify the Heimdal platform to a processing and transportation center for third-party business. Marathon owns a 23.798 percent interest in the Heimdal field and platform. Production of the remaining gas (remnant gas) from the Heimdal field was reinstated on the platform in August 2001, followed by the start-up of two planned third-party projects. 12 In November 2000, Marathon approved the development of the Vale field, located northeast of the Heimdal field. The single well was successfully drilled and the flowline installed. Topside modifications on the Heimdal platform continue, and the well is expected to be completed and brought on line second quarter 2002. Marathon owns a 46.904 percent interest in this field. An exploration well between the Vale and Heimdal fields has been deferred until 2003 due to platform capacity constraints. In January 2002, Marathon closed its acquisition of varied interests in five licenses in the Norwegian Sector of the North Sea. In the Heimdal area of the North Sea, Marathon acquired an 18.6 percent interest in License 088, which contains the Peik gas condensate discovery; a 20 percent interest in License 102, which contains the Byggve and Skirne gas discoveries and the East Heimdal oil discovery; and a 10 percent interest in License 150, which also contains an oil discovery. Approval of a plan of development is expected in early 2002 for combined development of the Byggve and Skirne fields with first production expected in early 2004. Close to the Brae fields, Marathon acquired a 28.2 percent interest in License 025, which contains the Gudrun oil and gas condensate discovery; and a 10 percent interest in adjacent License 187. In December 2001, Marathon also successfully bid for an additional license in the Heimdal area. Pending Norwegian governmental approvals, this could result in Marathon becoming operator under the license in 2002. Netherlands - In 2001, Marathon, through its 50 percent equity interest in CLAM, participated in one development well and four exploration wells in the Dutch sector of the North Sea. The Q4-A3 development well successfully completed the planned development of the Q4-A field. CLAM has a 19.8 percent interest in the field. The exploration well K15-16 was drilled into the K15- Mike Prospect and discovered the K15-FK field. It was suspended as a future producer. CLAM has a 9.95 percent interest in the K15-FK field. The Q4-10 exploratory well was drilled into the Q1-Deep Prospect, discovering the Q1-B field. The well was suspended as a future producer. CLAM has a 3.6 percent interest in the field. Two delineation wells were drilled into potential extensions of the F16-E field. The E18-4 well proved up additional reserves and was suspended as a future producer. The E18-5 well was abandoned as a dry hole. CLAM's interest in the F16-E field is 4.2 percent. In 1998, CLAM was awarded two blocks in the Danish sector of the North Sea. Surveys of 3-D seismic data were acquired in 1999 and two exploration wells were drilled in 2000, both of which were dry. CLAM is seeking ways of meeting the minimum requirements of the Danish authorities for relinquishment of the two blocks at a minimum cost. Independent of its interest in CLAM, Marathon holds a 24 percent working interest in the A-15 Block in the Dutch sector of the North Sea. Evaluation of the deeper sands is expected to continue during 2002. The above discussions include forward-looking statements concerning various projects, plans to acquire interests in licenses, drilling plans, expected production and sales levels, reserves and dates of initial production, which are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, reserve replacement rates, drilling rig availability, license relinquishments and other geological, operating and economic considerations. Offshore production and marine operations in areas such as the Gulf of Mexico, the North Sea, the U.K. Atlantic Margin, the Celtic Sea, offshore Nova Scotia and offshore West Africa are also subject to severe weather conditions, such as hurricanes or violent storms or other hazards. The plan to acquire an additional license in the Norwegian sector of the North Sea is subject to the execution and closing of definitive agreements, and the receipt of necessary approvals from the applicable Norwegian authorities. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations and tax regulations, which could adversely affect the economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. Reserves At December 31, 2001, Marathon's net proved liquid hydrocarbon and natural gas reserves, including its proportionate share of equity investee net proved reserves, totaled approximately 1 billion barrels on a barrel of oil equivalent ("BOE") basis, of which 72 percent were located in the United States. (For purposes of determining BOE, natural gas volumes are converted to approximate liquid hydrocarbon barrels by dividing the natural gas volumes expressed in thousands of cubic feet ("mcf") by 6. The liquid hydrocarbon volume is added to the barrel equivalent of gas volume to obtain BOE.) On a BOE basis, excluding dispositions, Marathon replaced 62 percent of its worldwide oil and gas production. 13 The table below sets forth estimated quantities of net proved oil and gas reserves at the end of each of the last three years. Estimated Quantities of Net Proved Oil and Gas Reserves at December 31
Developed & Developed Undeveloped ----------------- ----------------- (Millions of Barrels) 2001 2000 1999 2001 2000 1999 - -------------------------------------------------------------------------------- Liquid Hydrocarbons United States............................ 243 414 476 268 458 520 Europe................................... 69 74 90 88 108 90 Other International...................... 25 57 72 30 151 187 ----- ----- ----- ----- ----- ----- Total Consolidated...................... 337 545 638 386 717 797 Equity Investees(a)...................... 178 - 69 184 - 77 ----- ----- ----- ----- ----- ----- WORLDWIDE.................................. 515 545 707 570 717 874 ===== ===== ===== ===== ===== ===== Developed reserves as % of total net proved reserves.................................. 90.4% 76.0% 80.9% (Billions of Cubic Feet) Natural Gas Natural Gas United States................ 1,308 1,421 1,550 1,793 1,914 2,057 Europe................................... 473 563 741 615 614 774 Other International...................... 308 381 497 399 477 833 ----- ----- ----- ----- ----- ----- Total Consolidated...................... 2,089 2,365 2,788 2,807 3,005 3,664 Equity Investee(b)....................... 32 52 65 51 89 123 ----- ----- ----- ----- ----- ----- WORLDWIDE.................................. 2,121 2,417 2,853 2,858 3,094 3,787 ===== ===== ===== ===== ===== ===== Developed reserves as % of total net proved reserves.................................. 74.2% 78.1% 75.3% (Millions of Barrels) Total BOEs United States............................ 461 651 734 567 777 863 Europe................................... 148 168 213 190 211 219 Other International...................... 76 121 155 96 231 326 ----- ----- ----- ----- ----- ----- Total Consolidated...................... 685 940 1,102 853 1,219 1,408 Equity Investees(a)...................... 183 9 80 193 15 98 ----- ----- ----- ----- ----- ----- WORLDWIDE.................................. 868 949 1,182 1,046 1,234 1,506 ===== ===== ===== ===== ===== ===== Developed reserves as % of total net proved reserves.................................. 83.0% 76.9% 78.5% - --------------------------------------------------------------------------------
(a) Represents Marathon's equity interests in MKM and CLAM in 2001 and CLAM and Sakhalin Energy in 2000 and 1999. (b) Represents Marathon's equity interests in CLAM. The above estimates, which are forward-looking statements, are based on a number of assumptions, including (among others) prices, presently known physical data concerning size and character of the reservoirs, economic recoverability, production experience and other operating considerations. To the extent these assumptions prove inaccurate, actual recoveries could be materially different than current estimates. For additional details of estimated quantities of net proved oil and gas reserves at the end of each of the last three years, see "Consolidated Financial Statements and Supplementary Data - Supplementary Information on Oil and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas Reserves" on pages F-36 through F-38. Marathon has filed reports with the U.S. Department of Energy ("DOE") for the years 2000 and 1999 disclosing the year- end estimated oil and gas reserves. Marathon will file a similar report for 2001. The year-end estimates reported to the DOE are the same as the estimates reported in the Consolidated Supplementary Data. Delivery Commitments Marathon has commitments to deliver fixed and determinable quantities of natural gas to customers under a variety of contractual arrangements. In Alaska, Marathon has two long-term sales contracts with the local utility companies, which obligates Marathon to supply approximately 270 bcf of natural gas over the remaining life of these contracts. In addition, Marathon has a 30 percent ownership interest in a Kenai, Alaska, liquefied natural gas ("LNG") plant and a proportionate share of the long-term LNG sales obligation to two Japanese utility companies. This obligation is 14 estimated to total 178 bcf through the remaining life of the contract, which terminates March 31, 2009. These commitments are structured with variable- pricing terms. Marathon's production from various gas fields in the Cook Inlet supply the natural gas to service these contracts. Marathon's proved reserves and estimated production rates in the Cook Inlet sufficiently meet these contractual obligations. In the U.K., Marathon has two long-term sales contracts with utility companies, which obligate Marathon to supply approximately 269 bcf of natural gas over the remaining life of these contracts. Marathon's Brae-area production, together with natural gas acquired for injection and subsequent resale, will supply the natural gas to service these contracts. Marathon's Brae-area proved reserves, acquired natural gas contracts and estimated production rates sufficiently meet these contractual obligations. The terms of these gas sales contracts also reflect variable-pricing structures. Oil and Gas Acreage The following table sets forth, by geographic area, the developed and undeveloped oil and gas acreage that Marathon held as of December 31, 2001: Gross and Net Acreage
Developed & Developed Undeveloped Undeveloped ----------- ------------ ------------ (Thousands of Acres) Gross Net Gross Net Gross Net - -------------------------------------------------------------------------------- United States............................. 1,955 845 3,435 1,862 5,390 2,707 Europe.................................... 351 289 1,843 881 2,194 1,170 Other International....................... 889 521 6,111 2,190 7,000 2,711 ----- ----- ------ ----- ------ ----- Total Consolidated........................ 3,195 1,655 11,389 4,933 14,584 6,588 Equity Investees(a)....................... 529 63 302 69 831 132 ----- ----- ------ ----- ------ ----- WORLDWIDE................................. 3,724 1,718 11,691 5,002 15,415 6,720 - --------------------------------------------------------------------------------
(a) Represents Marathon's equity interests in MKM and CLAM. Oil and Natural Gas Production The following tables set forth daily average net production of liquid hydrocarbons and natural gas for each of the last three years: Net Liquid Hydrocarbons Production(a)
(Thousands of Barrels per Day) 2001 2000 1999 - -------------------------------------------------------------------------------- United States(b).............................................. 127 131 145 Europe(c)..................................................... 46 29 31 Other International(c)........................................ 27 36 31 ----- ----- ----- Total Consolidated.......................................... 200 196 207 Equity Investees (MKM, CLAM & Sakhalin Energy)(c)............. 9 11 1 ----- ----- ----- WORLDWIDE..................................................... 209 207 208 ===== ===== ===== Net Natural Gas Production(d) (Millions of Cubic Feet per Day) United States(b).............................................. 793 731 755 Europe(e)..................................................... 318 327 326 Other International(e)........................................ 123 143 163 ----- ----- ----- Total Consolidated.......................................... 1,234 1,201 1,244 Equity Investees (CLAM and MKM)(e)............................ 31 29 36 ----- ----- ----- WORLDWIDE..................................................... 1,265 1,230 1,280 - --------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas liquids. (b) Amounts reflect production from leasehold ownership, after royalties and interests of others. (c) Amounts reflect equity tanker liftings, truck deliveries and direct deliveries of liquid hydrocarbons before royalties, if any, excluding Canada, Gabon, Russia and the United States where amounts shown are after royalties. The amounts correspond with the basis for fiscal settlements with governments. Crude oil purchases, if any, from host governments are not included. (d) Amounts exclude volumes purchased from third parties for injection and subsequent resale of 8 mmcfd in 2001 and 11 and 16 mmcfd in 2000 and 1999, respectively. (e) Amounts reflect production before royalties, excluding Canada and the United States where amounts shown are after royalties. 15 At year-end 2001, Marathon was producing crude oil and/or natural gas in seven countries, including the United States. Marathon's worldwide liquid hydrocarbon production, including Marathon's proportionate share of equity investees' production, increased one percent over 2000 levels. Marathon's 2001 worldwide sales of natural gas production, including Marathon's proportionate share of equity investees' production, increased approximately three percent from 2000. In addition to sales of 441 net mmcfd of international natural gas production, Marathon sold 8 net mmcfd of natural gas acquired for injection and resale during 2001. In total, Marathon's 2001 worldwide production averaged 421,000 BOE per day. In 2002, Marathon's worldwide production is expected to average 430,000 BOE per day. The above projection of 2002 worldwide liquid hydrocarbon production and natural gas volumes is a forward-looking statement. Some factors that could potentially affect timing and levels of production include pricing, supply and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, reserve estimates, reserve replacement rates, production decline rates of mature fields, timing of commencing production from new wells, drilling rig availability, future acquisitions of producing properties, and other geological, operating and economic considerations. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statement. United States Including Marathon's proportionate share of equity investee production, approximately 65 percent of Marathon's 2001 worldwide liquid hydrocarbon production, and 63 percent of its worldwide natural gas production were from domestic operations. Marathon's principal domestic producing areas are located in the U.S. Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma, Texas and Wyoming. Marathon's ongoing domestic growth strategy is to apply its technical expertise in fields with undeveloped potential, to dispose of interests in non-core properties with limited upside potential and high production costs, and to acquire significant working interests in properties with high development potential. Gulf of Mexico - During 2001, Marathon's Gulf of Mexico production averaged 71,600 net bpd of liquid hydrocarbons and 112 net mmcfd of natural gas, representing 53 percent and 14 percent of Marathon's total U.S. liquid hydrocarbon and natural gas production, respectively. Liquid hydrocarbon and natural gas production increased by 10,000 net bpd and by 24 net mmcfd, respectively, from the prior year, mainly due to the ramp up and full year's production from Viosca Knoll 786 (Petronius) and the addition of Ursa which Marathon acquired in the December 2000 Sakhalin Energy exchange with Shell. At year-end 2001, Marathon held working interests in 9 producing fields and 17 platforms, of which 7 platforms are operated by Marathon. Production from Marathon's interests in the deepwater Gulf accounted for approximately 93 percent of total Gulf of Mexico production in 2001. Major components of Marathon's deepwater portfolio include the Marathon-operated Ewing Bank 873, 917, and 963 and the co-venturer operated Green Canyon 244 and Viosca Knoll 786. Alaska - Marathon's production from Alaska averaged 179 net mmcfd of natural gas in 2001, compared with 160 net mmcfd in 2000. Marathon's primary focus in Alaska is the expansion of its natural gas business through exploration, development and marketing. New Mexico - Production in New Mexico, primarily from the Indian Basin field, averaged 15,000 net bpd and 150 net mmcfd in 2001, compared with 12,600 net bpd and 121 net mmcfd in 2000. The increase in gas production was primarily due to ongoing development of the eastern area of the Indian Basin field and was preceded by the expansion in 2000 of Marathon's Indian Basin Gas Plant. Oklahoma - Gas production for 2001 averaged 124 net mmcfd, representing 16 percent of Marathon's total U.S. gas production, compared with 151 net mmcfd in 2000. The decrease in gas production was primarily due to the decline in Knox Morrow production. Texas - Onshore production for 2001 averaged 17,400 net bpd of liquid hydrocarbons and 111 net mmcfd of natural gas, representing 13 percent of Marathon's total U.S. liquid hydrocarbon and 14 percent of natural gas production. Liquid production volumes decreased by 6,000 net bpd from 2000 levels, and gas volumes decreased by 21 net mmcfd from 2000 levels. The volume decreases were mainly due to natural decline and reduced net volumes from the Yates field due to the contribution of Yates assets to the MKM joint venture. Wyoming - Liquid hydrocarbon production for 2001 averaged 24,600 net bpd, representing 18 percent of Marathon's total U.S. liquid hydrocarbon production. Average gas production increased to 90 net mmcfd in 2001 compared to 45 net mmcfd in 2000, as a result of the Pennaco acquisition. 16 International Marathon holds interests in liquid hydrocarbon and/or natural gas production in the U.K. North Sea, the U.K. Atlantic Margin, the Irish Celtic Sea, the Norwegian North Sea, Canada and Gabon. In addition, Marathon has interests through an equity investee in the Netherlands North Sea and recently completed an acquisition of interests in Equatorial Guinea, West Africa. U.K. North Sea - Production from the Brae area averaged 21,700 net bpd of liquid hydrocarbons in 2001, compared with 26,500 net bpd in 2000. The decrease is mainly within the Central and East Brae fields, reflecting field decline. The Brae A platform and facilities act as the host for the underlying South Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. The North Brae field, which is produced via the Brae B platform, and the East Brae field are gas condensate fields. These fields are produced using the gas cycling technique, whereby gas is injected into the reservoir for pressure maintenance, improved sweep efficiency and increased condensate liquid recovery. Although partial cycling continues, the majority of North Brae gas is being transferred to the East Brae reservoir for pressure maintenance and sales. The strategic location of the Brae A, Brae B and East Brae platforms and pipeline infrastructure has generated significant third-party processing and transportation business since 1986. Currently, there are 14 agreements with third-party fields contracted to use the Brae system. In addition to generating processing and pipeline tariff revenue, this third-party business also has a favorable impact on Brae area operations by optimizing infrastructure usage and extending the economic life of the facilities. Marathon owns a 41.6 percent interest in the Brae group which owns a 50 percent interest in the Scottish Area Gas Evacuation ("SAGE") system. The other 50 percent is owned by the Beryl group, which operates the system. The SAGE system provides pipeline transportation and onshore processing for Brae- area gas and has a total wet gas capacity of approximately 1.0 bcfd. Pipelines connect the Brae, Britannia, Beryl and Scott fields to the SAGE gas processing terminal at St. Fergus in northeast Scotland. Marathon's total United Kingdom gas sales from all sources averaged 242 net mmcfd in 2001, compared with 223 net mmcfd in 2000. Of these totals, 234 mmcfd and 212 mmcfd was Brae-area gas in 2001 and 2000, respectively, and 8 mmcfd and 11 mmcfd was gas acquired for injection and subsequent resale in 2001 and 2000, respectively. U.K. Atlantic Margin - Production from the Foinaven fields averaged 24,300 net bpd of liquid hydrocarbons in 2001. Ireland - Marathon holds a 100 percent working interest in the Kinsale Head, Ballycotton and Southwest Kinsale fields in the Irish Celtic Sea. Natural gas sales were 79 net mmcfd in 2001, compared with 115 net mmcfd in 2000. This reduction is due to natural field declines and changes to the production profile of the Southwest Kinsale field. The Southwest Kinsale field has been converted to a gas storage reservoir, where gas is injected in the summer and produced to meet peak demand in the winter. Norway - In the Norwegian North Sea, Marathon holds a 23.8 percent working interest in the Heimdal field. Production of the remaining remnant gas from Heimdal commenced in August 2001 with sales of 5 net mmcfd. Marathon also holds a 46.904 percent working interest in the Vale field. The Vale single well sub-sea development will be tied back to the Heimdal platform, with first production expected early 2002. Canada - Production in Canada averaged 11,000 bpd and 123 mmcfd in 2001, compared with 18,400 bpd and 143 mmcfd in 2000. During 2001, Marathon executed a strategic plan to rationalize operations in Western Canada. As a result, Marathon disposed of a significant number of non-core conventional oil and gas properties as well as all heavy oil assets, equating to approximately 127 million BOE of net remaining proved reserves. Annualized production sold approximated 9,800 net bpd and 30 net mmcfd. Gabon - Production in Gabon averaged 16,000 net bpd of liquid hydrocarbons in 2001, compared with 15,800 net bpd in 2000. This increase reflected a full year of production from the Cap Lopez formation of the Tchatamba South field, which began production in December 2000, and a full year of production from the Tchatamba West field, which began production in November 2000. These additions were partially offset by a reduction in Marathon's net share of gross production, based on the payout terms of the production sharing contract with Gabonese authorities. 17 Netherlands - Marathon's 50 percent equity interest in CLAM provides a 5 percent entitlement in the production from 25 gas fields, which provided sales of 31 net mmcfd of natural gas in 2001, compared with 29 net mmcfd in 2000. The following tables set forth productive wells and service wells for each of the last three years and drilling wells as of December 31, 2001. Gross and Net Wells
2001 Productive Wells(a) - ---- ------------------------ Service Drilling Oil Gas Wells(b) Wells(c) ------------ ----------- ----------- --------- Gross Net Gross Net Gross Net Gross Net - -------------------------------------------------------------------------------- United States.................... 6,550 2,415 4,828 2,935 2,852 856 25 18 Europe........................... 53 20 63 35 27 8 3 1 Other International.............. 508 251 1,352 986 52 25 3 1 ------ ----- ----- ----- ----- ----- --- --- Total Consolidated............. 7,111 2,686 6,243 3,956 2,931 889 31 20 Equity Investees(d).............. 2,002 609 83 4 1,142 243 1 0 ------ ----- ----- ----- ----- ----- --- --- WORLDWIDE........................ 9,113 3,295 6,326 3,960 4,073 1,132 32 20 ====== ===== ===== ===== ===== ===== === === 2000(e) Productive Wells(a) - ------- ------------------------ Service Oil Gas Wells(b) ------------ ----------- ----------- Gross Net Gross Net Gross Net United States.................... 8,013 3,113 2,526 1,275 3,103 976 Europe........................... 54 18 66 34 25 9 Other International.............. 927 665 1,450 1,084 136 109 ------ ----- ----- ----- ----- ----- Total Consolidated............. 8,994 3,796 4,042 2,393 3,264 1,094 Equity Investee(d)............... - - 85 5 - - ------ ----- ----- ----- ----- ----- WORLDWIDE........................ 8,994 3,796 4,127 2,398 3,264 1,094 ====== ===== ===== ===== ===== ===== 1999 Productive Wells(a) - ---- ------------------------ Service Oil Gas Wells(b) ------------ ----------- ----------- Gross Net Gross Net Gross Net United States.................... 8,654 3,205 3,122 1,396 3,617 1,056 Europe........................... 36 14 65 33 18 7 Other International.............. 1,590 754 1,746 1,214 461 133 ------ ----- ----- ----- ----- ----- Total Consolidated............. 10,280 3,973 4,933 2,643 4,096 1,196 Equity Investees(d).............. 5 2 83 4 1 - ------ ----- ----- ----- ----- ----- WORLDWIDE........................ 10,285 3,975 5,016 2,647 4,097 1,196 - --------------------------------------------------------------------------------
(a) Includes active wells and wells temporarily shut-in. Of the gross productive wells, gross wells with multiple completions operated by Marathon totaled 442, 469 and 478 in 2001, 2000 and 1999, respectively. Information on wells with multiple completions operated by other companies is not available to Marathon. (b) Consist of injection, water supply and disposal wells. (c) Consist of exploratory and development wells. (d) Represents MKM and CLAM in 2001, CLAM in 2000 and CLAM and Sakhalin Energy in 1999. (e) Certain amounts have been restated. 18 Refining, Marketing and Transportation Refining, Marketing and Transportation ("RM&T") operations are primarily conducted by MAP and its subsidiaries, including its wholly-owned subsidiaries, Speedway SuperAmerica LLC and Marathon Ashland Pipe Line LLC. Marathon holds a 62 percent interest in MAP and Ashland Inc. holds the remaining 38 percent interest. Refining MAP owns and operates seven refineries with an aggregate refining capacity of 935,000 barrels of crude oil per day. The table below sets forth the location and daily throughput capacity of each of MAP's refineries as of December 31, 2001: In-Use Refining Capacity (Barrels per Day) Garyville, LA............... 232,000 Catlettsburg, KY............ 222,000 Robinson, IL................ 192,000 Detroit, MI................. 74,000 Canton, OH.................. 73,000 Texas City, TX.............. 72,000 St. Paul Park, MN........... 70,000 ------- TOTAL....................... 935,000 =======
MAP's refineries include crude oil atmospheric and vacuum distillation, fluid catalytic cracking, catalytic reforming, desulfurization and sulfur recovery units. The refineries have the capability to process a wide variety of crude oils and to produce typical refinery products, including reformulated gasoline. MAP's refineries are integrated via pipelines and barges to maximize operating efficiency. The transportation links that connect the refineries allow the movement of intermediate products to optimize operations and the production of higher margin products. For example, naphtha may be moved from Texas City and Catlettsburg to Robinson where excess reforming capacity is available, gas oil may be moved from Robinson to Detroit and Catlettsburg where excess fluid catalytic cracking unit capacity is available, and light cycle oil may be moved from Texas City to Robinson where excess desulfurization capacity is available. MAP also produces asphalt cements, polymerized asphalt, asphalt emulsions and industrial asphalts. MAP manufactures petroleum pitch, primarily used in the graphite electrode, clay target and refractory industries. Additionally, MAP manufactures aromatics, aliphatic hydrocarbons, cumene, base lube oil, polymer grade propylene and slack wax. 19 During 2001, MAP's refineries processed 929,000 bpd of crude oil and 143,000 bpd of other charge and blend stocks. The following table sets forth MAP's refinery production by product group for each of the last three years: Refined Product Yields
(Thousands of Barrels per Day) 2001 2000 1999 - -------------------------------------------------------------------------------- Gasoline...................................................... 581 552 566 Distillates................................................... 286 278 261 Propane....................................................... 22 20 22 Feedstocks & Special Products................................. 69 74 66 Heavy Fuel Oil................................................ 39 43 43 Asphalt....................................................... 76 74 69 ----- ----- ----- TOTAL......................................................... 1,073 1,041 1,027 ===== ===== =====
Planned maintenance activities requiring temporary shutdown of certain refinery operating units ("turnarounds") are periodically performed at each refinery. MAP completed a major turnaround at its Detroit refinery in 2001. The Garyville, Louisiana coker unit project achieved mechanical completion in October 2001 and was operating at full production capacity by mid-December 2001. This unit allows for the use of heavier, lower-cost crude and reduces the production of heavy fuel oil. To supply this new unit, MAP entered into a multi-year contract with P.M.I. Comercio Internacional, S.A. de C.V. ("PMI"), an affiliate of Petroleos Mexicanos ("PEMEX"), to purchase approximately 90,000 bpd of heavy Mayan crude oil. Marketing In 2001, MAP's refined product sales volumes (excluding matching buy/sell transactions) totaled 19.3 billion gallons (1,259,000 bpd). Excluding sales related to matching buy/sell transactions, the wholesale distribution of petroleum products to private brand marketers and to large commercial and industrial consumers, primarily located in the Midwest, the upper Great Plains and the Southeast, and sales in the spot market, accounted for about 65 percent of MAP's refined product sales volumes in 2001. Approximately 47 percent of MAP's gasoline volumes and 82 percent of its distillate volumes were sold on a wholesale or spot market basis to independent unbranded customers or other wholesalers in 2001. 20 MAP markets asphalt through owned and leased terminals throughout the Midwest and Southeast. The MAP customer base includes approximately 900 asphalt paving contractors, government entities (states, counties, cities and townships) and asphalt roofing shingle manufacturers. The following table sets forth the volume of MAP's consolidated refined product sales by product group for each of the last three years: Refined Product Sales
(Thousands of Barrels per Day) 2001 2000 1999 - -------------------------------------------------------------------------------- Gasoline...................................................... 748 746 714 Distillates................................................... 345 352 331 Propane....................................................... 21 21 23 Feedstocks & Special Products................................. 71 69 66 Heavy Fuel Oil................................................ 41 43 43 Asphalt....................................................... 78 75 74 ----- ----- ----- TOTAL......................................................... 1,304 1,306 1,251 ===== ===== ===== Matching Buy/Sell Volumes included in above................... 45 52 45
MAP sells reformulated gasoline in parts of its marketing territory, primarily Chicago, Illinois; Louisville, Kentucky; Northern Kentucky; and Milwaukee, Wisconsin. MAP also markets low-vapor-pressure gasoline in nine states. As of December 31, 2001, MAP supplied petroleum products to about 3,800 Marathon and Ashland branded retail outlets located primarily in Michigan, Ohio, Indiana, Kentucky and Illinois. Branded retail outlets are also located in Florida, West Virginia, Georgia, Wisconsin, Minnesota, Tennessee, Virginia, Pennsylvania, North Carolina, South Carolina and Alabama. In 2001, retail sales of gasoline and diesel fuel were also made through company-operated outlets by a wholly owned MAP subsidiary, Speedway SuperAmerica LLC ("SSA"). As of December 31, 2001, this subsidiary had 2,104 retail outlets in 16 states which sold petroleum products and convenience- store merchandise and services, primarily under the brand names "Speedway" and "SuperAmerica". Excluding the travel centers contributed to Pilot Travel Centers LLC, as described below, SSA's revenues from the sale of convenience- store merchandise totaled $2.3 billion in 2001, compared with $2.2 billion in 2000. Profit levels from the sale of such merchandise and services tend to be less volatile than profit levels from the retail sale of gasoline and diesel fuel. Effective September 1, 2001, MAP and Pilot Corporation ("Pilot") completed a transaction to form Pilot Travel Centers LLC ("PTC"), which combined SSA's and Pilot's travel centers. Pilot and MAP each own a 50 percent interest in PTC. PTC is the largest operator of travel centers in the United States with about 230 locations in 35 states. The travel centers offer diesel fuel, gasoline and a variety of other services, including on-premises brand-name restaurants. PTC provides MAP with the opportunity to participate in the travel center business on a nationwide basis. Supply and Transportation MAP obtains the crude oil it processes from negotiated contracts and spot purchases or exchanges. In 2001, MAP's net purchases of U.S. crude oil for refinery input averaged 403,000 bpd, including 28,000 bpd from Marathon. In 2001, 57 percent or 526,000 bpd of the crude oil processed by MAP's refineries was from foreign sources, including approximately 303,000 bpd from the Middle East. This crude was acquired from various foreign national oil companies, producing companies and traders. MAP operates a system of pipelines and terminals to provide crude oil to its refineries and refined products to its marketing areas. At December 31, 2001, MAP owned, leased or had an ownership interest in approximately 3,450 miles of crude oil trunk lines and 2,847 miles of products trunk lines. MAP owned a 46.7 percent interest in LOOP LLC ("LOOP"), which is the owner and operator of the only U.S. deepwater oil port, located 18 miles off the coast of Louisiana; a 49.9 percent interest in LOCAP LLC ("LOCAP"), which is the owner and operator of a crude oil pipeline connecting LOOP and the Capline system; and a 37.2 percent interest in the Capline system, a large diameter crude oil pipeline extending from St. James, Louisiana to Patoka, Illinois. MAP also has a 33.3 percent ownership interest in Minnesota Pipe Line Company, which operates a crude oil pipeline in Minnesota. Minnesota Pipe Line Company provides MAP with access to crude oil common carrier 21 transportation from Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity of MAP's St. Paul Park, Minnesota, refinery. MAP has a 33.3 percent ownership interest in Centennial Pipeline LLC, a limited liability company formed to develop an interstate refined petroleum products pipeline extending from the U.S. Gulf of Mexico to the Midwest. In March 2001, the Federal Energy Regulatory Commission approved the abandonment of a 720-mile, 26-inch diameter pipeline extending from Longville, Louisiana to Bourbon, Illinois, from natural gas service, thereby allowing conversion to refined products service by Centennial Pipeline LLC. Also as part of the project, a two million barrel terminal storage facility has been constructed and a new 74-mile, 24-inch diameter pipeline extending from Beaumont, Texas, to Longville, Louisiana has been built. Marathon Ashland Pipe Line LLC has been designated operator of the pipeline. The Centennial Pipeline system will connect with existing MAP transportation assets and other common carrier lines. It is expected to be operational in the first quarter of 2002. A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company, and the pipeline will be an interstate common carrier pipeline. The pipeline is currently known as Cardinal Products Pipe Line and is expected to initially move about 50,000 barrels per day of refined petroleum into the central Ohio region. As of December 2001, ORPL had secured all of the rights-of-way required to build the pipeline. Applications for the remaining construction permits have been filed. Construction is currently planned for summer 2002 pending receipt of permits, with start-up of the pipeline to follow in first half 2003. MAP's 88 light product and asphalt terminals are strategically located throughout the Midwest, upper Great Plains and Southeast. These facilities are supplied by a combination of pipelines, barges, rail cars and/or trucks. MAP's marine transportation operations include towboats and barges that transport refined products on the Ohio, Mississippi and Illinois rivers, their tributaries and the Intercoastal Waterway. MAP also leases and owns rail cars in various sizes and capacities for movement and storage of petroleum products and a large number of tractors, tank trailers and general service trucks. The above RM&T discussions include forward-looking statements concerning anticipated pipeline projects. Some factors that could potentially cause actual results to differ materially from present expectations include (among others) price of petroleum products, levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions and regulatory approval constraints. This forward-looking information may prove to be inaccurate and actual results may differ significantly from those presently anticipated. Other Energy Related Businesses Natural Gas and Crude Oil Marketing and Transportation Marathon owns an interest in the following pipeline systems that were not contributed to MAP: Marathon has a 29 percent interest in Odyssey Pipeline LLC and a 28 percent interest in Poseidon Oil Pipeline Company, LLC, both Gulf of Mexico crude oil pipeline systems. Marathon has a 24 percent interest in Nautilus Pipeline Company, LLC and a 24 percent interest in Manta Ray Offshore Gathering Company, LLC, both Gulf of Mexico natural gas pipeline systems. Marathon has a 17 percent interest in Explorer Pipeline Company and a 2.5 percent interest in Colonial Pipeline Company, both light product pipeline systems extending from the Gulf of Mexico to the Midwest and East Coast, respectively. Marathon has a 30 percent ownership in a Kenai, Alaska, natural gas liquefication plant and two 87,500 cubic meter tankers used to transport liquefied natural gas ("LNG") to customers in Japan. Feedstock for the plant is supplied from a portion of Marathon's natural gas production in the Cook Inlet. From the first production in 1969, the LNG has been sold under a long- term contract with two of Japan's largest utility companies. Marathon has a 30 percent participation in this contract, which has been extended to continue through March 31, 2009. LNG deliveries totaled 66.5 gross bcf (20 net bcf) in 2001, up slightly from 2000. Marathon has a 34 percent ownership interest in the Neptune natural gas processing plant located in St. Mary Parish, Louisiana, which commenced operations on March 20, 2000. The plant has the capacity to process 300 mmcfd of natural gas, which is transported on the Nautilus pipeline system. 22 In addition to the sale of its own oil and natural gas production, Marathon purchases oil and gas from third-party producers and marketers for resale. Power Generation Marathon, through its wholly owned subsidiary, Marathon Power Company, Ltd., pursues development, construction, ownership and operation of integrated gas and electric power projects in the global electrical power market. Competition and Market Conditions Strong competition exists in all sectors of the oil and gas industry and, in particular, in the exploration and development of new reserves. Marathon competes with major integrated and independent oil and gas companies for the acquisition of oil and gas leases and other properties, for the equipment and labor required to develop and operate those properties and in the marketing of oil and natural gas to end-users. Many of Marathon's competitors have financial and other resources substantially greater than those available to Marathon. As a consequence, Marathon may be at a competitive disadvantage in bidding for the rights to explore for oil and gas. Acquiring the more attractive exploration opportunities frequently requires competitive bids involving substantial front-end bonus payments or commitments to work programs. Marathon also competes with its competitors in attracting and retaining personnel, including geologist, geophysicists and other specialists. Based on industry sources, Marathon believes it currently ranks eighth among U.S.-based petroleum corporations on the basis of 2000 worldwide liquid hydrocarbon and natural gas production. Marathon through MAP must also compete with a large number of other companies to acquire crude oil for refinery processing and in the distribution and marketing of a full array of petroleum products. MAP believes it ranks sixth among U.S. petroleum companies on the basis of crude oil refining capacity as of January 1, 2002. MAP competes in four distinct markets - wholesale, spot, branded and retail distribution--for the sale of refined products and believes it competes with about 50 companies in the wholesale distribution of petroleum products to private brand marketers and large commercial and industrial consumers; about 84 companies in the sale of petroleum products in the spot market; 12 refiner/marketers in the supply of branded petroleum products to dealers and jobbers; and over 600 petroleum product retailers in the retail sale of petroleum products. Marathon also competes in the convenience store industry through SSA's retail outlets. The retail outlets offer consumers gasoline, diesel fuel (at selected locations) and a broad mix of other merchandise and services. Some locations also have on-premises brand-name restaurants such as Subway(TM) and Taco Bell(TM). Marathon's operating results are affected by price changes in crude oil, natural gas and petroleum products, as well as changes in competitive conditions in the markets it serves. Generally, results from production operations benefit from higher crude oil and natural gas prices while refining and marketing margins may be adversely affected by crude oil price increases. Market conditions in the oil and gas industry are cyclical and subject to global economic and political events. Employees Marathon had 30,671 active employees as of December 31, 2001, including 27,698 MAP employees. Of the total number of MAP employees, 21,223 were employees of Speedway SuperAmerica LLC, most of whom were employees at retail marketing outlets. Certain hourly employees at the Catlettsburg and Canton refineries are represented by the Paper, Allied-Industrial, Chemical and Energy Workers International Union under labor agreements that expired on January 31, 2002. Negotiations are underway on new collective bargaining agreements. Certain hourly employees at the Texas City refinery are represented by the same union under a labor agreement that is scheduled to expire on March 31, 2002. Certain hourly employees at the St. Paul Park and Detroit refineries are represented by the International Brotherhood of Teamsters under labor agreements that are scheduled to expire on May 31, 2002 and January 31, 2003, respectively. Properties The location and general character of the principal oil and gas properties, refineries and gas plants, pipeline systems and other important physical properties of Marathon are described above. Except for oil and gas producing properties, which generally are leased, or as otherwise stated, such properties are held in fee. The plants and facilities have been constructed or acquired over a period of years and vary in age and operating efficiency. At the 23 date of acquisition of important properties, titles were examined and opinions of counsel obtained, but no title examination has been made specifically for the purpose of this document. The properties classified as owned in fee generally have been held for many years without any material unfavorably adjudicated claim. The basis for estimating oil and gas reserves is set forth in "Consolidated Financial Statements and Supplementary Data - Supplementary Information on Oil and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas Reserves" on pages F-36 and F-37. Unless otherwise indicated, all reserves shown are as of December 31, 2001. Property, Plant and Equipment Additions For property, plant and equipment additions, see "Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity - Capital Expenditures" on page 37. Environmental Matters Marathon maintains a comprehensive environmental policy overseen by the Corporate Governance and Public Policy Committee of Marathon's Board of Directors. Marathon's Health, Environment and Safety organization has the responsibility to ensure that Marathon's operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Health, Environment and Safety Management Committee, which is comprised of officers of Marathon, is charged with reviewing its overall performance with various environmental compliance programs. Marathon has also formed an Emergency Management Team, composed of senior management, which will oversee the response to any major emergency environmental incident involving Marathon or any of its properties. Marathon's businesses are subject to numerous laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act ("CAA") with respect to air emissions, the Clean Water Act ("CWA") with respect to water discharges, the Resource Conservation and Recovery Act ("RCRA") with respect to solid and hazardous waste treatment, storage and disposal, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to releases and remediation of hazardous substances and the Oil Pollution Act of 1990 ("OPA-90") with respect to oil pollution and response. In addition, many states where Marathon operates have similar laws dealing with the same matters. These laws and their associated regulations are subject to frequent change and many of them have become more stringent. In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and impose liability on Marathon for the conduct of others or conditions others have caused, or for Marathon's acts that complied with all applicable requirements when we performed them. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable, due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been finalized or, in some instances, are undergoing revision. These environmental laws and regulations, particularly the 1990 Amendments to the CAA, new water quality standards and stricter fuel regulations, could result in increased capital, operating and compliance costs. For a discussion of environmental capital expenditures and costs of compliance for air, water, solid waste and remediation, see "Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies" on page 40 and "Legal Proceedings" on page 26. Marathon has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures are not ultimately reflected in the prices of Marathon's products and services, Marathon's operating results will be adversely affected. Marathon believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil or refined products. In connection with government inspections at some of its refineries, MAP has received a number of notices of violations of environmental laws from the U.S. Environmental Protection Agency (the "EPA") and state environmental agencies. In some cases, MAP has entered into consent decrees or orders that require it to pay fines or install pollution controls to settle its alleged liability. For example, MAP agreed to settle alleged violations of 24 several environmental laws, including New Source Review regulations, with a consent decree signed on May 11, 2001. The agreement requires MAP to complete certain agreed upon environmental control programs over an eight-year period. The current estimated cost to complete these programs is approximately $300 million in expenditures over the next seven years. The agreement also requires MAP to perform supplemental environmental projects which are expected to cost approximately $8 million. These supplemental environmental projects are being undertaken as part of this settlement of an enforcement action for alleged CAA violations. In addition, MAP paid a $3.8 million penalty in 2001. Air Of particular significance to MAP are new EPA regulations that require substantially reduced sulfur levels in the manufacture of gasoline and diesel fuel. Marathon estimates that MAP's combined capital costs to achieve compliance with these rules could amount to approximately $700 million between 2002 and 2006. Some factors that could potentially affect MAP's gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating and logistical considerations, further refinement of preliminary engineering studies and project scopes and unforeseen hazards. In July 1997, the EPA promulgated more stringent revisions to the National Ambient Air Quality Standards ("NAAQS") for ozone and particulate matter. These revisions had been vacated by the Court of Appeals for the District of Columbia and remanded to the EPA for further action. The EPA sought review of the matter by the United States Supreme Court, and the Supreme Court heard the case in the fall of 2000. On February 27, 2001, the Supreme Court affirmed in part, reversed in part and remanded the case to the EPA to develop a reasonable interpretation of the nonattainment implementation provisions insofar as they relate to the revised ozone NAAQS. On remand, the EPA stood firm on the ozone standard, but another part of this case remains with the D.C. Circuit Court of Appeals for further determination. Additionally, in 1998, the EPA published a nitrogen oxide ("NOx") State Implementation Plan ("SIP") call, which would require some 22 states, including many states where Marathon has operations, to revise their SIPs to reduce NOx emissions. In December 1999, the EPA granted a petition from several northeastern states requesting that stricter NOx standards be adopted by midwestern states, including several states where Marathon has refineries. The impact of the revised NAAQS and NOx standards could be significant to Marathon, but the potential financial effects cannot be reasonably estimated until the EPA takes further action on the revised ozone NAAQS (along with any further judicial review) and the states, as necessary, develop and implement revised SIPs in response to the revised NAAQS and NOx standards. Water Marathon maintains numerous discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA and has implemented systems to oversee its compliance efforts. In addition, Marathon is regulated under OPA-90, which amended the CWA. Among other requirements, OPA-90 requires the owner or operator of a tank vessel or a facility to maintain an emergency plan to respond to releases of oil or hazardous substances. Also, in case of such releases OPA-90 requires responsible companies to pay resulting removal costs and damages, provides for substantial civil penalties and imposes criminal sanctions for violations of its provisions. Additionally, OPA-90 requires that new tank vessels entering or operating in domestic waters be double-hulled and that existing tank vessels that are not double-hulled be retrofitted or removed from domestic service, according to a phase-out schedule. Most of the barges used in MAP's river transportation operations meet the double-hulled requirements of OPA-90. Single-hulled barges owned and operated by MAP are in the process of being phased out. Displaced single-hulled barges will be divested or recycled into docks or floats within MAP's system. Marathon operates facilities at which spills of oil and hazardous substances could occur. Several coastal states in which Marathon operates have passed state laws similar to OPA-90, but with expanded liability provisions, including provisions for cargo owner responsibility as well as ship owner and operator responsibility. Marathon has implemented emergency oil response plans for all of its components and facilities covered by OPA-90. Solid Waste Marathon continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of underground storage tanks ("USTs") containing regulated substances. Since the EPA has not yet promulgated implementing regulations for all provisions of RCRA and has not yet made clear the 25 practical application of all the implementing regulations it has promulgated, the ultimate cost of compliance with this statute cannot be accurately estimated. In addition, new laws are being enacted and regulations are being adopted by various regulatory agencies on a continuing basis, and the costs of compliance with these new rules can only be broadly appraised until their implementation becomes more accurately defined. Remediation Marathon operates certain retail outlets where, during the normal course of operations, releases of petroleum products from USTs have occurred. Federal and state laws require that contamination caused by such releases at these sites be assessed and remediated to meet applicable standards. The enforcement of the UST regulations under RCRA has been delegated to the states, which administer their own UST programs. Marathon's obligation to remediate such contamination varies, depending on the extent of the releases and the stringency of the laws and regulations of the states in which it operates. A portion of these remediation costs may be recoverable from the appropriate state UST reimbursement fund once the applicable deductible has been satisfied. Accruals for remediation expenses and associated reimbursements are established for sites where contamination has been determined to exist and the amount of associated costs is reasonably determinable. As a general rule, Marathon and Ashland retained responsibility for certain remediation costs arising out of the prior ownership and operation of businesses transferred to MAP. Such continuing responsibility, in certain situations, may be subject to threshold or sunset agreements, which gradually diminish this responsibility over time. Item 3. Legal Proceedings Marathon is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are included below in this discussion. The ultimate resolution of these contingencies could, individually or in the aggregate, be material. