-----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, SVnaN896+tPc7tsqcuTS6YcPN3HH9buiS65skaYN579tOzNp8lN1SMnDpvjDXNsX O+1bA7AbEX7oK2tTlhnDMQ== 0000950132-01-000164.txt : 20010313 0000950132-01-000164.hdr.sgml : 20010313 ACCESSION NUMBER: 0000950132-01-000164 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USX CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-05153 FILM NUMBER: 1565878 BUSINESS ADDRESS: STREET 1: 600 GRANT ST CITY: PITTSBURGH STATE: PA ZIP: 15219-4776 BUSINESS PHONE: 4124331121 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 10-K 1 0001.txt FORM 10-K FORM 10-K 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________ Commission file number 1-5153 USX CORPORATION (Exact name of registrant as specified in its charter) Delaware 25-0996816 (State of Incorporation) (I.R.S. Employer Identification No.) 600 Grant Street, Pittsburgh, PA 15219-4776 (Address of principal executive offices) Tel. No. (412) 433-1121 Securities registered pursuant to Section 12 (b) of the Act:*
======================================================================================================== Title of Each Class - -------------------------------------------------------------------------------------------------------- USX-Marathon Group 8-3/4% Cumulative Monthly Income Preferred Shares, Common Stock, par value $1.00 Series A (Liquidation Preference $25 per share)**/(a)/ USX-U. S. Steel Group 6.75% Convertible Quarterly Income Preferred Common Stock, par value $1.00 Securities (Initial Liquidation Amount $50 per 6.50% Cumulative Convertible Preferred Security)***/(a)/ (Liquidation Preference $50.00 per share) 7% Guaranteed Notes Due 2002 of Marathon Oil Company/(a)/ ========================================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] Aggregate market value of Common Stock held by non-affiliates as of January 31, 2001: $10 billion. The amount shown is based on the closing prices of the registrant's Common Stocks on the New York Stock Exchange composite tape on that date. Shares of Common Stock held by executive officers and directors of the registrant are not included in the computation. However, the registrant has made no determination that such individuals are "affiliates" within the meaning of Rule 405 under the Securities Act of 1933. There were 308,269,864 shares of USX-Marathon Group Common Stock and 88,767,023 shares of USX-U. S. Steel Group Common Stock outstanding as of January 31, 2001. Documents Incorporated By Reference: Proxy Statement dated March 12, 2001 is incorporated in Part III. Proxy Statement dated March 9, 1998 is incorporated in Part IV. _______________ * These securities are listed on the New York Stock Exchange. In addition, the Common Stocks are listed on The Chicago Stock Exchange and the Pacific Exchange. ** Issued by USX Capital LLC. *** Issued by USX Capital Trust I. /(a)/ Obligations of Marathon Oil Company, USX Capital LLC and USX Capital Trust I, all wholly owned subsidiaries of the registrant, have been guaranteed by the registrant. INDEX PART I NOTE ON PRESENTATION........................................ 2 Item 1. BUSINESS USX CORPORATION........................................... 3 MARATHON GROUP............................................ 5 U.S. STEEL GROUP.......................................... 27 Item 2. PROPERTIES.................................................. 38 Item 3. LEGAL PROCEEDINGS MARATHON GROUP............................................ 38 U.S. STEEL GROUP.......................................... 41 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 46 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................... 47 Item 6. SELECTED FINANCIAL DATA USX CONSOLIDATED.......................................... 49 MARATHON GROUP............................................ 51 U. S. STEEL GROUP......................................... 52 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS USX CONSOLIDATED.......................................... U-39 MARATHON GROUP............................................ M-25 U. S. STEEL GROUP......................................... S-25 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK USX CONSOLIDATED.......................................... U-60 MARATHON GROUP............................................ M-37 U. S. STEEL GROUP......................................... S-38 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA USX CONSOLIDATED.......................................... U-1 MARATHON GROUP............................................ M-1 U. S. STEEL GROUP......................................... S-1 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 53 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 54 Item 11. MANAGEMENT REMUNERATION..................................... 55 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................ 55 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 55 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................................... 56 SIGNATURE.............................................................. 60 GLOSSARY OF CERTAIN DEFINED TERMS...................................... 61 SUPPLEMENTARY DATA SUMMARIZED FINANCIAL INFORMATION OF MARATHON OIL COMPANY............. 63 DISCLOSURES ABOUT FORWARD-LOOKING STATEMENTS......................... 64
NOTE ON PRESENTATION USX Corporation ("USX" or the "Corporation") is a diversified company principally engaged in the energy business through its Marathon Group and in the steel business through its U. S. Steel Group. USX has two classes of common stock, USX - Marathon Group Common Stock ("Marathon Stock") and USX - U. S. Steel Group Common Stock ("Steel Stock"). Each class of Common Stock is intended to provide stockholders of that class with a separate security reflecting the performance of the related group. Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the USX - Delhi Group ("Delhi Companies"). On January 26, 1998, USX used the $195 million net proceeds from the sale to redeem all of the 9.45 million outstanding shares of USX-Delhi Group Common Stock. USX continues to include consolidated financial information in its periodic reports required by the Securities Exchange Act of 1934, in its annual shareholder reports and in other financial communications. The consolidated financial statements are supplemented with separate financial statements of the Marathon Group and the U. S. Steel Group, together with the related Management's Discussion and Analyses, descriptions of business and other financial and business information to the extent such information is required to be presented in the report being filed. The financial information of the Marathon Group and U. S. Steel Group and certain financial information relating to the Delhi Companies, taken together, includes all accounts which comprise the corresponding consolidated financial information of USX. For consolidated financial reporting purposes, USX consists of the Marathon Group and the U. S. Steel Group. The attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets and responsibility for such liabilities. Holders of Marathon Stock and Steel Stock are holders of common stock of USX and continue to be subject to all of the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from either of the Groups that affect the overall cost of USX's capital could affect the results of operations and financial condition of both Groups. In addition, net losses of any Group, as well as dividends and distributions on any class of USX common stock or series of preferred stock and repurchases of any class of USX common stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of USX common stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group and the U. S. Steel Group financial information. For information regarding accounting matters and policies affecting the Marathon Group and the U. S. Steel Group financial statements, see "Financial Statements and Supplementary Data - Notes to Financial Statements - 1. Basis of Presentation and - 4. Corporate Activities" for each respective Group. For information regarding dividend limitations and dividend policies affecting holders of Marathon Stock and Steel Stock, see "Market for Registrant's Common Equity and Related Stockholder Matters." For a Glossary of Certain Defined Terms used in this document, see page 61. Forward-Looking Statements Certain sections of USX's Form 10-K, particularly Item 1. Business, Item 3. Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk, include forward-looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional factors affecting the businesses of USX, see Supplementary Data - Disclosures About Forward-Looking Statements. 2 PART I Item 1. BUSINESS USX CORPORATION USX Corporation was incorporated in 1901 and is a Delaware corporation. Executive offices are located at 600 Grant Street, Pittsburgh, PA 15219-4776. The terms "USX" and "Corporation" when used herein refer to USX Corporation or USX Corporation and its subsidiaries, as required by the context. Groups For consolidated reporting purposes, USX consists of the Marathon Group and the U. S. Steel Group. The businesses of the Marathon Group and the U. S. Steel Group, are as follows: . The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX, which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy related businesses. Marathon Group revenues as a percentage of total USX consolidated revenues were 85 percent in 2000, 81 percent in 1999 and 77 percent in 1998. . The U. S. Steel Group is engaged in the production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially-owned companies, such as USS-POSCO Industries, PRO-TEC Coating Company, Transtar, Inc., Clairton 1314B Partnership, and Republic Technologies International, LLC. On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o., which held the steel and related assets of VSZ a.s., headquartered in the Slovak Republic. U. S. Steel Group revenues as a percentage of total USX consolidated revenues were 15 percent in 2000, 19 percent in 1999 and 23 percent in 1998. On November 30, 2000, USX announced that the board of directors authorized management to retain financial, tax and legal advisors to perform an in-depth study of the corporation's targeted stock structure and all alternative structures which may be in the best interest of all USX shareholders. This study is ongoing and will take several months to complete. The advisors will report their findings and recommendations to the USX board of directors, who will review them to determine what actions to take. 3 A three-year summary of financial highlights for the groups is provided below.
Revenues Income Assets and from Net at Capital (Millions) Other Income/(a)/ Operations/(b)/ Income (Loss) Year-End Expenditures ------------------------------------------------------------------------------------------------------------ Marathon Group 2000 $ 33,859 $ 1,648 $ 432 $ 15,232 $ 1,425 1999 23,707 1,713 654 15,674 1,378 1998 21,623 938 310 14,544 1,270 U. S. Steel Group 2000 6,132 104 (21) 8,711 244 1999 5,470 150 44 7,525 287 1998 6,477 579 364 6,749 310 Eliminations 2000 (77) - - (542) - 1999 (58) - - (268) - 1998 (23) - - (160) - Total USX Corporation 2000 $ 39,914 $ 1,752 $ 411 $23,401 $ 1,669 1999 29,119 1,863 698 22,931 1,665 1998 28,077 1,517 674 21,133 1,580 ------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss), gain on ownership change in MAP, net gains (losses) on disposal of assets, and other income. /(b)/ Includes the following favorable (unfavorable) amounts: adjustments to the inventory market valuation reserve for the Marathon Group of $551 million and ($267) million in 1999 and 1998, respectively; and gain on ownership change in MAP of $12 million in 2000, $17 million in 1999 and $245 million in 1998. For additional financial information about the Groups, see "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - 8. Group and Segment Information" on page U-13. The total number of active USX Headquarters employees not assigned to a specific group at year-end 2000 was 235. A narrative description of the primary businesses of the Marathon Group and the U. S. Steel Group is provided below. 4 MARATHON GROUP The Marathon Group is comprised of Marathon Oil Company and certain other subsidiaries of USX which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon Oil Company; and other energy related businesses. Marathon Group revenues as a percentage of total USX consolidated revenues were 85 percent in 2000, 81 percent in 1999 and 77 percent in 1998. The following table summarizes Marathon Group revenues for each of the last three years: Revenues and Other Income
(Millions) 2000 1999 1998 --------------------------------------------------------------------------------------------- Revenues by product/(a)/: Refined products.................................. $ 22,514 $ 15,181 $ 12,852 Merchandise....................................... 2,441 2,194 1,941 Liquid hydrocarbons............................... 6,856 4,587 5,023 Natural gas....................................... 2,518 1,429 1,187 Transportation and other products................. 158 199 271 Gain on ownership change in MAP/(b)/................. 12 17 245 Other/(c)/........................................... (640) 100 104 --------- --------- -------- Total revenues and other income................... $ 33,859 $ 23,707 $ 21,623 ---------------------------------------------------------------------------------------------
/(a)/ Reclassified to conform to 2000 classifications. /(b)/ See Note 5 to the Marathon Group Financial Statements for a discussion of the gain on ownership change in MAP. /(c)/ Includes dividend and investee income, net gains (losses) on disposal of assets and other income. For additional financial information about USX's operating segments, see "Financial Statements and Supplementary Data - Notes to USX Consolidated Financial Statements - 8, Group and Segment Information" on page U-13. Exploration and Production Oil and Natural Gas Exploration and Development Marathon is currently conducting exploration and development activities in 11 countries. Principal exploration activities are in the United States, United Kingdom, Angola, Canada, Denmark, Ireland, the Netherlands and Norway. Principal development activities are in the United States, United Kingdom, Canada, Gabon, Ireland, the Netherlands and Norway. Marathon is also pursuing opportunities in North and West Africa, the Middle East and Southeast Asia. 5 The following table sets forth, by geographic area, the number of net productive and dry development and exploratory wells completed in each of the last three years (references to "net" wells or production indicate Marathon's ownership interest or share as the context requires): Net Productive and Dry Wells Completed/(a)/
2000 1999 1998 - ----------------------------------------------------------------------------------------- United States Development/(b)/ - Oil 23 11 28 - Gas 109 54 58 - Dry 2 1 2 ---- ---- ---- Total 134 66 88 Exploratory - Oil 2 5 7 - Gas 6 9 5 - Dry 5 13 8 ---- ---- ---- Total 13 27 20 ---- ---- ---- Total United States 147 93 108 International/(c)/ Development/(b)/ - Oil 12 42 7 - Gas 111 55 7 - Dry 5 11 2 ---- ---- ---- Total 128 108 16 Exploratory - Oil 4 2 5 - Gas 26 14 4 - Dry 14 16 15 ---- ---- ---- Total 44 32 24 ---- ---- ---- Total International 172 140 40 ---- ---- ---- Total Worldwide 320 233 148 - -----------------------------------------------------------------------------------------
/(a)/ Includes the number of wells completed during the year regardless of the year in which drilling was initiated. A dry well is a well found to be incapable of producing hydrocarbons in sufficient quantities to justify completion. A productive well is a well that is not a dry well. /(b)/ Indicates wells drilled in the proved area of an oil or gas reservoir. /(c)/ Includes Marathon's equity interest in CLAM Petroleum B.V. ("CLAM") and Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"). United States In the United States during 2000, Marathon drilled 24 gross (12 net) wildcat and delineation ("exploratory") wells of which 14 gross (8 net) wells encountered hydrocarbons. Of these 14 wells, 1 gross (1 net) well was temporarily suspended, and will be reported in the Net Productive and Dry Wells Completed table when completed. Principal domestic exploratory and development activities were in the U.S. Gulf of Mexico and the states of Alaska, Louisiana, New Mexico, Oklahoma, Texas and Wyoming. Exploration expenditures during the three-year period ended December 31, 2000, totaled $519 million in the United States, of which $161 million was incurred in 2000. Development expenditures during the three-year period ended December 31, 2000, totaled $951 million in the United States, of which $288 million was incurred in 2000. 6 On December 22, 2000, Marathon announced its plans to acquire Pennaco Energy, Inc. ("Pennaco"). Pennaco is a coal bed methane gas producer in the Powder River Basin, located in northern Wyoming and southern Montana. This acquisition will enhance Marathon's presence in a core area, the North American gas market, and will provide an opportunity for possible new reserves to be developed. The tender offer expired on February 5, 2001 at 12:00 midnight, Eastern time. Marathon acquired approximately 17.6 million shares of Pennaco common stock which were validly tendered and not withdrawn in the offer, representing approximately 87 percent of the outstanding Pennaco shares. Marathon plans to acquire the remaining Pennaco shares through a merger in which each share of Pennaco common stock, not purchased in the offer and not held by stockholders who have properly exercised dissenters rights under Delaware law, will be converted into the right to receive the tender offer price in cash, without interest. The following is a summary of recent, significant exploration and development activity in the United States including discussion, as deemed appropriate, of completed wells, drilling wells and wells under evaluation. Gulf of Mexico - Marathon continues to consider the Gulf of Mexico ("Gulf") as a core area for domestic growth in oil and gas production and has committed significant resources to exploit its opportunities. The Camden Hills field is located in the deepwater Gulf on Mississippi Canyon Block 348 in approximately 7,200 feet of water. The field, operated by Marathon with a 50.03 percent working interest, was discovered in August 1999 and confirmed by a subsequent well in January 2000. Development is being achieved with the sharing of infrastructure that will service two other fields in the area. The Canyon Express natural gas gathering system will link three gas fields, including Camden Hills, to a host processing platform named Canyon Station. Marathon personnel are engaged in several teams responsible for the design and implementation of Canyon Express as well as the completion of the subsea wells. The first production is scheduled for mid-2002. In July 2000, production commenced from the Viosca Knoll Block 786 ("Petronius") development in the deepwater Gulf. Proved reserves are estimated to be approximately 57 million gross barrels of oil equivalent ("BOE"). Marathon holds a 50 percent working interest in this project. In 2001, Marathon plans to drill six deepwater exploratory wells. To support the drilling of deepwater prospects, Marathon, along with two other parties, began a five-year commitment in 1999 on the Noble Amos Runner, a drilling rig capable of drilling in water depths up to 6,600 feet. Additionally, in the second quarter of 2001, Marathon expects to take receipt of the Transocean-Sedco-Forex Cajun Express, a drilling rig capable of drilling in water depths up to 8,500 feet. Marathon has an eighteen month commitment to utilize this rig. Alaska - After being placed in service during the second quarter of 2000, the Marathon-owned Glacier drilling rig was used to drill and complete four development wells and perform two workovers. Marathon's strong Cook Inlet lease position facilitates an aggressive 2001 drilling program to further its competitive position in the local gas market, as well as extending the ongoing liquefied natural gas ("LNG") export project. Marathon and a co-venturer have extended their LNG contract with the Japanese buyers from 2004 to 2009. This extension represents a total sales commitment of 125 billion cubic feet ("bcf") over a five year term commencing in 2004. Additionally, a prior gas discovery at Wolf Lake is expected to be developed in 2001. Louisiana - In North Louisiana, Marathon continued an active development program in the Haynesville, Cotton Valley and Logansport fields in 2000. These development programs will continue in 2001 with a total of 12 wells planned. 7 New Mexico - Marathon's New Mexico gas production continued with successful development activity in the Indian Basin field. In 2000, seven development wells were completed in this field and Marathon's Indian Basin gas plant was further expanded to a capacity of 300 million cubic feet per day ("mmcfd"). Of particular importance were three Upper Penn development wells in the eastern area of the Indian Basin field, which added 30 gross mmcfd. On the strength of these projects, record gross production of 160 mmcfd was reached by year-end from Marathon-operated wells. In 2001, eleven new well completions are planned, seven of which will be in the prospective east Indian Basin area. Oklahoma - Marathon continued exploration in the Granite Wash play of the Southern Anadarko Basin with four successful exploration wells drilled in 2000. Utilizing approximately 1,000 square miles of 3-D seismic data, Marathon plans to drill six exploratory wells along the Granite Wash play in 2001. With Marathon's active development drilling following its 1998 Granite Wash formation discovery, 19 wells were drilled in 2000 increasing production by 86 percent. Marathon's current net production now exceeds 26 mmcfd and 1,400 barrels of liquid hydrocarbons per day ("bpd"). In 2001, 18 additional development wells are planned in the Granite Wash formation. Development drilling in the Carter Knox field included nine wells on properties acquired in 2000. As a result, Marathon's production from acquired properties increased from 13 to 46 net mmcfd. Production from the acquired properties is nearly double expectations with well production fifteen percent better than that of offset operators. Marathon's total net production from Carter Knox increased 47 percent over the average 1999 total annual rate. In 2001, 14 development wells are planned for the Carter Knox field. Marathon's deep drilling activity in the Cement field, one of Oklahoma's oldest fields, increased Marathon's field production 60 percent in 2000. With six successful wells (all with depths of 14,000 feet or greater), Marathon's production now exceeds 15 net mmcfd. In 2001, four development wells and four exploratory wells (with depths greater than 16,000 feet) are planned. Texas - In East Texas, Marathon continued an active development program in the Oletha field after a January 2000 acquisition. An 11-well Travis Peak/Cotton Valley development program is planned in the Oletha field for 2001. Additionally, a horizontal well program in the James Lime play was initiated and will continue. In 2000, Marathon drilled three horizontal exploratory wells and participated in one horizontal exploratory well, all of which were successful. In West Texas, on December 28, 2000, Marathon signed a definitive agreement to form a joint venture with Kinder Morgan Energy Partners, L.P., which commenced operations in January 2001. The formation of the joint venture included contribution of interests in the Yates and SACROC assets. This transaction will allow Marathon to expand its interests in the Permian Basin and will improve access to materials for use in enhanced recovery techniques in the Yates field. Marathon holds an 85 percent economic interest in the combined entity. Wyoming - Successful exploratory and development drilling activity along the Wamsutter Arch and in the Washakie Basin contributed to a growth in gas production. This was offset, however, by a trade of minor interests in Moxa Arch southwest Wyoming gas producing properties for oil producing properties in the Big Horn Basin. The trade complements Marathon's position as Wyoming's largest oil producer and enhances production, transportation and marketing opportunities within the Big Horn Basin. 8 International Outside the United States during 2000, Marathon drilled 89 gross (53 net) exploratory wells in 7 countries. Of these 89 wells, 68 gross (39 net) wells encountered hydrocarbons, of which 6 gross (5 net) wells were temporarily suspended and will be reported in the Net Productive and Dry Wells Completed table when completed. Marathon's expenditures for international oil and natural gas exploration activities, including Marathon's 50 percent equity interest in CLAM and former 37.5 percent equity interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), during the three-year period ended December 31, 2000, totaled $372 million, of which $128 million was incurred in 2000. Marathon's international development expenditures, including CLAM and Sakhalin Energy, during the three-year period ended December 31, 2000, totaled $707 million, of which $222 million was incurred in 2000. The following is a summary of recent, significant exploration and development activity outside the United States, including discussion, as deemed appropriate, of completed wells, drilling wells and wells under evaluation. United Kingdom - In 2000, Marathon acquired an interest in the BP-operated Foinaven development in the U.K. Atlantic Margin. Marathon's interest is 28 percent in the main Foinaven field (T34), 20 percent in the deeper T35 Foinaven field and 47 percent in the East Foinaven field. Development activity is scheduled for both Foinaven and East Foinaven in 2001. The East Foinaven field will initially consist of production and water injection wells tied back to the floating production, storage and offloading (FPSO) vessel with first production expected late third quarter 2001. A third production well is planned in 2003. Further development drilling in the main Foinaven field involves four new production wells, a possible side track of an existing production well, and one new water injection well. As an interest owner in Foinaven, Marathon also has an 11.465 percent working interest in the West of Shetland gas evacuation line which is currently under construction. The line will take gas from fields in the West of Shetlands area to the BP-operated Magnus platform for injection and enhanced oil recovery purposes. Gas from the Foinaven field, which is currently injected for disposal, will be sold to the Magnus group, with sales commencing in early 2002. Marathon is continuing its development of the Brae area in the U.K. North Sea where it is the operator and owns a 41.6 percent interest in the South, Central and North Brae fields, a 38.5 percent interest in the East Brae field and a 28.1 percent interest in the West Brae/Sedgwick joint development project. Marathon has interests in 30 blocks in the U.K. North Sea and other offshore areas. Marathon drilled one and participated in one exploratory well offshore U.K. in 2000, and both were dry. One exploratory well in the Brae area is planned for 2001. Angola - In May 1999, Marathon was awarded an interest in Blocks 31 and 32 offshore Angola. The blocks, which are located approximately 90 miles northwest of Luanda in water depths between 5,400 and 9,200 feet, are adjacent to Blocks 15 and 17 where major discoveries by others have been made. Marathon holds a 10 percent working interest in these blocks, which are operated by co-venturers. Surveys of 3-D seismic data have been acquired for both blocks and two wells are planned to be drilled on Block 31 in 2001. Exploratory drilling should commence on Block 32 in early 2002. Canada - In May 1999, Marathon was awarded three exploration licenses offshore Nova Scotia. Marathon has a 30, 33.75 and 37.5 percent interest in Exploration Licenses ("EL") 2377, 2384 and 2376, respectively and will be the operator of EL 2377. Two of the licenses are in the immediate proximity of recent production by others. In 2000, 3-D seismic data was acquired for all blocks and is being evaluated. It is anticipated that a well will be drilled on EL 2376 in late 2001. Congo - In February 2000, Marathon acquired a 15 percent equity interest in the Mer Profonde Nord Permit, which is operated by a co-venturer. One exploratory well was drilled and abandoned in 2000. This permit was relinquished in December 2000. 9 Denmark - In June 1998, Marathon acquired one block in Denmark. A 3-D seismic program was completed in 1999 and evaluation of the data continues in 2001. Gabon - In November 2000, production commenced from the Tchatamba West field in the Kowe Permit, located 15 miles offshore Gabon. This field was developed as a one-well development tied back to the Tchatamba Marin facility. Marathon is operator of this field. Its working interest was proportionately reduced from 75 percent to 56.25 percent after the Gabonese government exercised its right to obtain a 25 percent interest in the field. In 1998, Marathon acquired a 50 percent working interest in the Inguessi Permit, which is adjacent to the Kowe Permit. During 1999, Marathon acquired 139 square miles of 3-D seismic data. The seismic data was evaluated and the block was relinquished in June 2000. Ireland - Plans are underway to convert the Southwest Kinsale field to a gas storage field. The Southwest Kinsale field, located in the Celtic Sea 30 miles south of Cork, was brought online in 1999 through a single subsea well tied back to the Kinsale Head field's Bravo platform. After producing just over nine gross bcf, the field was shut-in during August 2000. Gas injection through the existing well will commence in April 2001. Two additional wells to be used for gas injection and withdrawal will be drilled and tied back to the existing infrastructure during the second and third quarters of 2001. Marathon has a 100 percent interest in this field. During 2000, two additional appraisal wells were drilled in the Corrib gas field in the Slyne Trough License PL 2/93, located 40 miles off the west coast of Ireland. Four wells have now been drilled and suspended as producers in this field, and a fifth appraisal well is planned in 2001. In December 2000, a development plan was submitted to the Irish authorities with first gas expected in October 2003. Marathon owns an 18.5 percent interest in the Corrib field. Norway - In 2000, Marathon participated in a project to modify the Heimdal platform to a processing and transportation center for third party business. Marathon owns a 23.798 percent interest in the Heimdal field and platform. In November 2000, Marathon approved the development of the Vale field, located northeast of the Heimdal field. Production from Vale, which has estimated net proven reserves of six and one half million BOE, is expected to start early 2002. Marathon owns a 46.904 percent interest in this field. An exploration well between the Vale and Heimdal fields is planned in 2001. Netherlands - In 2000, Marathon, through its 50 percent equity interest in CLAM, participated in two exploratory wells and one development well in the Dutch sector of the North Sea. One exploration well was successful and was brought on production at 45 mmcfd in October 2000. CLAM has a 9.95 percent interest in this field. A second exploration well was spudded in late 2000. The Q4 field came onstream in December 2000 at an initial rate of 48 mmcfd. CLAM has a 19.8 percent interest in this field. The L12 FC field came onstream in December 2000 at a rate of 16 mmcfd. CLAM holds a 15 percent interest in this field. In 1998, CLAM was awarded two blocks in the Danish sector of the North Sea. Surveys of 3-D seismic data were acquired in 1999 and two exploration wells were drilled in 2000. Both wells were dry and the license will be relinquished in 2001. Independent from its interest in CLAM, Marathon holds a 24 percent working interest in the A-15 block in the Netherlands North Sea, which is operated by a co-venturer. One exploration well was drilled in 1999, which successfully tested the upper North Sea Group Sand. 3-D seismic data has been acquired and will be interpreted in early 2001 with another exploration well planned for 2001. In 2000, Marathon was awarded a new block, F12. Marathon's interest in F12 is 24 percent. 10 Russia - In December 2000, Marathon Sakhalin Limited transferred its 37.5 percent ownership interest in Sakhalin Energy to Shell Sakhalin Holdings B.V. In exchange, Marathon received: . Shell U.K. Limited's 28 percent interest in the BP-operated Foinaven field, located in the Atlantic Margin west of the Shetland Islands in the U.K. . Shell U.K. Limited's interests in discoveries and prospects on license areas adjacent to the Foinaven field. . A 3.5 percent overriding royalty, payable from Shell's working interest, on 100 percent of the production from an eight block area in the Gulf of Mexico, which includes the producing Ursa field and the recently announced Princess discovery. . Reimbursement of $54 million for its expenditures on the Sakhalin project for the year 2000. Tunisia - Marathon's 60 percent working interest in the South Jenein Permit in southern Tunisia was formally ratified by the government in 1996. In 2000, one exploratory well was drilled to test the Mabrouk prospect. The well was abandoned and no further drilling is planned for this permit as all work commitments have been fulfilled. The above discussions include forward-looking statements concerning various projects, drilling plans, expected production and sales levels, reserves and dates of initial production, which are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, reserve replacement rates, drilling rig availability, license relinquishments and other geological, operating and economic considerations. Offshore production and marine operations in areas such as the Gulf of Mexico, the U.K. North Sea, the U.K. Atlantic Margin and West Africa are also subject to severe weather conditions such as hurricanes or violent storms or other hazards. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations and tax regulations, which could adversely affect the economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. Reserves At December 31, 2000, the Marathon Group's net proved liquid hydrocarbon and natural gas reserves, including equity investee interests, totaled approximately 1.2 billion barrels on a BOE basis, of which 63 percent were located in the United States. (For purposes of determining BOE, natural gas volumes are converted to approximate liquid hydrocarbon barrels by dividing the natural gas volumes expressed in thousands of cubic feet ("mcf") by 6. The liquid hydrocarbon volume is added to the barrel equivalent of gas volume to obtain BOE.) At year-end 2000, Marathon revised its estimate of proved developed and undeveloped oil and gas reserves downward by 167 million BOE. These revisions were principally in Canada, the North Sea and the United States and are the result of production performance and disappointing drilling results. 11 The table below sets forth estimated quantities of net proved oil and gas reserves at the end of each of the last three years. Estimated Quantities of Net Proved Oil and Gas Reserves at December 31
Developed Developed & Undeveloped --------------------------- --------------------------- (Millions of Barrels) 2000 1999 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Liquid Hydrocarbons United States.................. 414 476 489 458 520 549 Europe......................... 74 90 119 108 90 122 Other International............ 57 72 67 151 187 194 ------ ------ ------ ------ ------ ------ Total Consolidated......... 545 638 675 717 797 865 Equity Investees/(a)/.......... - 69 - - 77 80 ------ ------ ------ ------ ------ ------ WORLDWIDE........................... 545 707 675 717 874 945 ====== ====== ====== ====== ====== ====== Developed reserves as % of total net proved reserves...... 76.0% 80.9% 71.4% (Billions of Cubic Feet) Natural Gas United States.................. 1,421 1,550 1,678 1,914 2,057 2,163 Europe......................... 563 741 909 614 774 966 Other International............ 381 497 534 477 833 830 ------ ------ ------ ------ ------ ------ Total Consolidated......... 2,365 2,788 3,121 3,005 3,664 3,959 Equity Investee/(b)/........... 52 65 76 89 123 110 ------ ------ ------ ------ ------ ------ WORLDWIDE........................... 2,417 2,853 3,197 3,094 3,787 4,069 ====== ====== ====== ====== ====== ====== Developed reserves as % of total net proved reserves...... 78.1% 75.3% 78.6% (Millions of Barrels) Total BOEs United States.................. 651 734 769 777 863 910 Europe......................... 168 213 270 211 219 282 Other International............ 121 155 156 231 326 332 ------ ------ ------ ------ ------ ------ Total Consolidated......... 940 1,102 1,195 1,219 1,408 1,524 Equity Investees/(a)/.......... 9 80 13 15 98 98 ------ ------ ------ ------ ------ ------ WORLDWIDE........................... 949 1,182 1,208 1,234 1,506 1,622 ====== ====== ====== ====== ====== ====== Developed reserves as % of total net proved reserves...... 76.9% 78.5% 74.5%
- ------------------------------------------------------------------------------- /(a)/ Represents Marathon's equity interests in CLAM and in 1999 and 1998, Sakhalin Energy. /(b)/ Represents Marathon's equity interests in CLAM. The above estimates, which are forward-looking statements, are based upon a number of assumptions, including (among others) prices, presently known physical data concerning size and character of the reservoirs, economic recoverability, production experience and other operating considerations. To the extent these assumptions prove inaccurate, actual recoveries could be materially different than current estimates. For additional details of estimated quantities of net proved oil and gas reserves at the end of each of the last three years, see "Consolidated Financial Statements and Supplementary Data - Supplementary Information on Oil and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas Reserves" on page U-32. Reports have been filed with the U.S. Department of Energy ("DOE") for the years 1999 and 1998 disclosing the year-end estimated oil and gas reserves. A similar report will be filed for 2000. The year-end estimates reported to the DOE are the same as the estimates reported in the USX Consolidated Supplementary Data. 12 Oil and Gas Acreage The following table sets forth, by geographic area, the developed and undeveloped oil and gas acreage held as of December 31, 2000: Gross and Net Acreage
----------------------------------------------------------------------------------------------------- Developed & Developed Undeveloped Undeveloped -------------------- -------------------- -------------------- (Thousands of Acres) Gross Net Gross Net Gross Net ----------------------------------------------------------------------------------------------------- United States............... 1,997 839 3,092 1,764 5,089 2,603 Europe...................... 348 287 2,465 1,205 2,813 1,492 Other International......... 1,406 869 7,099 2,882 8,505 3,751 ------ ------ ------ ------ ------ ------ Total Consolidated.......... 3,751 1,995 12,656 5,851 16,407 7,846 Equity Investee/(a)/........ 453 46 302 70 755 116 ------ ------ ------ ------ ------ ------ WORLDWIDE................... 4,204 2,041 12,958 5,921 17,162 7,962 -----------------------------------------------------------------------------------------------------
/(a)/ Represents Marathon's equity interests in CLAM. Oil and Natural Gas Production The following tables set forth daily average net production of liquid hydrocarbons and natural gas for each of the last three years:
Net Liquid Hydrocarbons Production/(a)/ (Thousands of Barrels per Day) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------- United States/(b)/............................................ 131 145 135 Europe/(c)/................................................... 29 31 42 Other International/(c)/...................................... 36 31 19 ---- ---- ---- Total Consolidated.................................... 196 207 196 Equity Investees (CLAM & Sakhalin Energy)/(c)/................ 11 1 - ---- ---- ---- WORLDWIDE..................................................... 207 208 196 ==== ==== ==== Net Natural Gas Production/(d)/ (Millions of Cubic Feet per Day) United States/(b)/............................................ 731 755 744 Europe/(e)/................................................... 327 325 360 Other International/(e)/...................................... 143 163 81 ------ ------ ------ Total Consolidated.................................... 1,201 1,243 1,185 Equity Investee (CLAM)/(e)/................................... 29 36 33 ------ ------ ------ WORLDWIDE..................................................... 1,230 1,279 1,218 - -------------------------------------------------------------------------------------------------------
