-----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, UcbaWTMeG79eNrvX9FiRSBeAAt0OHMxYXQB5HmhOWiN35b8HSdt4Aqb7Zo4X8XBy bMmoRyRKXTkAz9Wm2/anVg== 0000899243-02-002258.txt : 20020813 0000899243-02-002258.hdr.sgml : 20020813 20020813160928 ACCESSION NUMBER: 0000899243-02-002258 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05153 FILM NUMBER: 02729831 BUSINESS ADDRESS: STREET 1: P O BOX 3128 CITY: HOUSTON STATE: TX ZIP: 77253-3128 BUSINESS PHONE: 7136296600 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 FORMER COMPANY: FORMER CONFORMED NAME: USX CORP DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q FOR QUARTER ENDED 06-30-2002 ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 1-5153 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 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 (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X] No [_] There were 309,815,967 shares of Marathon Oil Corporation Common Stock outstanding as of July 31, 2002. ============================================================================== MARATHON OIL CORPORATION SEC FORM 10-Q QUARTER ENDED June 30, 2002 INDEX Page ----- ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statement of Income 3 Consolidated Balance Sheet 5 Consolidated Statement of Cash Flows 7 Selected Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 3. Quantitative and Qualitative Disclosures about Market Risk 38 Supplemental Statistics 43 PART II - OTHER INFORMATION Item 1. Legal Proceedings 46 Item 4. Submission of Matters to a Vote of Security Holders 46 Item 6. Exhibits and Reports on Form 8-K 47 2 Part I - Financial Information MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF INCOME (Unaudited)
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- REVENUES AND OTHER INCOME: Revenues $8,083 $9,113 $14,492 $17,720 Dividend and investee income 36 39 65 72 Net gains on disposal of assets 3 14 11 28 Gain (loss) on ownership change in Marathon Ashland Petroleum LLC 2 (7) 4 (6) Other income 3 9 9 76 ------ ------ ------ ------ Total revenues and other income 8,127 9,168 14,581 17,890 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of revenues (excludes items shown below) 5,985 6,194 10,744 12,415 Selling, general and administrative expenses 183 186 370 331 Depreciation, depletion and amortization 308 306 602 609 Taxes other than income taxes 1,151 1,203 2,211 2,325 Exploration expenses 44 26 101 49 Inventory market valuation credit (1) - (72) - ------ ------ ------ ------ Total costs and expenses 7,670 7,915 13,956 15,729 ------ ------ ------ ------ INCOME FROM OPERATIONS 457 1,253 625 2,161 Net interest and other financial costs 76 42 140 84 Minority interest in income of Marathon Ashland Petroleum LLC 82 320 93 427 ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 299 891 392 1,650 Provision for income taxes 105 311 144 569 ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS 194 580 248 1,081 DISCONTINUED OPERATIONS: Loss from discontinued operations - (18) - - Costs associated with disposition of United States Steel - (10) - (12) ------ ------ ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 194 552 248 1,069 Extraordinary loss from early extinguishment of debt (26) - (26) - Cumulative effect of changes in accounting principles - - 13 (8) ------ ------ ------ ------ NET INCOME $168 $552 $235 $1,061 ====== ====== ====== ======
Included in revenues and costs and expenses for the second quarter of 2002 and 2001 were $1,083 million and $1,132 million, respectively, representing consumer excise taxes on petroleum products and merchandise. Similar amounts for the six months of 2002 and 2001 were $2,079 million and $2,170 million, respectively. The accompanying notes are an integral part of these consolidated financial statements. 3 MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF INCOME (Continued) (Unaudited) INCOME PER COMMON SHARE
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions, except per share amounts) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------- MARATHON COMMON STOCK: Income from continuing operations applicable to Common Stock $ 194 $ 580 $ 248 $ 1,081 Net income applicable to Common Stock 168 582 235 1,082 Per Share Data: Basic and diluted: - Income from continuing operations .62 1.88 .80 3.50 - Net income .54 1.88 .76 3.50 Weighted average shares, in thousands - Basic 309,807 309,101 309,689 308,928 - Diluted 310,071 309,627 309,939 309,338 STEEL STOCK: Net loss applicable to Steel Stock $ -- $ (32) $ -- $ (25) Per Share Data: Basic and diluted - Net loss -- (0.36) -- (0.28) Weighted average shares, in thousands - Basic and diluted -- 89,005 -- 88,906
See Note 4, for a description and computation of income per common share. The accompanying notes are an integral part of these consolidated financial statements. 4 MARATHON OIL CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS
June 30 December 31 (Dollars in millions) 2002 2001 - ----------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 295 $ 657 Receivables, less allowance for doubtful accounts of $5 and $4 2,074 1,708 Receivables from United States Steel 14 64 Inventories 2,077 1,851 Other current assets 190 131 ------- ------- Total current assets 4,650 4,411 Investments and long-term receivables, less allowance for doubtful accounts of $4 and $4 1,546 1,076 Receivables from United States Steel 551 551 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $10,590 and $10,384 10,152 9,552 Prepaid pensions 211 207 Goodwill 272 88 Intangibles 55 61 Other noncurrent assets 206 183 ------- ------- Total assets $17,643 $16,129 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 5 MARATHON OIL CORPORATION CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31 (Dollars in millions) 2002 2001 - ------------------------------------------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $ 47 $ - Accounts payable 2,620 2,431 Payable to United States Steel 31 28 Payroll and benefits payable 153 243 Accrued taxes 328 171 Accrued interest 108 85 Obligations to repay preferred securities - 295 Long-term debt due within one year 72 215 ------- ------- Total current liabilities 3,359 3,468 Long-term debt 4,731 3,432 Deferred income taxes 1,393 1,297 Employee benefits 720 677 Payable to United States Steel 5 8 Deferred credits and other liabilities 374 344 Minority interest in Marathon Ashland Petroleum LLC 2,062 1,963 STOCKHOLDERS' EQUITY Common stock: Common Stock issued - 312,165,978 shares at June 30, 2002 and December 31, 2001 (par value $1 per share, authorized 550,000,000 shares) 312 312 Common stock held in treasury - 2,350,011 shares at June 30, 2002 and 2,770,929 shares at December 31, 2001 (62) (74) Additional paid-in capital 3,035 3,035 Retained earnings 1,736 1,643 Accumulated other comprehensive income (8) 34 Deferred compensation (14) (10) ------- ------- Total stockholders' equity 4,999 4,940 ------- ------- Total liabilities and stockholders' equity $17,643 $16,129 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 6 MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Six Months Ended June 30 (Dollars in millions) 2002 2001 - ----------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $ 235 $ 1,061 Adjustments to reconcile to net cash provided from operating activities: Cumulative effect of changes in accounting principles (13) 8 Extraordinary loss from early extinguishment of debt 26 -- Discontinued operations -- 12 Minority interest in income of Marathon Ashland Petroleum LLC 93 427 Depreciation, depletion and amortization 602 609 Inventory market valuation credits (72) -- Exploratory dry well costs 61 6 Deferred income taxes (22) (235) Net gains on disposal of assets (11) (28) Changes in: Current receivables (326) 132 Receivable from United States Steel (4) -- Inventories (144) (140) Current accounts payable and accrued expenses 346 (206) All other - net (37) 143 ------- ------- Net cash provided from continuing operations 734 1,789 Net cash provided from discontinued operations -- 234 ------- ------- Net cash provided from operating activities 734 2,023 ------- ------- INVESTING ACTIVITIES: Capital expenditures (640) (628) Acquisition of Equatorial Guinea interests (1,160) -- Acquisition of Pennaco Energy, Inc. -- (506) Disposal of assets 31 106 Receivable from United States Steel 54 -- Restricted cash - withdrawals 30 23 - - deposits (25) (13) Investees (96) 4 All other - net (4) (29) ------- ------- Net cash used in continuing operations (1,810) (1,043) Net cash used in discontinued operations -- (122) ------- ------- Net cash used in investing activities (1,810) (1,165) ------- ------- The accompanying notes are an integral part of these consolidated financial statements. 7 MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Continued) (Unaudited)
Six Months Ended June 30 (Dollars in millions) 2002 2001 - -------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net (340) (277) Other debt - borrowings 2,095 139 - repayments (608) (132) Repayment of preferred securities (295) - Common Stock - repurchased - (1) Treasury Stock - reissued 2 3 Dividends paid - Marathon Common Stock (142) (142) - Steel Stock - (31) - Preferred Stock - (4) Distributions to minority shareholder of Marathon Ashland Petroleum LLC - (244) ------ ------ Net cash provided from (used in) financing activities 712 (689) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 2 (5) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (362) 164 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 657 559 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $295 $723 ====== ====== Cash provided from (used in) operating activities included: Interest and other financial costs paid (net of amount capitalized) $(116) $(178) Income taxes paid (25) (218)