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Natural Gas Royalty Litigation Marathon was served in two qui tam cases, which allege that federal and Indian lessees violated the False Claims Act with respect to the reporting and payment of royalties on natural gas and natural gas liquids. The first case, U.S. ex rel Jack J. Grynberg v. Alaska Pipeline Co., et al. is primarily a gas measurement case, and the second case, U.S. ex rel Harrold e. Wright v Agip Petroleum Co. et al, is primarily a gas valuation case. These cases assert that false claims have been filed by lessees and that penalties, damages and interest total more than $25 billion. The Department of Justice has announced that it would intervene or has reserved judgment on whether to intervene against specified oil and gas companies and also announced that it would not intervene against certain other defendants including Marathon. In July 2001, the court in the consolidated proceeding denied defendants' motions to dismiss. Marathon intends to vigorously defend these cases. Cajun Express Arbitration Marathon canceled the Cajun Express rig contract on July 5, 2001 for persistent non-performance. Transocean Sedco Forex Inc. gave notice of its demand for arbitration on July 19, 2001 in which it sought net lost revenue of an unspecified amount. The contract may have generated $90 million dollars in gross revenues over the remainder of the 18 month period. Arbitration is scheduled for May 13, 2002 in Houston, Texas before one arbitrator applying the American Arbitration Association commercial rules. Marathon believes it properly canceled the contract and intends to vigorously defend against this claim. Environmental Proceedings The following is a summary of proceedings involving Marathon that were pending or contemplated as of December 31, 2001, under federal and state environmental laws. Except as described herein, it is not possible to predict accurately the ultimate outcome of these matters; however, management's belief set forth in the first paragraph under Item 3. "Legal Proceedings" above takes such matters into account. Claims under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expedite the cleanup of hazardous substances without regard to fault. Potentially responsible parties ("PRPs") for each site include present and former owners and operators of, transporters to and generators of the 26 substances at the site. Liability is strict and can be joint and several. Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, Marathon is unable to reasonably estimate its ultimate cost of compliance with CERCLA. Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from those stated in the forward-looking statements. At December 31, 2001, Marathon had been identified as a PRP at a total of 13 CERCLA waste sites. Based on currently available information, which is in many cases preliminary and incomplete, Marathon believes that its liability for cleanup and remediation costs in connection with all but one of these sites will be under $1 million per site, and most will be under $100,000. Marathon believes that its liability for cleanup and remediation costs in connection with the one remaining site will be under $4 million. In addition, there are three sites where Marathon has received information requests or other indications that it may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 114 additional sites, excluding retail marketing outlets, related to Marathon where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 13 were associated with properties conveyed to MAP by Ashland which have retained liability for all costs associated with remediation. Based on currently available information, which is in many cases preliminary and incomplete, Marathon believes that its liability for cleanup and remediation costs in connection with 18 of these sites will be under $100,000 per site, 32 sites have potential costs between $100,000 and $1 million per site, 12 sites may involve remediation costs between $1 million and $5 million per site and 7 sites have incurred remediation costs of more than $5 million per site. Of the 7 sites, only 1 site as described in the following paragraph has future costs that are estimated to exceed $5 million. There are 32 sites with insufficient information to estimate any remediation costs. There is one site that involves a remediation program in cooperation with the Michigan Department of Environmental Quality at a closed and dismantled refinery site located near Muskegon, Michigan. During the next 10 to 20 years, Marathon anticipates spending less than $7 million at this site. Expenditures in 2002 are expected to be approximately $500,000. Additionally, negotiations are taking place with the Michigan Department of Environmental Quality to eventually perform a risk-based closure on this site. In May 2001, Marathon and MAP settled, in a consent decree, EPA allegations that the Robinson refinery did not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the CAA. The government had alleged in a federal court lawsuit that the refinery's Total Annual Benzene releases exceeded the limitation of 10 megagrams per year, and as a result, the refinery was in violation of the benzene waste emission control, record keeping, and reporting requirements. The consent decree was approved by the court on July 26, 2001 and requires Marathon and MAP to pay a combined $1.6 million civil penalty and install various controls and other improvements. Marathon and MAP were also required to perform $125,000 in supplemental environmental projects, with these projects undertaken in connection with the settlement of an enforcement action undertaken by the United States. In 1998, the EPA conducted multi-media inspections of MAP's Detroit and Robinson refineries, covering compliance with the CAA, the CWA, reporting obligations under the Emergency Planning and Community Right to Know Act, CERCLA and the handling of process waste. The EPA served a number of Notices of Violation ("NOV") and Findings of Violation as a result of these inspections, but these allegations were resolved as part of the New Source Review consent decree which MAP agreed to on May 11, 2001. MAP's settlement with the EPA includes all of MAP's refineries and commits MAP to specific control technologies and implementation schedules for environmental expenditures and improvements to MAP's refineries over approximately an eight year period. The current estimated cost to complete these programs is approximately $300 million in expenditures over the next seven years. MAP is also committed to the performance of about $8 million in supplemental environmental projects and has paid an aggregate civil penalty in 2001 of $3.8 million, as part of this settlement of an enforcement action for alleged CAA violations. MAP believes that this settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions. The court approved this consent decree on August 28, 2001. 27 In 2000, the Kentucky Natural Resources and Environmental Cabinet ("Cabinet") sent Catlettsburg Refining, LLC a NOV seeking a $150,000 civil penalty for a tank rupture and spill at the Catlettsburg refinery. This matter is pending. In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in the form of an Agreed-to Administrative Order which was finalized and entered in January 2002 and required payment of a $170,000 penalty and reimbursement of past response costs up to $131,000. Item 4. Submission of Matters to a Vote of Security Holders A description of the matters voted upon by the stockholders of USX Corporation at an October 25, 2001 special meeting was reported in USX Corporation's Form 10-Q for the quarter ended September 30, 2001. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The principal market on which the Company's common stock is traded is the New York Stock Exchange. Information concerning the high and low sales prices for the common stock as reported in the consolidated transaction reporting system and the frequency and amount of dividends paid during the last two years is set forth in "Selected Quarterly Financial Data (Unaudited)" on page F-33. As of January 31, 2002, there were 69,264 registered holders of Marathon common stock. The Board of Directors intends to declare and pay dividends on Marathon common stock based on the financial condition and results of operations of Marathon Oil Corporation, although it has no obligation under Delaware law or the Restated Certificate of Incorporation to do so. In determining its dividend policy with respect to Marathon common stock, the Board will rely on the financial statements of Marathon. Dividends on Marathon common stock are limited to legally available funds of Marathon. 28 Item 6. Selected Financial Data(a)
Dollars in millions (except per share data) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------- Statement of Income Data: Total revenues and other income(b)....................... $33,066 $33,799 $23,666 $21,602 $15,670 Cost of revenues (excludes items shown below).................... 23,255 25,417 16,612 14,609 10,217 Selling, general and administrative expenses......... 726 643 498 519 379 Depreciation, depletion and amortization.................... 1,236 1,245 950 941 664 Taxes other than income taxes.... 4,679 4,626 4,218 4,029 3,030 Exploration expenses............. 144 238 238 313 188 Inventory market valuation charges (credits)............... 72 - (551) 267 284 ------- ------- ------- ------- ------- Income from operations........... 2,954 1,630 1,701 924 908 Net interest and other financial costs........................... 173 236 288 237 260 Minority interest in income of Marathon Ashland Petroleum LLC........... 704 498 447 249 - ------- ------- ------- ------- ------- Income from continuing operations before income taxes.......................... 2,077 896 966 438 648 Provision for income taxes....... 759 476 320 137 207 Income from continuing operations..................... 1,318 420 646 301 441 Income (loss) from discontinued operations..................... (169) (9) 59 373 547 Loss on disposition of United States Steel Corporation....... (984) - - - - ------- ------- ------- ------- ------- Income before extraordinary losses and cumulative effect of change in accounting principle...................... 165 411 705 674 988 Extraordinary losses............. - - (7) - - Cumulative effect of change in accounting principle............ (8) - - - - ------- ------- ------- ------- ------- Net income...................... $ 157 $ 411 $ 698 $ 674 $ 988 - -------------------------------------------------------------------------------- Segment Income From Operations: Exploration and production: Domestic........................ $ 1,124 $ 1,111 $ 494 $ 190 $ 500 International................... 297 420 124 88 273 Refining, marketing and transportation.................. 1,914 1,273 611 896 563 Other energy related business.... 60 42 61 33 48 ------- ------- ------- ------- ------- Segment income from operations.. 3,395 2,846 1,290 1,207 1,384 Items not allocated to segments.. (441) (1,216) 411 (283) (476) ------- ------- ------- ------- ------- Income from operations.......... $ 2,954 $ 1,630 $ 1,701 $ 924 $ 908 - -------------------------------------------------------------------------------- Earnings Per Share Common Stock Income from continuing operations Basic........................... $ 4.26 $ 1.35 $ 2.09 $ 1.03 $ 1.53 Diluted......................... $ 4.26 $ 1.35 $ 2.09 $ 1.02 $ 1.52 Net Income Basic........................... $ 1.22 $ 1.39 $ 2.11 $ 1.06 $ 1.59 Diluted......................... $ 1.22 $ 1.39 $ 2.11 $ 1.05 $ 1.58 Dividends paid per share........ $ .92 $ .88 $ .84 $ .84 $ .76 Shares of common stock outstanding (thousands) Basic........................... 309,150 311,531 309,696 292,876 288,038 Diluted......................... 309,510 311,761 310,010 293,435 290,520 Steel Stock Income/(loss) from discontinued operations Basic........................... $ (1.90) $ (.10) $ .67 $ 4.16 $ 6.35 Diluted......................... $ (1.90) $ (.10) $ .67 $ 4.02 $ 5.89 Net Income/(loss) Basic........................... $ (2.73) $ (.33) $ .40 $ 4.05 $ 5.24 Diluted......................... $ (2.74) $ (.33) $ .40 $ 3.92 $ 4.88 Dividends paid per share........ $ .55 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Shares of common stock outstanding (thousands) Basic........................... 89,058 88,613 88,392 87,508 85,672 Diluted......................... 89,058 88,613 88,396 94,943 94,203
- -------------------------------------------------------------------------------- (a) Historical data has been restated to reflect the effect of the separation of United States Steel. (b) Consists of revenues, dividend and investee income, gain on ownership change in MAP, net gain/(losses) on disposal of assets and other income. 29
Dollars in millions (except per share data) 2001 2000 1999 1998 1997 - -------------------------------------------------------------------------------- Other Data: Net cash from operating activities (from continuing operations)................... $2,919 $3,146 $2,008 $1,633 $1,231 Capital expenditures...................... 1,639 1,425 1,378 1,270 1,038 Ratio of earnings to fixed charges(b)..... 7.47 4.06 4.24 2.60 2.55 Ratio of earnings to combined fixed charges and preferred stock dividends(b)............................. 7.26 3.95 4.11 2.51 2.43 - -------------------------------------------------------------------------------- Balance Sheet Data: Cash and cash equivalents................. $ 657 $ 340 $ 111 $ 137 $ 36 Working capital........................... 943 973 937 366 (244) Net property, plant and equipment......... 9,578 9,375 10,293 10,429 7,566 Total assets.............................. 16,129 17,151 17,730 16,637 12,347 Long-term debt............................ 3,432 1,937 3,320 3,456 2,476 Minority interest in Marathon Ashland Petroleum LLC............................ 1,963 1,840 1,753 1,590 - Total stockholders' equity................ 4,940 6,764 6,856 6,405 5,400
- ------------------------------------------------------------------------------- (b) Amounts represent fixed charges and earnings from continued operations. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations On December 31, 2001, USX Corporation disposed of its steel business through a tax-free distribution of the common stock of its wholly-owned subsidiary United States Steel Corporation ("United States Steel") to holders of USX-U.S. Steel Group common stock ("Steel Stock") in exchange for all outstanding shares of Steel Stock on a one-for-one basis (the "Separation") and changed its name to Marathon Oil Corporation ("Marathon"). Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned subsidiary Marathon Ashland Petroleum LLC ("MAP"); and other energy related businesses. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Financial Statements and Notes to Consolidated Financial Statements. Marathon's 2001 financial performance benefited from strong worldwide natural gas prices and domestic refining margins. However, later in the year, performance was negatively impacted by lower crude oil and natural gas prices, as well as lower downstream margins, primarily from decreased demand caused by the general downturn in the global economy and warmer than normal weather. Certain sections of Management's Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements concerning trends or events potentially affecting the businesses of Marathon. These statements typically contain words such as "anticipates", "believes", "estimates", "expects", "targets" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of Marathon, see "Disclosures Regarding Forward-Looking Statements" on page 2. Management's Discussion and Analysis of Critical Accounting Policies The preparation of consolidated financial statements for Marathon requires management to make estimates and judgments that affect the amounts reported in the primary financial statements and the related footnote disclosures. Marathon considers the following accounting policies to be most significantly impacted by the estimates and judgments used in the preparation of its consolidated financial statements. Deferred Taxes Oil and gas exploration and production is a global business. As a result, Marathon is subject to taxation on its income in numerous jurisdictions. State and local income taxes are deductible and foreign income taxes in certain circumstances are creditable against U. S. federal income taxes. These interrelationships complicate the assessment of the realizability of deferred income tax assets. Marathon considers future taxable income in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable income, including factors such as future operating conditions (particularly as related to prevailing oil prices). The 30 judgments and assumptions used in determining future taxable income are consistent with those used for other financial statement purposes, including the determination of possible impairment of long-lived assets held and used. Additionally, generally accepted accounting principles require that Marathon consider any prudent and feasible tax planning strategies that would minimize the amount of deferred tax liabilities recognized or the amount of any valuation allowance recognized against deferred tax assets. The principal tax planning strategy available to Marathon relates to the permanent reinvestment of the earnings of foreign subsidiaries. As a result of the complexities inherent in multiple tax jurisdictions and the focus of generally accepted accounting principles on the proper measurement of deferred taxes recorded on the balance sheet, deferred tax adjustments included in the provision for income taxes do not necessarily correspond with amounts reported in income before income taxes. Property, Plant and Equipment Marathon uses the successful efforts method of accounting for its oil and gas producing activities. The successful efforts method inherently relies upon the estimation of proved reserves, which includes proved developed and proved undeveloped volumes. The existence and the estimated amount of proved reserves affects, among other things, whether or not costs are capitalized or expensed, the amount and timing of costs depleted or amortized into income and whether or not the costs capitalized in the balance sheet should be impaired. Marathon's estimation of total proved reserves is a highly technical process performed primarily by in-house reservoir engineers and geoscience professionals. The actual recoverability of hydrocarbons can vary from estimated amounts. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of proved reserves are subject to potentially substantial changes, either positively or negatively, as additional information becomes available and contractual and economic conditions change. Marathon adheres to Statement of Financial Accounting Standard ("SFAS") No. 19 for recognizing any impairment of capitalized costs relating to unproved property investments. Generally, the greatest portion of these costs relate to the acquisition of leasehold interests. The costs incurred are capitalized and periodically evaluated as to recoverability, based on changes brought about by general economic factors and potential shifts in the business strategy employed by management. Marathon considers a combination of time and geologic factors to evaluate the need for impairment of these capitalized costs. Contingent Liabilities Marathon accrues liabilities for income and other tax deficiencies in accordance with SFAS No. 5. Such contingent obligations are assessed regularly by Marathon's in-house tax legal counsel and advisers. In certain circumstances, outside legal counsel is utilized. Each potential issue is assessed individually, although accrued liabilities are aggregated and recorded by jurisdiction and by type of tax. Although it is difficult to predict with any degree of certainty the ultimate outcome of examinations of open tax years, management believes that the recorded amounts are reasonable. Marathon accrues its environmental remediation liabilities in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position 96-1. Liabilities for litigation claims and settlements are accrued in accordance with SFAS No. 5. Such contingent obligations are assessed regularly by Marathon's in-house legal counsel. In certain circumstances, outside legal counsel is utilized. Both environmental remediation liabilities and liabilities for litigation claims and settlements are recognized based on the likelihood of a third party having a viable claim against Marathon's assets. Each potential liability is assessed individually. For additional information on environmental liabilities, see Note 3 to the Financial Statements. Employee Related Benefits Accounting for pensions and other postretirement benefits involves several assumptions relating to expected rates of return on plan assets, determination of discount rates for remeasuring plan obligations, determination of inflation rates regarding compensation levels and health care cost projections. Marathon develops its demographics and utilizes the work of actuaries to assist with the measurement of employee related obligations. The assumptions used vary from year-to-year, which will affect future results of operations. Any differences among these assumptions and Marathon's actual return on assets, financial market-based discount rates, and the level of cost sharing provisions will also impact future results of operations. 31 Management's Discussion and Analysis of Income and Operations Revenues and Other Income for each of the last three years are summarized in the following table:
(Dollars in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Exploration & production ("E&P").................... $ 4,580 $ 4,687 $ 3,104 Refining, marketing & transportation ("RM&T")(a).... 27,356 28,849 20,076 Other energy related businesses(b).................. 1,915 1,691 835 ------- ------- ------- Revenues and other income of reportable segments.. 33,851 35,227 24,015 Revenues and other income not allocated to segments: Loss related to sale of certain Canadian assets.... (221) - - Joint venture formation charges(c)................. - (931) - Gain (loss) on ownership change in MAP............. (6) 12 17 Net gains (losses) on certain asset sales.......... - 124 (36) Gain on offshore lease resolution with U.S. Government........................................ 59 - - Elimination of intersegment revenues................ (587) (573) (289) Elimination of sales to United States Steel......... (30) (60) (41) ------- ------- ------- Total revenues and other income................... $33,066 $33,799 $23,666 ======= ======= ======= Items included in both revenues and costs and expenses, resulting in no effect on income: Consumer excise taxes on petroleum products and merchandise........................................ $ 4,404 $ 4,344 $ 3,973 Matching crude oil and refined product buy/sell transactions settled in cash: E&P............................................... $ 454 $ 643 $ 732 RM&T.............................................. 3,797 3,811 2,472 ------- ------- ------- Total buy/sell transactions...................... $ 4,251 $ 4,454 $ 3,204 - --------------------------------------------------------------------------------
(a) Amounts include 100 percent of MAP. (b) Includes domestic natural gas and crude oil marketing and transportation, and power generation. (c) Represents a charge related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. E&P segment revenues decreased by $107 million in 2001 from 2000 following an increase of $1,583 million in 2000 from 1999. The decrease in 2001 was primarily due to lower domestic liquid hydrocarbon production and prices, partially offset by higher domestic natural gas prices and production, and gains from derivative activities. The increase in 2000 was primarily due to higher worldwide liquid hydrocarbon and natural gas prices, partially offset by lower domestic liquid hydrocarbon and worldwide natural gas production. RM&T segment revenues decreased by $1,493 million in 2001 from 2000 following an increase of $8,773 million in 2000 from 1999. The decrease in 2001 primarily reflected lower refined product prices. The increase in 2000 primarily reflected higher refined product prices and increased refined product sales volumes. Other energy related businesses segment revenues increased by $224 million in 2001 from 2000 following an increase of $856 million in 2000 from 1999. The increase in 2001 reflected higher natural gas prices and crude oil resale activity, partially offset by lower crude oil prices and natural gas resale activity. The increase in 2000 reflected higher natural gas and crude oil resale activity accompanied by higher crude oil and natural gas prices. For additional discussion of revenues, see Note 10 to the Financial Statements. 32 Income from operations for each of the last three years is summarized in the following table:
(Dollars in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- E&P Domestic............................................. $1,124 $1,111 $ 494 International........................................ 297 420 124 ------ ------ ------ Income of E&P reportable segment..................... 1,421 1,531 618 RM&T(a) 1,914 1,273 611 Other energy related businesses........................ 60 42 61 ------ ------ ------ Income for reportable segments....................... 3,395 2,846 1,290 Items not allocated to reportable segments: Administrative expenses............................... (162) (136) (108) Gain on offshore lease resolution with U.S. Government........................................... 59 - - Gain/(loss) on disposal of assets(b).................. (221) 124 (36) Charge on formation of MKM Partners L.P. JV(c)........ - (931) - Impairment of oil and gas properties, and assets held for sale(d).......................................... - (197) (16) Gain (loss) on ownership change in MAP................ (6) 12 17 IMV reserve adjustment(e)............................. (72) - 551 Reorganization charges including pension settlement (loss)/gain & benefit accruals(f).................... (14) (70) 15 SG&A costs applicable to Steel Stock.................. (25) (18) (12) ------ ------ ------ Total income from operations........................ $2,954 $1,630 $1,701
- ------------------------------------------------------------------------------- (a) Amounts include 100 percent of MAP. (b) In 2001, represents a loss on the sale of certain Canadian assets. The net gain in 2000 represents a gain on the disposition of Angus/Stellaria, a gain on the Sakhalin exchange, a gain on the sale of Speedway SuperAmerica LLC ("SSA") non-core stores, and a loss on the sale of the Howard Glasscock field. The net loss in 1999 represents a loss on the sale of Scurlock Permian LLC, certain domestic production properties, and Carnegie Natural Gas Company and affiliated subsidiaries, and a gain on certain Egyptian properties. (c) Represents a charge related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. (d) Represents in 2000, an impairment of certain oil and gas properties, primarily in Canada, and assets held for sale. Represents in 1999, an impairment of certain domestic properties. (e) The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. For additional discussion of the IMV, see Note 19 to the Financial Statements. (f) Represents reorganization charges in 2001 and 2000 and pension settlement gains/(losses) and various benefit accruals resulting from retirement plan settlements and voluntary early retirement programs in 2000 and 1999. 2001 reorganization charges include costs related to the Separation from United States Steel. 33 Income for reportable segments increased by $549 million in 2001 from 2000, mainly due to a higher refining and wholesale marketing margin. Income for reportable segments increased by $1,556 in 2000 from 1999, mainly due to higher worldwide liquid hydrocarbon and natural gas prices, and higher refined product margins, partially offset by decreased natural gas volumes. Average Volumes and Selling Prices
2001 2000 1999 - ------------------------------------------------------------------------------ (thousands of barrels per day) Net liquids production(a) - U.S. 127 131 145 - International(b) 73 65 62 ------- ------- ------- - Total consolidated 200 196 207 - Equity investees(c) 9 11 1 ------- ------- ------- - Worldwide 209 207 208 (millions of cubic feet per day) Net natural gas production - U.S. 793 731 755 - International - equity 441 470 489 - International - other(d) 8 11 16 ------- ------- ------- - Total consolidated 1,242 1,212 1,260 - Equity investee(e) 31 29 36 ------- ------- ------- - Worldwide 1,273 1,241 1,296 - ------------------------------------------------------------------------------ (dollars per barrel) Liquid hydrocarbons(a)(f) - U.S. $ 20.62 $ 25.55 $ 16.01 - International 23.26 26.54 16.90 (dollars per mcf) Natural gas(f) - U.S. $ 3.69 $ 3.49 $ 2.07 - International - equity 2.97 2.76 1.90 (thousands of barrels per day) Refined products sold(g) 1,304 1,306 1,251 Matching buy/sell volumes included in above 45 52 45 - ------------------------------------------------------------------------------
(a) Includes crude oil, condensate and natural gas liquids. (b) Represents equity tanker liftings, truck deliveries and direct deliveries. (c) Represents Marathon's equity interest in MKM Partners L.P. ("MKM") and CLAM Petroleum B.V. ("CLAM") for 2001 and Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy") and CLAM for 2000 and 1999. (d) Represents gas acquired for injection and subsequent resale. (e) Represents Marathon's equity interest in CLAM. (f) Prices exclude gains/losses from hedging activities, equity investees and gas purchased for injection and subsequent resale. (g) Refined products sold and matching buy/sell volumes include 100 percent of MAP. Domestic E&P income increased by $13 million in 2001 from 2000 following an increase of $617 million in 2000 from 1999. The increase in 2001 was primarily due to gains from derivative activities and higher natural gas volumes and prices, partially offset by lower liquid hydrocarbon prices. The increase in 2000 was primarily due to higher liquid hydrocarbon and natural gas prices, partially offset by lower liquid hydrocarbon and natural gas volumes due to natural field declines and asset sales, and losses from derivative activities. International E&P income decreased by $123 million in 2001 from 2000 following an increase of $296 million in 2000 from 1999. The decrease in 2001 was primarily due to lower liquid hydrocarbon prices, increased depreciation expense due primarily to 2000 reserve write downs and lower natural gas volumes, partially offset by increased natural gas prices, lower dry well expense, and lower foreign royalty and geophysical contract expenditures. The increase in 2000 was mainly due to higher liquid hydrocarbon and natural gas prices, higher liquid hydrocarbon liftings, primarily in Russia and Gabon, and lower dry well expense, partially offset by lower natural gas volumes. 34 RM&T segment income increased by $641 million in 2001 from 2000 following an increase of $662 million in 2000 from 1999. The increase in 2001 was primarily due to a higher refining and wholesale marketing gross margin partially offset by lower SSA gasoline and distillate sales volumes and increased refining and wholesale marketing transportation expense. The increase in 2000 was primarily due to higher refined product margins, partially offset by higher operating expenses for SSA, higher administrative expenses including increased variable pay plan costs, and higher transportation costs. Other energy related businesses segment income increased by $18 million in 2001 following a decrease of $19 million in 2000 from 1999. The increase in 2001 was primarily a result of higher crude oil purchase and resale activity accompanied by increased margins and losses from derivative activities recorded in 2000. The decrease in 2000 was primarily due to losses from derivative activities and the reversal of pipeline abandonment accruals recorded in 1999. Items not allocated to reportable segments: IMV reserve adjustment - When Marathon was acquired in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, Marathon established an IMV reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations on January 1, 1998, Marathon established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered. In 2001, the IMV reserve adjustment resulted in a charge to income from operations of $72 million. No adjustment was required in 2000. The unfavorable 2001 IMV reserve adjustment was primarily due to the significant decrease in refined product prices, which occurred during the fourth quarter of 2001. Net interest and other financial costs decreased by $63 million in 2001 from 2000, following a decrease of $52 million in 2000 from 1999. The decrease in 2001 was primarily due to lower average debt levels and increased capitalized interest on RM&T projects. The decrease in 2000 was primarily due to lower average debt levels and increased interest income. For additional details, see Note 7 to the Financial Statements. The minority interest in income of MAP, which represents Ashland's 38 percent ownership interest, increased by $206 million in 2001 from 2000, following an increase of $51 million in 2000 from 1999. The increase in 2001 and 2000 was primarily due to higher MAP income. The provision for income taxes was $759 million in 2001, compared with $476 in 2000 and $320 in 1999. The higher 2001 provision is primarily a result of increased income from operations. The 2000 provision included a one-time, noncash deferred tax charge of $235 million as a result of the change in the amount, timing and nature of expected future foreign source income due to the exchange of Marathon's interest in Sakhalin Energy for other oil and gas producing interests. For additional discussion of income taxes, see Note 18 to the Financial Statements. Discontinued operations in 2001, represents the net income or loss attributed to Steel Stock, adjusted for certain corporate administrative expenses and interest expense (net of income tax effects). The loss on disposition of United States Steel Corporation represents the excess of the net investment in United States Steel over the aggregate fair market value of the outstanding shares of the Steel Stock at the time of the Separation. For additional discussion of discontinued operations, see Note 2 to the Financial Statements. Net income decreased by $254 million in 2001 from 2000, following a decrease of $287 million in 2000 from 1999, primarily reflecting the factors discussed above. 35 Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity Current assets decreased $574 million from year-end 2000, primarily due to a decrease in receivables and assets held for sale, partially offset by an increase in cash and cash equivalents. The decrease in receivables was mainly due to lower year-end commodity prices and the decrease in assets held for sale was primarily the result of the contribution of the Yates field assets to the MKM Partners L.P. joint venture. The increase in cash and cash equivalents primarily resulted from cash balances which were attributed in part to United States Steel in prior years. Current liabilities decreased $544 million from year-end 2000, primarily due to a decrease in accounts payable, including accounts payable to United States Steel, partially offset by an increase in redeemable securities. The decrease in accounts payable was due to lower year-end commodity prices. The decrease in accounts payable to United States Steel resulted from the settlement of 2001 income taxes with United States Steel upon Separation. Under Marathon's previous tax allocation policy, income tax settlements with United States Steel generally occurred in March of the following year. Obligations to repay preferred securities reflect securities that became redeemable or that were converted to a right to receive cash upon Separation. These obligations were paid in January 2002. Investments and long-term receivables increased $714 million from year-end 2000, primarily due to the contribution of assets to MKM Partners L.P. and Pilot Travel Centers LLC joint ventures. Net investment in United States Steel was eliminated with the disposition of the steel business. Long-term receivables from United States Steel of $551 million represents long-term debt for which United States Steel has assumed responsibility for repayment. Net property, plant and equipment increased $203 million from year-end 2000, primarily due to the acquisition of Pennaco Energy, Inc. ("Pennaco"), completion of the coker unit at the Garyville refinery and implementation of an integrated software system, partially offset by the sale of certain Canadian assets and the contribution of travel centers to Pilot Travel Centers LLC. Net property, plant and equipment for each of the last three years is summarized in the following table:
(Dollars in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- E&P Domestic............................................. $ 2,851 $ 2,229 $ 3,435 International........................................ 2,472 2,924 2,987 ------- ------- -------- Total E&P........................................... 5,323 5,153 6,422 RM&T(a)............................................... 4,010 4,035 3,712 Other(b).............................................. 245 187 159 ------- ------- -------- Total.............................................. $ 9,578 $ 9,375 $ 10,293 - --------------------------------------------------------------------------------
(a) Amounts include 100 percent of MAP. (b) Includes other energy related businesses and other miscellaneous corporate net property, plant and equipment. Long-term debt at December 31, 2001 was $3,432 million, an increase of $1,495 million from year-end 2000. The increase in debt was mainly due to the additional net debt and other financings retained by Marathon upon Separation. See Notes 2 and 13 to the Financial Statements. Preferred stock of subsidiary of $184 million was redeemed in 2001. See Note 23 to the Financial Statements. Stockholders' equity decreased $1,824 million from year-end 2000, primarily reflecting the distribution of Steel Stock to holders of the former USX-U.S. Steel Group common stock. Net cash provided from operating activities (for continuing operations) totaled $2,919 million in 2001, compared with $3,146 million in 2000 and $2,008 million in 1999. The decrease in 2001 mainly reflected unfavorable working capital changes partially offset by the favorable effects of improved net income (excluding noncash items). 36 Net cash provided from operating activities (for discontinued operations) totaled $717 million in 2001, compared with net cash used in operating activities of $615 million in 2000 and $72 million in 1999. This activity is related to the business of United States Steel. Net cash used in investing activities (for continuing operations) totaled $1,999 million in 2001, compared with $923 million in 2000 and $1,174 million in 1999. The increase in 2001 primarily resulted from the acquisition of Pennaco, decreased asset disposals and increased capital expenditures. Proceeds from the disposal of assets in 2001 of $296 million were primarily from the sale of certain Canadian assets, SSA stores, and various domestic producing properties. Proceeds in 2000 were mainly from the Sakhalin exchange, the disposition of Marathon's interest in the Angus/Stellaria development in the Gulf of Mexico, the sale of non-core SSA stores and other domestic production properties. Proceeds in 1999 were mainly from the sale of Scurlock Permian LLC, over 150 non-strategic domestic and international production properties and Carnegie Natural Gas Company and affiliated subsidiaries. Capital expenditures for each of the last three years are summarized in the following table:
(Dollars in millions) 2001 2000 1999 - -------------------------------------- E&P Domestic(a) $ 537 $ 516 $ 356 International 400 226 388 ------- ------- ------- Total E&P 937 742 744 RM&T(b) 591 656 612 Other(c) 111 27 22 ------- ------- ------- Total $ 1,639 $ 1,425 $ 1,378 - --------------------------------------
(a) Amounts exclude the acquisition of Pennaco. (b) Amounts include 100 percent of MAP. (c) Includes other energy related business and other miscellaneous corporate capital expenditures. During 2001, Domestic E&P capital spending mainly included exploration and development drilling in the Gulf of Mexico, and natural gas developments in gas basins throughout the western United States. International E&P projects included projects in the North Sea, primarily in the newly acquired Foinaven field, natural gas developments in Canada and exploration drilling in Nova Scotia and Angola. RM&T spending by MAP primarily consisted of refinery modifications, including completion of the coker project at the Garyville refinery, and upgrades and expansions of retail marketing outlets. Other spending primarily consisted of the implementation of an integrated software system. Capital expenditures, excluding the portion of exploration expenditures expected to be expensed, are estimated to be approximately $1.7 billion in 2002, a slight increase over 2001 levels. Domestic E&P spending for 2002 will be primarily focused on onshore natural gas exploration and development and offshore deepwater Gulf exploration. International E&P will primarily continue oil developments in the U.K. North Sea and natural gas developments in Canada and exploration in Angola. RM&T spending by MAP will primarily consist of refinery improvements, including the Catlettsburg refinery repositioning project, upgrades and expansions of retail marketing outlets and transportation assets, including construction of the Cardinal Products Pipe Line. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Outlook" on page 42, for additional discussion on the Catlettsburg refinery repositioning project. Other Marathon spending will include funds for natural gas and crude oil marketing and transportation projects as well as various other corporate capital expenditures. An additional $1.1 billion is anticipated for upstream acquisition expenditures, including the recently completed acquisition of interests in Equatorial Guinea. Contract commitments for property, plant and equipment acquisitions and long-term investments at year-end 2001 were $297 million, compared with $457 million at year-end 2000. For further discussion on commitments, see "Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity - Liquidity and Capital Resources" on page 38. Costs incurred for the periods ended December 31, 2001, 2000, and 1999 relating to the development of proved undeveloped oil and gas reserves, including Marathon's proportionate share of equity investee's costs incurred, were $365 million, $316 million, and $333 million, respectively. As of December 31, 2001, estimated future development costs relating to the development of proved undeveloped oil and gas reserves for the years 2002 through 2004 are projected to be $308 million, $155 million, and $40 million, respectively. Net cash used in investing activities (for discontinued operations) totaled $245 million in 2001, compared with $270 million in 2000 and $294 million in 1999. This activity related to the business of United States Steel. 37 Net cash used in financing activities totaled $1,290 million in 2001, compared with $911 million in 2000 and $480 million in 1999. Marathon manages its financing activities on a centralized, consolidated basis. Generally, financing transactions were not separately associated with either continuing or discontinued operations but rather were attributed to both businesses. The cash used in 2001 primarily reflects distributions to minority shareholder of MAP, dividends paid and the redemption of the 8.75% Cumulative Monthly Income Preferred Shares ("MIPS"). The cash used in 2000 primarily reflects distributions to minority shareholder of MAP, dividends paid and a stock repurchase program. The cash used in 1999 reflects distributions to minority shareholder of MAP and dividends paid, offset by other net borrowings. Debt Rating Marathon's senior debt is currently rated investment grade by Standard and Poor's Corporation, Moody's Investor Services, Inc. and Fitch Ratings with ratings of BBB+, Baa1, and BBB+, respectively. Derivative Instruments See "Quantitative and Qualitative Disclosures About Market Risk" on page 45, for a discussion of derivative instruments and associated market risk. Liquidity and Capital Resources Marathon's main sources of liquidity and capital resources are internally generated cash flow from operations, committed and uncommitted credit facilities, and access to both the debt and equity capital markets. Marathon's ability to access the debt capital market is supported by its investment grade credit ratings. Because of the liquidity and capital resource alternatives available to Marathon, including internally generated cash flow, Marathon's management believes that its short-term and long-term liquidity is adequate to fund operations, including its capital spending program, repayment of debt maturities for the years 2002, 2003, and 2004, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 26 to the Financial Statements). Marathon has a committed $1,354 million long-term revolving credit facility and a committed $451 million 364-day revolving credit facility. At December 31, 2001, $475 million had been drawn against these facilities. Additionally, at December 31, 2001, Marathon had an aggregate of $550 million in three other short-term credit facilities, of which no amounts were drawn. MAP currently has a committed $350 million long-term revolving credit facility and a committed $100 million 364-day revolving credit facility. As of December 31, 2001, MAP did not have any borrowings against these facilities or under its $190 million revolving credit agreement with Ashland Inc. Certain securities became redeemable or were converted to a right to receive cash upon the Separation of United States Steel. In early January 2002, Marathon paid $185 million to retire the 6.75% Convertible Quarterly Income Preferred Securities and $110 million to retire the 6.50% Cumulative Convertible Preferred Stock. In early March 2002, Marathon issued notes of $450 million due 2012 and $550 million due 2032, bearing interest at 6.125 percent and 6.8 percent, respectively. Marathon used the net proceeds to repay amounts borrowed to fund the purchase price and associated costs of the January 2002 acquisition of interests in oil and gas properties and related assets in Equatorial Guinea, West Africa. Marathon initially funded this acquisition through a combination of borrowings under long-term and short-term revolving credit facilities, borrowings under other short-term credit facilities and cash on hand. Marathon is not dependent on off-balance sheet arrangements to meet its liquidity and capital resource needs. Marathon has used and may use in the future off-balance sheet arrangements to fund specific projects. The largest category of off-balance sheet arrangements is operating lease obligations, for which contractual cash obligations totaled $422 million at December 31, 2001. Of that total, $160 million related to three agreements which covered two LNG tankers and Marathon's headquarters building, respectively. Under those three arrangements, Marathon does not have an ownership interest in the entities that hold the leased assets nor does Marathon hold title to the respective leased assets. These entities were established by financial institutions for the purpose of leasing specific assets to Marathon. Such entities are limited in the type of business activity that can be transacted. 38 The table below provides aggregated information on Marathon's obligations and commitments to make future payments under existing contracts as of December 31, 2001: Summary of Contractual Cash Obligations and Commercial Commitments