/(a)/ Includes crude oil, condensate and natural gas liquids. /(b)/ Amounts reflect production from leasehold and plant ownership, after royalties and interests of others. /(c)/ Amounts reflect equity tanker liftings, truck deliveries and direct deliveries of liquid hydrocarbons before royalties, if any; excluding Canada, Gabon and Russia where amounts are after royalties. The amounts correspond with the basis for fiscal settlements with governments. Crude oil purchases, if any, from host governments are not included. /(d)/ Amounts reflect sales of equity production, only. It excludes volumes purchased from third parties for injection and subsequent resale of 11 mmcfd in 2000 and 16 and 23 mmcfd in 1999 and 1998, respectively. /(e)/ Amounts reflect production before royalties, excluding Canada where amounts are after royalties. 13 At year-end 2000, Marathon was producing crude oil and/or natural gas in seven countries, including the United States. Marathon's worldwide liquid hydrocarbon production, including Marathon's share of equity investee production, remained consistent with 1999. Marathon's 2000 worldwide sales of equity natural gas production, including Marathon's share of CLAM's production, decreased about four percent from 1999 reflecting dispositions and natural field declines. In addition to sales of 500 net mmcfd of international equity natural gas production, Marathon sold 11 net mmcfd of natural gas acquired for injection and resale during 2000. In 2001, Marathon's worldwide production is expected to average 430,000 BOE per day. The above projections of 2001 worldwide liquid hydrocarbon production and natural gas volumes are forward-looking statements. Some factors that could potentially affect timing and levels of production include pricing, supply and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, reserve estimates, reserve replacement rates, production decline rates of mature fields, timing of commencing production from new wells, drilling rig availability, the completion of the merger with Pennaco, future acquisitions of producing properties, and other geological, operating and economic considerations. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. United States Approximately 63 percent of Marathon's 2000 worldwide liquid hydrocarbon production and equity investee liftings and 59 percent of worldwide natural gas production (including CLAM volumes) were from domestic operations. The principal domestic producing areas are located in the U.S. Gulf of Mexico and the states of Alaska, New Mexico, Oklahoma, Texas and Wyoming. Marathon's ongoing domestic growth strategy is to apply its technical expertise in fields with undeveloped potential, to dispose of interests in non-core properties with limited upside potential and high production costs, and to acquire significant working interests in properties with high development potential. Gulf of Mexico - During 2000, Marathon's Gulf of Mexico production averaged 61,600 net bpd of liquid hydrocarbons and 88 net mmcfd of natural gas, representing 47 percent and 12 percent of Marathon's total U.S. liquid hydrocarbon and natural gas production, respectively. Liquid hydrocarbon production decreased by 12,900 net bpd and natural gas production decreased by 18 net mmcfd from the prior year, mainly due to dispositions and natural field declines. At year-end 2000, Marathon held working interests in 9 fields and 17 platforms, of which 7 platforms are operated by Marathon. Ewing Bank 873 is an important part of Marathon's deepwater infrastructure. Marathon is the operator and holds a 66.7 percent working interest. Production averaged 22,700 net bpd and 18 net mmcfd in 2000, compared with 35,400 net bpd and 28 net mmcfd in 1999, primarily due to natural field declines. Based on liquid hydrocarbon and natural gas production, Ewing Bank ranked as Marathon's second highest domestic production field in 2000. Alaska - Marathon's production from Alaska averaged 160 net mmcfd of natural gas in 2000, compared with 148 net mmcfd in 1999. Marathon's primary focus in Alaska is the expansion of its natural gas business through exploration, development and marketing. New Mexico - Production in New Mexico, primarily from the Indian Basin field, averaged 12,600 net bpd and 121 net mmcfd in 2000, compared with 11,900 net bpd and 115 net mmcfd in 1999. The increase in gas production was primarily due to ongoing development of the eastern area of the Indian Basin field. Oklahoma - Gas production for 2000 averaged 151 net mmcfd, representing 21 percent of Marathon's total U.S. gas production, compared with 127 net mmcfd in 1999. The increase in gas production was primarily due to exploration success in the Anadarko Basin coupled with the acquisition and further development of existing producing properties. 14 Texas - Onshore production for 2000 averaged 23,400 net bpd of liquid hydrocarbons and 132 net mmcfd of natural gas, representing 18 percent of Marathon's total U.S. liquid hydrocarbon and natural gas production. Liquid production volumes decreased by 4,000 net bpd from 1999 levels, and gas volumes decreased by 34 net mmcfd from 1999 levels. The volume decreases were mainly due to natural field declines. Marathon's 13,900 net bpd of 2000 liquid hydrocarbon production from the Yates field accounted for 11 percent of Marathon's total U.S. liquids production. Wyoming - Liquid hydrocarbon production for 2000 averaged 25,300 net bpd, representing 19 percent of Marathon's total U.S. liquid hydrocarbon production, up from 22,000 net bpd in 1999. The increase in 2000 from 1999 was primarily due to the Moxa Arch for Big Horn Basin property exchange and associated development drilling on the acquired properties. Gas production averaged 45 net mmcfd in 2000, compared to 57 net mmcfd in 1999, with the decrease due mainly to property exchanges and natural production declines. International Interests in liquid hydrocarbon and/or natural gas production are held in the U.K. North Sea, the U.K. Atlantic Margin, Irish Celtic Sea, the Norwegian North Sea, Canada and Gabon. In addition, Marathon has interests through an equity investee in the Netherlands North Sea. U.K. North Sea - Production from the Brae area averaged 26,500 net bpd of liquid hydrocarbons in 2000, compared with 31,100 net bpd in 1999. The decrease is mainly within the East Brae field, reflecting the expected decline of the field. The Brae A facilities act as the host platform for the underlying South Brae field, adjacent Central Brae field and West Brae/Sedgwick fields. The North Brae field, which is produced via the Brae B platform, and the East Brae field are gas condensate fields. These fields are produced using the gas cycling technique. Although partial cycling continues, the majority of North Brae gas is being transferred to the East Brae reservoir for pressure maintenance and sales. The strategic location of the Brae A, Brae B and East Brae platforms and pipeline infrastructure has generated significant third-party business since 1986. Currently, there are 15 agreements with third-party fields contracted to use the Brae system. In addition to generating processing and pipeline tariff revenue, third-party business also has a favorable impact on Brae area operations by optimizing infrastructure usage and extending the economic life of the facilities. Participation in the Scottish Area Gas Evacuation ("SAGE") system provides pipeline transportation and onshore processing for Brae-area gas. The Brae group owns 50 percent of SAGE, which has a total wet gas capacity of approximately 1.0 bcfd. The other 50 percent is owned by the Beryl group, which operates the system. Pipelines connect the Brae, Britannia, Beryl and Scott fields to the SAGE gas processing terminal at St. Fergus in northeast Scotland. Marathon's total United Kingdom gas sales from all sources averaged 224 net mmcfd in 2000, compared with 184 net mmcfd in 1999. Sales of Brae-area gas through the SAGE pipeline system averaged 222 net mmcfd for the year 2000 and 182 net mmcfd for the year 1999. Of these totals, 211 mmcfd and 166 mmcfd was Brae-area equity gas in 2000 and 1999, respectively, and 11 and 16 mmcfd was gas acquired for injection and subsequent resale in 2000 and 1999, respectively. U.K. Atlantic Margin - As of the end of December 2000, the Foinaven field was producing approximately 24,000 net bpd of liquid hydrocarbons. Ireland - Marathon holds a 100 percent working interest in the Kinsale Head, Ballycotton and Southwest Kinsale fields in the Irish Celtic Sea. Natural gas sales were 114 net mmcfd in 2000, compared with 132 net mmcfd in 1999. This reduction is due to natural field declines and changes to the production profile of the Southwest Kinsale field. The Southwest Kinsale field has been shut-in so gas can be saved and produced at peak times. 15 Norway - In the Norwegian North Sea, Marathon holds a 23.8 percent working interest in the Heimdal field. Heimdal production ceased at the end of September 1999. Production of the remaining remnant gas from Heimdal is expected to commence in the second quarter of 2001. Marathon also holds a 46.904 percent working interest in the Vale field. This single well sub-sea development will be tied back to the Heimdal platform, with first production expected early 2002. Canada - Production in Canada averaged 18,400 bpd and 143 mmcfd in 2000, compared with 17,200 bpd and 150 mmcfd in 1999. The increase in liquid hydrocarbon production was primarily due to higher heavy oil volumes. Natural gas sales were lower because of natural declines and higher royalty payments due to higher realized sales prices. This decline was partially offset by production from new wells. Gabon - Production in Gabon averaged 15,800 net bpd of liquid hydrocarbons in 2000, compared with 9,000 net bpd in 1999. This increase reflected a full year production from the Tchatamba South field, which began production in August 1999, and the addition of the Tchatamba West field, which began production in November 2000. Netherlands - Marathon's 50 percent equity interest in CLAM provides a 5 percent entitlement in the production from 21 gas fields, which provided sales of 29 net mmcfd of natural gas in 2000, compared with 36 net mmcfd in 1999. 16 The following tables set forth productive wells and service wells for each of the last three years and drilling wells as of December 31, 2000: Gross and Net Wells
2000 Productive Wells/(a)/ - ---- --------------------------------- Oil Gas Service Wells/(b)/ Drilling Wells/(c)/ --------------- --------------- ---------------- --------------- Gross Net Gross Net Gross Net Gross Net - ---------------------------------------------------------------------------------------------------------- United States................. 8,013 3,113 2,526 1,275 3,103 976 31 16 Europe........................ 54 18 66 34 25 9 1 - Other International .......... 868 616 1,832 1,257 249 172 5 4 ------ ----- ----- ----- ----- ----- --- --- Total Consolidated....... 8,935 3,747 4,424 2,566 3,377 1,157 37 20 Equity Investee/(e)/.......... - - 85 5 - - 2 - ------ ----- ----- ----- ----- ----- --- --- WORLDWIDE..................... 8,935 3,747 4,509 2,571 3,377 1,157 39 20 ====== ===== ===== ===== ===== ===== === ===
1999 Productive Wells/(a)/ ---- --------------------------------- Oil Gas Service Wells/(b)/ --------------- --------------- ----------------- Gross Net Gross Net Gross Net - ---------------------------------------------------------------------------------------- United States................. 8,654 3,205 3,122 1,396 3,617 1,056 Europe........................ 36 14 65 33 18 7 Other International .......... 1,590 754 1,746 1,214 461 133 ------ ----- ----- ----- ----- ----- Total Consolidated....... 10,280 3,973 4,933 2,643 4,096 1,196 Equity Investees/(d)/......... 5 2 83 4 1 - ------ ----- ----- ----- ----- ----- WORLDWIDE..................... 10,285 3,975 5,016 2,647 4,097 1,196 ====== ===== ===== ===== ===== =====
1998 Productive Wells/(a)/ - ---- --------------------------------- Oil Gas Service Wells/(b)/ --------------- --------------- ------------------ Gross Net Gross Net Gross Net - ----------------------------------------------------------------------------------------- United States................. 9,396 3,616 3,214 1,414 4,062 1,127 Europe........................ 33 13 64 32 22 9 Other International........... 1,605 826 1,459 1,068 162 111 ------ ----- ----- ----- ----- ----- Total Consolidated....... 11,034 4,455 4,737 2,514 4,246 1,247 Equity Investee/(e)/.......... - - 83 4 - - ------ ----- ----- ----- ----- ----- WORLDWIDE..................... 11,034 4,455 4,820 2,518 4,246 1,247 - -----------------------------------------------------------------------------------------
/a)/ Includes active wells and wells temporarily shut-in. Of the gross productive wells, gross wells with multiple completions operated by Marathon totaled 469, 478 and 518 in 2000, 1999 and 1998, respectively. Information on wells with multiple completions operated by other companies is not available to Marathon. /(b)/ Consist of injection, water supply and disposal wells. /(c)/ Consist of exploratory and development wells. /(d)/ Represents CLAM and Sakhalin Energy. /(e)/ Represents CLAM. 17 The following tables set forth average production costs and sales prices per unit of production for each of the last three years:
Average Production Costs/(a)/ (Dollars per BOE) 2000 1999 1998 - ------------------------------------------------------------------------------------------------- United States................................................. $ 4.01 $ 3.26 $ 3.12 International - Europe....................................... 3.82 4.62 4.29 - Other International.......................... 6.09 4.66 4.73 Total Consolidated............................................ $ 4.29 $ 3.73 $ 3.55 - Equity Investees/(c)/........................ 6.00 10.02 3.99 WORLDWIDE..................................................... $ 4.35 $ 3.83 $ 3.56
Average Sales Prices/(b)/ 2000 1999 1998 2000 1999 1998 ------- ------- ------- ------- ------- ------- (Dollars per Barrel) Crude Oil and Condensate Natural Gas Liquids - ---------------------------------------------------------------------------------------------------------------- United States.............................. $ 25.96 $ 15.78 $ 10.60 $ 19.20 $ 12.30 $ 8.64 International - Europe.................... 27.90 17.59 12.87 24.98 13.84 11.49 - Other International....... 25.77 16.77 11.31 23.48 13.49 8.38 Total Consolidated......................... $ 26.22 $ 16.21 $ 11.14 $ 20.35 $ 12.67 $ 9.32 - Equity Investees/(c)/..... 29.64 23.43 - 28.74 13.22 12.65 WORLDWIDE.................................. $ 26.42 $ 16.25 $ 11.14 $ 20.37 $ 12.67 $ 9.33
(Dollars per Thousand Cubic Feet) Natural Gas - ----------------------------------------------------------------------------- United States.............................. $ 3.30 $ 1.90 $ 1.79 International - Europe.................... 2.56 2.03 2.07 - Other International....... 3.20 1.64 1.34 Total Consolidated......................... $ 3.08 $ 1.90 $ 1.85 - Equity Investee (CLAM).... 2.75 1.87 2.37 WORLDWIDE.................................. $ 3.08 $ 1.90 $ 1.86 - ------------------------------------------------------------------------------
/(a)/ Production costs are as defined by the Securities and Exchange Commission and include property taxes, severance taxes and other costs, but exclude depreciation, depletion and amortization of capitalized acquisition, exploration and development costs and certain administrative costs. Natural gas volumes were converted to BOE using a conversion factor of six mcf of natural gas to one barrel of oil. /(b)/ Prices exclude gains/losses from hedging activities. /(c)/ Represents CLAM and Sakhalin Energy for 2000 and 1999, and CLAM for 1998. 18 Refining, Marketing and Transportation Refining, Marketing and Transportation ("RM&T") operations are primarily conducted by MAP and its subsidiaries, including its wholly-owned subsidiaries, Speedway SuperAmerica LLC and Marathon Ashland Pipe Line LLC. Marathon holds a 62 percent interest in MAP and Ashland Inc. holds the remaining 38 percent interest. The following discussion of RM&T operations includes historical data for the three-year period ended December 31, 2000. Refining MAP owns and operates seven refineries with an aggregate refining capacity of 935,000 barrels of crude oil per day. The table below sets forth the location and daily throughput capacity of each of MAP's refineries as of December 31, 2000: In-Use Refining Capacity (Barrels per Day) Garyville, LA................. 232,000 Catlettsburg, KY.............. 222,000 Robinson, IL.................. 192,000 Detroit, MI................... 74,000 Canton, OH.................... 73,000 Texas City, TX................ 72,000 St. Paul Park, MN............. 70,000 -------- TOTAL......................... 935,000 ======== MAP's refineries include crude oil atmospheric and vacuum distillation, fluid catalytic cracking, catalytic reforming, desulfurization and sulfur recovery units. The refineries have the capability to process a wide variety of crude oils and to produce typical refinery products, including reformulated gasoline ("RFG"). MAP's refineries are integrated via pipelines and barges to maximize operating efficiency. The transportation links that connect the refineries allow the movement of intermediate products to optimize operations and the production of higher margin products. For example, naphtha is moved from Texas City and Catlettsburg to Robinson where excess reforming capacity is available. Gas oil is moved from Robinson to Detroit and Catlettsburg where excess fluid catalytic cracking unit capacity is available. Light cycle oil is moved from Texas City to Robinson where excess desulfurization capacity is available. MAP also produces asphalt cements, polymerized asphalt, asphalt emulsions and industrial asphalts. MAP manufactures petroleum pitch, primarily used in the graphite electrode, clay target and refractory industries. Additionally, MAP manufactures aromatics, aliphatic hydrocarbons, cumene, base oil and slack wax. 19 During 2000, MAP's refineries processed 900,000 bpd of crude oil and 141,000 bpd of other charge and blend stocks. The following table sets forth MAP's refinery production by product group for each of the last three years:
Refined Product Yields (Thousands of Barrels per Day) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Gasoline...................................................... 552 566 545 Distillates................................................... 278 261 270 Propane....................................................... 20 22 21 Feedstocks & Special Products................................. 74 66 64 Heavy Fuel Oil................................................ 43 43 49 Asphalt....................................................... 74 69 68 ----- ----- ----- TOTAL......................................................... 1,041 1,027 1,017 ===== ===== =====
Planned maintenance activities requiring temporary shutdown of certain refinery operating units ("turnarounds") are periodically performed at each refinery. MAP completed major turnarounds at the Catlettsburg, Detroit and Robinson refineries in 2000. MAP is constructing a delayed coker unit at its Garyville, Louisiana refinery. This unit will allow for the use of heavier, lower cost crude and reduce the production of heavy fuel oil. To supply this new unit, MAP reached an agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy Mayan crude oil. This is a multi-year contract, which will begin upon completion of the delayed coker unit which is scheduled in the fall of 2001. In addition, a project to increase light product output is underway at MAP's Robinson, Illinois refinery and is expected to be completed in the second quarter of 2001. Marketing In 2000, MAP's refined product sales volumes (excluding matching buy/sell transactions) totaled 19.3 billion gallons (1,254,000 bpd). Excluding sales related to matching buy/sell transactions, the wholesale distribution of petroleum products to private brand marketers and to large commercial and industrial consumers, primarily located in the Midwest, the upper Great Plains and the Southeast, and sales in the spot market, accounted for about 64 percent of MAP's refined product sales volumes in 2000. Approximately 46 percent of MAP's gasoline volumes and 78 percent of its distillate volumes were sold on a wholesale or spot market basis to independent unbranded customers or other wholesalers in 2000. 20 The following table sets forth the volume of MAP's consolidated refined product sales by product group for each of the last three years:
Refined Product Sales (Thousands of Barrels per Day) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Gasoline ..................................................... 746 714 671 Distillates................................................... 352 331 318 Propane ..................................................... 21 23 21 Feedstocks & Special Products................................. 69 66 67 Heavy Fuel Oil................................................ 43 43 49 Asphalt....................................................... 75 74 72 ----- ----- ----- TOTAL......................................................... 1,306 1,251 1,198 ===== ===== ===== Matching Buy/Sell Volumes included in above................... 52 45 39
As of December 31, 2000, MAP supplied petroleum products to 3,729 Marathon and Ashland branded retail outlets located primarily in Michigan, Ohio, Indiana, Kentucky and Illinois. Branded retail outlets are also located in West Virginia, Florida, Georgia, Wisconsin, Minnesota, Virginia, Tennessee, Pennsylvania, North Carolina, South Carolina and Alabama. In 2000, retail sales of gasoline and diesel fuel were also made through limited service and self-service stations and truck stops operated in 20 states by a wholly owned MAP subsidiary, Speedway SuperAmerica LLC ("SSA"). As of December 31, 2000, this subsidiary had 2,242 retail outlets which sold petroleum products and convenience-store merchandise, primarily under the brand names "Speedway"and "SuperAmerica". SSA's revenues from the sale of convenience-store merchandise totaled $2,322 million in 2000, compared with $2,056 million in 1999. Profits generated from these sales tend to moderate the margin volatility experienced in the retail sale of gasoline and diesel fuel. The selection of merchandise varies among outlets. At December 31, 2000, 2,100 of SSA's 2,242 outlets had convenience stores which sold a variety of food and merchandise, and the remaining outlets sold selected convenience-store items such as cigarettes, candy and beverages. MAP sells RFG in parts of its marketing territory, primarily Chicago, Illinois; Louisville, Kentucky; Northern Kentucky; Maryland; Virginia; and Milwaukee, Wisconsin. MAP also markets low-vapor-pressure gasolines in all or parts of eleven states. Supply and Transportation The crude oil processed in MAP's refineries is obtained from negotiated contract and spot purchases or exchanges. In 2000, MAP's net purchases of U.S. crude oil for refinery input averaged 400,000 bpd including 24,000 bpd from Marathon. In 2000, 56 percent or 500,000 bpd of the crude oil processed by MAP's refineries was from foreign sources, including approximately 301,000 bpd from the Middle East, and was acquired primarily from various foreign national oil companies, producing companies and traders. MAP operates a system of pipelines and terminals to provide crude oil to its refineries and refined products to its marketing areas. Ninety-one light product and asphalt terminals are strategically located throughout the Midwest, upper Great Plains and Southeast. These facilities are supplied by a combination of pipelines, barges, rail cars and trucks. At December 31, 2000, MAP owned, leased or had an ownership interest in approximately 68 miles of crude oil gathering lines; 3,564 miles of crude oil trunk lines; and 2,834 miles of products trunk lines. MAP owned a 46.7 percent interest in LOOP LLC ("LOOP"), which is the owner and operator of the only U.S. deepwater oil port, located 18 miles off the coast of Louisiana; a 49.9 percent interest in LOCAP Inc. ("LOCAP"), which is the owner and operator of a crude oil pipeline connecting LOOP and the Capline system; and a 37.2 percent interest in the Capline system, a large diameter crude oil pipeline extending from St. James, Louisiana to Patoka, Illinois. 21 MAP also has a 33.3 percent ownership interest in Minnesota Pipe Line Company, which operates a crude oil pipeline in Minnesota. Minnesota Pipe Line Company provides MAP with access to crude oil common carrier transportation from Clearbrook, Minnesota to Cottage Grove, Minnesota, which is in the vicinity of MAP's St. Paul Park, Minnesota, refinery. A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline is expected to initially move about 50,000 bpd of refined petroleum into the central Ohio region. The pipeline is currently expected to be operational in mid-2002. The startup of this pipeline is largely dependent on obtaining the final regulatory approvals, obtaining the necessary rights-of-way, of which approximately 95 percent have been obtained to date, and completion of construction. ORPL is still negotiating with a few landowners to obtain the remaining rights-of-way. Where necessary, ORPL has filed condemnation actions to acquire some rights-of-way. These actions are at various stages of litigation and appeal with several recent decisions supporting ORPL's use of eminent domain. MAP has joined CMS Energy Corporation and TEPPCO Partners, L.P., in an agreement to form a limited liability company with equal ownership to operate an interstate refined petroleum products pipeline extending from the U.S. Gulf of Mexico to the Midwest. The new company plans to build a 74-mile, 24-inch diameter pipeline connecting TEPPCO's facility in Beaumont, Texas, with an existing 720-mile, 26-inch diameter pipeline extending from Longville, Louisiana to Bourbon, Illinois. In addition, a two million barrel terminal storage facility will be constructed. The system will be called Centennial Pipeline and will connect with existing MAP transportation assets and other common carrier lines. Construction is expected to be completed in the fourth quarter of 2001. MAP's marine transportation operations include towboats and barges that transport refined products on the Ohio, Mississippi and Illinois rivers, their tributaries, and the Intercoastal Waterway. MAP also leases and owns rail cars in various sizes and capacities for movement and storage of petroleum products and a large number of tractors, tank trailers and general service trucks. The above RM&T discussions include forward-looking statements concerning anticipated refinery and pipeline projects. Some factors that could potentially cause actual results to differ materially from present expectations include (among others) price of petroleum products, levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions, obtaining the necessary rights-of-way and regulatory approval constraints. This forward-looking information may prove to be inaccurate and actual results may differ significantly from those presently anticipated. Other Energy Related Businesses Natural Gas and Crude Oil Marketing and Transportation Marathon owns and operates, as a common carrier, approximately 174 miles of crude oil gathering lines and 187 miles of crude oil trunk lines that were not contributed to MAP. Marathon also owns an interest in the following pipeline systems that were not contributed to MAP. Marathon has a 29 percent interest in Odyssey Pipeline LLC and a 28 percent interest in Poseidon Oil Pipeline Company, LLC, both Gulf of Mexico crude oil pipeline systems. Marathon has a 24 percent interest in Nautilus Pipeline Company, LLC and a 24 percent interest in Manta Ray Offshore Gathering Company, LLC, both Gulf of Mexico natural gas pipeline systems. Marathon has a 17 percent interest in Explorer Pipeline Company and a 2.5 percent interest in Colonial Pipeline Company, both light product pipeline systems extending from the Gulf of Mexico to the Midwest and East Coast, respectively. 22 Marathon has a 30 percent ownership in a Kenai, Alaska, natural gas liquefication plant and two 87,500 cubic meter tankers used to transport LNG to customers in Japan. Feedstock for the plant is supplied from a portion of Marathon's equity natural gas production in the Cook Inlet. LNG is sold under a long-term contract with two of Japan's largest utility companies which calls for the sale of more than 900 gross bcf over the term of the contract. Marathon has a 30 percent participation in this contract which is effective through March 31, 2004, and provides an option for a five-year extension. During 2000, LNG deliveries totaled 64 gross bcf (19 net bcf), unchanged from 1999. Marathon has a 34 percent ownership interest in the Neptune natural gas processing plant located in St. Mary Parish, Louisiana, which commenced operations on March 20, 2000. The plant has the capacity to process 300 mmcfd of natural gas, which is transported on the Nautilus pipeline system. In addition to the sale of equity oil and natural gas production, Marathon purchases oil and gas from third-party producers and marketers for resale. Power Generation Marathon, through its wholly owned subsidiary, Marathon Power Company, Ltd. ("Marathon Power"), pursues development, construction, ownership and operation of independent electric power projects in the global electrical power market. Competition and Market Conditions The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Acquiring the more attractive exploration opportunities frequently requires competitive bids involving substantial front-end bonus payments or commitments to work programs. Based on industry sources, Marathon believes it currently ranks 9th among U.S. based petroleum corporations on the basis of 1999 worldwide liquid hydrocarbon and natural gas production. Marathon through MAP must also compete with a large number of other companies to acquire crude oil for refinery processing and in the distribution and marketing of a full array of petroleum products. MAP believes it ranks fifth among U.S. petroleum companies on the basis of crude oil refining capacity as of January 1, 2001. MAP competes in four distinct markets - wholesale, spot, branded and retail distribution - for the sale of refined products, and believes it competes with about 50 companies in the wholesale distribution of petroleum products to private brand marketers and large commercial and industrial consumers; about 75 companies in the sale of petroleum products in the spot market; 10 refiner/marketers in the supply of branded petroleum products to dealers and jobbers; and over 600 petroleum product retailers in the retail sale of petroleum products. Marathon also competes in the convenience store industry through SSA's retail outlets. The retail outlets offer consumers gasoline, diesel fuel (at selected locations) and a broad mix of other products and services, such as tobacco, soft drinks, health and beauty aids, groceries, fresh-baked goods, automated teller machines, automotive accessories and a line of private-label items. Some locations also have on-premises brand-name restaurants such as Subway and Taco Bell. The Marathon Group's operating results are affected by price changes in crude oil, natural gas and petroleum products as well as changes in competitive conditions in the markets it serves. Generally, results from production operations benefit from higher crude oil and natural gas prices while refining and marketing margins may be adversely affected by crude oil price increases. Market conditions in the oil industry are cyclical and subject to global economic and political events. Employees The Marathon Group had 30,892 active employees as of December 31, 2000, which included 27,799 MAP employees. Of the MAP total, 21,677 were employees of Speedway SuperAmerica LLC, primarily representing employees at retail marketing outlets. 23 Certain hourly employees at the Catlettsburg and Canton refineries are represented by the Paper, Allied-Industrial, Chemical and Energy Workers International Union under labor agreements which expire on January 31, 2002, while certain hourly employees at the Texas City refinery are represented by the same union under a labor agreement which expires on March 31, 2002. Certain hourly employees at the St. Paul Park and Detroit refineries are represented by the International Brotherhood of Teamsters under labor agreements which expire on May 31, 2002 and January 31, 2003, respectively. Property, Plant and Equipment Additions For property, plant and equipment additions, see "Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity - Capital Expenditures"for the Marathon Group on page M-30. Environmental Matters The Marathon Group maintains a comprehensive environmental policy overseen by the Public Policy Committee of the USX Board of Directors. The Health, Environment and Safety organization has the responsibility to ensure that the Marathon Group's operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Health, Environment and Safety Management Committee, which is comprised of officers of the group, is charged with reviewing its overall performance with various environmental compliance programs. Also, the Marathon Group has formed an Emergency Management Team, composed of senior management, which will oversee the response to any major emergency environmental incident throughout the group. The businesses of the Marathon Group are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act ("CAA") with respect to air emissions, the Clean Water Act ("CWA") with respect to water discharges, the Resource Conservation and Recovery Act ("RCRA") with respect to solid and hazardous waste treatment, storage and disposal, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to releases and remediation of hazardous substances, and the Oil Pollution Act of 1990 ("OPA-90") with respect to oil pollution and response. In addition, many states where the Marathon Group operates have similar laws dealing with the same matters. These laws and their associated regulations are constantly evolving and many of them have become more stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been finalized or in certain instances are undergoing revision. These environmental laws and regulations, particularly the 1990 Amendments to the CAA, new water quality standards and stricter fuel regulations could result in increased capital, operating and compliance costs. For a discussion of environmental capital expenditures and costs of compliance for air, water, solid waste and remediation, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies"on page M-31 and "Legal Proceedings"for the Marathon Group on page 38. The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil or refined products. 24 Air The CAA imposes stringent limits on air emissions, establishes a federally mandated operating permit program and allows for civil and criminal enforcement sanctions. The principal impact of the CAA on the Marathon Group is on its RM&T operations. The CAA also establishes attainment deadlines and control requirements based on the severity of air pollution in a geographical area. It is estimated that, from 2001 to 2004, the Marathon Group, which includes all seven MAP refineries, may spend approximately $110 million in order to comply with the proposed Maximum Achievable Control Technology ("MACT") Phase II standards under the CAA. These standards require new control equipment on Fluid Catalytic Cracking Units and other units. New Tier II Fuels regulations were proposed in late 1999. The gasoline rules, which were finalized by the U.S. Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel rule which was finalized in January 2001, require substantially reduced sulfur levels. The combined capital cost to achieve compliance with the gasoline and diesel regulations could amount to approximately $600 - $700 million between 2003 and 2005. In July 1997, the EPA promulgated more stringent revisions to the National Ambient Air Quality Standards ("NAAQS") for ozone and particulate matter. These revisions had been vacated by the Court of Appeals for the District of Columbia and remanded to the EPA for further action. The EPA sought review of the matter by the United States Supreme Court, and the Supreme Court heard the case in the fall of 2000. On February 27, 2001 the Supreme Court affirmed in part, reversed in part, and remanded the case to the EPA to develop a reasonable interpretation of the nonattainment implementation provisions insofar as they relate to the revised ozone NAAQS. Additionally, in 1998, the EPA published a nitrogen oxide ("NOx") State Implementation Plan ("SIP") call, which would require some 22 states, including many states where the Marathon Group has operations, to revise their SIPs to reduce NOx emissions. In December 1999, the EPA granted a petition from several northeastern states requesting that stricter NOx standards be adopted by midwestern states, including several states where the Marathon Group has refineries. The impact of the revised NAAQS and NOx standards could be significant to Marathon, but the potential financial effects cannot be reasonably estimated until the EPA takes further action on the revised ozone NAAQA (along with any further judicial review) and the states, as necessary, develop and implement revised SIPs in response to the revised NAAQS and NOx standards. Water The Marathon Group maintains numerous discharge permits as required under the National Pollutant Discharge Elimination System program of the CWA, and has implemented systems to oversee its compliance efforts. In addition, the Marathon Group is regulated under OPA-90 which amended the CWA. Among other requirements, OPA-90 requires the owner or operator of a tank vessel or a facility to maintain an emergency plan to respond to releases of oil or hazardous substances. Also, in case of such releases, OPA-90 requires responsible companies to pay resulting removal costs and damages, provides for substantial civil penalties, and imposes criminal sanctions for violations of this law. Additionally, OPA-90 requires that new tank vessels entering or operating in domestic waters be double-hulled, and that existing tank vessels that are not double-hulled be retrofitted or removed from domestic service, according to a phase-out schedule. The Coast Guard National Pollution Funds Center has granted permission to Marathon and Ashland to self-insure the financial responsibility amount for liability purposes for MAP's tankers, as provided in OPA-90. In addition, most of the barges, which are used in MAP's river transportation operations, meet the double-hulled requirements of OPA-90. Single-hulled barges owned and operated by MAP are in the process of being phased out. Displaced single-hulled barges will be divested or recycled into docks or floats within MAP's system. The Marathon Group operates facilities at which spills of oil and hazardous substances could occur. Several coastal states in which Marathon operates have passed state laws similar to OPA-90, but with expanded liability provisions, including provisions for cargo owner responsibility as well as ship owner and operator responsibility. Marathon has implemented emergency oil response plans for all of its components and facilities covered by OPA-90. 25 Solid Waste The Marathon Group continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of underground storage tanks ("USTs") containing regulated substances. Since the EPA has not yet promulgated implementing regulations for all provisions of RCRA and has not yet made clear the practical application of all the implementing regulations it has promulgated, the ultimate cost of compliance cannot be accurately estimated. In addition, new laws are being enacted and regulations are being adopted by various regulatory agencies on a continuing basis, and the costs of compliance with these new rules can only be broadly appraised until their implementation becomes more accurately defined. Remediation The Marathon Group operates certain retail outlets where, during the normal course of operations, releases of petroleum products from USTs have occurred. Federal and state laws require that contamination caused by such releases at these sites be assessed and remediated to meet applicable standards. The enforcement of the UST regulations under RCRA has been delegated to the states which administer their own UST programs. The Marathon Group's obligation to remediate such contamination varies, depending upon the extent of the releases and the stringency of the laws and regulations of the states in which it operates. A portion of these remediation costs may be recoverable from the appropriate state UST reimbursement fund once the applicable deductible has been satisfied. Accruals for remediation expenses and associated reimbursements are established for sites where contamination has been determined to exist and the amount of associated costs is reasonably determinable. As a general rule, Marathon and Ashland retained responsibility for certain remediation costs arising out of the prior ownership and operation of those businesses transferred to MAP. Such continuing responsibility, in certain situations, may be subject to threshold or sunset agreements which gradually diminish this responsibility over time. USX is also involved in a number of remedial actions under RCRA, CERCLA and similar state statutes related to the Marathon Group. It is possible that additional matters relating to the Marathon Group may come to USX's attention which may require remediation. 26 U. S. STEEL GROUP The U. S. Steel Group is engaged in the production and sale of steel mill products, coke, and taconite pellets; the management of mineral resources; coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially-owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, and Republic Technologies International LLC ("Republic"). On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which held the steel and related assets of VSZ a.s., headquartered in the Slovak Republic. U. S. Steel Group revenues as a percentage of total USX consolidated revenues were approximately 15 percent in 2000, 19 percent in 1999 and 23 percent in 1998. The following table sets forth the total revenues of the U. S. Steel Group for each of the last three years.
Revenues and other income (Millions) 2000 1999 1998 -------------------------------------------------------------------------------------------- Revenues by product: Sheet and semi-finished steel products............ $ 3,288 $ 3,433 $ 3,598 Tubular, plate, and tin mill products ............ 1,731 1,140 1,546 Raw materials (coal, coke and iron ore)........... 626 549 744 Other/(a)/........................................ 445 414 490 Income (loss) from affiliates........................ (8) (89) 46 Gain on disposal of assets........................... 46 21 54 Other income (loss).................................. 4 2 (1) ------- ------- ------- Total revenues and other income................... $ 6,132 $ 5,470 $ 6,477 -------------------------------------------------------------------------------------------- /(a)/ Includes revenue from the sale of steel production by-products, real estate development, resource management, and engineering and consulting services.