The accompanying notes are an integral part of these consolidated financial statements. 8 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods reported. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2002 classifications. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2001 Annual Report on Form 10-K of Marathon Oil Corporation (Marathon). 2. Prior to December 31, 2001, Marathon, formerly named USX Corporation, 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. 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). 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 a $900 million 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 from discontinued operations for the periods ended June 30, 2001, represents the net income attributable to the Steel Stock, except for certain limitations on the amounts of corporate administrative expenses and interest expense (net of income tax effects) allocated to discontinued operations as required by accounting principles generally accepted in the United States. 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. 3. 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 Standard requires recognition of all derivatives as either assets or liabilities at fair value. 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 on other comprehensive income (OCI), net of a tax benefit of $4 million, was $8 million. 9 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. (Continued) Since the issuance of SFAS No. 133, the Financial Accounting Standards Board (FASB) has issued several interpretations. As a result, Marathon has recognized in income beginning on January 1, 2002, the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom. As of January 1, 2002, Marathon recognized a favorable cumulative effect of a change in accounting principle of $13 million, net of tax of $7 million. The favorable pretax change in the fair value of the gas contracts during the first six months of 2002 was $12 million. The recorded derivative assets will continue to be marked-to-market. Effective January 1, 2002, Marathon adopted the following Statements of Financial Accounting Standards: o No. 141 "Business Combinations" (SFAS No. 141), o No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142) and o No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS No.144) SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method. The transitional provisions of SFAS No. 141 required Marathon to reclassify $11 million from identifiable intangible assets to goodwill at January 1, 2002. SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. Effective January 1, 2002, Marathon ceased amortization of existing goodwill, which results in a favorable impact on annual earnings of approximately $3 million, net of tax. Marathon has completed the required transitional impairment test for existing goodwill as of the date of adoption. No impairment of goodwill was indicated. SFAS No. 144 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. For long-lived assets to be disposed of by sale, SFAS No. 144 broadens the definition of those disposals that should be reported separately as discontinued operations. The adoption of SFAS No. 144 had no initial effect on Marathon's financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standard No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). Marathon will adopt this Statement effective January 1, 2003, as required. The adoption of this Standard will result in a cumulative effect and be reported as a change in accounting principle. At this time, Marathon cannot reasonably estimate the effect of adoption on either its financial position or results of operations. 10 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 3. (Continued) In April 2002, the FASB issued Statement of Financial Accounting Standard No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145). Extinguishment of debt will be accounted for in accordance with Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 145 has a dual effective date. The provisions relating to accounting for leases were applicable to transactions occurring after May 15, 2002. The provisions relating to the early extinguishment of debt will be adopted by Marathon on January 1, 2003. As a result, losses from the early extinguishment of debt in 2002, which are currently reported as extraordinary items, will be reported in income from continuing operations in comparative financial statements subsequent to the adoption of SFAS No. 145. In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146 "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. 4. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock when applicable and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes exercise of stock options, provided the effect is not antidilutive. 11 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. (Continued)- COMPUTATION OF INCOME PER COMMON SHARE
Second Quarter Ended June 30 2002 2001 (Dollars in millions, except per share data) Basic Diluted Basic Diluted - ---------------------------------------------------------------------------------------------------------------------------- Common Stock - ------------- Income from continuing operations applicable to Common Stock $194 $194 $580 $580 Expenses included in income from continuing operations applicable to Steel Stock - - 12 12 Costs associated with disposition of United States Steel - - (10) (10) Extraordinary loss (26) (26) - - ------- ------- ------- ------- Net income applicable to Common Stock $168 $168 $582 $582 ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,807 309,807 309,101 309,101 Effect of dilutive securities - stock options - 264 - 526 ------- ------- ------- ------- Average common shares including dilutive effect 309,807 310,071 309,101 309,627 ======= ======= ======= ======= Per share: Income from continuing operations $.62 $.62 $1.88 $1.88 ======= ======= ======= ======= Extraordinary loss $(.08) $(.08) - - ======= ======= ======= ======= Net income $.54 $.54 $1.88 $1.88 ======= ======= ======= ======= Steel Stock - ----------- Loss from discontinued operations - - $(18) $(18) Expenses included in loss from continuing operations applicable to Steel Stock - - (12) (12) Preferred stock dividends - - (2) (2) ------ ------ ------ ------ Net loss applicable to Steel Stock - - $(32) $(32) ====== ====== ====== ====== Average common shares including dilutive effect (thousands) - - 89,005 89,005 ====== ====== ====== ====== Per share: Loss from discontinued operations - - $(.21) $(.21) ====== ====== ====== ====== Net loss - - $(.36) $(.36) ====== ====== ====== ======
12 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. (Continued)- COMPUTATION OF INCOME PER COMMON SHARE
Six Month Ended June 30 2002 2001 (Dollars in millions, except per share data) Basic Diluted Basic Diluted - ---------------------------------------------------------------------------------------------------------------------------- Common Stock - ------------- Income from continuing operations applicable to Common Stock $248 $248 $1,081 $1,081 Expenses included in income from continuing operations applicable to Steel Stock - - 21 21 Costs associated with disposition of United States Steel - - (12) (12) Extraordinary loss (26) (26) - - Cumulative effect of changes in accounting principles 13 13 (8) (8) ------- ------- ------- ------- Net income applicable to Common Stock $235 $235 $1,082 $1,082 ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,689 309,689 308,928 308,928 Effect of dilutive securities - stock options - 250 - 410 ------- ------- ------- ------- Average common shares including dilutive effect 309,689 309,939 308,928 309,338 ======= ======= ======= ======= Per share: Income from continuing operations $.80 $.80 $3.50 $3.50 ======= ======= ======= ======= Extraordinary loss $(.08) $(.08) - - ======= ======= ======= ======= Cumulative effect of changes in accounting principles $.04 $.04 $(.03) $(.03) ======= ======= ======= ======= Net income $.76 $.76 $3.50 $3.50 ======= ======= ======= ======= Steel Stock - ----------- Loss from discontinued operations - - $ - $ - Expenses included in loss from continuing operations applicable to Steel Stock - - (21) (21) Preferred stock dividends - - (4) (4) ------ ------ ------ ------ Net loss applicable to Steel Stock - - $(25) $(25) ====== ====== ====== ====== Average common shares including dilutive effect (thousands) - - 88,906 88,906 ====== ====== ====== ====== Per share: Loss from discontinued operations - - $ - $ - ====== ====== ====== ====== Net loss - - $(.28) $(.28) ====== ====== ====== ======
13 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. Marathon's operations consist of three operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB) - markets and transports, primarily in the United States and Europe, its own and third-party natural gas, crude oil and related products. The results of segment operations are as follows:
Total (In millions) E&P RM&T OERB Segments - --------------------------------------------------------------------------------------------------------------------------- SECOND QUARTER 2002 - ------------------- Revenues and other income: Customer $851 $6,735 $497 $8,083 Intersegment (a) 174 40 23 237 Equity in earnings of unconsolidated investees 15 15 6 36 Other (2) 9 (1) 6 ------ ------ ------ ------ Total revenues and other income $1,038 $6,799 $525 $8,362 ====== ====== ====== ====== Segment income $262 $211 $20 $493 ====== ====== ====== ====== SECOND QUARTER 2001 - ------------------ Revenues and other income: Customer $1,067 $7,535 $511 $9,113 Intersegment (a) 179 7 19 205 United States Steel (a) 5 - 3 8 Equity in earnings of unconsolidated investees 17 9 6 32 Other 8 18 4 30 ------ ------ ------ ------ Total revenues and other income $1,276 $7,569 $543 $9,388 ====== ====== ====== ====== Segment income $443 $842 $26 $1,311 ====== ====== ====== ======
(a) Management believes intersegment transactions and transactions with United States Steel were conducted under terms comparable to those with unrelated parties. 14 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Total (In millions) E&P RM&T OERB Segments - -------------------------------------------------------------------------------------------------------------------------- Six Months 2002 - --------------- Revenues and other income: Customer $1,536 $12,022 $934 $14,492 Intersegment (a) 316 59 37 412 Equity in earnings of unconsolidated investees 24 23 17 64 Other (1) 23 (1) 21 ------ ------ ------ ------ Total revenues and other income $1,875 $12,127 $987 $14,989 ====== ====== ====== ====== Segment income $427 $160 $45 $632 ====== ====== ====== ====== Six Months 2001 - --------------- Revenues and other income: Customer $2,243 $14,277 $1,200 $17,720 Intersegment (a) 359 13 45 417 United States Steel (a) 15 - 5 20 Equity in earnings of unconsolidated investees 37 15 10 62 Other 16 33 6 55 ------ ------ ------ ------ Total revenues and other income $2,670 $14,338 $1,266 $18,274 ====== ====== ====== ====== Segment income $1,043 $1,118 $34 $2,195 ====== ====== ====== ======
(a) Management believes intersegment transactions and transactions with United States Steel were conducted under terms comparable to those with unrelated parties. 15 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 5. (Continued) The following schedule reconciles segment revenues and income to amounts reported in the financial statements:
Second Quarter Ended June 30 (In millions) 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- Revenues and other income: Segment revenues and other income $8,362 $9,388 Items not allocated to segments: Gain (loss) on ownership change in MAP 2 (7) Elimination of intersegment revenues (237) (205) Elimination of sales to United States Steel - (8) ------ ------ Total revenues and other income $8,127 $9,168 ====== ====== Income: Segment income $493 $1,311 Items not allocated to segments: Administrative expenses (39) (51) Inventory market valuation credit 1 - Gain (loss) on ownership change in MAP 2 (7) ------ ------ Total income from operations $457 $1,253 ====== ====== Six Months Ended June 30 (In millions) 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------- Revenues and other income: Segment revenues and other income $14,989 $18,274 Items not allocated to segments: Gain (loss) on ownership change in MAP 4 (6) Gain on lease resolution with U.S. Government - 59 Elimination of intersegment revenues (412) (417) Elimination of sales to United States Steel - (20) ----- ----- Total revenues and other income $14,581 $17,890 ====== ====== Income: Segment income $632 $2,195 Items not allocated to segments: Administrative expenses (83) (87) Inventory market valuation credit 72 - Gain (loss) on ownership change in MAP 4 (6) Gain on lease resolution with U.S. Government - 59 ------ ------ Total income from operations $625 $2,161 ====== ======