2003- 2005- (Dollars in millions) Total 2002 2004 2006 Later Years - -------------------------------------------------------------------------------- Contractual cash obligations (excluding amounts assumed by United States Steel) Short and long-term debt................. $3,093 210 529 863 1,491 Capital lease obligations................ 10 1 2 2 5 Off-balance sheet arrangements: Operating lease obligations............. 403 86 117 135 65 Operating lease obligations under sublease............................... 16 5 6 3 2 Unconditional purchase obligations...... 70 5 10 10 45 Commercial commitments (excluding amounts related to United States Steel) Throughput and deficiency agreements..... 112 14 16 20 62 Guarantees of the indebtedness of others.................................. 35 -- -- -- 35 Contract commitments to acquire property, plant and equipment..................... 297 184 90 23 -- ------ --- --- ----- ----- Total excluding amounts related to United States Steel.............................. 4,036 505 770 1,056 1,705 Contractual cash obligations assumed by United States Steel Long-term debt........................... 470 -- -- -- 470 Sale-leaseback financing................. 128 11 22 22 73 Off-balance sheet arrangements: Operating lease obligations............. 19 7 6 6 -- Operating lease obligations under sublease............................... 96 18 38 10 30 Commercial commitments related to United States Steel Guarantees of indebtedness of others..... 28 5 -- -- 23 ------ --- --- ----- ----- Total amounts related to United States Steel..................................... 741 41 66 38 596 ------ --- --- ----- ----- Total contractual obligations and commercial commitments.................... $4,777 546 836 1,094 2,301 - --------------------------------------------------------------------------------
Marathon remains primarily obligated for certain debt and other financings for which United States Steel has assumed responsibility for repayment under the terms of the Separation. In addition, Marathon remains contingently liable for certain operating lease obligations of United States Steel. Marathon has also guaranteed certain obligations related to the business of United States Steel. United States Steel is the sole general partner of Clairton 1314B Partnership, L.P., which owns certain coke-making facilities formerly owned by United States Steel. Marathon has guaranteed to the limited partners all obligations of United States Steel under the partnership documents. United States Steel may dissolve the partnership under certain circumstances, including if it is required to fund accumulated cash shortfalls of the partnership in excess of $150 million. In addition to the normal commitments of a general partner, United States Steel has indemnified the limited partners for certain income tax exposures. As of December 31, 2001, United States Steel had no unpaid outstanding obligations to the limited partners and, accordingly, no amounts were reflected in the above table for this guarantee. Excluded from the table is indebtedness of equity investees which Marathon does not support through guarantees or otherwise. If Marathon were obligated to share in this debt on a pro rata basis, its share would have been approximately $353 million as of December 31, 2001. In the event of default by any of these equity investees, Marathon has no obligation to support the debt; however, any such default could adversely impact our financial investment in the respective equity investee. The table excludes commitments to transport crude oil, natural gas and refined products that were not negotiated as part of arranging the financing of the transportation facilities under contract, which totaled $780 million at December 31, 2001. The table also excludes contractual obligations under long- term agreements to purchase crude oil, refinery feedstock and refined products used in day-to-day operations to generate revenues. Marathon management's opinion concerning liquidity and Marathon's ability to avail itself in the future of the financing options mentioned in the above forward-looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that affect the availability of financing include the performance of Marathon (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the global financial climate, and, in particular, with respect to borrowings, the levels of Marathon's outstanding debt and credit ratings by rating agencies. 39 Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies Marathon has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of Marathon's products and services, operating results will be adversely affected. Marathon believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business, power business or the marine transportation of crude oil and refined products. Marathon's environmental expenditures for each of the last three years were(a):
(Dollars in millions) 2001 2000 1999 - -------------------------------------------------------------------------------- Capital...................................................... $ 67 $ 73 $ 46 Compliance Operating & maintenance..................................... 155 139 117 Remediation(b).............................................. 34 30 25 ----- ----- ----- Total..................................................... $ 256 $ 242 $ 188 - --------------------------------------------------------------------------------
(a) Amounts are determined based on American Petroleum Institute survey guidelines and include 100 percent of MAP. (b) These amounts include spending charged against remediation reserves, net of recoveries, where permissible, but do not include noncash provisions recorded for environmental remediation. Marathon's environmental capital expenditures accounted for four percent of total capital expenditures in 2001, five percent in 2000, and three percent in 1999. During 1999 through 2001, compliance expenditures represented one percent of Marathon's total operating costs. Remediation spending during this period was primarily related to retail marketing outlets which incur ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping. Marathon has been notified that it is a potentially responsible party ("PRP") at 13 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 2001. In addition, there are three sites where Marathon has received information requests or other indications that Marathon may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 114 additional sites, excluding retail marketing outlets, related to Marathon where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 13 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, Marathon is one of a number of parties involved and the total cost of remediation, as well as Marathon's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. Marathon accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 26 to the Financial Statements. New or expanded environmental requirements, which could increase Marathon's environmental costs, may arise in the future. Marathon intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, Marathon does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2002. Marathon's environmental capital expenditures are expected to be approximately $130 million in 2002. Predictions beyond 2002 can only be broad-based estimates, which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified 40 projects, Marathon anticipates that environmental capital expenditures will be approximately $157 million in 2003; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. New Tier II gasoline rules, which were finalized by the EPA in February 2000, and the diesel fuel rules, which were finalized in January 2001, require substantially reduced sulfur levels. The combined capital costs to achieve compliance with the gasoline and diesel regulations could amount to approximately $700 million between 2002 and 2006. This is a forward-looking statement. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating and logistical considerations, further refinement of preliminary engineering studies and project scopes, and unforeseen hazards. In May 2001, Marathon and MAP settled, in a consent decree, EPA allegations that the Robinson refinery did not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the Clean Air Act ("CAA"). The government had alleged in a federal court lawsuit that the refinery's Total Annual Benzene releases exceeded the limitation of 10 megagrams per year, and as a result, the refinery was in violation of the benzene waste emission control, record keeping, and reporting requirements. The consent decree was approved by the court on July 26, 2001 and requires Marathon and MAP to pay a combined $1.6 million civil penalty, perform $125,000 in supplemental environmental projects, as part of an enforcement action for alleged CAA violations, and install various controls and other improvements. In 1998, the EPA conducted multi-media inspections of MAP's Detroit and Robinson refineries, covering compliance with the CAA, the Clean Water Act, reporting obligations under the Emergency Planning and Community Right to Know Act, CERCLA and the handling of process waste. The EPA served a number of Notices of Violation ("NOV") and Findings of Violation as a result of these inspections, but these allegations were resolved as part of the New Source Review consent decree which MAP agreed to on May 11, 2001. MAP's settlement with the EPA includes all of MAP's refineries and commits MAP to specific control technologies and implementation schedules for environmental expenditures and improvements to MAP's refineries over approximately an eight year period. The current estimated cost to complete these programs is approximately $300 million in expenditures over the next seven years. MAP is also committed to the performance of about $8 million in supplemental environmental projects and has paid an aggregate civil penalty in 2001 of $3.8 million, as part of this settlement of an enforcement action for alleged CAA violations. MAP believes that this settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions. The court approved this consent decree on August 28, 2001. In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in the form of an Agreed-to Administrative Order which was finalized and entered in January 2002 and required payment of a $170,000 penalty and reimbursement of past response costs up to $131,000. Marathon is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. See Note 26 to the Financial Statements for a discussion of certain of these matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathon. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to Marathon. See "Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity" on page 36. 41 Outlook The outlook regarding Marathon's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on Marathon's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. In 2002, worldwide production is expected to average 430,000 barrels of oil equivalent per day, split evenly between liquid hydrocarbons and natural gas, including Marathon's proportionate share of equity investee's production and future acquisitions. On January 3, 2002, Marathon completed its acquisition of CMS Energy's interests in Equatorial Guinea. For a total cash consideration of $993 million, excluding working capital adjustments, Marathon acquired: . a 52.4 percent interest in, and operatorship of, the offshore Alba Block, which contains the currently producing Alba gas field as well as undeveloped oil and gas discoveries and several possible exploration prospects; . a 37.6 percent interest in the adjacent offshore Block D; . a 52.4 percent interest in an onshore condensate separation facility; . a 45 percent interest in a joint venture onshore methanol production plant; . a 43.2 percent interest in an onshore liquefied petroleum gas processing plant. In 2002, Marathon plans to drill, or complete drilling operations on three or four deepwater wells in the Gulf of Mexico, including the appraisal of the Ozona Deep discovery. Other major upstream projects, which are currently underway or under evaluation and are expected to improve future income streams, include: . Norway, where Marathon has completed the acquisition of various interests in five licenses in the Norwegian sector of the North Sea; . Alaska, where Marathon recently had a natural gas discovery on the Ninilchik Unit on the Kenai Peninsula. Additional drilling is planned in 2002. . Angola, where Marathon expects to participate in the drilling of up to three exploration wells during 2002. On February 28, 2002, Marathon announced proposed plans for a major liquefied natural gas ("LNG") re-gasification and power generation complex near Tijuana in the Mexican State of Baja California. The proposed complex would consist of a LNG marine terminal, an off-loading terminal, onshore LNG re-gasification facilities, and pipeline infrastructure necessary to transport the natural gas. In addition, a 400 megawatt natural gas-fired power generation plant would be constructed on the site. The complex would supply natural gas and electricity for local use as well as for export to Southern California. Completion and potential start-up is projected for 2005. On February 28, 2002, Marathon announced plans to lead an initiative for a new North Sea natural gas pipeline designed to provide additional gas for the U.K. market. The proposed 675 kilometer dry natural gas pipeline would connect the Norwegian Heimdal area of the North Sea to Bacton, on the southeast coast of the U.K. The pipeline would pass through the Brae complex and pass adjacent to other large gas processing/transportation facilities in the U.K. North Sea. The pipeline would terminate at or near the existing Bacton Terminal. The pipeline would allow gas to be aggregated from numerous U.K. and Norwegian North Sea producers for transportation to Bacton where it would then be sold to commercial, industrial and residential customers. Marathon estimates that the pipeline could begin operations in 2005. The above discussion includes forward-looking statements with respect to the timing and levels of Marathon's worldwide liquid hydrocarbon and natural gas production, and the exploration drilling program. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production and the exploration drilling program include acts of war or terrorist acts and the governmental or military response thereto, pricing, supply and demand for petroleum products, amount of capital available for exploration and development, occurrence of 42 acquisitions/dispositions of oil and gas properties, regulatory constraints, timing of commencing production from new wells, drilling rig availability and other geological, operating and economic considerations. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. Some factors that could affect the planned construction of the LNG re-gasification, power generation and related facilities, as well as the North Sea pipeline transportation and related facilities, include, but are not limited to, unforeseen difficulty in the negotiation of definitive agreements among project participants, identification of additional participants to reach optimum levels of participation, inability or delay in obtaining necessary government and third party approvals, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects, and environmental and permitting issues. Additionally, the LNG project could be impacted by the availability or construction of sufficient LNG vessels. Marathon's downstream income is largely dependent upon the refining and wholesale marketing margin for refined products, the retail gross margin for gasoline and distillates, and the gross margin on retail merchandise sales. The refining and wholesale marketing margin reflects the difference between the wholesale selling prices of refined products and the cost of raw materials refined, purchased product costs and manufacturing expenses. Refining and wholesale marketing margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, the seasonal pattern of certain product sales, crude oil costs, manufacturing costs, the available supply of crude oil and refined products, and logistical constraints. The retail gross margin for gasoline and distillates reflects the difference between the retail selling prices of these products and their wholesale cost including secondary transportation. Retail gasoline and distillate margins have also been historically volatile, but tend to be counter cyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations which impact driving conditions. The gross margin on retail merchandise sales tends to be less volatile than the retail gasoline and distillate margin. Factors affecting the gross margin on retail merchandise sales include consumer demand for merchandise items and the level of economic activity in the marketing area. At its Catlettsburg, Kentucky refinery, MAP has initiated a multi-year integrated investment program to upgrade product yield realizations and reduce fixed and variable manufacturing expenses. This program involves the expansion, conversion and retirement of certain refinery processing units which, in addition to improving profitability, will reduce the refinery's total gasoline pool sulfur below 30 ppm, thereby eliminating the need for additional clean fuels program investments at the refinery. The project is expected to be completed in 2004. MAP is working to improve its logistics network and Marathon Ashland Pipe Line LLC has been designated operator of the Centennial Pipeline, owned jointly by Panhandle Eastern Pipe Line Company, a subsidiary of CMS Energy Corporation, MAP, and TE Products Pipe Line Company, Limited Partnership. The new pipeline, which will connect the Gulf Coast refiners with the Midwest market, will have the capacity to transport approximately 210,000 barrels per day of refined petroleum products and is expected to be operational in the first quarter of 2002. A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline is currently known as Cardinal Products Pipe Line and is expected to initially move about 50,000 barrels per day of refined petroleum into the central Ohio region. As of December 2001, ORPL has secured all of the rights-of-way required to build the pipeline. Applications for the remaining construction permits have been filed. Construction is currently planned for summer 2002 pending receipt of permits, with start-up of the pipeline to follow in first half 2003. The above discussion includes forward-looking statements with respect to the Catlettsburg refinery and the Centennial Pipeline and Cardinal Products Pipe Line systems. Some factors which could potentially cause the actual results from the Catlettsburg investment program to differ materially from current expectations include the price of petroleum products, levels of cash flows from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions and regulatory approval constraints. The primary factor, which could impact the Centennial Pipeline system, is unforeseen hazards. Some factors, which could impact the Cardinal Products Pipe Line, include obtaining the necessary permits and completion of construction. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. 43 Accounting Standards Adopted in 2001 - Effective January 1, 2001, Marathon adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Statement, as amended, requires recognition of all derivatives at fair value as either assets or liabilities. For additional information, see Note 4 of the Financial Statements. To be adopted in future periods - In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141 "Business Combinations" (SFAS No. 141), No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method, eliminating the use of the pooling method. This Statement also establishes for all business combinations made after June 30, 2001, specific criteria for the allocation of the purchase price to intangible assets separately from goodwill. SFAS No. 141 also requires that the excess of fair value of acquired assets over cost in a business combination (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. Marathon will account for the acquisition of certain interests from CMS Energy in January 2002 under SFAS No. 141. SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS No. 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. Marathon will adopt SFAS No. 142 effective January 1, 2002, as required. At that time, the annual amortization of existing goodwill of $3 million, net of tax, will cease on the unamortized portion associated with previous acquisitions and certain investments accounted for under the equity method. A transitional impairment test is required for existing goodwill as of the date of adoption of this Standard, which must be completed within the first year. Any impairment loss resulting from applying the transitional goodwill impairment test will be reported as a change in accounting principle. Goodwill recorded after adoption of this Standard is to be tested for impairment at least annually and any resulting impairment is not considered part of the change in accounting principle. SFAS No. 143 establishes a new accounting model for the recognition and measurement of retirement obligations associated with tangible long-lived assets. SFAS No. 143 requires that an asset retirement cost be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. Marathon will adopt this Statement effective January 1, 2003, as required. The transition adjustment resulting from the adoption of SFAS No. 143 will be reported as a cumulative effect of a change in accounting principle. At this time, Marathon cannot reasonably estimate the effect of the adoption of this Statement on either its financial position or results of operations. In August 2001, the FASB approved SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement establishes a single accounting model for long-lived assets to be disposed of by sale and provides additional implementation guidance for assets to be held and used and assets to be disposed of other than by sale. Marathon will adopt the Statement prospectively effective January 1, 2002. The timing of classifying a long- lived asset as held for sale may change as compared to previous accounting standards. 44 Item 7A. Quantitative and Qualitative Disclosures About Market Risk Management Opinion Concerning Derivative Instruments Marathon uses commodity-based and foreign currency derivative instruments to manage its price risk. Management has authorized the use of futures, forwards, swaps and options to manage exposure to price fluctuations related to the purchase, production or sale of crude oil, natural gas, and refined products. For transactions that qualify for hedge accounting under SFAS No. 133, the changes in fair value of the derivative instruments are classified within Other Comprehensive Income, if the hedge qualifies as a Cash Flow Hedge. The resulting deferred gains or losses are subsequently recognized in income from operations, in the same period as the underlying physical transaction. If the hedge position qualifies as a Fair Value Hedge, the resulting gains or losses from the change in fair value of both the hedged item and the related derivative, are reflected within income in that period. Marathon also uses derivative instruments to economically hedge price risk but designates such strategies as nonhedge. Changes in fair value for these contracts is reflected within income in that period. Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period in income from operations. While Marathon's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies that assume price risk. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose Marathon to material risk. The use of derivative instruments could materially affect Marathon's results of operations in particular quarterly or annual periods. However, management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of accounting policies related to derivative instruments, see Note 3 to the Financial Statements. Commodity Price Risk and Related Risks In the normal course of its business, Marathon is exposed to market risk or price fluctuations related to the purchase, production or sale of crude oil, natural gas and refined products. To a lesser extent, Marathon is exposed to the risk of price fluctuations on natural gas liquids and petroleum feedstocks used as raw materials. Marathon's market risk strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, Marathon uses fixed-price contracts and derivative commodity instruments to manage a minor portion of its commodity price risk. Marathon uses fixed-price contracts for portions of its natural gas production to manage exposure to fluctuations in natural gas prices. Certain derivative commodity instruments have the effect of restoring the equity portion of fixed-price sales of natural gas to variable market-based pricing. These instruments are used as part of Marathon's overall risk management programs. 45 Quantitative and Qualitative Disclosures About Market Risk CONTINUED Sensitivity analyses of the incremental effects on pretax income of hypothetical 10 percent and 25 percent changes in commodity prices for open derivative commodity instruments as of December 31, 2001 and December 31, 2000, are provided in the following table:(a)
(Dollars in millions) - ------------------------------------------------------------------------------- Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) 2001 2000 Derivative Commodity Instruments(b)(c) 10% 25% 10% 25% - ------------------------------------------------------------------------------- Crude oil(d)............................. $ 23.4(e) $ 46.7(e) $9.1(e) $ 27.2(e) Natural gas(d)........................... 8.6(e) 18.2(e) 20.2(e) 50.6(e) Refined products(d)...................... 1.0(f) 3.9(f) 6.1(e) 16.5(e) - -------------------------------------------------------------------------------
(a) Marathon remains at risk for possible changes in the market value of derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income, after deducting for minority interest. Amounts reflect hypothetical 10% and 25% changes in closing commodity prices for each open contract position at December 31, 2001 and December 31, 2000. Marathon management evaluates their portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Marathon is also exposed to credit risk in the event of nonperformance by counterparties. The credit worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical. Changes to the portfolio subsequent to December 31, 2001, would cause future pretax income effects to differ from those presented in the table. (b) The number of net open contracts varied throughout 2001, from a low of 19,040 contracts at July 18, to a high of 41,298 contracts at November 8, and averaged 29,279 for the year. The derivative commodity instruments used and hedging positions taken also varied throughout 2001, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. (c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. (e) Price increase. (f) Price decrease. Marathon uses derivative instruments in its exploration and production ("E&P") operations to mitigate the price risk associated with equity production of crude oil and natural gas volumes. In addition, Marathon has sold forward a specified volume of natural gas. Marathon has used derivatives to convert the fixed price in this contract to market prices. The underlying physical contract matures in 2008. Marathon recorded total net pretax derivative gains/(losses) of approximately $85 million in 2001 and $(47) million in 2000. The amounts for 1999 were diminimus. Marathon's refining, marketing, and transportation (RM&T) operations generally use derivative commodity instruments to lock-in costs of certain crude oil and other feedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. Marathon's RM&T operations recorded total net pretax derivative gains/(losses), net of the 38 percent minority interest in MAP, of approximately $130 million in 2001, $(127) million in 2000, and $13 million for 1999. Marathon's trading activity gains/(losses) are included in the afore-mentioned amounts and totaled $3 million in 2001, $(11) million in 2000 and $5 million in 1999, respectively. Marathon's other energy related businesses are exposed to market risk associated with the purchase and subsequent resale of natural gas. Marathon uses derivative instruments to mitigate the price risk on purchased volumes and anticipated sales volumes. Marathon recorded net pretax derivative gains/(losses) of $(29) million in 2001, $13 million in 2000 and $3 million in 1999, respectively. Marathon is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange (NYMEX) contracts for natural gas are priced at Louisiana's Henry Hub, while the underlying quantities of natural gas may be produced and sold in the Western United States at prices that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk. 46 Quantitative and Qualitative Disclosures About Market Risk CONTINUED Marathon is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions. Interest Rate Risk Marathon is subject to the effects of interest rate fluctuations affecting the fair value of certain non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10 percent decrease in year-end 2001 and 2000 interest rates is provided in the following table:
(Dollars in millions) - -------------------------------------------------------------------------------- As of December 31, 2001 2000 Incremental Incremental Increase in Increase in Non-Derivative Financial Fair Fair Fair Fair Instruments(a) Value(b) Value(c) Value(b) Value(c) - -------------------------------------------------------------------------------- Financial assets: Investments and long-term receivables(d)................... $ 192 $ - $ 171 $ - Financial liabilities: Long-term debt(e)(f).............. $ 3,830 $127 $ 2,174 $ 86 Preferred stock of subsidiary(g).. - - 175 15 ------- ---- ------- ----- Total liabilities................ $ 3,830 $127 $ 2,349 $ 101 - --------------------------------------------------------------------------------
(a) Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. (b) See Note 22 to the Financial Statements for carrying value of instruments. (c) For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of Marathon's long-term debt at December 31, 2001 and December 31, 2000. (d) For additional information, see Note 20 to the Financial Statements. (e) Includes amounts due within one year. (f) Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. For additional information, see Note 13 to the Financial Statements. (g) See Note 22 to the Financial Statements for further explanation. At December 31, 2001 and 2000, Marathon's portfolio of long-term debt was substantially comprised of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $127 million increase in the fair value of long-term debt assuming a hypothetical 10 percent decrease in interest rates. However, Marathon's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect Marathon's results and cash flows only to the extent that Marathon would elect to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value. Foreign Currency Exchange Rate Risk Marathon is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than the U.S. dollar. Marathon has used on occasion forward currency contracts or other derivative instruments to manage this risk. At December 31, 2001, Marathon had no open forward currency contracts in place. At December 31, 2000, Marathon had open Canadian dollar forward purchase contracts with a total carrying value of approximately $14 million. A 10 percent increase in the December 31, 2000, Canadian dollar to U.S. dollar forward rate, would have resulted in a charge to income of approximately $1 million. Safe Harbor Marathon's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with the use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas, refined products and other feedstocks. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to Marathon's hedging programs may differ materially from those discussed in the forward-looking statements. 47 Item 8. Financial Statements and Supplementary Data MARATHON OIL CORPORATION Index to 2001 Consolidated Financial Statements and Supplementary Data
Page ---- Management's Report........................................................ F-1 Audited Consolidated Financial Statements: Report of Independent Accountants........................................ F-1 Consolidated Statement of Income......................................... F-2 Consolidated Balance Sheet............................................... F-4 Consolidated Statement of Cash Flows..................................... F-5 Consolidated Statement of Stockholders' Equity........................... F-6 Notes to Consolidated Financial Statements............................... F-8 Selected Quarterly Financial Data.......................................... F-33 Principal Unconsolidated Investees......................................... F-33 Supplementary Information.................................................. F-34
Management's Report The accompanying consolidated financial statements of Marathon Oil Corporation (formerly USX Corporation) are the responsibility of and have been prepared by Marathon Oil Corporation in conformity with accounting principles generally accepted in the United States of America. They necessarily include some amounts that are based on best judgments and estimates. The financial information displayed in other sections of this report is consistent with these financial statements. Marathon Oil Corporation seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. Marathon Oil Corporation has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, Marathon Oil Corporation's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated financial statements. /s/ Clarence P. Cazalot, Jr. /s/ John T. Mills /s/ Albert G. Adkins Clarence P. Cazalot, Jr. John T. Mills Albert G. Adkins President and Chief Financial Officer Vice President- Chief Executive Officer Accounting and Controller Report of Independent Accountants To the Stockholders of Marathon Oil Corporation: In our opinion, the accompanying consolidated financial statements appearing on pages F-2 through F-32 present fairly, in all material respects, the financial position of Marathon Oil Corporation and its subsidiaries (Marathon) at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Marathon's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 4 to the financial statements, Marathon changed its method of accounting for derivatives in 2001. As discussed in Note 2 to the financial statements, on December 31, 2001, Marathon distributed its steel business to the holders of USX-U. S. Steel Group common stock and has accounted for this business as a discontinued operation. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania February 15, 2002 F-1 Consolidated Statement of Income
(Dollars in millions) 2001 2000 1999 - ------------------------------------------------------------------------------ Revenues and other income: Revenues $ 33,019 $ 34,427 $ 23,549 Dividend and investee income 138 102 69 Net losses on disposal of assets (177) (785) - Gain (loss) on ownership change in Marathon Ashland Petroleum LLC (6) 12 17 Other income 92 43 31 -------- -------- -------- Total revenues and other income 33,066 33,799 23,666 -------- -------- -------- Costs and expenses: Cost of revenues (excludes items shown below) 23,255 25,417 16,612 Selling, general and administrative expenses 726 643 498 Depreciation, depletion and amortization 1,236 1,245 950 Taxes other than income taxes 4,679 4,626 4,218 Exploration expenses 144 238 238 Inventory market valuation charges (credits) 72 - (551) -------- -------- -------- Total costs and expenses 30,112 32,169 21,965 -------- -------- -------- Income from operations 2,954 1,630 1,701 Net interest and other financial costs 173 236 288 Minority interest in income of Marathon Ashland Petroleum LLC 704 498 447 -------- -------- -------- Income from continuing operations before income taxes 2,077 896 966 Provision for income taxes 759 476 320 -------- -------- -------- Income from continuing operations 1,318 420 646 Discontinued operations Income (loss) from discontinued operations (169) (9) 59 Loss on disposition of United States Steel Corporation (984) - - -------- -------- -------- Income before extraordinary losses and cumulative effect of change in accounting principle 165 411 705 Extraordinary losses - - (7) Cumulative effect of change in accounting principle (8) - - -------- -------- -------- Net income $ 157 $ 411 $ 698 - ------------------------------------------------------------------------------
Included in revenues and costs and expenses for 2001, 2000 and 1999 were $4,404 million, $4,344 million and $3,973 million, respectively, representing consumer excise taxes on petroleum products and merchandise. The accompanying notes are an integral part of these consolidated financial statements. F-2 Income Per Common Share
(Dollars in millions, except per share data) 2001 2000 1999 - --------------------------------------------------------------------- MARATHON COMMON STOCK Income from continuing operations applicable to Common Stock $ 1,317 $ 420 $ 646 ------- ------ ------ Net income applicable to Common Stock $ 377 $ 432 $ 654 ------- ------ ------ Per Share Data Basic and diluted: Income from continuing operations $ 4.26 $ 1.35 $ 2.09 ------- ------ ------ Net income $ 1.22 $ 1.39 $ 2.11 ------- ------ ------ STEEL STOCK Net income (loss) applicable to Steel Stock $ (243) $ (29) $ 35 ------- ------ ------ Per Share Data Basic: Net income (loss) $ (2.73) $ (.33) $ .40 ------- ------ ------ Diluted: Net income (loss) $ (2.74) $ (.33) $ .40 - ---------------------------------------------------------------------
See Note 8, for a description and computation of income per common share. The accompanying notes are an integral part of these consolidated financial statements. F-3 Consolidated Balance Sheet
(Dollars in millions) December 31 2001 2000 - ----------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 657 $ 340 Receivables, less allowance for doubtful accounts of $8 and $3 1,708 2,262 Receivables from United States Steel 64 5 Inventories 1,851 1,867 Assets held for sale 16 330 Deferred income tax benefits 13 60 Other current assets 102 121 -------- -------- Total current assets 4,411 4,985 Investments and long-term receivables 1,076 362 Net investment in United States Steel - 1,919 Receivables from United States Steel 551 - Property, plant and equipment - net 9,578 9,375 Prepaid pensions 207 207 Other noncurrent assets 306 303 -------- -------- Total assets $ 16,129 $ 17,151 - ----------------------------------------------------------------------------- Liabilities Current liabilities: Notes payable $ - $ 80 Accounts payable 2,431 3,019 Payable to United States Steel 28 366 Payroll and benefits payable 243 230 Accrued taxes 171 108 Accrued interest 85 61 Obligations to repay preferred securities 295 - Long-term debt due within one year 215 148 -------- -------- Total current liabilities 3,468 4,012 Long-term debt 3,432 1,937 Deferred income taxes 1,297 1,354 Employee benefits 677 648 Payable to United States Steel 8 97 Deferred credits and other liabilities 344 315 Preferred stock of subsidiary - 184 Minority interest in Marathon Ashland Petroleum LLC 1,963 1,840 Stockholders' Equity Preferred stock - 6.50% Cumulative Convertible issued - 2,413,487 shares ($121 liquidation preference) at December 31, 2000 - 2 Common stocks: Common Stock issued - 312,165,978 shares at December 31, 2001 and 2000 (par value $1 per share, authorized 550,000,000 shares) 312 312 Steel Stock issued - 88,767,395 shares at December 31, 2000 (par value $1 per share, authorized 200,000,000 shares) - 89 Securities exchangeable solely into Common Stock - issued - 281,148 shares at December 31, 2000 - - Common Stock held in treasury - 2,770,929 shares at December 31, 2001 and 3,899,714 shares at December 31, 2000 (74) (104) Additional paid-in capital 3,035 4,676 Retained earnings 1,643 1,847 Accumulated other comprehensive income (loss) 34 (50) Deferred compensation (10) (8) -------- -------- Total stockholders' equity 4,940 6,764 -------- -------- Total liabilities and stockholders' equity $ 16,129 $ 17,151 - -----------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 Consolidated Statement of Cash Flows
(Dollars in millions) 2001 2000 1999 - --------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 157 $ 411 $ 698 Adjustments to reconcile to net cash provided from operating activities: Cumulative effect of change in accounting principle 8 - - Extraordinary losses - - 7 Loss (income) from discontinued operations 169 9 (59) Loss on disposition of United States Steel 984 - - Minority interest in income of Marathon Ashland Petroleum LLC 704 498 447 Depreciation, depletion and amortization 1,236 1,245 950 Exploratory dry well costs 60 86 109 Inventory market valuation charges (credits) 72 - (551) Deferred income taxes (217) (240) 105 Net losses on disposal of assets 177 785 - Changes in: Current receivables 172 (377) (844) Inventories (66) 17 (63) Current accounts payable and accrued expenses (601) 717 1,106 All other - net 64 (5) 103 ------- ------- ------- Net cash provided from continuing operations 2,919 3,146 2,008 Net cash provided from (used in) discontinued operations 717 (615) (72) ------- ------- ------- Net cash provided from operating activities 3,636 2,531 1,936 ------- ------- ------- Investing activities: Capital expenditures (1,639) (1,425) (1,378) Acquisition of Pennaco Energy, Inc. (506) - - Disposal of assets 296 539 356 Cash held by United States Steel upon disposition (147) - - Restricted cash - withdrawals 67 271 45 - deposits (62) (268) (44) Investees - investments (17) (65) (59) - loans and advances (6) (6) (70) - returns and repayments 10 10 1 All other - net 5 21 (25) ------- ------- ------- Net cash used in continuing operations (1,999) (923) (1,174) Net cash used in discontinued operations (245) (270) (294) ------- ------- ------- Net cash used in investing activities (2,244) (1,193) (1,468) Financing activities: Commercial paper and revolving credit arrangements--net (51) 62 (381) Other debt - borrowings 649 273 810 - repayments (758) (339) (242) Redemption of preferred stock of subsidiary (223) - - Preferred stock repurchased - (12) (2) Common stock - issued - - 89 - repurchased (1) (105) - Treasury common stock reissued 12 1 - Dividends paid (341) (371) (354) Distributions to minority shareholder of Marathon Ashland Petroleum LLC (577) (420) (400) ------- ------- ------- Net cash used in financing activities (1,290) (911) (480) ------- ------- ------- Effect of exchange rate changes on cash: Continuing operations (3) (2) (1) Discontinued operations (1) 1 - ------- ------- ------- Net increase (decrease) in cash and cash equivalents 98 426 (13) Cash and cash equivalents at beginning of year 559 133 146 ------- ------- ------- Cash and cash equivalents at end of year $ 657 $ 559 $ 133 - ---------------------------------------------------------------------------
Cash and cash equivalents at end of year for 2000 and 1999 include $219 million and $22 million, respectively, of cash held by United States Steel. The accompanying notes are an integral part of these consolidated financial statements. F-5 Consolidated Statement of Stockholders' Equity
Dollars in millions Shares in thousands ------------------- ------------------------- 2001 2000 1999 2001 2000 1999 - -------------------------------------------------------------------------------- Preferred stock - 6.50% Cumulative Convertible: Balance at beginning of year $ 2 $ 3 $ 3 2,413 2,715 2,768 Repurchased - (1) - (9) (302) (53) Converted into Steel Stock - - - (1) - - Exchanged for debt - - - (195) - - Converted to right to receive cash at Separation (2) - - (2,208) - - ----- ----- ----- ------- ------- ------- Balance at end of year $ - $ 2 $ 3 - 2,413 2,715 - -------------------------------------------------------------------------------- Common stocks: Common Stock: Balance at beginning of year $ 312 $ 312 $ 308 312,166 311,767 308,459 Issued in public offering - - - - - 67 Issued for: Employee stock plans - - 3 - 391 2,903 Dividend Reinvestment and Direct Stock Purchase Plan - - - - - 120 Exchangeable Shares - - 1 - 8 218 ----- ----- ----- ------- ------- ------- Balance at end of year $ 312 $ 312 $ 312 312,166 312,166 311,767 - -------------------------------------------------------------------------------- Steel Stock: Balance at beginning of year $ 89 $ 88 $ 88 88,767 88,398 88,336 Issued for: Employee stock plans - 1 - 430 369 62 Conversion of preferred stock - - - 1 - - Exchanged for investment in United States Steel (89) - - (89,198) - - ----- ----- ----- ------- ------- ------- Balance at end of year $ - $ 89 $ 88 - 88,767 88,398 - -------------------------------------------------------------------------------- Securities exchangeable solely into Common Stock: Balance at beginning of year $ - $ - $ 1 281 289 507 Exchanged for Common Stock - - (1) (281) (8) (218) ----- ----- ----- ------- ------- ------- Balance at end of year $ - $ - $ - - 281 289 - -------------------------------------------------------------------------------- Treasury common stocks, at cost: Common Stock: Balance at beginning of year $(104) $ - $ - (3,900) - - Repurchased (1) (105) - (27) (3,957) - Reissued for: Exchangeable shares 7 - - 281 - - Employee stock plans 24 1 - 875 43 - Nonemployee directors deferred compensation plan - - - - 14 - ----- ----- ----- ------- ------- ------- Balance at end of year $ (74) $(104) $ - (2,771) (3,900) - - -------------------------------------------------------------------------------- Steel Stock: Balance at beginning of year $ - $ - $ - - - - Repurchased - - - (20) - - Reissued for employee stock plans - - - 18 - - Distributed to United States Steel - - - 2 - - ----- ----- ----- ------- ------- ------- Balance at end of year $ - $ - $ - - - - - --------------------------------------------------------------------------------
(Table continued on next page) F-6
Comprehensive Stockholders' Equity Income ------------------------ ------------------- (Dollars in millions) 2001 2000 1999 2001 2000 1999 - -------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of year $ 4,676 $ 4,673 $4,587 Marathon Stock issued 4 9 92 Steel Stock issued 8 5 2 Exchanged for investment in United States Steel (1,526) - - Exchangeable Shares exchanged for Common Stock (9) - (6) 6.50% Preferred stock: Repurchased - (11) (2) Converted to right to receive cash at Separation (118) - - ------- ------- ------ Balance at end of year $ 3,035 $ 4,676 $4,673 - -------------------------------------------------------------------------------- Deferred compensation net of taxes: Balance at beginning of year $ (8) $ - $ 1 Change during year (11) (8) (1) Transfer to United States Steel 9 - - ------- ------- ------ Balance at end of year $ (10) $ (8) $ - - -------------------------------------------------------------------------------- Retained earnings: Balance at beginning of year $ 1,847 $ 1,807 $1,467 Net income 157 411 698 $ 157 $ 411 $ 698 Excess redemption value over carrying value of preferred securities (20) - - Dividends on preferred stock (8) (8) (9) Dividends on Common Stock (per share: $.92 in 2001, $.88 in 2000 and $.84 in 1999) (284) (274) (261) Dividends on Steel Stock (per share $.55 in 2001 and $1.00 in 2000 and 1999) (49) (89) (88) ------- ------- ------ Balance at end of year $ 1,643 $ 1,847 $1,807 - -------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) net of taxes(a): Minimum pension liability adjustments: Balance at beginning of year $ (21) $ (10) $ (37) Changes during year (13) (11) 27 (13) (11) 27 Reclassified to earnings 20 - - 20 - - ------- ------- ------ Balance at end of year (14) (21) (10) ------- ------- ------ Foreign currency translation adjustments: Balance at beginning of year $ (29) $ (17) $ (11) Changes during year (3) (12) (6) (3) (12) (6) Reclassified to earnings 29 - - 29 - - ------- ------- ------ Balance at end of year (3) (29) (17) ------- ------- ------ Unrealized holding losses on investments: Balance at beginning of year $ - $ - $ - Changes during year - - (1) - - (1) Reclassified to earnings - - 1 - - 1 ------- ------- ------ Balance at end of year - - - ------- ------- ------ Deferred gains (losses) on derivative instruments: Balance at beginning of year $ - $ - $ - Cumulative effect adjustment (8) - - (8) - - Reclassification of the cumulative effect adjustment into earnings 23 - - 23 - - Changes in fair value 34 - - 34 - - Reclassification to earnings 2 - - 2 - - ------- ------- ------ Balance at end of year $ 51 $ - $ - ------- ------- ------ Total balances at end of year $ 34 $ (50) $ (27) - -------------------------------------------------------------------------------- Total comprehensive income $ 241 $ 388 $ 719 - -------------------------------------------------------------------------------- Total stockholders' equity $ 4,940 $ 6,764 $6,856 - -------------------------------------------------------------------------------- (a) Related income tax provision (credit): 2001 2000 1999 Minimum pension liability adjustments $ 4 $ (4) $ 13 Foreign currency translation adjustments - (1) (3) Net deferred gains on derivative instruments 27 - -