For additional financial information about USX's industry segments, see "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - 8. Group and Segment Information"on page U-13. The total number of active U. S. Steel Group domestic employees at year-end 2000 was 18,784. The total number of active USSK employees was 16,244. Most hourly and certain salaried employees in the United States are represented by the United Steelworkers of America ("USWA"). Most USSK employees are represented by OZ Metalurg which on February 16, 2001 signed a Collective Labor Agreement with USSK which, for nonwage issues, covers the years 2001 to 2004 and covers all 2001 wage issues. Wage issues for the remainder of the term of the Collective Labor Agreement are expected to be renegotiated annually. Steel Industry Background and Competition The steel industry is cyclical and highly competitive and is affected by excess world capacity, which has restricted price increases during periods of economic growth and led to price decreases during economic contraction. In addition, the domestic and international steel industries face competition from producers of materials such as aluminum, cement, composites, glass, plastics and wood in many markets. 27 U. S. Steel Group is one of the largest steel producers in the United States and, through its subsidiary USSK, the largest integrated flat rolled producer in Central Europe, and competes with many domestic and foreign steel producers. Competitors include integrated producers which, like U. S. Steel Group, use iron ore and coke as primary raw materials for steel production, and mini-mills which primarily use steel scrap and, increasingly, iron bearing feedstocks as raw materials. Mini-mills generally produce a narrower range of steel products than integrated producers, but typically enjoy certain competitive advantages such as lower capital expenditures for construction of facilities and non-unionized work forces with lower employment costs and more flexible work rules. An increasing number of mini-mills utilize thin slab casting technology to produce flat-rolled products. Through the use of thin slab casting, mini-mill competitors are increasingly able to compete directly with integrated producers of flat-rolled products. Depending on market conditions, the additional production generated by flat-rolled mini-mills could have an adverse effect on U. S. Steel Group's selling prices and shipment levels. Steel imports to the United States accounted for an estimated 27%, 26% and 30% of the domestic steel market for 2000, 1999 and 1998, respectively. Steel imports of pipe increased 37% and of hot rolled steel increased 19% in 2000, compared to 1999. Foreign competitors typically have lower labor costs and are often owned, controlled or subsidized by their governments, allowing their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. High levels of imported steel are expected to continue to have an adverse effect on future market prices and demand levels for domestic steel. On November 13, 2000, U. S. Steel Group joined with eight other producers and the Independent Steelworkers Union to file trade cases against hot-rolled carbon steel flat products from 11 countries (Argentina, India, Indonesia, Kazakhstan, the Netherlands, the People's Republic of China, Romania, South Africa, Taiwan, Thailand and Ukraine). Three days later the USWA also entered the cases as a petitioner. Antidumping ("AD") cases were filed against all the countries and countervailing duty ("CVD") cases were filed against Argentina, India, Indonesia, South Africa and Thailand. On December 28, 2000, the U.S. International Trade Commission ("ITC") made a preliminary determination that there is a reasonable indication that the domestic industry is materially injured by the imports in question. As a result, both the ITC and the U.S. Department of Commerce ("Commerce") will continue their investigations in these cases. U. S. Steel Group believes that the remedies provided by U.S. law to private litigants are insufficient to correct the widespread dumping and subsidy abuses that currently characterize steel imports into our country. U. S. Steel Group, nevertheless, intends to file additional AD and CVD petitions against unfairly traded imports that adversely impact, or threaten to adversely impact, the results of the U. S. Steel Group and is urging the U.S. government to take additional steps. On July 3, 2000, Commerce and the ITC initiated the mandatory five-year "sunset"reviews of AD orders issued in 1995 against seamless pipe from Argentina, Brazil, Germany and Italy and oil country tubular goods ("OCTG") from Argentina, Italy, Japan, Mexico and South Korea. The reviews also encompass the 1995 CVD orders against the same two products from Italy. The "sunset" review procedures require that an order must be revoked after five years unless Commerce and the ITC determine that, if the orders would be discontinued, dumping or a countervailable subsidy would be likely to continue or recur and that material injury to the domestic industry would be likely to continue or recur. Of the 11 orders, 8 are the subject of expedited review at Commerce because there was no response, inadequate response, or waiver of participation by the respondent parties. Therefore, at Commerce, only three of the orders (AD: OCTG from Mexico; and CVD: OCTG and seamless pipe from Italy) are the subject of a full review. The ITC is conducting full reviews of all the cases, despite the fact that responses by some of the respondent countries were inadequate. 28 The U. S. Steel Group's domestic businesses are subject to numerous federal, state and local laws and regulations relating to the storage, handling, emission and discharge of environmentally sensitive materials. U. S. Steel Group believes that its major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such other competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on U. S. Steel Group's competitive position with regard to domestic mini-mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. For further information, see Environmental Proceedings on page 42, Legal Proceedings on page 42, and Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies on page S-30. USSK does business primarily in Central Europe and is subject to market conditions in this area which are similar to domestic factors, including excess world supply, and also can be influenced by matters peculiar to international marketing such as tariffs. Business Strategy U. S. Steel Group produces raw steel at Gary Works in Indiana, Mon Valley Works in Pennsylvania, Fairfield Works in Alabama, and USSK in Kosice, Slovak Republic. U. S. Steel Group has responded to competition resulting from excess steel industry capability by eliminating less efficient facilities, modernizing those that remain and entering into joint ventures, all with the objective of focusing production on higher value-added products, where superior quality and special characteristics are of critical importance. These products include bake hardenable steels and coated sheets for the automobile and appliance industries, laminated sheets for the manufacture of motors and electrical equipment, higher strength plate products, improved tin mill products for the container industry and oil country tubular goods. Several recent modernization projects further support U. S. Steel Group's objectives of providing value-added products and services to customers. These projects include, for the automotive industry - the degasser facility at Mon Valley Works, the second hot-dip galvanized sheet at PRO-TEC, the Fairless Works galvanizing line upgrade and the cold reduction mill upgrades at Gary Works and Mon Valley Works; for the construction industry - the dual coating lines at Fairfield Works and Mon Valley Works; for the tubular market - the Fairfield Works pipemill upgrade and acquiring full ownership of Lorain Tubular Company LLC's tubular facilities and for the plate market - the heat treat facility at the Gary Works plate mill. Also, a new pickle line was built at the Mon Valley Works which replaced three older and less efficient facilities located at Fairless Works and Mon Valley Works. Through its purchase in 2000 of USSK, which held the steel producing operations and related assets of VSZ a.s. in the Slovak Republic, the U. S. Steel Group took a major strategic step by expanding offshore and following many of its customers into the European market. The objective is to advance USSK to become a leader among European steel producers and the prime supplier of flat-rolled steel to the growing central European market. This globalization strategy is also being pursued through our Acero Prime joint venture in Mexico. The location of this joint venture allows for easy servicing and just-in-time delivery to customers throughout Mexico. In addition, in October 2000, U. S. Steel Group entered into an agreement with LTV Corporation ("LTV") to purchase LTV's tin mill products business, including its Indiana Harbor, Indiana tin operations. This acquisition recently closed and was effective March 1, 2001. Under this agreement, U. S. Steel Group will lease the land and take title to the buildings, facilities and inventory of LTV's Indiana Harbor tin operations. U. S. Steel Group intends to operate these facilities as an ongoing business and tin mill employees at Indiana Harbor became U. S. Steel Group employees. The U. S. Steel Group and LTV also entered into 5-year agreements for LTV to supply U. S. Steel Group with pickled hot bands and for U. S. Steel Group to provide LTV with processing of cold rolled steel. U. S. Steel Group will not lease the land or take title to the buildings of LTV's Aliquippa, Pennsylvania tin operations. However, U. S. Steel Group has the right to transfer certain tin line equipment from Aliquippa to Indiana Harbor and other U. S. Steel Group tin operations to upgrade those facilities. In addition to the modernization of its production facilities, USX has entered into a number of joint ventures with domestic and foreign partners to take advantage of market or manufacturing opportunities in the sheet, tin mill, tubular, bar and plate consuming industries. 29 U. S. Steel Group continues to pursue lower manufacturing cost objectives through continuing cost improvement programs. These initiatives include, but are not limited to, reduced production cycle time, improved yields, increased customer orientation and improved process control. In January 2001, U. S. Steel domestic operations requested from current suppliers an immediate, temporary eight percent price reduction from existing levels. The following table lists products and services by facility or business unit:
Domestic Steel -------------- Gary............................................. Sheets; Tin Mill; Plates; Coke Fairfield........................................ Sheets; Tubular Mon Valley....................................... Sheets Fairless......................................... Sheets; Tin Mill USS-POSCO/(a)/................................... Sheets; Tin Mill Lorain Tubular Company LLC....................... Tubular Republic Technologies International, LLC/(a)/.... Bar PRO-TEC/(a)/..................................... Galvanized Sheet Clairton......................................... Coke Clairton 1314B Partnership/(a)/.................. Coke Transtar/(a)/.................................... Transportation Minntac.......................................... Taconite Pellets U. S. Steel Mining............................... Coal Resource Management.............................. Administration of Mineral, Coal and Timber Properties USX Realty Development........................... Real estate sales, leasing and management USX Engineers and Consultants.................... Engineering and Consulting Services USSK ---- U. S. Steel Kosice s.r.o......................... Sheets; Tin Mill; Plates; Coke ------------------------------------------------------------------------------------------------------------------ /(a)/ Equity investee
U. S. Steel Domestic Operations U. S. Steel domestic operations includes plants which produce steel products in a variety of forms and grades. Raw steel production was 11.4 million tons in 2000, compared with 12.0 million tons in 1999 and 11.2 million tons in 1998. Raw steel produced was nearly 100% continuous cast in 2000, 1999 and 1998. Raw steel production averaged 89% of capability in 2000, compared with 94% of capability in 1999 and 88% of capability in 1998. U. S. Steel's stated annual raw steel production capability was 12.8 millions tons for 2000 (7.5 million at Gary Works, 2.9 million at Mon Valley Works, and 2.4 million at Fairfield Works). Steel shipments were 10.8 million tons in 2000, 10.6 million tons in 1999 and 10.7 million tons in 1998. U. S. Steel Group shipments comprised approximately 9.8% of domestic steel shipments in 2000. Exports accounted for approximately 5% of U. S. Steel Group shipments in 2000, 3% in 1999 and 4% in 1998. 30 The following tables set forth significant U. S. Steel domestic operations shipment data by major markets and products for each of the last three years. Such data does not include shipments by joint ventures and other affiliates of USX accounted for by the equity method. Steel Shipments By Market and Product (United States production only)
Sheets & Tubular, Semi-finished Plate & Tin Major Market - 2000 Steel Mill Products Total - ------------------------------------------------------------------------------------------------------ (Thousands of Net Tons) Steel Service Centers......................................... 1,636 679 2,315 Further Conversion: Trade Customers.......................................... 742 432 1,174 Joint Ventures........................................... 1,771 - 1,771 Transportation (Including Automotive)......................... 1,206 260 1,466 Containers.................................................... 182 520 702 Construction and Construction Products........................ 778 158 936 Oil, Gas and Petrochemicals................................... - 973 973 Export........................................................ 346 198 544 All Other..................................................... 748 127 875 ----- ----- ------ TOTAL................................................. 7,409 3,347 10,756 ===== ===== ====== Major Market - 1999 - ------------------- (Thousands of Net Tons) Steel Service Centers......................................... 1,867 589 2,456 Further Conversion: Trade Customers.......................................... 1,257 376 1,633 Joint Ventures........................................... 1,818 - 1,818 Transportation (Including Automotive)......................... 1,280 225 1,505 Containers.................................................... 167 571 738 Construction and Construction Products........................ 660 184 844 Oil, Gas and Petrochemicals................................... - 363 363 Export........................................................ 246 75 321 All Other..................................................... 819 132 951 ----- ----- ------ TOTAL.................................................... 8,114 2,515 10,629 ===== ===== ====== Major Market - 1998 - ------------------- (Thousands of Net Tons) Steel Service Centers......................................... 1,867 696 2,563 Further Conversion: Trade Customers.......................................... 706 434 1,140 Joint Ventures........................................... 1,473 - 1,473 Transportation (Including Automotive)......................... 1,438 347 1,785 Containers.................................................... 222 572 794 Construction and Construction Products........................ 809 178 987 Oil, Gas and Petrochemicals................................... - 509 509 Export........................................................ 226 156 382 All Other..................................................... 867 186 1,053 ----- ----- ------ TOTAL.................................................... 7,608 3,078 10,686 ===== ===== ======
31 USX and its wholly owned entity, U. S. Steel Mining, have domestic coal properties with demonstrated bituminous coal reserves of approximately 787 million net tons at year-end 2000 and at year-end 1999. The reserves are of metallurgical and steam quality in approximately equal proportions. They are located in Alabama, Illinois, Indiana, Pennsylvania, Tennessee and West Virginia. Approximately 93% of the reserves are owned, and the rest are leased. The leased properties are covered by leases which expire in 2005 and 2012. During 2000, the U. S. Steel Group recorded $71 million of impairments relating to coal assets located in West Virginia and Alabama. The impairment was recorded as a result of a reassessment of long-term prospects after geological conditions were encountered. U. S. Steel Mining's coal production was 6.2 million tons in 2000, compared with 6.6 million tons in 1999 and 8.2 million tons in 1998. Coal shipments were 6.8 million tons in 2000, compared with 6.9 million tons in 1999 and 7.7 million tons in 1998. USX controls domestic iron ore properties having demonstrated iron ore reserves in grades subject to beneficiation processes in commercial use by U. S. Steel domestic operations of approximately 710 million tons at year-end 2000, substantially all of which are iron ore concentrate equivalents available from low-grade iron-bearing materials. All demonstrated reserves are located in Minnesota. Approximately 32% of these reserves are owned and the remaining 68% are leased. Most of the leased reserves are covered by a lease expiring in 2058 and the remaining leases have expiration dates ranging from 2021 to 2026. U. S. Steel Group's iron ore operations at Mt. Iron, Minnesota ("Minntac") produced 16.3 million net tons of taconite pellets in 2000, 14.3 million net tons in 1999 and 15.8 million net tons in 1998. Taconite pellet shipments were 15.0 million tons in 2000, compared with 15.0 million tons in 1999 and 15.4 million tons in 1998. USX's Resource Management administers the remaining mineral lands and timber lands of U. S. Steel domestic operations and is responsible for the lease or sale of these lands and their associated resources, which encompass approximately 270,000 acres of surface rights and 1,500,000 acres of mineral rights in 13 states. USX Engineers and Consultants, Inc. sells technical services worldwide to the steel, mining, chemical and related industries. Together with its subsidiary companies, it provides engineering and consulting services for facility expansions and modernizations, operating improvement projects, integrated computer systems, coal and lubrication testing and environmental projects. USX Realty Development develops real estate for sale or lease and manages retail and office space, business and industrial parks and residential and recreational properties. For significant operating data for U. S. Steel Group for each of the last five years, see "USX Consolidation Financial Statements and Supplementary Data - Five-Year Operating Summary - U. S. Steel Group" on page U-37. USX participates directly and through subsidiaries in a number of joint ventures included in the Domestic Steel segment. All of the joint ventures are accounted for under the equity method. Certain of the joint ventures and other investments are described below, all of which are at least 50% owned except Transtar, Republic, Acero Prime and the Clairton 1314B Partnership. For financial information regarding joint ventures and other investments, see "Financial Statements and Supplementary Data - Notes to Financial Statements - 16. Investments and Long-Term Receivables" for the U. S. Steel Group on page S-16. USX and Pohang Iron & Steel Co., Ltd. ("POSCO") of South Korea participate in a joint venture, USS-POSCO, which owns and operates the former U. S. Steel Pittsburg, California plant. The joint venture markets high quality sheet and tin products, principally in the western United States. USS-POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel, with hot bands principally provided by U. S. Steel Group and POSCO. Total shipments by USS-POSCO were approximately 1.5 million tons in 2000. USX owns approximately a 16% interest in Republic Technologies International, LLC ("Republic"), a subsidiary of Republic Technologies International Holdings, LLC which is controlled by Blackstone Capital Partners II. Republic produces raw steel, semi-finished steel products and bar products. Total shipments by Republic were approximately 2.5 million tons in 2000. 32 USX and Kobe Steel, Ltd. ("Kobe") participate in a joint venture, PRO-TEC, which owns and operates two hot-dip galvanizing lines in Leipsic, Ohio. The first galvanizing line commenced operations in early 1993. In November 1998, operations commenced on a second hot-dip galvanized sheet line which expanded PRO-TEC's capacity nearly 400,000 tons a year to 1.0 million tons annually. Total shipments by PRO-TEC were approximately 1.0 million tons in 2000. USX and Worthington Industries Inc. participate in a joint venture known as Worthington Specialty Processing which operates a steel processing facility in Jackson, Michigan. The plant is operated by Worthington Industries, Inc. The facility contains state-of-the-art technology capable of processing master steel coils into both slit coils and sheared first operation blanks including rectangles, trapezoids, parallelograms and chevrons. It is designed to meet specifications for the automotive, appliance, furniture and metal door industries. In 2000, Worthington Specialty Processing shipments were approximately 299 thousand tons. USX and Rouge Steel Company participate in Double Eagle Steel Coating Company ("DESCO"), a joint venture which operates an electrogalvanizing facility located in Dearborn, Michigan. This facility enables U. S. Steel Group to supply the automotive demand for steel with corrosion resistant properties. The facility can coat both sides of sheet steel with zinc or alloy coatings and has the capability to coat one side with zinc and the other side with alloy. Availability of the facility is shared equally by the partners. In 2000, DESCO produced approximately 799 thousand tons of electrogalvanized steel. USX and Olympic Steel, Inc. participate in a 50-50 joint venture to process laser welded sheet steel blanks at a facility in Van Buren, Michigan. The joint venture conducts business as Olympic Laser Processing. Startup began in 1998. In February 2000 an expansion project was announced adding two manually operated welding lines. The expansion will create the needed flexibility and capacity to service current and growing requirements for automotive laser weld applications. Laser welded blanks are used in the automotive industry for an increasing number of body fabrication applications. U. S. Steel Group is the venture's primary customer and is responsible for marketing the laser-welded blanks. In 2000, Olympic Laser Processing shipments were approximately 676 thousand parts. In 2000, USX owned a 46% interest in Transtar, which in 1988 purchased the former domestic transportation businesses of USX including railroads, a dock company, USS Great Lakes Fleet, Inc. and Warrior & Gulf Navigation Company. Blackstone Transportation Partners, L.P. and Blackstone Capital Partners L.P., both affiliated with The Blackstone Group, together owned 53% of Transtar, and the senior management of Transtar owned the remaining 1%. In October 2000, Transtar announced that it had entered into a Reorganization and Exchange Agreement with its two voting shareholders, USX and Transtar Holdings, L.P. ("Holdings"), an affiliate of Blackstone Capital Partners L.P. Upon closing, USX will become sole owner of Transtar and certain of its subsidiaries, namely, the Birmingham Southern Railroad Company; the Elgin, Joliet and Eastern Railway Company; the Lake Terminal Railroad Company; the McKeesport Connecting Railroad Company; the Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior & Gulf Navigation Company; and Tracks Traffic Management Services, Inc. and their subsidiaries. Holdings will own the other subsidiaries. In 1998, USX and VSZ a.s. ("VSZ"), formed a 50-50 joint venture in Kosice, Slovak Republic for the production and marketing of tin mill products. VSZ's interest in the joint venture was transferred as part of the November 24, 2000 transaction in which USX purchased USSK. In 2000, through the date of the acquisition, the former joint venture shipments were approximately 148 thousand net tons. USX, through its subsidiary, United States Steel Export Company de Mexico, along with Feralloy Mexico, S.R.L. de C.V., and Intacero de Mexico, S.A. de C.V., participate in a joint venture, Acero Prime, for a slitting and warehousing facility in San Luis Potosi, Mexico. In May 2000, an expansion project was announced for the joint venture. The expansion project involves the construction of a 60,000 square-foot addition that will double the current facility's size and total warehousing capacity. A second slitting line and an automatic packaging system will also be installed as part of the project. Also, a new 70,000 square-foot, in-bond warehouse facility will be built in Coahuilla state in Ramos Arizpe. The warehouse will store and manage coil inventories. Startup is scheduled for the first quarter of 2001. In 2000, the joint venture processed approximately 95 thousand tons. 33 On February 24, 2000, U. S. Steel Group entered into a strategic alliance with e-STEEL Corporation ("e-STEEL"), a leading online exchange for the global steel industry. e-STEEL provides an easy-to-use, secure web site where both steel buyers and sellers can initiate, describe, specifically target, negotiate in real time, and conclude transactions online. As part of the agreement, U. S. Steel Group has taken a minority stake in e-STEEL. e-STEEL also entered into agreements with USX Engineers and Consultants, Inc., a wholly owned subsidiary of USX, for joint marketing and implementation of system integration services. U. S. Steel Kosice On November 24, 2000, USX completed the acquisition of the steelmaking operations and related assets of VSZ located in Kosice in the Slovak Republic. These operations are now operating as USSK. The commercial strategy is to serve existing U. S. Steel Group customers in Central Europe and to grow our customer base in this region. For more information on this transaction, see "Financial Statements and Supplementary Data - Notes to Financial Statements - 5. Business Combination" for the U. S. Steel Group on page S-8. USSK produces steel products in a variety of forms and grades. For the 38 days of U. S. Steel Group's ownership in 2000, USSK raw steel production was 382 thousand tons or 82% of capability, based on annual capability of 4.5 million tons. USSK has three blast furnaces, two steel shops with two vessels each, a dual strand caster attached to each steel shop, a hot strip mill, cold rolling mill, pickling lines, galvanizing line, tin coating line and two coke batteries. Raw steel produced in 2000 was 100% continuous cast. USSK shipped 317 thousand tons following the acquisition. These shipments included sheet products, galvanized sheet products, tin mill products and plate products. In addition, USSK includes Walzwerk Finow GmbH, located in eastern Germany, which produces about 90,000 tons per year of welded precision steel tubes from both cold rolled and hot rolled product as well as cold rolled specialty shaped sections. USSK also has facilities for manufacturing heating radiators and spiral weld pipe. A majority of product sales by USSK are anticipated to be denominated in Euros while only a small percent of expected expenditures is anticipated to be in Euros. In addition, most interest and debt payments will be in U.S. dollars and the majority of other spending is expected to be in U.S. dollars and the Slovak koruna. This introduces exposure to currency fluctuations. Property, Plant and Equipment Additions For property, plant and equipment additions, including capital leases, see "Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity - Capital Expenditures for the U. S. Steel Group" on page S-28. Environmental Matters The U. S. Steel Group maintains a comprehensive environmental policy overseen by the Public Policy Committee of the USX Board of Directors. The Environmental Affairs organization has the responsibility to ensure that the U. S. Steel Group's operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Executive Environmental Committee, which is comprised of officers of the U. S. Steel Group, is charged with reviewing its overall performance with various environmental compliance programs. Also, the U. S. Steel Group, largely through the American Iron and Steel Institute, continues its involvement in the negotiation of various air, water, and waste regulations with federal, state and local governments concerning the implementation of cost effective pollution reduction strategies. 34 The businesses of the U. S. Steel Group are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act ("CAA") with respect to air emissions; the Clean Water Act ("CWA") with respect to water discharges; the Resource Conservation and Recovery Act ("RCRA") with respect to solid and hazardous waste treatment, storage and disposal; and the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to releases and remediation of hazardous substances. In addition, all states where the U. S. Steel Group operates have similar laws dealing with the same matters. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been promulgated or in certain instances are undergoing revision. These environmental laws and regulations, particularly the CAA, could result in substantially increased capital, operating and compliance costs. For a discussion of environmental capital expenditures and the cost of compliance for air, water, solid waste and remediation, see "Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies" on page S-30 and "Legal Proceedings" for the U. S. Steel Group on page 42. The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet CAA obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. U. S. Steel believes that its major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on U. S. Steel's competitive position with regard to domestic mini-mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. For further information, see "Legal Proceedings" on page 42, and "Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies" on page S-30. The 1997 Kyoto Global Climate Change Agreement ("Kyoto Protocol") produced by the United Nations convention on climate change, if ratified by the U. S. Senate, would require restrictions on greenhouse gas emissions in the United States. Options that could be considered by federal regulators to force the reductions necessary to meet these restrictions could escalate energy costs and thereby increase steel production costs. Until action is taken by the U. S. Senate to ratify or reject the Kyoto Protocol, it is not possible to estimate the effect of regulations that may be considered for implementation of emissions restrictions in the United States. Air The CAA imposed more stringent limits on air emissions, established a federally mandated operating permit program and allowed for enhanced civil and criminal enforcement sanctions. The principal impact of the CAA on the U. S. Steel Group is on the coke-making and primary steel-making operations of U. S. Steel, as described in this section. The coal mining operations and sales of U. S. Steel Mining may also be affected. The CAA requires the regulation of hazardous air pollutants and development and promulgation of Maximum Achievable Control Technology ("MACT") Standards. The amendment to the Chrome Electroplating MACT to include the chrome processes at Gary and Fairless is expected sometime in the next couple years. The EPA is also promulgating MACT standards for integrated iron and steel plants and taconite iron ore processing which are expected to be finalized in 2002. The impact of these new standards could be significant to U. S. Steel, but the cost cannot be reasonably estimated until the rules are finalized. 35 The CAA specifically addressed the regulation and control of coke oven batteries. The National Emission Standard for Hazardous Air Pollutants for coke oven batteries was finalized in October 1993, setting forth the MACT standard and, as an alternative, a Lowest Achievable Emission Rate ("LAER") standard. Effective January 1998, U. S. Steel elected to comply with the LAER standards. U. S. Steel believes it will be able to meet the current LAER standards. The LAER standards will be further revised in 2010 and additional health risk-based standards are expected to be adopted in 2020. EPA is in the process of developing the Phase II Coke MACT for pushing, quenching and battery stacks which is scheduled to be finalized in 2002. This MACT will impact U. S. Steel, but the cost cannot be reasonably estimated at this time. The CAA also mandates the nationwide reduction of emissions of acid rain precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired electrical utility plants. U. S. Steel, like all other electricity consumers, will be impacted by increased electrical energy costs that are expected as electric utilities seek rate increases to comply with the acid rain requirements. In September 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and particulate matter which are significantly more stringent than prior standards. EPA has issued a Nitrogen Oxide ("NOx") State Implementation Plan ("SIP") call to require certain states to develop plans to reduce NOx emissions focusing on large utility and industrial boilers. The impact of these revised standards could be significant to U. S. Steel, but the cost cannot be reasonably estimated until the final revised standards and the NOx SIP call are issued and, more importantly, the states implement their SIPs covering their standards. In 2000, all of the coal production of U. S. Steel Mining was metallurgical coal, which is primarily used in coke production. While USX believes that the new environmental requirements for coke ovens will not have an immediate effect on U. S. Steel Mining, the requirements may encourage development of steelmaking processes that reduce the usage of coke. The new ozone and particulate matter standards could be significant to U. S. Steel Mining, but the cost is not capable of being reasonably estimated until rules are proposed or finalized. Water The U. S. Steel Group maintains the necessary discharge permits as required under the National Pollutant Discharge Elimination System ("NPDES") program of the CWA, and it is in compliance with such permits. In 1998, USX entered into a consent decree with the Environmental Protection Agency ("EPA") which resolved alleged violations of the Clean Water Act NPDES permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. In 1999, USX paid civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs. In addition, USX will pay the public trustees $1 million at the end of the remediation project for future monitoring costs and USX is obligated to purchase and restore several parcels of property that have been or will be conveyed to the trustees. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $36.4 million over the next five years. Estimated remediation and monitoring costs for this project have been accrued. Solid Waste The U. S. Steel Group continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. Corrective action under RCRA related to past waste disposal activities is discussed below under "Remediation." 36 Remediation A significant portion of the U. S. Steel Group's currently identified environmental remediation projects relate to the remediation of former and present operating locations. These projects include the remediation of the Grand Calumet River (discussed above), and the closure and remediation of permitted hazardous and non-hazardous waste landfills. The U. S. Steel Group is also involved in a number of remedial actions under CERCLA, RCRA and other federal and state statutes, and it is possible that additional matters may come to its attention which may require remediation. For a discussion of remedial actions related to the U. S. Steel Group, see "Legal Proceedings - U. S. Steel Group Environmental Proceedings" on page 42. 37 Item 2. PROPERTIES The location and general character of the principal oil and gas properties, plants, mines, pipeline systems and other important physical properties of USX are described in the Item 1. Business section of this document. Except for oil and gas producing properties, which generally are leased, or as otherwise stated, such properties are held in fee. The plants and facilities have been constructed or acquired over a period of years and vary in age and operating efficiency. At the date of acquisition of important properties, titles were examined and opinions of counsel obtained, but no title examination has been made specifically for the purpose of this document. The properties classified as owned in fee generally have been held for many years without any material unfavorably adjudicated claim. Several steel production facilities and interests in two liquefied natural gas tankers are leased. See "Financial Statements and Supplementary Data - - Notes to Consolidated Financial Statements - 10. Leases" on page U-17. The basis for estimating oil and gas reserves is set forth in "Consolidated Financial Statements and Supplementary Data - Supplementary Information on Oil and Gas Producing Activities - Estimated Quantities of Proved Oil and Gas Reserves" on pages U-32 and U-33. USX believes that its surface and mineral rights covering reserves are adequate to assure the basic legal right to extract the minerals, but may not yet have obtained all governmental permits necessary to do so. Unless otherwise indicated, all reserves shown are as of December 31, 2000. Item 3. LEGAL PROCEEDINGS USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments related to the Marathon Group and the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are included below in this discussion. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements and/or to the financial statements of the applicable Group. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Marathon Group Posted Price Litigation The Marathon Group, alone or with other energy companies, was named in a number of lawsuits in State and Federal courts alleging various causes of action related to crude oil royalty payments based on posted prices, including underpayment of royalty interests, underpayment of severance taxes, antitrust violations, and violation of the Texas common purchaser statute. Plaintiffs in these actions included governmental entities and private entities or individuals. Except for the litigation described in the following paragraph, all posted price litigation involving crude oil royalties has been resolved as to Marathon. During November 1997, Marathon and over twenty other defendants entered into a proposed class settlement agreement covering antitrust and contract claims from January 1, 1986, through September 30, 1997, excluding federal and Indian royalty claims, common purchaser claims and severance tax claims. A new settlement agreement was filed with the U.S. District Court for the Southern District of Texas on June 26, 1998, which replaced the November 1997 Settlement Agreement. The new settlement agreement omits from the settlement class all State entities which receive royalty payments and only covers private claimants. At a hearing on December 1, 1998, the court preliminarily approved the new settlement agreement for the group of defendants of which Marathon is a part. The new settlement agreement settles all private claims, subject to opt-outs. The agreement was approved by the court in April 1999. The approval of the settlement has been appealed to the 5th Circuit Court of Appeals. A decision from the court is expected in 2001. This statement as to the expected decision from the court is a forward-looking statement. Predictions as to the date of the decision are subject to uncertainties with respect to (among other things) the court's docket and caseload. 38 Marathon has been named by private plaintiffs as a defendant, along with 17 other energy companies, in a lawsuit under the False Claims Act in the U.S. District Court for the Eastern District of Texas. In February 2001, Marathon paid $7.7 million to settle this dispute over the calculation and amount of royalties due from leases on federal and Native American lands between 1988 and 1998. Marathon is a named defendant in Wright v. Chevron, et al., a qui tam case originally filed in the U.S. District Court for the Eastern District of Texas against over 125 companies which alleges violations under the federal False Claims Act arising from the reporting and payment of royalties on natural gas and natural gas liquids in connection with leases on federal and Native American lands. The Department of Justice decided not to intervene in the case against Marathon. The Marathon Group intends to vigorously defend such remaining cases. Manteo On July 18, 1997, the United States Court of Federal Claims, Case No. 92-331C, entered a judgment in the amount of $78 million in favor of Marathon Oil Company and against the United States of America. The U.S. government was effectively ordered to return lease bonuses that Marathon paid in 1981 for interest in five oil and gas leases offshore North Carolina. The lawsuit filed in May 1992 alleged, inter alia, that the federal government breached the leases through passage of legislation which disputed the company's rights to explore, develop, and produce hydrocarbons from the leases. The Department of Justice appealed the trial court's decision to the U.S. Court of Appeals for Federal Claims which reversed the trial court. During the fourth quarter of 1999, Marathon's request for Writ of Certiorari to the U.S. Supreme Court was granted. On June 26, 2000, the U.S. Supreme Court reversed and remanded the case to the U.S. Court of Appeals for the Federal Circuit for further action. The court of appeals subsequently ordered full restitution. The U.S. government's request for reconsideration was denied. FTC Investigation On June 27, 2000, the Federal Trade Commission ("FTC") issued a subpoena to MAP as part of an investigation to determine whether firms engaged in the production, transportation, distribution, marketing or sale of petroleum products have engaged in any unfair methods of competition in the Midwest in violation of Section 5 of the Federal Trade Commission Act. MAP responded to the subpoena and has cooperated with the investigation. On June 29, 2000, MAP received a demand for information from the Wisconsin Attorney General which is substantially similar to the FTC subpoena. MAP has responded to the request and certain other informal requests for information. The investigation was in response to gasoline price increases during the summer of 2000, particularly those in the Midwest. MAP believes that much of the increase nationwide was related to the price of crude oil, which nearly tripled between January 1999 and the summer of 2000, and to the implementation of regulations which force refiners to produce an ever-widening array of motor fuels for different markets. In addition to these factors, the Midwest had been experiencing an imbalance of gasoline supply and demand. The primary causes of this imbalance were new fuels required June 1, 2000 for the Chicago, Milwaukee and St. Louis markets and a series of pipeline and refinery disruptions. MAP believes that it properly responded to market forces in its gasoline pricing practices. Environmental Proceedings The following is a summary of proceedings attributable to the Marathon Group that were pending or contemplated as of December 31, 2000, under federal and state environmental laws. Except as described herein, it is not possible to predict accurately the ultimate outcome of these matters; however, management's belief set forth in the first paragraph under Item 3. "Legal Proceedings" above takes such matters into account. Claims under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expedite the cleanup of hazardous substances without regard to fault. Potentially responsible parties ("PRPs") for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several. 39 Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, USX is unable to reasonably estimate its ultimate cost of compliance with CERCLA. Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from those stated in forward-looking statements. At December 31, 2000, USX had been identified as a PRP at a total of 13 CERCLA waste sites related to the Marathon Group. Based on currently available information, which is in many cases preliminary and incomplete, USX believes that its liability for cleanup and remediation costs in connection with all but one of these sites will be under $1 million per site, and most will be under $100,000. USX believes that its liability for cleanup and remediation costs in connection with the one remaining site will be under $2.5 million. In addition, there are 6 waste sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 115 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 15 were associated with properties conveyed to MAP by Ashland which has retained liability for all costs associated with remediation. Based on currently available information, which is in many cases preliminary and incomplete, the Marathon Group believes that its liability for cleanup and remediation costs in connection with 20 of these sites will be under $100,000 per site, 32 sites have potential costs between $100,000 and $1 million per site, 10 sites may involve remediation costs between $1 million and $5 million per site and 6 sites have incurred remediation costs of more than $5 million per site. Of the 6 sites, only 1 site as described in the following paragraph has future costs that are estimated to exceed $5 million. There are 32 sites with insufficient information to estimate any remediation costs. There is one site that involves a remediation program in cooperation with the Michigan Department of Environmental Quality at a closed and dismantled refinery site located near Muskegon, Michigan. During the next 10 to 20 years, the Marathon Group anticipates spending less than $7 million at this site. Expenditures in 2001 are expected to be approximately $500,000. Additionally, negotiations are taking place with Michigan Department of Environmental Quality to eventually perform a risk-based closure on this site. In October 1998, the National Enforcement Investigations Center and Region V of the EPA conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. MAP has been advised, in ongoing discussions with the EPA, as to certain compliance issues regarding MAP's Detroit and Robinson refineries. Thus far, MAP has been served with two Notices of Violation ("NOV") and three Findings of Violation in connection with the multi-media inspection at its Detroit refinery. The Detroit notices allege violations of the Michigan State Air Pollution Regulations, the EPA New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants for Benzene. On March 6, 2000, MAP received its first NOV arising out of the multi-media inspection of the Robinson refinery conducted in November 1998. The NOV is for alleged Resource Conservation and Recovery Act (hazardous waste) violations. 40 MAP has responded to information requests from the EPA regarding New Source Review ("NSR") compliance at its Garyville and Texas City refineries. In addition, the scope of the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries included NSR compliance. NSR requires new major stationary sources and major modifications at existing major stationary sources to obtain permits, perform air quality analysis and install stringent air pollution control equipment at affected facilities. The current EPA initiative appears to target many items that the industry has historically considered routine repair, replacement and maintenance or other activity exempted from the NSR requirements. MAP is engaged in ongoing discussions with the EPA on these issues concerning all of MAP's refineries. While MAP has not been notified of any formal findings or violations resulting from either the information requests or inspections regarding NSR compliance, MAP has been informed during discussions with the EPA of potential non-compliance concerns of the EPA based on these inspections and other information identified by the EPA. Recently, discussions with the EPA have included commitment to some specific control technologies and implementation schedules, but not penalties. In addition, MAP anticipates that some or all of the non-NSR related issues arising from the multi-media inspections may also be resolved as part of the current discussions with the EPA. A negotiated resolution with the EPA could result in increased environmental capital expenditures in future years, in addition to as yet, undetermined penalties. In connection with the multi-media inspection at MAP's Detroit refinery, in December 1998, EPA, Region V issued a Notice of Violation against the refinery alleging that, as a result of "stack tests" conducted in 1992, 1995, 1997 and 1998, at the fluid catalytic cracking unit and the fluid catalytic cracking unit carbon monoxide boiler, the refinery exceeded the emission limits for particulate matter and sulfur dioxide thereby violating the CAA. In January 1997, a Notice of Violation ("NOV") was served by the Illinois Environmental Protection Agency on the Marathon Group, including Marathon Oil Company (Robinson Refinery and Brand Marketing, now operating organizations within MAP), Marathon Pipe Line Company (now Marathon Ashland Pipe Line LLC) and Emro Marketing Company (now Speedway SuperAmerica LLC), consolidating various alleged violations of federal and state environmental laws and regulations relating to air, water and soil contamination. Three of these matters have been resolved through two court consent decrees (relating to an Underground Storage Tank ("UST") site in Chicago, Illinois and Stage II Vapor Recovery Systems at certain station sites) and an administrative order (a UST site in Springfield, Illinois) with civil penalties of less than $100,000 per matter. Three more matters have settlements in concept (two refining and one pipeline) with civil penalties of less than $100,000 per matter. In October 1996, EPA Region V issued a Finding of Violation against the Robinson refinery alleging that it does not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the CAA, because the refinery's Total Annual Benzene releases exceed the limitation of 10 megagrams per year, and as a result, the refinery is in violation of the emission control, record keeping, and reports requirements. The Marathon Group contends that it does qualify for the exemption. However, in February 1999, the U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint in the U.S. District Court for the Southern District of Illinois alleging six counts of violations of the CAA with respect to the benzene releases. The case has been settled in concept with Marathon and MAP agreeing to pay a combined $1.8 million civil penalty and conduct various injunctive remedies. It is anticipated that a consent decree will be negotiated and agreed to in the first half of 2001. In connection with the formation of MAP all three of the refineries owned by Ashland Inc. ("Ashland") were conveyed effective January 1, 1998, to MAP or its subsidiaries. Ashland reported in its 1997 Form 10-K, that during 1997, the EPA completed comprehensive inspections of these three refineries, prior to formation of MAP. These inspections resulted in a consent decree, which required Ashland to pay civil penalties and to undertake specific remedial projects and improvements at the refinery sites, as well as a number of supplemental environmental projects involving improvements to the facilities' operations. Under the terms of its agreements with MAP, Ashland has retained responsibility for matters arising out of these inspections, including commencement of work as soon as practical on certain enumerated projects. During 2000, Ashland continued its work under its consent decree with the EPA regarding these matters. 41 In 2000, the Kentucky Natural Resources and Environmental Cabinet ("Cabinet") sent Catlettsburg Refining, LLC a NOV seeking a $150,000 civil penalty for a tank rupture and spill at the Catlettsburg refinery. This matter is pending. In 2000, the Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a $300,000 civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. Discussions with the Cabinet have been ongoing. U. S. Steel Group Inland Steel Patent Litigation In July 1991, Inland Steel Company ("Inland") filed an action against USX and another domestic steel producer in the U. S. District Court for the Northern District of Illinois, Eastern Division, alleging defendants had infringed two of Inland's steel-related patents. Inland seeks monetary damages of up to approximately $50 million and an injunction against future infringement. USX in its answer and counterclaim alleges the patents are invalid and not infringed and seeks a declaratory judgment to such effect. In May 1993, a jury found USX to have infringed the patents. The District Court has yet to rule on the validity of the patents. In July 1993, the U.S. Patent Office rejected the claims of the two Inland patents upon a reexamination at the request of USX and the other steel producer. A further request was submitted by USX to the Patent Office in October 1993, presenting additional questions as to patentability which was granted and consolidated for consideration with the original request. In 1994, the Patent Office issued a decision rejecting all claims of the Inland patents. On September 21, 1999, the Patent Office Board of Appeals affirmed the decision of the Patent Office. Inland filed a notice of appeal with the Court of Appeals for the Federal Circuit on November 17, 1999. A hearing was held before the court on January 10, 2001, and the decision is pending. Asbestos Litigation USX has been and is a defendant in a large number of cases in which plaintiffs allege injury resulting from exposure to asbestos. Many of these cases involve multiple plaintiffs and most have multiple defendants. These claims fall into three major groups: (1) claims made under the Jones Act and general maritime law by employees of the Great Lakes or Intercoastal Fleets, former operations of USX; (2) claims made by persons who did work at U. S. Steel Group facilities; and (3) claims made by industrial workers allegedly exposed to an electrical cable product formerly manufactured by USX. To date all actions resolved have been either dismissed or settled for immaterial amounts. It is not possible to predict with certainty the outcome of these matters; however, based upon present knowledge, USX believes that the remaining actions will be similarly resolved. This statement of belief is a forward-looking statement. Predictions as to the outcome of pending litigation are subject to substantial uncertainties with respect to (among other things) factual and judicial determinations, and actual results could differ materially from those expressed in the forward-looking statements. Environmental Proceedings The following is a summary of the proceedings attributable to the U. S. Steel Group that were pending or contemplated as of December 31, 2000, under federal and state environmental laws. Except as described herein, it is not possible to accurately predict the ultimate outcome of these matters; however, management's belief set forth in the first paragraph under "Item 3. Legal Proceedings" above takes such matters into account. Claims under CERCLA and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expedite the cleanup of hazardous substances without regard to fault. PRPs for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several. Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, USX is unable to reasonably estimate its ultimate cost of compliance with CERCLA. 42 Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of environmental projects may differ materially from those stated in forward-looking statements. At December 31, 2000, USX had been identified as a PRP at a total of 25 CERCLA sites related to the U. S. Steel Group. Based on currently available information, which is in many cases preliminary and incomplete, USX believes that its liability for cleanup and remediation costs in connection with 11 of these sites will be between $100,000 and $1 million per site and 7 will be under $100,000. At the remaining 7 sites, USX expects that its share in the remaining cleanup costs at any single site will not exceed $5 million, although it is not possible to accurately predict the amount of USX's share in any final allocation of such costs. Following is a summary of the status of these sites: 1. At USX's former Duluth, Minn. Works, USX spent a total of approximately $11.2 million through 2000. The Duluth Works was listed by the Minnesota Pollution Control Agency under the Minnesota Environmental Response and Liability Act on its Permanent List of Priorities. The EPA has consolidated and included the Duluth Works site with the St. Louis River and Interlake sites on the EPA's National Priorities List. The Duluth Works cleanup has proceeded since 1989. USX is conducting an engineering study of the estuary sediments and the construction of a breakwater in the estuary. Depending upon the method and extent of remediation at this site, future costs are presently unknown and indeterminable. 2. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been used at various times as a disposal site for coal mine refuse and municipal and industrial waste. USX is one of 15 PRPs that have entered into an agreed order with the EPA to perform a remediation of the site. Implementation of the remedial design plan, resulting in a long-term cleanup of the site, is estimated to cost approximately $28.5 million. One of the PRPs filed suit against the EPA, the Ohio Environmental Protection Agency, and 13 PRPs including USX. The EPA, in turn, filed suit against the PRPs to recover $1.5 million in oversight costs. In May 1996, USX entered into a final settlement agreement to resolve this litigation and the overall allocation. USX agreed to pay 4.8% of the estimated costs which would result in USX paying an additional amount of approximately $1.1 million over a two- to three-year period. To date USX has spent $900,000 at the site. Remediation commenced in 1999 and should be substantially completed in 2001. 3. The D'Imperio/Ewan sites in New Jersey are waste disposal sites where a former USX subsidiary allegedly disposed of used paint and solvent wastes. USX has entered into a settlement agreement with the major PRPs at the sites which fixes USX's share of liability at approximately $1.2 million, $598,000 of which USX has already paid. The balance, which is expected to be paid over the next several years, has been accrued. 4. The Berks Associates/Douglassville Site ("Berks Site") is situated on a 50-acre parcel located on the Schuylkill River in Berks County, Pa. Used oil and solvent reprocessing operations were conducted on the Berks Site between 1941 and 1986. The EPA undertook the dismantling of the Berks Site's former processing area and instituted a cost recovery suit in July 1991 against 30 former Berks Site customers, as PRPs to recover $8 million it expended in the process area dismantling. The 30 PRPs targeted by the EPA joined over 400 additional PRPs in the EPA's cost recovery litigation. On June 30, 1993, the EPA issued a unilateral administrative order to the original 30 PRPs ordering remediation which the EPA estimated would cost over $70 million. In June 1996, the PRPs proposed an alternative remedy estimated to cost approximately $20 million. USX expected its share of these costs to be approximately 7%. In September 1997, USX signed a consent decree to conduct a feasibility study at the site relating to the alternative remedy. In 1999, a new Record of Decision was approved by EPA and the DOJ. On January 19, 2001, USX signed a consent decree with the EPA to remediate this site. The cost to USX for remediating this site is approximately $450,000. 43 In February 1996, USX and other Berks Site PRPs were sued by the Pennsylvania Department of Environmental Resources ("PaDER") for $6 million in past costs. 5. In 1987 the California Department of Health Services ("DHS") issued a remedial action order for the GBF/Pittsburg landfill near Pittsburg, Calif. DHS alleged that from 1972 through 1974, Pittsburg Works arranged for the disposal of approximately 2.6 million gallons of waste oil, sludge, caustic mud and acid which were eventually taken to this landfill for disposal. The parties are attempting to negotiate a buyout arrangement with a third party remediation firm, whereby the firm would agree to take title to and remediate the site and also indemnify the PRPs. This commitment would be backed by pollution insurance. USX's share to participate in the buyout has been estimated at approximately $1.05 million. 6. In 1988, USX and three other PRPs agreed to the issuance of an administrative order by the EPA to undertake emergency removal work at the Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The cost of such removal, which has been completed, was approximately $4.2 million, of which USX paid $3.4 million. The EPA has indicated that further remediation of this site may be required in the future, but it has not conducted any assessment or investigation to support what remediation would be required. In October 1991, the PaDER placed the site on the Pennsylvania State Superfund list and began a Remedial Investigation ("RI") which was issued in 1997. It is not possible to estimate accurately the cost of any remediation or USX's share in any final allocation formula; however, based on presently available information, USX may have been responsible for as much as 70% of the waste material deposited at the site. On October 10, 1995, the DOJ filed a complaint in the U.S. District Court for Western Pennsylvania against USX and other Municipal & Industrial Disposal Co. defendants to recover alleged costs incurred at the site. In June 1996, USX agreed to pay $245,000 to settle the government's claims for costs against USX, American Recovery, and Carnegie Natural Gas. In 1996, USX filed a cost recovery action against parties who did not contribute to the cost of the removal activity at the site. USX has reached a settlement in principle with all of the parties except the site owner. The PRPs are awaiting issuance of the State's Feasibility Study ("FS"). 7. USX participated with 35 other PRPs in performing removal work at the Ekotek/Petrochem site in Salt Lake City, Utah under the terms of a 1991 administrative order negotiated with the EPA. The removal work was completed in 1992 at a cost of over $9 million. In July 1992, the PRP Remediation Committee negotiated an administrative order on consent to perform a RI/FS of the site. The RI/FS was completed in 1995. A remediation plan estimated to cost $16.6 million was proposed by the EPA in 1995. In 1997, the EPA issued a revised Record of Decision with a remedial action estimated to cost $12.2 million. USX has contributed approximately $1.1 million through 1999 towards completing the removal work and performing the RI/FS. USX's proportionate share of costs presently being used by the PRP Remediation Committee is approximately 5% of the participating PRPs. The PRP Remediation Committee commenced cost recovery litigation against approximately 1,100 non- participating PRPs. Almost all of these defendants have settled their liability or joined the PRP Remediation Committee. In February 1997, the EPA issued an administrative order to USX and other PRPs to undertake the proposed remedial action and to reimburse approximately $5 million to de minimus PRPs who had earlier settled with the EPA on the basis of a substantially greater remedial cost estimate. On December 15, 1997, USX, along with forty other parties, signed a consent decree to clean up the site. Site cleanup commenced in 1999 and was completed in 2000. Payment has been made for all remediation work. In addition, there are 17 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. 44 There are also 29 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Based on currently available information, which is in many cases preliminary and incomplete, the U. S. Steel Group believes that its liability for cleanup and remediation costs in connection with 4 of these sites will be under $100,000 per site, another 3 sites have potential costs between $100,000 and $1 million per site, and 7 sites may involve remediation costs between $1 million and $5 million. Another 3 sites, including the Grand Calumet River remediation at Gary Works, the Peters Creek Lagoon remediation at Clairton, and the potential claim for investigation, restoration and compensation of injuries to sediments in the East Branch of the Grand Calumet River near Gary Works, have or are expected to have costs for remediation, investigation, restoration or compensation in excess of $5 million. Potential costs associated with remediation at the remaining 12 sites are not presently determinable. The following is a discussion of remediation activities at the U. S. Steel Group's major facilities: Gary Works In 1990 a consent decree was signed by USX which, among other things, required USX to study and implement a program to remediate the sediment in a portion of the Grand Calumet River. USX has developed a sediment remediation plan for the section of the Grand Calumet River that runs through Gary Works. As proposed, this project would require five to six years to complete after approval and would be followed by an environmental recovery validation. The estimated program cost, which has been accrued, is approximately $36.4 million. In 1998, USX entered into a consent decree with the EPA which provides for the expanded sediment remediation program and resolves alleged violations of the prior consent decree and National Pollutant Discharge Elimination System permit since 1990. In 1999, USX paid civil penalties of $2.9 million for alleged violations of the Clean Water Act at Gary Works. In addition, USX has entered into a consent decree with the public trustees to settle natural resource damage claims for the portion of the Grand Calumet River that runs through Gary Works. This settlement obligates USX to purchase and restore several parcels of property and pay $1.5 million in past and future assessment and monitoring costs. In 1999, USX reimbursed past assessment costs of $570,000 and purchased properties which were conveyed to trustees. In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The Public Trustees completed a preassessment screen pursuant to federal regulations and have determined to perform a NRD Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. The Trustees notified the public of their plan for assessment and later adopted the plan. In 2000, the Trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group is discussing settlement opportunities with the Trustees and EPA. On October 23, 1998, a final Administrative Order on Consent was issued by EPA addressing Corrective Action for Solid Waste Management Units throughout Gary Works. This order requires USX to perform a RCRA Facility Investigation ("RFI") and a Corrective Measure Study ("CMS") at Gary Works. The Current Conditions Report, USX's first deliverable, was submitted to EPA in January 1997 and was approved by EPA in 1998. The Phase I RFI work plan was submitted to the EPA in July 1999. IDEM issued NOVs to USS Gary Works in 1994 alleging various violations of air pollution requirements. In early 1996, USX paid a $6 million penalty and agreed to install additional pollution control equipment and programs and implement programs costing over $100 million over a period of several years. In 1999, USS Gary Works entered into an Agreed Order with IDEM to resolve outstanding air issues. USX paid a penalty of $207,400 and installed equipment at the No. 8 Blast Furnace and the No. 1 BOP to reduce air emissions. In November 1999, IDEM issued to USS Gary Works a NOV alleging various air violations. USS and IDEM are in the process of negotiating an Agreed Order. 45 In February 1999, the DOJ and EPA issued a letter demanding a cash payment of approximately $4 million to resolve a Finding of Violation issued in 1997 alleging improper sampling of benzene waste streams at Gary Coke. On September 18, 2000, a Consent Decree was entered which required USX to pay a civil penalty of $587,000 and to replace PCB transformers as a Supplemental Environmental Program ("SEP") at a cost of approximately $2.2 million. Payment of the civil penalty was made on October 13, 2000. Clairton In 1987, USX and the PaDER entered into a consent Order to resolve an incident in January 1985 involving the alleged unauthorized discharge of benzene and other organic pollutants from Clairton Works in Clairton, Pa. That consent Order required USX to pay a penalty of $50,000 and a monthly payment of $2,500 for five years. In 1990, USX and the PaDER reached agreement to amend the consent Order. Under the amended Order, USX agreed to remediate the Peters Creek Lagoon (a former coke plant waste disposal site); to pay a penalty of $300,000; and to pay a monthly penalty of up to $1,500 each month until the former disposal site is closed. Remediation costs have amounted to $8.8 million with another $634,000 presently projected to complete the project. Fairless Works In January 1992, USX commenced negotiations with the EPA regarding the terms of an Administrative Order on consent, pursuant to the RCRA, under which USX would perform a RFI and a CMS at Fairless Works. A Phase I RFI report was submitted during the third quarter of 1997. A Phase II/III RFI will be submitted following EPA approval. The RFI/CMS will determine whether there is a need for, and the scope of, any remedial activities at Fairless Works. USX is working with the Commonwealth of Pennsylvania to use PA Act 2 to facilitate the site cleanup. Fairfield Works In December 1995, USX reached an agreement in principle with the EPA and the DOJ with respect to alleged RCRA violations at Fairfield Works. A consent decree was signed by USX and the United States and filed with the court on December 11, 1997, under which USX will pay a civil penalty of $1 million, implement two SEPs costing a total of $1.75 million and implement a RCRA corrective action at the facility. One SEP was completed during 1998 at a cost of $250,000. The second SEP is underway. The first RFI work plan for the site will be submitted for agency approval in the first quarter of 2001. In November 2000, Fairfield received a Notice of Violation from Jefferson County Health Department ("JHCD") alleging violation of the Halogenated Solvent NESHAP and the JCHD VOC regulation at the Sheet Mill Stretch Leveler. USX has proposed a civil penalty of $100,000 and a VOC emission limit. Mon Valley Works/Edgar Thomson Plant In September 1997, USX received a draft consent decree addressing issues raised in a NOV issued by the EPA in January 1997. The NOV alleged air quality violations at U. S. Steel's Edgar Thomson Plant, which is part of Mon Valley Works. The draft consent decree addressed these issues, including various operational requirements, which EPA believed were necessary to bring the plant into compliance. USX has completed implementing the compliance requirements identified by EPA. USX has paid a cash penalty of $550,000 and implemented five SEPs valued at approximately $1.5 million in settlement of the government's allegations. On February 1, 2000, the U.S. District Court for Western Pennsylvania entered the consent decree. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 46 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal market on which Marathon Stock and Steel Stock are traded is the New York Stock Exchange. Information concerning the high and low sales prices for the common stocks as reported in the consolidated transaction reporting system and the frequency and amount of dividends paid during the last two years is set forth in "Consolidated Financial Statements and Supplementary Data - Selected Quarterly Financial Data (Unaudited)"on page U-29. As of January 31, 2001, there were 64,511 registered holders of Marathon Stock and 49,940 registered holders of Steel Stock. The Board of Directors intends to declare and pay dividends on Marathon Stock and Steel Stock based on the financial condition and results of operations of the Marathon Group and the U. S. Steel Group respectively, although it has no obligation under Delaware law or the USX Restated Certificate of Incorporation to do so. In determining its dividend policy with respect to Marathon Stock and Steel Stock, the Board will rely on the separate financial statements of the Marathon Group and the U. S. Steel Group, respectively. The method of calculating earnings per share for Marathon Stock and Steel Stock reflects the Board's intent that separately reported earnings and the surplus the Marathon Group and the U. S. Steel Group would have if separately calculated, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although the amount of funds legally available under Delaware law for the payment of dividends on these classes of stock do not necessarily correspond with these amounts. Dividends on all classes of preferred stock and USX common stock are limited to legally available funds of USX, which are determined on the basis of the entire Corporation. Distributions on Marathon Stock and Steel Stock would be precluded by a failure to pay dividends on any series of preferred stock of USX. In addition, net losses of either Group, as well as dividends or distributions on either class of USX common stock or series of preferred stock and repurchases of any class of USX common stock or preferred stock at prices in excess of par or stated value will reduce the funds of USX legally available for payment of dividends on the two classes of USX common stock as well as any preferred stock. Dividends on Steel Stock are further limited to the Available Steel Dividend Amount. Net losses of the Marathon Group and distributions on Marathon Stock, and on any preferred stock attributed to the Marathon Group will not reduce the funds available for declaration and payment of dividends on Steel Stock unless the legally available funds of USX are less than the Available Steel Dividend Amount. See "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - 18. Dividends" on page U-23. The Board has adopted certain policies with respect to the Marathon Group and the U. S. Steel Group, including, without limitation, the intention to: (i) limit capital expenditures of the U. S. Steel Group over the long term to an amount equal to the internally generated cash flow of the U. S. Steel Group, including funds generated by sales of assets of the U. S. Steel Group, (ii) sell assets and provide services between the Marathon Group and the U. S. Steel Group only on an arm's-length basis and (iii) treat funds generated by sales of Marathon Stock or Steel Stock and securities convertible into such stock as assets of the Marathon Group or the U. S. Steel Group, as the case may be, and apply such funds to acquire assets or reduce liabilities of the Marathon Group or the U. S. Steel Group, respectively. These policies may be modified or rescinded by action of the Board, or the Board may adopt additional policies, without the approval of holders of the two classes of USX common stock, although the Board has no present intention to do so. 47 Fiduciary Duties of the Board; Resolution of Conflicts Under Delaware law, the Board must act with due care and in the best interest of all the stockholders, including the holders of the shares of each class of USX common stock. The interests of the holders of any class of USX common stock may, under some circumstances, diverge or appear to diverge. Examples include the optional exchange of Steel Stock for Marathon Stock at the 10% premium, the determination of the record date of any such exchange or for the redemption of any Steel Stock; the establishing of the date for public announcement of the liquidation of USX and the commitment of capital among the Marathon Group and the U. S. Steel Group. Because the Board owes an equal duty to all common stockholders regardless of class, the Board is the appropriate body to deal with these matters. In order to assist the Board in this regard, the Board has adopted policies to serve as guidelines for the resolution of matters involving a conflict or a potential conflict, including policies dealing with the payment of dividends, limiting capital investment in the U. S. Steel Group over the long term to its internally generated cash flow and allocation of corporate expenses and other matters. The Board has been advised concerning the applicable law relating to the discharge of its fiduciary duties to the common stockholders in the context of the separate classes of USX common stock and has delegated to the Audit Committee of the Board the responsibility to review matters which relate to this subject and report to the Board. Under principles of Delaware law and the "business judgment rule,"absent abuse of discretion, a good faith determination made by a disinterested and adequately informed Board with respect to any matter having disparate impacts upon holders of Marathon and Steel Stock would be a defense to any challenge to such determination made by or on behalf of the holders of either class of USX common stock. 48 Item 6. SELECTED FINANCIAL DATA USX - Consolidated
Dollars in millions (except per share data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Statement of Operations Data: Revenues and other income/(a)(b)/.............. $ 39,914 $ 29,119 $28,077 $22,824 $ 22,938 Income from operations/(b)/................. 1,752 1,863 1,517 1,705 1,779 Includes: Inventory market valuation charges (credits)........................ - (551) 267 284 (209) Gain on ownership change in MAP............. (12) (17) (245) - - Income from continuing operations.............. $ 411 $ 705 $ 674 $ 908 $ 946 Income (loss) from discontinued operations..... - - - 80 6 Extraordinary losses........................... - (7) - - (9) ------- ------- ------- ------- ------- Net income .................................... $ 411 $ 698 $ 674 $ 988 $ 943 Noncash credit from exchange of preferred stock............................. - - - 10 - Dividends on preferred stock................... (8) (9) (9) (13) (22) ------- ------- ------- ------- ------- Net income applicable to common stocks......... $ 403 $ 689 $ 665 $ 985 $ 921 - ------------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss), gain on ownership change in MAP, net gains/(losses) on disposal of assets, gain on investee stock offering and other income. /(b)/ Excludes amounts for the Delhi Companies (sold in 1997), which have been reclassified as discontinued operations. See Note 5 to the USX Consolidated Financial Statements, on page U-12. - --------------------------------------------------------------------------------
Common Share Data Marathon Stock: Income before extraordinary losses applicable to Marathon Stock................ $ 432 $ 654 $ 310 $ 456 $ 671 Per share - basic (in dollars)................ 1.39 2.11 1.06 1.59 2.33 - diluted (in dollars).............. 1.39 2.11 1.05 1.58 2.31 Net income applicable to Marathon Stock.............................. 432 654 310 456 664 Per share - basic (in dollars) ............... 1.39 2.11 1.06 1.59 2.31 - diluted (in dollars).............. 1.39 2.11 1.05 1.58 2.29 Dividends paid per share (in dollars).......... .88 .84 .84 .76 .70 Common Stockholders' Equity per share (in dollars)................... 15.70 15.38 13.95 12.53 11.62