16 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. During 2002, in two separate transactions, Marathon acquired interests in the Alba Field offshore Equatorial Guinea, West Africa, and certain other related assets. On January 3, 2002, Marathon acquired certain interests from CMS Energy Corporation for $1,005 million. Marathon acquired three entities that own a combined 52.4% working interest in the Alba Production Sharing Contract and a net 43.2% interest in an onshore liquefied petroleum gas processing plant through an equity method investee. Additionally, Marathon acquired a 45% net interest in an onshore methanol production plant through an equity method investee. Results of operations for the six months of 2002 include the results of the interests acquired from CMS Energy from January 3, 2002. On June 20, 2002, Marathon acquired 100% of the outstanding stock of Globex Energy, Inc. (Globex) for $155 million. Globex owned an additional 10.9% working interest in the Alba Production Sharing Contract and an additional net 9.0% interest in the onshore liquefied petroleum gas processing plant. Globex also held oil and gas interests offshore Australia. The allocations of purchase price are preliminary. The allocations to intangible assets are not expected to be significant. The goodwill arising from the preliminary allocations was $176 million, which was assigned to the E&P segment. Significant factors that resulted in the recognition of goodwill include: the ability to acquire an established business with an assembled workforce, a proven track record and the right to operatorship, and a strategic acquisition in a core geographic area. Additionally, the purchase price allocated to the equity method investments is $224 million higher than the underlying net assets of the investees. This excess will be amortized over the expected useful life of the underlying assets except for $35 million of goodwill relating to the equity investments. The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisitions: (In millions) ------------- Receivables $ 33 Inventories 9 Investments and long-term receivables 454 Property, plant and equipment 661 Goodwill (none deductible for income tax purposes) 176 Other assets 4 ------ Total assets acquired $1,337 ------ Current liabilities $ (30) Deferred income taxes (147) ------ Total liabilities assumed $ (177) ------ Net assets acquired $1,160 ====== 17 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. (Continued) 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 goodwill totaled $70 million. Goodwill amortization ceased upon adoption of SFAS No. 142 on January 1, 2002. Results of operations for the six months of 2001 include the results of Pennaco from February 7, 2001. The following unaudited pro forma data for Marathon includes the results of operations of the above acquisitions giving effect to them as if they had been consummated at the beginning of the periods presented. The pro forma data 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. Six Months Ended June 30 (In millions, except per share amounts) 2002 2001 --------------------------------------- Revenues and other income $14,592 $17,936 Income from continuing operations 238 1,062 Net income 225 1,040 Per share amounts applicable to Common Stock - Income from continuing operations - basic and diluted .77 3.43 - Net income - basic and diluted .73 3.46 7. During the second quarter of 2002, Marathon acquired additional interests in coalbed methane assets in the Powder River Basin of northern Wyoming and southern Montana from XTO Energy, Inc. (XTO) in exchange for certain oil and gas properties in eastern Texas and northern Louisiana. On July 1, 2002, Marathon completed this transaction by selling its production interests in the San Juan Basin of New Mexico to XTO for $42 million. Marathon will recognize a gain of $24 million in the third quarter related to this transaction. 18 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. Inventories are carried at lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last-in, first-out (LIFO) method. (In millions) ----------------------- June 30 December 31 2002 2001 ------- ----------- Crude oil and natural gas liquids $670 $693 Refined products and merchandise 1,308 1,143 Supplies and sundry items 99 87 ------ ------ Total (at cost) 2,077 1,923 Less inventory market valuation reserve - 72 ------ ------ Net inventory carrying value $2,077 $1,851 ====== ====== Marathon has established an inventory market valuation (IMV) reserve to adjust the cost basis of its inventories to current market value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. Decreases in market prices below the cost basis result in charges to income from operations. Once a reserve has been established, subsequent inventory turnover and increases in prices (up to the cost basis) result in credits to income from operations. Six months ended June 30, 2002, results of operations include a credit to income from operations of $72 million. 9. The following sets forth Marathon's comprehensive income for the periods shown:
Second Quarter Six Months Ended Ended June 30 June 30 (In millions) 2002 2001 2002 2001 ------------- ------ ------ ------ ------ Net income $168 $552 $235 $1,061 Other comprehensive income (loss), net of tax Foreign currency translation adjustments (2) - (3) (2) Deferred gains (losses) on derivative instruments (8) 8 (39) 42 Pensions - 2 - 2 ------ ------ ------ ------ Total comprehensive income $158 $562 $193 $1,103 ====== ====== ====== ======
During the second quarter of 2002, $9 million of gains, net of tax, were reclassified into earnings as a result of the discontinuance of cash flow hedges because it is no longer probable the original forecasted transactions will occur. 19 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 10. The provision for income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. The first six months of 2002 and 2001 tax provision amounts include a foreign deferred tax benefit of $1 million and $9 million, respectively, related to reductions in the statutory rate enacted in the Canadian province of Alberta. Also, in the first six months of 2002 and 2001, the provision for income taxes includes unfavorable adjustments of $4 million and $5 million, respectively, related to prior years' taxes. Interest and other financial costs in the six months of 2001 included a favorable adjustment of $9 million related to certain prior years' taxes. 11. At June 30, 2002, Marathon had no borrowings against its $1,354 million long-term revolving credit facility and no borrowings against its $451 million short-term revolving credit facility. In April 2002, Marathon initiated a $1,350 million U.S. commercial paper program which is backed by the long-term revolving credit facility of which $135 million was outstanding at June 30, 2002. Certain banks provide Marathon with uncommitted short-term lines of credit totaling $200 million. At June 30, 2002, there were no borrowings against these facilities. At June 30, 2002, MAP had no borrowings against its $450 million revolving credit agreements with banks and had $47 million outstanding against its $190 million revolving credit agreement with Ashland, Inc., which was amended and extended for one year to March 15, 2003. At June 30, 2002, in the event of a change in control of Marathon, debt obligations totaling $2,438 million and operating lease obligations of $100 million may be declared immediately due and payable. In such event, Marathon may also be required to either repurchase the leased Fairfield slab caster for $96 million or provide a letter of credit to secure the remaining obligation. 12. In early June 2002, Marathon Global Funding Corporation, a 100%-owned consolidated finance subsidiary of Marathon, issued notes of $400 million due 2012, bearing interest at 6.000%. Marathon has fully and unconditionally guaranteed the securities. Marathon used the net proceeds to reduce outstanding commercial paper, to fund the purchase price and associated costs of the June 2002 acquisition of Globex Energy, Inc. for approximately $155 million and for other general corporate purposes. In late May 2002, Marathon issued notes of $450 million due 2007, bearing interest at 5.375%. Marathon used the net proceeds to improve the debt portfolio by refinancing existing debt, including approximately $337 million aggregate principal amount of debt Marathon agreed to repurchase or retire early. The debt repurchased and retired early had average terms to maturity of between two and 21 years bearing interest at rates ranging from 8.125% to 9.375% per year, or a weighted average of 9.04% per year. The retirement of $193 million in the second quarter resulted in a pre-tax extraordinary loss of $41 million ($26 million net of taxes or $0.08 per share). The remaining net proceeds were used to reduce outstanding commercial paper issued to fund working capital requirements and for other general corporate purposes. 20 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 12. (Continued) In early March 2002, Marathon issued notes of $450 million due 2012 and $550 million due 2032, bearing interest at 6.125% and 6.8%, 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. 13. 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 the 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. 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 June 30, 2002 and December 31, 2001, accrued liabilities for remediation totaled $74 million and $77 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $57 million at June 30, 2002, and $60 million at December 31, 2001. 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 the six months of 2002 and for the years 2001 and 2000, such capital expenditures totaled $17 million, $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. At June 30, 2002 and December 31, 2001, accrued liabilities for platform abandonment and dismantlement totaled $212 million and $193 million, respectively. Marathon guaranteed certain obligations related to the business of United States Steel. As of June 30, 2002 and December 31, 2001, the exposure for all of these matters totaled $22 million and $28 million, respectively. 21 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 13. (Continued) 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. United States Steel currently has no unpaid outstanding obligations to the limited partners. At June 30, 2002, and December 31, 2001, Marathon's pro rata share of obligations of LOOP LLC and various pipeline investees secured by throughput and deficiency agreements totaled $167 million and $168 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 June 30, 2002, and December 31, 2001, MAP had guaranteed the repayment of $47 million and $35 million, respectively of the outstanding balance of Centennial Pipeline LLC's Master Shelf Agreement. At June 30, 2002, and December 31, 2001, Marathon's contract commitments to acquire property, plant and equipment and long-term investments totaled $500 million and $297 million, respectively. 22 MARATHON OIL CORPORATION AND SUBSIDIARY COMPANIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Marathon Oil Corporation (Marathon), formerly USX Corporation, 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; and other energy related businesses. Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements. The discussion of the Consolidated Statement of Income should be read in conjunction with the Supplemental Statistics provided on page 43. 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. On December 31, 2001, Marathon disposed of its steel business by distributing 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). Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting Marathon. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of Marathon, see the information preceding Part I in the Marathon 2001 Form 10-K and subsequent filings. New Accounting Standards Since the issuance of Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), the FASB has issued several interpretations. As a result, Marathon has recognized in income beginning on January 1, 2002, the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom (U.K.). As of January 1, 2002, Marathon recognized a favorable cumulative effect of a change in accounting principle of $13 million, net of tax of $7 million. The favorable pretax change in the fair value of the gas contracts during the first six months of 2002 was $12 million. The recorded derivative assets will continue to be marked-to-market. Marathon expects to experience some volatility in earnings as a result of these interpretations. Effective January 1, 2002, Marathon adopted the following Statements of Financial Accounting Standards: o No. 141 "Business Combinations" (SFAS No. 141), o No. 142 "Goodwill and Other Intangible Assets" (SFAS No. 142) and o No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). 23 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method. The transitional provisions of SFAS No. 141 required Marathon to reclassify $11 million from identifiable intangible assets to goodwill at January 1, 2002. SFAS No. 142 addresses the accounting for goodwill and other intangible assets after an acquisition. Effective January 1, 2002, Marathon ceased amortization of all goodwill, which results in a favorable impact on annual earnings of approximately $3 million, net of tax. Marathon has completed the required transitional impairment test for existing goodwill as of the date of adoption. No impairment of goodwill was indicated. SFAS No. 144 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. For long-lived assets to be disposed of by sale, SFAS No. 144 broadens the definition of those disposals that should be reported separately as discontinued operations. The adoption of SFAS No. 144 had no initial effect on Marathon's financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standard No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). Marathon will adopt this Statement effective January 1, 2003, as required. The adoption of this Standard will result in a cumulative effect and be reported as a change in accounting principle. At this time, Marathon cannot reasonably estimate the effect of adoption on either its financial position or results of operations. In April 2002, the FASB issued Statement of Financial Accounting Standard No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145). Extinguishment of debt will be accounted for in accordance with Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 145 has a dual effective date. The provisions relating to accounting for leases were applicable to transactions occurring after May 15, 2002. The provisions relating to the early extinguishment of debt will be adopted by Marathon on January 1, 2003. As a result, losses from the early extinguishment of debt in 2002, which are currently reported as extraordinary items, will be reported in income from continuing operations in comparative financial statements subsequent to the adoption of SFAS No. 145. In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146 "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. 24 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Revenues and other income for the second quarter and first six months of 2002 and 2001 are summarized in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------- Exploration & production $1,038 $1,276 $1,875 $2,670 Refining, marketing & transportation 6,799 7,569 12,127 14,338 Other energy related businesses 525 543 987 1,266 ------ ------ ------ ------ Segment revenues and other income 8,362 9,388 14,989 18,274 Revenues and other income not allocated to segments: Gain (loss) on ownership change in MAP 2 (7) 4 (6) Gain on lease resolution with the U.S. Government - - - 59 Elimination of intersegment revenues (237) (205) (412) (417) Elimination of sales to United States Steel - (8) - (20) ----- ----- ------ ------ Total revenues and other income $8,127 $9,168 $14,581 $17,890 ====== ====== ====== ====== Items included in both revenues and costs and expenses, resulting in no effect on income: Consumer excise taxes on petroleum products and merchandise $1,083 $1,132 $2,079 $2,170 Matching crude oil, gas and refined product buy/sell transactions settled in cash: E&P 77 127 149 233 RM&T 1,056 904 1,889 1,897 ------ ------ ------ ------ Total buy/sell transactions $1,133 $1,031 $2,038 $2,130 ====== ====== ====== ======
E&P segment revenues decreased by $238 million in the second quarter of 2002 from the comparable prior-year period. For the first six months of 2002, revenues decreased by $795 million from the prior-year period. The decrease in both periods primarily reflected lower worldwide natural gas and liquid hydrocarbon prices and lower gains from derivative activities, partially offset by higher international liquid hydrocarbon volumes and higher domestic liquid hydrocarbon prices in the second quarter of 2002. 25 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RM&T segment revenues decreased by $770 million in the second quarter of 2002 from the comparable prior-year period. For the first six months of 2002, revenues decreased by $2,211 million from the prior-year period. The decrease in both periods primarily reflected lower refined product prices. OERB revenues decreased by $18 million in the second quarter of 2002 from the comparable prior-year period. For the first six months of 2002, revenues decreased by $279 million from the prior-year period. The decrease in the first six months primarily reflected lower natural gas prices. Income from operations for the second quarter and first six months of 2002 and 2001 is summarized in the following table:
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------- E&P Domestic $189 $358 $271 $800 International 73 85 156 243 ------ ------ ------ ------ E&P segment income 262 443 427 1,043 RM&T 211 842 160 1,118 OERB 20 26 45 34 ------ ------ ------ ------ Segment income 493 1,311 632 2,195 Items not allocated to segments: Administrative expenses (39) (51) (83) (87) Inventory Market Valuation 1 - 72 - Gain (loss) on ownership change - MAP 2 (7) 4 (6) Gain on lease resolution with U.S. Government - - - 59 ------ ------ ------ ------ Total income from operations $457 $1,253 $625 $2,161 ====== ====== ====== ======
In the second quarter of 2002 segment income decreased by $818 million from last year's second quarter. Segment income in the first six months of 2002 decreased by $1,563 million from the first six months of 2001. The decrease in both periods was due primarily to lower worldwide natural gas and liquid hydrocarbon prices, lower refined product margins and lower worldwide natural gas volumes. This was partially offset by higher liquid hydrocarbon volumes. Worldwide E&P segment income in the second quarter of 2002 decreased by $181 million from last year's second quarter, primarily due to the factors discussed below. Domestic E&P income in the second quarter of 2002 decreased by $169 million from last year's second quarter. Results in the first six months of 2002 decreased by $529 million from the same period in 2001. These decreases were mainly due to lower natural gas prices, lower liquid hydrocarbon and natural gas volumes, partially offset by slightly higher liquid hydrocarbon prices in the second quarter. Other factors included higher exploratory dry well expense and decreases in derivative gains, partially offset by lower production taxes. 26 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS International E&P income in the second quarter of 2002 decreased by $12 million from last year's second quarter. Results in the first six months of 2002 decreased by $87 million from the same period in 2001. These decreases were mainly due to lower natural gas and liquid hydrocarbon prices and higher depreciation expense. This was partially offset by higher liquid hydrocarbon volumes. The higher volumes and depreciation expense largely resulted from a second quarter 2002 U.K. overlift versus a second quarter 2001 underlift. In addition, the first six months of 2002 income includes a $12 million gain related to changes in the fair value of natural gas sales contracts in the U.K. See Note 3 to the Consolidated Financial Statements. RM&T segment income in the second quarter of 2002 decreased by $631 million from last year's second quarter. Results in the first six months of 2002 decreased by $958 million from the same period in 2001. The decrease in downstream segment income was primarily due to a significantly lower refining and wholesale marketing gross margin. The refining and wholesale marketing gross margin was severely compressed in the first six months of 2002 as refined product prices declined more quickly than crude oil and other raw material costs. A narrowing of the price differential between sweet and sour crude oil in the first six months of 2002 also negatively impacted the refining and wholesale marketing gross margin. OERB segment income in the second quarter of 2002 decreased by $6 million from last year's second quarter. Results in the first six months of 2002 increased by $11 million from the same period in 2001. This decrease in the second quarter was primarily due to a loss at the newly acquired AMPCO Methanol Plant in Equatorial Guinea, in which Marathon holds a 45-percent interest. An unplanned 62-day shutdown occurred during the second quarter. Also, earnings from Marathon's equity investments in various pipelines decreased from the same period in the prior year. The increase for the six months was primarily the net result of marked-to-market valuation changes in derivatives used to support gas marketing margins. Net interest and other financial costs for the second quarter and the first six months of 2002 increased $34 million and $56 million, respectively, from the comparable 2001 period. These increases were due to higher average debt levels resulting from acquisitions and the Separation. Also, in the first six months of 2001, interest and other financial costs included a favorable adjustment of $9 million related to prior year taxes. The minority interest in income of MAP, which represents Ashland's 38 percent ownership interest, decreased $238 million and $334 million in the second quarter and the first six months of 2002, respectively, from the comparable 2001 periods, due to lower RM&T segment income as discussed above. The provision for income taxes in the second quarter and the first six months of 2002 decreased by $206 million and $425 million from the comparable 2001 period primarily due to a decrease in income before income taxes. The first six months of 2002 and 2001 tax provision amounts include a foreign deferred tax benefit of $1 million and $9 million, respectively related to reductions in the statutory rate enacted in the Canadian province of Alberta. Also, in the first six months of 2002 and 2001, the provision for income taxes includes unfavorable adjustments of $4 million and $5 million, respectively, related to prior years' taxes. 