The accompanying notes are an integral part of these consolidated financial statements. F-7 Notes to Consolidated Financial Statements - ------------------------------------------------------------------------------- 1. Basis of Presentation Marathon Oil Corporation (Marathon) was originally organized in 2001 as USX HoldCo, Inc., a wholly owned subsidiary of USX Corporation. As a result of a reorganization transaction completed in July 2001, USX HoldCo, Inc. (1) became the parent entity of the consolidated enterprise (the former USX Corporation was merged into a subsidiary of USX HoldCo, Inc.) and (2) changed its name to USX Corporation. In connection with the Separation transaction discussed below, USX Corporation changed its name to Marathon Oil Corporation. The accompanying consolidated financial statements reflect Marathon Oil Corporation and its subsidiaries as the continuation of the consolidated enterprise. Prior to December 31, 2001, Marathon had two outstanding classes of common stock: USX-Marathon Group common stock (Marathon Stock), which was intended to reflect the performance of Marathon's energy business, and USX-U. S. Steel Group common stock (Steel Stock), which was intended to reflect the performance of Marathon's steel business. As described further in Note 2, on December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation (United States Steel) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis (the Separation). In connection with the Separation, Marathon's certificate of incorporation was amended on December 31, 2001 and, from that date, Marathon has only one class of common stock authorized. Marathon is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned subsidiary Marathon Ashland Petroleum LLC (MAP); and other energy related businesses. - ------------------------------------------------------------------------------- 2. Discontinued Operations On December 31, 2001, in a tax-free distribution to holders of Steel Stock, Marathon exchanged the common stock of United States Steel for all outstanding shares of Steel Stock on a one-for-one basis. The net assets of United States Steel at Separation were approximately the same as the net assets attributable to Steel Stock immediately prior to the Separation, except for a value transfer of $900 million in the form of additional net debt and other financings retained by Marathon. During the last six months of 2001, United States Steel completed a number of financings so that upon Separation, the net debt and other financings of United States Steel as a separate legal entity would approximate the net debt and other financings attributable to Steel Stock. At December 31, 2001, the net debt and other financings of United States Steel was $54 million less than the net debt and other financings attributable to the Steel Stock, adjusted for the value transfer and certain one-time items related to the Separation. On February 6, 2002, United States Steel made a payment to Marathon of $54 million, plus applicable interest, to settle this difference. Marathon has accounted for the business of United States Steel as a discontinued operation. The income or loss from discontinued operations for the periods ended December 31, 2001, 2000 and 1999 represent the net income or loss attributable to Steel Stock for the periods presented, adjusted for corporate administrative expenses and interest expense (net of income tax effects) which may not be allocated to discontinued operations under generally accepted accounting principles in the United States of America (USGAAP). The loss on disposition of United States Steel represents the excess of the net investment in United States Steel over the aggregate fair market value of the outstanding shares of the Steel Stock at the time of the Separation. The net investment in United States Steel at December 31, 2000, represents the net assets attributable to Steel Stock at that date. Because operating and investing activities are separately identifiable to each of Marathon and United States Steel, such amounts have been separately disclosed in the statement of cash flows. Financing activities were managed on a centralized, consolidated basis. Therefore they have been reflected on a consolidated basis in the statement of cash flows. Transactions related to invested cash, debt and related interest and other financial costs, and preferred stock and related dividends were attributed to discontinued operations based on the cash flows of United States Steel for the periods presented and the initial capital structure attributable to Steel Stock. However, certain limitations on the amount of interest expense allocated to discontinued operations are required by USGAAP. Corporate general and administrative costs attributable to Steel Stock that were allocated using methods which considered certain measures of business activities, such as employment, investments and revenues, are not permitted to be classified as discontinued operations under USGAAP. Income taxes were allocated to discontinued operations in accordance with Marathon's tax allocation policy. In general, such policy provided that the consolidated tax provision and related tax payments or refunds were allocated to discontinued operations based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to United States Steel. F-8 The results of operations of United States Steel, subject to the limitations described above, have been reclassified as discontinued operations for all periods presented in the Statement of Income and are summarized as follows:
(In millions) 2001 2000 1999 - ------------------------------------------------------------------------ Revenues and other income $ 6,375 $ 6,132 $ 5,470 Costs and expenses 6,755 6,010 5,308 ------- ------- ------- Income (loss) from operations (380) 122 162 Net interest and other financial costs 101 105 74 ------- ------- ------- Income (loss) before income taxes (481) 17 88 Provision (credit) for estimated income taxes (312) 26 29 ------- ------- ------- Net income (loss) $ (169) $ (9) $ 59 - ------------------------------------------------------------------------
The computation of the loss on disposition of United States Steel on December 31, 2001 was as follows: (In millions) - ------------------------------------------------------------------------- Market value of Steel Stock (89,197,740 shares of stock issued and outstanding at $18.11 per share) $ 1,615 Less: Net investment in United States Steel 2,564 Costs associated with the Separation, net of tax 35 ------- Loss on disposition of United States Steel $ (984) - -------------------------------------------------------------------------
The net investment in United States Steel as of December 31, 2000 was comprised of: (In millions) - ------------------------------------------------------ Current assets $ 2,717 Property, plant and equipment - net 2,739 Prepaid pensions 2,672 Other noncurrent assets 583 ------- Total assets 8,711 ------- Current liabilities 1,391 Long-term debt 2,236 Employee benefits 1,767 Other liabilities 1,149 Preferred stock of subsidiary 66 Trust preferred securities 183 ------- Total liabilities 6,792 ------- Net investment in United States Steel $ 1,919 - ------------------------------------------------------
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously announced reorganization with its two voting shareholders, United States Steel and Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As a result of this transaction, United States Steel became sole owner of Transtar and certain of its subsidiaries. Holdings became owner of the other subsidiaries of Transtar. United States Steel accounted for the change in its ownership interest in Transtar using the purchase method of accounting. United States Steel recognized in 2001 a pretax gain of $68 million (included in dividend and investee income) and a favorable deferred tax adjustment of $33 million related to this transaction. United States Steel previously accounted for its investment in Transtar under the equity method of accounting. On March 1, 2001, United States Steel completed the purchase of the tin mill products business of LTV Corporation (LTV), which is now operated as East Chicago Tin. In this noncash transaction, United States Steel assumed approximately $66 million of certain employee related obligations from LTV. The acquisition was accounted for using the purchase method of accounting. Results of operations for the year 2001 include the operations of East Chicago Tin from the date of acquisition. On November 24, 2000, United States Steel acquired U. S. Steel Kosice, s.r.o. (USSK), which is located in the Slovak Republic. USSK was formed in June 2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The cash purchase price was $69 million. Additional payments to VSZ totaling $75 million, which were contingent upon the performance of USSK in 2001, will be made in 2002 and 2003. The acquisition was accounted for under the purchase F-9 method of accounting. The 2000 results of operations include the operations of USSK from the date of acquisition. Prior to this transaction, United States Steel and VSZ were equal partners in VSZ U. S. Steel, s.r.o. (VSZUSS), a tin mill products manufacturer. The assets of USSK included VSZ's interest in VSZUSS. The acquisition of the remaining interest in VSZUSS was accounted for under the purchase method of accounting. Previously, United States Steel had accounted for its investment in VSZUSS under the equity method of accounting. Marathon remains primarily obligated for certain financings for which United States Steel has assumed responsibility for repayment under the terms of the Separation. These obligations totaled $561 million at December 31, 2001. When United States Steel makes payments on the principal of these financings, both the receivable and the obligation will be reduced. In addition, Marathon remains contingently liable for certain operating lease obligations of United States Steel, which totaled $115 million at December 31, 2001. As discussed in Note 26, Marathon has also guaranteed certain obligations related to the business of United States Steel. The Tax Sharing Agreement between Marathon and United States Steel governing the liability for and administration of tax matters for periods prior to the Separation is discussed in Note 18. - ------------------------------------------------------------------------------- 3. Summary of Principal Accounting Policies Principles applied in consolidation - These consolidated financial statements include the accounts of the businesses comprising Marathon. Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly owned gas processing plants are consolidated on a pro rata basis. Investments in entities over which Marathon has significant influence are accounted for using the equity method of accounting and are carried at Marathon's share of net assets plus loans and advances. Differences in the basis of the investment and the separate net asset value of the investee, if any, are amortized into earnings in accordance with the underlying remaining useful life of the associated assets. Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Dividend and investee income includes Marathon's proportionate share of income from equity method investments and dividend income from other investments. Dividend income is recognized when dividend payments are received. Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated investee are recognized in the period of change. Use of estimates - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year- end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of property, plant and equipment; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for tax deficiencies and litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. Revenue recognition - Revenues are recognized generally when products are shipped or services are provided to customers, the sales price is fixed and determinable, and collectibility is reasonably assured. Costs associated with revenues, including shipping and other transportation costs, are recorded in cost of revenues. Matching buy/sell transactions settled in cash are recorded in both revenues and cost of revenues as separate sales and purchase transactions, with no net effect on income. Marathon follows the sales method of accounting for gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance situation. Cash and cash equivalents - Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments - Marathon uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management has authorized the use of futures, forwards, swaps and options to reduce the effects of fluctuations related to the purchase, production or sale of crude oil, natural gas and refined products and also certain business transactions denominated F-10 in foreign currencies. Changes in the fair value of all derivatives are recognized immediately in earnings, either within revenues or cost of revenues, unless the derivative qualifies as a hedge of future cash flows or certain foreign currency exposures. For derivatives qualifying as hedges of future cash flows or certain foreign currency exposures, the effective portion of any changes in fair value is recognized in a component of stockholders' equity called other comprehensive income and then reclassified to earnings, either within revenues or cost of revenues, when the underlying anticipated transaction is consummated. Any ineffective portion of such hedges is recognized in earnings as it occurs. For derivatives designated as hedges of the fair value of recognized assets, liabilities or firm commitments, changes in the fair value of both the hedged item and the related derivative are recognized immediately in earnings, either within revenues or cost of revenues, with an offsetting effect included in the basis of the hedged item. The net effect is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. Property, plant and equipment - Marathon uses the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed. Capitalized costs of producing oil and gas properties are depreciated and depleted by the units-of-production method. Support equipment and other property, plant and equipment are depreciated over their estimated useful lives. Marathon evaluates its oil and gas producing properties for impairment of value on a field-by-field basis or, in certain instances, by logical grouping of assets if there is significant shared infrastructure, using undiscounted future cash flows based on total proved and risk-adjusted probable and possible reserves. Oil and gas producing properties deemed to be impaired are written down to their fair value, as determined by discounted future cash flows based on total proved and risk-adjusted probable and possible reserves or, if available, comparable market values. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment. Other unproved properties are amortized over their remaining holding period. For property, plant and equipment unrelated to oil and gas producing activities, depreciation is generally computed on the straight-line method over their estimated useful lives. When property, plant and equipment depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of property, plant and equipment are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when the assets are reclassified as held for sale. Proceeds from disposal of property, plant and equipment depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Major maintenance activities - Marathon incurs planned major maintenance costs primarily for refinery turnarounds. Such costs are expensed in the same annual period as incurred; however, estimated annual turnaround costs are recognized in income throughout the year on a pro rata basis. Environmental liabilities - Environmental expenditures are capitalized if the costs mitigate or prevent future contamination or if the costs improve existing assets' environmental safety or efficiency. Marathon provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based upon estimated proved oil and gas reserves on a units-of-production method. Stock-based compensation - In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The Company has elected to continue to apply the principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Deferred taxes - Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The realization of deferred tax assets is assessed periodically based on several interrelated factors. These factors include Marathon's expectation to generate sufficient future taxable income including future foreign source income, tax credits, operating loss carryforwards, and management's intent regarding the permanent reinvestment of the earnings from certain foreign subsidiaries. F-11 Reclassifications - Certain reclassifications of prior years' data have been made to conform to 2001 classifications. - ------------------------------------------------------------------------------- 4. New Accounting Standards Adopted in 2001 - Effective January 1, 2001, Marathon adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Statement, as amended, requires recognition of all derivatives at fair value as either assets or liabilities. The transition adjustment related to adopting SFAS No. 133 on January 1, 2001, was recognized as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of a tax benefit of $5 million, was $8 million. The unfavorable cumulative effect included within Other Comprehensive Income (OCI), net of a tax benefit of $4 million, was $8 million. A portion of the cumulative effect adjustment relating to the adoption of SFAS No. 133 was recognized in OCI which relates only to deferred gains or losses for hedge transactions as of December 31, 2000. OCI is also impacted by the changes in fair value associated with cash flow hedges. A reconciliation of the changes in OCI relating to derivative instruments is included in the Statement of Stockholders' Equity. Of the $51 million recorded in OCI net of income taxes as of December 31, 2001, $21 million is expected to be reclassified to earnings over the 12-month period ending December 31, 2002. The actual amounts that will be reclassified to earnings over the next twelve months will vary as a result of changes in fair value. To be adopted in future periods - In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 141 "Business Combinations" (SFAS No. 141), No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method. This Statement establishes specific criteria for the allocation of purchase price to intangible assets separately from goodwill for all business combinations made after June 30, 2001. SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS No. 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for intangible assets with finite lives will no longer be limited to forty years. Marathon will adopt SFAS No. 142 effective January 1, 2002, as required. At that time, annual amortization of existing goodwill of $3 million, net of tax, will cease on the unamortized portion associated with previous acquisitions and certain investments accounted for under the equity method. As required, a transitional impairment test is required for existing goodwill as of the date of adoption of this Standard. This test must be completed within the first year. Any loss resulting from applying the transitional impairment test will be reported as a cumulative effect of a change in accounting principle. Goodwill recorded after adoption of this Standard is to be tested for impairment at least annually and any resulting impairment is included in income from operations. SFAS No. 143 establishes a new accounting model for the recognition and measurement of retirement obligations associated with tangible long-lived assets. SFAS No. 143 requires that an asset retirement cost be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. Marathon will adopt this Statement effective January 1, 2003, as required. The transition adjustment resulting from the adoption of SFAS No. 143 will be reported as a cumulative effect of a change in accounting principle. At this time, Marathon cannot reasonably estimate the effect of the adoption of this Statement on either its financial position or results of operations. In August 2001, the FASB approved SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). This Statement establishes a single accounting model for long-lived assets to be disposed of by sale and provides additional implementation guidance for assets to be held and used and assets to be disposed of other than by sale. Marathon will adopt the Statement prospectively effective January 1, 2002. F-12 - ------------------------------------------------------------------------------- 5. Extraordinary Losses In 1999, Marathon irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of Marathon's obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee exchanged one RTI share for each note at maturity. All shares were required for satisfaction of the indexed debt; therefore, none reverted back to Marathon. As a result of the above transaction, Marathon recorded in 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in income (loss) from discontinued operations. Since Marathon's investment in RTI was attributed to United States Steel, the indexed debt was also attributed to United States Steel. In 1999, Republic Technologies International, LLC, an equity investee of United States Steel, recorded an extraordinary loss related to the early extinguishment of debt. As a result, Marathon recorded an extraordinary loss of $2 million, net of a $1 million income tax benefit, representing its share of the extraordinary loss. - ------------------------------------------------------------------------------- 6. Business Combinations In the first quarter 2001, Marathon acquired Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into the right to receive $19 in cash. The total cash purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the preliminary fair value of net assets acquired (goodwill) was $70 million and was originally to be amortized over 17 years. However, with the adoption of SFAS No. 142, effective January 1, 2002, Marathon will cease the amortization of goodwill and will test the unamortized balance for impairment on an annual basis. Results of operations for the year 2001 include the results of Pennaco from February 7, 2001. The following unaudited pro forma data includes the results of operations of the Pennaco acquisition giving effect to it as if it had been consummated at the beginning of the years presented. It is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
(In millions, except per share amounts) 2001 2000 - --------------------------------------------------------------- Revenues and other income $ 33,074 $ 33,852 Income from continuing operations 1,314 389 Net income 374 401 Per share amounts applicable to Common Stock Income from continuing operations - basic 4.25 1.25 - diluted 4.24 1.25 Net income - basic and diluted 1.21 1.29 - ---------------------------------------------------------------
- ------------------------------------------------------------------------------- 7. Other Items
(In millions) 2001 2000 1999 - ------------------------------------------------------------------------ Net interest and other financial costs from continuing operations Interest and other financial income: Interest income $ 29 $ 26 $ 15 Other (6) (2) (13) ----- ----- ----- Total 23 24 2 ----- ----- ----- Interest and other financial costs: Interest incurred 203 240 281 Less interest capitalized 26 16 20 ----- ----- ----- Net interest 177 224 261 Interest on tax issues (2) 6 5 Financial costs on preferred stock of subsidiary 11 17 17 Amortization of discounts 2 2 2 Other 8 11 5 ----- ----- ----- Total 196 260 290 ----- ----- ----- Net interest and other financial costs $ 173 $ 236 $ 288 - ------------------------------------------------------------------------
F-13 Foreign currency transactions For 2001, 2000 and 1999, the aggregate foreign currency transaction gains (losses) from continuing operations included in determining net income were $2 million, $30 million and $(12) million, respectively. - ------------------------------------------------------------------------------- 8. Income Per Common Share Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share assumes exercise of stock options and warrants and conversion of convertible debt and preferred securities, provided the effect is not antidilutive. COMPUTATION OF INCOME PER SHARE
2001 2000 1999 ------------------ ------------------ ------------------ (Dollars in millions, except per share data) Basic Diluted Basic Diluted Basic Diluted - ------------------------------------------------------------------------------------ COMMON STOCK Income from continuing operations $ 1,318 $ 1,318 $ 420 $ 420 $ 646 $ 646 Excess redemption value of preferred securities (1) (1) - - - - -------- -------- -------- -------- -------- -------- Income from continuing operations applicable to Common Stock 1,317 1,317 420 420 646 646 Expenses included in income from continuing operations applicable to Steel Stock 41 41 12 12 8 8 Loss on disposition of United States Steel (984) (984) - - - - Expenses included in loss on disposition of United States Steel applicable to Steel Stock 11 11 - - - - Cumulative effect of change in accounting principle (8) (8) - - - - -------- -------- -------- -------- -------- -------- Net income applicable to Common Stock $ 377 $ 377 $ 432 $ 432 $ 654 $ 654 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,150 309,150 311,531 311,531 309,696 309,696 Effect of dilutive securities - stock options - 360 - 230 -- 314 -------- -------- -------- -------- -------- -------- Average common shares including dilutive effect 309,150 309,510 311,531 311,761 309,696 310,010 ======== ======== ======== ======== ======== ======== Per share: Income from continuing operations $ 4.26 $ 4.26 $ 1.35 $ 1.35 $ 2.09 $ 2.09 ======== ======== ======== ======== ======== ======== Loss on disposition of United States Steel $ (3.18) $ (3.18) $ - $ - $ - $ - ======== ======== ======== ======== ======== ======== Cumulative effect of change in accounting principle $ (.03) $ (.03) $ - $ - $ - $ - ======== ======== ======== ======== ======== ======== Net income $ 1.22 $ 1.22 $ 1.39 $ 1.39 $ 2.11 $ 2.11 - ------------------------------------------------------------------------------------ STEEL STOCK Income (loss) from discontinued operations $ (169) $ (169) $ (9) $ (9) $ 59 $ 59 Expenses included in income from continuing operations applicable to Steel Stock (41) (41) (12) (12) (8) (8) Expenses included in loss on disposition of United States Steel applicable to Steel Stock (11) (11) -- - - - Preferred stock dividends (8) (8) (8) (8) (9) (9) Loss on redemption of preferred securities (14) (14) - - - - Extraordinary losses - - - - (7) (7) -------- -------- -------- -------- -------- -------- Net income (loss) applicable to Steel Stock $ (243) $ (243) $ (29) $ (29) $ 35 $ 35 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 89,058 89,058 88,613 88,613 88,392 88,392 Effect of dilutive securities - stock options - - - - - 4 -------- -------- -------- -------- -------- -------- Average common shares including dilutive effect 89,058 89,058 88,613 88,613 88,392 88,396 ======== ======== ======== ======== ======== ======== Per share: Income (loss) from discontinued operations $ (1.90) $ (1.90) $ (.10) $ (.10) $ .67 .67 ======== ======== ======== ======== ======== ======== Extraordinary losses $ - $ - $ - $ - $ (.08) $ (.08) ======== ======== ======== ======== ======== ======== Net income (loss) $ (2.73) $ (2.74) $ (.33) $ (.33) $ .40 $ .40 - ------------------------------------------------------------------------------------
F-14 - ------------------------------------------------------------------------------- 9. Transactions Between MAP and Ashland During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. At December 31, 2001 and 2000, MAP had current receivables from Ashland of $19 million and $35 million, respectively, and current payables to Ashland of $20 million and $2 million, respectively. MAP has a $190 million revolving credit agreement with Ashland. Interest on borrowings is based on defined short-term market rates. At December 31, 2001 and 2000, there were no borrowings against this facility. During 2001, 2000 and 1999, MAP's sales to Ashland, consisting primarily of petroleum products, were $237 million, $285 million and $198 million, respectively, and MAP's purchases of products and services from Ashland were $29 million, $26 million and $22 million, respectively. Management believes these transactions were conducted under terms comparable to those with unrelated parties. - ------------------------------------------------------------------------------- 10. Segment Information Marathon's operations consist of three reportable operating segments: 1) Exploration and Production - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through MAP; and 3) Other Energy Related Businesses. Other Energy Related Businesses is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third-party natural gas and crude oil in the United States; and 2) Power Generation - develops, constructs and operates independent electric power projects worldwide. Revenues by product line are:
(In millions) 2001 2000 1999 - ------------------------------------------------------------- Refined products $ 20,841 $ 22,513 $ 15,143 Merchandise 2,506 2,441 2,194 Liquid hydrocarbons 6,585 6,856 4,587 Natural gas 2,933 2,459 1,429 Transportation and other products 154 158 196 -------- -------- -------- Total $ 33,019 $ 34,427 $ 23,549 - -------------------------------------------------------------
Segment income represents income from operations allocable to operating segments. Marathon corporate general and administrative costs are not allocated to operating segments. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Certain general and administrative costs related to all Marathon's operating segments in excess of amounts billed to MAP under service contracts and amounts charged out to operating segments under Marathon's shared services procedures also are not allocated to operating segments. Additionally, the following items are not allocated to operating segments: inventory market valuation adjustments, gain (loss) on ownership change in MAP and certain other items not allocated to operating segments for business performance reporting purposes (see reconcilement table on page F-17). Information on assets by segment is not provided as it is not reviewed by the chief operating decision maker. F-15 The following presents information by operating segment:
Refining, Other Exploration Marketing Energy and and Related (In millions) Production Transportation Businesses Total - ----------------------------------------------------------------------------- 2001 Revenues and other income: Customer $ 3,991 $ 27,225 $ 1,803 $ 33,019 Intersegment(a) 495 21 71 587 United States Steel(a) 21 1 8 30 Equity in earnings of unconsolidated investees 59 41 18 118 Other 14 68 15 97 ------- -------- ------- -------- Total revenues and other income $ 4,580 $ 27,356 $ 1,915 $ 33,851 ======= ======== ======= ======== Segment income $ 1,421 $ 1,914 $ 60 $ 3,395 Significant noncash items included in segment income - Depreciation, depletion and amortization(b) 868 345 4 1,217 Capital expenditures(c) 937 591 8 1,536 - ----------------------------------------------------------------------------- 2000 Revenues and other income: Customer $ 4,177 $ 28,693 $ 1,557 $ 34,427 Intersegment(a) 412 83 78 573 United States Steel(a) 30 1 29 60 Equity in earnings of unconsolidated investees 47 22 15 84 Other 21 50 12 83 ------- -------- ------- -------- Total revenues and other income $ 4,687 $ 28,849 $ 1,691 $ 35,227 ======= ======== ======= ======== Segment income $ 1,531 $ 1,273 $ 42 $ 2,846 Significant noncash items included in segment income - Depreciation, depletion and amortization(b) 723 315 3 1,041 Capital expenditures(c) 742 656 2 1,400 - ----------------------------------------------------------------------------- 1999 Revenues and other income: Customer $ 2,855 $ 19,962 $ 732 $ 23,549 Intersegment(a) 202 47 40 289 United States Steel(a) 19 - 22 41 Equity in earnings (losses) of unconsolidated investees (2) 17 26 41 Other 30 50 15 95 ------- -------- ------- -------- Total revenues and other income $ 3,104 $ 20,076 $ 835 $ 24,015 ======= ======== ======= ======== Segment income $ 618 $ 611 $ 61 $ 1,290 Significant noncash items included in segment income - Depreciation, depletion and amortization(b) 638 280 5 923 Capital expenditures(c) 744 612 4 1,360 - -----------------------------------------------------------------------------
(a) Management believes intersegment transactions and transactions with United States Steel were conducted under terms comparable to those with unrelated parties. (b) Differences between segment totals and Marathon totals represent amounts included in administrative expenses and international and domestic oil and gas property impairments. (c) Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities. F-16 The following schedules reconcile segment amounts to amounts reported in Marathon's consolidated financial statements:
(In millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Revenues and Other Income: Revenues and other income of reportable segments $ 33,851 $ 35,227 $ 24,015 Items not allocated to segments: Loss related to sale of certain Canadian assets (221) - - Joint venture formation charges - (931) - Gain (loss) on ownership change in MAP (6) 12 17 Net gains (losses) on certain asset sales - 124 (36) Gain on offshore lease resolution with U.S. Government 59 - - Elimination of intersegment revenues (587) (573) (289) Elimination of sales to United States Steel (30) (60) (41) -------- -------- -------- Total revenues and other income $ 33,066 $ 33,799 $ 23,666 ======== ======== ======== Income from Operations: Income for reportable segments $ 3,395 $ 2,846 $ 1,290 Items not allocated to segments: Administrative expenses (162) (136) (108) Gain on offshore lease resolution with U.S. Government 59 - - Loss related to sale of certain Canadian assets (221) - - Net gains (losses) on certain asset sales - 124 (36) Joint venture formation charges - (931) - Impairment of certain oil and gas properties, and assets held for sale - (197) (16) Gain (loss) on ownership change in MAP (6) 12 17 Inventory market valuation adjustments (72) - 551 Other(a) (39) (88) 3 -------- -------- -------- Total income from operations $ 2,954 $ 1,630 $ 1,701 - -------------------------------------------------------------------------------
(a) Includes selling, general and administrative expenses related to Steel Stock for all periods presented. Includes costs related to Separation in 2001. Includes reorganization charges in 2000. Includes costs of a voluntary early retirement program in 1999. Geographic Area: The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Revenues and Other Income ------------------------------------------ Within Between (In millions) Year Geographic Areas Geographic Areas Total Assets(a) - ----------------------------------------------------------------------------------- United States 2001 $ 31,889 $ - $ 31,889 $ 8,046 2000 32,179 - 32,179 6,711 1999 22,675 - 22,675 7,555 Canada 2001 390 871 1,261 498 2000 856 899 1,755 940 1999 426 521 947 1,112 United Kingdom 2001 680 - 680 1,534 2000 567 - 567 1,698 1999 459 - 459 1,581 Other Foreign Countries 2001 107 134 241 474 2000 197 188 385 310 1999 106 88 194 735 Eliminations 2001 - (1,005) (1,005) - 2000 - (1,087) (1,087) - 1999 - (609) (609) - Total 2001 $ 33,066 $ - $ 33,066 $10,552 2000 33,799 - 33,799 9,659 1999 23,666 - 23,666 10,983 - -----------------------------------------------------------------------------------
(a) Includes property, plant and equipment and investments. F-17 - ------------------------------------------------------------------------------- 11. Leases Future minimum commitments for capital leases (including sale-leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases - ---------------------------------------------------------------- 2002 $ 12 $ 116 2003 12 90 2004 12 77 2005 12 120 2006 12 34 Later years 78 97 Sublease rentals - (112) ---- ------ Total minimum lease payments 138 $ 422 ====== Less imputed interest costs 47 ---- Present value of net minimum lease payments included in long-term debt $ 91 - ----------------------------------------------------------------
In connection with past sales of various plants and operations, United States Steel assigned and the purchasers assumed certain leases of major equipment used in the divested plants and operations. In the event of a default by any of the purchasers, United States Steel has assumed these obligations; however, Marathon remains primarily obligated under these leases. Minimum lease payments under these operating leases of $96 million have been included above and an equal amount has been reported as sublease rentals. Of the $91 million present value of net minimum capital lease payments, $84 million was related to sale-leaseback financing assumed by United States Steel under the Financial Matters Agreement. For additional information, see Note 13. Of the $422 million total minimum operating lease payments, $19 million was assumed by United States Steel under the Financial Matters Agreement. Operating lease rental expense from continuing operations:
(In millions) 2001 2000 1999 - ------------------------------------------ Minimum rental $ 159 $ 156 $ 149 Contingent rental 15 13 11 Sublease rentals (11) (13) (13) ----- ----- ----- Net rental expense $ 163 $ 156 $ 147 - ------------------------------------------
Marathon leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of Marathon, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $101 million may be declared immediately due and payable. - ------------------------------------------------------------------------------- 12. Short-Term Debt In November 2001, Marathon renewed its $451 million 364-day revolving credit agreement, which now terminates in November 2002. Interest is based on defined short-term market rates. During the term of the agreement, Marathon is obligated to pay a facility fee on total commitments, which at December 31, 2001, was 0.10%. At December 31, 2001, there were no borrowings against this facility. Additionally, Marathon has an aggregate of $550 million in three other short-term credit facilities. Interest is based on short-term market rates. At December 31, 2001, there were no borrowings against these facilities. In July 2001, MAP renewed its $100 million 364-day revolving credit agreement, which now terminates in July 2002. Interest is based on defined short-term market rates. During the term of the agreement, MAP is required to pay a facility fee on total commitments, which at December 31, 2001 was 0.11%. At December 31, 2001, there were no borrowings against this facility. Additionally, MAP has a revolving credit agreement with Ashland as discussed in Note 9. F-18 - ------------------------------------------------------------------------------- 13. Long-Term Debt
Interest December 31 (In millions) Rates - % Maturity 2001 2000 - ------------------------------------------------------------------------------- Marathon: Revolving credit facility(a) 2005 $ 475 $ 300 Commercial paper(a) 7.68 - 77 Notes payable 6.57 - 9 5/8 2002 - 2023 2,281 2,505 Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes(b) 1 17/25 - 6 7/8 2009 - 2033 499 494 Receivables facility(c) 2004 - 350 Sale-leaseback financing(d) 2002 - 2012 84 88 Consolidated subsidiaries: Revolving credit facilities(e) 2003 - - Loan facility(f) 8 1/2 2010 - 325 Guaranteed Notes 7 2002 135 135 Guaranteed Loan(g) 9 1/20 2002 - 2006 172 199 All other obligations, including capital leases 2002 - 2011 8 12 Amounts attributed to United States Steel(h) - (2,387) ------- ------- Total(i)(j) 3,654 2,098 Less unamortized discount 7 13 Less amount due within one year 215 148 ------- ------- Long-term debt due after one year $ 3,432 $ 1,937 - -------------------------------------------------------------------------------
(a) Marathon has a $1,354 million 5-year revolving credit agreement, that terminates in November 2005. Interest on the facility is based on defined short-term market rates. During the term of the agreement, Marathon is obligated to pay a variable facility fee on total commitments, which at December 31, 2001 was 0.125%. At December 31, 2001, $475 million had been borrowed against this facility. Commercial paper is supported by the unused and available credit on the 5-year facility and, accordingly, is classified as long-term debt. (b) United States Steel has assumed responsibility for repayment of $470 million of these obligations. At December 31, 2001, Environmental Improvement Bonds in the amount of $146 million were supported by letter of credit arrangements that could become short-term obligations under certain circumstances. (c) United States Steel participated in a program, which was terminated in 2001, to sell an undivided interest in certain accounts receivable. The program was accounted for as a secured borrowing. (d) This sale-leaseback financing arrangement relates to a lease of a slab caster at United States Steel's Fairfield Works facility in Alabama with a term through 2012. Marathon is the obligor under this lease. Under the Financial Matters Agreement, United States Steel has assumed responsibility for all obligations under this lease. This lease is an amortizing financing with a final maturity of 2012, subject to additional extensions. (e) MAP has a $350 million revolving credit facility that terminates in July 2003. Interest is based on defined short-term market rates. During the term of the agreement, MAP is required to pay a variable facility fee on total commitments, which at December 31, 2001 was 0.125%. At December 31, 2001, there were no borrowings or letters of credit outstanding against the revolving credit facility. In the event that MAP defaults on indebtedness (as defined in the agreement) in excess of $100 million, Marathon has guaranteed the payment of any outstanding obligations. (f) A United States Steel subsidiary has a loan with a group of financial institutions aggregating $325 million. The loan bears interest at a fixed rate of 8.5% per annum. This obligation remained with United States Steel. Marathon has no ongoing responsibility associated with this debt. (g) The Guaranteed Loan was used to fund a portion of the costs in connection with the development of the East Brae Field and the SAGE pipeline in the North Sea. A portion of proceeds from a long-term gas sales contract is dedicated to loan service under certain circumstances. Prepayment of the loan may be required under certain situations, including events impairing the security interest. (h) Long-term debt attributed to United States Steel was determined based on the cash flows of United States Steel and the initial capital structure attributable to Steel Stock and was included in net investment in United States Steel. (i) Required payments of long-term debt for the years 2003-2006 are $188 million, $341 million, $520 million and $343 million, respectively. (j) In the event of a change in control of Marathon, as defined in the related agreements, debt obligations totaling $3,297 million may be declared immediately due and payable. The principal obligations subject to such a provision are Notes payable - $2,255 million; Revolving credit facility - $475 million; Guaranteed Loan - $172 million; and Environmental Improvement Bonds - $151 million. F-19 - -------------------------------------------------------------------------------- 14. Supplemental Cash Flow Information
(In Millions) 2001 2000 1999 - ------------------------------------------------------------------------------- Net cash provided from operating activities from continuing operations included: Interest and other financial costs paid (net of amount capitalized) $ (165) $ (270) $ (289) Income taxes paid to taxing authorities (437) (377) (103) Income tax settlements received from (paid to) United States Steel (819) (91) 2 - ------------------------------------------------------------------------------- Commercial paper and revolving credit arrangements - net: Commercial paper - issued $ 389 $ 3,362 $ 6,282 - repayments (465) (3,450) (6,117) Credit agreements - borrowings 925 437 5,529 - repayments (750) (437) (5,980) Other credit arrangements - net (150) 150 (95) ------ ------- ------- Total $ (51) $ 62 $ (381) - ------------------------------------------------------------------------------- Noncash investing and financing activities: Common Stock issued for dividend reinvestment and employee stock plans $ 23 $ 10 $ 4 Common Stock issued for Exchangeable Shares 9 - 7 Investee preferred stock received in conversion of investee loan - - 142 Capital expenditures for which payment has been deferred 29 - - Disposal of assets: Exchange of Steel Stock for net investment in United States Steel 1,615 - - Exchange of Sakhalin Energy Investment Company Ltd. - 410 - Notes received - 6 19 Business combinations: Acquisition of Pennaco - liabilities assumed 309 - - Other acquisitions - liabilities assumed - - 16 Net assets contributed to joint ventures 571 - - Preferred stocks exchanged for debt 49 - - - -------------------------------------------------------------------------------
F-20 - ------------------------------------------------------------------------------- 15. Transactions with United States Steel Revenues and purchases - Marathon's revenues for sales to United States Steel totaled $30 million, $60 million and $41 million in 2001, 2000 and 1999, respectively. Marathon's purchases from United States Steel totaled $7 million in 2001 and $17 million in both 2000 and 1999. Marathon revenues for sales to United States Steel equity investees were $29 million in 2001, $28 million in 2000 and $22 million in 1999. Management believes these transactions were conducted under terms comparable to those with unrelated parties. Receivables from/payables to United States Steel - At December 31, 2001 and 2000, amounts receivable or payable were included in the balance sheet as follows:
(In millions) December 31 2001 2000 - ---------------------------------------------------------------------------- Receivables: Current: Trade receivables $ - $ 1 Income tax settlement receivable - 4 Separation settlement receivable 54 - Receivables related to debt and other obligations for which United States Steel has assumed responsibility for repayment 10 - ---- ---- Current receivables from United States Steel 64 5 ---- ---- Noncurrent: Receivables related to debt and other obligations for which United States Steel has assumed responsibility for repayment 551 - ---- ---- Payables: Current: Trade payables - 2 Income tax settlement payable 28 364 ---- ---- Current payables to United States Steel 28 366 ---- ---- Noncurrent: Estimated future income tax settlements payable - 97 Reimbursements payable under nonqualified employee benefit plans 8 - ---- ---- Noncurrent payables to United States Steel $ 8 $ 97 - ----------------------------------------------------------------------------
In connection with the Separation, Marathon and United States Steel entered into the following Agreements: Financial Matters Agreement - This agreement establishes the responsibilities of Marathon and United States Steel relating to certain corporate obligations of Marathon at the time of Separation as follows: . The assumption by United States Steel of payment responsibility for certain industrial revenue bonds and certain other financial obligations of Marathon. See Note 13 for details. . Obligations for which Marathon is solely responsible. See Note 13 for details of Marathon's debt obligations. . Obligations of Marathon for which United States Steel remains contingently liable. . Obligations of United States Steel for which Marathon remains contingently liable. See Notes 11 and 26 for details. Tax Sharing Agreement - See Note 18, for a discussion of this agreement. Transition Services Agreement - This agreement provides that, to the extent that one company or the other is not able to immediately service its own needs relating to services formerly managed on a corporate-wide basis, Marathon and United States Steel will provide such services to the other to the extent requested if the providing company is able to do so. Such agreements will be for a term of up to twelve months and be on a cost reimbursement basis. License Agreement - This agreement granted to United States Steel a non- exclusive license to use the USX name rights and certain intellectual property with the right to sublicense to subsidiaries. Insurance Assistance Agreement - This agreement provides for the division of responsibility for joint insurance arrangements and the associated payment of insurance claims and deductibles following the Separation for claims associated with pre-Separation periods. F-21 - ------------------------------------------------------------------------------- 16. Pensions and Other Postretirement Benefits Marathon has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are based primarily upon years of service and final average pensionable earnings. Certain subsidiaries provide benefits for employees covered by other plans based primarily upon employees' service and career earnings. Marathon also has defined benefit retiree health care and life insurance plans (other benefits) covering most employees upon their retirement. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to certain nonunion and most union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. Other benefits have not been prefunded.
Pension Other Benefits Benefits ------------------ -------------- (In millions) 2001 2000 2001 2000 - ------------------------------------------------------------------------------ Change in benefit obligations Benefit obligations at January 1 $ 938 $ 868 $ 575 $ 478 Service cost 55 52 14 14 Interest cost 68 67 42 37 Plan amendments - 6 - 1 Actuarial (gains) losses 197 121 (13) 46 Settlements, curtailments and termination benefits (6) (99) - 22 Benefits paid (95) (77) (28) (23) ------- ------ ------ ------ Benefit obligations at December 31 $ 1,157 $ 938 $ 590 $ 575 - ------------------------------------------------------------------------------ Change in plan assets Fair value of plan assets at January 1 $ 1,079 $1,310 Actual return on plan assets (35) (8) Employer contributions - 1 Trustee distributions(a) (20) (18) Settlements paid - (134) Benefits paid from plan assets (82) (72) ------- ------ Fair value of plan assets at December 31 $ 942 $1,079 - ------------------------------------------------------------------------------ Funded status of plans at December 31 $ (215)(b) $ 141 (b) $ (590) $ (575) Unrecognized net gain from transition (14) (18) - - Unrecognized prior service costs (credits) 53 59 (51) (59) Unrecognized actuarial (gains) losses 299 (37) 97 115 Additional minimum liability(c) (21) (19) - - ------- ------ ------ ------ Prepaid (accrued) benefit cost $ 102 $ 126 $ (544) $ (519) - ------------------------------------------------------------------------------ (a) Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code. (b) Includes several plans that have accumulated benefit obligations in excess of plan assets: 2001 2000 ------- ------ Aggregate accumulated benefit obligations $ (26) $ (34) Aggregate projected benefit obligations (58) (43) Aggregate plan assets - - (c)Additional minimum liability recorded was offset by the following: Intangible asset $ - $ 3 ======= ====== Accumulated other comprehensive income (losses): Beginning of year $ (11) $ (3) Change during year (net of tax) (3) (8) ------- ------ Balance at end of year $ (14) $ (11)
Differences in accumulated other comprehensive losses between the above presentation and amounts reported in the statement of equity represent amounts related to the net investment in United States Steel. - ------------------------------------------------------------------------------- F-22
Pension Benefits Other Benefits --------------------- ------------------ (In millions) 2001 2000 1999 2001 2000 1999 - ----------------------------------------------------------------------------------- Components of net periodic benefit cost (credit) - continuing operations Service cost $ 55 $ 52 $ 65 $ 14 $ 14 $ 17 Interest cost 68 67 67 42 37 36 Expected return on plan assets (107) (117) (114) - - - Amortization - net transition gain (4) (4) (5) - - - - prior service costs (credits) 5 4 4 (7) (10) (8) - actuarial (gains) losses - (9) 1 4 3 7 Multiemployer and other plans 5 5 5 - - - Settlement and termination (gain) loss 3 32(a) (7)(a) - 21(a) - ----- ----- ----- ---- ---- ---- Net periodic benefit cost $ 25 $ 30 $ 16 $ 53 $ 65 $ 52 - -----------------------------------------------------------------------------------
(a) Includes voluntary early retirement programs.