49 SELECTED FINANCIAL DATA (contd.) USX - Consolidated (contd.)
Dollars in millions (except per share data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Steel Stock: Income (loss) before extraordinary losses applicable to Steel Stock................... $ (29) $ 42 $ 355 $ 449 $ 253 Per share - basic (in dollars) ............... (.33) .48 4.05 5.24 3.00 - diluted (in dollars).............. (.33) .48 3.92 4.88 2.97 Net income (loss) applicable to Steel Stock.... (29) 35 355 449 251 Per share - basic (in dollars) ............... (.33) .40 4.05 5.24 2.98 - diluted (in dollars).............. (.33) .40 3.92 4.88 2.95 Dividends paid per share (in dollars).......... 1.00 1.00 1.00 1.00 1.00 Common Stockholders' Equity per share (in dollars)...................... 21.58 23.23 23.66 20.56 18.37 - ------------------------------------------------------------------------------------------------------------------- Balance Sheet Data - December 31: Capital expenditures - for year................ $ 1,669 $ 1,665 $ 1,580 $ 1,373 $ 1,168 Total assets................................ 23,401 22,931 21,133 17,284 16,980 Capitalization: Notes payable............................... $ 150 $ - $ 145 $ 121 $ 81 Total long-term debt........................ 4,460 4,283 3,991 3,403 4,212 Preferred stock of subsidiary/(a)/.......... 250 250 250 250 250 Trust preferred securities/(a)/............. 183 183 182 182 - Minority interest in MAP.................... 1,840 1,753 1,590 - - Redeemable Delhi Stock/(b)/................. - - - 195 - Preferred stock............................. 2 3 3 3 7 Common stockholders' equity................. 6,762 6,853 6,402 5,397 5,015 -------- --------- -------- -------- --------- Total capitalization........................ $ 13,647 $ 13,325 $ 12,563 $ 9,551 $ 9,565 ======== ========= ======== ======== ========= Ratio of earnings to fixed charges/(c)/........ 3.89 4.32 3.56 3.79 3.65 Ratio of earnings to combined fixed charges and preferred stock dividends/(c)/.......... 3.79 4.20 3.45 3.63 3.41 - -------------------------------------------------------------------------------------------------------------------
/(a)/ See Note 22 to the USX Consolidated Financial Statements, on page U-25. /(b)/ On January 26, 1998, USX redeemed all of the outstanding shares of Delhi Stock. For additional information regarding Delhi Stock, see Note 5 to the USX Consolidated Financial Statements, on page U-12. /(c)/ Amounts represent combined fixed charges and earnings from continuing operations. 50 SELECTED FINANCIAL DATA (contd.) USX - Marathon Group
Dollars in millions (except per share data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Statement of Operations Data: Revenues and other income/(a)/................. $ 33,859 $ 23,707 $21,623 $15,775 $ 16,153 Income from operations......................... 1,648 1,713 938 932 1,296 Includes: Inventory market valuation charges (credits)........................ - (551) 267 284 (209) Gain on ownership change in MAP............. (12) (17) (245) - - Income before extraordinary losses............. 432 654 310 456 671 Net income..................................... $ 432 $ 654 $ 310 $ 456 $ 664 Net income applicable to Marathon Stock.............................. $ 432 $ 654 $ 310 $ 456 $ 664 - ------------------------------------------------------------------------------------------------------------------ Per Common Share Data Income before extraordinary losses - basic..................................... $ 1.39 $ 2.11 $ 1.06 $ 1.59 $ 2.33 - diluted................................... 1.39 2.11 1.05 1.58 2.31 Net income - basic........................... 1.39 2.11 1.06 1.59 2.31 - diluted......................... 1.39 2.11 1.05 1.58 2.29 Dividends paid................................. .88 .84 .84 .76 .70 Common stockholders' equity.................... 15.70 15.38 13.95 12.53 11.62 - ------------------------------------------------------------------------------------------------------------------ Balance Sheet Data-December 31: Capital expenditures - for year................ $ 1,425 $ 1,378 $ 1,270 $ 1,038 $ 751 Total assets................................... 15,232 15,674 14,544 10,565 10,151 Capitalization: Notes payable............................... $ 80 $ - $ 132 $ 108 $ 59 Total long-term debt........................ 2,085 3,368 3,515 2,893 2,906 Preferred stock of subsidiary............... 184 184 184 184 182 Minority interest in MAP.................... 1,840 1,753 1,590 - - Common stockholders' equity................. 4,845 4,800 4,312 3,618 3,340 --------- --------- -------- -------- --------- Total capitalization..................... $ 9,034 $ 10,105 $ 9,733 $ 6,803 $ 6,487 - ------------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income, gain on ownership change in MAP, net gains/(losses) on disposal of assets and other income. 51 SELECTED FINANCIAL DATA (contd.) USX - U. S. Steel Group
Dollars in millions (except per share data) 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Statement of Operations Data: Revenues and other income/(a)/................. $ 6,132 $ 5,470 $ 6,477 $ 7,156 $ 6,872 Income from operations......................... 104 150 579 773 483 Income (loss) before extraordinary losses...... (21) 51 364 452 275 Net income (loss).............................. $ (21) $ 44 $ 364 $ 452 $ 273 Noncash credit from exchange of preferred stock.......................... - - - 10 - Dividends on preferred stock................... (8) (9) (9) (13) (22) -------- -------- ------- ------- -------- Net income (loss) applicable to Steel Stock.... $ (29) $ 35 $ 355 $ 449 $ 251 - ------------------------------------------------------------------------------------------------------------------ Per Common Share Data Income (loss) before extraordinary losses - basic..................................... $ (.33) $ .48 $ 4.05 $ 5.24 $ 3.00 - diluted................................... (.33) .48 3.92 4.88 2.97 Net income (loss) - basic..................... (.33) .40 4.05 5.24 2.98 - diluted................... (.33) .40 3.92 4.88 2.95 Dividends paid................................. 1.00 1.00 1.00 1.00 1.00 Common stockholders' equity.................... 21.58 23.23 23.66 20.56 18.37 - ------------------------------------------------------------------------------------------------------------------ Balance Sheet Data - December 31: Capital expenditures - for year................ $ 244 $ 287 $ 310 $ 261 $ 337 Total assets................................... 8,711 7,525 6,749 6,694 6,580 Capitalization: Notes payable............................... $ 70 $ - $ 13 $ 13 $ 18 Total long-term debt........................ 2,375 915 476 510 1,087 Preferred stock of subsidiary............... 66 66 66 66 64 Trust Preferred Securities.................. 183 183 182 182 - Preferred stock............................. 2 3 3 3 7 Common stockholders' equity................. 1,917 2,053 2,090 1,779 1,559 -------- -------- ------- ------- -------- Total capitalization..................... $ 4,613 $ 3,220 $ 2,830 $ 2,553 $ 2,735 - ------------------------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss), net gains on disposal of assets, gain on investee stock offering and other income (loss). 52 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Indexes to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk of USX Consolidated, the Marathon Group and the U. S. Steel Group are presented immediately preceding pages U-1, M-1 and S-1, respectively. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Indexes to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk for USX Consolidated, the Marathon Group and the U. S. Steel Group are presented immediately preceding pages U-1, M-1 and S-1, respectively. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 53 USX Index to Consolidated Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk
Page ---- Management's Report...................................................... U-1 Audited Consolidated Financial Statements: Report of Independent Accountants....................................... U-1 Consolidated Statement of Operations.................................... U-2 Consolidated Balance Sheet.............................................. U-4 Consolidated Statement of Cash Flows.................................... U-5 Consolidated Statement of Stockholders' Equity.......................... U-6 Notes to Consolidated Financial Statements.............................. U-8 Selected Quarterly Financial Data........................................ U-29 Principal Unconsolidated Affiliates...................................... U-30 Supplementary Information................................................ U-30 Five-Year Operating Summary -- Marathon Group............................ U-35 Five-Year Operating Summary -- U. S. Steel Group......................... U-37 Five-Year Financial Summary.............................................. U-38 Management's Discussion and Analysis..................................... U-39 Quantitative and Qualitative Disclosures About Market Risk............... U-60
THIS PAGE IS INTENTIONALLY LEFT BLANK Management's Report The accompanying consolidated financial statements of USX Corporation and Subsidiary Companies (USX) are the responsibility of and have been prepared by USX in conformity with accounting principles generally accepted in the United States. They necessarily include some amounts that are based on best judgments and estimates. The consolidated financial information displayed in other sections of this report is consistent with these consolidated financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the consolidated financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated financial statements.
Thomas J. Usher Robert M. Hernandez Larry G. Schultz Chairman, Board of Directors & Vice Chairman & Vice President- Chief Executive Officer Chief Financial Officer Accounting
Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying consolidated financial statements appearing on pages U-2 through U-28 present fairly, in all material respects, the financial position of USX Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 7, 2001 U-1 Consolidated Statement of Operations
(Dollars in millions) 2000 1999 1998 -------------------------------------------------------------------------------------- Revenues and other income: Revenues (Note 6) $40,500 $29,068 $27,629 Dividend and investee income (loss) 94 (20) 96 Net gains (losses) on disposal of assets (Note 27) (739) 21 82 Gain on ownership change in Marathon Ashland Petroleum LLC (Note 3) 12 17 245 Other income 47 33 25 ------- ------- ------- Total revenues and other income 39,914 29,119 28,077 ------- ------- ------- Costs and expenses: Cost of revenues (excludes items shown below) 31,056 21,679 20,211 Selling, general and administrative expenses 402 203 304 Depreciation, depletion and amortization 1,605 1,254 1,224 Taxes other than income taxes 4,861 4,433 4,241 Exploration expenses 238 238 313 Inventory market valuation charges (credits) (Note 15) - (551) 267 ------- ------- ------- Total costs and expenses 38,162 27,256 26,560 ------- ------- ------- Income from operations 1,752 1,863 1,517 Net interest and other financial costs (Note 6) 341 362 279 Minority interest in income of Marathon Ashland Petroleum LLC (Note 3) 498 447 249 ------- ------- ------- Income before income taxes and extraordinary losses 913 1,054 989 Provision for income taxes (Note 11) 502 349 315 ------- ------- ------- Income before extraordinary losses 411 705 674 Extraordinary losses (Note 7) - 7 - ------- ------- ------- Net income 411 698 674 Dividends on preferred stock 8 9 9 ------- ------- ------- Net income applicable to common stocks $ 403 $ 689 $ 665 --------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. U-2 Income Per Common Share
(Dollars in millions, except per share data) 2000 1999 1998 --------------------------------------------------------------------- Applicable to Marathon Stock: Net income $ 432 $ 654 $ 310 Per Share Data: Basic 1.39 2.11 1.06 Diluted 1.39 2.11 1.05 --------------------------------------------------------------------- Applicable to Steel Stock: Income (loss) before extraordinary losses $ (29) $ 42 $ 355 Extraordinary losses - 7 - ----- ----- ----- Net income (loss) $ (29) $ 35 $ 355 Per Share Data Basic: Income (loss) before extraordinary losses $(.33) $ .48 $4.05 Extraordinary losses - .08 - ----- ----- ----- Net income (loss) $(.33) $ .40 $4.05 Diluted: Income (loss) before extraordinary losses $(.33) $ .48 $3.92 Extraordinary losses - .08 - ----- ----- ----- Net income (loss) $(.33) $ .40 $3.92 ---------------------------------------------------------------------
See Note 20, for a description and computation of income per common share. The accompanying notes are an integral part of these consolidated financial statements. U-3 Consolidated Balance Sheet
(Dollars in millions) December 31 2000 1999 ------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 559 $ 133 Receivables, less allowance for doubtful accounts of $60 and $12 2,888 2,367 Receivables subject to a security interest (Note 14) 350 350 Inventories (Note 15) 2,813 2,627 Deferred income tax benefits (Note 11) 261 303 Assets held for sale (Note 27) 330 84 Other current assets 131 92 ------- ------- Total current assets 7,332 5,956 Investments and long-term receivables, less reserves of $28 and $3 (Note 12) 801 1,237 Property, plant and equipment - net (Note 21) 12,114 12,809 Prepaid pensions (Note 9) 2,879 2,629 Other noncurrent assets 275 300 ------- ------- Total assets $23,401 $22,931 ------------------------------------------------------------------------------------------------------- Liabilities Current liabilities: Notes payable (Note 13) $ 150 $ - Accounts payable 3,774 3,409 Payroll and benefits payable 432 468 Accrued taxes 281 283 Accrued interest 108 107 Long-term debt due within one year (Note 14) 287 61 ------- ------- Total current liabilities 5,032 4,328 Long-term debt (Note 14) 4,173 4,222 Deferred income taxes (Note 11) 2,020 1,839 Employee benefits (Note 9) 2,415 2,809 Deferred credits and other liabilities 724 691 Preferred stock of subsidiary (Note 22) 250 250 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX (Note 22) 183 183 Minority interest in Marathon Ashland Petroleum LLC (Note 3) 1,840 1,753 Stockholders' Equity (Details on pages U-6 and U-7) Preferred stock (Note 23) - 6.50% Cumulative Convertible issued - 2,413,487 shares and 2,715,287 shares ($121 and $136 liquidation preference, respectively) 2 3 Common stocks: Marathon Stock issued - 312,165,978 shares and 311,767,181 shares (par value $1 per share, authorized 550,000,000 shares) 312 312 Steel Stock issued - 88,767,395 shares and 88,397,714 shares (par value $1 per share, authorized 200,000,000 shares) 89 88 Securities exchangeable solely into Marathon Stock - issued - 281,148 shares and 288,621 shares (Note 3) - - Treasury common stock, at cost - Marathon Stock - 3,899,714 shares and -0- shares (104) - Additional paid-in capital 4,676 4,673 Deferred compensation (8) - Retained earnings 1,847 1,807 Accumulated other comprehensive income (loss) (50) (27) ------- ------- Total stockholders' equity 6,764 6,856 ------- ------- Total liabilities and stockholders' equity $23,401 $22,931 -------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. U-4 Consolidated Statement of Cash Flows
(Dollars in millions) 2000 1999 1998 ---------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 411 $ 698 $ 674 Adjustments to reconcile to net cash provided from operating activities: Extraordinary losses - 7 - Minority interest in income of Marathon Ashland Petroleum LLC 498 447 249 Depreciation, depletion and amortization 1,605 1,254 1,224 Exploratory dry well costs 86 109 186 Inventory market valuation charges (credits) - (551) 267 Pensions and other postretirement benefits (778) (220) (181) Deferred income taxes 149 212 184 Gain on ownership change in Marathon Ashland Petroleum LLC (12) (17) (245) Net (gains) losses on disposal of assets 739 (21) (82) Changes in: Current receivables - sold - (320) (30) - operating turnover (375) (988) 451 Inventories (46) (77) (6) Current accounts payable and accrued expenses 182 1,251 (497) All other - net 72 152 (172) ------- ------- ------- Net cash provided from operating activities 2,531 1,936 2,022 ------- ------- ------- Investing activities: Capital expenditures (1,669) (1,665) (1,580) Acquisitions - U.S. Steel Kosice s.r.o., net of cash acquired of $59 (10) - - - Tarragon Oil and Gas Limited - - (686) Disposal of assets 560 366 86 Restricted cash - withdrawals 273 60 241 - deposits (270) (61) (67) Investees - investments (100) (74) (115) - loans and advances (16) (70) (104) - returns and repayments 10 1 71 All other - net 29 (25) (4) ------- ------- ------- Net cash used in investing activities (1,193) (1,468) (2,158) ------- ------- ------- Financing activities: Commercial paper and revolving credit arrangements - net 62 (381) 724 Other debt - borrowings 273 810 1,036 - repayments (339) (242) (1,445) Common stock - issued - 89 668 - repurchased (105) - (195) Treasury common stock reissued 1 - - Preferred stock repurchased (12) (2) (8) Dividends paid (371) (354) (342) Distributions to minority shareholder of Marathon Ashland Petroleum LLC (420) (400) (211) ------- ------- ------- Net cash provided from (used in) financing activities (911) (480) 227 ------- ------- ------- Effect of exchange rate changes on cash (1) (1) 1 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 426 (13) 92 Cash and cash equivalents at beginning of year 133 146 54 ------- ------- ------- Cash and cash equivalents at end of year $ 559 $ 133 $ 146 ----------------------------------------------------------------------------------------------------------
See Note 16, for supplemental cash flow information. The accompanying notes are an integral part of these consolidated financial statements. U-5 Consolidated Statement of Stockholders' Equity USX has two classes of common stock: USX - Marathon Group Common Stock (Marathon Stock) and USX - U. S. Steel Group Common Stock (Steel Stock), which are intended to reflect the performance of the Marathon and U. S. Steel Groups, respectively. (See Note 8, for a description of the two Groups.) During 1998, USX issued 878,074 Exchangeable Shares (exchangeable solely into Marathon Stock) related to the purchase of Tarragon Oil and Gas Limited. (See Note 3.) On all matters where the holders of Marathon Stock and Steel Stock vote together as a single class, Marathon Stock has one vote per share and Steel Stock has a fluctuating vote per share based on the relative market value of a share of Steel Stock to the market value of a share of Marathon Stock. In the event of a disposition of all or substantially all the properties and assets of the U. S. Steel Group, USX must either distribute the net proceeds to the holders of the Steel Stock as a special dividend or in redemption of the stock, or exchange the Steel Stock for the Marathon Stock. In the event of liquidation of USX, the holders of the Marathon Stock and Steel Stock will share in the funds remaining for common stockholders based on the relative market capitalization of the respective Marathon Stock and Steel Stock to the aggregate market capitalization of both classes of common stock.
Dollars in millions Shares in thousands ------------------------------- ------------------------------- 2000 1999 1998 2000 1999 1998 --------------------------------------------------------------------------------------------------------------------- Preferred stock (Note 23) - 6.50% Cumulative Convertible: Balance at beginning of year $ 3 $ 3 $ 3 2,715 2,768 2,962 Repurchased (1) - - (302) (53) (194) ----- ----- ----- ------- ------- ------- Balance at end of year $ 2 $ 3 $ 3 2,413 2,715 2,768 --------------------------------------------------------------------------------------------------------------------- Common stocks: Marathon Stock: Balance at beginning of year $ 312 $ 308 $ 289 311,767 308,459 288,786 Issued in public offering - - 17 - 67 17,000 Issued for: Employee stock plans - 3 2 391 2,903 2,236 Dividend Reinvestment and Direct Stock Purchase Plan - - - - 120 66 Exchangeable Shares - 1 - 8 218 371 ----- ----- ----- ------- ------- ------- Balance at end of year $ 312 $ 312 $ 308 312,166 311,767 308,459 --------------------------------------------------------------------------------------------------------------------- Steel Stock: Balance at beginning of year $ 88 $ 88 $ 86 88,398 88,336 86,578 Issued for: Employee stock plans 1 - 2 369 62 1,733 Dividend Reinvestment and Direct Stock Purchase Plan - - - - - 25 ----- ----- ----- ------- ------- ------- Balance at end of year $ 89 $ 88 $ 88 88,767 88,398 88,336 --------------------------------------------------------------------------------------------------------------------- Securities exchangeable solely into Marathon Stock: Balance at beginning of year $ - $ 1 $ - 289 507 - Issued to acquire Tarragon stock - - 1 - - 878 Exchanged for Marathon Stock - (1) - (8) (218) (371) ----- ----- ----- ------- ------- ------- Balance at end of year $ - $ - $ 1 281 289 507 --------------------------------------------------------------------------------------------------------------------- Treasury common stock, at cost - Marathon Stock: Balance at beginning of year $ - $ - $ - - - - Repurchased (105) - - (3,957) - - Reissued for: Employee stock plans 1 - - 43 - - Non-employee Board of Directors deferred compensation plan - - - 14 - - ----- ----- ----- ------- ------- ------- Balance at end of year $(104) $ - $ - (3,900) - - ---------------------------------------------------------------------------------------------------------------------
(Table continued on next page) U-6
Stockholders' Equity Comprehensive Income ---------------------------- ----------------------- (Dollars in millions) 2000 1999 1998 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of year $4,673 $4,587 $3,924 Marathon Stock issued 9 92 598 Steel Stock issued 5 2 57 Exchangeable Shares: Issued - - 28 Exchanged for Marathon Stock - (6) (12) Repurchase of 6.50% preferred stock (11) (2) (8) ------ ------ ------ Balance at end of year $4,676 $4,673 $4,587 ---------------------------------------------------------------------------------------- Deferred compensation (Note 17) $ (8) $ - $ (1) ---------------------------------------------------------------------------------------- Retained earnings: Balance at beginning of year $1,807 $1,467 $1,138 Net income 411 698 674 $ 411 $ 698 $ 674 Dividends on preferred stock (8) (9) (9) Dividends on Marathon Stock (per share: $.88 in 2000 and $.84 in 1999 and 1998) (274) (261) (248) Dividends on Steel Stock (per share $1.00) (89) (88) (88) ------ ------ ------ Balance at end of year $1,847 $1,807 $1,467 ---------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss): Minimum pension liability adjustments: Balance at beginning of year $ (10) $ (37) $ (32) Changes during year, net of taxes/(a)/ (11) 27 (5) (11) 27 (5) ------ ------ ------ Balance at end of year (21) (10) (37) ------ ------ ------ Foreign currency translation adjustments: Balance at beginning of year $ (17) $ (11) $ (8) Changes during year, net of taxes/(a)/ (12) (6) (3) (12) (6) (3) ------ ------ ------ Balance at end of year (29) (17) (11) ------ ------ ------ Unrealized holding losses on investments: Balance at beginning of year $ - $ - $ 3 Changes during year, net of taxes/(a)/ - (1) 2 - (1) 2 Reclassification adjustment included in net income - 1 (5) - 1 (5) ------ ------ ------ Balance at end of year - - - ---------------------------------------------------------------------------------------- Total balances at end of year $ (50) $ (27) $ (48) ---------------------------------------------------------------------------------------------------------------------- Total comprehensive income/(b)/ $ 388 $ 719 $ 663 ---------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $6,764 $6,856 $6,405 ---------------------------------------------------------------------------------------- /(a)/ Related income tax provision (credit): 2000 1999 1998 ------ ------ ------ Minimum pension liability adjustments $ 4 $ (13) $ 3 Foreign currency translation adjustments (4) 3 4 Unrealized holding gains on investments - - 2 /(b)/ Total comprehensive income (loss) by Group: Marathon Group $ 419 $ 660 $ 306 U. S. Steel Group (31) 59 357 ------ ------ ------ Total $ 388 $ 719 $ 663 ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements. U-7 Notes to Consolidated Financial Statements 1. Summary of Principal Accounting Policies Principles applied in consolidation - The consolidated financial statements include the accounts of USX Corporation and the majority-owned subsidiaries which it controls (USX). Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly owned gas processing plants are consolidated on a pro rata basis. Investments in entities over which USX has significant influence are accounted for using the equity method of accounting and are carried at USX's share of net assets plus loans and advances. Investments in companies whose stock is publicly traded are carried generally at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Dividend and investee income includes USX's proportionate share of income from equity method investments and dividend income from other investments. Dividend income is recognized when dividend payments are received. Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated investee are recognized in the period of change. Use of estimates - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. Revenue recognition - Revenues are recognized generally when products are shipped or services are provided to customers, the sales price is fixed and determinable, and collectibility is reasonably assured. Costs associated with revenues, including shipping and other transportation costs, are recorded in cost of revenues. Matching buy/sell transactions settled in cash are recorded in both revenues and cost of revenues as separate sales and purchase transactions, with no net effect on income. USX follows the sales method of accounting for gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance situation. Cash and cash equivalents - Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments - USX uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management is authorized to use futures, forwards, swaps and options related to the purchase, production or sale of crude oil, natural gas, refined products, nonferrous metals and electricity. While USX's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies which assume price risk. U-8 Commodity-Based Hedging Transactions - For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, as a component of revenues or cost of revenues, in the same period as the underlying physical transaction. To qualify for hedge accounting, derivative positions cannot remain open if the underlying physical market risk has been removed. If such derivative positions remain in place, they would be marked-to- market and accounted for as trading or other activities. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities, as appropriate. Commodity-Based Trading and Other Activities - Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period within income from operations. This category also includes the use of derivative instruments that have no offsetting underlying physical market risk. Foreign Currency Transactions - USX uses forward exchange contracts to manage currency risks. Gains or losses related to firm commitments are deferred and recognized concurrent with the underlying transaction. All other gains or losses are recognized in income in the current period as revenues, cost of revenues, interest income or expense, or other income, as appropriate. Forward exchange contracts are recorded as receivables or payables, as appropriate. Exploration and development - USX follows the successful efforts method of accounting for oil and gas exploration and development. Long-lived assets - Except for oil and gas producing properties, depreciation is generally computed on the straight-line method based upon estimated lives of assets. USX's method of computing depreciation for domestic steel producing assets modifies straight- line depreciation based on the level of production. The modification factors range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of-production method. Depletion of mineral properties, other than oil and gas, is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. USX evaluates impairment of its oil and gas producing assets primarily on a field-by-field basis using undiscounted cash flows based on total proved reserves. Other assets are evaluated on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when long-lived assets are reclassified as assets held for sale. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Major maintenance activities - USX incurs planned major maintenance costs primarily for refinery turnarounds in the Marathon Group and blast furnace relines in the U. S. Steel Group. Costs associated with refinery turnarounds are expensed in the same annual period as incurred; however, estimated annual turnaround costs are recognized in income throughout the year on a pro rata basis. Costs associated with blast furnace relines are separately capitalized in property, plant and equipment. Such costs are amortized over their estimated useful life, which is generally the period until the next scheduled reline. Environmental liabilities - USX provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based on production of estimated proved oil and gas reserves. Postemployment benefits - USX recognizes an obligation to provide postemployment benefits, primarily for disability-related claims covering indemnity and medical payments. The obligation for these claims and the related periodic costs are measured using actuarial techniques and assumptions, including an appropriate discount rate, analogous to the required methodology for measuring pension and other postretirement benefit obligations. Actuarial gains and losses are deferred and amortized over future periods. U-9 Insurance - USX is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications - Certain reclassifications of prior years' data have been made to conform to 2000 classifications. ________________________________________________________________________________ 2. New Accounting Standards In the fourth quarter of 2000, USX adopted the following accounting pronouncements primarily related to the classification of items in the financial statements. The adoption of these new pronouncements had no net effect on the financial position or results of operations of USX, although they required reclassifications of certain amounts in the financial statements, including all prior periods presented. . In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements," which summarizes the SEC staff's interpretations of generally accepted accounting principles related to revenue recognition and classification. . In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent," which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which addresses the classification of costs incurred for shipping goods to customers. . In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. USX adopted certain recognition and reclassification provisions of SFAS 140, which were effective for fiscal years ending after December 15, 2000. The remaining provisions of SFAS 140 are effective after March 31, 2001. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which later was amended by SFAS Nos. 137 and 138. This Standard requires recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. USX may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards. USX will adopt the Standard effective January 1, 2001. The transition adjustment resulting from the adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of tax, is expected to approximate $9 million. The unfavorable cumulative effect on other comprehensive income, net of tax, will approximate $7 million. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations. ________________________________________________________________________________ 3. Business Combinations On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. (USSK), which is located in the Slovak Republic. USSK was formed in June 2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The cash purchase price was $69 million. Additional payments to VSZ of not less than $25 million and up to $75 million are contingent upon the future performance of USSK. Additionally, $325 million of debt was included with the acquisition. The acquisition was accounted for under the purchase method of accounting. The 2000 results of operations include the operations of USSK from the date of acquisition. Prior to this transaction, USX and VSZ were equal partners in VSZ U. S. Steel s.r.o. (VSZUSS), a tin mill products manufacturer. The assets of USSK included VSZ's interest in VSZUSS. The acquisition of the remaining interest in VSZUSS was accounted for under the purchase method of accounting. Previously, USX had accounted for its investment in VSZUSS under the equity method of accounting. U-10 VSZ did not provide historical carve-out financial information for its steel activities prepared in accordance with generally accepted accounting principles in the United States. USX was unable to fully determine the effects of transfer pricing, intercompany eliminations and expense allocations in order to prepare such carve-out information from Slovak statutory reports and VSZ internal records. USX broadly estimates that the unaudited pro forma effect on its 2000 and 1999 revenues, giving effect to the acquisition as if it had been consummated at the beginning of those periods, would have been to increase revenues in each period by approximately $1 billion. USX cannot determine the unaudited pro forma effect on its 2000 and 1999 net income. In any event, historical pro forma information is not necessarily indicative of future results of operations. In August 1998, Marathon Oil Company (Marathon) acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for-one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of 878,074 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. The Exchangeable Shares are exchangeable at the option of the holder at any time and automatically redeemable on August 11, 2003 (and, in certain circumstances, as early as August 11, 2001). The holders of Exchangeable Shares are entitled to receive declared dividends equivalent to dividends declared from time to time by USX on Marathon Stock. USX accounted for the acquisition using the purchase method of accounting. The 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million in 1998. In accordance with MAP closing agreements, Marathon and Ashland have made capital contributions to MAP for environmental improvements. The closing agreements stipulate that ownership interests in MAP will not be adjusted as a result of such contributions. Accordingly, Marathon recognized a gain on ownership change of $12 million in 2000 and $17 million in 1999. In connection with the formation of MAP, Marathon and Ashland entered into a Limited Liability Company Agreement dated January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an initial term of MAP expiring on December 31, 2022 (25 years from its formation). The term will automatically be extended for ten-year periods, unless a termination notice is given by either party. Also in connection with the formation of MAP, the parties entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland's ownership interest in MAP, for an amount in cash and/or Marathon or USX debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. Payment could be made at closing, or at Marathon's option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland's ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. ________________________________________________________________________________ 4. Transactions Between MAP and Ashland At December 31, 2000 and 1999, MAP had current receivables from Ashland of $35 million and $26 million, respectively, and current payables to Ashland of $2 million. MAP has a $190 million revolving credit agreement with Ashland. Interest on borrowings is based on defined short-term market rates. At December 31, 2000 and 1999, there were no borrowings against this facility. During 2000, 1999 and 1998, MAP's sales to Ashland, consisting primarily of petroleum products, were $285 million, $198 million and $190 million, respectively, and MAP's purchases of products and services from Ashland were $26 million, $22 million and $47 million, respectively. These transactions were conducted under terms comparable to those with unrelated parties. U-11 ________________________________________________________________________________ 5. Discontinued Operations Effective October 31, 1997, USX sold its stock in Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group. USX elected to use the net proceeds of $195 million, or $20.60 per share, to redeem all shares of Delhi Stock. The net proceeds were distributed to the Delhi shareholders on January 26, 1998. After the redemption, 50,000,000 shares of Delhi Stock remain authorized but unissued. ________________________________________________________________________________ 6. Other Items
(In millions) 2000 1999 1998 ---------------------------------------------------------------------------- Net interest and other financial costs Interest and other financial income: Interest income $ 29 $ 16 $ 35 Other 5 (13) 4 ----- ----- ----- Total 34 3 39 ----- ----- ----- Interest and other financial costs: Interest incurred 328 326 325 Less interest capitalized 19 26 46 ----- ----- ----- Net interest 309 300 279 Interest on tax issues 17 20 21 Financial costs on trust preferred securities 13 13 13 Financial costs on preferred stock of subsidiary 22 22 22 Amortization of discounts 3 3 6 Expenses on sales of accounts receivable - 15 21 Adjustment to settlement value of indexed debt - (13) (44) Other 11 5 - ----- ----- ----- Total 375 365 318 ----- ----- ----- Net interest and other financial costs $ 341 $ 362 $ 279 ----------------------------------------------------------------------------
Foreign currency transactions For 2000, 1999 and 1998, the aggregate foreign currency transaction gains (losses) included in determining net income were $37 million, $(12) million and $13 million, respectively. Consumer excise taxes Included in revenues and costs and expenses for 2000, 1999 and 1998 were $4,344 million, $3,973 million and $3,824 million, respectively, representing consumer excise taxes on petroleum products and merchandise. ________________________________________________________________________________ 7. Extraordinary Losses In 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee exchanged one RTI share for each note at maturity. All shares were required for satisfaction of the indexed debt; therefore, none reverted back to USX. As a result of the above transaction, USX recorded in 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in net gains (losses) on disposal of assets. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. In 1999, Republic Technologies International, LLC, an equity investee of USX, recorded an extraordinary loss related to the early extinguishment of debt. As a result, USX recorded an extraordinary loss of $2 million, net of a $1 million income tax benefit, representing its share of the extraordinary loss. U-12 ________________________________________________________________________________ 8. Group and Segment Information USX has two classes of common stock: Marathon Stock and Steel Stock, which are intended to reflect the performance of the Marathon Group and the U. S. Steel Group, respectively. A description of each group and its products and services is as follows: Marathon Group - The Marathon Group includes Marathon Oil Company and certain other subsidiaries of USX. Marathon Group revenues as a percentage of total consolidated USX revenues were 85% in 2000, 81% in 1999 and 77% in 1998. U. S. Steel Group - The U. S. Steel Group consists of U. S. Steel, the largest domestic integrated steel producer and U. S. Steel operations in the Slovak Republic. U. S. Steel Group revenues as a percentage of total consolidated USX revenues were 15% in 2000, 19% in 1999 and 23% in 1998. Group Operations:
Income Net From Income Capital (In millions) Year Revenues Operations (Loss) Expenditures Assets - ----------------------------------------------------------------------------------------------------------------------------------- Marathon Group 2000 $34,487 $1,648 $ 432 $ 1,425 $15,232 1999 23,590 1,713 654 1,378 15,674 1998 21,274 938 310 1,270 14,544 - ----------------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group 2000 6,090 104 (21) 244 8,711 1999 5,536 150 44 287 7,525 1998 6,378 579 364 310 6,749 - ----------------------------------------------------------------------------------------------------------------------------------- Eliminations 2000 (77) - - - (542) 1999 (58) - - - (268) 1998 (23) - - - (160) - ----------------------------------------------------------------------------------------------------------------------------------- Total USX 2000 $40,500 $1,752 $ 411 $ 1,669 $23,401 Corporation 1999 29,068 1,863 698 1,665 22,931 1998 27,629 1,517 674 1,580 21,133 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues by Product: (In millions) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Marathon Group Refined products $22,514 $15,181 $12,852 Merchandise 2,441 2,194 1,941 Liquid hydrocarbons 6,856 4,587 5,023 Natural gas 2,518 1,429 1,187 Transportation and other products 158 199 271 - ----------------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group Sheet and semi-finished steel products $ 3,288 $ 3,433 $ 3,598 Tubular, plate and tin mill products 1,731 1,140 1,546 Raw materials (coal, coke and iron ore) 626 549 744 Other/(a)/ 445 414 490 - -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-products, engineering and consulting services, real estate development and resource management. Operating Segments: USX's reportable operating segments are business units within the Marathon and U. S. Steel Groups, each providing their own unique products and services. Each operating segment is independently managed and requires different technology and marketing strategies. Segment income represents income from operations allocable to operating segments. The following items included in income from operations are not allocated to operating segments: . Gain on ownership change in MAP . Net pension credits associated with the U. S. Steel Group's pension plan assets and liabilities . Certain costs related to former U. S. Steel Group business activities . Certain general and administrative costs related to all Marathon Group operating segments in excess of amounts billed to MAP under service contracts and amounts charged out to operating segments under Marathon's shared services procedures . USX corporate general and administrative costs. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. . Inventory market valuation adjustments . Certain other items not allocated to operating segments for business performance reporting purposes (see (a) in reconcilement table on page U- 15) U-13 The Marathon Group's operations consist of three reportable operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through MAP; and 3) Other Energy Related Businesses (OERB). Other Energy Related Businesses is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third-party natural gas and crude oil in the United States; and 2) Power Generation - develops, constructs and operates independent electric power projects worldwide. The U. S. Steel Group consists of two reportable operating segments: 1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the United States operations of U. S. Steel, while USSK includes the U. S. Steel Kosice operations in the Slovak Republic. Domestic Steel is engaged in the domestic production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; coal mining; engineering and consulting services; and real estate development and management. USSK is engaged in the production and sale of steel mill products and coke and primarily serves European markets. Information on assets by segment is not provided as it is not reviewed by the chief operating decision maker.