27 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Discontinued operations in the first six months 2001 related to the businesses of United States Steel. Extraordinary loss from early extinguishment of debt in the second quarter 2002 was attributable to the $193 million of long-term debt retired, resulting in a pre-tax extraordinary loss of $41 million ($26 million net of taxes or $.08 per share). In July 2002, Marathon retired an additional $144 million, resulting in a pre-tax extraordinary loss of $12 million ($7 million net of taxes) which will be recognized in the third quarter. The cumulative effect of changes in accounting principles of $13 million, net of a tax provision of $7 million in the first six months of 2002 represents the adoption of recently issued interpretations by the FASB of SFAS No. 133 in which Marathon must recognize in income the effect of changes in the fair value of two long term natural gas contracts in the United Kingdom. The $8 million loss, net of a tax benefit of $5 million, in the first six months of 2001 was an unfavorable transition adjustment related to the adoption of SFAS No. 133. For further discussion, see Note 3 to the Consolidated Financial Statements. Net income for the second quarter and first six months decreased by $384 million and $826 million, respectively, in 2002 from 2001, primarily reflecting the factors discussed above. Dividends to Stockholders On July 31, 2002, the Marathon Board of Directors (the Board) declared dividends of 23 cents per share, payable September 10, 2002, to stockholders of record at the close of business on August 21, 2002. Cash Flows Net cash provided from operating activities was $734 million in the first six months of 2002, compared with $1,789 million (from continuing operations) in the first six months of 2001. The $1,055 million decrease mainly reflects the effects of lower refined product margins and lower prices for natural gas and liquid hydrocarbons. Capital expenditures in the first six months of 2002 totaled $640 million excluding the acquisitions of Equatorial Guinea interests, compared with $628 million in the first six months of 2001. The $12 million increase mainly reflected increased spending in the first six months of 2002 in the E&P segment offset by decreased spending in the RM&T segment. For information regarding capital expenditures by segment, refer to the Supplemental Statistics on page 43. Acquisitions included cash payments of $1,160 million in the first six months of 2002 for the two acquisitions of Equatorial Guinea interests and $506 million in the first six months of 2001 for Pennaco Energy, Inc. (Pennaco). For further discussion of acquisitions, see Note 6 to the Consolidated Financial Statements. 28 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash from disposal of assets was $31 million in the first six months of 2002, compared with $106 million in the first six months of 2001. In 2002 proceeds were primarily from the disposition of certain Speedway SuperAmerica LLC (SSA) stores. Proceeds in 2001 were mainly from the sale of various Canadian oil fields, various domestic producing properties and certain SSA stores. Net cash provided from financing activities was $712 million in the first six months of 2002, compared with net cash used of $689 million in the first six months 2001. The increase was due to the financing primarily associated with the two acquisitions of Equatorial Guinea interests of approximately $1.2 billion. This was partially offset by the early extinguishment of debt of $193 million and the $295 million repayment of preferred securities which became redeemable or were converted to a right to receive cash upon the Separation. 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. Significant non-cash activities in the first six months of 2002 included an asset exchange with XTO Energy Inc. (XTO) whereby Marathon acquired additional interests in coalbed methane assets in the Powder River Basin of northern Wyoming and southern Montana in exchange for certain oil and gas properties in eastern Texas and northern Louisiana. This exchange was part of a larger transaction with XTO completed in the third quarter. Derivative Instruments See Quantitative and Qualitative Disclosure About Market Risk for discussion of derivative instruments and associated market risk. Debt Ratings Marathon's senior unsecured 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. Liquidity 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. 29 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Marathon has a committed $1,354 million long-term revolving credit facility and a committed $451 million 364-day revolving credit facility. At June 30, 2002, there were no borrowings against these facilities. In April 2002, Marathon initiated a $1,350 million U.S. commercial paper program which is backed by the long-term revolving credit facility of which $135 million was outstanding at June 30, 2002. Additionally, at June 30, 2002, Marathon had other uncommitted short-term lines of credit totaling $200 million, of which no amounts were drawn. MAP currently has a committed $350 million revolving credit facility. MAP had an additional committed $100 million 364-day revolving credit facility which expired in July 2002. As of June 30, 2002, MAP did not have any borrowings against these facilities and had $47 million outstanding under its $190 million revolving credit agreement with Ashland. In early June 2002, Marathon Global Funding Corporation, a 100%-owned consolidated finance subsidiary of Marathon, issued notes of $400 million due 2012, bearing interest at 6.0%. Marathon has fully and unconditionally guaranteed the securities. Marathon used the net proceeds to reduce outstanding commercial paper, to fund the purchase price and associated costs of the June 2002 acquisition of Globex Energy, Inc. for approximately $155 million and for other general corporate purposes. In late May 2002, Marathon issued notes of $450 million due 2007, bearing interest at 5.375%. Marathon used the net proceeds to improve the debt portfolio by refinancing existing debt, including approximately $337 million aggregate principal amount of debt Marathon agreed to repurchase or retire early. The debt repurchased and retired early had average terms to maturity of between two and 21 years bearing interest at rates ranging from 8.125% to 9.375% per year, or a weighted average of 9.04% per year. The retirement of $193 million in the second quarter resulted in a pre-tax extraordinary loss of $41 million ($26 million net of taxes or $0.08 per share). In July 2002, Marathon retired an additional $144 million, resulting in a pre-tax extraordinary loss of $12 million ($7 million net of taxes) which will be recognized in the third quarter. The remaining net proceeds were used to reduce outstanding commercial paper issued to fund working capital requirements and for other general corporate purposes. In early March 2002, Marathon issued notes of $450 million due 2012 and $550 million due 2032, bearing interest at 6.125% and 6.8%, 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. 30 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. For additional details of off-balance sheet arrangements, see Liquidity and Capital Resources on page 38 of the Annual Report on Form 10-K. Contract commitments for property, plant and equipment acquisitions and long-term investments at June 30, 2002, totaled $500 million compared with $297 million at December 31, 2001. In April 2002, Marathon cancelled its common stock repurchase program and reinstated its dividend reinvestment program and direct stock purchase plan for first-time, non-employee purchasers of Marathon common stock. Since the stock repurchase program was authorized, Marathon acquired 3,976,800 shares of common stock at a cost of $106 million as Marathon's financial condition and market conditions warranted. 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 changes, 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. 31 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Obligations Associated with the Separation of United States Steel Marathon remains obligated (primarily or contingently) for certain debt and other financial arrangements for which United States Steel has assumed responsibility for repayment under the terms of the Separation. In the event of United States Steel's failure to satisfy these obligations, Marathon would become responsible for repayment. As of June 30, 2002, Marathon has identified the following obligations totaling $691 million which have been assumed by United States Steel: o $470 million of industrial revenue bonds related to environmental improvement projects for current and former United States Steel facilities, with maturities ranging from 2009 through 2033. Accrued interest payable on these bonds was $6 million at June 30, 2002. o $84 million of sale-leaseback financing under a lease for equipment at United States Steel's Fairfield Works, with a term extending to 2012, subject to extensions. Accrued interest payable on this financing was $5 million at June 30, 2002. o $104 million of operating lease obligations, of which $89 million was in turn assumed by purchasers of major equipment used in plants and operations divested by United States Steel. o A guarantee of United States Steel's $22 million contingent obligation to repay certain distributions from its 50%-owned joint venture PRO-TEC Coating Company. o A guarantee of all obligations of United States Steel as general partner of Clairton 1314B Partnership, L.P. to the limited partners. United States Steel currently has no unpaid outstanding obligations to the limited partners. For further discussion of the Clairton 1314B guarantee, see Note 13 to the Consolidated Financial Statements. Of the total $691 million, obligations of $565 million and corresponding receivables from United States Steel were recorded on Marathon's consolidated balance sheet (current portion - $14 million; long-term portion - $551 million). The remaining $126 million was related to off-balance sheet arrangements and contingent liabilities of United States Steel. Each of Marathon and United States Steel, as members of the same consolidated tax reporting group during taxable periods ended on or prior to December 31, 2001, is jointly and severally liable for the federal income tax liability of the entire consolidated tax reporting group for those periods. Marathon and United States Steel have entered into a tax sharing agreement which allocates tax liabilities relating to taxable periods ended on or prior to December 31, 2001. To address the possibility that the taxing authorities may seek to collect a tax liability from one party where the tax sharing agreement allocates that liability to the other party, the agreement includes indemnification provisions. United States Steel currently has no unpaid outstanding obligations to Marathon under the tax sharing agreement. United States Steel reported in its Form 10-Q for the quarterly period ended June 30, 2002, that it has significant restrictive covenants related to its indebtedness including cross-default and cross-acceleration clauses on selected debt which could have an adverse effect on its financial position and liquidity. However, United States Steel management believes that its liquidity will be adequate to satisfy its obligations for the foreseeable future. If there is a prolonged delay in the recovery of the manufacturing sector of the U.S. economy, United States Steel believes that it can maintain adequate liquidity through a combination of deferral of nonessential capital spending, sale of non-strategic assets and other cash conservation measures. 