Pension Benefits Other Benefits ----------------- --------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------- Weighted average actuarial assumptions at December 31: Discount rate 7.0% 7.5% 7.0% 7.5% Expected annual return on plan assets 9.5% 9.5% n/a n/a Increase in compensation rate 5.0% 5.0% 5.0% 5.0% - ----------------------------------------------------------------------------
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 5% for 2007 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease - --------------------------------------------------------------------------- Effect on total of service and interest cost components $ 9 $ (7) Effect on other postretirement benefit obligations 77 (63) - ---------------------------------------------------------------------------
Marathon also contributes to several defined contribution plans for salaried employees. Contributions to these plans, which for the most part are based on a percentage of the employees' salaries, totaled $35 million in 2001, $32 million in 2000 and $34 million in 1999. - ------------------------------------------------------------------------------- 17. Property, Plant and Equipment
December (In millions) 31 2001 2000 - ---------------------------------------------------------------------- Production $12,965 $12,266 Refining 3,078 2,800 Marketing 2,043 2,286 Transportation 1,492 1,402 Other 384 312 ------- ------- Total 19,962 19,066 Less accumulated depreciation, depletion and amortization 10,384 9,691 ------- ------- Net $ 9,578 $ 9,375 - ----------------------------------------------------------------------
Property, plant and equipment includes gross assets acquired under capital leases of $8 million at December 31, 2001 and 2000, with related amounts in accumulated depreciation, depletion and amortization of $1 million at December 31, 2001. During 2000, Marathon recorded $193 million of impairments of certain E&P segment oil and gas properties, primarily located in Canada. The impairments were recorded due to reserve revisions as a result of production performance and disappointing drilling results. The fair value of the properties was determined using a discounted cash flow model, unless an indicative offer to purchase was available. Marathon used pricing assumptions based on forecasted prices applicable for the remaining life of the assets derived from current market conditions and long-term forecasts. The discounted cash flow calculation included risk-adjusted probable and possible reserve quantities. Impairment charges were included in depreciation, depletion and amortization. F-23 - ------------------------------------------------------------------------------- 18. Income Taxes Provisions (credits) for income taxes from continuing operations were:
2001 2000 1999 ---------------------- ---------------------- ---------------------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total - -------------------------------------------------------------------------------------- Federal $ 706 $ (96) $ 610 $ 608 $ (144) $ 464 $ 187 $ 158 $ 345 State and local 86 16 102 53 (46) 7 3 (7) (4) Foreign 184 (137) 47 55 (50) 5 25 (46) (21) ----- ------ ----- ----- ------ ----- ----- ----- ----- Total $ 976 $ (217) $ 759 $ 716 $ (240) $ 476 $ 215 $ 105 $ 320 - --------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total provisions from continuing operations follows:
(In millions) 2001 2000 1999 - --------------------------------------------------------------------------- Statutory rate applied to income before income taxes $ 727 $ 314 $ 338 Effects of foreign operations: Impairment of deferred tax benefits(a) - 235 - Adjustments to foreign valuation allowances - (30) - All other, including foreign tax credits (30) (30) (18) State and local income taxes after federal income tax effects 66 5 (3) Credits other than foreign tax credits (9) (7) (7) Effects of partially owned companies (5) (5) (5) Dispositions of subsidiary investments - - 7 Adjustment of prior years' federal income taxes 3 (11) 4 Other 7 5 4 ----- ----- ----- Total provisions $ 759 $ 476 $ 320 - ---------------------------------------------------------------------------
(a) During 2000, the amount of net deferred tax assets expected to be realized was reduced as a result of the change in the amount and timing of future foreign source income due to the exchange of Marathon's interest in Sakhalin Energy Investment Company Ltd. (Sakhalin Energy) for other oil and gas producing interests. Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 2001 2000 - ------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards (expiring in 2021) $ 13 $ - State tax loss carryforwards (expiring in 2007 through 2019) 153 70 Foreign tax loss carryforwards (portions of which expire in 2004 through 2008) 361 269 Employee benefits 236 246 Receivables, payables and debt 7 41 Expected federal benefit for: Crediting certain foreign deferred income taxes 288 315 Deducting state deferred income taxes 13 20 Contingencies and other accruals 159 155 Investments in subsidiaries and equity investees 72 69 Other 56 60 Valuation allowances: State (76) (16) Foreign (285) (252) ------- ------- Total deferred tax assets(b) 997 977 ------- ------- Deferred tax liabilities: Property, plant and equipment 1,705 1,642 Inventory 313 320 Prepaid pensions 82 119 Other 151 160 ------- ------- Total deferred tax liabilities 2,251 2,241 ------- ------- Net deferred tax liabilities $ 1,254 $ 1,264 - -------------------------------------------------------------------------------
(b) Marathon expects to generate sufficient future taxable income to realize the benefit of the deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and Marathon's tax profile in the years that such credits may be claimed. F-24 The consolidated tax returns of Marathon for the years 1992 through 1997 are under various stages of audit and administrative review by the IRS. Marathon believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income from continuing operations included $102 million, $237 million and $66 million attributable to foreign sources in 2001, 2000 and 1999, respectively. Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 2001, amounted to $342 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because Marathon intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $91 million would have been required. On December 31, 2001, the Separation Date, Marathon and United States Steel entered into a Tax Sharing Agreement that reflects each party's rights and obligations relating to payments and refunds of income, sales, transfer and other taxes that are attributable to periods beginning prior to and including the Separation Date and taxes resulting from transactions effected in connection with the Separation. The Tax Sharing Agreement incorporates the general tax sharing principles of the former tax allocation policy. In general, Marathon and United States Steel will make payments between them such that, with respect to any consolidated, combined or unitary tax returns for any taxable period or portion thereof ending on or before the Separation Date, the amount of taxes to be paid by each of Marathon and United States Steel will be determined, subject to certain adjustments, as if the former groups each filed their own consolidated, combined or unitary tax return. The Tax Sharing Agreement also provides for payments between Marathon and United States Steel for certain tax adjustments which may be made after the Separation. Other provisions address, but are not limited to, the handling of tax audits, settlements and return filing in cases where both Marathon and United States Steel have an interest in the results of these activities. A preliminary settlement for the calendar year 2001 federal income taxes, which would have been made in March 2002 under the former tax allocation policy, was made immediately prior to the Separation at a discounted amount to reflect the time value of money. Under the preliminary settlement for calendar year 2001, United States Steel received approximately $440 million from Marathon immediately prior to Separation arising from the application of the tax allocation policy. This policy provided that United States Steel would receive the benefit of tax attributes (principally net operating losses and various tax credits) that arose out of its business and which were used on a consolidated basis. Additionally, pursuant to the Tax Sharing Agreement, Marathon and United States Steel have agreed to protect the tax-free status of the Separation. Marathon and United States Steel each covenant that during the two-year period following the Separation, it will not cease to be engaged in an active trade or business. Each party has represented that there is no plan or intention to liquidate such party, take any other actions inconsistent with the information and representations set forth in the ruling request filed with the IRS or sell or otherwise dispose of its assets (other than in the ordinary course of business) during the two-year period following the Separation. To the extent that a breach of a representation or covenant results in corporate tax being imposed, the breaching party, either Marathon or United States Steel, will be responsible for the payment of the corporate tax. - ------------------------------------------------------------------------------- 19. Inventories
(In millions) December 31 2001 2000 - -------------------------------------------------------- Crude oil and natural gas liquids $ 693 $ 701 Refined products and merchandise 1,143 1,069 Supplies and sundry items 87 97 ------- ------- Total (at cost) 1,923 1,867 Less inventory market valuation reserve 72 - ------- ------- Net inventory carrying value $ 1,851 $ 1,867 - --------------------------------------------------------
Inventories of crude oil and refined products are valued by the LIFO method. The LIFO method accounted for 92% of total inventory value at December 31, 2001 and 2000. Current acquisition costs were estimated to exceed the above inventory values at December 31, 2000, by approximately $500 million. Cost of revenues was reduced and income from operations was increased by $17 million in 2001 and $14 million in 2000 as a result of liquidations of LIFO inventories. The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. During 2000, there were no charges or credits to costs and expenses. F-25 - ------------------------------------------------------------------------------- 20. Investments and Long-Term Receivables
(In millions) December 31 2001 2000 - --------------------------------------------- Equity method investments $ 940 $ 250 Other investments 34 34 Receivables due after one year 90 54 Deposits of restricted cash 11 16 Other 1 8 ------- ----- Total $ 1,076 $ 362 - ---------------------------------------------
Summarized financial information of investees accounted for by the equity method of accounting follows:
(In millions) 2001 2000 1999 - -------------------------------------------------------- Income data - year: Revenues and other income $ 2,824 $ 417 $ 422 Operating income 332 174 152 Net income 257 123 119 - -------------------------------------------------------- Balance sheet data - December 31: Current assets $ 598 $ 328 Noncurrent assets 3,172 1,247 Current liabilities 534 256 Noncurrent liabilities 1,097 650 - --------------------------------------------------------
Marathon's carrying value of its equity method investments is $118 million lower than the underlying net assets of investees. Generally this basis difference is being amortized into earnings over the lives of the underlying net assets. In the third quarter of 2001, MAP and Pilot Corporation formed a joint venture combining their travel center operations. The joint venture company, named Pilot Travel Centers LLC (PTC), commenced operations on September 1, 2001 and is accounted for under the equity method of accounting. MAP sales to PTC totaled $210 million in 2001. There were no sales to PTC in 2000 or 1999. In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed a definitive agreement to form a joint venture combining certain of their oil and gas producing activities in the U.S. Permian Basin, including Marathon's interest in the Yates Field. The joint venture, named MKM Partners L.P., commenced operations in January 2001 and is accounted for under the equity method of accounting. As a result of the agreement to form this joint venture, Marathon recognized a pretax charge of $931 million in the fourth quarter 2000, which is included in net gains (losses) on disposal of assets, and reclassified the remaining book value associated with the Yates Field from property, plant and equipment to assets held for sale. In 2000, Marathon exchanged its investment in Sakhalin Energy for a working interest in the Foinaven field located in the Atlantic Margin offshore the United Kingdom and an overriding royalty interest in an eight block area in the Gulf of Mexico, which includes the Ursa field. Additionally, Marathon received reimbursement for amounts advanced to Sakhalin Energy in 2000 and a cash settlement for certain other activities in 2000. The transaction was recorded at fair value and resulted in a pretax gain on disposal of assets of $58 million. Dividends and partnership distributions received from equity investees were $95 million in 2001, $46 million in 2000 and $44 million in 1999. Marathon purchases from equity investees totaled $54 million, $61 million and $50 million in 2001, 2000 and 1999, respectively. F-26 - ------------------------------------------------------------------------------- 21. Stock-Based Compensation Plans The 1990 Stock Plan, amended and restated as the Marathon Oil Corporation 1990 Stock Plan, authorizes the Compensation and Organization Committee of the board of directors of Marathon to grant restricted stock, stock options and stock appreciation rights to key management employees. Up to 0.5 percent of the outstanding stock, as determined on December 31 of the preceding year, is available for grants during each calendar year the 1990 Plan is in effect. In addition, awarded shares that do not result in shares being issued are available for subsequent grant, and any ungranted shares from prior years' annual allocations are available for subsequent grant during the years the 1990 Plan is in effect. Stock options represent the right to purchase shares of stock at the market value of the stock at date of grant. Certain options contain the right to receive cash and/or common stock equal to the excess of the fair market value of shares of common stock, as determined in accordance with the plan, over the option price of shares. Most stock options vest after a one-year service period and all expire 10 years from the date they are granted. The following is a summary of stock option activity:
Shares Price(a) - ---------------------------------------------- Balance December 31, 1998 4,074,940 $26.62 Granted 1,005,000 29.38 Exercised (176,160) 27.27 Canceled (121,055) 30.19 --------- Balance December 31, 1999 4,782,725 27.08 Granted 1,799,880 25.18 Exercised (58,870) 23.11 Canceled (410,115) 28.06 --------- Balance December 31, 2000 6,113,620 26.50 Granted 1,642,395 32.52 Exercised (961,480) 21.70 Canceled (64,430) 30.11 --------- Balance December 31, 2001 6,730,105 28.62 - ----------------------------------------------
(a) Weighted-average exercise price. The following table represents stock options at December 31, 2001:
Outstanding Exercisable ------------------------------------------- -------------------------- Number of Number of Range of Shares Weighted-Average Shares Exercise Under Remaining Weighted-Average Under Weighted-Average Prices Option Contractual Life Exercise Price Option Exercise Price - -------------------------------------------------------------------------------------- $17.00 - 23.44 1,131,035 4.3 years $21.06 1,131,035 $21.06 25.50 - 26.47 1,359,010 8.4 25.54 1,359,010 25.54 29.38 - 34.00 4,240,060 7.6 31.62 2,624,565 31.07 --------- --------- Total 6,730,105 7.2 28.62 5,114,610 27.39 - --------------------------------------------------------------------------------------
The following net income and per share data represent the difference between stock-based compensation valued at fair value on the date of grant and recognized compensation costs.
(In millions, except per share data) December 31 2001 2000 1999 - --------------------------------------------------------------------------- Income from continuing operations applicable to Common Stock - As reported $ 1,317 $ 420 $ 646 - Pro forma 1,311 415 642 Basic and diluted net income per share - As reported 4.26 1.35 2.09 - Pro forma 4.24 1.34 2.08 Net income applicable to Common Stock - As reported $ 377 $ 432 $ 654 - Pro forma 371 427 650 Basic and diluted net income per share - As reported 1.22 1.39 2.11 - Pro forma 1.20 1.38 2.10 - ---------------------------------------------------------------------------
F-27 The above pro forma amounts were based on a Black-Scholes option-pricing model, which included the following information and assumptions:
2001 2000 1999 - ----------------------------------------------------------------------------- Weighted-average grant-date exercise price per share $ 32.52 $ 25.18 $ 29.38 Expected annual dividends per share $ .92 $ .88 $ .84 Expected life in years 5 5 7 Expected volatility 34% 33% 29% Risk-free interest rate 4.9% 6.5% 5.8% - ----------------------------------------------------------------------------- Weighted-average grant-date fair value of options granted during the year, as calculated from above $ 9.45 $ 7.51 $ 8.89 - -----------------------------------------------------------------------------
Restricted stock represents stock granted for such consideration, if any, as determined by the Compensation and Organization Committee, subject to forfeiture provisions and restrictions on transfer. Those restrictions may be removed as conditions such as performance, continuous service and other criteria are met. Restricted stock is issued at the market price per share at the date of grant and vests over service periods that range from one to five years. Deferred compensation is charged to equity when the restricted stock is granted and subsequently adjusted for changes in the market value of the underlying stock. The deferred compensation is expensed over the balance of the vesting period and adjusted if conditions of the restricted stock grant are not met. The following table presents information on restricted stock grants under the 1990 Stock Plan:
2001 2000 1999 - ------------------------------------------------------------------------------ Number of shares granted 205,346 410,025 28,798 Weighted-average grant-date fair value per share $ 31.30 $ 25.50 $ 29.38 - ------------------------------------------------------------------------------
Marathon also has a restricted stock plan for certain salaried employees that are not officers of Marathon. Participants in the plan are awarded restricted stock by the Salary and Benefits Committee based on their performance within certain guidelines. 50% of the awarded stock vests at the end of two years from the date of grant and the remaining 50% vests in four years from the date of grant. Prior to vesting, the employee has the right to vote such stock and receive dividends thereon. The nonvested shares are not transferable and are retained by the Corporation until they vest. Deferred compensation is charged to equity when the restricted stock is granted. The deferred compensation is expensed over the balance of the vesting period and adjusted if conditions of the restricted stock grant are not met. The following table presents information on the restricted stock grants under the nonofficers plan for 2001: - ----------------------------------------------------------- Number of shares granted 540,488 Weighted-average grant-date fair value per share $ 29.31 - -----------------------------------------------------------
Marathon has a deferred compensation plan for nonemployee directors of its Board of Directors. The plan permits participants to defer some or all of their annual retainers in the form of common stock units or cash and it requires new directors to defer at least half of their annual retainer in the form of common stock units. Common stock units are book entry units equal in value to a share of stock. During 2001, 12,358 shares of stock were issued, during 2000, 14,242 shares of stock were issued and during 1999, 10,541 shares of stock were issued. Actual stock based compensation expense (credit) was $16 million in 2001, $5 million in 2000 and $(4) million in 1999. F-28 - ------------------------------------------------------------------------------- 22. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 25, by individual balance sheet account. Marathon's financial instruments at December 31, 2001 and 2000 were:
2001 2000 ---------------- ---------------- Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount - ------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 657 $ 657 $ 340 $ 340 Receivables 1,708 1,708 2,262 2,262 Receivables from United States Steel 515 615 5 5 Investments and long-term receivables 192 136 171 107 ------- ------- ------- ------- Total financial assets $ 3,072 $ 3,116 $ 2,778 $ 2,714 - ------------------------------------------------------------------------------- Financial liabilities: Notes payable $ - $ - $ 80 $ 80 Accounts payable 2,431 2,431 3,019 3,019 Accrued interest 85 85 61 61 Payable to United States Steel 28 28 366 366 Obligations to repay preferred securities 295 295 - - Long-term debt (including amounts due within one year) 3,830 3,556 2,174 2,078 Preferred stock of subsidiary - - 175 184 ------- ------- ------- ------- Total financial liabilities $ 6,669 $ 6,395 $ 5,875 $ 5,788 - -------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short-term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of preferred stock of subsidiary was based on market prices. Fair value of long- term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. Marathon's only unrecognized financial instruments are financial guarantees and commitments to extend credit. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to financial guarantees, see Note 26. - ------------------------------------------------------------------------------- 23. Preferred Stocks USX Capital LLC, a former wholly owned subsidiary of Marathon, had sold 10,000,000 shares (carrying value of $250 million) of 8 3/4% Cumulative Monthly Income Preferred Shares (MIPS) (liquidation preference of $25 per share) in 1994. In December 2001, $27 million of MIPS was exchanged for debt securities of United States Steel. On December 31, 2001, USX Capital LLC redeemed all of the remaining outstanding MIPS. At the redemption date, USX Capital LLC paid $25.18 per share reflecting the redemption price of $25 per share, plus a cash payment for accrued but unpaid dividends through the redemption date. After the redemption date, the MIPS ceased to accrue dividends and only represented the right to receive the redemption price. In 1997, Marathon exchanged approximately 3.9 million, $50 face value, 6.75% Convertible Quarterly Income Preferred Securities of USX Capital Trust I (QUIPS), a Delaware statutory business trust, for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock). In December 2001, $12 million of QUIPS was exchanged for debt securities of United States Steel. At the time of Separation, all outstanding QUIPS became redeemable at their face value plus accrued but unpaid distributions. The QUIPS were included in the net investment in United States Steel. Marathon had issued 6.50% Preferred Stock and, prior to the Separation, had 2,209,042 shares (stated value of $1.00 per share; liquidation preference of $50.00 per share) outstanding. In December 2001, $10 million of 6.50% Preferred Stock was exchanged for debt securities of United States Steel. At the time of Separation, all outstanding shares of the 6.50% Preferred Stock were converted into the right to receive $50.00 in cash. Holders received payment on January 3, 2002. F-29 - ------------------------------------------------------------------------------- 24. Stockholder Rights Plan In 2002, the Marathon's stockholder rights plan (the Rights Plan), was amended due to the Separation. Under the Rights Plan each outstanding share of Common Stock currently includes one right to purchase from Marathon one one-hundredth of a share of its Series A Junior Preferred Stock at an exercise price of $110 per unit, subject to adjustment. Under the Rights Plan, the rights will become exercisable, subject to certain exceptions, after any person or group of affiliated or associated persons has acquired, obtained the right to acquire or made a tender or exchange offer for 15% or more of the outstanding voting power represented by the outstanding Common Stock, except pursuant to a qualifying all-cash tender offer for all outstanding shares of Common Stock which results in the offeror owning shares of Common Stock representing a majority of the voting power (other than Voting Stock beneficially owned by the offeror immediately prior to the offer). If the rights become exercisable, each right will entitle the holder, other than the acquiring person or group, to purchase one one-hundredth of a share of Series A Junior Preferred Stock or, upon the acquisition by any person of 15% or more of the outstanding voting power represented by the outstanding Common Stock (or, in certain circumstances, other property) or other securities of Marathon having a market value of twice the exercise price. After a person or group acquires 15% or more of the outstanding voting power, if Marathon engages in a merger or other business combination where it is not the surviving corporation or where it is the surviving corporation and the Common Stock is changed or exchanged, or if 50% or more of Marathon's assets, earnings power or cash flow are sold or transferred, each right will entitle the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The rights and the exercise price are subject to adjustment. The rights will expire on October 9, 2009, unless such date is extended or the rights are earlier redeemed by Marathon before they become exercisable. Under certain circumstances, the Board of Directors has the option to exchange one share of the respective class of Common Stock for each exercisable right. - ------------------------------------------------------------------------------- 25. Derivative Instruments The following table sets forth quantitative information by category of derivative instrument at December 31, 2001. The amounts exclude the variable margin deposit balances held in various brokerage accounts. Marathon did not have any foreign currency contracts in place at December 31, 2001.
Fair Carrying Value Fair Value Value Carrying Value (In millions) Assets(a) (Liabilities)(a) Assets(b) (Liabilities)(b) - ---------------------------------------------------------------------------- Fair Value Hedges(c): Exchange-traded commodity futures $ - $ (1) $ -- $ (1) Exchange-traded commodity options - - - - OTC commodity swaps - (13) - (13) OTC commodity options - -- - -- Cash Flow Hedges(d): Exchange-traded commodity futures $ - $ (3) $ - $ (3) Exchange-traded commodity options - - - - OTC commodity swaps 68 (15) 68 (15) OTC commodity options - - - - Non-Hedge Designation(e): Exchange-traded commodity futures $ 16 $ (31) $ 16 $ (31) Exchange-traded commodity options 15 (10) 15 (10) OTC commodity swaps 152 (85) 152 (85) OTC commodity options 32 (14) 32 (14) - ----------------------------------------------------------------------------
(a) The fair value amounts for OTC positions are based on various indices or dealer quotes. The fair value of exchange-traded positions are based on market price changes for each commodity. (b) The carrying values represent the value of the derivative instruments. This excludes any margin deposit amounts with respective brokers. These amounts are reflected on a gross basis. Marathon's consolidated balance sheet is reflected on a net asset/(liability) basis, as permitted by the master netting agreements, by brokerage firm. (c) There was no ineffectiveness associated with fair value hedges for 2001 because the hedging instrument and the existing firm commitment contracts are priced on the same underlying index. Certain derivative instruments used in the fair value hedges mature between 2002 and 2008. (d) The ineffective portion of changes in the fair value, on a pretax basis, for cash flow hedges recognized during 2001 was a favorable $3 million. In addition, during 2001, $12 million was recognized in income before tax as the result of a discontinuation of a portion of a cash flow hedge related to sales of natural gas production. This amount was reflected within revenues. Certain derivative instruments used in the cash flow hedges mature in 2002. (e) The table excludes nontraditional derivative instruments which are created due to netting of physical receipts and delivery volumes with the same counterparty. At December 31, 2001, the fair value of these assets and liabilities was $27 million and $26 million, respectively. F-30 - ------------------------------------------------------------------------------- 26. Contingencies and Commitments Marathon is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathon's consolidated financial statements. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Environmental matters - Marathon is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 2001 and 2000, accrued liabilities for remediation totaled $77 million and $75 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $60 million and $57 million at December 31, 2001 and 2000, respectively. For a number of years, Marathon has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 2001 and 2000, such capital expenditures totaled $67 million and $73 million, respectively. Marathon anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. On May 11, 2001, MAP entered into a consent decree with the U.S. Environmental Protection Agency which commits it to complete certain agreed upon environmental programs over an eight-year period primarily aimed at reducing air emissions at its seven refineries. This consent decree was approved by the court on August 28, 2001. The current estimated cost to complete these programs is approximately $300 million in expenditures over the next seven years. In addition, MAP is required to complete certain agreed upon supplemental environmental projects as part of this settlement of an enforcement action for alleged Clean Air Act violations, at a current estimated cost of $8 million. At December 31, 2001 and 2000, accrued liabilities for platform abandonment and dismantlement totaled $193 million and $162 million, respectively. Guarantees - Marathon guaranteed certain obligations related to the business of United States Steel. As of December 31, 2001, the exposure for all of these matters totaled $28 million. United States Steel is the sole general partner of Clairton 1314B Partnership, L.P., which owns certain cokemaking facilities formerly owned by United States Steel. Marathon has guaranteed to the limited partners all obligations of United States Steel under the partnership documents. United States Steel may dissolve the partnership under certain circumstances, including if it is required to fund accumulated cash shortfalls of the partnership in excess of $150 million. In addition to the normal commitments of a general partner, United States Steel has indemnified the limited partners for certain income tax exposures. As of December 31, 2001, United States Steel had no unpaid outstanding obligation to the limited partners. At December 31, 2001 and 2000, Marathon's pro rata share of obligations of LOOP LLC and various pipeline investees secured by throughput and deficiency agreements totaled $112 million and $119 million, respectively. Under the agreements, Marathon is required to advance funds if the investees are unable to service debt. Any such advances are prepayments of future transportation charges. At December 31, 2001, MAP had guaranteed the repayment of $35 million of the outstanding balance of Centennial Pipeline LLC's Master Shelf Agreement. Concentration of credit risk - Marathon is exposed to credit risk in the event of nonpayment by counterparties, a significant portion of which are concentrated in energy related industries. The creditworthiness of customers and other counterparties is subject to continuing review, including the use of master netting agreements, where appropriate. While no single customer accounts for more than 5% of annual gross revenues, Marathon has significant exposures to United States Steel arising from the separation. Those exposures are discussed in Notes 2, 11 and 15. Commitments - At December 31, 2001 and 2000, Marathon's contract commitments to acquire property, plant and equipment totaled $297 million and $457 million, respectively. Marathon is a party to a 15-year transportation services agreement with a natural gas transmission company. The contract requires Marathon to pay minimum annual charges of approximately $5 million and concludes in 2015. The payments are required even if the transportation facility is not utilized. Payments made under the contract in 2001 were $5 million. Payments of less than $1 million were made in 2000. F-31 Put/Call Agreements - In connection with the 1998 formation of MAP, Marathon and Ashland entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland's ownership interest in MAP, for an amount in cash and/or Marathon debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. Payment could be made at closing, or at Marathon's option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland's ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. As part of the formation of Pilot Travel Centers LLC (PTC), MAP and Pilot Corporation (Pilot) entered into a Put/Call and Registration Rights Agreement (Agreement). The Agreement provides that any time after September 1, 2006, Pilot can sell its interest in PTC to MAP for an amount of cash and/or Marathon, MAP or Ashland equity securities equal to the product of 90% (95% if paid in securities) of the fair market value of PTC at the time multiplied by Pilot's percentage interest in PTC. At any time after September 1, 2011, under certain conditions MAP will have the right to purchase Pilot's interest in PTC for an amount of cash and/or Marathon, MAP or Ashland equity securities equal to the product of 105% (110% if paid in securities) of the fair market value of PTC at the time multiplied by Pilot's percentage interest in PTC. - ------------------------------------------------------------------------------- 27. Subsequent Event - Business Combination On January 3, 2002, Marathon completed its acquisition of certain interests in Equatorial Guinea, West Africa from CMS Energy Corporation for $993 million in cash, excluding working capital adjustments. The acquisition includes oil and gas producing assets, exploration interests and certain processing facilities. Marathon utilized unused lines of credit to fund this acquisition until permanent financing is obtained. Marathon will account for this acquisition under SFAS No. 141, which was described in Note 4. Any goodwill arising from this transaction will be accounted for under SFAS No. 142, which also was described in Note 4. F-32 Selected Quarterly Financial Data (Unaudited)
2001 2000 -------------------------------------- ------------------------------------ (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - --------------------------------------------------------------------------------------------------- Revenues and other income: Revenues $ 6,803 $ 8,496 $ 9,113 $ 8,607 $ 8,881 $ 9,150 $ 8,667 $ 7,729 Other income (loss) 43 (166) 55 115 (833) 59 30 116 ------- ------- ------- ------- ------- ------- ------- ------- Total 6,846 8,330 9,168 8,722 8,048 9,209 8,697 7,845 Income (loss) from operations 216 577 1,253 908 (471) 723 857 521 Includes: Loss related to sale of certain Canadian assets - (221) - - - - - - Inventory market valuation reserve adjustments (72) - - - - - - - Joint venture formation charges - - - - (931) - - - Income (loss) from continuing operations 53 183 580 502 (313) 116 365 252 Income (loss) from discontinued operations (1,127) (13) (29) 16 (136) 23 60 44 Income (loss) before cumulative effect of change in accounting principle (1,074) 170 551 518 (449) 139 425 296 Net income (loss) (1,074) 170 551 510 (449) 139 425 296 - --------------------------------------------------------------------------------------------------- Common Stock data: Net income (loss) (898) 193 582 500 (310) 121 367 254 - Per share - basic and diluted(a) (2.90) .63 1.88 1.62 (1.00) .38 1.18 .81 Dividends paid per share .23 .23 .23 .23 .23 .23 .21 .21 Price range of Common Stock(b) - Low 25.27 24.95 26.23 25.85 25.25 23.50 22.81 20.69 - High 30.35 32.75 33.73 29.99 30.38 29.63 29.19 27.50 - --------------------------------------------------------------------------------------------------- Steel Stock data: Net income (loss) (193) (25) (32) 7 (141) 17 54 41 - Per share - basic and diluted (2.17) (.28) (.36) .08 (1.59) .19 .62 .45 Dividends paid per share .10 .10 .10 .25 .25 .25 .25 .25 Price range of Steel Stock(b) - Low 13.00 13.08 13.72 14.00 12.69 14.88 18.25 20.63 - High 18.75 21.70 22.00 18.00 18.31 19.69 26.88 32.94 - ---------------------------------------------------------------------------------------------------
(a) Net income (loss) per share equals income (loss) per share before cumulative effect of change in accounting principle for all periods except the first quarter of 2001, where there was a negative $.03 per share cumulative effect. Basic and diluted earnings (loss) per share are equal for all periods except the third quarter of 2001 where diluted earnings per share is $.01 less than basic earnings per share presented. (b)Composite tape. Principal Unconsolidated Investees (Unaudited)
December 31, 2001 Company Country Ownership Activity - --------------------------------------------------------------------------------------- Centennial Pipeline LLC United States 33%(a) Pipeline & Storage Facility CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production Kenai LNG Corporation United States 30% Natural Gas Liquefication LOCAP LLC United States 50%(a) Pipeline & Storage Facilities LOOP LLC United States 47%(a) Offshore Oil Port MKM Partners L.P. United States 50%(b) Oil & Gas Production Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission Minnesota Pipe Line Company United States 33%(a) Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Pilot Travel Centers LLC United States 50%(a) Travel Centers Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation Southcap Pipe Line Company United States 22%(a) Crude Oil Transportation - ---------------------------------------------------------------------------------------
(b) Marathon's income participation is 85%. (a) Represents the ownership interest held by MAP. F-33 Supplementary Information on Oil and Gas Producing Activities (Unaudited) The Supplementary Information on Oil and Gas Producing Activities is presented in accordance with Statement of Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing Activities". Included as supplemental information are capitalized costs related to oil and gas producing activities, results of operations for oil and gas producing activities and costs incurred in oil and gas property acquisition, exploration and development activities. These tables reflect data related to oil and gas producing activities only and do not correspond with the Exploration and Production data reported in Management's Discussion and Analysis of Income and Operations and in Note 10 of the Notes to Consolidated Financial Statements. Supplemental information is also provided for estimated quantities of proved oil and gas reserves, standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities and a summary of changes therein. The supplemental information is disclosed by the following geographic areas: the United States, Europe, which primarily includes activities in the United Kingdom, Denmark, Ireland, the Netherlands and Norway; and Other International, which includes activities in Angola, Canada, Gabon and other international locations outside of Europe. Equity Investees include Marathon's equity share of the activities of oil and gas companies that are accounted for by the equity method. This includes MKM Partners L.P. (MKM) and CLAM Petroleum B.V. (CLAM) for 2001 and CLAM and Sakhalin Energy Investment Company Ltd. (Sakhalin Energy) for 2000 and 1999. Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
United Other Equity (In millions) December 31 States Europe Intl. Consolidated Investees Total - --------------------------------------------------------------------------------------- 2001 Capitalized costs: Proved properties $ 6,123 $ 4,920 $ 840 $ 11,883 $ 569 $ 12,452 Unproved properties 651 183 262 1,096 2 1,098 ------- ------- ------- -------- ----- -------- Total 6,774 5,103 1,102 12,979 571 13,550 ------- ------- ------- -------- ----- -------- Accumulated depreciation, depletion and amortization: Proved properties 3,789 3,375 360 7,524 183 7,707 Unproved properties 68 - 11 79 - 79 ------- ------- ------- -------- ----- -------- Total 3,857 3,375 371 7,603 183 7,786 ------- ------- ------- -------- ----- -------- Net capitalized costs $ 2,917 $ 1,728 $ 731 $ 5,376 $ 388 $ 5,764 - --------------------------------------------------------------------------------------- 2000 Capitalized costs: Proved properties $ 5,752 $ 4,739 $ 1,373 $ 11,864 $ 226 $ 12,090 Unproved properties 343 124 180 647 2 649 ------- ------- ------- -------- ----- -------- Total 6,095 4,863 1,553 12,511 228 12,739 ------- ------- ------- -------- ----- -------- Accumulated depreciation, depletion and amortization: Proved properties 3,435 3,074 420 6,929 170 7,099 Unproved properties 107 - 13 120 1 121 ------- ------- ------- -------- ----- -------- Total 3,542 3,074 433 7,049 171 7,220 ------- ------- ------- -------- ----- -------- Net capitalized costs $ 2,553 $ 1,789 $ 1,120 $ 5,462 $ 57 $ 5,519 - --------------------------------------------------------------------------------------- Costs Incurred for Property Acquisition, Exploration and Development - Including Capital Expenditures United Other Equity (In millions) States Europe Intl. Consolidated Investees Total - --------------------------------------------------------------------------------------- 2001: Property acquisition: Proved $ 231 $ - $ 1 $ 232 $ - $ 232 Unproved 395 24 91 510 - 510 Exploration 190 20 63 273 8 281 Development 356 205 52 613 19 632 - --------------------------------------------------------------------------------------- 2000: Property acquisition: Proved $ 128 $ - $ 12 $ 140 $ - $ 140 Unproved (5)(a) - 10 5 - 5 Exploration 161 33 93 287 2 289 Development 288 42 103 433 77 510 - --------------------------------------------------------------------------------------- 1999: Property acquisition: Proved $ 20 $ - $ 10 $ 30 $ - $ 30 Unproved 26 12 107 145 - 145 Exploration 141 47 64 252 8 260 Development 232 34 117 383 84 467 - ---------------------------------------------------------------------------------------
(a) Includes proceeds of $25 million realized from the reduction of mineral interests. F-34 Supplementary Information on Oil and Gas Producing Activities (Unaudited) C O N T I N U E D Results of Operations for Oil and Gas Producing Activities, Excluding Corporate Overhead and Interest Costs(a)
United Other Equity (In millions) States Europe(b) Intl. Consolidated Investees Total - ----------------------------------------------------------------------------------- 2001:Revenues: Sales $ 871 $ 706 $ 247 $ 1,824 $ 49 $ 1,873 Transfers 1,235 - 134 1,369 69 1,438 Other revenues(c) 68 - (221) (153) - (153) ------- ----- ----- ------- ---- ------- Total revenues 2,174 706 160 3,040 118 3,158 Expenses: Production costs (356) (154) (103) (613) (34) (647) Shipping and handling costs (99) (35) - (134) (1) (135) Exploration expenses (90) (8) (46) (144) - (144) Depreciation, depletion and amortization (449) (249) (113) (811) (13) (824) Impairments - - (1) (1) - (1) Other expenses (38) (4) (58) (100) - (100) ------- ----- ----- ------- ---- ------- Total expenses (1,032) (450) (321) (1,803) (48) (1,851) Other production- related earnings (losses)(d) 3 (24) 5 (16) 1 (15) ------- ----- ----- ------- ---- ------- Results before income taxes 1,145 232 (156) 1,221 71 1,292 Income taxes (credits) 389 69 (58) 400 25 425 ------- ----- ----- ------- ---- ------- Results of operations $ 756 $ 163 $ (98) $ 821 $ 46 $ 867 - ----------------------------------------------------------------------------------- 2000:Revenues: Sales $ 783 $ 579 $ 310 $ 1,672 $145 $ 1,817 Transfers 1,337 - 188 1,525 - 1,525 Other revenues(c) (875) 10 55 (810) - (810) ------- ----- ----- ------- ---- ------- Total revenues 1,245 589 553 2,387 145 2,532 Expenses: Production costs (371) (101) (133) (605) (34) (639) Shipping and handling costs (72) (10) - (82) - (82) Exploration expenses (125) (37) (74) (236) (6) (242) Reorganization costs (45) (12) (10) (67) - (67) Depreciation, depletion and amortization (380) (175) (122) (677) (27) (704) Impairments (5) - (188) (193) - (193) Other expenses (33) (3) (15) (51) - (51) ------- ----- ----- ------- ---- ------- Total expenses (1,031) (338) (542) (1,911) (67) (1,978) Other production- related earnings (losses)(d) 4 (21) 4 (13) 1 (12) ------- ----- ----- ------- ---- ------- Results before income taxes 218 230 15 463 79 542 Income taxes (credits)(e) 70 62 (1) 131 27 158 ------- ----- ----- ------- ---- ------- Results of operations $ 148 $ 168 $ 16 $ 332 $ 52 $ 384 - ----------------------------------------------------------------------------------- 1999:Revenues: Sales $ 547 $ 431 $ 200 $ 1,178 $ 33 $ 1,211 Transfers 882 - 88 970 - 970 Other revenues(c) 4 - (2) 2 - 2 ------- ----- ----- ------- ---- ------- Total revenues 1,433 431 286 2,150 33 2,183 Expenses: Production costs (322) (135) (99) (556) (25) (581) Shipping and handling costs (77) (2) - (79) - (79) Exploration expenses (134) (42) (51) (227) (4) (231) Depreciation, depletion and amortization (362) (143) (99) (604) (13) (617) Impairments (16) - - (16) - (16) Other expenses (28) (7) (15) (50) - (50) ------- ----- ----- ------- ---- ------- Total expenses (939) (329) (264) (1,532) (42) (1,574) Other production- related earnings (losses)(d) 1 4 4 9 1 10 ------- ----- ----- ------- ---- ------- Results before income taxes 495 106 26 627 (8) 619 Income taxes (credits) 168 33 (7) 194 (3) 191 ------- ----- ----- ------- ---- ------- Results of operations $ 327 $ 73 $ 33 $ 433 $ (5) $ 428 - -----------------------------------------------------------------------------------
(b) Prior years reclassified to conform to 2001 classifications. (a) Includes the results of using derivative instruments to manage commodity and foreign currency risks. (c) Includes gain on offshore lease resolution with U.S. Government and net gains (losses) on asset dispositions. (d) Includes revenues, net of associated costs, from third-party activities that are an integral part of Marathon's production operations which may include the processing and/or transportation of third-party production, and the purchase and subsequent resale of gas utilized in reservoir management. (e) Excludes net valuation allowance tax charges of $205 million. F-35 Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Average Production Costs(a)
(Dollars per BOE) 2001 2000 1999 - ---------------------------------------------------------- United States $ 3.78 $ 4.01 $ 3.26 International - Europe 4.31 3.48 4.55 - Other International 5.93 6.09 4.66 Total Consolidated 4.16 4.22 3.71 - Equity Investees 6.37 6.00 10.02 Worldwide 4.24 4.29 3.82 - ----------------------------------------------------------
(a) Computed using production costs as disclosed in Results of Operations for Oil and Gas Activities and as defined by the Securities and Exchange Commission. Natural gas volumes were converted to barrels of oil equivalent (BOE) using a conversion factor of six mcf of natural gas to one barrel of oil. Average Sales Prices
Crude Oil and Condensate Natural Gas Liquids Natural Gas ----------------------- ----------------------- -------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------- ------- ------- ------ ------ ------ Average Sales Prices(a) (excluding results of (Dollars per hedging) (Dollars per Barrel) Thousand Cubic Feet) - --------------------------------------------------------------------------------------------- United States $ 21.13 $ 26.47 $ 16.41 $ 16.67 $ 19.20 $ 12.30 $ 3.69 $ 3.49 $ 2.07 International - Europe 23.74 27.90 17.59 19.17 24.98 13.84 2.77 2.56 2.03 - Other International 22.97 25.77 16.77 21.34 23.48 13.49 3.48 3.20 1.64 Total Consolidated 22.02 26.56 16.65 17.46 20.35 12.67 3.43 3.20 2.00 - Equity Investee 23.59 29.64 23.43 19.58 28.74 13.22 3.39 2.75 1.87 Worldwide 22.09 26.74 16.68 17.50 20.37 12.67 3.43 3.19 2.00 - --------------------------------------------------------------------------------------------- Crude Oil and Condensate Natural Gas Liquids Natural Gas ----------------------- ----------------------- -------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------- ------- ------- ------ ------ ------ Average Sales Prices(a) (including results of (Dollars per hedging) (Dollars per Barrel) Thousand Cubic Feet) - --------------------------------------------------------------------------------------------- United States $ 21.56 $ 26.00 $ 16.31 $ 16.67 $ 19.20 $ 12.30 $ 3.92 $ 3.40 $ 2.09 International - Europe 23.74 27.90 17.59 19.17 24.98 13.84 2.77 2.56 2.03 - Other International 22.97 25.77 16.63 21.34 23.48 13.49 3.48 3.14 1.66 Total Consolidated 22.28 26.25 16.56 17.46 20.35 12.67 3.58 3.14 2.02 - Equity Investee 23.59 29.64 23.43 19.58 28.74 13.22 3.39 2.75 1.87 Worldwide 22.35 26.44 16.59 17.50 20.37 12.67 3.58 3.13 2.01 - ---------------------------------------------------------------------------------------------
(a) Prior years reclassified to conform to 2001 classifications. Estimated Quantities of Proved Oil and Gas Reserves Marathon's estimated net proved liquid hydrocarbon (oil, condensate, and natural gas liquids) and gas reserves and the changes thereto for the years 2001, 2000 and 1999 are shown in the following tables. Estimates of the proved reserves have been prepared by asset teams including reservoir engineers and geoscience professionals. Reserve estimates are periodically reviewed by the Corporate Reserves Group to assure that rigorous professional standards and the reserves definitions prescribed by the U. S. Securities and Exchange Commission (SEC) are consistently applied throughout the company. Proved reserves are the estimated quantities of oil and gas that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Due to the inherent uncertainties and the limited nature of the reservoir data, estimates of proved reserves are subject to potentially substantial changes, either positively or negatively, as additional information becomes available and contractual and economic conditions change. Marathon's net proved reserve estimates have been adjusted as necessary to reflect all contractual agreements, royalty obligations and interests owned by others at the time of the estimate. Only reserves that are estimated to be recovered during the term of the current contract, unless there is a clear and consistent history of contract extension, have been included in the proved reserve estimate. Reserves from properties governed by Production Sharing Contracts have been calculated using the "economic interest" method prescribed by the SEC. Reserves that are not currently considered proved, that may result from extensions of currently proved areas, or that may result from applying secondary or tertiary recovery processes not yet tested and determined to be economic, are excluded. Purchased natural gas utilized in reservoir management and subsequently resold is also excluded. Marathon does not have any quantities of oil and gas reserves subject to long-term supply agreements with foreign governments or authorities in which Marathon acts as producer. F-36 Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Proved developed reserves are the quantities of oil and gas expected to be recovered through existing wells with existing equipment and operating methods. In some cases, proved undeveloped reserves may require substantial new investments in additional wells and related facilities. Production volumes shown are sales volumes, net of any products consumed during production activities.