Total Total Marathon Domestic U. S. Steel (In millions) E&P RM&T OERB Segments Steel USSK Segments Total - ----------------------------------------------------------------------------------------------------------------------------------- 2000 Revenues and other income: Customer $4,184 $28,693 $1,550 $34,427 $5,981 $92 $6,073 $40,500 Intersegment/(a)/ 412 83 78 573 - - - 573 Intergroup/(a)/ 30 1 29 60 17 - 17 77 Equity in earnings (losses) of unconsolidated investees 47 22 15 84 (8) - (8) 76 Other 21 50 12 83 50 - 50 133 ------ ------- ------ ------- ------ ---- ------ ------- Total revenues and other income $4,694 $28,849 $1,684 $35,227 $6,040 $92 $6,132 $41,359 ====== ======= ====== ======= ====== ==== ====== ======= Segment income $1,535 $ 1,273 $ 38 $ 2,846 $ 23 $ 2 $ 25 $ 2,871 Significant noncash items included in segment income - depreciation, depletion and amortization/(b)/ 723 315 3 1,041 285 4 289 1,330 Capital expenditures/(c)/ 742 656 2 1,400 239 5 244 1,644 - ----------------------------------------------------------------------------------------------------------------------------------- 1999 Revenues and other income: Customer $2,856 $19,962 $ 731 $23,549 $5,519 $ - $5,519 $29,068 Intersegment/(a)/ 202 47 40 289 - - - 289 Intergroup/(a)/ 19 - 22 41 17 - 17 58 Equity in earnings (losses) of unconsolidated investees (2) 17 26 41 (43) - (43) (2) Other 30 50 15 95 46 - 46 141 ------ ------- ------ ------- ------ ---- ------ ------- Total revenues and other income $3,105 $20,076 $ 834 $24,015 $5,539 $ - $5,539 $29,554 ====== ======= ====== ======= ====== ==== ====== ======= Segment income $ 618 $ 611 $ 61 $ 1,290 $ 91 $ - $ 91 $ 1,381 Significant noncash items included in segment income - depreciation, depletion and amortization/(b)/ 638 280 5 923 304 - 304 1,227 Capital expenditures/(c)/ 744 612 4 1,360 286 - 286 1,646 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 Revenues and other income: Customer $1,905 $19,018 $ 306 $21,229 $6,374 $ - $6,374 $27,603 Intersegment/(a)/ 144 10 17 171 - - - 171 Intergroup/(a)/ 13 - 7 20 2 - 2 22 Equity in earnings of unconsolidated investees 2 12 14 28 46 - 46 74 Other 26 40 11 77 55 - 55 132 ------ ------- ------ ------- ------ ---- ------ ------- Total revenues and other income $2,090 $19,080 $ 355 $21,525 $6,477 $ - $6,477 $28,002 ====== ======= ====== ======= ====== ==== ====== ======= Segment income $ 278 $ 896 $ 33 $ 1,207 $ 517 $ - $ 517 $ 1,724 Significant noncash items included in segment income - depreciation, depletion and amortization/(b)/ 581 272 6 859 283 - 283 1,142 Capital expenditures/(c)/ 839 410 8 1,257 305 - 305 1,562 - -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Intersegment and intergroup revenues and transfers were conducted under terms comparable to those with unrelated parties. /(b)/ Differences between segment totals and consolidated totals represent amounts included in administrative expenses, international and domestic oil and gas property impairments and impairment of coal assets. /(c)/ Differences between segment totals and consolidated totals represent amounts related to corporate administrative activities. U-14 The following schedules reconcile segment amounts to amounts reported in the Groups' financial statements:
Marathon Group U. S. Steel Group --------------------------------- ------------------------------ (In millions) 2000 1999 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Revenues and Other Income: Revenues and other income of reportable segments $35,227 $24,015 $21,525 $6,132 $5,539 $6,477 Items not allocated to segments: Joint venture formation charges (931) - - - - - Gain on ownership change in MAP 12 17 245 - - - Losses on certain equity investments - - - - (69) - Other 124 (36) 24 - - - Elimination of intersegment revenues (573) (289) (171) - - - ------- ------- ------- ------ ------ ------ Total Group revenues and other income $33,859 $23,707 $21,623 $6,132 5,470 $6,477 ======= ======= ======= ====== ====== ====== Income: Income for reportable segments $ 2,846 $ 1,290 $ 1,207 $ 25 $ 91 $ 517 Items not allocated to segments: Joint venture formation charges (931) - - - - - Gain on ownership change in MAP 12 17 245 - - - Administrative expenses (136) (108) (106) (25) (17) (24) Net pension credits - - - 266 228 186 Costs related to former business activities - - - (91) (83) (100) Inventory market valuation adjustments - 551 (267) - - - Other/(a)/ (143) (37) (141) (71) (69) - ------- ------- ------- ------ ------ ------ Total Group income from operations $ 1,648 $ 1,713 $ 938 $ 104 $ 150 $ 579 - -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents in 2000, for the Marathon Group, certain oil and gas property impairments, net gains on certain asset sales and reorganization charges and for the U. S. Steel Group, impairment of coal assets. Represents in 1999, for the Marathon Group, primarily certain oil and gas property impairments, costs of a voluntary early retirement program and net losses on certain asset sales and, for the U. S. Steel Group, certain losses related to investments in equity investees. Represents in 1998, certain international oil and gas property impairments, certain suspended exploration well write-offs, a gas contract settlement and MAP transition charges. Geographic Area: The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Revenues and Other Income -------------------------------------------- Within Between (In millions) Year Geographic Areas Geographic Areas Total Assets/(a)/ - --------------------------------------------------------------------------------------------------------------------------- Marathon Group: United States 2000 $32,239 $ - $32,239 $ 6,711 1999 22,716 - 22,716 7,555 1998 20,837 - 20,837 7,659 Canada 2000 856 899 1,755 940 1999 426 521 947 1,112 1998 209 368 577 1,094 United Kingdom 2000 567 - 567 1,698 1999 459 - 459 1,581 1998 462 - 462 1,739 Other Foreign Countries 2000 197 188 385 310 1999 106 88 194 735 1998 115 52 167 468 Eliminations 2000 - (1,087) (1,087) - 1999 - (609) (609) - 1998 - (420) (420) - Total Marathon Group 2000 $33,859 $ - $33,859 $ 9,659 1999 23,707 - 23,707 10,983 1998 21,623 - 21,623 10,960 - --------------------------------------------------------------------------------------------------------------------------- U. S. Steel Group: United States 2000 $ 6,027 $ - $ 6,027 $ 2,745 1999 5,452 - 5,452 2,889 1998 6,460 - 6,460 3,043 Foreign Countries 2000 105 - 105 386 1999 18 - 18 63 1998 17 - 17 69 Total U. S. Steel Group 2000 $ 6,132 $ - $ 6,132 $ 3,131 1999 5,470 - 5,470 2,952 1998 6,477 - 6,477 3,112 - --------------------------------------------------------------------------------------------------------------------------- Eliminations 2000 $ (77) $ - $ (77) $ - 1999 (58) - (58) - 1998 (23) - (23) - - --------------------------------------------------------------------------------------------------------------------------- Total USX Corporation 2000 $39,914 $ - $39,914 $12,790 1999 29,119 - 29,119 13,935 1998 28,077 - 28,077 14,072 - ---------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments. U-15 ________________________________________________________________________________ 9. Pensions and Other Postretirement Benefits USX has noncontributory defined benefit pension plans covering substantially all U.S. employees. Benefits under these plans are primarily based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, pension benefits based upon a percent of total career pensionable earnings cover certain participating salaried employees. USX also has defined benefit retiree health care and life insurance plans (other benefits) covering most U.S. employees upon their retirement. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to certain nonunion and union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. For most U.S. union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions.
Pension Benefits Other Benefits --------------------- ----------------------- (In millions) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------ Change in benefit obligations Benefit obligations at January 1 $ 7,584 $ 8,629 $ 2,374 $ 2,710 Service cost 128 152 26 32 Interest cost 572 540 184 169 Plan amendments 6 399/(a)/ 1 (30) Actuarial (gains) losses 551 (1,019) 306 (333) Plan mergers and acquisitions - 56 - 11 Settlements, curtailments and termination benefits (99) (329) 22 - Benefits paid (883) (844) (189) (185) -------- -------- -------- -------- Benefit obligations at December 31 $ 7,859 $ 7,584 $ 2,724 $ 2,374 ------------------------------------------------------------------------------------------------------------ Change in plan assets Fair value of plan assets at January 1 $ 11,305 $ 11,574 $ 281 $ 265 Actual return on plan assets 131 865 26 20 Plan merger and acquisitions (1) 38 - 1 Employer contributions 1 2 576/(b)/ 34 Trustee distributions/(c)/ (34) (30) - - Settlements paid (134) (306) - - Benefits paid from plan assets (877) (838) (41) (39) -------- -------- -------- -------- Fair value of plan assets at December 31 $ 10,391 $ 11,305 $ 842 $ 281 ------------------------------------------------------------------------------------------------------------ Funded status of plans at December 31 $ 2,532/(d)/ $ 3,721/(d)/ $ (1,882) $ (2,093) Unrecognized net gain from transition (20) (95) - - Unrecognized prior service costs (credits) 778 880 (47) (53) Unrecognized net actuarial gains (499) (1,945) (126) (458) Additional minimum liability/(e)/ (38) (24) - - -------- -------- -------- -------- Prepaid (accrued) benefit cost $ 2,753 $ 2,537 $ (2,055) $ (2,604) ------------------------------------------------------------------------------------------------------------ /(a)/ Results primarily from a five-year labor contract with the United Steelworkers of America ratified in August 1999. /(b)/ Includes for the U. S. Steel Group, contributions of $530 million to a Voluntary Employee Benefit Association trust, comprised of $30 million in contractual requirements and an elective contribution of $500 million. Also includes for the U. S. Steel Group, a $30 million elective contribution to the non-union retiree life insurance trust. /(c)/ Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code. /(d)/ Includes several plans that have accumulated benefit obligations in excess of plan assets: Aggregate accumulated benefit obligations $ (74) $ (53) Aggregate projected benefit obligations (92) (76) Aggregate plan assets - - /(e)/ Additional minimum liability recorded was offset by the following: Intangible asset $ 6 $ 9 -------- -------- Accumulated other comprehensive income (losses): Beginning of year $ (10) $ (37) Change during year (net of tax) (11) 27 -------- -------- Balance at end of year $ (21) $ (10) ------------------------------------------------------------------------------------------------------------
U-16
Pension Benefits Other Benefits ------------------------------ ---------------------------------- (In millions) 2000 1999 1998 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost (credit) Service cost $ 128 $ 152 $ 119 $ 26 $ 32 $ 27 Interest cost 572 540 544 184 169 172 Expected return on plan assets (958) (895) (876) (24) (21) (21) Amortization - net transition gain (71) (72) (74) - - - - prior service costs (credits) 102 87 75 (6) (4) 1 - actuarial (gains) losses (53) 7 6 (26) (5) (13) Multiemployer and other USX plans 5 5 6 9/(a)/ 7/(a)/ 13/(a)/ Settlement and termination (gains) losses 32/(b)/ (42)/(b)/ 10/(b)/ 21/(b)/ - - ------- ------- ------ ------ ----- ----- Net periodic benefit cost (credit) $ (243) $ (218) $ (190) $ 184 $ 178 $ 179 ----------------------------------------------------------------------------------------------------------------------
/(a)/ Represents payments to a multiemployer health care benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $84 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned. /(b)/ Relates primarily to voluntary early retirement programs.
Pension Benefits Other Benefits ------------------ -------------------- 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------------- Weighted average actuarial assumptions at December 31: Discount rate 7.5% 8.0% 7.5% 8.0% Expected annual return on plan assets 9.0% 8.6% 8.5% 8.5% Increase in compensation rate 4.1% 4.1% 4.1% 4.1% ----------------------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5% in 2006 for the U. S. Steel Group and in 2007 for the Marathon Group and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease ---------------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 25 $ (21) Effect on other postretirement benefit obligations 248 (209) ----------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 10. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases ---------------------------------------------------------------------------------------------------------------------- 2001 $ 12 $ 173 2002 12 139 2003 12 98 2004 12 87 2005 12 141 Later years 89 173 Sublease rentals - (80) ----- ----- Total minimum lease payments 149 $ 731 ===== Less imputed interest costs 54 ----- Present value of net minimum lease payments included in long-term debt $ 95 ----------------------------------------------------------------------------------------------------------------------
Operating lease rental expense: (In millions) 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- Minimum rental $ 288 $ 273 $ 288 Contingent rental 30 29 29 Sublease rentals (19) (19) (14) ----- ----- --------- Net rental expense $ 299 $ 283 $ 303 ----------------------------------------------------------------------------------------------------------------------
USX leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $104 million may be declared immediately due and payable. U-17 - -------------------------------------------------------------------------------- 11. Income Taxes Provisions (credits) for income taxes were:
2000 1999 1998 --------------------------- --------------------------- ---------------------------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total -------------------------------------------------------------------------------------------------------------------- Federal $257 $ 196 $453 $107 $ 257 $ 364 $102 $ 168 $ 270 State and local 41 3 44 4 1 5 33 18 51 Foreign 55 (50) 5 26 (46) (20) (4) (2) (6) ---- ----- ---- ---- ----- ----- ---- ----- ----- Total $353 $ 149 $502 $137 $ 212 $ 349 $131 $ 184 $ 315 --------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total provisions follows:
(In millions) 2000 1999 1998 ---------------------------------------------------------------------------------------------------------- Statutory rate applied to income before income taxes $ 320 $ 369 $ 346 Effects of foreign operations: Impairment of deferred tax benefits 235 - - Adjustments to foreign valuation allowances (30) - - All other, including foreign tax credits (35) (20) (37) State and local income taxes after federal income tax effects 29 3 33 Credits other than foreign tax credits (10) (10) (12) Excess percentage depletion (3) (7) (11) Effects of partially owned companies (5) (5) (4) Dispositions of subsidiary investments - 7 - Adjustment of prior years' federal income taxes (6) 4 (5) Other 7 8 5 -------- -------- ---------- Total provisions $ 502 $ 349 $ 315 ----------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 2000 1999 --------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Minimum tax credit carryforwards $ 39 $ 131 State tax loss carryforwards (expiring in 2001 through 2020) 125 122 Foreign tax loss carryforwards (portion of which expire in 2001 through 2015) 269 408 Employee benefits 1,028 1,204 Expected federal benefit for: Crediting certain foreign deferred income taxes 315 530 Deducting state deferred income taxes 36 36 Receivables, payables and debt 93 82 Contingency and other accruals 226 202 Investments in foreign subsidiaries 39 52 Other 62 45 Valuation allowances: Federal - (30) State (50) (52) Foreign (252) (282) ------- ------- Total deferred tax assets/(a)/ 1,930 2,448 ------- ------- Deferred tax liabilities: Property, plant and equipment 1,890 2,365 Prepaid pensions 1,165 1,048 Inventory 335 340 Investments in subsidiaries and equity investees 52 76 Other 221 155 ------- ------- Total deferred tax liabilities 3,663 3,984 ------- ------- Net deferred tax liabilities $ 1,733 $ 1,536 ---------------------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of its deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and USX's tax profile in the years that such credits may be claimed. During 2000, the amount of net deferred tax assets expected to be realized was reduced as a result of the change in the amount and timing of future foreign source income due to the exchange of Marathon's interest in Sakhalin Energy Investment Company Ltd. (Sakhalin Energy) for other oil and gas producing interests. Additionally, gross deferred tax assets and the associated valuation allowance were reduced by a change in management's intent regarding the permanent reinvestment of the earnings from certain foreign subsidiaries. The consolidated tax returns of USX for the years 1990 through 1997 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income (loss) included $245 million, $63 million and $(75) million attributable to foreign sources in 2000, 1999 and 1998, respectively. U-18 Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 2000, amounted to $223 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because USX intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $78 million would have been required. - -------------------------------------------------------------------------------- 12. Investments and Long-Term Receivables
(In millions) December 31 2000 1999 ------------------------------------------------------------------------------------------------- Equity method investments $ 575 $1,055 Other investments 101 71 Receivables due after one year 59 57 Deposits of restricted cash 19 22 Other 47 32 ------ ------ Total $ 801 $1,237 -------------------------------------------------------------------------------------------------
Summarized financial information of investees accounted for by the equity method of accounting follows:
(In millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------- Income data - year: Revenues and other income $3,901 $3,449 $3,510 Operating income 286 95 324 Net income (loss) (43) (74) 176 ------------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $1,239 $1,382 Noncurrent assets 3,443 5,008 Current liabilities 1,427 1,481 Noncurrent liabilities 1,957 2,317 -------------------------------------------------------------------------------------------------
USX acquired a 25% interest in VSZ during 2000. VSZ does not provide its shareholders with financial statements prepared in accordance with generally accepted accounting principles in the United States (USGAAP). Although shares of VSZ are traded on the Bratislava Stock Exchange, those securities do not have a readily determinable fair value as defined under USGAAP. Accordingly, USX accounts for its investment in VSZ under the cost method of accounting. In 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a transaction that combined the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone Capital Partners II. The combined entity was named Republic Technologies International, LLC and is a wholly owned subsidiary of Republic Technologies International Holdings, LLC (Republic). As a result of this transaction, USX recorded $47 million in charges related to the impairment of the carrying value of its investment in USS/Kobe and costs related to the formation of Republic. These charges were included in dividend and investee income (loss) in 1999. In addition, USX made a $15 million equity investment in Republic. USX owned 50% of USS/Kobe and now owns 16% of Republic. USX accounts for its investment in Republic under the equity method of accounting. The seamless pipe business of USS/Kobe was excluded from this transaction. That business, now known as Lorain Tubular Company, LLC, became a wholly owned subsidiary of USX at the close of business on December 31, 1999. Dividends and partnership distributions received from equity investees were $56 million in 2000, $46 million in 1999 and $42 million in 1998. USX purchases from equity investees totaled $627 million, $411 million and $395 million in 2000, 1999 and 1998, respectively. USX sales to equity investees totaled $986 million, $853 million and $747 million in 2000, 1999 and 1998, respectively. - -------------------------------------------------------------------------------- 13. Short-Term Debt In November 2000, USX entered into a $451 million 364-day revolving credit agreement, which terminates in November 2001. Interest is based on defined short-term market rates. During the term of the agreement, USX is obligated to pay a variable facility fee on total commitments, which at December 31, 2000 was .10%. At December 31, 2000, there were no borrowings against this facility. USX has a short-term line of credit totaling $150 million, bearing interest at a defined short-term market rate, which at December 31, 2000 was 7.10%. At December 31, 2000, USX had borrowed $150 million against this facility. Certain other banks provide short-term lines of credit totaling $150 million which require a .125% fee or maintenance of compensating balances of 3%. At December 31, 2000, there were no borrowings against these facilities. U-19 MAP has a $100 million short-term revolving credit facility that terminates in July 2001. Interest is based on defined short- term market rates. During the term of the agreement, MAP is required to pay a variable facility fee on total commitments, which at December 31, 2000 was .11%. At December 31, 2000, there were no borrowings against this facility. USSK has a short-term $50 million credit facility that expires in November 2001. The facility, which is non-recourse to USX, bears interest on prevailing short-term market rates plus 1%. USSK is obligated to pay a .25% commitment fee on undrawn amounts. At December 31, 2000, there were no borrowings against this facility. - -------------------------------------------------------------------------------- 14. Long-Term Debt
Interest December 31 (In millions) Rates - % Maturity 2000 1999 ----------------------------------------------------------------------------------------------------------- USX Corporation: Revolving credit facility/(a)/ 2005 $ 300 $ 300 Commercial paper/(a)/ 7.68 77 165 Notes payable 6 13/20 - 9 4/5 2001 - 2023 2,505 2,525 Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes/(b)/ 4 1/4 - 6 7/8 2009 - 2033 494 494 Receivables facility/(c)/ 2004 350 350 All other obligations, including sale-leaseback financing and capital leases 2001 - 2012 88 92 Consolidated subsidiaries: Revolving credit facilities/(d)/ 2001 - 2003 - - USSK loan facility/(e)/ 8 1/2 2010 325 - Guaranteed Notes 7 2002 135 135 Guaranteed Loan/(f)/ 9 1/20 2001 - 2006 199 223 Notes payable 8 1/2 2001 1 1 All other obligations, including capital leases 2001 - 2011 11 26 ------ ------ Total/(g)(h)/ 4,485 4,311 Less unamortized discount 25 28 Less amount due within one year 287 61 ------ ------ Long-term debt due after one year $4,173 $4,222 -----------------------------------------------------------------------------------------------------------
/(a)/ In November 2000, USX entered into a $1,354 million 5-year revolving credit agreement, terminating in November 2005, which in conjunction with a $451 million 364-day revolving credit agreement, terminating in December 2001, replaced the prior $2,350 million facility. Interest on the facility is based on defined short-term market rates. During the term of the agreement, USX is obligated to pay a variable facility fee on total commitments, which at December 31, 2000 was .125%. At December 31, 2000, $300 million had been borrowed against this facility. The commercial paper is supported by the unused and available credit on the 5-year facility and, accordingly, is classified as long-term debt. /(b)/ At December 31, 2000, USX had outstanding obligations relating to Environmental Improvement Bonds in the amount of $141 million, which were supported by letter of credit arrangements that could become short-term obligations under certain circumstances. /(c)/ In December 1999, USX entered into an agreement under which the U. S. Steel Group participates in a program to sell an undivided interest in certain accounts receivable. A previous program expired in October 1999 and was accounted for as a transfer of receivables. The new program is accounted for as a secured borrowing. Payments are collected from sold accounts receivable and invested in new accounts receivable for the purchaser and a yield, based on short- term market rates, is transferred to the purchaser. If the U. S. Steel Group does not have sufficient eligible receivables to reinvest for the purchaser, the size of the program is reduced accordingly. The purchaser has a security interest in a pool of receivables to secure USX's obligations under the program. If the receivables facility is not renewed annually, the balance outstanding of such facility could be refinanced by the 5-year facility discussed in (a), or another long-term debt source; and therefore, is classified as long-term debt. The amounts sold under the previous receivables programs averaged $291 million and $347 million for the years 1999 and 1998, respectively. /(d)/ MAP has a $400 million revolving credit facility that terminates in July 2003. Interest is based on defined short- term market rates. During the term of the agreement, MAP is required to pay a variable facility fee on total commitments, which at December 31, 2000 was .125%. At December 31, 2000, the unused and available credit was $352 million, which reflects reductions for outstanding letters of credit. In the event that MAP defaults on indebtedness (as defined in the agreement) in excess of $100 million, USX has guaranteed the payment of any outstanding obligations. /(e)/ USSK has a loan facility with a group of financial institutions aggregating $325 million. The loan, which is non-recourse to USX, bears interest at a fixed rate of 8.5% per annum. The loan is subject to annual repayments of $20 million beginning in 2003, with the balance due in 2010. Mandatory prepayments of the loan may be required based upon a cash flow formula or a change in control of USX. /(f)/ The Guaranteed Loan was used to fund a portion of the costs in connection with the development of the East Brae Field and the SAGE pipeline in the North Sea. A portion of proceeds from a long-term gas sales contract is dedicated to loan service under certain circumstances. Prepayment of the loan may be required under certain situations, including events impairing the security interest. /(g)/ Required payments of long-term debt for the years 2002-2005 are $209 million, $207 million, $710 million and $440 million, respectively. /(h)/ In the event of a change in control of USX, as defined in the related agreements, debt obligations totaling $3,614 million may be declared immediately due and payable. The principal obligations subject to such a provision are Notes payable -$2,505 million; USSK loan facility - $325 million; and Guaranteed Loan - $199 million. In such event, USX may also be required to either repurchase the leased Fairfield slab caster for $100 million or provide a letter of credit to secure the remaining obligation. U-20 - -------------------------------------------------------------------------------- 15. Inventories
(In millions) December 31 2000 1999 ------------------------------------------------------------------------------------------------------- Raw materials $ 915 $ 830 Semi-finished products 429 392 Finished products 1,279 1,239 Supplies and sundry items 190 166 ------ ------ Total (at cost) 2,813 2,627 Less inventory market valuation reserve - - ------ ------ Net inventory carrying value $2,813 $2,627 -------------------------------------------------------------------------------------------------------
At December 31, 2000 and 1999, the LIFO method accounted for 92% and 91%, respectively, of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $880 million and $570 million in 2000 and 1999, respectively. Cost of revenues was reduced and income from operations was increased by $17 million in 2000 as a result of liquidations of LIFO inventories. The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. During 2000, there were no charges or credits to costs and expenses. - -------------------------------------------------------------------------------- 16. Supplemental Cash Flow Information
(In millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------- Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (341) $ (366) $ (336) Income taxes paid (387) (98) (183) ------------------------------------------------------------------------------------------------------- Commercial paper and revolving credit arrangements - net: Commercial paper - issued $ 3,362 $ 6,282 $ - - repayments (3,450) (6,117) - Credit agreements - borrowings 437 5,529 17,486 - repayments (437) (5,980) (16,817) Other credit arrangements - net 150 (95) 55 ------- ------- -------- Total $ 62 $ (381) $ 724 ------------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Common stock issued for dividend reinvestment and employee stock plans $ 15 $ 6 $ 5 Marathon Stock issued for Exchangeable Shares - 7 11 Investee preferred stock received in conversion of investee loan - 142 - Disposal of assets: Exchange of Sakhalin Energy investment 410 - - Deposit of RTI common shares in satisfaction of indexed debt - 56 - Interest in USS/Kobe contributed to Republic - 40 - Other - notes or common stock received 20 20 2 Business combinations: Acquisition of USSK: Liabilities assumed 568 - - Contingent consideration payable at present value 21 - - Investee liabilities consolidated in step acquisition 3 - - Acquisition of Tarragon: Exchangeable Shares issued - - 29 Liabilities assumed - - 433 Acquisition of Ashland RM&T net assets: 38% interest in MAP - - 1,900 Liabilities assumed - - 1,038 Other acquisitions: Liabilities assumed - 42 - Investee liabilities consolidated in step acquisition - 26 - -------------------------------------------------------------------------------------------------------
U-21 ________________________________________________________________________________ 17. Stock-Based Compensation Plans The 1990 Stock Plan, as amended and restated, authorizes the Compensation Committee of the Board of Directors to grant restricted stock, stock options and stock appreciation rights to key management employees. Such employees are generally granted awards of the class of common stock intended to reflect the performance of the group(s) to which their work relates. Up to .5 percent of the outstanding Marathon Stock and .8 percent of the outstanding Steel Stock, as determined on December 31 of the preceding year, are available for grants during each calendar year the 1990 Plan is in effect. In addition, awarded shares that do not result in shares being issued are available for subsequent grant, and any ungranted shares from prior years' annual allocations are available for subsequent grant during the years the 1990 Plan is in effect. As of December 31, 2000, 8,519,302 Marathon Stock shares and 2,108,128 Steel Stock shares were available for grants in 2001. Restricted stock represents stock granted for such consideration, if any, as determined by the Compensation Committee, subject to provisions for forfeiture and restricting transfer. Those restrictions may be removed as conditions such as performance, continuous service and other criteria are met. Restricted stock is issued at the market price per share at the date of grant and vests over service periods that range from one to five years. Deferred compensation is charged to stockholders' equity when the restricted stock is granted and subsequently adjusted for changes in the market value of the underlying stock. The deferred compensation is expensed over the balance of the vesting period and adjusted if conditions of the restricted stock grant are not met. The following table presents information on restricted stock grants:
Marathon Stock Steel Stock ----------------------------- ----------------------------- 2000 1999 1998 2000 1999 1998 ----------------------------------------------------------------------------------------------- Number of shares granted 410,025 28,798 25,378 305,725 18,272 17,742 Weighted-average grant-date fair value per share $ 25.50 $ 29.38 $ 34.00 $ 23.00 $ 28.22 $ 37.28 -----------------------------------------------------------------------------------------------
Stock options represent the right to purchase shares of Marathon Stock or Steel Stock at the market value of the stock at date of grant. Certain options contain the right to receive cash and/or common stock equal to the excess of the fair market value of shares of common stock, as determined in accordance with the plan, over the option price of shares. Most stock options vest after a one-year service period and all expire 10 years from the date they are granted. The following is a summary of stock option activity:
Marathon Stock Steel Stock ------------------------ ---------------------- Shares Price/(a)/ Shares Price/(a)/ ------------------------------------------------------------------------------- Balance December 31, 1997 3,694,865 $24.81 1,633,100 $34.35 Granted 987,535 34.00 611,515 37.28 Exercised (594,260) 27.61 (230,805) 32.00 Canceled (13,200) 27.22 (21,240) 35.89 --------- --------- Balance December 31, 1998 4,074,940 26.62 1,992,570 35.50 Granted 1,005,000 29.38 656,400 28.22 Exercised (176,160) 27.27 (2,580) 24.92 Canceled (121,055) 30.19 (20,005) 38.51 --------- --------- Balance December 31, 1999 4,782,725 27.08 2,626,385 33.67 Granted 1,799,880 25.18 915,470 23.00 Exercised (58,870) 23.11 (400) 24.30 Canceled (410,115) 28.06 (62,955) 38.19 --------- --------- Balance December 31, 2000 6,113,620 26.50 3,478,500 30.78 -------------------------------------------------------------------------------
/(a)/ Weighted-average exercise price The weighted-average grant-date fair value per option for the Marathon Stock was $7.51 in 2000, $8.89 in 1999 and $10.43 in 1998. For the Steel Stock such amounts were $6.63 in 2000, $6.95 in 1999 and $8.29 in 1998. The following table represents stock options at December 31, 2000:
Outstanding Exercisable ---------------------------------------------- ------------------------- Weighted- Number Average Weighted- Number Weighted- Range of of Shares Remaining Average of Shares Average Exercise Under Contractual Exercise Under Exercise Prices Option Life Price Option Price -------------------------------------------------------------------------------------------------------------------- Marathon Stock $ 17.00-23.44 1,947,290 4.5 years $21.03 1,647,290 $20.60 25.38-26.47 1,512,905 8.6 25.53 135,225 25.38 29.38-34.00 2,653,425 7.5 31.06 2,653,425 31.06 --------- --------- Total 6,113,620 4,435,940 --------- --------- Steel Stock $ 23.00-28.22 1,592,305 8.8 years $25.17 678,135 $28.10 31.69-34.44 1,050,920 5.2 32.53 1,050,920 32.53 37.28-44.19 835,275 6.0 39.26 835,275 39.26 --------- --------- Total 3,478,500 2,564,330 --------------------------------------------------------------------------------------------------------------------
U-22 Actual stock-based compensation expense (credit) was $6 million in 2000 and $(3) million in 1999 and 1998. Incremental compensation expense, as determined under a fair value model, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. USX has a deferred compensation plan for non-employee directors of its Board of Directors. The plan permits participants to defer some or all of their annual retainers in the form of common stock units or cash and it requires new directors to defer at least half of their annual retainer in the form of common stock units. Common stock units are book entry units equal in value to a share of Marathon Stock or Steel Stock. Deferred stock benefits are distributed in shares of common stock within five business days after a participant leaves the Board of Directors. During 2000, 14,242 shares of Marathon Stock and 4,872 shares of Steel Stock were issued and during 1999, 10,541 shares of Marathon Stock and 3,798 shares of Steel Stock were issued. During 1998, no shares of common stock were issued. ________________________________________________________________________________ 18. Dividends In accordance with the USX Certificate, dividends on the Marathon Stock and Steel Stock are limited to the legally available funds of USX. Net losses of any Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on all classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock and Steel Stock based on the financial condition and results of operations of the related group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to each of the Marathon Stock and Steel Stock, the Board of Directors considers, among other things, the long-term earnings and cash flow capabilities of the related group as well as the dividend policies of similar publicly traded companies. Dividends on the Steel Stock are further limited to the Available Steel Dividend Amount. At December 31, 2000, the Available Steel Dividend Amount was at least $3,161 million. The Available Steel Dividend Amount will be increased or decreased, as appropriate, to reflect U. S. Steel Group net income, dividends, repurchases or issuances with respect to the Steel Stock and preferred stock attributed to the U. S. Steel Group and certain other items. ________________________________________________________________________________ 19. Stockholder Rights Plan On September 28, 1999, USX's Board of Directors adopted a new Stockholder Rights Plan and declared a dividend distribution of one right for each outstanding share of Marathon Stock and Steel Stock (referred to together as "Voting Stock") to stockholders of record on October 9, 1999. Each right becomes exercisable, at a price of $110, after any person or group has acquired, obtained the right to acquire or made a tender or exchange offer for 15% or more of the outstanding voting power represented by the outstanding Voting Stock, except pursuant to a qualifying all-cash tender offer for all outstanding shares of Voting Stock which results in the offeror owning shares of Voting Stock representing a majority of the voting power (other than Voting Stock beneficially owned by the offeror immediately prior to the offer). Each right entitles the holder, other than the acquiring person or group, to purchase one one- hundredth of a share of Series A Junior Preferred Stock or, upon the acquisition by any person of 15% or more of the outstanding voting power represented by the outstanding Voting Stock, Marathon Stock or Steel Stock (or, in certain circumstances, other property) having a market value of twice the exercise price. After a person or group acquires 15% or more of the outstanding voting power, if USX engages in a merger or other business combination where it is not the surviving corporation or where it is the surviving corporation and the Voting Stock is changed or exchanged, or if 50% or more of USX's assets, earnings power or cash flow are sold or transferred, each right entitles the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The rights and the exercise price are subject to adjustment. The rights will expire on October 9, 2009, unless such date is extended or the rights are earlier redeemed by USX for one cent per right at any time prior to the point they become exercisable. Under certain circumstances, the Board of Directors has the option to exchange one share of the respective class of Voting Stock for each exercisable right. U-23 - -------------------------------------------------------------------------------- 20. Income Per Common Share The method of calculating net income (loss) per share for the Marathon Stock and the Steel Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Certificate, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group and the U. S. Steel Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. COMPUTATION OF INCOME PER SHARE
2000 1999 1998 ------------------- --------------------- ------------------ Basic Diluted Basic Diluted Basic Diluted ------------------------------------------------------------------------------------------------------------------ Marathon Group -------------- Net income (millions) $ 432 $ 432 $ 654 $ 654 $ 310 $ 310 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 311,531 311,531 309,696 309,696 292,876 292,876 Effect of dilutive securities - Stock options - 230 - 314 - 559 -------- -------- -------- -------- -------- -------- Average common shares and dilutive effect 311,531 311,761 309,696 310,010 292,876 293,435 ======== ======== ======== ======== ======== ======== Net income per share $ 1.39 $ 1.39 $ 2.11 $ 2.11 $ 1.06 $ 1.05 ------------------------------------------------------------------------------------------------------------------ U. S. Steel Group ----------------- Net income (loss) (millions): Income (loss) before extraordinary losses $ (21) $ (21) $ 51 $ 51 $ 364 $ 364 Dividends on preferred stock 8 8 9 9 9 - Extraordinary losses - - 7 7 - - -------- -------- -------- -------- -------- -------- Net income (loss) applicable to Steel Stock (29) (29) 35 35 355 364 Effect of dilutive securities - Trust preferred securities - - - - - 8 -------- -------- -------- -------- -------- -------- Net income (loss) assuming conversions $ (29) $ (29) $ 35 $ 35 $ 355 $ 372 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,613 88,613 88,392 88,392 87,508 87,508 Effect of dilutive securities: Trust preferred securities - - - - - 4,256 Preferred stock - - - - - 3,143 Stock options - - - 4 - 36 -------- -------- -------- -------- -------- -------- Average common shares and dilutive effect 88,613 88,613 88,392 88,396 87,508 94,943 ======== ======== ======== ======== ======== ======== Per share: Income (loss) before extraordinary losses $ (.33) $ (.33) $ .48 $ .48 $ 4.05 $ 3.92 Extraordinary losses - - .08 .08 - - -------- -------- -------- -------- -------- -------- Net income (loss) $ (.33) $ (.33) $ .40 $ .40 $ 4.05 $ 3.92 ------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 21. Property, Plant and Equipment
(In millions) December 31 2000 1999 ------------------------------------------------------------------------------------------------------------ Marathon Group $ 19,066 $ 20,860 U. S. Steel Group 9,270 8,748 -------- -------- Total 28,336 29,608 Less accumulated depreciation, depletion and amortization 16,222 16,799 -------- -------- Net $ 12,114 $ 12,809 ------------------------------------------------------------------------------------------------------------
Property, plant and equipment includes gross assets acquired under capital leases (including sale-leasebacks accounted for as financings) of $106 million at December 31, 2000, and $125 million at December 31, 1999; related amounts in accumulated depreciation, depletion and amortization were $79 million and $81 million, respectively. During 2000, the U. S. Steel Group recorded $71 million of impairments relating to coal assets located in West Virginia and Alabama. The impairment was recorded as a result of a reassessment of long-term prospects after adverse geological conditions were encountered. During 2000, the Marathon Group recorded $193 million of impairments of certain E&P segment oil and gas properties, primarily located in Canada. The impairments were recorded due to reserve revisions as a result of production performance and disappointing drilling results. These impairment charges are included in depreciation, depletion and amortization. U-24 ________________________________________________________________________________ 22. Preferred Stock of Subsidiary and Trust Preferred Securities USX Capital LLC, a wholly owned subsidiary of USX, sold 10,000,000 shares (carrying value of $250 million) of 8-3/4% Cumulative Monthly Income Preferred Shares (MIPS) (liquidation preference of $25 per share) in 1994. Proceeds of the issue were loaned to USX. USX has the right under the loan agreement to extend interest payment periods for up to 18 months, and as a consequence, monthly dividend payments on the MIPS can be deferred by USX Capital LLC during any such interest payment period. In the event that USX exercises this right, USX may not declare dividends on any share of its preferred or common stocks. The MIPS are redeemable at the option of USX Capital LLC and subject to the prior consent of USX, in whole or in part from time to time, for $25 per share, and will be redeemed from the proceeds of any repayment of the loan by USX. In addition, upon final maturity of the loan, USX Capital LLC is required to redeem the MIPS. The financial costs are included in net interest and other financial costs. In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million. USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in net interest and other financial costs. Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037 (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of Steel Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, at a premium of 101.95% of the initial liquidation amount through March 31, 2001, and thereafter, declining annually to the initial liquidation amount on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. In addition, USX unconditionally guarantees the Trust's Debentures. The obligations of USX under the Debentures, and the related indenture, trust agreement and guarantee constitute a full and unconditional guarantee by USX of the Trust's obligations under the Trust Preferred Securities. ________________________________________________________________________________ 23. Preferred Stock USX is authorized to issue 40,000,000 shares of preferred stock, without par value - 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) - As of December 31, 2000, 2,413,487 shares (stated value of $1.00 per share; liquidation preference of $50.00 per share) were outstanding. The 6.50% Preferred Stock is convertible at any time, at the option of the holder, into shares of Steel Stock at a conversion price of $46.125 per share of Steel Stock, subject to adjustment in certain circumstances. This stock is redeemable at USX's sole option, at a price of $50.975 per share beginning April 1, 2000, and thereafter at prices declining annually on each April 1 to an amount equal to $50.00 per share on and after April 1, 2003. U-25 ________________________________________________________________________________ 24. Derivative Instruments USX remains at risk for possible changes in the market value of derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. USX is also exposed to credit risk in the event of nonperformance by counterparties. The credit-worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument for derivative instruments categorized as trading or other than trading:
Recognized Fair Carrying Trading Recorded Value Amount Gain or Deferred Aggregate Assets Assets (Loss) for Gain or Contract (In millions) (Liabilities)/(a)(b)/ (Liabilities) the Year (Loss) Values/(c)/ - ---------------------------------------------------------------------------------------------------------------- December 31, 2000: Exchange-traded commodity futures: Trading $ - $ - $ (19) $ - $ - Other than trading - - - 7 897 Exchange-traded commodity options: Trading - - - - - Other than trading (6)/(d)/ (6) - (1) 971 OTC commodity swaps/(e)/: Trading - - - - - Other than trading 35/(f)/ 35 - 25 426 OTC commodity options: Trading - - - - - Other than trading (52)/(g)/ (52) - (40) 94 ------- ------- ------- ------ ------- Total commodities $ (23) $ (23) $ (19) $ (9) $ 2,388 ======= ======= ======= ====== ======= Forward exchange contracts/(h)/: - receivable $ 14 $ 14 $ - $ - $ 14 - ---------------------------------------------------------------------------------------------------------------- December 31, 1999: Exchange-traded commodity futures: Trading $ - $ - $ 4 $ - $ 8 Other than trading - - - 28 344 Exchange-traded commodity options: Trading - - 4 - 179 Other than trading (6)/(d)/ (6) - (10) 1,262 OTC commodity swaps: Trading - - - - - Other than trading 6/(f)/ 6 - 5 193 OTC commodity options: Trading - - - - - Other than trading 4/(g)/ 4 - 5 238 ------- ------- ------- ------ ------- Total commodities $ 4 $ 4 $ 8 $ 28 $ 2,224 ======= ======= ======= ====== ======= Forward exchange contracts: - receivable $ 52 $ 52 $ - $ - $ 51 - ----------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts for OTC positions are based on various indices or dealer quotes. The fair value amounts for currency contracts are based on dealer quotes of forward prices covering the remaining duration of the forward exchange contract. The exchange-traded futures contracts and certain option contracts do not have a corresponding fair value since changes in the market prices are settled on a daily basis. /(b)/ The aggregate average fair value of all trading activities for 2000 and 1999 was $(5) million and $3 million, respectively. Detail by class of instrument was not available. /(c)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. /(d)/ Includes fair values as of December 31, 2000 and 1999, for assets of $10 million and $11 million and for liabilities of $(16) million and $(17) million, respectively. /(e)/ The OTC swap arrangements vary in duration with certain contracts extending into 2008. /(f)/ Includes fair values as of December 31, 2000 and 1999, for assets of $84 million and $11 million and for liabilities of $(49) million and $(5) million, respectively. /(g)/ Includes fair values as of December 31, 2000 and 1999, for assets of $1 million and $5 million and for liabilities of $(53) million and $(1) million, respectively. /(h)/ The forward exchange contracts relating to USX's foreign operations have various maturities ending in March 2001. U-26 - -------------------------------------------------------------------------------- 25. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 24, by individual balance sheet account:
2000 1999 ------------------ --------------------- Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount ---------------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 559 $ 559 $ 133 $ 133 Receivables 3,238 3,238 2,717 2,717 Investments and long-term receivables 211 147 190 134 ------ ------ ------ ------ Total financial assets $4,008 $3,944 $3,040 $2,984 ---------------------------------------------------------------------------------------------------------------------- Financial liabilities: Notes payable $ 150 $ 150 $ - $ - Accounts payable 3,774 3,774 3,409 3,409 Accrued interest 108 108 107 107 Long-term debt (including amounts due within one year) 4,549 4,365 4,278 4,176 Preferred stock of subsidiary and trust preferred securities 357 433 408 433 ------ ------ ------ ------ Total financial liabilities $8,938 $8,830 $8,202 $8,125 ----------------------------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short- term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Certain foreign cost method investments are excluded from investments and long-term receivables because the fair value is not readily determinable. USX is subject to market risk and liquidity risk related to its investments; however, these risks are not readily quantifiable. Fair value of preferred stock of subsidiary and trust preferred securities was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. USX's only unrecognized financial instruments are financial guarantees and commitments to extend credit. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to financial guarantees, see Note 26. - -------------------------------------------------------------------------------- 26. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Environmental matters - USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 2000 and 1999, accrued liabilities for remediation totaled $212 million and $170 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $57 million at December 31, 2000, and $52 million at December 31, 1999. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 2000 and 1999, such capital expenditures totaled $91 million and $78 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At December 31, 2000 and 1999, accrued liabilities for platform abandonment and dismantlement totaled $162 million and $152 million, respectively. U-27 Guarantees - Guarantees of the liabilities of unconsolidated entities by USX and its consolidated subsidiaries totaled $82 million at December 31, 2000, and $219 million at December 31, 1999. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the investees to reduce potential losses resulting from these guarantees. As of December 31, 2000, the largest guarantee for a single such entity was $59 million. At December 31, 2000 and 1999, USX's pro rata share of obligations of LOOP LLC and various pipeline investees secured by throughput and deficiency agreements totaled $119 million and $146 million, respectively. Under the agreements, USX is required to advance funds if the investees are unable to service debt. Any such advances are prepayments of future transportation charges. Commitments - At December 31, 2000 and 1999, contract commitments to acquire property, plant and equipment and long-term investments totaled $663 million and $568 million, respectively. USSK has a commitment to the Slovak government for a capital improvements program of $700 million, subject to certain conditions, over a period commencing with the acquisition date and ending on December 31, 2010. USSK is required to report periodically to the Slovak government on its status toward meeting this commitment. The first reporting period ends on December 31, 2003. USX entered into a 15-year take-or-pay arrangement in 1993, which requires USX to accept pulverized coal each month or pay a minimum monthly charge of approximately $1 million. Charges for deliveries of pulverized coal totaled $23 million in 2000, 1999 and 1998. If USX elects to terminate the contract early, a maximum termination payment of $96 million, which declines over the duration of the agreement, may be required. USX is a party to a 15-year transportation services agreement with a natural gas transmission company. The contract requires USX to pay minimum annual demand charges of approximately $5 million starting in December 2000 and concluding in 2015. The payments are required even if the transportation facility is not utilized. Demand charges paid in 2000 were less than $1 million. - -------------------------------------------------------------------------------- 27. Joint Venture Formation In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed a definitive agreement to form a joint venture combining certain of their oil and gas producing activities in the U.S. Permian Basin, including Marathon's interest in the Yates Field. This transaction will allow Marathon to expand its interests in the Permian Basin and will improve access to materials for use in enhanced recovery techniques in the Yates Field. The joint venture named MKM Partners L.P., commenced operations in January 2001 and will be accounted for under the equity method of accounting. As a result of the agreement to form this joint venture, Marathon recognized a pretax charge of $931 million in the fourth quarter 2000, which is included in net gains (losses) on disposal of assets, and reclassified the remaining book value associated with the Yates Field from property, plant and equipment to assets held for sale. Upon completion of this transaction in January 2001, the book value will be transferred from assets held for sale to investments and long-term receivables. - -------------------------------------------------------------------------------- 28. Subsequent Event - Business Combination On February 7, 2001, Marathon acquired 87% of the outstanding common stock of Pennaco Energy Inc., a natural gas producer. Marathon plans to acquire the remaining Pennaco shares through a merger in which each share of Pennaco common stock, not purchased in the offer and not held by stockholders who have properly exercised dissenters rights under Delaware law, will be converted into the right to receive the tender offer price in cash, without interest. The purchase price is expected to approximate $500 million. The acquisition will be accounted for using the purchase method of accounting. U-28 Selected Quarterly Financial Data (Unaudited)
2000 -------------------------------------------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ----------------------------------------------------------------------------------------------------------- Revenues and other income: Revenues/(a)/ $ 10,293 $ 10,607 $ 10,293 $ 9,307 Other income (loss) (837) 72 57 122 -------- --------- --------- -------- Total 9,456 10,679 10,350 9,429 Income (loss) from operations (625) 789 972 616 Includes: Joint venture formation charges (931) - - - Inventory market valuation credits - - - - Income (loss) before extraordinary losses (449) 140 423 297 Net income (loss) (449) 140 423 297 - ----------------------------------------------------------------------------------------------------------- Marathon Stock data: - -------------------- Net income (loss) $ (310) $ 121 $ 367 $ 254 Per share - basic and diluted (1.00) .38 1.18 .81 Dividends paid per share .23 .23 .21 .21 Price range of Marathon Stock/(b)/: - Low 25-1/4 23-1/2 22-13/16 20-11/16 - High 30-3/8 29-5/8 29-3/16 27-1/2 - ----------------------------------------------------------------------------------------------------------- Steel Stock data: - ----------------- Income (loss) before extraordinary losses applicable to Steel Stock $ (141) $ 17 $ 54 $ 41 - Per share: basic (1.59) .19 .62 .45 diluted (1.59) .19 .62 .45 Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(b)/: - Low 12-11/16 14-7/8 18-1/4 20-5/8 - High 18-5/16 19-11/16 26-7/8 32-15/16 - ----------------------------------------------------------------------------------------------------------- 1999 -------------------------------------------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ----------------------------------------------------------------------------------------------------------- Revenues and other income: Revenues/(a)/ $ 8,725 $ 7,713 $ 6,649 $ 5,981 Other income (loss) 53 (13) 35 (24) -------- --------- --------- -------- Total 8,778 7,700 6,684 5,957 Income (loss) from operations 425 535 502 401 Includes: Joint venture formation charges - - - - Inventory market valuation credits - 136 66 349 Income (loss) before extraordinary losses 205 201 189 110 Net income (loss) 205 199 189 105 - ----------------------------------------------------------------------------------------------------------- Marathon Stock data: - -------------------- Net income (loss) $ 171 $ 230 $ 134 $ 119 Per share - basic and diluted .55 .74 .43 .38 Dividends paid per share .21 .21 .21 .21 Price range of Marathon Stock/(b)/: - Low 23-5/8 28-1/2 25-13/16 19-5/8 - High 30-5/8 33-7/8 32-3/4 31-3/8 - ----------------------------------------------------------------------------------------------------------- Steel Stock data: - ----------------- Income (loss) before extraordinary losses applicable to Steel Stock $ 32 $ (31) $ 52 $ (11) - Per share: basic .35 (.35) .60 (.13) diluted .35 (.35) .59 (.13) Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(b)/: - Low 21-3/4 24-9/16 23-1/2 22-1/4 - High 33 30-1/16 34-1/4 29-1/8 - -----------------------------------------------------------------------------------------------------------
/(a)/ Certain items have been reclassified between revenues and cost of revenues, primarily to give effect to new accounting standards as disclosed in Note 2 of the Notes to Consolidated Financial Statements. Amounts reclassified in the first, second and third quarters of 2000 were $(65) million, $(138) million and $(14) million, respectively, and for the first, second, third and fourth quarters of 1999 were $(97) million, $(82) million, $(113) million and $(172) million, respectively. /(b)/ Composite tape. U-29 Principal Unconsolidated Investees (Unaudited)
December 31, 2000 Company Country Ownership Activity - ----------------------------------------------------------------------------------------------------------------- Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production Double Eagle Steel Coating Company United States 50% Steel Processing Kenai LNG Corporation United States 30% Natural Gas Liquification LOCAP, Inc. United States 50% /(a)/ Pipeline & Storage Facilities LOOP LLC United States 47% /(a)/ Offshore Oil Port Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission Minnesota Pipe Line Company United States 33% /(a)/ Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation PRO-TEC Coating Company United States 50% Steel Processing Republic Technologies International, LLC United States 16% Steel Products Transtar, Inc. United States 46% Transportation USS-POSCO Industries United States 50% Steel Processing Worthington Specialty Processing United States 50% Steel Processing - -----------------------------------------------------------------------------------------------------------------
/(a)/ Represents the ownership of MAP. Supplementary Information on Mineral Reserves (Unaudited) Mineral Reserves (other than oil and gas)
Reserves at December 31/(a)/ Production -------------------------------------- ------------------------------------ (Million tons) 2000 1999 1998 1997 1996 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Iron/(b)/ 709.8 726.1 738.6 754.8 716.3 16.3 14.3 15.8 16.8 15.1 Coal/(c)/ 786.6 787.4 789.7 798.8 859.5 5.5 6.2 7.3 7.5 7.1 - -------------------------------------------------------------------------------------------------------------------------
/(a)/ Commercially recoverable reserves include demonstrated (measured and indicated) quantities which are expressed in recoverable net product tons. /(b)/ Iron ore reserves decreased in 2000, 1999 and 1998 due to production, lease activity and engineering revisions. The increase in 1997 resulted from lease exchanges of 55.3 million tons. /(c)/ Coal reserves decreased due to production, lease activity and engineering revisions, and additionally in 1997 due to a 53.2 million ton lease termination. Supplementary Information on Oil and Gas Producing Activities (Unaudited) Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
United Other Equity (In millions) December 31 States Europe Intl. Consolidated Investees Total - ---------------------------------------------------------------------------------------------------------------------------- 2000 Capitalized costs: Proved properties $ 5,752 $ 4,739 $ 1,373 $ 11,864 $ 226 $ 12,090 Unproved properties 343 124 180 647 2 649 -------- -------- -------- --------- --------- --------- Total 6,095 4,863 1,553 12,511 228 12,739 -------- -------- -------- --------- --------- --------- Accumulated depreciation, depletion and amortization: Proved properties 3,435 3,074 420 6,929 170 7,099 Unproved properties 107 - 13 120 1 121 -------- -------- -------- --------- --------- --------- Total 3,542 3,074 433 7,049 171 7,220 -------- -------- -------- --------- --------- --------- Net capitalized costs $ 2,553 $ 1,789 $ 1,120 $ 5,462 $ 57 $ 5,519 - ---------------------------------------------------------------------------------------------------------------------------- 1999 Capitalized costs: Proved properties $ 8,270 $ 4,465 $ 1,270 $ 14,005 $ 612 $ 14,617 Unproved properties 349 55 187 591 123 714 -------- -------- -------- --------- --------- --------- Total 8,619 4,520 1,457 14,596 735 15,331 -------- -------- -------- --------- --------- --------- Accumulated depreciation, depletion and amortization: Proved properties 5,019 2,859 136 8,014 169 8,183 Unproved properties 78 - 6 84 - 84 -------- -------- -------- --------- --------- --------- Total 5,097 2,859 142 8,098 169 8,267 -------- -------- -------- --------- --------- --------- Net capitalized costs $ 3,522 $ 1,661 $ 1,315 $ 6,498 $ 566 $ 7,064 - ----------------------------------------------------------------------------------------------------------------------------
U-30 Supplementary Information on Oil and Gas Producing Activities (Unaudited) continued Results of Operations for Oil and Gas Producing Activities, Excluding Corporate Overhead and Interest Costs/(a)/
United Other Equity (In millions) States Europe Intl. Consolidated Investees Total ---------------------------------------------------------------------------------------------------------------------------- 2000: Revenues: Sales $ 783 $ 579 $ 310 $ 1,672 $ 145 $ 1,817 Transfers 1,337 - 188 1,525 - 1,525 Other revenues/(b)/ (875) 10 55 (810) - (810) -------- -------- -------- --------- --------- --------- Total revenues 1,245 589 553 2,387 145 2,532 Expenses: Production costs (371) (111) (133) (615) (34) (649) Shipping and handling costs/(c)/ (72) - - (72) - (72) Exploration expenses (125) (37) (74) (236) (6) (242) Reorganization costs (45) (12) (10) (67) - (67) Depreciation, depletion and amortization (380) (175) (122) (677) (27) (704) Impairments (5) - (188) (193) - (193) Other expenses (33) (3) (15) (51) - (51) -------- -------- -------- --------- --------- --------- Total expenses (1,031) (338) (542) (1,911) (67) (1,978) Other production-related earnings (losses)/(d)/ 4 (21) 4 (13) 1 (12) -------- -------- -------- --------- --------- --------- Results before income taxes 218 230 15 463 79 542 Income taxes (credits)/(e)/ 70 62 (1) 131 27 158 -------- -------- -------- --------- --------- --------- Results of operations $ 148 $ 168 $ 16 $ 332 $ 52 $ 384 ---------------------------------------------------------------------------------------------------------------------------- 1999: Revenues: Sales $ 547 $ 431 $ 200 $ 1,178 $ 33 $ 1,211 Transfers 882 - 88 970 - 970 Other revenues/(b)/ 4 - (2) 2 - 2 -------- -------- -------- --------- --------- --------- Total revenues 1,433 431 286 2,150 33 2,183 Expenses: Production costs (322) (137) (99) (558) (25) (583) Shipping and handling costs/(c)/ (77) - - (77) - (77) Exploration expenses (134) (42) (51) (227) (4) (231) Depreciation, depletion and amortization (362) (143) (99) (604) (13) (617) Impairments (16) - - (16) - (16) Other expenses (28) (7) (15) (50) - (50) -------- -------- -------- --------- --------- --------- Total expenses (939) (329) (264) (1,532) (42) (1,574) Other production-related earnings (losses)/(d)/ 1 4 4 9 1 10 -------- -------- -------- --------- --------- --------- Results before income taxes 495 106 26 627 (8) 619 Income taxes (credits) 168 33 (7) 194 (3) 191 -------- -------- -------- --------- --------- --------- Results of operations $ 327 $ 73 $ 33 $ 433 $ (5) $ 428 ---------------------------------------------------------------------------------------------------------------------------- 1998: Revenues: Sales $ 542 $ 454 $ 71 $ 1,067 $ 28 $ 1,095 Transfers 536 - 51 587 - 587 Other revenues/(b)/ 43 - - 43 - 43 -------- -------- -------- --------- --------- ---------- Total revenues 1,121 454 122 1,697 28 1,725 Expenses: Production costs (295) (153) (57) (505) (8) (513) Shipping and handling costs/(c)/ (67) - - (67) - (67) Exploration expenses (165) (23) (49) (237) (5) (242) Depreciation, depletion and amortization (339) (150) (58) (547) (8) (555) Impairments/(f)/ (14) (22) (47) (83) - (83) Other expenses (37) (3) (11) (51) - (51) -------- -------- -------- --------- --------- --------- Total expenses (917) (351) (222) (1,490) (21) (1,511) Other production-related earnings (losses)/(d)/ 1 15 3 19 1 20 -------- -------- -------- --------- --------- --------- Results before income taxes 205 118 (97) 226 8 234 Income taxes (credits) 61 22 (28) 55 3 58 -------- -------- -------- --------- --------- --------- Results of operations $ 144 $ 96 $ (69) $ 171 $ 5 $ 176 ----------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes the results of using derivative instruments to manage commodity and foreign currency risks. /(b)/ Includes net gains (losses) on asset dispositions and contract settlements. /(c)/ Represents a reclassification of shipping and handling costs previously reported as a reduction from oil and gas revenues. /(d)/ Includes revenues, net of associated costs, from third-party activities that are an integral part of USX's production operations which may include the processing and/or transportation of third-party production, and the purchase and subsequent resale of gas utilized in reservoir management. /(e)/ Excludes net valuation allowance tax charges of $205 million. /(f)/ Includes suspended exploration well write-offs. U-31 Supplementary Information on Oil and Gas Producing Activities (Unaudited) continued Costs Incurred for Property Acquisition, Exploration and Development - Including Capital Expenditures
United Other Equity (In millions) States Europe Intl. Consolidated Investees Total ------------------------------------------------------------------------------------------------------------------------------ 2000: Property acquisition: Proved $ 128 $ - $ 12 $ 140 $ - $ 140 Unproved (5)/(a)/ - 10 5 - 5 Exploration 161 33 93 287 2 289 Development 288 42 103 433 77 510 ----------------------------------------------------------------------------------------------------------------------------- 1999: Property acquisition: Proved $ 20 $ - $ 10 $ 30 $ - $ 30 Unproved 26 12 107 145 - 145 Exploration 141 47 64 252 8 260 Development 232 34 117 383 84 467 ----------------------------------------------------------------------------------------------------------------------------- 1998: Property acquisition: Proved $ 3 $ 3 $1,051 $1,057 $ - $1,057 Unproved 82 - 57 139 - 139 Exploration 217 39 75 331 11 342 Development 431 39 46 516 165 681 ------------------------------------------------------------------------------------------------------------------------------
/(a)/ Includes proceeds of $25 million realized from the reduction of mineral interests. Estimated Quantities of Proved Oil and Gas Reserves The following estimates of net reserves have been determined by deducting royalties of various kinds from USX's gross reserves. The reserve estimates are believed to be reasonable and consistent with presently known physical data concerning size and character of the reservoirs and are subject to change as additional knowledge concerning the reservoirs becomes available. The estimates include only such reserves as can reasonably be classified as proved; they do not include reserves which may be found by extension of proved areas or reserves recoverable by secondary or tertiary recovery methods unless these methods are in operation and are showing successful results. Undeveloped reserves consist of reserves to be recovered from future wells on undrilled acreage or from existing wells where relatively major expenditures will be required to realize production. USX did not have any quantities of oil and gas reserves subject to long- term supply agreements with foreign governments or authorities in which USX acts as producer.
United Other Equity (Millions of barrels) States Europe Intl. Consolidated Investees Total ------------------------------------------------------------------------------------------------------------------------ Liquid Hydrocarbons Proved developed and undeveloped reserves: Beginning of year - 1998 590 161 26 777 82 859 Purchase of reserves in place 1 - 156 157 - 157 Revisions of previous estimates (1) (28) 1 (28) (2) (30) Improved recovery 3 - - 3 - 3 Extensions, discoveries and other additions 10 4 18 32 - 32 Production (49) (15) (7) (71) - (71) Sales of reserves in place (5) - - (5) - (5) ------ ------ ------ ----- ----- ----- End of year - 1998 549 122 194 865 80 945 Purchase of reserves in place 14 - 7 21 - 21 Revisions of previous estimates 2 (20) - (18) (3) (21) Improved recovery 11 - 1 12 - 12 Extensions, discoveries and other additions 9 - 5 14 - 14 Production (53) (12) (11) (76) - (76) Sales of reserves in place (12) - (9) (21) - (21) ------ ------ ------ ----- ----- ----- End of year - 1999 520 90 187 797 77 874 Purchase of reserves in place 27 - - 27 - 27 Exchange of interest/(a)/ 6 60 - 66 (73) (7) Revisions of previous estimates (4) (35) (21) (60) - (60) Improved recovery 7 - - 7 - 7 Extensions, discoveries and other additions 15 3 1 19 - 19 Production (48) (10) (13) (71) (4) (75) Sales of reserves in place (65) - (3) (68) - (68) ------ ------ ------ ----- ----- ----- End of year - 2000 458 108 151 717 - 717 ------------------------------------------------------------------------------------------------------------------------ Proved developed reserves: Beginning of year - 1998 486 161 12 659 - 659 End of year - 1998 489 119 67 675 - 675 End of year - 1999 476 90 72 638 69 707 End of year - 2000 414 74 57 545 - 545 ------------------------------------------------------------------------------------------------------------------------
/(a)/ Reserves represent the exchange of an equity interest in Sakhalin Energy Investment Company Ltd. for certain interests in the UK Atlantic Margin area and the Gulf of Mexico. U-32 Supplementary Information on Oil and Gas Producing Activities (Unaudited) continued Estimated Quantities of Proved Oil and Gas Reserves (continued)
United Other Equity (Billions of cubic feet) States Europe Intl. Consolidated Investees Total ---------------------------------------------------------------------------------------------------------------------------- Natural Gas Proved developed and undeveloped reserves: Beginning of year - 1998 2,232 1,048 23 3,303 111 3,414 Purchase of reserves in place 10 - 782 792 - 792 Revisions of previous estimates (16) 10 (1) (7) 5 (2) Improved recovery - - - - - - Extensions, discoveries and other additions 238 32 55 325 5 330 Production (272) (124) (29) (425) (11) (436) Sales of reserves in place (29) - - (29) - (29) ------- ------ ----- ------ ------ ------ End of year - 1998 2,163 966 830 3,959 110 4,069 Purchase of reserves in place 5 - 11 16 - 16 Revisions of previous estimates (83) (81) (3) (167) 13 (154) Improved recovery 8 - 2 10 - 10 Extensions, discoveries and other additions 281 - 94 375 13 388 Production (275) (111) (59) (445) (13) (458) Sales of reserves in place (42) - (42) (84) - (84) ------- ------ ----- ------ ------ ------ End of year - 1999 2,057 774 833 3,664 123 3,787 Purchase of reserves in place 114 - 15 129 - 129 Exchange of interest/(a)/ 14 31 - 45 - 45 Revisions of previous estimates (154) (114) (347) (615) (26) (641) Improved recovery - - - - - - Extensions, discoveries and other additions 217 35 38 290 2 292 Production (268) (112) (52) (432) (10) (442) Sales of reserves in place (66) - (10) (76) - (76) ------- ------ ----- ------ ------ ------ End of year - 2000 1,914 614 477 3,005 89 3,094 ---------------------------------------------------------------------------------------------------------------------------- Proved developed reserves: Beginning of year - 1998 1,702 1,024 19 2,745 78 2,823 End of year - 1998 1,678 909 534 3,121 76 3,197 End of year - 1999 1,550 741 497 2,788 65 2,853 End of year - 2000 1,421 563 381 2,365 52 2,417 ----------------------------------------------------------------------------------------------------------------------------
/(a)/ Reserves represent the exchange of an equity interest in Sakhalin Energy Investment Company Ltd. for certain interests in the UK Atlantic Margin area and the Gulf of Mexico. Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves Estimated discounted future net cash flows and changes therein were determined in accordance with Statement of Financial Accounting Standards No. 69. Certain information concerning the assumptions used in computing the valuation of proved reserves and their inherent limitations are discussed below. USX believes such information is essential for a proper understanding and assessment of the data presented. Future cash inflows are computed by applying year-end prices of oil and gas relating to USX's proved reserves to the year-end quantities of those reserves. Future price changes are considered only to the extent provided by contractual arrangements in existence at year-end. The assumptions used to compute the proved reserve valuation do not necessarily reflect USX's expectations of actual revenues to be derived from those reserves nor their present worth. Assigning monetary values to the estimated quantities of reserves, described on the preceding page, does not reduce the subjective and ever-changing nature of such reserve estimates. Additional subjectivity occurs when determining present values because the rate of producing the reserves must be estimated. In addition to uncertainties inherent in predicting the future, variations from the expected production rate also could result directly or indirectly from factors outside of USX's control, such as unintentional delays in development, environmental concerns, changes in prices or regulatory controls. The reserve valuation assumes that all reserves will be disposed of by production. However, if reserves are sold in place or subjected to participation by foreign governments, additional economic considerations also could affect the amount of cash eventually realized. Future development and production costs, including abandonment and dismantlement costs, are computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. Future income tax expenses are computed by applying the appropriate year-end statutory tax rates, with consideration of future tax rates already legislated, to the future pretax net cash flows relating to USX's proved oil and gas reserves. Permanent differences in oil and gas related tax credits and allowances are recognized. Discount was derived by using a discount rate of 10 percent a year to reflect the timing of the future net cash flows relating to proved oil and gas reserves. U-33 Supplementary Information on Oil and Gas Producing Activities (Unaudited) continued Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (continued)
United Other Equity (In millions) States Europe Intl. Consolidated Investees Total ---------------------------------------------------------------------------------------------------------------------- December 31, 2000: Future cash inflows $ 25,052 $ 4,571 $ 6,704 $ 36,327 $ 313 $ 36,640 Future production costs (5,689) (1,662) (1,156) (8,507) (125) (8,632) Future development costs (638) (185) (309) (1,132) (26) (1,158) Future income tax expenses (6,290) (677) (2,102) (9,069) (76) (9,145) -------- ------- ------- -------- ------- -------- Future net cash flows 12,435 2,047 3,137 17,619 86 17,705 10% annual discount for estimated timing of cash flows (5,403) (486) (1,524) (7,413) (19) (7,432) -------- ------- ------- -------- ------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 7,032 $ 1,561 $ 1,613 $ 10,206 $ 67 $ 10,273 ---------------------------------------------------------------------------------------------------------------------- December 31, 1999: Future cash inflows $ 15,393 $ 4,426 $ 5,242 $ 25,061 $ 2,154 $ 27,215 Future production costs (4,646) (1,864) (1,107) (7,617) (850) (8,467) Future development costs (445) (86) (315) (846) (88) (934) Future income tax expenses (3,102) (987) (1,581) (5,670) (328) (5,998) -------- ------- ------- -------- ------- -------- Future net cash flows 7,200 1,489 2,239 10,928 888 11,816 10% annual discount for estimated timing of cash flows (3,371) (374) (862) (4,607) (372) (4,979) -------- ------- ------- -------- ------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 3,829 $ 1,115 $ 1,377 $ 6,321 $ 516 $ 6,837 ---------------------------------------------------------------------------------------------------------------------- December 31, 1998: Future cash inflows $ 8,442 $ 3,850 $ 2,686 $ 14,978 $ 1,036 $ 16,014 Future production costs (3,731) (2,240) (950) (6,921) (586) (7,507) Future development costs (559) (130) (323) (1,012) (124) (1,136) Future income tax expenses (816) (630) (542) (1,988) (45) (2,033) -------- ------- ------- -------- ------- -------- Future net cash flows 3,336 850 871 5,057 281 5,338 10% annual discount for estimated timing of cash flows (1,462) (256) (392) (2,110) (136) (2,246) -------- ------- ------- -------- ------- -------- Standardized measure of discounted future net cash flows relating to proved oil and gas reserves $ 1,874 $ 594 $ 479 $ 2,947 $ 145 $ 3,092 ----------------------------------------------------------------------------------------------------------------------
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
Consolidated Equity Investees Total ------------------------------ --------------------------- ------------------------------- (In millions) 2000 1999 1998 2000 1999 1998 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------------- Sales and transfers of oil and gas produced, net of production costs $(2,508) $(1,516) $(1,125) $ (111) $ (8) $ (20) $(2,619) $(1,524) $(1,145) Net changes in prices and production costs related to future production 6,820 5,891 (3,579) 12 484 (372) 6,832 6,375 (3,951) Extensions, discoveries and improved recovery, less related costs 1,472 566 284 3 9 4 1,475 575 288 Development costs incurred during the period 433 383 516 77 84 165 510 467 681 Changes in estimated future development costs (273) (69) (285) (22) (52) (100) (295) (121) (385) Revisions of previous quantity estimates (1,899) (346) (110) (43) (8) (2) (1,942) (354) (112) Net changes in purchases and sales of minerals in place 380 68 637 - - - 380 68 637 Net change in exchanges of reserves in place 755 - - (547) - - 208 - - Accretion of discount 843 382 623 62 18 39 905 400 662 Net change in income taxes (1,969) (1,995) 825 90 (117) 57 (1,879) (2,112) 882 Other (169) 10 401 30 (39) 102 (139) (29) 503 -------------------------------------------------------------------------------------------------------------------------------- Net change for the year 3,885 3,374 (1,813) (449) 371 (127) 3,436 3,745 (1,940) Beginning of year 6,321 2,947 4,760 516 145 272 6,837 3,092 5,032 -------------------------------------------------------------------------------------------------------------------------------- End of year $10,206 $ 6,321 $ 2,947 $ 67 $ 516 $ 145 $10,273 $ 6,837 $ 3,092 --------------------------------------------------------------------------------------------------------------------------------
U-34 Five-Year Operating Summary - Marathon Group
2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ Net Liquid Hydrocarbon Production (thousands of barrels per day) United States (by region) Alaska - - - - 8 Gulf Coast 62 74 55 29 30 Southern 5 5 6 8 9 Central 4 4 4 5 4 Mid-Continent 34 38 44 46 45 Rocky Mountain 26 24 26 27 26 --------------------------------------------- Total United States 131 145 135 115 122 --------------------------------------------- International Canada 19 17 6 - - Egypt 1 5 8 8 8 Gabon 16 9 5 - - Norway - - 1 2 3 United Kingdom 29 31 41 39 48 --------------------------------------------- Total International 65 62 61 49 59 --------------------------------------------- Consolidated 196 207 196 164 181 Equity investee/(a)/ 11 1 - - - --------------------------------------------- Total 207 208 196 164 181 Natural gas liquids included in above 22 19 17 17 17 - ------------------------------------------------------------------------------------------------------------------------ Net Natural Gas Production (millions of cubic feet per day) United States (by region) Alaska 160 148 144 151 145 Gulf Coast 88 107 84 78 88 Southern 147 178 208 189 161 Central 156 134 117 119 109 Mid-Continent 133 129 125 125 122 Rocky Mountain 47 59 66 60 51 --------------------------------------------- Total United States 731 755 744 722 676 --------------------------------------------- International Canada 143 150 65 - - Egypt - 13 16 11 13 Ireland 115 132 168 228 259 Norway - 26 27 54 87 United Kingdom - equity 212 168 165 130 140 - other/(b)/ 11 16 23 32 32 --------------------------------------------- Total International 481 505 464 455 531 --------------------------------------------- Consolidated 1,212 1,260 1,208 1,177 1,207 Equity investee/(c)/ 29 36 33 42 45 --------------------------------------------- Total 1,241 1,296 1,241 1,219 1,252 - ------------------------------------------------------------------------------------------------------------------------ Average Sales Prices Liquid Hydrocarbons (dollars per barrel)/(d)(e)/ United States $ 25.11 $15.44 $10.42 $16.88 $18.58 International 26.54 16.90 12.24 18.77 20.34 Natural Gas (dollars per thousand cubic feet)/(d)(e)/ United States $ 3.30 $1.90 $1.79 $2.20 $2.09 International 2.76 1.90 1.94 2.00 1.97 - ------------------------------------------------------------------------------------------------------------------------ Net Proved Reserves at year-end (developed and undeveloped) Liquid Hydrocarbons (millions of barrels) United States 458 520 549 590 570 International 259 277 316 187 203 --------------------------------------------- Consolidated 717 797 865 777 773 Equity investee/(a)/ - 77 80 82 - --------------------------------------------- Total 717 874 945 859 773 Developed reserves as % of total net reserves 76% 81% 71% 77% 80% - ------------------------------------------------------------------------------------------------------------------------ Natural Gas (billions of cubic feet) United States 1,914 2,057 2,163 2,232 2,251 International 1,091 1,607 1,796 1,071 1,199 --------------------------------------------- Consolidated 3,005 3,664 3,959 3,303 3,450 Equity investee/(c)/ 89 123 110 111 132 --------------------------------------------- Total 3,094 3,787 4,069 3,414 3,582 Developed reserves as % of total net reserves 78% 75% 79% 83% 83% - ------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents Marathon's equity interest in Sakhalin Energy Investment Company Ltd. and CLAM Petroleum B.V. /(b)/ Represents gas acquired for injection and subsequent resale. /(c)/ Represents Marathon's equity interest in CLAM Petroleum B.V. /(d)/ Prices exclude gains/losses from hedging activities. /(e)/ Prices exclude equity investees and purchase/resale gas. U-35 Five-Year Operating Summary - Marathon Group continued
2000/(a)/ 1999/(a)/ 1998/(a)/ 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Refinery Operations (thousands of barrels per day) In-use crude oil capacity at year-end 935 935 935 575 570 Refinery runs - crude oil refined 900 888 894 525 511 - other charge and blend stocks 141 139 127 99 96 In-use crude oil capacity utilization rate 96% 95% 96% 92% 90% - ----------------------------------------------------------------------------------------------------------------------------------- Source of Crude Processed (thousands of barrels per day) United States 400 349 317 202 229 Canada 102 92 98 24 18 Middle East and Africa 346 363 394 241 193 Other International 52 84 85 58 73 ------------------------------------------------------ Total 900 888 894 525 513 - ----------------------------------------------------------------------------------------------------------------------------------- Refined Product Yields (thousands of barrels per day) Gasoline 552 566 545 353 345 Distillates 278 261 270 154 155 Propane 20 22 21 13 13 Feedstocks and special products 74 66 64 36 35 Heavy fuel oil 43 43 49 35 30 Asphalt 74 69 68 39 36 ------------------------------------------------------ Total 1,041 1,027 1,017 630 614 - ----------------------------------------------------------------------------------------------------------------------------------- Refined Products Yields (% breakdown) Gasoline 53% 55% 54% 56% 56% Distillates 27 25 27 24 25 Other products 20 20 19 20 19 ------------------------------------------------------ Total 100% 100% 100% 100% 100% - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Refined Product Sales Volumes (thousands of barrels per day) Gasoline 746 714 671 452 468 Distillates 352 331 318 198 192 Propane 21 23 21 12 12 Feedstocks and special products 69 66 67 40 37 Heavy fuel oil 43 43 49 34 31 Asphalt 75 74 72 39 35 ------------------------------------------------------ Total 1,306 1,251 1,198 775 775 Matching buy/sell volumes included in above 52 45 39 51 71 - ----------------------------------------------------------------------------------------------------------------------------------- Refined Products Sales Volumes by Class of Trade (as a % of total sales volumes) Wholesale - independent private-brand marketers and consumers 65% 66% 65% 61% 62% Marathon and Ashland brand jobbers and dealers 12 11 11 13 13 Speedway SuperAmerica retail outlets 23 23 24 26 25 ------------------------------------------------------ Total 100% 100% 100% 100% 100% - ----------------------------------------------------------------------------------------------------------------------------------- Refined Products (dollars per barrel) Average sales price $38.24 $24.59 $20.65 $26.38 $27.43 Average cost of crude oil throughput 29.07 18.66 13.02 19.00 21.94 - ----------------------------------------------------------------------------------------------------------------------------------- Petroleum Inventories at year-end (thousands of barrels) Crude oil, raw materials and natural gas liquids 33,720 34,255 35,630 19,351 20,047 Refined products 34,386 32,853 32,334 20,598 21,283 - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Refined Product Marketing Outlets at year-end MAP operated terminals 91 93 88 51 51 Retail - Marathon and Ashland brand outlets 3,728 3,482 3,117 2,465 2,392 - Speedway SuperAmerica outlets 2,242 2,433 2,257 1,544 1,592 - ----------------------------------------------------------------------------------------------------------------------------------- Pipelines (miles of common carrier pipelines)/(b)/ Crude Oil - gathering lines 419 557 2,827 1,003 1,052 - trunklines 4,623 4,720 4,859 2,665 2,665 Products - trunklines 2,834 2,856 2,861 2,310 2,310 ------------------------------------------------------ Total 7,876 8,133 10,547 5,978 6,027 - ----------------------------------------------------------------------------------------------------------------------------------- Pipeline Barrels Handled (millions)/(c)/ Crude Oil - gathering lines 22.7 30.4 47.8 43.9 43.2 - trunklines 563.6 545.7 571.9 369.6 378.7 Products - trunklines 329.7 331.9 329.7 262.4 274.8 ------------------------------------------------------ Total 916.0 908.0 949.4 675.9 696.7 - ----------------------------------------------------------------------------------------------------------------------------------- River Operations Barges - owned/leased 158 169 169 - - Boats - owned/leased 6 8 8 - - - -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ 1998-2000 statistics include 100% of MAP and should be considered when compared to prior periods. /(b)/ Pipelines for downstream operations also include non-common carrier, leased and equity investees. /(c)/ Pipeline barrels handled on owned common carrier pipelines, excluding equity investees. U-36 Five-Year Operating Summary - U. S. Steel Group
(Thousands of net tons, unless otherwise noted) 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------- Raw Steel Production Gary, IN 6,610 7,102 6,468 7,428 6,840 Mon Valley, PA 2,683 2,821 2,594 2,561 2,746 Fairfield, AL 2,069 2,109 2,152 2,361 1,862 Kosice, Slovak Republic 382 - - - - ------------------------------------------------------- Total 11,744 12,032 11,214 12,350 11,448 ----------------------------------------------------------------------------------------------------------------- Raw Steel Capability Domestic Steel 12,800 12,800 12,800 12,800 12,800 U. S. Steel Kosice/(a)/ 467 - - - - ------------------------------------------------------- Total 13,267 12,800 12,800 12,800 12,800 Total production as % of total capability 88.5 94.0 87.6 96.5 89.4 ----------------------------------------------------------------------------------------------------------------- Hot Metal Production Domestic Steel 9,904 10,344 9,743 10,591 9,716 U. S. Steel Kosice 340 - - - - ------------------------------------------------------- Total 10,244 10,344 9,743 10,591 9,716 ----------------------------------------------------------------------------------------------------------------- Coke Production Domestic Steel/(b)/ 5,003 4,619 4,835 5,757 6,777 U. S. Steel Kosice 188 - - - - ------------------------------------------------------- Total 5,191 4,619 4,835 5,757 6,777 ----------------------------------------------------------------------------------------------------------------- Iron Ore Pellets - Minntac, MN Shipments 15,020 15,025 15,446 16,403 14,962 ----------------------------------------------------------------------------------------------------------------- Coal Production 6,195 6,632 8,150 7,528 7,283 ----------------------------------------------------------------------------------------------------------------- Coal Shipments 6,779 6,924 7,670 7,811 7,117 ----------------------------------------------------------------------------------------------------------------- Steel Shipments by Product - Domestic Steel Sheet and semi-finished steel products 7,409 8,114 7,608 8,170 8,677 Tubular, plate and tin mill products 3,347 2,515 3,078 3,473 2,695 ------------------------------------------------------- Total 10,756 10,629 10,686 11,643 11,372 Total as % of domestic steel industry 9.8 10.0 10.5 10.9 11.3 ----------------------------------------------------------------------------------------------------------------- Steel Shipments by Product - U. S. Steel Kosice Sheet and semi-finished steel products 207 - - - - Tubular, plate and tin mill products 110 - - - - ------------------------------------------------------- Total 317 - - - - ----------------------------------------------------------------------------------------------------------------- Steel Shipments by Market - Domestic Steel Steel service centers 2,315 2,456 2,563 2,746 2,831 Transportation 1,466 1,505 1,785 1,758 1,721 Further conversion: Joint ventures 1,771 1,818 1,473 1,568 1,542 Trade customers 1,174 1,633 1,140 1,378 1,227 Containers 702 738 794 856 874 Construction 936 844 987 994 865 Oil, gas and petrochemicals 973 363 509 810 746 Export 544 321 382 453 493 All other 875 951 1,053 1,080 1,073 ------------------------------------------------------- Total 10,756 10,629 10,686 11,643 11,372 ----------------------------------------------------------------------------------------------------------------- Average Steel Price Per Ton Domestic Steel $ 450 $ 420 $ 469 $ 479 $ 467 U. S. Steel Kosice 269 - - - - -------------------------------------------------------------------------------------------------------------------
/(a)/ Represents the operations of U. S. Steel Kosice s.r.o., following the acquisition of the steelmaking operations and related assets of VSZ a.s. on November 24, 2000. /(b)/ The reduction in coke production after 1996 reflected U. S. Steel's entry into a strategic partnership with two limited partners on June 1, 1997, to acquire an interest in three coke batteries at its Clairton (Pa.) Works. U-37 Five-Year Financial Summary