32 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Environmental Matters, Contingencies and Commitments 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 or the marine transportation of crude oil and refined products. Marathon has been notified that it is a potentially responsible party (PRP) at 12 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) as of June 30, 2002. 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 113 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 13 to the Consolidated 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 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. 33 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Environmental Matters, Contingencies and Commitments - (Continued) 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 13 to the Consolidated 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 and Results of Operations - Liquidity". Credit Risk Marathon is exposed to credit risk in the form of possible nonpayment by customers and trading partners. A significant portion of this risk is concentrated in energy related businesses. The creditworthiness of customers and trading partners is subject to continuing review. When deemed appropriate, Marathon requires prepayment or letters of credit to secure credit exposure. Additionally, netting agreements are utilized to reduce exposures to firms with both receivables and payables. Marathon has in the past and continues to conduct business with the so-called "energy merchant" firms. Many of these firms have seen their credit ratings deteriorate during 2002. As a result, Marathon has reduced its exposure to these entities. In some cases security has been requested and, in other cases, all business activity has been stopped. Marathon estimates its aggregate net exposure to energy merchant companies to be less than $25 million with no individual company exposure greater than $10 million. Marathon has significant exposures to United States Steel arising from the separation. Those exposures are discussed in "Obligations Associated with the Separation of United States Steel". Outlook The outlook regarding Marathon's E&P segment 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 regions. 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 420,000 barrels of oil equivalent per day, split evenly between liquid hydrocarbons and natural gas, including Marathon's proportionate share of equity investee's production. Through the projects undertaken during the past 18 months, Marathon anticipates increasing production to an approximate range of 430,000 to 435,000 boepd by 2004 and expects to increase proven reserves by approximately 40 percent from 2001 to 2004, which equates to an average 190-percent reserve replacement per year. In 2002, Marathon plans to drill, or complete drilling operations on, two or three deepwater wells in the Gulf of Mexico. 34 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Outlook - (Continued) Other major upstream projects, which are currently underway or under evaluation, include: o Norway, where Marathon has interests in nine licenses in the Norwegian sector of the North Sea; o Alaska, where Marathon had a natural gas discovery on the Ninilchik Unit on the Kenai Peninsula with additional drilling planned in 2002; o Angola, where Marathon is participating in the drilling of one exploration well and expects to participate in the drilling of up to two additional exploration wells during 2002; o Eastern Canada, where Marathon has recently completed drilling the Annapolis well; and o Equatorial Guinea, where expansion plans to boost gas and condensate production from 250 to approximately 800 mmcfd and increase condensate production such that condensate and LPG exports total approximately 50,000 gross blpd by the third quarter of 2003. Marathon recently acquired an additional 125 mmcfd of long term gas transportation capacity out of the Rocky Mountain region into midcontinent gas market hubs. The acquisition of this additional firm transportation provides protection against lower local price differentials. Marathon has 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. Additionally, a 1,000 megawatt natural gas-fired power generation plant would be constructed on the site. Completion and potential start-up is projected for 2005. In the North Sea, the Symphony natural gas pipeline project, another key component of Marathon's integrated gas strategy, currently is conducting an open season for prospective shippers on this pipeline that is designed to transport gas from the UK and Norwegian North Sea to southern England. Based upon input from prospective shippers, Marathon is considering increasing the design capacity of the pipeline beyond the 1 billion cubic feet per day originally announced. Marathon estimates the pipeline could begin operations in 2005, assuming timely regulatory approval by applicable U.K., Norwegian and European regulatory officials, satisfactory supply commitments and financing arrangements. Marathon recently received the U.K. Department of Trade and Industry's approval of the development plan for the Braemar Field and the Brae-Miller Link Line in the UK North Sea. Braemar is a gas and condensate reservoir located in the Central North Sea some 189 miles northeast of Aberdeen in approximately 413 feet of water. Gas and condensate will be produced from a single subsea wellhead and transported in an insulated pipe-in-pipe flowline to the Marathon-operated East Brae platform 7 miles away where the gas and liquids will be processed. Liquids will be delivered from East Brae to the Forties pipeline system for transportation onshore. First production is expected in the fourth quarter of 2003 at an initial rate of approximately 46 mmcfd and 4,000 barrels of condensate. 35 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Outlook - (Continued) In July 2002, the United Kingdom enacted a supplementary 10 percent tax on profits from North Sea oil and gas production retroactively effective to April 17, 2002. Marathon has approximately 19 percent of current year production originating from the U.K. It is anticipated that the U.K. tax law change will add approximately 2 percentage points to Marathon's effective tax rate beginning in the third quarter, excluding a one-time non-cash deferred tax adjustment. The non-cash deferred tax adjustment to be recognized in third quarter 2002 results is expected to increase the consolidated tax provision by approximately $60 million to $65 million. On August 6, 2002, Marathon announced it will begin expensing the fair value of employee stock options on January 1, 2003. Marathon will adopt Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123). Under this methodology, stock options will be valued by using an option-pricing model, which expenses stock option grants over the vesting period. Currently, Marathon accounts for stock options using the principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Based upon this change, and assuming the number of stock options granted in 2003 approximates the number of those granted in 2002, the estimated impact on Marathon's 2003 earnings would not be materially different than under APB No. 25. On August 13, 2002, Marathon announced a gas discovery at the Annapolis G-24 deepwater exploratory well offshore Nova Scotia. The Annapolis G-24 well is located 215 miles south of Halifax in 5,500 feet of water. The well encountered approximately 100 feet of net gas pay over several zones. The well will be temporarily abandoned, allowing for re-entry at a later date. Marathon holds a 30 percent interest in the Annapolis prospect and serves as operator. The above discussion includes forward-looking statements with respect to the timing and levels of Marathon's worldwide liquid hydrocarbon and natural gas production, the exploration drilling program, and the planned construction of LNG and pipeline facilities. 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, pricing, supply and demand for petroleum products, amount of capital available for exploration and development, occurrence of 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. 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. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. 36 MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Outlook - (Continued) Marathon's RM&T segment 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 countercyclical 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 that 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 low sulfur gasoline compliance investments at the refinery. The project is expected to be completed in 2004. 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 June 2002, ORPL had secured all of the rights-of-way required to build the pipeline, and on August 2, 2002, the final permits required to build the pipeline were approved. Construction is currently planned for the second half of 2002, with start-up of the pipeline expected to follow in the first half of 2003. The above discussion includes forward-looking statements with respect to the Catlettsburg refinery and the Cardinal Products Pipe Line system. Some factors that 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, unforeseen hazards such as weather conditions and regulatory approval constraints. A factor that could impact the Cardinal Products Pipe Line is completion of construction. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. 37 MARATHON OIL CORPORATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management Opinion Concerning Derivative Instruments Management has authorized the use of futures, forwards, swaps and options to manage exposure to market fluctuations related to commodities, interest rates, and foreign currency. Marathon uses commodity-based derivatives to manage price risk 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 on petroleum feedstocks used as raw materials. When it is deemed to be advantageous, E&P segment may lock-in market prices on portions of its production. Marathon's RM&T segment generally uses derivative commodity instruments to mitigate the price risk associated with crude oil and other feedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. 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. As market conditions change, Marathon evaluates its risk management program and could enter into strategies that assume market risk whereby cash settlement of commodity-based derivatives will be based on market prices. From time to time Marathon enters into financial instrument hedging activities involving the economic hedging of interest rate exposures. As derivative positions are entered into, assessments are made as to the qualification of each transaction for hedge accounting under SFAS No. 133. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose Marathon to material risk. However, the use of derivative instruments could materially affect Marathon's results of operations in particular quarterly or annual periods. Management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. Commodity Price Risk and Related Risks Marathon's strategy has generally been to obtain competitive prices for its products and allow operating results to reflect market price movements dictated by supply and demand. As part of achieving Marathon's strategy, certain fixed-priced physical contracts are hedged using derivative instruments that assume market risk. Marathon will use a variety of derivative instruments, including option combinations, as part of the overall risk management program to manage commodity price risk within its different businesses. 38 MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Commodity Price Risk and Related Risks - (Continued) Sensitivity analysis of the incremental effects on pretax income of hypothetical 10 percent and 25 percent changes in commodity prices for open derivative commodity instruments are provided in the following table(a): Incremental Decrease in Income Before Income Taxes Assuming a Hypothetical Price Change of:(a) (Dollars in millions) 10% 25% - ----------------------------------------------------------------------------- Derivative Commodity Instruments(b)(c) Crude oil(d) $ 1.7(e) $40.6(e) Natural gas(d) 22.3(e) 68.1(e) Refined products(d) 2.5(e) 8.5(e) (a) Amounts adjusted to reflect Marathon's 62 percent ownership of MAP. 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 analysis. Amounts reflect hypothetical 10% and 25% changes in closing commodity prices for each open contract position at June 30, 2002. Marathon management evaluates its 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 creditworthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical. Changes to the portfolio subsequent to June 30, 2002, would cause future pretax income effects to differ from those presented in the table. (b) Net open contracts for the combined E&P and OERB segments varied throughout second quarter 2002, from a low of 29,614 contracts at April 26, to a high of 39,867 contracts at June 14, and averaged 34,694 for the quarter. The number of net open contracts for the RM&T segment varied throughout second quarter 2002, from a low of 26 contracts at June 14, to a high of 5,022 contracts at April 29, and averaged 2,099 for the quarter. The net open contracts represent 100% of MAP's positions. The derivative commodity instruments used and hedging positions taken will vary and, 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. 39 MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Commodity Price Risk and Related Risks - (Continued) E&P Segment Marathon uses derivative instruments in its E&P segment to mitigate the price risk associated with equity production of crude oil and natural gas. As of June 30, 2002, Marathon has hedged approximately 29% of its remaining 2002 worldwide equity liquids production through the use of zero-cost collar options. These collars have been structured so that on average Marathon will receive the following: o When prices are below $19.34, market price plus $4 per barrel; o $23.34 when prices are between $19.34 and $23.34; o Market price when prices are between $23.34 and $29.35; and o No participation in market price movements above $29.35. The above-mentioned strategy is being marked-to-market and is reflected in income for the period. As of June 30, 2002, Marathon has hedged approximately 29% of its remaining 2002 worldwide equity natural gas production. Different hedging strategies have been employed including the use of zero-cost collar options. In one of the more significant hedges, Marathon has hedged 169 MMCFD at an average of $4.33 per MCF for the balance of 2002 relating to the Powder River Basin area. A portion of the above-mentioned strategy is being marked-to-market and is reflected in income for the period. The balance qualifies for hedge accounting under SFAS 133. Marathon has also entered into a zero-cost collar on 200 MMCFD through December 2002, whereby Marathon will receive up to $4.48 per MCF but no less than $3.19 per MCF. The above-mentioned strategy is being marked-to-market and is reflected in income for the period. Additionally, Marathon has also entered into zero-cost collars on 145 MMCFD January through December 2003, whereby Marathon will receive up to an average $4.64 per MCF but no less than an average $3.64 per MCF. Total net pretax derivative gains for the E&P segment were $47 million and $45 million for the first six months of 2002 and 2001, respectively. Gains from trading activity of $13 million for the first six months of 2002 are included in the aforementioned amounts. These trading gains primarily result from the discontinuance of cash flow hedges because it is no longer probable the original forecasted transactions will occur. RM&T Segment Total net pretax derivative losses, net of the 38 percent minority interest in MAP, were $29 million for the first six months 2002 compared with gains of $42 million for the first six months 2001. RM&T's trading activity gains and losses were not significant for the first six months 2002 and 2001. OERB Segment 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 generally will use derivative instruments to assume market risk on these contracts. In addition, Marathon uses fixed-price physical contracts for portions of its purchase for resale volumes to manage exposure to fluctuations in natural gas prices. Total net pretax derivative losses were $3 million and $30 million for the first six months of 2002 and 2001, respectively. 40 MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Other Commodity Related Risks 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. 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 Sensitivity analysis of the incremental effects on the change in fair value assuming a hypothetical 10 percent change in interest rates is provided in the following table: Incremental (Dollars in millions) Fair Increase in Value(c) Fair Value(a) - --------------------------------------------------------------------------- Financial liabilities: Long-term debt(b) $4,995 $207 (a) For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of Marathon's long-term debt at June 30, 2002 (b) Includes amounts due within one year. (c) Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. At June 30, 2002, 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 $207 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. 41 MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk - (Continued) During the first six months of 2002, Marathon entered into U.S. Treasury Rate lock agreements to hedge pending issuances of new debt. The U.S. Treasury Rate lock agreements, which were designated and effective as cash flow hedges, were settled for a net of $14 million concurrent with the issuance of the new debt. The $9 million, net of tax, unrecognized loss is being reclassified from accumulated other comprehensive loss to interest expense over the life of the new debt. Foreign Currency Exchange Rate Risk As of June 30, 2002, the discussion of foreign currency exchange rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in Marathon's 2001 Form 10-K. 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 and demand for crude oil, natural gas, and refined products. 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. 42 MARATHON OIL CORPORATION SUPPLEMENTAL STATISTICS (Unaudited)
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS Exploration & Production United States $189 $358 $271 $800 International 73 85 156 243 ----- ----- ----- ----- E&P Segment Income 262 443 427 1,043 Refining, Marketing & Transportation(a) 211 842 160 1,118 Other Energy Related Businesses(b) 20 26 45 34 ----- ----- ----- ----- Segment Income $493 $1,311 $632 $2,195 Items Not Allocated To Segments: Administrative Expenses (39) (51) (83) (87) Inventory Market Valuation Credit 1 - 72 - Gain on lease resolution with U.S. Government - - - 59 Gain (Loss) on Ownership Change - MAP 2 (7) 4 (6) ------ ------ ------ ------ Income From Operations $457 $1,253 $625 $2,161 CAPITAL EXPENDITURES Exploration & Production $220 $217 $438 $374 Refining, Marketing & Transportation 113 115 182 212 Other(c) 15 20 20 42 ----- ----- ----- ----- Total $348 $352 $640 $628 EXPLORATION EXPENSE United States $32 $12 $81 $25 International 12 14 20 24 ----- ----- ----- ----- Total $44 $26 $101 $49 OPERATING STATISTICS Net Liquid Hydrocarbon Production(d) United States 119.0 126.3 120.5 125.4 U.S. Equity Investee (MKM) 8.3 9.4 8.6 9.8 ------ ------ ------ ------ Total United States 127.3 135.7 129.1 135.2 Europe 68.3 34.7 56.9 44.2 Other International 4.5 13.1 4.3 13.9 West Africa 22.7 19.1 24.1 19.3 International Equity Investee (CLAM) - .1 - .1 Total International 95.5 67.0 85.3 77.5 ------ ------ ------ ------ Worldwide 222.8 202.7 214.4 212.7 Net Natural Gas Production(e)(f) United States 734.4 773.7 760.3 781.3 Europe 321.0 319.6 328.3 332.5 Other International 107.5 127.2 106.5 128.7 West Africa 23.1 - 36.1 - International Equity Investee (CLAM) 22.4 33.8 27.0 34.2 Total International 474.0 480.6 497.9 495.4 ------ ------- ------- ------ Worldwide 1,208.4 1,254.3 1,258.2 1,276.7 Total production (MBOEPD) 424.2 411.7 424.1 425.5
43 MARATHON OIL CORPORATION SUPPLEMENTAL STATISTICS (Unaudited)
Second Quarter Six Months Ended Ended June 30 June 30 (Dollars in millions) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- OPERATING STATISTICS Average Sales Prices (excluding derivative gains and losses) Liquids Hydrocarbons United States $22.31 $21.70 $20.13 $22.82 U.S. Equity Investee (MKM) 25.00 24.59 22.47 25.10 Total United States 22.49 21.90 20.29 22.99 Europe 23.60 27.37 22.31 26.16 Other International 22.56 19.83 20.58 20.97 West Africa 23.72 28.18 22.21 26.57 International Equity Investees (CLAM) - 10.45 - 23.49 Total International 23.59 26.10 22.18 25.33 Worldwide $22.96 $23.29 $21.04 $23.84 Natural Gas(g) United States $2.99 $4.14 $2.66 $4.94 Europe 2.33 2.69 2.63 2.83 Other International 2.57 3.76 2.23 4.92 West Africa 25 - 25 - International Equity Investees (CLAM) 3.01 3.71 3.03 3.52 Total International 2.31 3.05 2.39 3.43 Worldwide $2.72 $3.73 $2.55 $4.36 Average Sales Prices (including derivative gains and losses) Liquids Hydrocarbons United States $22.25 $21.70 $19.35 $22.82 U.S. Equity Investee (MKM) 25.00 24.59 22.47 25.10 Total United States 22.43 21.90 19.56 22.99 Europe 23.60 27.37 22.31 26.16 Other International 22.56 19.83 20.58 20.97 West Africa 23.72 28.18 22.21 26.57 International Equity Investees (CLAM) -- 10.45 -- 23.49 Total International 23.59 26.10 22.18 25.33 Worldwide $22.93 $23.29 $20.60 $23.84 Natural Gas(g) United States $3.35 $5.05 $2.89 $5.26 Europe 2.18 2.69 2.84 2.83 Other International 2.57 3.77 2.23 4.92 West Africa 25 - 25 - International Equity Investees (CLAM) 3.01 3.71 3.03 3.52 Total International 2.21 3.06 2.53 3.43 Worldwide $2.90 $4.29 $2.74 $4.56 MAP: Crude Oil Refined(d) 972.9 958.2 932.2 914.3 Consolidated Refined Products Sold(d) 1,351.2 1,303.1 1,289.9 1,278.2 Matching buy/sell volumes included in refined products sold(d) 80.3 35.3 67.3 44.3 Refining and Wholesale Marketing Margin(h)(i) $.0518 $.1839 $.0350 $.1364 Number of SSA retail outlets(k) 2,081 2,177 - - SSA Gasoline and Distillate Sales(j)(k) 911 893 1,763 1,741 SSA Gasoline and Distillate Gross Margin(h)(k) $.1116 $.1280 $.0977 $.1177 SSA Merchandise Sales(k) $612 $574 $1,152 $1,062 SSA Merchandise Gross Margin(k) $156 $136 $286 $250