United Other Equity (Millions of barrels) States Europe Intl. Consolidated Investees Total - ------------------------------------------------------------------------------- Liquid Hydrocarbons Proved developed and undeveloped reserves: Beginning of year - 1999 549 122 194 865 80 945 Purchase of reserves in place 14 - 7 21 - 21 Revisions of previous estimates 2 (20) - (18) (3) (21) Improved recovery 11 - 1 12 - 12 Extensions, discoveries and other additions 9 - 5 14 - 14 Production (53) (12) (11) (76) - (76) Sales of reserves in place (12) - (9) (21) - (21) ---- --- ---- ---- --- ---- End of year - 1999 520 90 187 797 77 874 Purchase of reserves in place 27 - - 27 - 27 Exchange of reserves in place(a) 6 60 - 66 (73) (7) Revisions of previous estimates (4) (35) (21) (60) - (60) Improved recovery 7 - - 7 - 7 Extensions, discoveries and other additions 15 3 1 19 - 19 Production (48) (10) (13) (71) (4) (75) Sales of reserves in place (65) - (3) (68) - (68) ---- --- ---- ---- --- ---- End of year - 2000 458 108 151 717 - 717 Purchase of reserves in place 8 - - 8 - 8 Exchange of reserves in place(b) (191) - - (191) 191 - Revisions of previous estimates 14 (3) - 11 (3) 8 Improved recovery 13 - - 13 - 13 Extensions, discoveries and other additions 12 - 1 13 - 13 Production (46) (17) (10) (73) (4) (77) Sales of reserves in place - - (112) (112) - (112) ---- --- ---- ---- --- ---- End of year - 2001 268 88 30 386 184 570 - ------------------------------------------------------------------------------- Proved developed reserves: Beginning of year - 1999 489 119 67 675 - 675 End of year - 1999 476 90 72 638 69 707 End of year - 2000 414 74 57 545 - 545 End of year - 2001 243 69 25 337 178 515 - -------------------------------------------------------------------------------
(a) Reserves represent the exchange of an equity interest in Sakhalin Energy Investment Company Ltd. for certain interests in the U.K. Atlantic Margin area and the Gulf of Mexico. (b) Reserves represent the contribution of certain oil and gas interests to MKM Partners L.P., a joint venture accounted for under the equity method of accounting. F-37 Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Estimated Quantities of Proved Oil and Gas Reserves (continued)
United Other Equity (Billions of cubic feet) States Europe Intl. Consolidated Investees Total - ------------------------------------------------------------------------------ Natural Gas Proved developed and undeveloped reserves: Beginning of year - 1999 2,163 966 830 3,959 110 4,069 Purchase of reserves in place 5 - 11 16 - 16 Revisions of previous estimates (83) (81) (3) (167) 13 (154) Improved recovery 8 - 2 10 - 10 Extensions, discoveries and other additions 281 - 94 375 13 388 Production(a) (275) (111) (59) (445) (13) (458) Sales of reserves in place (42) - (42) (84) - (84) ----- ---- ---- ----- --- ----- End of year - 1999 2,057 774 833 3,664 123 3,787 Purchase of reserves in place 114 - 15 129 - 129 Exchange of reserves in place(b) 14 31 - 45 - 45 Revisions of previous estimates (154) (114) (347) (615) (26) (641) Improved recovery - - - - - - Extensions, discoveries and other additions 217 35 38 290 2 292 Production(a) (268) (112) (52) (432) (10) (442) Sales of reserves in place (66) - (10) (76) - (76) ----- ---- ---- ----- --- ----- End of year - 2000 1,914 614 477 3,005 89 3,094 Purchase of reserves in place 223 - - 223 - 223 Exchange of reserves in place - - - - - - Revisions of previous estimates (267) (12) 3 (276) (27) (303) Improved recovery 10 - - 10 - 10 Extensions, discoveries and other additions 210 126 48 384 - 384 Production(a) (289) (113) (45) (447) (11) (458) Sales of reserves in place (8) - (84) (92) - (92) ----- ---- ---- ----- --- ----- End of year - 2001 1,793 615 399 2,807 51 2,858 - ------------------------------------------------------------------------------ Proved developed reserves: Beginning of year - 1999 1,678 909 534 3,121 76 3,197 End of year - 1999 1,550 741 497 2,788 65 2,853 End of year - 2000 1,421 563 381 2,365 52 2,417 End of year - 2001 1,308 473 308 2,089 32 2,121 - ------------------------------------------------------------------------------
(a) Excludes the resale of purchased gas utilized in reservoir management. (b) Reserves represent the exchange of an equity interest in Sakhalin Energy Investment Company Ltd. for certain interests in the U.K. Atlantic Margin area and the Gulf of Mexico. Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves Estimated discounted future net cash flows and changes therein were determined in accordance with Statement of Financial Accounting Standards No. 69. Certain information concerning the assumptions used in computing the valuation of proved reserves and their inherent limitations are discussed below. Marathon believes such information is essential for a proper understanding and assessment of the data presented. Future cash inflows are computed by applying year-end prices of oil and gas relating to Marathon's proved reserves to the year-end quantities of those reserves. Future price changes are considered only to the extent provided by contractual arrangements in existence at year-end. The assumptions used to compute the proved reserve valuation do not necessarily reflect Marathon's expectations of actual revenues to be derived from those reserves nor their present worth. Assigning monetary values to the estimated quantities of reserves, described on the preceding page, does not reduce the subjective and ever-changing nature of such reserve estimates. Additional subjectivity occurs when determining present values because the rate of producing the reserves must be estimated. In addition to uncertainties inherent in predicting the future, variations from the expected production rate also could result directly or indirectly from factors outside of Marathon's control, such as unintentional delays in development, environmental concerns, changes in prices or regulatory controls. The reserve valuation assumes that all reserves will be disposed of by production. However, if reserves are sold in place or subjected to participation by foreign governments, additional economic considerations also could affect the amount of cash eventually realized. Future development and production costs, including abandonment and dismantlement costs, are computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the appropriate year- end statutory tax rates, with consideration of future tax rates already legislated, to the future pretax net cash flows relating to Marathon's proved oil and gas reserves. Permanent differences in oil and gas related tax credits and allowances are recognized. Discount was derived by using a discount rate of 10 percent a year to reflect the timing of the future net cash flows relating to proved oil and gas reserves. F-38 Supplementary Information on Oil and Gas Producing Activities (Unaudited) CONTINUED Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (continued)
United Other Equity (In millions) States Europe Intl. Consolidated Investees Total - ---------------------------------------------------------------------------------------- December 31, 2001: Future cash inflows $ 8,210 $ 3,601 $ 1,520 $ 13,331 $ 3,456 $ 16,787 Future production costs (3,013) (1,630) (863) (5,506) (1,211) (6,717) Future development costs (496) (141) (73) (710) (165) (875) Future income tax expenses (1,480) (572) (142) (2,194) (468) (2,662) -------- -------- -------- -------- -------- -------- Future net cash flows 3,221 1,258 442 4,921 1,612 6,533 10% annual discount for estimated timing of cash flows (1,086) (267) (180) (1,533) (1,400) (2,933) -------- -------- -------- -------- -------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves(a) $ 2,135 $ 991 $ 262 $ 3,388 $ 212 $ 3,600 - ---------------------------------------------------------------------------------------- December 31, 2000: Future cash inflows $ 25,052 $ 4,571 $ 6,704 $ 36,327 $ 313 $ 36,640 Future production costs (5,689) (1,662) (1,156) (8,507) (125) (8,632) Future development costs (638) (185) (309) (1,132) (26) (1,158) Future income tax expenses (6,290) (677) (2,102) (9,069) (76) (9,145) -------- -------- -------- -------- -------- -------- Future net cash flows 12,435 2,047 3,137 17,619 86 17,705 10% annual discount for estimated timing of cash flows (5,403) (486) (1,524) (7,413) (19) (7,432) -------- -------- -------- -------- -------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 7,032 $ 1,561 $ 1,613 $ 10,206 $ 67 $ 10,273 - ---------------------------------------------------------------------------------------- December 31, 1999: Future cash inflows $ 15,393 $ 4,426 $ 5,242 $ 25,061 $ 2,154 $ 27,215 Future production costs (4,646) (1,864) (1,107) (7,617) (850) (8,467) Future development costs (445) (86) (315) (846) (88) (934) Future income tax expenses (3,102) (987) (1,581) (5,670) (328) (5,998) -------- -------- -------- -------- -------- -------- Future net cash flows 7,200 1,489 2,239 10,928 888 11,816 10% annual discount for estimated timing of cash flows (3,371) (374) (862) (4,607) (372) (4,979) -------- -------- -------- -------- -------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 3,829 $ 1,115 $ 1,377 $ 6,321 $ 516 $ 6,837 - ----------------------------------------------------------------------------------------
(a)Excludes $59 million of discounted future net cash flows from the effects of hedging transactions. Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
Consolidated Equity Investees Total ---------------------------- ---------------------- ----------------------------- (In millions) 2001 2000 1999 2001 2000 1999 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------- Sales and transfers of oil and gas produced, net of production costs $ (2,405) $ (2,508) $ (1,516) $ (83) $ (111) $ (8) $ (2,488) $ (2,619) $ (1,524) Net changes in prices and production costs related to future production (9,242) 6,820 5,891 (141) 12 484 (9,383) 6,832 6,375 Extensions, discoveries and improved recovery, less related costs 646 1,472 566 - 3 9 646 1,475 575 Development costs incurred during the period 613 433 383 19 77 84 632 510 467 Changes in estimated future development costs (242) (273) (69) (16) (22) (52) (258) (295) (121) Revisions of previous quantity estimates (217) (1,899) (346) (38) (43) (8) (255) (1,942) (354) Net changes in purchases and sales of minerals in place (1,291) 380 68 - - - (1,291) 380 68 Net change in exchanges of reserves in place (357) 755 - 357 (547) - - 208 - Accretion of discount 1,565 843 382 56 62 18 1,621 905 400 Net change in income taxes 3,466 (1,969) (1,995) 124 90 (117) 3,590 (1,879) (2,112) Other 646 (169) 10 (133) 30 (39) 513 (139) (29) - -------------------------------------------------------------------------------------------------------------- Net change for the year (6,818) 3,885 3,374 145 (449) 371 (6,673) 3,436 3,745 Beginning of year 10,206 6,321 2,947 67 516 145 10,273 6,837 3,092 - -------------------------------------------------------------------------------------------------------------- End of year $ 3,388 $ 10,206 $ 6,321 $ 212 $ 67 $ 516 $ 3,600 $ 10,273 $ 6,837 - --------------------------------------------------------------------------------------------------------------
F-39 Five-Year Operating Summary
2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------ Net Liquid Hydrocarbon Production (thousands of barrels per day) United States (by business unit)(a)) Gulf Coast 72 62 74 55 29 Northern 29 30 28 30 32 Southern 26 39 43 50 54 ------- ------- ------- ------- ------- Total United States 127 131 145 135 115 ------- ------- ------- ------- ------- International Canada 11 19 17 6 - Egypt - 1 5 8 8 Gabon 16 16 9 5 - Norway - - - 1 2 United Kingdom 46 29 31 41 39 ------- ------- ------- ------- ------- Total International 73 65 62 61 49 ------- ------- ------- ------- ------- Consolidated 200 196 207 196 164 Equity investee(b) 9 11 1 - - ------- ------- ------- ------- ------- Total 209 207 208 196 164 Natural gas liquids included in above 19 22 19 17 17 - ------------------------------------------------------------------------------ Net Natural Gas Production (millions of cubic feet per day) United States (by business unit)(a) Alaska 179 160 148 144 151 Gulf Coast 112 88 107 84 78 Northern 218 203 193 183 179 Southern 284 280 307 333 314 ------- ------- ------- ------- ------- Total United States 793 731 755 744 722 ------- ------- ------- ------- ------- International Canada 123 143 150 65 - Egypt - - 13 16 11 Ireland 79 115 132 168 228 Norway 5 - 26 27 54 United Kingdom - equity 234 212 168 165 130 - other(c) 8 11 16 23 32 ------- ------- ------- ------- ------- Total International 449 481 505 464 455 ------- ------- ------- ------- ------- Consolidated 1,242 1,212 1,260 1,208 1,177 Equity investee(d) 31 29 36 33 42 ------- ------- ------- ------- ------- Total 1,273 1,241 1,296 1,241 1,219 - ------------------------------------------------------------------------------ Average Sales Prices(a) Liquid Hydrocarbons (dollars per barrel)(e) United States $ 20.62 $ 25.55 $ 16.01 $ 10.90 $ 17.22 International 23.26 26.54 16.90 12.24 18.77 Natural Gas (dollars per thousand cubic feet)(e) United States $ 3.69 $ 3.49 $ 2.07 $ 1.95 $ 2.34 International 2.97 2.76 1.90 1.94 2.00 - ------------------------------------------------------------------------------ Net Proved Reserves at year-end (developed and undeveloped) Liquid Hydrocarbons (millions of barrels) United States 268 458 520 549 590 International 118 259 277 316 187 ------- ------- ------- ------- ------- Consolidated 386 717 797 865 777 Equity investee(b) 184 - 77 80 82 ------- ------- ------- ------- ------- Total 570 717 874 945 859 Developed reserves as % of total net reserves 90% 76% 81% 71% 77% ------- ------- ------- ------- ------- Natural Gas (billions of cubic feet) United States 1,793 1,914 2,057 2,163 2,232 International 1,014 1,091 1,607 1,796 1,071 ------- ------- ------- ------- ------- Consolidated 2,807 3,005 3,664 3,959 3,303 Equity investee(d) 51 89 123 110 111 ------- ------- ------- ------- ------- Total 2,858 3,094 3,787 4,069 3,414 Developed reserves as % of total net reserves 74% 78% 75% 79% 83% - ------------------------------------------------------------------------------
(a) Prior years reclassified to conform to 2001 classifications. (b) Represents Marathon's equity interest in MKM Partners L.P., Sakhalin Energy Investment Company Ltd. and CLAM Petroleum B.V. (c) Represents gas acquired for injection and subsequent resale. (d) Represents Marathon's equity interest in CLAM Petroleum B.V. (e) Prices exclude gains/losses from hedging activities, equity investees and gas purchased for injection and subsequent resale. F-40 Five-Year Operating Summary CONTINUED
2001(a) 2000(a) 1999(a) 1998(a) 1997 - --------------------------------------------------------------------------------- Refinery Operations (thousands of barrels per day) In-use crude oil capacity at year-end 935 935 935 935 575 Refinery runs - crude oil refined 929 900 888 894 525 - other charge and blend stocks 143 141 139 127 99 In-use crude oil capacity utilization rate 99% 96% 95% 96% 92% - --------------------------------------------------------------------------------- Source of Crude Processed (thousands of barrels per day) United States 403 400 349 317 202 Canada 115 102 92 98 24 Middle East and Africa 347 346 363 394 241 Other International 64 52 84 85 58 ------- ------- ------- ------- ------- Total 929 900 888 894 525 - --------------------------------------------------------------------------------- Refined Product Yields (thousands of barrels per day) Gasoline 581 552 566 545 353 Distillates 286 278 261 270 154 Propane 22 20 22 21 13 Feedstocks and special products 69 74 66 64 36 Heavy fuel oil 39 43 43 49 35 Asphalt 76 74 69 68 39 ------- ------- ------- ------- ------- Total 1,073 1,041 1,027 1,017 630 - --------------------------------------------------------------------------------- Refined Product Sales Volumes (thousands of barrels per day)(b) Gasoline 748 746 714 671 452 Distillates 345 352 331 318 198 Propane 21 21 23 21 12 Feedstocks and special products 71 69 66 67 40 Heavy fuel oil 41 43 43 49 34 Asphalt 78 75 74 72 39 ------- ------- ------- ------- ------- Total 1,304 1,306 1,251 1,198 775 Matching buy/sell volumes included in above 45 52 45 39 51 - --------------------------------------------------------------------------------- Refined Products Sales Volumes by Class of Trade (as a % of total sales volumes) Wholesale - independent private-brand marketers and consumers 66% 65% 66% 65% 61% Marathon and Ashland brand jobbers and dealers 13 12 11 11 13 Speedway SuperAmerica retail outlets 21 23 23 24 26 ------- ------- ------- ------- ------- Total 100% 100% 100% 100% 100% - --------------------------------------------------------------------------------- Refined Products (dollars per barrel) Average sales price $ 34.54 $ 38.24 $ 24.59 $ 20.65 $ 26.38 Average cost of crude oil throughput 23.47 29.07 18.66 13.02 19.00 - --------------------------------------------------------------------------------- Refining and Wholesale Marketing Margin (dollars per gallon)(c) $ .1167 $ .0788 $ .0353 $ .0536 $ .0540 - --------------------------------------------------------------------------------- Refined Product Marketing Outlets at year-end MAP operated terminals 88 90 92 87 50 Retail - Marathon and Ashland brand 3,800 3,728 3,482 3,117 2,465 - Speedway SuperAmerica(d) 2,104 2,148 2,346 2,178 1,468 - --------------------------------------------------------------------------------- Speedway SuperAmerica(d) Gasoline & distillates sales (millions of gallons) 3,572 3,732 3,610 3,681 2,511 Gasoline & distillates gross margin (dollars per gallon) $ .1206 $ .1261 $ .1274 $ .1368 $ .1106 Merchandise sales (millions) $ 2,253 $ 2,160 $ 1,917 $ 1,708 $ 936 Merchandise gross margin (millions) $ 527 $ 510 $ 500 $ 462 $ 226 - --------------------------------------------------------------------------------- Petroleum Inventories at year-end (thousands of barrels) Crude oil, raw materials and natural gas liquids 32,741 33,884 34,470 35,937 19,385 Refined products 36,310 34,386 32,853 32,334 20,598 - --------------------------------------------------------------------------------- Pipelines (miles of common carrier pipelines)(e) Crude Oil - gathering lines 271 419 557 2,827 1,003 - trunklines 4,511 4,623 4,720 4,859 2,665 Products - trunklines 2,847 2,834 2,856 2,861 2,310 ------- ------- ------- ------- ------- Total 7,629 7,876 8,133 10,547 5,978 - --------------------------------------------------------------------------------- Pipeline Barrels Handled (millions)(f) Crude Oil - gathering lines 16.3 22.7 30.4 47.8 43.9 - trunklines 570.6 563.6 545.7 571.9 369.6 Products - trunklines 345.6 329.7 331.9 329.7 262.4 ------- ------- ------- ------- ------- Total 932.5 916.0 908.0 949.4 675.9 - --------------------------------------------------------------------------------- River Operations Barges - owned/leased 156 158 169 169 - Boats - owned/leased 8 7 8 8 - - ---------------------------------------------------------------------------------
(a) 1998-2001 statistics include 100% of MAP and should be considered when compared to 1997. (b) Total average daily volumes of all refined product sales to MAP's wholesale, branded and retail (SSA) customers. (c) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation. (d) Excludes travel centers contributed to Pilot Travel Centers LLC. Periods prior to September 1, 2001 have been restated. (e) Pipelines for downstream operations also include non-common carrier, leased and equity investees. (f) Pipeline barrels handled on owned common carrier pipelines, excluding equity investees. F-41 Five-Year Financial Summary
(Dollars in millions, except as noted) 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------- From Continuing Operations Revenues and Other Income Revenues by product: Refined products $ 20,841 $ 22,513 $ 15,143 $ 12,852 $ 10,300 Merchandise 2,506 2,441 2,194 1,941 1,099 Liquid hydrocarbons 6,585 6,856 4,587 5,023 2,755 Natural gas 2,933 2,459 1,429 1,168 1,264 Transportation and other products 154 158 196 269 166 Gain (loss) on ownership change in MAP (6) 12 17 245 - Other(a) 53 (640) 100 104 86 -------- -------- -------- -------- -------- Total revenues and other income $ 33,066 $ 33,799 $ 23,666 $ 21,602 $ 15,670 - ----------------------------------------------------------------------------------------- Income From Operations Exploration and production (E&P) Domestic $ 1,124 $ 1,111 $ 494 $ 190 $ 500 International 297 420 124 88 273 -------- -------- -------- -------- -------- Income for E&P reportable segment 1,421 1,531 618 278 773 Refining, marketing and transportation 1,914 1,273 611 896 563 Other energy related businesses 60 42 61 33 48 -------- -------- -------- -------- -------- Income for reportable segments 3,395 2,846 1,290 1,207 1,384 Items not allocated to reportable segments: Administrative expenses (162) (136) (108) (106) (168) Loss related to sale of certain Canadian assets (221) - - - - Joint venture formation charges - (931) - - - Inventory market valuation adjustments (72) - 551 (267) (284) Gain (loss) on ownership change & transition charges - MAP (6) 12 17 223 - Int'l. & domestic oil & gas impairments & gas contract settlement - (197) (16) (119) - Other items 20 36 (33) (14) (24) -------- -------- -------- -------- -------- Income from operations 2,954 1,630 1,701 924 908 Minority interest in income of MAP 704 498 447 249 - Net interest and other financial costs 173 236 288 237 260 Provision for income taxes 759 476 320 137 207 -------- -------- -------- -------- -------- Income From Continuing Operations $ 1,318 $ 420 $ 646 $ 301 $ 441 Per common share - basic (in dollars) 4.26 1.35 2.09 1.03 1.53 - diluted (in dollars) 4.26 1.35 2.09 1.02 1.52 Net Income 377 432 654 310 456 Per common share - basic (in dollars) 1.22 1.39 2.11 1.06 1.59 - diluted (in dollars) 1.22 1.39 2.11 1.05 1.58 - ----------------------------------------------------------------------------------------- Balance Sheet Position at year-end Current assets $ 4,411 $ 4,985 $ 4,081 $ 2,976 $ 2,018 Net investment in United States Steel - 1,919 2,056 2,093 1,782 Net property, plant and equipment 9,578 9,375 10,293 10,429 7,566 Total assets 16,129 17,151 17,730 16,637 12,347 Short-term debt 215 228 48 191 525 Other current liabilities 3,253 3,784 3,096 2,419 1,737 Long-term debt 3,432 1,937 3,320 3,456 2,476 Minority interest in MAP 1,963 1,840 1,753 1,590 - Common stockholders' equity 4,940 6,764 6,856 6,405 5,400 - ----------------------------------------------------------------------------------------- Cash Flow Data--Continuing Operations Net cash from operating activities $ 2,919 $ 3,146 $ 2,008 $ 1,633 $ 1,231 Capital expenditures(b) 1,639 1,425 1,378 1,270 1,038 Disposal of assets 296 539 356 65 60 Dividends paid 284 274 257 246 219 - ----------------------------------------------------------------------------------------- Employee Data--Continuing Operations(c) Marathon: Total employment costs $ 1,498 $ 1,474 $ 1,421 $ 1,054 $ 854 Average number of employees 30,791 31,515 33,086 24,344 20,695 Number of pensioners at year-end 3,105 3,255 3,402 3,378 3,099 Speedway SuperAmerica LLC: (Included in Marathon totals) Total employment costs $ 496 $ 489 $ 452 $ 283 $ 263 Average number of employees 21,449 21,649 22,801 12,831 12,816 Number of pensioners at year-end 205 211 209 212 215 - ----------------------------------------------------------------------------------------- Stockholder Data at year-end Number of common shares outstanding (in millions) 309.4 308.3 311.8 308.5 288.8 Registered shareholders (in thousands) 69.7 65.0 71.4 77.3 84.0 Market price of common stock $ 30.000 $ 27.750 $ 24.688 $ 30.125 $ 33.750 - -----------------------------------------------------------------------------------------
(b) Includes capital expenditures for which payment has been deferred in 2001. (c) Employee Data for 1998 includes Ashland employees from the date of their payroll transfer to MAP, which occurred at various times throughout 1998. These employees were contracted to MAP in 1998, prior to their payroll transfer. (a) Includes dividend and investee income, net gains (losses) on disposal of assets and other income. F-42 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of The Registrant Information concerning the directors of Marathon required by this item is incorporated by reference to the material appearing under the heading "Election of Directors" in Marathon's Proxy Statement dated March 11, 2002, for the 2002 Annual Meeting of Stockholders. The executive officers of Marathon or its subsidiaries and their ages as of February 1, 2002, are as follows: Albert G. Adkins........ 54 Vice President, Accounting and Controller Philip G. Behrman....... 51 Senior Vice President, Worldwide Exploration Clarence P. Cazalot, Jr..................... 51 President and Chief Executive Officer, and Director G. David Golder......... 54 Senior Vice President, Commercialization and Development Steven B. Hinchman...... 43 Senior Vice President, Production Operations Jerry Howard............ 53 Senior Vice President, Corporate Affairs Steven J. Lowden........ 42 Senior Vice President, Business Development Kenneth L. Matheny...... 54 Vice President, Investor Relations John T. Mills........... 54 Chief Financial Officer Paul C. Reinbolt........ 46 Vice President, Finance and Treasurer William F. Schwind, Jr..................... 57 Vice President, General Counsel and Secretary Thomas J. Usher......... 59 Chairman of the Board of Directors
With the exception of Mr. Cazalot, Mr. Behrman and Mr. Lowden mentioned above, all of the executive officers have held responsible management or professional positions with Marathon or its subsidiaries for more than the past five years. Item 11. Management Remuneration Information required by this item is incorporated by reference to the material appearing under the heading "Executive Compensation" in Marathon's Proxy Statement dated March 11, 2002, for the 2002 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated by reference to the material appearing under the headings, "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Directors and Executive Officers" in Marathon's Proxy Statement dated March 11, 2002, for the 2002 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by reference to the material appearing under the heading "Transactions" in Marathon's Proxy Statement dated March 11, 2002, for the 2002 Annual Meeting of Stockholders. 48 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K A. Documents Filed as Part of the Report 1. Financial Statements (see Part II, Item 8. of this report regarding financial statements). 2. Financial Statement Schedules. Financial Statement Schedules listed under SEC rules but not included in this report are omitted because they are not applicable or the required information is contained in the financial statements or notes thereto. Schedule II--Valuation and Qualifying Accounts is provided on page 55. B. Reports on Form 8-K Form 8-K dated October 12, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the October 12, 2001 press release titled "United States Steel Announces Filing for Exchange Offer". Form 8-K dated October 22, 2001, as amended, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the October 22, 2001 USX-Marathon Group and USX-U. S. Steel Group Earnings Releases. Form 8-K dated October 25, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the October 25, 2001 press release titled "USX Shareholders Approve Plan of Reorganization". Form 8-K dated November 2, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the November 2, 2001 press release titled "Marathon continues international growth strategy; announces plans to acquire interests in Equatorial Guinea, West Africa". Form 8-K dated November 5, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the November 5, 2001 press release titled "USX Capital LLC Calls Its MIPS". Form 8-K dated November 7, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the November 7, 2001 press release titled "United States Steel to Commence Exchange Offers". Form 8-K dated November 14, 2001, reporting under Item 9. Regulation FD Disclosure, that USX Corporation is furnishing information relating to Clarence P. Cazalot, Jr.'s presentation to analysts. Form 8-K dated November 28, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the November 28, 2001 press release titled "USX Capital Trust I Redeems Its QUIPS". Form 8-K dated December 4, 2001, reporting under item 5. Other Events, that USX Corporation is furnishing information for the December 4, 2001 press release titled "U.S. Steel Developing Plan for Significant Consolidation in Domestic Integrated Steel Industry". Form 8-K dated December 9, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the December 9, 2001 press release titled "U. S. Steel, NKK Corporation and National Steel in Consolidation Talks". Form 8-K dated December 10, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the December 10, 2001 press release titled "United States Steel Extends and Decreases Minimum Condition to Exchange Offers". 49 Form 8-K dated December 13, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the December 13, 2001 press release titled "United States Steel Discloses Updated Outlook", and filing the following unaudited combined financial statements for United States Steel: Combined Statement of Operations - Third Quarter and Nine Months Ended September 30, 2001 and 2000; Combined Balance Sheet - at September 30, 2001 and December 31, 2000; Combined Statement of Cash Flows - Nine Months Ended September 30, 2001 and 2000; and Selected Notes to Combined Financial Statements, all of which are unaudited. Form 8-K dated December 17, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the December 17, 2001 press release titled "Fire Halts Production at Double Steel Coating Company". Form 8-K dated December 17, 2001, reporting under Item 5. Other Events, that USX Corporation is furnishing information for the December 17, 2001 press release titled "United States Steel Completes Exchange Offers". Form 8-K dated December 31, 2001 (as amended by a Form 8-K/A (dated January 3, 2002)) filed January 15, 2002), reporting under Item 2. Acquisition or Disposition of Assets, that Marathon Oil Corporation, formerly known as USX Corporation, is furnishing information relating to the completion on December 31, 2001 of the separation of USX Corporation's steel and energy businesses pursuant to the Agreement and Plan of Reorganization, dated as of July 31, 2001, by and between USX Corporation and United States Steel LLC, filing by amendment to this 8-K of Pro Forma Financial Information, and information for the December 31, 2001, press release titled "USX to Complete Previously Announced Spin- Off of its Steel Business". Form 8-K/A dated January 3, 2002, reporting under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits, that Marathon Oil Corporation is filing Unaudited Pro Forma Condensed Financial Statements to give effect to the separation of and significant transactions related to the separation of USX Corporation (renamed Marathon Oil Corporation) into two separate companies, Marathon Oil Corporation and United States Steel Corporation. Form 8-K dated February 27, 2002, reporting under Item 5. Other Events, the filing of the audited Financial Statements and Supplementary Data for the fiscal year ended December 31, 2001, reports of independent accountants, the computation of the ratio of earnings to combined fixed charges and preferred stock dividends, and the ratio of earnings to fixed charges for Marathon Oil Corporation for the fiscal year ended December 31, 2001. Form 8-K dated February 27, 2002, reporting under Item 5. Other Events, that Marathon Oil Corporation entered into an underwriting agreement for the public offering of $450 million aggregate principal amount of 6.125% Notes due 2012 and $550 million aggregate principal amount of 6.800% Notes due 2032. 50 C. Exhibits Exhibit No. 2. Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession (a) Holding Company Reorganization Agreement, dated as of July 1, 2001, by and among USX Corporation, USX Holdco, Inc. and United States Steel LLC........................... Incorporated by reference to Exhibit 3.1 to USX Corporation's Form 8-K dated July 2, 2001. (b) Agreement and Plan of Reorganization, dated as of July 31, 2001, by and between USX Corporation and United States Steel LLC ................................ Incorporated by reference to Exhibit 2.1 to USX Corporation's Registration Statement on Form S- 4 filed September 7, 2001 (Registration No. 333-69090). 3. Articles of Incorporation and By-laws (a) Restated Certificate of Incorporation of Marathon Oil Corporation......................... (b) By-laws of Marathon Oil Corporation......................... Incorporated by reference to Exhibit 3.2 to USX Corporation's Form 8-K dated July 2, 2001. 4. Instruments Defining the Rights of Security Holders, Including Indentures (a) Five Year Credit Agreement dated as of November 30, 2000................ Incorporated by reference to Exhibit 4(a) to USX Corporation's Form 10-K for the year ended December 31, 2000. (b) Rights Agreement between Marathon Oil Corporation and National City Bank, as Right Agent, as amended.... Incorporated by reference to Exhibit 4.6 to Post-Effective Amendment No. 2 to Marathon Oil Corporation's Registration Statement on Form S-3 filed on February 6, 2002 (Registration No. 333-88797). (c) Senior Indenture dated February 26, 2002 between Marathon Oil Corporation and JPMorgan Chase Bank, as Trustee.................... Incorporated by reference to Exhibit 4.1 to Marathon Oil Corporation's Form 8-K dated February 27, 2002. (d) Pursuant to CFR 229.601(b)(4)(iii), instruments with respect to long- term debt issues have been omitted where the amount of securities authorized under such instruments does not exceed 10% of the total consolidated assets of Marathon. Marathon hereby agrees to furnish a copy of any such instrument to the Commission upon its request. 10. Material Contracts (a) Marathon Oil Corporation 1990 Stock Plan, As Amended and Restated Effective January 1, 2002........... (b) Marathon Oil Corporation Annual Incentive Compensation Plan, As Amended Effective January 1, 2002... 51 (c) Marathon Oil Corporation Senior Executive Officer Annual Incentive Compensation Plan, As Amended and Restated Effective January 1, 2002................................ (d) Marathon Oil Corporation Deferred Compensation Plan for Non-Employee Directors, Amended and Restated as of January 1, 2002.................. (e) Marathon Oil Corporation Non- Officer Restricted Stock Plan, As Amended and Restated Effective January 1, 2002..................... (f) Marathon Oil Corporation Non- Employee Director Stock Plan, As Amended and Restated Effective January 1, 2002..................... (g) Marathon Oil Company Annual Incentive Compensation Plan, As Amended November 23, 1999........... Incorporated by reference to Exhibit 10(d) of USX Corporation's Form 10-K for the year ended December 31, 1999. (h) Form of Change of Control Agreement between USX Corporation and Various Officers............................ Incorporated by reference to Exhibit 10.12 to Amendment No. 1 to USX Corporation's Registration Statement on Form S-4 filed September 20, 2001. (Registration No. 333-69090) (i) Completion and Retention Agreement, dated as of August 8, 2001, among USX Corporation, United States Steel LLC and Thomas J. Usher....... Incorporated by reference to Exhibit 10.10 to Amendment No. 1 to USX Corporation's Registration Statement on Form S-4 filed September 20, 2001. (Registration No. 333-69090) (j) Agreement between Marathon Oil Company and Clarence P. Cazalot, Jr., executed February 28, 2000..... Incorporated by reference to Exhibit 10(k) of USX Corporation's Form 10-K for the year ended December 31, 1999. (k) Letter Agreement between Marathon Oil Company and Steven J. Lowden, executed September 17, 2000......... (l) Letter Agreement between Marathon Oil Company and Philip G. Behrman, executed September 19, 2000......... (m) Letter Agreement between USX Corporation and John T. Mills, executed September 25, 2000......... (n) Amended and Restated Limited Liability Company Agreement of Marathon Ashland Petroleum LLC, dated as of December 31, 1998....... Incorporated by reference to Exhibit 10(b) of USX Corporation's Form 10-Q for the quarter ended June 30, 1999. 52 (o) Amendment No. 1 dated as of December 31, 1998 to Put/Call, Registration Rights and Standstill Agreement of Marathon Ashland Petroleum LLC dated as of January 1, 1998............................. Incorporated by reference to Exhibit 10.2 of USX Corporation's Form 8-K dated January 1, 1998, and Exhibit 10(i) of USX Corporation's Form 10-Q for the quarter ended June 30, 1999. (p) Tax Sharing Agreement between USX Corporation (renamed Marathon Oil Corporation) and United States Steel LLC (converted into United States Steel Corporation) dated as of December 31, 2001................ Incorporated by reference to Exhibit 99.3 to Marathon Oil Corporation's Form 8-K dated December 31, 2001. (q) Transition Services Agreement between USX Corporation (renamed Marathon Oil Corporation) and United States Steel LLC (converted into United States Steel Corporation) dated as of December 31, 2001............................ Incorporated by reference to Exhibit 99.4 to Marathon Oil Corporation's Form 8-K dated December 31, 2001. (r) Financial Matters Agreement between USX Corporation (renamed Marathon Oil Corporation) and United States Steel LLC (converted into United States Steel Corporation) dated December 31, 2001................... Incorporated by reference to Exhibit 99.5 to Marathon Oil Corporation's Form 8-K dated December 31, 2001. (s) Insurance Assistance Agreement between USX Corporation (renamed Marathon Oil Corporation) and United States Steel LLC (converted into United States Steel Corporation) dated as of December 31, 2001............................ Incorporated by reference to Exhibit 99.6 to Marathon Oil Corporation's Form 8-K dated December 31, 2001. (t) License Agreement between USX Corporation (renamed Marathon Oil Corporation) and United States Steel LLC (converted into United States Steel Corporation) dated as of December 31, 2001................ Incorporated by reference to Exhibit 99.7 to Marathon Oil Corporation's Form 8-K dated December 31, 2001. (u) Letter Agreement between John P. Surma and Marathon Group of USX Corporation, executed January 27, 1997................................ (v) Letter Agreement between John P. Surma and USX Corporation, executed December 21, 2001................... 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges 21. List of Significant Subsidiaries 23. Consent of Independent Accountants 53 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Marathon Oil Corporation: Our audit of the consolidated financial statements referred to in our report dated February 15, 2002 appearing in the 2001 Annual Report of Marathon Oil Corporation (which report and consolidated financial statements are included in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania February 15, 2002 54 Marathon Oil Corporation Schedule II--Valuation and Qualifying Accounts For the Years Ended December 31, 2001, 2000 and 1999
Additions ------------------- Balance at Charged to Charged Balance at Beginning of Costs and to Other End of (In millions) Period Expenses Accounts Deductions(a) Period - ----------------------------------------------------------------------------------- Year ended December 31, 2001 Reserves deducted in the balance sheet from the assets to which they apply: Allowance for doubtful accounts... $ 3 $25 $ - $ 20 $ 8 Inventory market valuation reserve... - 72 - - 72 Tax valuation allowances: State.............. 16 7 53(b) - 76 Foreign............ 252 - 43(c) 10 285 Year ended December 31, 2000 Reserves deducted in the balance sheet from the assets to which they apply: Allowance for doubtful accounts... $ 2 $ 8 $ - $ 7 $ 3 Tax valuation allowances: Federal............ 30 - - 30 - State.............. 11 - 5(c) - 16 Foreign............ 282 - - 30 252 Year ended December 31, 1999 Reserves deducted in the balance sheet from the assets to which they apply: Allowance for doubtful accounts... $ 3 $ 3 $ - $ 4 $ 2 Inventory market valuation reserve... 551 - - 551 - Tax valuation allowances: Federal............ 30 - - - 30 State.............. 8 - 3(c) - 11 Foreign............ 260 22 - - 282 - -----------------------------------------------------------------------------------
(a) Deductions for the allowance for doubtful accounts and long-term receivables include amounts written off as uncollectible, net of recoveries. Deductions in the inventory market valuation reserve reflect increases in market prices and inventory turnover, resulting in noncash credits to costs and expenses. Reductions in the tax valuation allowances reflect changes in the amount of deferred taxes expected to be realized, resulting in credits to the provision for income taxes. (b) The increase in the valuation allowance is related to net operating losses previously attributed to United States Steel which were retained by Marathon in connection with the Separation. The transfer of net operating losses and the related valuation allowance was recorded as a capital transaction with United States Steel. (c) Reflects valuation allowances established for deferred tax assets generated in the current period, primarily related to net operating losses. 55 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity indicated on March 11, 2002. MARATHON OIL CORPORATION /s/ Albert G. Adkins By: _______________________________ Albert G. Adkins Vice President, Accounting and Controller
Signature Title --------- ----- /s/ Thomas J. Usher Chairman of the Board and Director __________________________________________ Thomas J. Usher /s/ Clarence P. Cazalot, Jr. President & Chief Executive Officer and __________________________________________ Director Clarence P. Cazalot, Jr. /s/ John T. Mills Chief Financial Officer __________________________________________ John T. Mills /s/ Albert G. Adkins - Vice President, Accounting and Controller __________________________________________ Albert G. Adkins /s/ Shirley Ann Jackson Director __________________________________________ Shirley Ann Jackson /s/ Seth E. Schofield Director __________________________________________ Seth E. Schofield /s/ Douglas C. Yearly Director __________________________________________ Douglas C. Yearly /s/ Neil A. Armstrong Director __________________________________________ Neil A. Armstrong /s/ David A. Daberko Director __________________________________________ David A. Daberko /s/ Charles R. Lee Director __________________________________________ Charles R. Lee /s/ Dennis H. Reilley Director __________________________________________ Dennis H. Reilley
56 GLOSSARY OF CERTAIN DEFINED TERMS The following definitions apply to terms used in this document: Ashland................. Ashland Inc. bcf..................... billion cubic feet bcfd.................... billion cubic feet per day BOE..................... barrels of oil equivalent bpd..................... barrels per day CAA..................... Clean Air Act CERCLA.................. Comprehensive Environmental Response, Compensation, and Liability Act CLAM.................... CLAM Petroleum B.V. CWA..................... Clean Water Act DOE..................... Department of Energy downstream.............. refining, marketing and transportation operations E&P..................... exploration and production EPA..................... U.S. Environmental Protection Agency exploratory............. wildcat and delineation, i.e., exploratory wells Gulf.................... Gulf of Mexico IMV..................... Inventory Market Valuation Indexed Debt............ 6 3/4% Exchangeable Notes Due February 1, 2000 Kinder Morgan........... Kinder Morgan Energy Partners, L.P. LNG..................... liquefied natural gas LPG..................... liquefied petroleum gas LTV..................... LTV Corporation MAP..................... Marathon Ashland Petroleum LLC Marathon................ Marathon Oil Corporation Marathon Stock.......... USX-Marathon Group Common Stock mcf..................... thousand cubic feet MIPS.................... 8 3/4% Cumulative Monthly Income Preferred Stock MKM..................... MKM Partners L.P. mmcfd................... million cubic feet per day NOV..................... Notice of Violation OPA-90.................. Oil Pollution Act of 1990 OTC..................... over the counter Pennaco................. Pennaco Energy Petronius............... Viosca Knoll Block 786 Pilot................... Pilot Corporation PRP..................... potentially responsible party PTC..................... Pilot Travel Centers LLC QUIPS................... 6.75% Convertible Quarterly Income Preferred Securities of USX Capital Trust I RCRA.................... Resource Conservation and Recovery Act RM&T.................... refining, marketing and transportation RTI..................... RTI International Metals, Inc. (formerly RMI Titanium Company) SAGE.................... Scottish Area Gas Evacuation Sakhalin Energy......... Sakhalin Energy Investment Company Ltd. SG&A.................... selling, general and administrative SSA..................... Speedway SuperAmerica LLC Steel Stock............. USX-U. S. Steel Group Common Stock Transtar................ Transtar Inc. U.K. ................... United Kingdom United States Steel..... United States Steel Corporation upstream................ exploration and production operations USSK.................... U. S. Steel Kosice s.r.o. USTs.................... underground storage tanks VSZ..................... VSZ a.s. VSZ U. S. Steel s. U. S. Steel and VSZ a.s. joint venture in Kosice, r.o. .................. Slovakia