(Dollars in millions, except as noted) 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------------------- Statement of Operations Revenues and other income/(a)/ $ 39,914 $ 29,119 $28,077 $22,824 $ 22,938 Income from operations 1,752 1,863 1,517 1,705 1,779 Includes: Joint venture formation charges (931) - - - - Inventory market valuation (charges) credits - 551 (267) (284) 209 Gain on ownership change in MAP 12 17 245 - - Income from continuing operations $ 411 $ 705 $ 674 $ 908 $ 946 Income from discontinued operations - - - 80 6 Extraordinary losses - (7) - - (9) ------------------------------------------------------------ Net Income $ 411 $ 698 $ 674 $ 988 $ 943 ---------------------------------------------------------------------------------------------------------------------------- Applicable to Marathon Stock Income before extraordinary loss $ 432 $ 654 $ 310 $ 456 $ 671 Income before extraordinary loss per share - basic (in dollars) 1.39 2.11 1.06 1.59 2.33 - diluted (in dollars) 1.39 2.11 1.05 1.58 2.31 Net income 432 654 310 456 664 Net income per share - basic (in dollars) 1.39 2.11 1.06 1.59 2.31 - diluted (in dollars) 1.39 2.11 1.05 1.58 2.29 Dividends paid per share (in dollars) .88 .84 .84 .76 .70 ---------------------------------------------------------------------------------------------------------------------------- Applicable to Steel Stock Income (loss) before extraordinary losses $ (29) $ 42 $ 355 $ 449 $ 253 Income (loss) before extraordinary losses per share - basic (in dollars) (.33) .48 4.05 5.24 3.00 - diluted (in dollars) (.33) .48 3.92 4.88 2.97 Net income (loss) (29) 35 355 449 251 Net income (loss) per share - basic (in dollars) (.33) .40 4.05 5.24 2.98 - diluted (in dollars) (.33) .40 3.92 4.88 2.95 Dividends paid per share (in dollars) 1.00 1.00 1.00 1.00 1.00 ----------------------------------------------------------------------------------------------------------------------------- Balance Sheet Position at year-end Cash and cash equivalents $ 559 $ 133 $ 146 $ 54 $ 55 Total assets 23,401 22,931 21,133 17,284 16,980 Capitalization: Notes payable $ 150 $ - $ 145 $ 121 $ 81 Total long-term debt 4,460 4,283 3,991 3,403 4,212 Preferred stock of subsidiary and trust preferred securities 433 433 432 432 250 Minority interest in MAP 1,840 1,753 1,590 - - Redeemable Delhi Stock - - - 195 - Preferred stock 2 3 3 3 7 Common stockholders' equity 6,762 6,853 6,402 5,397 5,015 ------------------------------------------------------------ Total capitalization $ 13,647 $ 13,325 $12,563 $ 9,551 $ 9,565 ---------------------------------------------------------------------------------------------------------------------------- % of total debt to capitalization/(b)/ 36.9 35.4 36.4 41.4 47.5 ---------------------------------------------------------------------------------------------------------------------------- Cash Flow Data Net cash from operating activities $ 2,531 $ 1,936 $ 2,022 $ 1,464 $ 1,655 Capital expenditures 1,669 1,665 1,580 1,373 1,168 Disposal of assets 560 366 86 481 443 Dividends paid 371 354 342 316 307 ---------------------------------------------------------------------------------------------------------------------------- Employee Data Total employment costs/(c)(d)/ $ 2,692 $ 2,582 $ 2,372 $ 2,289 $ 2,179 Average number of employees/(c)(d)/ 52,459 52,596 44,860 41,620 41,553 Number of pensioners at year-end/(d)/ 97,594 100,504/(e)/ 95,429 97,051 99,713 ----------------------------------------------------------------------------------------------------------------------------
/(a)/ 1996-1999 reclassified to conform to 2000 classifications. /(b)/ Total debt represents the sum of notes payable, total long-term debt and preferred stock of subsidiary and trust preferred securities. /(c)/ Includes U. S. Steel Kosice s.r.o. from date of acquisition in 2000 and excludes the Delhi Companies sold in 1997. /(d)/ Data for 1998 includes Ashland employees from the date of their payroll transfer to MAP, which occurred at various times throughout 1998. These employees were contracted to MAP in 1998, prior to their payroll transfer. /(e)/ Includes approximately 8,000 surviving spouse beneficiaries added to the U. S. Steel pension plan in 1999. U-38 Management's Discussion and Analysis USX Corporation ("USX") is a diversified company engaged primarily in the energy business through its Marathon Group, and in the steel business through its U. S. Steel Group. Effective October 31, 1997, USX sold Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the USX - Delhi Group ("Delhi Companies"). On January 26, 1998, USX used the $195 million net proceeds from the sale to redeem all of the 9.45 million outstanding shares of USX - Delhi Group Common Stock. For additional information, see Note 5 to the USX Consolidated Financial Statements. On January 1, 1998, Marathon Oil Company ("Marathon") transferred certain refining, marketing and transportation ("RM&T") net assets to Marathon Ashland Petroleum LLC ("MAP"), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland Inc. ("Ashland") in exchange for a 38 percent interest in MAP. Financial measures such as revenues, income from operations and capital expenditures in 2000, 1999 and 1998 include 100 percent of MAP and are not comparable to prior period amounts. Net income and related per share amounts for 2000, 1999 and 1998 are net of minority interest. For further discussion of MAP, see Note 3 to the USX Consolidated Financial Statements. On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited ("Tarragon"), a Canadian oil and gas exploration and production company. The purchase price included $686 million in cash payments, the assumption of $345 million in debt and the issuance of Exchangeable Shares of an indirect Canadian subsidiary of Marathon valued at $29 million. The Exchangeable Shares are exchangeable at any time on a one-for-one basis for shares of USX -Marathon Group Common Stock ("Marathon Stock"). On November 4, 1998, USX sold 17 million shares of Marathon Stock. The proceeds to USX of $528 million were used to reduce indebtedness incurred to fund the Tarragon acquisition. Financial measures such as revenues, income from operations and capital expenditures include operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. For further discussion of Tarragon, see Note 3 to the USX Consolidated Financial Statements. On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which held the steel operations and related assets of VSZ a.s. ("VSZ"), located in the Slovak Republic. The 2000 results include USSK operations after the acquisition date. For further discussion of USSK, see Note 3 to the USX Consolidated Financial Statements. Management's Discussion and Analysis of USX Consolidated Financial Statements provides certain information about the Marathon and U. S. Steel Groups, particularly in Management's Discussion and Analysis of Operations by Group. More expansive Group information is provided in Management's Discussion and Analysis of the Marathon Group and U. S. Steel Group, which are included in the USX 2000 Form 10-K. Management's Discussion and Analysis should be read in conjunction with the USX Consolidated Financial Statements and Notes to the USX Consolidated Financial Statements. Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of USX, see Supplementary Data - Disclosures About Forward-Looking Statements in the USX 2000 Form 10-K. U-39 Management's Discussion and Analysis continued Management's Discussion and Analysis of Income Revenues and Other Income for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------ Revenues and other income/(a)/ Marathon Group $33,859 $23,707 $21,623 U. S. Steel Group 6,132 5,470 6,477 Eliminations (77) (58) (23) ------- ------- ------- Total USX Corporation revenues and other income 39,914 29,119 28,077 Less: Consumer excise taxes on petroleum products and merchandise/(b)/ 4,344 3,973 3,824 ------- ------- ------- Revenues and other income adjusted to exclude above item $35,570 $25,146 $24,253 ------------------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income (loss), gain on ownership change in MAP, net gains (losses) on disposal of assets and other income. /(b)/ Included in both revenues and costs and expenses for the Marathon Group and USX Consolidated, resulting in no effect on income. Adjusted revenues and other income increased by $10,424 million in 2000 compared with 1999, reflecting a 43 percent increase for the Marathon Group and a 12 percent increase for the U. S. Steel Group. Adjusted revenues and other income increased by $893 million in 1999 compared with 1998, reflecting a 10 percent increase for the Marathon Group, partially offset by a 16 percent decrease for the U. S. Steel Group. For further discussion, see Management's Discussion and Analysis of Operations by Group, herein. Income from operations for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------ Reportable segments Marathon Group Exploration & production $ 1,535 $ 618 $ 278 Refining, marketing & transportation 1,273 611 896 Other energy related businesses 38 61 33 ------- ------ ------ Income for reportable segments - Marathon Group 2,846 1,290 1,207 U. S. Steel Group Domestic Steel 23 91 517 U. S. Steel Kosice 2 - - ------- ------ ------ Income for reportable segments - U. S. Steel Group 25 91 517 ------- ------ ------ Income for reportable segments - USX Corporation 2,871 1,381 1,724 Items not allocated to reportable segments: Marathon Group (1,198) 423 (269) U. S. Steel Group 79 59 62 ------- ------ ------ Total income from operations - USX Corporation $ 1,752 $1,863 $1,517 ------------------------------------------------------------------------------------------------
Income from operations decreased $111 million in 2000 compared with 1999 and increased $346 million in 1999 compared with 1998. The decrease in 2000, despite higher income from reportable segments for the Marathon Group, was primarily due to special charges at Marathon, in particular a noncash adjustment related to the formation of a joint venture with Kinder Morgan Energy Partners, L.P. In addition, income from operations for the U. S. Steel Group declined in 2000 due primarily to higher costs related to energy and inefficient operating levels, lower income from raw materials operations, particularly coal operations, and lower sheet shipments resulting from high levels of imports that continued in 2000. For further discussion, see Management's Discussion and Analysis of Operations by Group, herein. U-40 Management's Discussion and Analysis continued Net interest and other financial costs for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ----------------------------------------------------------------- Interest and other financial income $ 34 $ 3 $ 39 Interest and other financial costs 375 365 318 ----- ----- ----- Net interest and other financial costs 341 362 279 Less: Favorable adjustment to carrying value of indexed debt/(a)/ - (13) (44) ------ ----- ----- Net interest and other financial costs adjusted to exclude above item $ 341 $ 375 $ 323 -----------------------------------------------------------------
/(a)/ In December 1996, USX issued $117 million in aggregate principal amount of 6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for common stock of RTI International Metals, Inc. ("RTI") or for the equivalent amount of cash, at USX's option. The carrying value of indexed debt was adjusted quarterly to settlement value based on changes in the value of RTI common stock. Any resulting adjustment was charged or credited to income and included in interest and other financial costs. In 1999, USX irrevocably deposited with a trustee the RTI common stock resulting in satisfaction of USX's obligation. For further information see Note 7 to the USX Consolidated Financial Statements. Excluding the effect of the adjustment to the carrying value of indexed debt, net interest and other financial costs decreased by $34 million in 2000 as compared with 1999, and increased by $52 million in 1999 as compared with 1998. The decrease in 2000 was primarily due to higher interest income. The increase in 1999 was primarily due to lower interest income and increased financial costs as a result of higher average debt levels. For additional information, see Note 6 to the USX Consolidated Financial Statements. The provision for income taxes was $502 million in 2000, compared with $349 million in 1999 and $315 million in 1998. The 2000 provision included a $235 million one-time, noncash deferred tax charge for the Marathon Group as a result of the change in the amount and timing of future foreign source income due to the exchange of its interest in Sakhalin Energy Investment Company Ltd. for oil and gas producing interests. The 1999 provision included a $23 million favorable adjustment to deferred taxes for the Marathon Group related to the outcome of a United States Tax Court case. The 1998 income tax provision included $33 million of favorable income tax accrual adjustments relating to foreign operations. For reconciliation of the federal statutory rate to total provisions on income from continuing operations, see Note 11 to the USX Consolidated Financial Statements. Extraordinary loss of $7 million, net of income tax benefit, in 1999 included a $5 million loss resulting from the satisfaction of the indexed debt and a $2 million loss for USX's share of Republic Technologies International, LLC's extraordinary loss related to the early extinguishment of debt. For additional information, see Note 7 to the USX Consolidated Financial Statements. Net income was $411 million in 2000, $698 million in 1999 and $674 million in 1998. Excluding the gain on change of ownership in MAP in 2000, 1999 and 1998 and adjustments to the inventory market valuation reserve in 1999 and 1998, net income decreased by $69 million in 2000 compared with 1999, and decreased by $152 million in 1999 compared with 1998. Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity Current assets increased by $1,376 million from year-end 1999, primarily reflecting increased cash and cash equivalents, receivables, inventories and assets held for sale. Receivables primarily increased as a result of higher commodity prices. Cash and cash equivalents increased primarily due to an increase in cash held by certain foreign subsidiaries. Inventories increased by $186 million largely due to increases at the U. S. Steel Group, in particular the acquisition of USSK. Assets held for sale increased mainly due to the reclassification of the Yates field from property, plant and equipment. U-41 Management's Discussion and Analysis continued Current liabilities increased by $704 million from year-end 1999, primarily due to an increase in accounts payable reflecting higher year-end commodity prices for the Marathon Group and the acquisition of USSK for the U. S. Steel Group. In addition, notes payable increased and, because of the reclassification of long- term debt to short-term, short-term debt also increased. Investments and long-term receivables decreased by $436 million from year-end 1999, primarily due to the exchange of Marathon's interest in Sakhalin Energy Investment Company Ltd. Net property, plant and equipment decreased by $695 million from year-end 1999, primarily due to depreciation, asset impairments and sales, and reclassifications to assets held for sale, partially offset by property additions, including USSK. Total long-term debt and notes payable increased by $327 million from year-end 1999, primarily due to $325 million of debt related to the acquisition of USSK, which is nonrecourse to USX. Debt attributed to the U. S. Steel Group increased, while debt attributed to the Marathon Group decreased. Stockholders' equity decreased by $92 million from year-end 1999 mainly reflecting net income of $411 million offset by dividends declared and Marathon Stock repurchases of $105 million. In July 2000, the USX Board of Directors authorized spending up to $450 million to repurchase shares of Marathon Stock. This repurchase program will continue from time to time as the Corporation's financial condition and market conditions warrant. Net cash provided from operating activities was $2,531 million in 2000, $1,936 million in 1999 and $2,022 million in 1998. Cash provided from operating activities in 2000 included a $500 million elective contribution to a Voluntary Employee Benefit Association Trust ("VEBA"), a trust established by contract in 1994 covering United Steelworkers of America retirees' health care and life insurance benefits and a $30 million elective contribution to a non-union retiree life insurance trust. Cash provided from operating activities in 1999 included a payment of $320 million resulting from the expiration of a program to sell U. S. Steel Group's accounts receivable. Excluding the effects of these items, cash provided from operating activities increased $805 million in 2000 compared with 1999 primarily due to increased cash provided from operations at the Marathon Group partially offset by increased income tax payments. Cash provided from operating activities in 1998 included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works #8 blast furnace explosion and the payment of $30 million for the repurchase of sold accounts receivable. Excluding the effects of these adjustments, cash provided from operating activities increased by $242 million in 1999 compared with 1998 primarily due to favorable working capital changes. Capital expenditures for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ------------------------------------------------------------------------ Marathon Group Exploration & production Domestic $ 516 $ 356 $ 652 International 226 388 187 Refining, marketing & transportation 656 612 410 Other 27 22 21 ------ ------ ------ Subtotal Marathon Group 1,425 1,378 1,270 U. S. Steel Group 244 287 310 ------ ------ ------ Total USX Corporation capital expenditures $1,669 $1,665 $1,580 ------------------------------------------------------------------------
Domestic exploration and production capital expenditures for the Marathon Group in 2000 mainly included the completion of the Viosca Knoll Block 786 (Petronius) development in the Gulf of Mexico, various producing property acquisitions, and natural gas developments in East Texas and other gas basins throughout the western United States. International exploration and production projects included the completion of the Tchatamba West development, located offshore Gabon, and continued oil and natural gas developments in Canada. Refining, marketing and transportation capital expenditures by MAP primarily consisted of refinery modifications, including the initiation of the delayed coker unit project at the Garyville refinery, and upgrades and expansions of retail marketing outlets. U-42 Management's Discussion and Analysis continued Capital expenditures for the U. S. Steel Group in 2000 included exercising an early buyout option of a lease for approximately half of the Gary Works No. 2 Slab Caster, the continued replacement of coke battery thruwalls at Gary Works, installation of the remaining two coilers at Gary's hot strip mill, a blast furnace stove replacement at Gary Works and the continuation of an upgrade to the Mon Valley cold reduction mill. Capital expenditures in 2001 are expected to be approximately $1.9 billion. Expenditures for the Marathon Group are expected to be approximately $1.5 billion. Domestic exploration and production projects planned for 2001 will focus on gas projects and include various producing property acquisitions. Planned capital expenditures in 2001 do not include the capital requirements related to the acquisition of Pennaco Energy, Inc. ("Pennaco"). International exploration and production projects include the continued development of the Foinaven area in the U.K. Atlantic Margin and continued oil and natural gas developments in Canada. Refining, marketing and transportation spending by MAP will primarily consist of refinery improvements, including the completion of the delayed coker unit project at the Garyville refinery, upgrades and expansions of retail marketing outlets, and expansion and enhancement of logistics systems. Other Marathon spending will include funds for development and installation of SAP software, which is an enterprise resource planning system that will allow the integration of processes among business units and with outside enterprises. Capital expenditures for the U. S. Steel Group in 2001 are expected to be approximately $425 million. Planned projects include exercising an early buyout option of a lease for the balance of the Gary Works No. 2 Slab Caster, work on the No. 3 blast furnace at Mon Valley Works, work on the No. 2 stove at the No. 6 blast furnace at Gary Works, the completion of the replacement of coke battery thruwalls at Gary Works, the completion of an upgrade to the Mon Valley cold reduction mill, mobile equipment purchases, systems development projects, and projects at USSK, including the completion of the tin mill upgrade. Contract commitments to acquire property, plant and equipment and long-term investments at December 31, 2000, totaled $663 million compared with $568 million at December 31, 1999. Investments in investees of $100 million in 2000 mainly reflected Marathon Group development spending for the Sakhalin II project in Russia and U. S. Steel Group investment in stock of VSZ in which USX now holds a 25 percent interest. The above statements with respect to capital expenditures are forward-looking statements reflecting management's best estimates based on information currently available. To the extent this information proves to be inaccurate, the timing and levels of future expenditures could differ materially from those included in the forward-looking statements. Factors that could cause future capital expenditures to differ materially include changes in industry supply and demand, general economic conditions, the availability of business opportunities and levels of cash flow from operations for each of the Groups. The timing of completion or cost of particular capital projects could be affected by unforeseen hazards such as weather conditions, explosions or fires. Proceeds from disposal of assets were $560 million in 2000, compared with $366 million in 1999 and $86 million in 1998. Proceeds in 2000 primarily reflected Marathon's Sakhalin exchange, sales of interest in the Angus/Stellaria development in the Gulf of Mexico, the sale of non-core Speedway SuperAmerica stores and other domestic production properties. Proceeds in 1999 primarily reflected the sales of Scurlock Permian LLC, over 150 non-strategic domestic and international production properties and Carnegie Natural Gas Company and affiliated subsidiaries, all of which were attributed to the Marathon Group. The net change in restricted cash was a net withdrawal of $3 million in 2000, compared with a net deposit of $1 million in 1999 and a net withdrawal of $174 million in 1998. The $174 million net withdrawal in 1998 was primarily the result of redeeming all of the outstanding shares of USX - Delhi Group Common Stock with the $195 million of net proceeds from the sale of the Delhi Companies. Repayments of loans and advances to investees were $10 million in 2000 compared with $1 million in 1999 and $71 million in 1998. In 1998, Sakhalin Energy Investment Company Ltd. repaid advances made by Marathon in connection with the Sakhalin II project. U-43 Management's Discussion and Analysis continued Net cash changes related to financial obligations (the net of commercial paper and revolving credit arrangements, debt borrowings and repayments on the Consolidated Statement of Cash Flows) decreased $4 million in 2000, compared with an increase of $187 million in 1999 and an increase of $315 million in 1998. The decrease in 2000 reflects the net effects of net cash provided from operating activities, net cash used in investing activities, distributions to minority shareholder of MAP, dividends paid and a stock repurchase program for Marathon Group. The increase in 1999 reflects the net effects of net cash provided from operating activities, net cash used in investing activities, distributions to minority shareholder of MAP and dividends paid. The increase in 1998 was primarily the result of borrowings against revolving credit agreements to fund the acquisition of Tarragon. Significant additions to long-term debt for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ----------------------------------------------------------------- Aggregate principal amounts of: 6.65% Notes due 2006 $ - $ 300 $ - 6.85% Notes due 2008 - - 400 U. S. Steel receivables facility - 350 - USSK loan facility/(a)/ 325 - - Environmental bonds and capital leases/(b)/ - 37 280 ----- ----- ----- Total $ 325 $ 687 $ 680 -----------------------------------------------------------------
/(a)/ The USSK loan facility is nonrecourse to USX. /(b)/ Issued to refinance an equivalent amount of environmental improvement refunding bonds. In the event of a change in control of USX, debt and lease obligations totaling $3,818 million at year-end 2000 may be declared immediately due and payable or required to be collateralized. See Notes 10 and 14 to the USX Consolidated Financial Statements. Marathon Stock repurchased was $105 million in 2000. In July 2000, the USX Board of Directors authorized spending up to $450 million to repurchase shares of Marathon Stock. This repurchase program will continue from time to time as the Corporation's financial condition and market conditions warrant. Dividends paid increased $17 million in 2000 compared with 1999 and increased $12 million in 1999 compared with 1998. The increase in 2000 was due primarily to a two-cents-per-share increase in the quarterly Marathon Stock dividend effective with dividends paid in the third quarter 2000. Benefit Plan Activity In 2000, USX contributed $530 million to a VEBA, including a $500 million elective contribution, and $30 million to a non- union retiree life insurance trust. In 1999, USX contributed $20 million to a VEBA. Debt and Preferred Stock Ratings In May 2000, Standard & Poor's Corp. upgraded USX's and Marathon's senior debt to BBB, which continues the investment grade rating. At the same time, USX's subordinated debt was upgraded to BBB- and preferred stock was upgraded to BB+. Also in May 2000, Moody's Investors Services, Inc., upgraded USX's and Marathon's senior debt to the investment grade rating of Baa1, USX's subordinated debt to Baa2 and USX's preferred stock to baa3. Fitch IBCA Duff & Phelps currently rates USX's senior notes as investment grade at BBB and USX's subordinated debt as BBB-. In December 2000, Standard & Poor's Corp. advised that they had put USX on "Credit Watch Developing" status and Fitch IBCA, Duff & Phelps advised that they had put USX on "Rating Watch-Evolving" status. Both moves were in response to USX's announced structure study. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for discussion of derivative instruments and associated market risk. U-44 Management's Discussion and Analysis continued Liquidity In December 2000, USX entered into a $1,354 million five- year revolving credit agreement, terminating in November 2005, and a $451 million 364-day facility, which together replaced the prior $2,350 million facility. At December 31, 2000, USX had $300 million of borrowings against its $1,354 million long-term revolving credit agreements and commercial paper borrowings of $77 million. Also, USX had a short-term line of credit totaling $150 million which was fully drawn at December 31, 2000. There were no borrowings against MAP or USSK revolving credit agreements at December 31, 2000. USX had a total of $1,678 million available at December 31, 2000 under existing shelf registration statements filed with the Securities and Exchange Commission. These allow USX to offer and issue unsecured debt securities, common and preferred stock and warrants in one or more separate offerings on terms to be determined at the time of sale. USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of December 31, 2000, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the years 2001, 2002 and 2003, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 26 to the USX Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings or other external financing sources. However, on November 30, 2000, USX announced that the USX Board of Directors had authorized management to retain financial, tax and legal advisors to perform an in-depth study of the corporation's targeted stock structure. Until the study is complete, USX management believes it will be more difficult to access traditional debt and equity markets. Although USX management believes that it will not be necessary to access financial markets during this time frame, nontraditional sources should be available to provide adequate liquidity, if necessary. USX management's opinion concerning liquidity and USX's ability to avail itself in the future of the financing options mentioned in the above forward-looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that affect the availability of financing include the performance of each Group (as indicated by levels of cash provided from operating activities and other measures), the results of the announced structure study, the state of the debt and equity markets, investor perceptions of past performance and expectations regarding future actions and performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, levels of USX's outstanding debt and credit ratings by rating agencies. For a summary of short-term and long-term debt, see Notes 13 and 14 to the USX Consolidated Financial Statements. Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. In addition, USX expects to incur capital expenditures to meet environmental standards under the Slovak Republic's environmental laws for the U. S. Steel Group's USSK operation. U-45 Management's Discussion and Analysis continued The following table summarizes USX's environmental expenditures for each of the last three years/(a)/:
(Dollars in millions) 2000 1999 1998 --------------------------------------------------------- Capital Marathon Group $ 73 $ 46 $ 83 U. S. Steel Group 18 32 49 ----- ----- ----- Total capital $ 91 $ 78 $ 132 --------------------------------------------------------- Compliance Operating & maintenance Marathon Group $ 139 $ 117 $ 126 U. S. Steel Group 194 199 198 ----- ----- ----- Total operating & maintenance 333 316 324 Remediation/(b)/ Marathon Group 30 25 10 U. S. Steel Group 18 22 19 ----- ----- ----- Total remediation 48 47 29 Total compliance $ 381 $ 363 $ 353 ---------------------------------------------------------
/(a)/ Amounts for the Marathon Group are calculated based on American Petroleum Institute survey guidelines and include 100% of MAP. Amounts for the U. S. Steel Group are based on previously established U.S. Department of Commerce survey guidelines. /(b)/ Amounts do not include noncash provisions recorded for environmental remediation, but include spending charged against remediation reserves, net of recoveries where permissible. USX's environmental capital expenditures accounted for 5%, 5% and 8% of total consolidated capital expenditures in 2000, 1999 and 1998, respectively. USX's environmental compliance expenditures averaged 1% of total consolidated costs in each of 2000, 1999 and 1998. Remediation spending primarily reflected ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping at retail gasoline stations, and remediation activities at former and present operating locations. The Resource Conservation and Recovery Act ("RCRA") establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. A significant portion of USX's currently identified environmental remediation projects relate to the remediation of former and present operating locations. These projects include remediation of contaminated sediments in a river that receives discharges from the Gary Works and the closure of permitted hazardous and non-hazardous waste landfills. USX has been notified that it is a potentially responsible party ("PRP") at 38 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 2000. In addition, there are 23 sites where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 144 additional sites, excluding retail gasoline stations, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 15 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 26 to the USX Consolidated Financial Statements. U-46 Management's Discussion and Analysis continued New Tier II Fuels regulations were proposed in late 1999. The gasoline rules, which were finalized by the U.S. Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel rule, which was finalized in January 2001, require substantially reduced sulfur levels. The combined capital cost to achieve compliance with the gasoline and diesel regulations could amount to approximately $700 million between 2003 and 2005. This is a forward-looking statement and can only be a broad-based estimate due to the ongoing evolution of regulatory requirements. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating considerations, and unforeseen hazards such as weather conditions. In October 1998, the National Enforcement Investigations Center and Region V of the EPA conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. MAP has been advised, in ongoing discussions with the EPA, as to certain compliance issues regarding MAP's Detroit and Robinson refineries. Thus far, MAP has been served with two Notices of Violation ("NOV") and three Findings of Violation in connection with the multi-media inspection at its Detroit refinery. The Detroit notices allege violations of the Michigan State Air Pollution Regulations, the EPA New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants for Benzene. On March 6, 2000, MAP received its first NOV arising out of the multi-media inspection of the Robinson refinery conducted in November 1998. The NOV is for alleged Resource Conservation and Recovery Act (hazardous waste) violations. MAP has responded to information requests from the EPA regarding New Source Review ("NSR") compliance at its Garyville and Texas City refineries. In addition, the scope of the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries included NSR compliance. NSR requires new major stationary sources and major modifications at existing major stationary sources to obtain permits, perform air quality analysis and install stringent air pollution control equipment at affected facilities. The current EPA initiative appears to target many items that the industry has historically considered routine repair, replacement and maintenance or other activity exempted from the NSR requirements. MAP is engaged in ongoing discussions with the EPA on these issues concerning all of MAP's refineries. While MAP has not been notified of any formal findings or violations resulting from either the information requests or inspections regarding NSR compliance, MAP has been informed during discussions with the EPA of potential non-compliance concerns of the EPA based on these inspections and other information identified by the EPA. Recently, discussions with the EPA have included commitment to some specific control technologies and implementation schedules, but not penalties. In addition, MAP anticipates that some or all of the non-NSR related issues arising from the multi-media inspections may also be resolved as part of the current discussions with the EPA. A negotiated resolution with the EPA could result in increased environmental capital expenditures in future years, in addition to as yet, undetermined penalties. During 1999 an EPA advisory panel on oxygenate use in gasoline issued recommendations to the EPA, calling for the improved protection of drinking water from methyl tertiary butyl ether ("MTBE") impacts, a substantial reduction in the use of MTBE, and action by Congress to remove the oxygenate requirements for reformulated gasoline under the Clean Air Act. The panel reviewed public health and environmental issues that have been raised by the use of MTBE in gasoline, and specifically by the discovery of MTBE in water supplies. State and federal environmental regulatory agencies could implement the majority of the recommendations, while some would require Congressional legislative action. California has acted to ban MTBE use by December 31, 2002 and has requested a waiver from the EPA of California state oxygenate requirements. In addition, a number of states have passed laws which limit or require the phase out of MTBE in gasoline, including states in MAP's marketing area U-47 Management's Discussion and Analysis continued such as Michigan and Minnesota. Many other states are considering bills which require similar limitations or the phase out of MTBE. MAP has a non-material investment in MTBE units at its Robinson, Catlettsburg and Detroit refineries. Approximately seven percent of MAP's refinery gasoline production includes MTBE. Potential phase-outs or restrictions on the use of MTBE would not be expected to have a material impact on MAP and its operations, although it is not possible to reach any conclusions until further federal or state actions, if any, are taken. In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U. S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a pre-assessment screen pursuant to federal regulations and have determined to perform an NRD Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. The trustees notified the public of their plan for assessment and later adopted the plan. In 2000, the trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group is discussing settlement opportunities with the trustees and the EPA. In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture between USX and Kobe Steel, Ltd. ("Kobe"), was the subject of a multi-media audit by the EPA that included an air, water and hazardous waste compliance review. USS/Kobe and the EPA entered into a tolling agreement pending issuance of the final audit and commenced settlement negotiations in July 1999. In August 1999, the steelmaking and bar producing operations of USS/Kobe were combined with companies controlled by Blackstone Capital Partners II to form Republic Technologies International, LLC ("Republic"). The tubular operations of USS/Kobe were transferred to a newly formed entity, Lorain Tubular Company, LLC ("Lorain Tubular"), which operated as a joint venture between USX and Kobe until December 31, 1999 when USX purchased all of Kobe's interest in Lorain Tubular. Republic and Lorain Tubular are continuing negotiations with the EPA. Most of the matters raised by the EPA relate to Republic's facilities; however, air discharges from Lorain Tubular's #3 seamless pipe mill have also been cited. Lorain Tubular will be responsible for matters relating to its facilities. The final report and citations from the EPA have not been issued. In 1998, USX entered into a consent decree with the EPA which resolved alleged violations of the Clean Water Act National Pollution Discharge Elimination System ("NPDES") permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. In 1999, USX paid civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs. In addition, USX will pay the public trustees $1 million at the end of the remediation project for future monitoring costs and USX is obligated to purchase and restore several parcels of property that have been or will be conveyed to the trustees. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $36.4 million over the next five years. Estimated remediation and monitoring costs for this project have been accrued. In February 1999, the U.S. Department of Justice and EPA issued a letter demanding a cash payment of approximately $4 million to resolve a Finding of Violation issued in 1997 alleging improper sampling of benzene waste streams at Gary Coke. On September 18, 2000, a Consent Decree was entered which required USX to pay a civil penalty of $587,000 and to replace PCB transformers as a Supplemental Environmental Program at a cost of approximately $2.2 million. Payment of the civil penalty was made on October 13, 2000. U-48 Management's Discussion and Analysis continued New or expanded environmental requirements, which could increase USX's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, USX does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2001. USX expects environmental capital expenditures in 2001 to be approximately $120 million, or approximately 5% of total estimated consolidated capital expenditures. Predictions beyond 2001 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, USX anticipates that environmental capital expenditures in 2002 will total approximately $143 million; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements, and could increase if additional projects are identified or additional requirements are imposed. USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Outlook For Outlook, see Management's Discussion and Analysis for the Marathon Group and the U. S. Steel Group, herein. Accounting Standards In the fourth quarter of 2000, USX adopted the following accounting pronouncements primarily related to the classification of items in the financial statements. The adoption of these new pronouncements had no net effect on the financial position or results of operations of USX, although they required reclassifications of certain amounts in the financial statements, including all prior periods presented. . In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," which summarizes the SEC staff's interpretations of generally accepted accounting principles related to revenue recognition and classification. . In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board ("EITF") issued EITF consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent," which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which addresses the classification of costs incurred for shipping goods to customers. . In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. USX adopted certain recognition and reclassification provisions of SFAS 140, which were effective for fiscal years ending after December 15, 2000. The remaining provisions of SFAS 140 are effective after March 31, 2001. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which later was amended by SFAS Nos. 137 and 138. This Standard requires U-49 Management's Discussion and Analysis continued recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. USX may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards. USX will adopt the Standard effective January 1, 2001. The transition adjustment resulting from adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of tax, is expected to approximate $9 million. The unfavorable cumulative effect on other comprehensive income, net of tax, will approximate $7 million. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations. Management's Discussion and Analysis by Group The Marathon Group The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy related businesses. The Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Notes to Financial Statements. The Marathon Group's 2000 financial performance was primarily affected by the strong recovery in worldwide liquid hydrocarbon and natural gas prices and stronger refining margins. During 2000, Marathon focused on the acquisition of assets with a strong strategic fit, the disposal of non-core properties, and workforce reductions through a voluntary early retirement program. Revenues and Other Income for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------ Exploration & production ("E&P") $ 4,694 $ 3,105 $ 2,090 Refining, marketing & transportation ("RM&T")/(a)/ 28,849 20,076 19,080 Other energy related businesses/(b)/ 1,684 834 355 ------- ------- ------- Revenues and other income of reportable segments 35,227 24,015 21,525 Revenues and other income not allocated to segments: Joint venture formation charges/(c)/ (931) - - Gain on ownership change in MAP 12 17 245 Other/(d)/ 124 (36) 24 Elimination of intersegment revenues (573) (289) (171) ------- ------- ------- Total Group revenues and other income $33,859 $23,707 $21,623 ======= ======= ======= Items included in both revenues and costs and expenses, resulting in no effect on income: Consumer excise taxes on petroleum products and merchandise $ 4,344 $ 3,973 $ 3,824 ------------------------------------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP. /(b)/ Includes domestic natural gas and crude oil marketing and transportation, and power generation. /(c)/ Represents a pretax charge related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. /(d)/ Represents net gains/(losses) on certain asset sales. E&P segment revenues increased by $1,589 million in 2000 from 1999 following an increase of $1,015 million in 1999 from 1998. The increase in 2000 was primarily due to higher worldwide liquid hydrocarbon and natural gas prices, partially offset by lower domestic liquid hydrocarbon and U-50 Management's Discussion and Analysis continued worldwide natural gas production. The increase in 1999 was primarily due to higher worldwide liquid hydrocarbon prices, increased domestic liquid hydrocarbon production and higher E&P crude oil buy/sell volumes. RM&T segment revenues increased by $8,773 million in 2000 from 1999 following an increase of $996 million in 1999 from 1998. The increase in 2000 primarily reflected higher refined product prices and increased refined product sales volumes. The increase in 1999 was mainly due to higher refined product prices, increased volumes of refined product sales and higher merchandise sales, partially offset by reduced crude oil sales revenues following the sale of Scurlock Permian LLC. Other energy related businesses segment revenues increased by $850 million in 2000 from 1999 following an increase of $479 million in 1999 from 1998. The increase in 2000 reflected higher natural gas and crude oil resale activity accompanied by higher crude oil and natural gas prices. The increase in 1999 was primarily due to increased crude oil and natural gas purchase and resale activity. For additional discussion of revenues, see Note 10 to the Marathon Group Financial Statements. Income from operations for each of the last three years is summarized in the following table:
(Dollars in millions) 2000 1999 1998 ----------------------------------------------------------------------------------------- E&P Domestic $1,115 $ 494 $ 190 International 420 124 88 ------ ------ ------ Income of E&P reportable segment 1,535 618 278 RM&T/(a)/ 1,273 611 896 Other energy related businesses 38 61 33 ------ ------ ------ Income for reportable segments 2,846 1,290 1,207 Items not allocated to reportable segments: Joint venture formation charges/(b)/ (931) - - Administrative expenses/(c)/ (136) (108) (106) IMV reserve adjustment/(d)/ - 551 (267) Gain on ownership change & transition charges - MAP/(e)/ 12 17 223 Impairment of oil and gas properties, assets held for sale, and gas contract settlement/(f)/ (197) (16) (119) Gain/(loss) on disposal of assets/(g)/ 124 (36) - Reorganization charges including pension settlement (loss)/gain & benefit accruals/(h)/ (70) 15 - ------ ------ ------ Total income from operations $1,648 $1,713 $ 938 -----------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP. /(b)/ Represents a pretax charge related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. /(c)/ Includes the portion of the Marathon Group's administrative costs not charged to the operating segments and the portion of USX corporate general and administrative costs allocated to the Marathon Group. /(d)/ The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. For additional discussion of the IMV, see Note 20 to the Marathon Group Financial Statements. /(e)/ The gain on ownership change and one-time transition charges in 1998 relate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 5 to the Marathon Group Financial Statements. /(f)/ Represents in 2000, an impairment of certain oil and gas properties, primarily in Canada, and assets held for sale. Represents in 1999, an impairment of certain domestic properties. Represents in 1998, a write-off of certain non- revenue producing international investments and several exploratory wells which had encountered hydrocarbons but had been suspended pending further evaluation. It also includes in 1998 a gain from the resolution of a contract dispute with a purchaser of Marathon's natural gas production from certain domestic properties. /(g)/ The net gain in 2000 represents a gain on the disposition of Angus/Stellaria, a gain on the Sakhalin exchange, a gain on the sale of Speedway SuperAmerica LLC ("SSA") non-core stores, and a loss on the sale of the Howard Glasscock field. The net loss in 1999 represents a loss on the sale of Scurlock Permian LLC, certain domestic production properties, Carnegie Natural Gas Company and affiliated subsidiaries and a gain on certain Egyptian properties. /(h)/ Amounts in 2000 and 1999 represent pension settlement gains/(losses) and various benefit accruals resulting from retirement plan settlements, the voluntary early retirement program, and reorganization charges. U-51 Management's Discussion and Analysis continued Income for reportable segments increased by $1,556 million in 2000 from 1999, mainly due to higher worldwide liquid hydrocarbon and natural gas prices, and higher refined product margins, partially offset by decreased natural gas volumes. Income for reportable segments increased by $83 million in 1999 from 1998, mainly due to higher worldwide liquid hydrocarbon prices, partially offset by lower refined product margins. Income from operations includes 100 percent of MAP beginning in 1998, and results from Marathon Canada Limited (formerly known as Tarragon) commencing August 12, 1998.