44 MARATHON OIL CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) (a) Includes MAP at 100%. RM&T income for reportable segments includes Ashland's 38% interest in MAP of $82 million, $320 million, $66 million and $428 million in the second quarter and six month year-to-date 2002 and 2001, respectively. (b) Includes domestic natural gas and crude oil marketing and transportation, and power generation. (c) Includes other energy related businesses and corporate capital expenditures. (d) Thousands of barrels per day (e) Millions of cubic feet per day (f) Includes gas acquired for injection and subsequent resale of 5.4, 9.0, 4.6, and 9.1 mmcfd in the second quarter and six month year-to-date 2002 and 2001, respectively. (g) Prices exclude gas acquired for injection and subsequent resale. (h) Per gallon (i) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation. (j) Millions of gallons (k) Excludes travel centers contributed to Pilot Travel Centers LLC. Periods prior to September 1, 2001 have been restated. 45 Part II - Other Information: Item 1. LEGAL PROCEEDINGS Environmental Proceedings On December 3, 2001, Illinois EPA (IEPA) issued a NOV to Marathon Ashland Petroleum LLC (MAP) arising out of the sinking of a floating roof on a storage tank at a Martinsville, Illinois facility. A heavy rainfall caused the floating roof to sink. MAP believes it may have an Act of God/emergency defense. Based upon recent discussions with IEPA, MAP expects the matter to be referred to the Illinois Attorney General's office for enforcement proceedings. In March, 2002, MAP attended a meeting with the Illinois EPA concerning MAP's self reporting of possible emission exceedences and permitting issues related to some storage tanks at MAP's Robinson, Illinois facility. In late April, MAP submitted to IEPA a comprehensive settlement proposal which was rejected by IEPA. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held April 24, 2002. In connection with the meeting, proxies were solicited pursuant to the Securities Exchange Act. The following are the voting results on proposals considered and voted upon at the meeting, all of which were described in the proxy statement. 1. All nominees for director listed in the proxy statement were elected. 2. PricewaterhouseCoopers LLC was elected as the independent accountants for 2002. (For, 257,578,104; against, 11,181,873; abstained, 1,300,812). 3. Stockholder proposal for redemption or termination of Marathon's shareholder rights plan: For, 168,159,468; against, 66,228,352; abstained, 3,153,846. 46 Part II - Other Information (Continued): Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 4.1 Senior Indenture dated June 14, 2002 among Marathon Global Funding Corporation, Issuer, Marathon Oil Corporation, Guarantor, and JPMorgan Chase Bank, Trustee................... Incorporated by reference to Exhibit 4.1 to Marathon Oil Corporation's Form 8-K dated June 18, 2002 (filed June 21, 2002). 10.1 Marathon Oil Corporation Non-Officer Restricted Stock Plan, As Amended and Restated Effective January 2, 2002 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 99.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) REPORTS ON FORM 8-K Form 8-K dated April 23, 2002, as amended (filed April 26, 2002), reporting under Item 9. Regulation FD Disclosure, Marathon Oil Corporation updated Outlook section of its Form 10-K for the fiscal year ended December 31, 2001. Form 8-K dated May 23, 2002 (filed May 29, 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 5.375% Notes due 2007. Form 8-K dated June 18, 2002 (filed June 21, 2002), reporting under Item 5. Other Events, that Marathon Oil Corporation and Marathon Global Funding Corporation entered into an underwriting agreement for the public offering of $400 million aggregate principal amount of 6.000% Notes due 2012. Form 8-K dated August 13, 2002 (filed August 13, 2002), reporting under Item 9. Regulation FD Disclosure, that Marathon Oil Corporation's President and Chief Executive Officer and Chief Financial Officer submitted to the SEC statements under oath regarding facts and circumstances relating to exchange act filings. 47 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned chief accounting officer thereunto duly authorized. MARATHON OIL CORPORATION By /s/ A. G. Adkins ------------------------------ Albert G. Adkins Vice President - Accounting and Controller August 13, 2002 48 EX-10.1 3 dex101.txt NON-OFFICER RESTRICTED STOCK PLAN EXHIBIT 10.1 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 2, 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 The Compensation and Organization Committee of the Marathon Oil Corporation Board of Directors (the "Compensation and Organization Committee") shall create and authorize pools of specific numbers of Shares to be granted under the Plan by the Granting 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. Except as otherwise set forth herein, 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 general administration of 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 Administering Committee may delegate to the Stock Plan Officer (as designated under the Marathon Oil Corporation 1990 Stock Plan) its duties under this Plan pursuant to such conditions or limitations as the Administering Committee may establish. From and after May 28, 2002, the Compensation and Organization Committee shall authorize a committee (the "Director Committee") consisting of the employee Director(s) of the Marathon Oil Corporation Board of Directors to grant awards of specific numbers of Shares to eligible employees. The term "Granting Committee" shall refer to the Administrative Committee prior to May 28, 2002, and shall refer to the Director Committee from and after May 28, 2002. 3. Eligibility for Participation Individuals who are employed by one of the following entities and are below Salary Grade 19 shall be eligible to receive grants under the Plan: Marathon Oil Corporation and its wholly-owned direct and indirect subsidiaries, Marathon Oil Company and its wholly-owned direct and indirect subsidiaries, Marathon Ashland Petroleum LLC and its wholly-owned direct and indirect subsidiaries, Speedway SuperAmerica LLC and its wholly-owned direct and indirect subsidiaries, or any foreign entity that is wholly-owned, directly or indirectly, by Marathon Oil Corporation. The Granting Committee shall select from among such eligible employees those to whom Shares shall be granted and shall determine the number of Shares to be granted to each such grantee. 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. Notwithstanding anything herein to the contrary, if the grantee is eligible to participate in a change of control plan adopted by his or her employer, any provisions of such plan that relate to the vesting of restricted stock shall apply to the Shares. 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. 2 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. The Marathon Oil Corporation Board of Directors shall approve all amendments to the Plan. 10. Awards to Employees on Non-U.S. Payrolls The Granting Committee shall have the power to grant awards under the Plan in the form of restricted stock units ("Units"), with each Unit representing the right to receive one share of the Corporation's common stock ("Common Stock"), subject to certain conditions. Grantees receiving Units shall have the right to receive cash dividend equivalents equal in value to any cash dividends paid on the shares of Common Stock represented by the Units but shall have no voting rights with respect to such Units prior to the vesting of the Units. Upon the vesting of Units under Paragraph 6 hereof, the vested Units shall be cancelled and a number of shares of Common Stock equal to the number of vested Units shall be registered in the name of the grantee. Thereafter the grantee shall have all the rights of a stockholder of the Corporation, including the right to vote such shares of Common Stock. Except as otherwise noted in this Paragraph 10, Units granted hereunder shall be subject to the provisions of Paragraphs 1 through 9 of the Plan; provided however, that the terms and conditions of such Units shall be subject to the rules and regulations of applicable U.S. and foreign laws (including, but not limited to tax withholding, resale restrictions, and transferability), and shall be administered at all times in accordance with such applicable laws. 11. Effective Date This amended and restated Plan is effective as of January 2, 2002, and supercedes the prior Plan document. 3 IN WITNESS WHEREOF, the Corporation has executed this Plan this 26th day of July, 2002, but effective as of January 2, 2002. MARATHON OIL CORPORATION By /s/ Eileen M. Campbell ------------------------------ Eileen M. Campbell Vice President, Human Resources ATTEST: /s/ Richard J. Kolencik - ------------------------- Richard J. Kolencik Assistant Secretary 4 EX-12.1 4 dex121.txt RATIO OF EARNINGS TO COMBINED 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)
Six Months Ended June 30 Year Ended December 31 -------------- -------------------------------------- 2002 2001 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ ------ ------ Portion of rentals representing interest $ 30 $ 25 $ 54 $ 52 $ 49 $ 53 $ 35 Capitalized interest, including discontinued operations 7 13 27 19 26 46 31 Other interest and fixed charges, including discontinued operations 144 120 349 375 365 318 352 Pretax earnings which would be required to cover preferred stock dividend requirements of parent - 6 12 12 14 15 20 ------ ------ ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends (A) $ 181 $ 164 $ 442 $ 458 $ 454 $ 432 $ 438 ====== ====== ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B). $ 659 $2,217 $3,213 $1,809 $1,866 $1,087 $1,067 ====== ====== ====== ====== ====== ====== ====== Ratio of (B) to (A) 3.64 13.56 7.26 3.95 4.11 2.51 2.43 ====== ====== ====== ====== ====== ====== ======
EX-12.2 5 dex122.txt RATIO OF EARNINGS Exhibit 12.2 Marathon Oil Corporation Computation of Ratio of Earnings to Fixed Charges TOTAL ENTERPRISE BASIS - Unaudited Continuing Operations (Dollars in Millions)
Six Months Ended June 30 Year Ended December 31 -------------- -------------------------------------- 2002 2001 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ ------ ------ Portion of rentals representing interest $ 30 $ 25 $ 54 $ 52 $ 49 $ 53 $ 35 Capitalized interest, including discontinued operations 7 13 27 19 26 46 31 Other interest and fixed charges, including discontinued operations 144 120 349 375 365 318 352 ------ ------ ------ ------ ------ ------ ------ Total fixed charges (A) $ 181 $ 158 $ 430 $ 446 $ 440 $ 417 $ 418 ====== ====== ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B). $ 659 $2,217 $3,213 $1,809 $1,866 $1,087 $1,067 ====== ====== ====== ====== ====== ====== ====== Ratio of (B) to (A) 3.64 14.09 7.47 4.06 4.24 2.60 2.55 ====== ====== ====== ====== ====== ====== ======
EX-99.1 6 dex991.txt CERTIFICATION OF PRESIDENT AND CEO Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Marathon Oil Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Clarence P. Cazalot, Jr., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Clarence P. Cazalot, Jr. Clarence P. Cazalot, Jr. President & Chief Executive Officer August 13, 2002 EX-99.2 7 dex992.txt CERTIFICATION OF CFO Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Marathon Oil Corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John T. Mills, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John T. Mills John T. Mills Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----