57 EX-3.A 3 dex3a.txt CERTIFICATE OF INCORPORATION EXHIBIT 3(a) RESTATED CERTIFICATE OF INCORPORATION OF MARATHON OIL CORPORATION First: The name of the Corporation (which is hereinafter referred to as the "Corporation") is MARATHON OIL CORPORATION Second: Its registered office and place of business in the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, County of New Castle. The registered agent in charge thereof upon whom process against the Corporation may be served is The Corporation Trust Company. Third: The purposes of the Corporation are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and without limiting the foregoing to engage in integrated steel operations and to develop, mine, produce, manufacture, construct, transport, buy, hold, sell and generally deal in products, materials, property, both tangible and intangible, and services of all kinds. Fourth: The total number of shares of capital stock which the Corporation shall have authority to issue is Five Hundred and Seventy Six Million (576,000,000), of which Five Hundred and Fifty Million (550,000,000) shares shall be Common Stock having a par value of one dollar ($1.00) per share and Twenty Six Million (26,000,000) shares shall be shares of Preferred Stock, without par value (hereinafter called "Preferred Stock") and A statement of the designations of the Preferred Stock or of any series thereof, and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, or of the authority of the Board of Directors to fix by resolution or resolutions such designations and other terms not fixed by the Certificate of Incorporation, is as follows: 1. The Preferred Stock may be issued in one or more series, from time to time, with each such series to have such designation, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation, subject to the limitations prescribed by law and in accordance with the provisions hereof, the Board of Directors being hereby expressly vested with authority to adopt any such resolution or resolutions. The authority of the Board of Directors with respect to each such series shall include, but not be limited to, the determination or fixing of the following: (i) The distinctive designation and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then outstanding) from time to time by like action of the Board of Directors; (ii) The dividend rate of such series, the conditions and times upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock or series thereof, or any other series of the same class, and whether dividends shall be cumulative or non-cumulative; (iii) The conditions upon which the shares of such series shall be subject to redemption by the Corporation and the times, prices and other terms and provisions upon which the shares of the series may be redeemed; (iv) Whether or not the shares of the series shall be subject to the operation of a retirement or sinking fund to be applied to the purchase or redemption of such shares and, if such retirement or sinking fund be established, the annual amount thereof and the terms and provisions relative to the operation thereof; (v) Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes, with or without par value, or of any other series of the same class, and, if provision is made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; (vi) Whether or not the shares of the series shall have voting rights, in addition to the voting rights provided by law, and, if so, subject to the limitation hereinafter set forth, the terms of such voting rights; (vii) The rights of the shares of the series in the event of voluntary or involuntary liquidation, dissolution, or upon the distribution of assets of the Corporation; 2 (viii) Any other powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of this Certificate of Incorporation. 2. The holders of shares of the Preferred Stock of each series shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends at the rates fixed by the Board of Directors for such series, and no more, before any dividends, other than dividends payable in Common Stock, shall be declared and paid, or set apart for payment, on the Common Stock with respect to the same dividend period. 3. Whenever, at any time, dividends on the then outstanding Preferred Stock as may be required with respect to any series outstanding shall have been paid or declared and set apart for payment on the then outstanding Preferred Stock, and after complying with respect to any retirement or sinking fund or funds for any series of Preferred Stock, the Board of Directors may, subject to the provisions of the resolution or resolutions creating any series of Preferred Stock, declare and pay dividends on the Common Stock, and the holders of shares of the Preferred Stock shall not be entitled to share therein. 4. The holders of shares of the Preferred Stock of each series shall be entitled upon liquidation or dissolution or upon the distribution of the assets of the Corporation to such preferences as provided in the resolution or resolutions creating such series of Preferred Stock, and no more, before any distribution of the assets of the Corporation shall be made to the holders of shares of the Common Stock. 5. Except as otherwise provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock or by the General Corporation Law of Delaware, the holders of shares of the Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive power to vote. The holders of shares of the Preferred Stock issued and outstanding shall, in no event, be entitled to more than one vote for each share of Preferred Stock held by them unless otherwise required by law. Terms of the Preferred Stocks are as follows: SERIES A JUNIOR PREFERRED STOCK Section 1. Designation and Amount. This resolution shall provide for a single series of preferred stock, the designation of which shall be "Series A Junior Preferred Stock", without par value, and the number of shares constituting such series shall be Eight Million (8,000,000). 3 Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Preferred Stock with respect to dividends, the holders of shares of Series A Junior Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $5.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), to be or being declared on the Common Stock, par value $1.00 per share, of the Corporation (the "Common Stock") with respect to the same dividend period. If the Quarterly Dividend Payment Date is a Saturday, Sunday or legal holiday then such Quarterly Dividend Payment Date shall be the first immediately preceding calendar day which is not a Saturday, Sunday or legal holiday. In the event the Corporation shall at any time after October 10, 1989 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Preferred Stock as provided in paragraph (A) above immediately prior to the time it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall be declared on the Common Stock with respect to a particular dividend period, a dividend of $5.00 per share on the Series A Junior Preferred 4 Stock shall nevertheless be payable on such Quarterly Dividend Payment Date with respect to such quarterly period. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Dividends in arrears may be declared and paid at any time, without reference to any Quarterly Dividend Payment Date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors. (D) Except as hereinafter provided, no dividends shall be declared or paid or set apart for payment on the shares of Series A Junior Preferred Stock for any period if the Corporation shall be in default in the payment of any dividends (including cumulative dividends, if applicable) on any shares of Preferred Stock ranking, as to dividends, prior to the Series A Junior Preferred Stock, unless the same shall be contemporaneously declared and paid. (E) Dividends payable on the Series A Junior Preferred Stock for the initial dividend period and for any period less than a full quarterly period, shall be computed on the basis of a 360-day year of 30-day months. Section 3. Voting Rights. The holders of shares of Series A Junior Preferred Stock shall have the following voting rights: (A) Each share of Series A Junior Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the 5 stockholders of the Corporation. The holders of Series A Junior Preferred Stock shall be entitled to notice of all meetings of the stockholders of the Corporation. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in preference dividends on the Preferred Stock shall exist, the number of directors constituting the Board of Directors of the Corporation shall be increased by two, and the holders of the Preferred Stock of all series (whether or not the holders of such series of Preferred Stock would be entitled to vote for the election of directors if such default in preference dividends did not exist), shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Corporation to fill such newly created directorships. Each director elected by the holders of shares of Preferred Stock (herein called a "Preferred Director"), shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Preferred Stock, called for the purpose. So long as a default in any preference dividends on the Preferred Stock shall exist (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and no default in preference dividends shall exist, the number of directors constituting the Board of Directors of the Corporation shall be reduced by two. For the purposes of this paragraph (C), a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued and unpaid dividends upon any series of the Preferred Stock shall be equivalent to six full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only 6 until, all accrued dividends on all shares of Preferred Stock of each and every series then outstanding shall have been paid through the last Quarterly Dividend Payment Date. Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on (other than a dividend in Common Stock or in any other stock of the Corporation ranking junior to the Series A Junior Preferred Stock as to dividends and upon liquidation, dissolution or winding up and other than as provided in subparagraph (ii) of this section), or redeem or purchase or otherwise acquire for consideration (except by conversion into or exchange for stock of the Corporation ranking junior to the Series A Junior Preferred Stock as to dividends and upon dissolution, liquidation or winding up), any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, except dividends paid ratably on the Series A Junior Preferred Stock and all stock ranking on a parity with the Series A Junior Preferred Stock as to dividends on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Junior Preferred Stock; (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Preferred Stock, except in accordance 7 with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Series A Junior Preferred Stock shall be entitled to receive the greater of (a) $100 per share, plus accrued dividends to the date of distribution, whether or not earned or declared, or (b) an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock (the "Series A Liquidation Preference"). In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event pursuant to clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference 8 and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. Optional Redemption. (A) The Corporation shall have the option to redeem the whole or any part of the Series A Junior Preferred Stock at any time on at least 30 days notice in accordance with the provisions of paragraph (B) of this Section 8 at a redemption price equal to, subject to the provision for adjustment hereinafter set forth, 100 times the "current per share market price" of the Common Stock on the date of the mailing of the notice of redemption, together with unpaid accumulated dividends to the date of such redemption. In the event the Corporation shall at any time after October 10, 1989 (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were otherwise entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. The "current per share market price" on any date shall be deemed to be the average of the closing price per share of such Common Stock for the 10 consecutive 9 Trading Days (as such term is hereinafter defined) immediately prior to such date. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Stock is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Corporation. If on such date no such market maker is making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Corporation shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close. (B) Whenever shares of Series A Junior Preferred Stock are to be redeemed, the Corporation shall mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each holder of record of shares of Series A Junior Preferred Stock to be redeemed and to the transfer agent for the Series A Junior Preferred Stock. The Notice of Redemption shall be addressed to the holder at the address of the holder appearing on the stock transfer books of the Corporation maintained by the transfer agent for the Series A Junior Preferred Stock. The Notice of Redemption shall include a statement of (i) the redemption date, (ii) the redemption price, (iii) the number of shares of Series A Junior Preferred Stock to be redeemed, (iv) the place or places where shares of the Series A Junior Preferred Stock are to be surrendered for payment of the redemption price, (v) that the dividends on the shares to be redeemed will cease to accrue on such redemption date, and (vi) the provision under which redemption is made. No defect in the Notice of Redemption or in the mailing thereof shall affect the validity of the redemption proceedings, except as required 10 by law. From the date on which a Notice of Redemption shall have been given as aforesaid and the Corporation shall have deposited with the transfer agent for the Series A Junior Preferred Stock a sum sufficient to redeem the shares of Series A Junior Preferred Stock as to which Notice of Redemption has been given, with irrevocable instructions and authority to pay the redemption price to the holders thereof, or if no such deposit is made, then upon such date fixed for redemption (unless the Corporation shall default in making payment of the redemption price), all rights of the holders thereof as stockholders of the Corporation by reason of the ownership of such shares (except their right to receive the redemption price thereof, but without interest), shall terminate including, but not limited to, their right to receive dividends, and such shares shall no longer be deemed outstanding. The Corporation shall be entitled to receive, from time to time, from the transfer agent for Series A Junior Preferred Stock the interest, if any, on such monies deposited with it and the holders of any shares so redeemed shall have no claim to any such interest. In case the holder of any shares so called for redemption shall not claim the redemption price for his shares within one year after the date of redemption, the transfer agent for the Series A Junior Preferred Stock shall, upon demand, pay over to the Corporation such amount remaining on deposit and the transfer agent for the Series A Junior Preferred Stock shall thereupon be relieved of all responsibility to the holders of such shares and such holder of the shares of the Series A Junior Preferred Stock so called for redemption shall look only to the Corporation for the payment thereof. (C) In the event that fewer than all the outstanding shares of the Series A Junior Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable. (D) If the Corporation shall be in default in the payment of any dividends (including cumulative dividends, if applicable) on any shares of Preferred Stock ranking, as to dividends, prior to the Series A Junior Preferred Stock, then no shares of the Series A Junior Preferred Stock shall be redeemed and the Corporation shall not purchase or otherwise acquire any shares of the Series A Junior Preferred Stock. Section 9. Ranking. (A) The Series A Junior Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, unless the terms of any such series shall provide otherwise. 11 (B) For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank: (i) prior to the shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of the Series A Junior Preferred Stock. Each holder of any share of the Series A Junior Preferred Stock, by his acceptance thereof, expressly covenants and agrees that the rights of the holders of any shares of any other series of Preferred Stock of the Corporation to receive dividends or amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be and hereby are expressly prior to his rights unless in the case of any particular series of Preferred Stock the certificate or other instrument creating or evidencing the same expressly provides that the rights of the holders of such series shall not be prior to the shares of the Series A Junior Preferred Stock; and (ii) on a parity with shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of the Series A Junior Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of the Series A Junior Preferred Stock; and (iii) junior to shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, if such class or classes shall be Common Stock or if the holders of shares of the Series A Junior Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of such class or classes. 12 Section 10. Amendment. Except as otherwise set forth in this Certificate of Designation, Preferences and Rights with respect to the Series A Junior Preferred Stock, holders of Series A Junior Preferred Stock shall not have any special powers and their consent shall not be required for taking any corporate action, provided, however, that: (A) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66b% of all of the shares of the Series A Junior Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Series A Junior Preferred Stock shall vote together as a separate class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation, Preferences and Rights or any similar document relating to any series of Preferred Stock) so as to affect adversely the powers, preferences, or rights, of this Series A Junior Preferred Stock. The increase of the authorized amount of the Preferred Stock, or the creation, authorization or issuance of any shares of any other class of stock of the Corporation ranking prior to or on a parity with the shares of the Series A Junior Preferred Stock as to dividends or upon liquidation, or the reclassification of any authorized or outstanding stock of the Corporation into any such prior or parity shares, or the creation, authorization or issuance of any obligation or security convertible into or evidencing the right to purchase any such prior or parity shares shall not be deemed to affect adversely the powers, preferences or rights of the Series A Junior Preferred Stock. Section 11. Fractional Shares. Series A Junior Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Preferred Stock. Fifth: The existence of the Corporation is to be perpetual. Sixth: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. Seventh: The number of directors of the Corporation shall be fixed from time to time by, or in the manner provided in, its by-laws and may be increased or decreased as therein provided; but the number thereof shall not be less than three. The directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the 13 whole number of the Board of Directors. In the election of directors at the 1984 annual meeting of the stockholders, the Class I directors shall be elected to hold office for a term to expire at the first annual meeting of the stockholders thereafter; the Class II directors shall be elected to hold office for a term to expire at the second annual meeting of the stockholders thereafter; and the Class III directors shall be elected to hold office for a term to expire at the third annual meeting of the stockholders thereafter, and in the case of each class, until their respective successors are duly elected and qualified. At each annual election held after the 1984 annual meeting of the stockholders the directors elected to succeed those whose terms expire shall be identified as being of the same class as the directors they succeed and shall be elected to hold office for a term to expire at the third annual meeting of the stockholders after their election, and until their respective successors are duly elected and qualified. If the number of directors is changed, any increase or decrease in directors shall be apportioned among the classes so as to maintain all classes as equal in number as possible, and any additional director elected to any class shall hold office for a term which shall coincide with the terms of the other directors in such class and until his successor is duly elected and qualified. In the case of any increase in the number of directors of the Corporation, the additional director or directors shall be elected by the Board of Directors. In the case of any vacancy in the Board of Directors from death, resignation, disqualification or other cause, a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election of his successor, shall be elected by a majority of the Board of Directors then in office, though less than a quorum. Directors of the Corporation may be removed only for cause. Eighth: The Board of Directors shall have power to adopt, amend and repeal the by-laws at any regular or special meeting of the Board of Directors, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of meeting; or, without any such notice, by a vote of two-thirds of the directors then in office. Stockholders may adopt, amend and repeal the by-laws at any regular or special meeting of the stockholders by an affirmative vote of two-thirds of the shares outstanding and entitled to vote thereon, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of the meeting. Any action required to be taken at any annual or special meeting of the stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders or otherwise, may not be taken without a meeting, prior notice and a vote, and stockholders may not act by written consent. Ninth: The Board of Directors from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulations, the 14 accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by the Board of Directors, or by the stockholders. Tenth: The directors may from time to time declare such dividends as they shall deem advisable and proper, subject to the provisions of Article Fourth and to such restrictions as may be imposed by law, and pay the same to the stockholders at such times as they shall fix. The Board of Directors shall have power to issue bonds, debentures, or other obligations, either non-convertible or convertible into the Corporation's stock, subject to the provisions of Article Fourth and upon such terms, in such manner and under such conditions in conformity with law, as may be fixed by the Board of Directors prior to the issue of such bonds, debentures or other obligations. Eleventh: No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director, except (i) for breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Eleventh shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. Twelfth: The powers and authorities hereinbefore conferred upon the Board of Directors are in furtherance and not in limitation of those conferred by the laws of the State of Delaware. Thirteenth: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article. 15 EX-10.A 4 dex10a.txt 1990 AMENDED STOCK PLAN EXHIBIT 10(a) THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 MARATHON OIL CORPORATION 1990 STOCK PLAN, (As Amended and Restated Effective January 1, 2002) 1. Objectives. The Marathon Oil Corporation 1990 Stock Plan, formerly named the USX Corporation 1990 Stock Plan (the "Plan"), is designed: (a) to promote the long-term financial interests and growth of the Corporation and subsidiaries by attracting and retaining management personnel with the training, experience and ability to enable them to make a substantial contribution to the success of the Corporation's businesses; (b) to motivate management personnel by means of growth-related incentives to achieve long-range growth goals; and (c) to further the identity of interests of participants with those of the stockholders of the Corporation through opportunities for increased stock ownership in the Corporation. 2. Definitions. (a) Board. The Board of Directors of Marathon Oil Corporation; (b) Committee. The Compensation & Organization Committee of the Board of Directors of Marathon Oil Corporation, which will consist of not less than three directors of the Corporation who are appointed by the Board of Directors and who will satisfy the definition of "non-employee director" under Rule 16b- 3 promulgated under the Securities Exchange Act of 1934 or any successor rule. In addition, in order to be a member of the Committee, a director must be an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder; (c) Corporation. Marathon Oil Corporation, formerly named USX Corporation, (MOC) and its (1) wholly-owned and partially-owned subsidiaries including limited liability companies ("Subsidiaries") and wholly-owned and partially-owned subsidiaries, direct and indirect, of Subsidiaries, and (2) joint ventures included within MOC or any entity described in (1) above; (d) Fair Market Value. Such value of a Share as reported for stock exchange transactions and determined in accordance with any applicable resolutions or regulations of the Committee in effect at the relevant time; (e) Grant. A Grant made under the Plan to a Participant in the form of an Option, Restored Option, Stock Appreciation Right or Restricted Stock or any combination thereof; (f) Marathon Stock. Marathon Oil Corporation Common Stock, par value $1.00; - 2 - (g) Participant. An employee of the Corporation to whom a Grant is made; and (h) Share. A share of Marathon Stock, which may be authorized but unissued or issued and reacquired. 3. Eligibility. Employees of the Corporation eligible for a Grant under the Plan are all executive officers and others in responsible positions whose performance, in the judgment of the Committee, affects the Corporation's success. 4. Administration. The Plan shall be administered by the Committee in accordance with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any successor rule. The Committee shall determine the type or types of Grants to be made to each Participant and shall set forth in such Grant the terms, conditions and limitations applicable to it, including provisions relating to change in control of the Corporation. Grants may be made singly, in combination or in tandem. The Committee shall have full and exclusive power to interpret the Plan, to adopt rules, regulations and guidelines relating to the Plan, to grant waivers of Plan restrictions, other than the restrictions described in Paragraph 10, and to make all of the determinations necessary for its administration. 5. Shares Subject to the Plan. Up to 0.5% of the outstanding Marathon Stock, as determined on December 31 of the preceding year, shall be available for Grants during each calendar year in which the Plan is in effect. In addition, Shares related to Grants that are forfeited, terminated, cancelled, expire unexercised, settled in cash in lieu of stock or in such manner that all or some of the Shares covered by a Grant are not issued to a Participant shall immediately become available for Grants, and these Shares, as well as any unused portion of the percentage limit of Shares in any calendar year, shall be carried forward and available for Grants in succeeding calendar years. During any calendar year, no Participant shall be awarded Grants pursuant to Paragraphs 7, 8, 9 and 10 hereof with respect to more than 500,000 Shares of stock. 6. Delegation of Authority. The Committee may delegate to the Stock Option Officer and to other senior officers of the Corporation its duties under the Plan subject to such conditions and limitations as the Committee shall prescribe except that only the Committee may designate and make Grants to Participants who are subject to Section 16 of the Securities Exchange Act of 1934. 7. Option. A right to purchase a specified number of Shares at not less than 100% of Fair Market Value on the date of the Grant. All Options will be Non- Qualified Options. Full payment for Shares purchased shall be made at the time of the exercise of the Option, in whole or in part. Payment of the purchase price shall be made in cash or in such other form as the Committee may approve, including Shares valued at the Fair Market Value of the Shares on the date of exercising the Option. No option shall have a term exceeding ten years from the date of grant or be exercisable prior to the expiration of one year from the date of grant, and no option shall be repriced except as provided for in Paragraph 12. - 3 - 8. Restored Option. An option issued as a result of the exercise of an option for which the purchase price is paid wholly in previously owned Shares of the class of stock of the underlying option. Upon such an exercise, a Restored Option shall be granted with respect to Shares of the class of stock of the underlying option, equal to the number of Shares actually used to exercise the underlying option or portion thereof plus any Shares withheld for the payment of taxes. A Restored Option (1) shall have an option price equal to the Fair Market Value of the class of stock of the underlying option on the date of exercise, (2) shall have the same expiration date as the underlying option and (3) shall not be exercisable prior to the expiration of one year from the date of grant. Grants and exercises of Restored Options shall be subject to such other restrictions as shall be determined by the Committee. 9. Stock Appreciation Right. A right to receive a payment in cash and/or Shares equal to the excess of the Fair Market Value of a Share on the date the Stock Appreciation Right (SAR) is exercised over the Fair Market Value of a Share at the date of the SAR Grant for a specified number of Shares; provided, that for any SAR exercised during the 10-business-day period beginning on the third business day following the release of MOC's quarterly earnings, the Committee may, in its sole discretion, establish a uniform Fair Market Value of a Share for such period which shall not be more than the highest daily Fair Market Value and shall not be less than the lowest daily Fair Market Value during such 10-business-day period. No Stock Appreciation Right shall be exercisable prior to the expiration of one year from the date of grant. "Business day" shall mean all calendar days except Saturdays, Sundays and national holidays. 10. Restricted Stock. An award of Shares for no cash consideration, if permitted by applicable law, or for such other consideration as determined by the Committee. Each award shall be subject to: the condition that the Participant's continuous service with the Corporation continue for at least one year following the date of such award; vesting restrictions based on achievement of business objectives, Corporation performance and other criteria; and provisions for forfeiture and non-transfer. Subject to such forfeiture and transfer restriction provisions as may be established by the Committee, any Participant receiving an award shall have all the rights of a stockholder of the Corporation with respect to Shares of Restricted Stock, including the right to vote the Shares and the right to receive any cash dividends thereon. During the period January 1, 1998 through May 31, 2005, the number of Shares of Restricted Stock granted shall not exceed 1,200,000. Each award of Restricted Stock under this Plan shall remain unvested until the Committee vests the Shares based upon the specific performance measures outlined in the table below. The Committee has the authority to adopt, in accordance with regulations established under the Code, applicable target levels under these performance measures and the percentage of Restricted Stock to be vested for attaining these target levels. The Committee reserves the - 4 - right to reduce the percentage of Restricted Shares to be vested for a Participant. Shares of Restricted Stock under this Plan will be vested only after the Committee certifies in writing that the applicable performance measures have been satisfied. No Shares of Restricted Stock shall be vested prior to the expiration of one year from the date of grant. In the case of a change in control of the Corporation, all restrictions shall terminate. Earnings before interest, taxes and depreciation as % of total assets Oil and gas reserve replacement ratio Upstream - Income per barrel of oil equivalent produced Downstream - Operating income per barrel of refinery throughput Safety performance 11. Transfer. No Grant may be assigned, pledged or transferred other than by will or by the laws of descent and distribution and during a Participant's lifetime shall be exercisable only by the Participant or his or her guardian or legal representative. 12. Adjustments. In the event of any change in the outstanding common stock of MOC by reason of a stock split, stock dividend, stock combination or reclassification, recapitalization or merger, or similar event, the Committee may adjust appropriately the number of Shares available for or covered by Grants and Share prices related to outstanding Grants and make such other revisions to outstanding Grants as it deems are equitably required. The number of Shares covered by Options and Restored Options unexercised on December 31, 2001 and/or their exercise prices will be adjusted by the Committee, if necessary, so that (i) the aggregate intrinsic value of the Options and Restored Options on January 1, 2002 is not greater than the aggregate intrinsic value of the Options and Restored Options immediately before January 1, 2002, and (ii) the ratio of the exercise price per share to the market value per share is not reduced. Any such adjustments will be based on the closing price per share of Shares (then trading as USX-Marathon Group Common Stock) on the last trading day before January 1, 2002 relative to the opening price per share of Shares on the next trading day. 13. Tax Withholding. The Corporation shall have the right to deduct applicable taxes from any cash payment under this Plan which are required to be withheld and further to condition the obligation to deliver or the vesting of Shares under this Plan upon the Participant paying MOC such amount as it may request to satisfy any liability for applicable withholding taxes. Participants may elect to have MOC withhold Shares to satisfy all or part of their withholding liability in the manner and to the extent provided for by the Committee at the time of such election. -5- 14. Amendments. The Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding Grants as are consistent with this Plan provided that, except for adjustments under Paragraph 12 hereof, no such action shall modify such Grant in a manner adverse to the Participant without the Participant's consent except as such modification is provided for or contemplated in the terms of the Grant. The Board may amend, suspend or terminate the Plan except that no such action may be taken (other than as provided in Paragraph 12) which would, without stockholder approval, increase the aggregate number of Shares available for Grants under the Plan; decrease the price of Options, Restored Options or SARs; change the requirements relating to the Committee; or extend the term of the Plan. 15. Effective and Termination Dates. The Plan became effective on May 7, 1990, the date it was approved by the stockholders, and shall terminate on May 31, 2005, subject to earlier termination by the Board pursuant to Paragraph 14. EX-10.B 5 dex10b.txt AMENDED INCENTIVE COMPENSATION PLAN EXHIBIT 10(b) MARATHON OIL CORPORATION ANNUAL INCENTIVE COMPENSATION PLAN (As Amended Effective January 1, 2002) 1. Purpose of the Plan The objectives of the Plan, formerly named the USX Corporation Annual Incentive Compensation Plan, are to advance the interests of the Corporation and its shareholders by providing officers and key employees incentive opportunities in order that the Corporation might attract, retain and motivate outstanding personnel by: a) providing compensation opportunities which are competitive with those of other major corporations of comparable size and in similar businesses; b) supporting the Corporation's goal-setting and strategic planning process; and c) motivating officers and key employees to achieve annual business goals and contribute to team performance by allowing them to share in the risks and rewards of the business. 2. Administration This Plan shall be administered by the Compensation and Organization Committee of the Board of Directors, which shall consist of not less than three directors of the Corporation who are appointed by the Board of Directors and who shall not be, and shall not have been, an officer or an employee of the Corporation. The Committee is authorized to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to delegate the granting of awards pursuant to guidelines established from time to time by the Committee, and to make all other determinations necessary for its administration. 3. Eligibility for Participation Employees of the Corporation eligible to receive incentive compensation under the Plan are those in responsible positions whose performance may affect the Corporation's success. Participants shall include employees of the Corporation and any subsidiary and/or joint venture if such employees are specifically designated as participants. 4. Amount Available for Plan The Board of Directors, upon the recommendation of the Committee, shall determine the aggregate amount which may be awarded with respect to each year. -2- 5. Awards Within the limits of the Plan, annual incentive awards stated in dollars may be made to any or all eligible participants. Determinations as to participation and award level shall be made on the basis of the positions, responsibilities and accomplishments of the eligible employees; the performance of the respective individuals, divisions, departments and subsidiaries of the Corporation; the overall performance and best interests of the Corporation; the recommendations of the Chairman; and other pertinent factors; such factors to be given such weight as is deemed appropriate. The guidelines established by the Committee shall provide that no participant shall have an annual target award in excess of 150% of his annual base salary; any exceptions to this limit shall be specifically approved by the Committee. If a participant retires during the year with respect to which awards are made, the Committee may grant him an award, but it shall be prorated based on the number of months of active employment. If a participant dies during the year, the Committee may grant a prorated award to the employee's estate. 6. Payment of Awards In its discretion, the Committee may permit participants in the Plan to defer the receipt of all or any part of any award granted under the Plan for such period and under such conditions as the Committee may determine, including the payment of interest on deferred awards if the Committee so determines. Unless receipt is deferred, all awards will be paid in cash as soon as practicable following the grant. An award will be considered as part of "gross pay" for purposes of calculation of benefits under the respective retirement and thrift plans unless the award is paid after a participant retires. No award will be paid to a person who quits or is discharged prior to payment of the award. 7 Effective Date; Amendment, Suspension or Termination of the Plan This Plan became effective as of January 1, 1984. The Board of Directors may, from time to time, amend, suspend or terminate the Plan in whole or in part. If it is suspended or terminated, the Board of Directors may reinstate any or all of the provisions of the Plan. EX-10.C 6 dex10c.txt AMENDED OFFICER COMPENSATION PLAN EXHIBIT 10(c) Marathon Oil Corporation Senior Executive Officer Annual Incentive Compensation Plan -------------------------------------------------- (As Amended and Restated Effective January 1, 2002) 1. Purpose The objectives of the Marathon Oil Corporation Senior Executive Officer Annual Incentive Compensation Plan, formerly named the USX Corporation Senior Executive Officer Annual Incentive Compensation Plan (the "Plan"), are to advance the interests of the Corporation by providing Plan Participants with annual incentive opportunities linked directly to specific results. It is intended that the Plan will: (a) reinforce the Corporation's goal-setting and strategic planning process, (b) recognize the efforts of senior executive officers in achieving objectives, and (c) aid in attracting and retaining competent senior executive officers, thus ensuring the long-range success of the Corporation. 2. Definitions The following definitions will apply: Award - An award granted under the Senior Executive Officer Annual Incentive Compensation Plan. Board - The Board of Directors of Marathon Oil Corporation. Committee - The Compensation & Organization Committee of the Board of Directors of Marathon Oil Corporation, which will consist of not less than three directors of the Corporation who are appointed by the Board of Directors and who will not be and will not have been an officer or an employee of the Corporation. In addition, in order to be a member of the Committee, a director must be an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder. Corporation - Marathon Oil Corporation, formerly named USX Corporation, together with any 80% or more owned subsidiary companies. Participant - A senior executive officer who is eligible to receive incentive compensation under the Plan. - 2 - 3. Administration The Committee will administer the Plan and will make all other determinations necessary under the Plan. Determinations made by the Committee will be final and binding upon Participants and their legal representatives and, in the case of deceased Participants, upon their executors, administrators, estates, beneficiaries, heirs and legatees. The terms and provisions of the Plan will be construed under and controlled by the law of the State of Delaware. 4. Participants Participants in the Plan are employees who served the Corporation in one of the positions listed below for at least a portion of the year for which Awards are made: Chairman Chief Executive Officer President Vice Chairmen Chief Operating Officer Chief Financial Officer General Counsel Executive Vice Presidents Senior Vice Presidents Awards made to individuals who die (in which case the Award will be made to the estate of the Participant) or retire during the year will be prorated based on the period of active employment. An employee who is a participant in any other cash incentive plan for a year or portion thereof may not participate in the Plan for the same year or portion thereof. 5. Determination of Awards Each Award granted under the Plan will be based upon the performance of the Corporation. Performance will be evaluated using the specific performance measures outlined in the table below. The Committee has the authority to adopt, in accordance with regulations established under the Code, applicable target levels under these performance measures and the amounts to be awarded for attaining these target levels. The Committee reserves the right to reduce the amount of an Award or eliminate an Award that would otherwise be payable to a Participant under the Plan. In no event will the amount of an Award payable to a Participant for a year exceed $3.0 million. - 3 - Applicable Performance Measures - ------------------------------------- Income From Operations Oil and Natural Gas Production Liquid Hydrocarbon Natural Gas Increases in Reserves in Excess of Annual Production Liquid Hydrocarbon Natural Gas Refined Products Sales Margins Worker Safety (Lost Time Accidents) Toxic Emissions Improvements Work Force Diversity Common Stock Performance 6. Payment of Awards Awards can be paid under the Plan only after the Committee certifies in writing that the applicable performance measures have been satisfied. The Committee may permit deferral of receipt of all or any portion of an Award granted under the Plan for such period and under such conditions as the Committee may determine, including the payment of interest at a reasonable rate. No Award will be paid to a Participant who quits or is discharged prior to payment of an Award. Unless receipt is deferred, an Award will be paid in cash as soon as practicable following the determination of Awards. Awards are subject to income and payroll tax withholding. Awards are included in "gross pay" for purposes of benefit calculations under the respective retirement and thrift plans unless the Award is paid after a Participant retires. 7. Effective Date This Plan became effective on May 2, 1994, applicable to each calendar year thereafter. EX-10.D 7 dex10d.txt AMENDED DEFERRED COMPENSATION PLAN EXHIBIT 10(d) MARATHON OIL CORPORATION DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (AMENDED AND RESTATED AS OF JANUARY 1, 2001) 1. Purpose The Marathon Oil Corporation Deferred Compensation Plan for Non-Employee Directors, formerly named the USX Corporation Deferred Compensation Plan for Non-Employee Directors, is intended to enable the Corporation to attract and retain non-employee Directors and to enhance the long-term mutuality of interest between such Directors and shareholders of the Corporation. 2. DEFINITIONS The following definitions apply to this Plan and to the Deferral Election Forms: (a) BENEFICIARY OR BENEFICIARIES means a person or persons or other entity designated on a Beneficiary Designation Form by a Participant as allowed in subsection 8(c) of this Plan to receive Deferred Benefit payments. If there is no valid designation by the Participant, or if the designated Beneficiary or Beneficiaries fail to survive the Participant or otherwise fail to take the Benefit, the Participant's Beneficiary is the Participant's surviving spouse or, if there is no surviving spouse, the Participant's estate. (b) BENEFICIARY DESIGNATION FORM means a form acceptable to the Committee or its designee and used by a Participant according to this Plan to name his/her Beneficiary or Beneficiaries. (c) BOARD means the board of directors of Marathon Oil Corporation. (d) COMMITTEE means the Compensation and Organization Committee of the Board. (e) COMMON STOCK means the common stock of the Corporation. (f) COMMON STOCK UNIT shall have the meaning assigned to it in Section 7(a). (g) CORPORATION means Marathon Oil Corporation, formerly named USX Corporation. (h) DEFERRAL ELECTION FORM means a document governed by the provisions of section 4 of this Plan, including the portion that is the Distribution Election Form and the related Beneficiary Designation Form. (i) DEFERRAL YEAR means a calendar year for which a Participant has a Deferred Benefit. (j) DEFERRED BENEFIT means either a Deferred Cash Benefit or a Deferred Stock Benefit under the Plan. (k) DEFERRED CASH ACCOUNT means that bookkeeping record established for each Participant who elects a Deferred Cash Benefit under this Plan. A Deferred Cash Account is established only for purposes of measuring a Deferred Cash Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Cash Benefit. A Deferred Cash Account will be credited with that portion of the Participant's Retainer Fee deferred as a Deferred Cash Benefit according to a Deferral Election Form and according to section 6 of this Plan. A Deferred Cash Account will be credited periodically with amounts as provided under section 6(b) of this Plan. (l) DEFERRED CASH BENEFIT means the Deferred Benefit elected by a Participant under section 4 that results in payments governed by sections 6 and 8. (m) DEFERRED STOCK ACCOUNT means that bookkeeping record established for each Participant to reflect the status of his/her Deferred Stock Benefits under this Plan. A Deferred Stock Account is established only for purposes of measuring a Deferred Stock Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Stock Benefit. A Deferred Stock Account will be credited with that portion of the Participant's Retainer Fee deferred as a Deferred Stock Benefit according to a Deferral Election Form and according to sections 3 and 7 of this Plan. A Deferred Stock Account will be credited periodically with amounts determined by the Committee under subsection 7(b) of this Plan. (n) DEFERRED STOCK BENEFIT means the Deferred Benefit that results in distributions governed by sections 7 and 8. (o) DIRECTORS means those duly named members of the Board. (p) DISTRIBUTION ELECTION FORM means that part of a Deferral Election Form used by a Participant according to this Plan to establish the post-Termination duration of deferral of a Deferred Cash Benefit or a Deferred Stock Benefit and the frequency of payments of any Deferred Cash Benefit. If a Deferred Benefit has no Distribution Election Form that is operative according to section 4, distribution of that Deferred Benefit is governed by section 8. (q) ELECTION DATE means the date established by this Plan as the date before which a Participant must submit a valid Deferral Election Form to the Committee. For each Deferral Year, the Election Date is December 31 of the preceding calendar year or, in the case of an individual who becomes a Participant during a Deferral Year, the date that he/she becomes a Participant. Despite the two preceding sentences, the Committee may set an earlier date as the Election Date for any Deferral Year. (r) PARTICIPANT means a Director who is not simultaneously an employee of the Corporation. -2- (s) PLAN means the Marathon Oil Corporation Deferred Compensation Plan for Non-Employee Directors, formerly named the USX Corporation Deferred Compensation Plan for Non-Employee Directors. (t) RETAINER FEE means that portion of a Participant's compensation that is fixed and paid without regard to his/her attendance at meetings. (u) TERMINATE, TERMINATING, OR TERMINATION, with respect to a Participant, means cessation of his/her relationship with the Corporation as a Director whether by retirement, death, disability or severance for any other reason. 3. MINIMUM STOCK-BASED COMPENSATION Each Person who becomes a Participant after October 29, 1996 shall receive at least 50 percent of his/her annual Retainer Fee in the form of Common Stock Units. 4. DEFERRAL ELECTION A deferral election is valid when a Deferral Election Form is completed, signed by the Participant, and received by the Committee or its designee. Deferral elections are governed by the provisions of this section. (a) A Participant may elect a Deferred Benefit for any Deferral Year if he/she is a Participant at the beginning of that Deferral Year or becomes a Participant during the Deferral Year. (b) Before each Deferral Year's Election Date, each Participant will be provided with a Deferral Election Form. Subject to Section 3, a Participant may elect on or before the Election Date to defer until after Termination the receipt of all or part of his/her Retainer Fee for the Deferral Year in the form of a Deferred Stock Benefit or a Deferred Cash Benefit. (c) A Participant may not elect to convert a Deferred Cash Benefit to a Deferred Stock Benefit or to convert a Deferred Stock Benefit to a Deferred Cash Benefit. (d) Each Distribution Election Form is part of the Deferral Election Form on which it appears or to which it states that it is related. The Committee may allow a Participant to file one Distribution Election Form for all of his/her Deferred Cash Benefits and one for all of his/her Deferred Stock Benefits. The provisions of subsection 2(p) apply to any Deferred Benefit under this Plan if there is no operative Distribution Election Form for that Deferred Benefit. (e) If it does so before the last business day of the Deferral Year, the Committee may reject any Deferral Election Form or any Distribution Election Form or both, and the Committee is not required to state a reason for any rejection. The Committee may modify any Distribution Election Form at any time to the extent necessary to comply with any laws or regulations. However, the Committee's rejection of any Deferral Election Form or any Distribution Election Form or the Committee's modification of any Distribution Election Form must be based upon action -3- taken without regard to any vote of the Participant whose Deferral Election Form or Distribution Election Form is under consideration, and the Committee's rejections must be made on a uniform basis with respect to similarly situated Participants. If the Committee rejects a Deferral Election Form, the Participant must be paid the amounts he/she would then have been entitled to receive if he/she had not submitted the rejected Deferral Election Form. (f) A Participant may not revoke a Deferral Election Form or a Distribution Election Form after the Deferral Year begins. Any revocation before the beginning of the Deferral Year is the same as a failure to submit a Deferral Election Form or a Distribution Election Form. Any writing signed by a Participant expressing an intention to revoke his/her Deferral Election Form or a related Distribution Election Form and delivered to the Committee or its designee before the close of business on the relevant Election Date is a revocation. 5. EFFECT OF NO ELECTION A Participant who has not submitted a valid Deferral Election Form to the Committee or its designee on or before the relevant Election Date may not defer any part of the cash portion of his/her Retainer Fee for the Deferral Year under this Plan. In the case of a person who becomes a Participant after October 29, 1996 and who does not submit a valid Deferral Election Form on or before the relevant Election Date, fifty percent of such Participant's Retainer Fee will become a Deferred Stock Benefit pursuant to section 4 of this Plan. The Deferred Benefit of a Participant who submits a valid Deferral Election Form but fails to submit a valid Distribution Election Form for that Deferred Benefit before the relevant Election Date or who otherwise has no valid Distribution Election Form for that Deferred Benefit is governed by section 2(p). 6. DEFERRED CASH BENEFITS (a) Deferred Cash Benefits will be set up in a Deferred Cash Account for each Participant and credited with investment returns as provided in section 6(b). Deferred Cash Benefits are credited to the applicable Participant's Deferred Cash Account as of the day they would have been paid but for the deferral. (b) A Participant may select one or more investment options approved by the Committee for his/her Deferred Cash Benefits. Amounts will be credited to Deferred Cash Accounts to reflect the returns on such investment options at periods determined by the Committee. 7. DEFERRED STOCK BENEFITS (a) Deferred Stock Benefits will consist of Common Stock Units and will be set up in a Deferred Stock Account for each Participant. "Common Stock Unit" shall mean a book-entry unit equal in value to a share of Common Stock. Each Common Stock Unit will increase or decrease in value by the same amount and with the same frequency as the fair market value of a share of Common Stock. Each Deferred Stock Account will be credited on January 15th of each year (or, if such day is not a -4- business day, on the next succeeding business day) with a quantity of Common Stock Units determined in accordance with this section based on the closing price of a share of Common Stock on the NYSE on the last trading day of the preceding calendar year. (b) Each Deferred Stock Account will be credited each calendar quarter, on the date on which dividends are reinvested under the Corporation's dividend reinvestment and stock purchase plans (the "Investment Date"), with additional Common Stock Units, including fractional units, in a quantity equal to the quotient of the dividends payable on the quantity of shares in such account divided by the Stock Purchase Price. "Stock Purchase Price" means the price obtained by averaging the daily high and low sales prices of a share of Common Stock on the NYSE for the twelve days immediately preceding the Investment Date on which shares of Common Stock are reported on the NYSE. (c) If a trust is established under section 9(b), an electing Participant may advise the trustee under the governing trust agreement as to the voting of shares of the Common Stock allocated to that Participant's separate account under the trust according to this subsection and provisions of the governing trust agreement. Before each annual or special meeting of the Corporation's shareholders, the trustee under the governing trust agreement must furnish each Participant with a copy of the proxy solicitation and other relevant material for the meeting as furnished to the trustee by the Corporation, and a form addressed to the trustee requesting the Participant's confidential advice as to the voting of shares of the Common Stock allocated to his/her account as of the valuation date established under the governing trust agreement preceding the record date. 8. DISTRIBUTIONS (a) According to a Participant's Distribution Election Form, but subject to section 4(e), a Deferred Cash Benefit must be distributed in cash. Subject to section 4(e), a Deferred Stock Benefit will be distributed in shares of Common Stock corresponding to, and equal to the number of, the Common Stock Units credited to the Participant's Deferred Stock Account. However, cash must be paid in lieu of fractional shares of the Common Stock otherwise distributable. (b) Deferred Cash Benefits will be paid in a lump sum unless the Participant's Distribution Election Form specifies payment of a Deferred Cash Benefit in installment payments over ten years. For a Deferred Cash Benefit payable in installments, investment returns under section 6(b) will continue to accrue on the unpaid balance of a Deferred Cash Account. Any lump-sum cash payment will be paid or installment payments will begin to be paid or delivery of Common Stock will be made no later than five business days after the Participant's Termination, unless a later post-Termination date is specified in a Participant's Distribution Election Form. -5- (c) Deferred Benefits may not be assigned by a Participant or Beneficiary. A Participant may use a Beneficiary Designation Form to designate one or more Beneficiaries for all of his/her Deferred Benefits; such designations are revocable. Each Beneficiary will receive his/her portion of the Participant's Deferred Cash Account and Deferred Stock Account on February 15 of the year following the Participant's death unless the Beneficiary's request for a different distribution schedule is received before distributions begin and is approved at the Committee's sole discretion. The Committee may require that multiple Beneficiaries agree upon a single distribution method. (d) Upon the occurrence of a Change in Control resulting in a Participant's Termination, the Corporation shall pay such Participant, on the fifth day following such Termination, cash in an aggregate amount equal to the value of such Participant's Deferred Cash Account and Deferred Stock Account on the date of the Change in Control, as determined using the higher of the closing prices of the Common Stock on the New York Stock Exchange on such date or the highest per-share price actually paid in connection with such Change in Control. For purposes of this Plan, "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is then subject to such reporting requirement; provided, that, without limitation, such a change in control shall be deemed to have occurred if (A) any person (as defined in Sections 13(d) and 14(d) of the Exchange Act) (a "Person") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding voting securities; provided, however, that for purposes of this Agreement the term "Person" shall not include (i) the Corporation or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation; or (B) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the -6- Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved; or (C) there is consummated a merger or consolidation of the Corporation or a subsidiary thereof with any other corporation, other than a merger or consolidation which would result in the holders of the voting securities of the Corporation outstanding immediately prior thereto holding securities which represent immediately after such merger or consolidation at least 50% of the combined voting power of the voting securities of the entity surviving the merger or consolidation (or the parent of such surviving entity) or the shareholders of the Corporation approve a plan of complete liquidation of the Corporation, or there is consummated the sale or other disposition of all or substantially all of the Corporation's assets. 9. CORPORATION'S OBLIGATION (a) The Plan is unfunded. A Deferred Benefit is at all times solely a contractual obligation of the Corporation. A Participant and his/her Beneficiaries have no right, title or interest in the Deferred Benefits or any claim against them. Except according to section 9(b), the Corporation will not segregate any funds or assets for Deferred Benefits nor issue any notes or security for the payment of any Deferred Benefit. (b) The Corporation may establish a grantor trust and transfer to that trust shares of the Corporation's common stock or other assets. The governing trust agreement must require a separate account to be established for each electing Participant. The governing trust agreement must also require that all Corporation assets held in trust remain at all times subject to the Corporation's judgment creditors. 10. CONTROL BY PARTICIPANT A Participant has no control over Deferred Benefits except according to his/her Deferral Election Forms, Distribution Election Forms, and Beneficiary Designation Form. 11. CLAIMS AGAINST PARTICIPANT'S DEFERRED BENEFITS A Deferred Cash Account and Deferred Stock Account relating to a Participant under this Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so is void. A Deferred Benefit is not subject to attachment or legal process for a Participant's debts or other obligations. Nothing contained in this Plan gives any Participant any interest, lien or claim against any specific asset of the Company. A Participant or his/her beneficiary has no rights other than as a general creditor. -7- 12. AMENDMENT OR TERMINATION This Plan may be altered, amended, suspended, or terminated at any time by the Board. 13. NOTICES Notices and elections under this Plan must be in writing. A notice or election is deemed delivered if it is delivered personally or if it is mailed by registered or certified mail to the person at his/her last known business address. 14. WAIVER The waiver of a breach of any provision in this Plan does not operate as and may not be construed as a waiver of any later breach. 15. CONSTRUCTION This Plan is created, adopted, maintained and governed according to the laws of the state of Delaware. Headings and captions are only for convenience; they do not have substantive meaning. If a provision of this Plan is not valid or not enforceable, the validity or enforceability of any other provision is not affected. Use of one gender includes all, and the singular and plural include each other. 16. EFFECTIVE DATE The effective date of the Plan is January 1, 1997. -8- EX-10.E 8 dex10e.txt AMENDED NON-OFFICER STOCK PLAN EXHIBIT 10(e) THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 Marathon Oil Corporation Non-Officer Restricted Stock Plan ---------------------------------------------------------- (As Amended and Restated Effective January 1, 2002) 1. Purpose The objective of the Marathon Oil Corporation Non-Officer Restricted Stock Plan, formerly named the USX Corporation Non-Officer Restricted Stock Plan, (the "Plan") is, through the issuance of restricted stock ("Shares"), to advance the interests of Marathon Oil Corporation (formerly named USX Corporation), its subsidiaries, affiliates and joint ventures (the "Corporation") (a) by promoting the retention of outstanding employees, (b) by rewarding specific noteworthy achievements on the part of an employee or a group of employees, (c) by motivating employees through growth-related incentives to achieve long-term goals and (d) by aligning the interests of employees with those of the stockholders. 2. Administration Except as noted below, the Plan shall be administered by the Salary and Benefits Committee of the Corporation (the "Administering Committee"): The Administering Committee shall establish its own guidelines for granting Shares and for general administration of grants made under the Plan. Such guidelines shall be subject to review by the Law, Tax and Accounting departments. The Administering Committee shall have the power to cancel a grant made under the Plan when such cancellation is deemed appropriate. The Compensation and Organization Committee of the Marathon Oil Corporation Board of Directors (the "Compensation and Organization Committee") shall create and authorize pools for specific numbers of Shares to be granted by the Administering Committee. Authorizations shall be made every two years, and no authorization shall exceed 1 percent of the total shares of common stock outstanding on December 31 of the preceding year. In addition, Shares related to grants that are forfeited or cancelled before vesting shall immediately become available for grants, and these Shares, as well as any unused portion of the percentage limit of Shares available from previous authorizations, shall be carried forward and available for grants in succeeding calendar years. The Marathon Oil Corporation Board of Directors (the "Marathon Board") shall approve all amendments to the Plan. 3. Eligibility for Participation Participation in this Plan shall be limited to exempt employees below the officer level,up to and including Salary Grade 18. 4. Grants All grants shall be subject to such forfeiture and transfer restriction provisions as may be established by the Administering Committee. Grantees receiving an award shall have all the rights of a stockholder of the Corporation, including the right to vote the Shares and the right to receive any cash dividends paid thereon. 5. Source of Shares Shares granted under the Plan may be granted out of authorized and unissued shares, treasury shares or open-market purchases. 6. Vesting Shares granted to an employee shall vest as follows: 50 percent of the Shares received pursuant to a specific grant shall vest on the second anniversary of the grant; the remaining 50 percent shall vest on the fourth anniversary of the grant. Each grant shall be subject to the condition that the employee's continuous service with the Corporation continues through the relevant anniversary date, unless terminated by reason of death. 7. Adjustments In the event of any change in the outstanding common stock of the Corporation by reason of a stock split, stock dividend, stock combination or reclassification, recapitalization or merger, or similar event, the Compensation and Organization Committee may appropriately adjust the number of Shares covered by a grant and make such other revisions to outstanding grants as it deems are equitably required. 8. Tax Withholding The Corporation shall have the right to condition the obligation to deliver or the vesting of Shares under this Plan upon the employee paying the Corporation such amount as it may request to satisfy any liability for applicable withholding taxes. Employees may elect to have the Corporation withhold Shares to satisfy all or part of their withholding liability in the manner and to the extent provided for by the Administering Committee at the time of such election. 9. Amendments The Administering Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding grants as are consistent with the Plan, provided that, except for adjustments under Paragraph 7 hereof, no such action shall modify a grant in a manner adverse to the grantee without the grantee's prior consent, except as such modification is provided for or contemplated in the terms of the grant. 10. Effective Date This Plan became effective on January 30, 2001. -2- EX-10.F 9 dex10f.txt AMENDED NON-EMPLOYEE DIRECTOR STOCK PLAN EXHIBIT 10(f) MARATHON OIL CORPORATION NON-EMPLOYEE DIRECTOR STOCK PLAN While this Plan is in effect Marathon Oil Corporation, formerly named USX Corporation, will supplement the fees paid to each non-employee director of the Corporation with a grant of shares of common stock of the Corporation. The number of shares of common stock to be granted shall be equal to that number of shares purchased in an open market transaction or transactions by the director during the sixty days following the effective date on which such non-employee director first becomes a member of the Board of Directors, up to a maximum grant of 1,000 shares of common stock. The grant will be made as of the date or dates of purchase of common stock by the director. The shares issued under this Plan will not be registered under the Securities Act of 1933 and will be subject to the provisions of the securities laws, including Rule 144 of the Securities and Exchange Commission, which affect the transferability of such shares. A certificate for the shares granted shall be issued by the Corporation to the director from Treasury stock, or previously unissued shares, such certificate to bear a restrictive legend in such a form as may be approved by the General Counsel & Secretary. As amended and restated effective January 1, 2002. EX-10.K 10 dex10k.txt LOWDEN AGREEMENT LETTER EXHIBIT 10(k) September 15, 2000 Mr. Steve Lowden Den Farm Near Tonbridge Kent TN12 9PX U.K. Dear Mr. Lowden: On behalf of C. P. Cazalot, I want to confirm the terms of Marathon Oil Company's (Marathon's) offer of employment and your acceptance for the position of Senior Vice President, Business Development. The terms of the starting compensation package specific to you, which include additional benefits that all Marathon executives at your level receive as a part of their respective employment packages are as follows: . Base compensation @ $275,000 per annum . Cash incentive compensation @ 80% of base compensation (pro-rated from your date of employment) . Stock option grant of 30,000 USX-MRO shares vesting 10,000 shares on the one- year anniversary of your date of employment; 10,000 shares on the two-year anniversary of your date of employment; and 10,000 shares on the three-year anniversary of your date of employment. These options shall be granted at a strike price equal to the average high and low price of USX-MRO shares traded on the NYSE on your first day of employment with Marathon, which is anticipated to be no later than December 1, 2000. . Five (5) weeks of vacation with pay . Membership in one (1) local country club as agreed upon by C. P. Cazalot including initiation fees and payment of monthly dues. Additionally, I want to confirm that in the event, for reasons other than cause, you are involuntarily dismissed from your employment as Senior Vice President, Business Development prior to the first anniversary of your date of employment, Marathon will pay you the pro rata unpaid portion of your annual base compensation and any compensation award, under the 2001 Annual Incentive Compensation Plan, should such award be unpaid at that time. The obligation undertaken by Marathon Oil as described in this paragraph shall constitute Marathon's sole responsibility to you in the event circumstances occur that trigger this obligation. Marathon's obligation shall expire on the one-year anniversary of your date of employment. 2 Assuming that the above described terms accurately reflect our correspondence, please sign this letter in duplicate in the space provided below and return one copy to me for my file. Very truly yours, /s/ Daniel J. Sullenbarger Daniel J. Sullenbarger DJS/sjt xc: C.P. Cazalot, Jr. ACCEPTED AND AGREED TO THIS 17th DAY OF September, 2000. /s/ Steve Lowden - ------------------------------ Steve Lowden EX-10.L 11 dex10l.txt BEHRMAN AGREEMENT LETTER EXHIBIT 10(l) September 18, 2000 Dr. Philip G. Behrman 903 Wade Hampton Houston, TX 77024 Dear Dr. Behrman, On behalf of C. P. Cazalot, I want to confirm the terms of Marathon Oil Company's (Marathon's) offer of employment and your acceptance for the position of Senior Vice President, Worldwide Exploration. The terms of the starting compensation package specific to you, which include additional benefits that all Marathon executives at your level receive as a part of their respective employment packages are as follows: . Base compensation @ $275,000 per annum . Cash incentive compensation @ 80% of base compensation (pro-rated @ .25) . Stock option grant of 30,000 USX-MRO shares vesting 10,000 shares on the one- year anniversary of your date of employment; 10,000 shares on the two-year anniversary of your date of employment; and 10,000 shares on the three-year anniversary of your date of employment. These options shall be granted at a strike price equal to the average high and low price of USXMRO shares traded on the NYSE on your first day of employment with Marathon, which is anticipated to be no later than September 25, 2000. . four weeks vacation Assuming that the above-described terms accurately reflect our correspondence, please sign this letter in duplicate in the space provided below and return one copy to me for my file. Very truly yours, /s/ Daniel J. Sullenbarger Daniel J. Sullenbarger DJS/sjt xc: C. P. Cazalot, Jr ACCEPTED AND AGREED TO THIS 19th DAY OF Sept., 2000 /s/ Philip G. Behrman - ------------------------------------ Philip G. Behrman EX-10.M 12 dex10m.txt MILLS AGREEMENT LETTER EXHIBIT 10(m) Mr. John T. Mills 33 West Oak Drive Houston, TX 77056 September 25, 2000 Dear John, In consideration for your agreeing to continue your employment with USX Corporation and its subsidiaries until at least December 1, 2001, and to provide the Corporation with notice of your retirement at least 90 days prior to the date of your retirement, the Corporation agrees to provide the benefits outlined in Sections I. and II. below if you retire during the period December 1, 2001, through December 1, 2003. I. Pension Benefits A. Value of Enhanced Early Retirement Benefit The Corporation will provide a pension supplement to you upon your retirement from the Corporation, or upon your death prior to retirement, equal to the excess of (1) minus (2) below: (1) the sum of the pension and surviving spouse benefits which would be provided on your behalf under the Retirement Plan of Marathon Oil Company (the "Retirement Plan") and the Excess Benefit Plan of Marathon Oil Company, if such benefits were calculated using - (a) your actual age at retirement (or death) plus three years, for purposes of applying the Retirement Plan's early retirement factors; (b) your actual Retirement Plan participation at retirement (or death) plus three years; (c) the "Current Interest Rate Assumption" provided in the Retirement Plan, except that such rate shall not exceed the "Current Interest Rate Assumption" that is in effect on December 1, 2000 (i.e., 4.5%); and (d) the actuarial factors and assumptions that are in effect under the Retirement Plan as of December 1, 2000, using your actual age at retirement; (2) the sum of the pension and surviving spouse benefits which are actually payable on your behalf under the Retirement Plan and the Excess Benefit Plan of Marathon Oil Company as of your retirement (or death). For purposes of determining the amounts in (1) and (2) above, benefits will be based upon the amount of immediate pension payable in the form of a lump sum distribution under the terms of the applicable plan. Salary and bonuses paid by USX Corporation shall be taken into account in calculating final average pay under the applicable plans. B. July 22, 1998 Agreement The Corporation agrees to modify the calculation of the amount payable, if any, under the July 22, 1998 letter agreement signed by Mr. T. J. Usher and Mr. John T. Mills regarding the recognition of USX Corporation service as participation service under the Marathon plans (the "July 1998 Agreement"), so that the Retirement Plan and Excess Benefit Plan benefits referenced in paragraphs (1) and (2) of such agreement are calculated using the Enhanced Early Retirement Benefit described in paragraph A.(1) above. II. Retiree Medical The Corporation will provide additional compensation to you upon your retirement from the Corporation, or upon your death prior to retirement, equal to the excess, if any, of (A) your member contributions for you and your covered dependents under the Health Plan of Marathon Oil Company (the "Health Plan"), over (B) such member contributions that you would have paid under the age and service point system provided for in the Health Plan if your age and service was calculated using: (1) your actual age at retirement (or death) plus three years, and (2) your actual years of service at retirement (or death) plus three years. The additional compensation payable under this Section II will be paid in a single sum upon retirement and will be equal to the actuarial value of such excess amount each month during your and your spouse's life expectancies, using the actuarial factors and assumptions that are in effect under the Retirement Plan as of December 1, 2000. To the extent a pension supplement and/or additional compensation is payable under this agreement, it will be paid by USX Corporation or Marathon Oil Company, whichever is your employer at the time of retirement. Except as specifically modified by this agreement, the terms and provisions of the July 1998 Agreement remain in force. Sincerely, /s/ T. J. Usher T. J. Usher Agreed to: /s/ John T. Mills September 25, 2000 ------------------------- John T. Mills 2 EX-10.U 13 dex10u.txt SURMA AGREEMENT WITH MARATHON EXHIBIT 10(u) January 27, 1997 Mr. John P. Surma 1356 High Oak Court Pittsburgh, PA 15241 Dear Mr. Surma: This letter formally confirms, on behalf of the Marathon Group of USX Corporation ("Marathon"), an offer of employment for the position of Senior Vice President-Finance and Accounting, Marathon, which I am authorized by the USX Board of Directors to extend to you. Significant aspects of Marathon's offer include the following: 1. You will be paid, in equal monthly installments, an annual salary of $250,000. In addition, you will be eligible to receive an annual performance bonus, based upon your and Marathon's actual performance in each calendar year, having a target award in any one year equal to 60% of your annual salary. 2. Should you accept this offer of employment, I will recommend to the USX Compensation Committee that it approve, at its May, 1997 meeting, the issuance to you, at the then current market price, of 50,000 stock option shares of USX-Marathon Group stock, as well as 2,000 shares of USX-Marathon Group restricted stock. Your entitlement to have the restricted stock issued to you vest will be determined in accordance with the provisions of the USX 1990 Stock Plan. 3. Marathon will pay on your behalf all dues and service charges which you incur as a consequence of your continuing memberships in the Duquesne Club and the St. Clair Country Club. In addition, upon your relocation to Houston, Texas, Marathon will pay any initiation fees, and thereafter all annual dues and service charges which you incur, in a Houston country club to be determined by mutual agreement between us. 4. Immediately upon your commencement of actual employment with Marathon, you will be credited with 15 years of continuous service for all purposes in all Marathon pension plans applicable to executive officers. Thereafter, you will accrue future service and benefits under Marathon pension plans in accordance with the terms of the pension plan documents. Mr. John P. Surma January 27, 1997 Page 2 5. Should you accept this offer, your relocation from the Pittsburgh area to the Houston area will be covered by and receive the benefits of Marathon's management relocation policy, including the house purchase provisions thereof. 6. As a Marathon executive employee, you will be eligible to participate in all of Marathon's existing and future employee benefit programs applicable to executive officers. In addition, you will: (1) receive one comprehensive physical examination at Company expense in each calendar year in accordance with Marathon's policy covering physical examinations of Marathon executive officers; and (2) tax preparation and financial planning advice under terms and conditions comparable to those applicable to USX executive management. 7. Upon your employment by Marathon, the USX Board of Directors will extend to you a change in control agreement which, upon your acceptance thereof, will provide you with earnings protection up to a maximum of three times your annual salary and bonus should a change in control of USX, as defined in such agreement, occur. Both Marathon and I believe that because of your extensive financial background and personal qualities, you are an individual who can make a unique and valuable contribution to Marathon's future success. I therefore hope, both personally and for Marathon, that you will accept our offer of employment. Sincerely, /s/ Dan D. Sandman Dan D. Sandman P.S. We have also agreed to 5 weeks paid vacation. Accepted/ /s/ John P. Surma 1/27/97 EX-10.V 14 dex10v.txt SURMA AGREEMENT WITH USX EXHIBIT 10(v) Mr. John P. Surma 2006 Hycroft Drive Pittsburgh, PA 15241 December 21, 2001 Dear John, In furtherance of your employment letter dated January 27, 1997, and in consideration for your agreeing to act as Vice Chairman of United States Steel Corporation effective January 1, 2002 (or such later date on which the USX Corporation Board of Directors approves the restructure of USX), USX Corporation, renamed Marathon Oil Corporation effective upon the USX restructure ("Marathon"), United States Steel LLC ("Steel"), Marathon Ashland Petroleum LLC ("MAP"), Speedway SuperAmerica LLC ("SSA"), and their successors (collectively, the "Corporation") agree to provide the non-qualified benefit supplements outlined in Section A below. The supplements payable under this letter agreement ("Agreement") are in addition to the pension and savings benefits and non- qualified deferred compensation that you are otherwise entitled to as an executive employee of the Corporation. Unless you elect otherwise in accordance with Section B below, the supplements payable under this Agreement shall be paid by Steel and Marathon in the form of a lump sum distribution within 90 days of the date of your termination of employment from all employers of the Corporation (or, if earlier, the date of your death). Any such lump sum distribution shall be calculated in the same manner as it would have been calculated had it been made under the Steel or Marathon pension plan, as applicable. If you die prior to receipt of such lump sum, such lump sum will be paid to your surviving spouse or to your estate if there is no surviving spouse. A. Pension and Savings Benefits - Attributable to Bonus Service Steel and Marathon shall provide non-qualified benefit supplements equal to the difference between (1) the Adjusted Benefits, and (2) the Actual Benefits, as outlined below. (1) Adjusted Benefits The term "Adjusted Benefits" shall mean the pension (and surviving spouse and survivor) or savings benefits that would be provided to you under the Steel Plans and the Marathon Plans specified in Exhibit A attached if your actual continuous service with the Corporation is adjusted to reflect an increase of fifteen (15) years of continuous service. As outlined in Exhibit A, such bonus years will be used for purposes of determining eligibility and vesting for both the Steel Plans and Marathon Plans. For benefit accrual purposes, the fifteen bonus years of service will be allocated between Steel and Marathon (and their plans) based upon the ratio of the number of months of service you have worked for Steel or Marathon, respectively, as compared to the combined number of months of service you have worked for Steel and Marathon as of the determination date. Solely for purposes of determining the above-described allocation ratio, years of service with USX prior to the USX restructure will be counted as service for Steel and years of service with MAP and SSA shall be counted as service for Marathon. The determination date shall be the date of your termination of employment (or, if earlier, the date of your death). A partial month of service shall be counted as a month if it includes at least 15 days of service. (2) Actual Benefit The term "Actual Benefits" shall mean the pension (and surviving spouse and survivor) and savings benefits that are provided to you under the Steel Plans and the Marathon Plans specified in Exhibit A as of the determination date. For purposes of determining the amounts in (1) and (2) above, benefits will be based upon the amount of immediate benefit payable in the form of a lump sum distribution under the terms of the applicable plan. B. Alternative Forms of Benefit You may receive all or a portion of the supplements payable by Steel or Marathon under this Agreement in one or more alternative forms of benefit if you make an election to do so at least one year prior to the date of your retirement from the Corporation (or, if earlier, from the date of your death). Any alternative form of benefit must be approved by the Corporation and may include, for example, the alternatives outlined below. To be valid, any such election must be received in writing and approved by the Vice President-Employee Relations of Steel and/or Marathon, as applicable. (1) Installments In accordance with the terms of a valid election, the benefit payable under this Agreement may be paid either: (a) in full on February 1 of the year following the year in which you retire, or (b) in up to ten annual installments with the first annual installment payable within 90 days following the date of your retirement and the succeeding installments payable on the next anniversary(ies) of the first payment date. Interest would accrue and be payable on the balance due at the rate used to determine the actuarially equivalent lump sum value of your benefit under the Steel or Marathon pension plan, as applicable. If you die prior to receipt of the remaining installments, such remaining installments shall be paid to your surviving spouse or to your estate if there is no surviving spouse. 2 Subject to a 2% penalty, you may elect to accelerate the payment of all remaining installments to a date prior to the scheduled date. If such an election is made, the accelerated payment would be reduced by an amount equal to 2% of the amounts accelerated (including interest). Such an election for acceleration of any balance due will be valid only if it is filed in writing with the appropriate Vice President-Employee Relations at least 20 days prior to the date payment is requested. (2) Split Dollar Life Insurance In accordance with the terms of a valid election, you may waive your right to all or a portion of the benefits payable by Steel and/or Marathon under this Agreement in return for split dollar life insurance coverage under terms to be subsequently determined by Steel or Marathon. C. Deferred Compensation Arrangements As with other similarly situated former employees, Marathon agrees that you will be treated the same as an employee transferred to an employer within the Marathon Oil Corporation controlled group of corporations for purposes of the MAP and SSA Deferred Compensation Arrangements outlined in Exhibit B attached. In this regard, no distributions under these Arrangements will be permitted or required solely as a result of the separation of USX Corporation. Consistent with the terms of the January 27, 1997 letter agreement, Marathon agrees to provide the non-qualified benefit supplement under this Agreement that is payable by Steel to the extent, if any, that such supplement is not paid by Steel within 60 days of the due date. In such event, Marathon shall pay such unpaid portion within 60 days of the date that you notify Marathon that Steel has failed to satisfy its obligation under this Agreement. For your information, attached as Exhibit B is a list of the pension and savings plans and non-qualified deferred compensation arrangements in which you are currently participating. Sincerely, /s/ T. J. Usher T. J. Usher Agreed to: /s/ John P. Surma December 21, 2001 ---------------------------------- John P. Surma 3
EXHIBIT A JOHN P. SURMA LETTER AGREEMENT - DECEMBER 21, 2001 APPLICATION OF BONUS SERVICE TO STEEL AND MARATHON PLANS (AND THEIR SUCCESSORS) ADJUSTED BENEFIT UNDER LETTER AGREEMENT ---------------------------------------------------------------------- PLANS ELIGIBILITY AND VESTING BENEFIT ACCRUAL - ---------------------------------------------------------- ------------------------------ ------------------------------------- STEEL PLANS - ----------- USS Plan for Non-Union Employee Pension Benefits 15 years of bonus service Steel's pro rata portion/1/ of 15 bonus years USS Corporation Non-Tax Qualified Pension Plan 15 years of bonus service Steel's pro rata portion of 15 bonus years USS Corporation Executive Management Supplemental Pension Program 15 years of bonus service Steel's pro rata portion of 15 bonus years USS Corporation Supplemental Thrift Program 15 years of bonus service No impact (provides higher Co. match) MARATHON PLANS - -------------- Retirement Plan of Marathon Oil Company 15 years of bonus service No impact. (Marathon's pro rata portion of 15 bonus years is used in hypothetical MAP Ret. Plan unreduced for Marathon Retirement Plan offset)/2/ Marathon Oil Company Excess Benefits Plan 15 years of bonus service No impact Refining, Marketing, and Transportation Subplan of Marathon Ashland Petroleum Retirement Plan 15 years of bonus service Marathon's pro rata portion of 15 bonus years Marathon Ashland Petroleum Excess Benefits Plan 15 years of bonus service Marathon's pro rata portion of 15 bonus years Retail Subplan of Marathon Ashland Petroleum Plan - Petroleum Marketing Legacy Provisions 15 years of bonus service No impact - Pension Equity Provisions 15 years of bonus service No impact on number of accrual years (provides higher accrual rate) Speedway SuperAmerica Excess Benefits Plan 15 years of bonus service No impact - -------------------- /1/ Pro rata portion is determined as of the determination date based upon the ratio of the number of months of service for Steel (including pre-2002 USX) or Marathon, respectively, as compared to the combined number of months of service for Steel and Marathon. Determination data is the date of retirement (or, if earlier, date of death). /2/ The term "Marathon's pro rata portion" refers to the portion allocable to service with Marathon, MAP, and SSA.
EXHIBIT B JOHN P. SURMA - APPLICABLE PENSION AND SAVINGS PLANS AND DEFERRED COMPENSATION ARRANGEMENTS (AND THEIR SUCCESSORS) SUMMARY OF BENEFITS ----------------------------------------------------------------------------------------- ESTIMATED LUMP ACTIVE PLANS SUM VALUE-7/1/01 PARTICIPATION EXPLANATION - ----------------------------------------- ------------------ -------------- ------------------------------------------------ STEEL PLANS - ----------- 1. USS Non-Union Employee Pension Plan 0 9/01 - DB pension on non-bonus compensation 2. USS Non-Tax Qualified Pension Plan 0 9/01 - Excess/1/ not payable under Plan 1 [Non-Qual.] 3. USS Supplemental Pension Program 0 9/01 - DB Pension on bonus compensation [Non-Qual.] 4. USS Savings Fund Plan 0 9/01 - DC savings [401(k) and 401(m)] 5. USS Supplemental Thrift Program 0 9/01 - Company match not provided under Plan 4 [Non-Q.] MARATHON PLANS - -------------- 6. MRO - Marathon Retirement Plan 54,582 2/97 - 8/98 DB pension on regular and bonus compensation 7. MRO and MAP - Thrift Plan (See website) 2/97 - 8/98 DC savings [401(k) and 401(m)] 1/00 - 8/01 8. MRO - Excess Benefits Plan 2/97 - 8/98 Excess not payable under Plans 6 & 7 [Non-Qual.] . Excess Defined Contribution (Thrift) 30,800 . Excess Defined Benefit (Shown in Plan 6) 9. MAP - RM&T Subplan of MAP Plan 111,345 1/00 - 8/01 DB pension on regular and bonus compensation 10. MAP - Excess Benefits Plan 1/00 - 8/01 Excess not payable under Plans 9 & 7 [Non-Qual.] . Excess Defined Contribution (Thrift) 35,900 . Excess Defined Benefit (Shown in Plan 9) 11. SSA - Retail Subplan of MAP Plan - Petroleum Marketing Legacy 17,471 9/98 - 12/98 DB pension on regular and bonus compensation - Pension Equity Provisions 79,848 1/99 - 12/99 DB pension on regular and bonus compensation 12. SSA - Excess Benefits Plan (Shown in Plan 11) 9/98 - 12/99 Excess not payable under Plan 11 [Non-Qual.] DEFERRED COMPENSATION ARRANGEMENTS - ---------------------------------- 13. MAP - Deferred Compensation 178,100 1/00 - 8/01 Deferred income; hypothetical Fidelity options 14. SSA - Deferred Compensation - 1998 21,200 9/98 - 12/98 Deferrals; earnings tied to prime rate 15. SSA - Deferred Compensation - 1999 131,600 1/99 - 12/99 Deferred income; hypothetical Fidelity options - ------------------------ /1/ For purposes of this chart, the term "Excess" means the amount not payable under a qualified trust on account of Code sections 401(a)(17) and 415 (or other Code sections).
EX-12.1 15 dex121.txt EARNINGS TO COMBINED FIXED CHARGES EXHIBIT 12.1 Marathon Oil Corporation Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends TOTAL ENTERPRISE BASIS--Unaudited Including Discontinued Operations (Dollars in Millions)
Year Ended December 31 ------------------------------------------- 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ Portion of rentals representing interest...... $ 54 $ 52 $ 49 $ 53 $ 35 Capitalized interest, including discontinued operations.................................. 27 19 26 46 31 Other interest and fixed charges, including discontinued operations..................... 349 375 365 318 352 Pretax earnings which would be required to cover preferred stock dividend requirements of parent................................... 12 12 14 15 20 ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends (A)............................... $ 442 $ 458 $ 454 $ 432 $ 438 ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B).................. $3,213 $1,809 $1,866 $1,087 $1,067 ====== ====== ====== ====== ====== Ratio of (B) to (A)........................... 7.26 3.95 4.11 2.51 2.43 ====== ====== ====== ====== ======
EX-12.2 16 dex122.txt EARNINGS TO FIXED CHARGES EXHIBIT 12.2 Marathon Oil Corporation Computation of Ratio of Earnings to Fixed Charges TOTAL ENTERPRISE BASIS--Unaudited Continuing Operations (Dollars in Millions)
Year Ended December 31 ------------------------------------------ 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ Portion of rentals representing interest.... $ 54 $ 52 $ 49 $ 53 $ 35 Capitalized interest, including discontinued operations................................. 27 19 26 46 31 Other interest and fixed charges, including discontinued operations.................... 349 375 365 318 352 ------ ------ ------ ------ ------ Total fixed charges (A)..................... $ 430 $ 446 $ 440 $ 417 $ 418 ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B)................ $3,213 $1,809 $1,866 $1,087 $1,067 ====== ====== ====== ====== ====== Ratio of (B) to (A)......................... 7.47 4.06 4.24 2.60 2.55 ====== ====== ====== ====== ======
EX-21 17 dex21.txt SUBSIDIARIES Exhibit 21. List of Significant Subsidiaries The following subsidiaries were 100 percent owned, either directly or indirectly, and were consolidated by Marathon Oil Corporation at December 31, 2001: State or jurisdiction Name of Subsidiary in which incorporated Marathon Canada Limited Canada Marathon International Oil Company Delaware Marathon Oil Company Ohio Marathon Oil U.K., Ltd. Delaware Marathon Petroleum Investment, Ltd. Delaware Marathon West Texas Holdings, LLC Delaware The following subsidiaries were 62 percent owned, directly or indirectly, by Marathon Oil Corporation at December 31, 2001: Marathon Ashland Petroleum LLC Delaware Speedway SuperAmerica LLC Delaware Names of particular subsidiaries have been omitted from the above list since, considered in the aggregate, they would not constitute a significant subsidiary at December 31, 2001. EX-23 18 dex23.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements listed below of Marathon Oil Corporation of our reports dated February 15, 2002, relating to the financial statements and financial statement schedule, which appear in this Form 10-K: On Form S-3: Relating to: File No. 33-57997 Dividend Reinvestment Plan 333-56867 USX Corporation Debt Securities, Preferred Stock and Common Stock 333-88947 Dividend Reinvestment and Direct Stock Purchase Plan 333-88797 Marathon Oil Corporation Debt Securities, Preferred Stock and Common Stock On Form S-8: Relating to: File No. 33-41864 1990 Stock Plan 33-56828 Marathon Oil Company Thrift Plan 333-29699 1990 Stock Plan 333-29709 Marathon Oil Company Thrift Plan 333-52751 1990 Stock Plan 333-86847 1990 Stock Plan PricewaterhouseCoopers LLP Pittsburgh, PA March 11, 2002 -----END PRIVACY-ENHANCED MESSAGE-----