Average Volumes and Selling Prices 2000 1999 1998 ---------------------------------------------------------------------------------------- (thousands of barrels per day) Net liquids production/(a)/ - U.S. 131 145 135 - International/(b)/ 65 62 61 ------ ------ ------ - Total consolidated 196 207 196 - Equity investees/(c)/ 11 1 - ------ ------ ------ - Worldwide 207 208 196 (millions of cubic feet per day) Net natural gas production - U.S. 731 755 744 - International - equity 470 489 441 - International - other/(d)/ 11 16 23 ------ ------ ------ - Total consolidated 1,212 1,260 1,208 - Equity investee/(e)/ 29 36 33 ------ ------ ------ - Worldwide 1,241 1,296 1,241 ---------------------------------------------------------------------------------------- (dollars per barrel) Liquid hydrocarbons/(a)(f)/ - U.S. $25.11 $15.44 $10.42 - International 26.54 16.90 12.24 (dollars per mcf) Natural gas/(f)/ - U.S. $ 3.30 $ 1.90 $ 1.79 - International - equity 2.76 1.90 1.94 (thousands of barrels per day) Refined products sold/(g)/ 1,306 1,251 1,198 Matching buy/sell volumes included in above 52 45 39 ----------------------------------------------------------------------------------------
/(a)/ Includes crude oil, condensate and natural gas liquids. /(b)/ Represents equity tanker liftings, truck deliveries and direct deliveries. /(c)/ Represents Marathon's equity interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy") and CLAM Petroleum B.V. ("CLAM") for 2000 and 1999. /(d)/ Represents gas acquired for injection and subsequent resale. /(e)/ Represents Marathon's equity interest in CLAM. /(f)/ Prices exclude gains/losses from hedging activities, equity investees and purchase/resale gas. /(g)/ Refined products sold and matching buy/sell volumes include 100 percent of MAP. Domestic E&P income increased by $621 million in 2000 from 1999 following an increase of $304 million in 1999 from 1998. The increase in 2000 was primarily due to higher liquid hydrocarbon and natural gas prices, partially offset by lower liquid hydrocarbon and natural gas volumes due to natural field declines and asset sales, and derivative losses from other than trading activities. The increase in 1999 was primarily due to higher liquid hydrocarbon and natural gas prices, increased liquid hydrocarbon volumes resulting from new production in the Gulf of Mexico and lower exploration expense. International E&P income increased by $296 million in 2000 from 1999 following an increase of $36 million in 1999 from 1998. The increase in 2000 was mainly due to higher liquid hydrocarbon and natural gas prices, higher liquid hydrocarbon liftings, primarily in Russia and Gabon, and lower dry well expense, partially offset by lower natural gas volumes. The increase in 1999 was primarily due to higher liquid hydrocarbon prices, partially offset by lower liquid hydrocarbon and natural gas production in Europe and higher exploration expense. U-52 Management's Discussion and Analysis continued RM&T segment income increased by $662 million in 2000 from 1999 following a decrease of $285 million in 1999 from 1998. The increase in 2000 was primarily due to higher refined product margins, partially offset by higher operating expenses for SSA, higher administrative expenses including increased variable pay plan costs, and higher transportation costs. The decrease in 1999 was primarily due to lower refined product margins, partially offset by recognized mark-to-market derivative gains, increased refined product sales volumes, higher merchandise sales at SSA and the realization of additional operating efficiencies as a result of forming MAP. Other energy related businesses segment income decreased by $23 million in 2000 from 1999 following an increase of $28 million in 1999 from 1998. The decrease in 2000 was primarily a result of derivative losses from other than trading activities and lower equity earnings as a result of decreased pipeline throughput. The increase in 1999 was primarily due to higher equity earnings as a result of increased pipeline throughput and a reversal of abandonment accruals of $10 million in 1999. Items not allocated to reportable segments: IMV reserve adjustment - When U. S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, the Marathon Group's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, the Marathon Group has established an IMV reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the Marathon Group's combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, many of which do not have such adjustments. Therefore, the Marathon Group reports separately the effects of the IMV reserve adjustments on financial results. In management's opinion, the effects of such adjustments should be considered separately when evaluating operating performance. In 1999, the IMV reserve adjustment resulted in a credit to income from operations of $551 million compared to a charge of $267 million in 1998, or a change of $818 million. The favorable 1999 IMV reserve adjustment, which is almost entirely recorded by MAP, was primarily due to the significant increase in refined product prices experienced during 1999. For additional discussion of the IMV reserve, see Note 20 to the Marathon Group Financial Statements. Joint venture formation charges represent a pretax charge of $931 million in 2000 related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. The formation of the joint venture included contribution of interests in the Yates and SACROC assets. Marathon holds an 85 percent economic interest in the combined entity which commenced operations in January 2001. Impairment of oil and gas properties, assets held for sale, and gas contract settlement includes in 2000, the impairments of certain oil and gas properties primarily in Canada and assets held for sale totaling $197 million. In 1999, the $16 million charge relates to the impairment of certain domestic properties. In 1998, the $119 million charge relates to a write-off of certain non- revenue producing international investments and several exploratory wells, partially offset by a gain from the resolution of a contract dispute with a purchaser of Marathon's natural gas production from certain domestic properties. U-53 Management's Discussion and Analysis continued Gain/(loss) on disposal of assets represents in 2000 a net gain on the sale of Marathon's interest in the Angus/Stellaria development in the Gulf of Mexico, a gain on the Sakhalin exchange, a loss on the sale of the Howard Glasscock Field, and a gain on the sale of non-core SSA stores. In 1999, the net loss represents losses on the sale of Scurlock Permian LLC, certain domestic production properties, Carnegie Natural Gas Company and affiliated subsidiaries and a gain on certain Egyptian properties. Reorganization charges including pension settlement (loss)/gain and benefit accruals represent charges related to a reorganization program initiated by Marathon for its upstream business during 2000. Outlook for 2001 - Marathon Group The outlook regarding the results of operations for the Marathon Group's upstream segment is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on the Marathon Group's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. At year-end 2000, Marathon revised its estimate of proved developed and undeveloped oil and gas reserves downward by 167 million barrels of oil equivalent ("BOE"). These revisions were principally in Canada, the North Sea and United States and are the result of production performance and disappointing drilling results. BOE is a combined measure of worldwide liquid hydrocarbon and natural gas production, measured in barrels per day and cubic feet per day, respectively. For purposes of determining BOE, natural gas volumes are converted to approximate liquid hydrocarbon barrels by dividing the natural gas volumes expressed in thousands of cubic feet ("mcf") by 6. The liquid hydrocarbon volume is added to the barrel equivalent of gas volume to obtain BOE. Marathon intends to disclose total production estimates on a BOE basis from this point forward. In 2001, worldwide production is expected to average 430,000 BOE per day, split evenly between liquid hydrocarbons and natural gas, including production from Marathon's share of equity investees and future acquisitions. On December 28, 2000, Marathon signed a definitive agreement to form a joint venture with Kinder Morgan Energy Partners, L.P., which commenced operations in January 2001. The formation of the joint venture included contribution of interests in the Yates and SACROC assets. This transaction will allow Marathon to expand its interests in the Permian Basin and will improve access to materials for use in enhanced recovery techniques in the Yates Field. Marathon holds an 85 percent economic interest in the combined entity, which will be accounted for under the equity method of accounting. On December 22, 2000, Marathon announced its plans to acquire Pennaco. This acquisition will enhance Marathon's presence in a core area, the North American gas market, and will provide a significant new reserve base that can be developed. The tender offer expired on February 5, 2001 at 12:00 midnight, Eastern time. Marathon acquired approximately 17.6 million shares of Pennaco common stock which were validly tendered and not withdrawn in the offer, representing approximately 87 percent of the outstanding Pennaco shares. Marathon plans to acquire the remaining Pennaco shares through a merger in which each share of Pennaco common stock not purchased in the offer and not held by stockholders who have properly exercised dissenters rights under Delaware law will be converted into the right to receive the tender offer price in cash, without interest. U-54 Management's Discussion and Analysis continued Marathon plans to drill six deepwater Gulf of Mexico exploratory wells in 2001. To support this increased drilling activity, Marathon has contracted two new deepwater rigs, capable of drilling in water depths beyond 6,500 feet. Other major upstream projects, which are currently underway or under evaluation and are expected to improve future income streams, include the Mississippi Canyon Block 348 in the Gulf of Mexico and various North American natural gas fields. Also, Marathon expects continued development in the Foinaven area in the U.K. Atlantic Margin. Marathon acquired an interest in this location through the exchange of its Sakhalin interests with Shell Oil in the fourth quarter of 2000. Marathon E&P is currently on target for achieving $150 million in annual repeatable pre-tax operating efficiencies by year-end 2001. Marathon initiated a reorganization program for its upstream business units which will contribute to an overall workforce reduction of 24% compared to 1999 levels. In addition, regional production offices in Lafayette, Louisiana and Tyler, Texas have been closed along with the Petroleum Technology Center in Littleton, Colorado. The above discussion includes forward-looking statements with respect to 2001 worldwide liquid hydrocarbon production and natural gas volumes, the acquisition of Pennaco, commencement of upstream projects, and the Gulf of Mexico drilling program. Some factors that could potentially affect worldwide liquid hydrocarbon production/gas volumes, upstream projects, and the drilling program include: pricing, worldwide supply and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, reserve estimates, reserve replacement rates, production decline rates of mature fields, timing of commencing production from new wells, timing and results of future development drilling, drilling rig availability, the completion of the merger with Pennaco, future acquisitions of producing properties, and other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the timing and economics of projects. A factor that could affect the Pennaco acquisition is successful completion of the merger. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. Downstream income of the Marathon Group is largely dependent upon refined product margins, which reflect the difference between the selling prices of refined products and the cost of raw materials refined and manufacturing costs. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, crude oil costs, manufacturing costs, logistical limitations and the available supply of crude oil and refined products. In 2000, MAP, CMS Energy Corporation, and TEPPCO Partners, L.P. formed a limited liability company with equal ownership to operate an interstate refined petroleum products pipeline extending from the U.S. Gulf of Mexico to the Midwest. The new company plans to build a 74-mile, 24-inch diameter pipeline connecting TEPPCO's facility in Beaumont, Texas, with an existing 720-mile, 26-inch diameter pipeline extending from Longville, Louisiana to Bourbon, Illinois. In addition, a two million barrel terminal storage facility will be constructed. The system will be called Centennial Pipeline and will connect with existing MAP transportation assets and other common carrier lines. Construction is expected to be completed in the fourth quarter of 2001. A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline is expected to initially move about 50,000 bpd of refined petroleum into the central Ohio region. The pipeline is currently expected to be operational in mid-2002. The startup of this pipeline is largely dependent on obtaining the final regulatory approvals, obtaining the necessary rights-of-way, of which approximately 95 percent have been obtained to date, and completion of construction. ORPL is still negotiating with a few landowners to obtain the remaining rights-of-way. Where necessary, ORPL has filed condemnation actions to acquire some rights-of-way. These actions are at various stages of litigation and appeal with several recent decisions supporting ORPL's use of eminent domain. U-55 Management's Discussion and Analysis continued MAP is constructing a delayed coker unit at its Garyville, Louisiana refinery. This unit will allow for the use of heavier, lower cost crude and reduce the production of heavy fuel oil. To supply this new unit, MAP reached an agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy Mayan crude oil. This is a multi-year contract, which will begin upon completion of the delayed coker unit which is scheduled in the fall of 2001. In addition, a project to increase light product output is underway at MAP's Robinson, Illinois refinery and is expected to be completed in the second quarter of 2001. MAP initiated a program for 2000 to dispose of approximately 270 non-core SSA retail outlets in the Midwest and Southeast. At the end of this program through December 31, 2000, 159 stores, which comprise about 7 percent of MAP's owned and operated SSA retail network, had been sold. MAP will continue to sell additional SSA stores as part of its ongoing store development process. The above discussion includes forward-looking statements with respect to pipeline and refinery improvement projects. Some factors that could potentially cause actual results to differ materially from present expectations include the price of petroleum products, levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions, obtaining the necessary rights-of-way, outcome of pending litigation, and regulatory approval constraints. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. The U. S. Steel Group The U. S. Steel Group is engaged in the production and sale of steel mill products, coke, and taconite pellets; the management of mineral resources; coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, and Republic Technologies International, LLC ("Republic"). On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which held the steel and related assets of VSZ a.s. ("VSZ"), headquartered in the Slovak Republic. Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements. Revenues and Other Income for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 -------------------------------------------------------------------- Revenues by product: Sheet and semi-finished steel products $ 3,288 $ 3,433 $ 3,598 Tubular, plate, and tin mill products 1,731 1,140 1,546 Raw materials (coal, coke and iron ore) 626 549 744 Other/(a)/ 445 414 490 Income (loss) from investees (8) (89) 46 Net gains on disposal of assets 46 21 54 Other income (loss) 4 2 (1) ------- ------- ------- Total revenues and other income $ 6,132 $ 5,470 $ 6,477 --------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by- products, real estate development, resource management, and engineering and consulting services. Total revenues and other income increased by $662 million in 2000 from 1999 primarily due to the consolidation of Lorain Tubular Company, LLC, ("Lorain Tubular") effective January 1, 2000, higher average realized prices, particularly tubular product prices, and lower losses from investees, which, in 1999, included a $47 million charge for the impairment of U. S. Steel's investment in USS/Kobe Steel Company. Total revenues and other income in 1999 decreased by $1,007 million from 1998 primarily due to lower average realized prices and lower income from investees. U-56 Management's Discussion and Analysis continued Income from operations for the U. S. Steel Group for the last three years was:
(Dollars in millions) 2000 1999 1998 --------------------------------------------------------------------------------- Segment income for Domestic Steel/(a)/ $ 23 $ 91 $ 517 Segment income for U. S. Steel Kosice/(b)/ 2 - - ----- ----- ----- Income for reportable segments $ 25 $ 91 $ 517 Items not allocated to segments: Net pension credits 266 228 186 Administrative expenses (25) (17) (24) Costs related to former business activities/(c)/ (91) (83) (100) Asset impairments - Coal (71) - - Impairment of USX's investment in USS/Kobe and costs related to formation of Republic - (47) - Loss on investment in RTI stock used to satisfy indexed debt obligations/(d)/ - (22) - ----- ----- ----- Total income from operations $ 104 $ 150 $ 579 ---------------------------------------------------------------------------------
/(a)/ Includes income from the sale and domestic production of steel mill products, coke and taconite pellets; the management of mineral resources; coal mining; real estate development and management; and engineering and consulting services. /(b)/ Includes the sale and production of steel products from facilities primarily located in the Slovak Republic commencing November 24, 2000. For further details, see Note 5 to the U. S. Steel Group Financial Statements. /(c)/ Includes the portion of postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. /(d)/ For further details, see Note 6 to the U. S. Steel Group Financial Statements. Segment income for Domestic Steel Domestic Steel operations recorded segment income of $23 million in 2000 versus segment income of $91 million in 1999, a decrease of $68 million. The 2000 segment income included $36 million for certain environmental and legal accruals, a $34 million charge to establish reserves against notes and receivables from financially distressed steel companies and a $10 million charge for USX's share of Republic special charges. Results in 1999 included $17 million in charges for certain environmental and legal accruals and $7 million in various non-recurring equity investee charges. Excluding these items, the decrease in segment income for Domestic Steel was primarily due to higher costs related to energy and inefficient operating levels due to lower throughput, lower income from raw materials operations, particularly coal operations and lower sheet shipments resulting from high levels of imports that continued in 2000. Segment income for Domestic Steel operations in 1999 decreased $426 million from 1998. Results in 1998 included a net favorable $30 million for an insurance litigation settlement and charges of $10 million related to a voluntary workforce reduction plan. Excluding these items, the decrease in segment income for Domestic Steel was primarily due to lower average steel prices, lower income from raw materials operations, a less favorable product mix and lower income from investees. Segment income for U. S. Steel Kosice USSK segment income for the period following the November 24, 2000 acquisition was $2 million. Items not allocated to segments: Net pension credits, which are primarily noncash, totaled $266 million in 2000, $228 million in 1999 and $186 million in 1998. Net pension credits in 1999 included $35 million for a one-time favorable pension settlement primarily related to the voluntary early retirement program for salaried employees. For additional information on pensions, see Note 12 to the U. S. Steel Group Financial Statements. Asset impairments - Coal, were for asset impairments at U. S. Steel Mining's coal mines in Alabama and West Virginia in 2000 following a reassessment of long-term prospects after adverse geological conditions were encountered. In 1999, an impairment of USX's investment in USS/Kobe and costs related to the formation of Republic totaled $47 million. U-57 Management's Discussion and Analysis continued Income from operations in 1999 also included a loss on investment in RTI stock used to satisfy indexed debt obligations of $22 million from the termination of ownership in RTI International Metals, Inc. For further discussion, see Note 6 to the U. S. Steel Group Financial Statements. Outlook for 2001 - U. S. Steel Group Domestic Steel's order book and prices remain soft due to continued high import volumes (which in 2000 were second only to record-year 1998 levels), a draw-down of inventories by spot purchasers and increasing evidence that the growth in the domestic economy is slowing. In addition to these factors, our plate products business is being impacted by recently added domestic capacity. Although domestic shipments for the first quarter of 2001 are projected to be somewhat better than fourth quarter 2000 levels, we expect that sheet and plate pricing, which declined markedly in the fourth quarter, will continue to be depressed as a result of the factors cited above. The tubular business, however, remains strong. For the year 2001, domestic shipments are expected to be approximately 11 million net tons, excluding any shipments from the potential acquisition of LTV Corporation tin operations. For the year 2001, USSK shipments are expected to be approximately 3.3 million to 3.6 million net tons. High natural gas prices adversely affected our results in 2000 and are expected to persist for some time. The blast furnace idled at Gary Works in July 2000 for a planned 10-day outage remained down until late February 2001 due to business conditions. The U. S. Steel Group has continued its cost reduction efforts, and has recently requested from its current suppliers an immediate, temporary eight percent price reduction from existing levels to help weather this difficult period. Several domestic competitors recently have filed for Chapter 11 bankruptcy protection. This provides them with certain competitive advantages and further demonstrates the very difficult economic circumstances faced by the domestic industry. U. S. Steel Group's income from operations includes net pension credits, which are primarily noncash, associated with all of U. S. Steel's pension plans. Net pension credits were $266 million in 2000. At the end of 2000, U. S. Steel's main pension plans' transition asset was fully amortized, decreasing the pension credit by $69 million annually in future years for this component. In addition, for the year 2001, low marketplace returns on trust assets in the year 2000 and pending business combinations in the current year are expected to further reduce net pension credits to approximately $160 million. The above includes forward-looking statements concerning net pension credits which can vary depending upon the market performance of plan assets, changes in actuarial assumptions regarding such factors as the selection of a discount rate and rate of return on plan assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels, business combinations and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent net pension credits decline in the future, income from operations would be adversely affected. The U. S. Steel Group includes a 16 percent equity method investment in Republic (through an ownership interest in Republic Technologies International Holdings, LLC ("Republic Holdings"), which is the sole owner of Republic). In the third quarter of 2000, Republic announced that it had completed a financial restructuring to improve its liquidity position. Republic raised approximately $30 million in loans from certain of its direct and indirect equity partners in exchange for notes of Republic and warrants to purchase Class D common stock of Republic Technologies International, Inc., Republic's majority owner. The U. S. Steel Group's portion was approximately $6 million and the U. S. Steel Group also agreed to certain deferred payment terms into the year 2002, up to a maximum of $30 million, with regard to Republic's obligations relating to iron ore pellets supplied to Republic. In its Form 10-Q for the period ended September 30, 2000, which was filed with the SEC on October 31, 2000, Republic Holdings stated that "Notwithstanding these efforts, [Republic Holdings] may need to obtain additional financing to meet its cash flow requirements, including financing from the sale of additional debt or equity securities." Republic Holdings also stated "As a result of the factors mentioned above, [Republic Holdings] is highly leveraged and could be considered a risky investment." U-58 Management's Discussion and Analysis continued At December 31, 2000, the U. S. Steel Group's financial exposure to Republic totaled approximately $131 million, consisting of amounts owed by Republic to the U. S. Steel Group and debt obligations assumed by Republic. In early October 2000, the U. S. Steel Group announced an agreement with LTV Corporation ("LTV") to purchase LTV's tin mill products business, including its Indiana Harbor, Indiana tin operations. This acquisition recently closed and was effective March 1, 2001. Terms of this noncash transaction call for the U. S. Steel Group to assume certain employee-related obligations of LTV. The U. S. Steel Group intends to operate these facilities as an ongoing business and tin mill employees at Indiana Harbor became U. S. Steel Group employees. The U. S. Steel Group and LTV also entered into 5-year agreements for LTV to supply the U. S. Steel Group with pickled hot bands and for the U. S. Steel Group to provide LTV with processing of cold rolled steel. In October 2000, Transtar announced it had entered into a Reorganization and Exchange Agreement with its two voting shareholders. Upon closing, Transtar and certain of its subsidiaries, namely, the Birmingham Southern Railroad Company; the Elgin, Joliet and Eastern Railway Company; the Lake Terminal Railroad Company; the McKeesport Connecting Railroad Company; the Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior & Gulf Navigation Company; and Tracks Traffic and Management Services, Inc. will become subsidiaries within the U. S. Steel Group. The other shareholder, Transtar Holdings, L.P., an affiliate of Blackstone Capital Partners L.P., will become the owner of the other subsidiaries. The preceding statements concerning anticipated steel demand, steel pricing, and shipment levels are forward-looking and are based upon assumptions as to future product prices and mix, and levels of steel production capability, production and shipments. These forward-looking statements can be affected by imports, domestic and international economies, domestic production capacity, the completion of the LTV and Transtar transactions, and customer demand. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. U-59 Quantitative and Qualitative Disclosures About Market Risk Management Opinion Concerning Derivative Instruments USX uses commodity-based and foreign currency derivative instruments to manage its price risk. Management has authorized the use of futures, forwards, swaps and options to manage exposure to price fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products, and nonferrous metals. For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, in the same period as the underlying physical transaction. Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period in income from operations. While USX's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies that assume price risk. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose USX to material risk. The use of derivative instruments could materially affect USX's results of operations in particular quarterly or annual periods. However, management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of accounting policies related to derivative instruments, see Note 1 to the USX Consolidated Financial Statements. Commodity Price Risk and Related Risks In the normal course of its business, USX is exposed to market risk or price fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products and steel products. To a lesser extent, USX is exposed to the risk of price fluctuations on coal, coke, natural gas liquids, petroleum feedstocks and certain nonferrous metals used as raw materials. USX's market risk strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, USX uses fixed-price contracts and derivative commodity instruments to manage a relatively small portion of its commodity price risk. USX uses fixed-price contracts for portions of its natural gas production to manage exposure to fluctuations in natural gas prices. Certain derivative commodity instruments have the effect of restoring the equity portion of fixed-price sales of natural gas to variable market-based pricing. These instruments are used as part of USX's overall risk management programs. U-60 Quantitative and Qualitative Disclosures About Market Risk continued Sensitivity analyses of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of December 31, 2000 and December 31, 1999, are provided for the Marathon Group in the following table. While the U. S. Steel Group uses derivative commodity instruments, its usage is immaterial to the results of operations.
(Dollars in millions) ----------------------------------------------------------------------------------- Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of/(a)/ 2000 1999 Derivative Commodity Instruments 10% 25% 10% 25% ----------------------------------------------------------------------------------- Marathon Group/(b)(c)/: Crude oil/(d)/ Trading $ - $ - /(e)/ $ 1.3 $ 7.7 /(e)/ Other than trading 9.1 27.2 /(e)/ 16.5 54.0 /(e)/ Natural gas/(d)/ Trading - - /(e)/ - - /(f)/ Other than trading 20.2 50.6 /(e)/ 4.7 16.8 /(f)/ Refined products/(d)/ Trading - - /(e)/ - - /(e)/ Other than trading 6.1 16.5 /(e)/ 8.4 23.8 /(e)/ -----------------------------------------------------------------------------------
/(a)/ Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at December 31, 2000 and December 31, 1999. Marathon Group management evaluates their portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to December 31, 2000, would cause future pretax income effects to differ from those presented in the table. /(b)/ The number of net open contracts varied throughout 2000, from a low of 12,252 contracts at July 5, to a high of 34,554 contracts at October 25, and averaged 21,875 for the year. The derivative commodity instruments used and hedging positions taken also varied throughout 2000, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. /(c)/ The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. /(d)/ The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. /(e)/ Price increase. /(f)/ Price decrease. U-61 Quantitative and Qualitative Disclosures About Market Risk continued In total, Marathon's exploration and production operations recorded net pretax other than trading activity losses of approximately $34 million in 2000, gains of $3 million in 1999 and losses of $3 million in 1998. Marathon's refining, marketing and transportation operations generally use derivative commodity instruments to lock-in costs of certain crude oil and other feedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. Marathon's refining, marketing and transportation operations recorded net pretax other than trading activity losses, net of the 38% minority interest in MAP, of approximately $116 million in 2000, and net pretax other than trading activity gains, net of the 38% minority interest in MAP, of $8 million in 1999 and $28 million in 1998. Marathon's refining, marketing and transportation operations used derivative instruments for trading activities and recorded net pretax trading activity losses, net of the 38% minority interest in MAP, of $11 million in 2000 and net pretax trading activity gains, net of the 38% minority interest in MAP, of $5 million in 1999. The U. S. Steel Group uses OTC commodity swaps to manage exposure to market risk related to the purchase of natural gas, heating oil and certain nonferrous metals. The U. S. Steel Group recorded net pretax other than trading activity gains of $2 million in 2000, losses of $4 million in 1999 and losses of $6 million in 1998. These gains and losses were offset by changes in the realized prices of the underlying hedged commodities. For additional quantitative information relating to derivative commodity instruments, including aggregate contract values and fair values, where appropriate, see Note 24 to the USX Consolidated Financial Statements. USX is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange ("NYMEX") contracts for natural gas are priced at Louisiana's Henry Hub, while the underlying quantities of natural gas may be produced and sold in the Western United States at prices that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk. USX is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions. U-62 Quantitative and Qualitative Disclosures About Market Risk continued Interest Rate Risk USX is subject to the effects of interest rate fluctuations on certain of its non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10% decrease in year-end 2000 and 1999 interest rates on the fair value of USX's non-derivative financial instruments, is provided in the following table:
(Dollars in millions) ------------------------------------------------------------------------------------------------- As of December 31, 2000 1999 Incremental Incremental Increase in Increase in Fair Fair Fair Fair Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(c)/ Value/(b)/ Value/(c)/ ------------------------------------------------------------------------------------------------- Financial assets: Investments and long-term receivables/(d)/ $ 211 $ - $ 190 $ - Financial liabilities: Long-term debt/(e)(f)/ $ 4,549 $ 166 $ 4,278 $ 164 Preferred stock of subsidiary/(g)/ 238 20 239 21 USX obligated mandatorily redeemable convertible preferred securitiesof a subsidiary trust/(g)/ 119 10 169 15 --------- --------- --------- --------- Total liabilities $ 4,906 $ 196 $ 4,686 $ 200 -------------------------------------------------------------------------------------------------
/(a)/ Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest, approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. /(b)/ See Note 25 to the USX Consolidated Financial Statements for carrying value of instruments. /(c)/ Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at December 31, 2000 and December 31, 1999, on the fair value of USX's non-derivative financial instruments. For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of USX's long-term debt at December 31, 2000 and December 31, 1999. /(d)/ For additional information, see Note 12 to the USX Consolidated Financial Statements. /(e)/ Includes amounts due within one year. /(f)/ Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. For additional information, see Note 14 to the USX Consolidated Financial Statements. /(g)/ See Note 22 to the USX Consolidated Financial Statements. At December 31, 2000, USX's portfolio of long-term debt was comprised primarily of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $166 million increase in the fair value of long-term debt assuming a hypothetical 10% decrease in interest rates. However, USX's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect USX's results and cash flows only to the extent that USX elected to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value. Foreign Currency Exchange Rate Risk USX is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than U.S. dollars, such as the Euro, the Slovak koruna and the Canadian dollar. USX has not generally used derivative instruments to manage this risk. However, USX has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At December 31, 2000, USX had open Canadian dollar forward purchase contracts with a total carrying value of approximately $14 million compared to $52 million at December 31, 1999. A 10% increase in the December 31, 2000, Canadian dollar to U.S. dollar forward rate, would result in a charge to income of approximately $1 million. Last year, a 10% increase in the December 31, 1999, Canadian dollar to U.S. dollar forward rate, would have resulted in a charge to income of $5 million. U-63 Quantitative and Qualitative Disclosures About Market Risk continued Equity Price Risk USX is subject to equity price risk and liquidity risk related to its investment in VSZ, which is attributed to the U. S. Steel Group. These risks are not readily quantifiable. Safe Harbor USX's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with USX's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas, refined products, steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to USX's hedging programs may differ materially from those discussed in the forward- looking statements. U-64 Marathon Group Index to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk
Page ---- Management's Report...................................................... M-1 Audited Financial Statements: Report of Independent Accountants....................................... M-1 Statement of Operations................................................. M-2 Balance Sheet........................................................... M-3 Statement of Cash Flows................................................. M-4 Notes to Financial Statements........................................... M-5 Selected Quarterly Financial Data........................................ M-21 Principal Unconsolidated Affiliates...................................... M-21 Supplementary Information................................................ M-21 Five-Year Operating Summary.............................................. M-22 Five-Year Financial Summary.............................................. M-24 Management's Discussion and Analysis..................................... M-25 Quantitative and Qualitative Disclosures About Market Risk............... M-37
Management's Report The accompanying financial statements of the Marathon Group are the responsibility of and have been prepared by USX Corporation (USX) in conformity with accounting principles generally accepted in the United States. They necessarily include some amounts that are based on best judgments and estimates. The Marathon Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Thomas J. Usher Robert M. Hernandez Larry G. Schultz Chairman, Board of Directors & Vice Chairman & Vice President- Chief Executive Officer Chief Financial Officer Accounting Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages M-2 through M-20 present fairly, in all material respects, the financial position of the Marathon Group at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Marathon Group is a business unit of USX Corporation (as described in Note 1, page M-5); accordingly, the financial statements of the Marathon Group should be read in connection with the consolidated financial statements of USX Corporation. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 7, 2001 M-1 Statement of Operations
(Dollars in millions) 2000 1999 1998 - -------------------------------------------------------------------------------------- Revenues and other income: Revenues (Note 6) $34,487 $23,590 $21,274 Dividend and investee income 102 69 50 Net gains (losses) on disposal of assets (Note 26) (785) - 28 Gain on ownership change in Marathon Ashland Petroleum LLC (Note 5) 12 17 245 Other income 43 31 26 ------- ------- ------- Total revenues and other income 33,859 23,707 21,623 ------- ------- ------- Costs and expenses: Cost of revenues (excludes items shown below) 25,477 16,653 14,630 Selling, general and administrative expenses 625 486 505 Depreciation, depletion and amortization 1,245 950 941 Taxes other than income taxes 4,626 4,218 4,029 Exploration expenses 238 238 313 Inventory market valuation charges (credits) (Note 20) - (551) 267 ------- ------- ------- Total costs and expenses 32,211 21,994 20,685 ------- ------- ------- Income from operations 1,648 1,713 938 Net interest and other financial costs (Note 6) 236 288 237 Minority interest in income of Marathon Ashland Petroleum LLC (Note 5) 498 447 249 ------- ------- ------- Income before income taxes 914 978 452 Provision for income taxes (Note 18) 482 324 142 ------- ------- ------- Net income $ 432 $ 654 $ 310 - -------------------------------------------------------------------------------------- Income Per Common Share 2000 1999 1998 - -------------------------------------------------------------------------------------- Basic $ 1.39 $ 2.11 $ 1.06 Diluted 1.39 2.11 1.05 - --------------------------------------------------------------------------------------
See Note 7, for a description and computation of income per common share. The accompanying notes are an integral part of these financial statements. M-2 Balance Sheet
(Dollars in millions) December 31 2000 1999 - ---------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 340 $ 111 Receivables, less allowance for doubtful accounts of $3 and $2 2,267 1,887 Inventories (Note 20) 1,867 1,884 Assets held for sale (Note 26) 330 84 Deferred income tax benefits (Note 18) 60 23 Other current assets 121 92 -------- -------- Total current assets 4,985 4,081 Investments and long-term receivables (Note 19) 362 762 Property, plant and equipment - net (Note 16) 9,375 10,293 Prepaid pensions (Note 14) 207 225 Other noncurrent assets 303 313 -------- -------- Total assets $ 15,232 $ 15,674 - ----------------------------------------------------------------------------------------------------- Liabilities Current liabilities: Notes payable $ 80 $ - Accounts payable 3,021 2,654 Income taxes payable (Note 23) 364 97 Payroll and benefits payable 230 146 Accrued taxes 108 107 Accrued interest 61 92 Long-term debt due within one year (Note 12) 148 48 -------- -------- Total current liabilities 4,012 3,144 Long-term debt (Note 12) 1,937 3,320 Deferred income taxes (Note 18) 1,354 1,495 Employee benefits (Note 14) 648 564 Deferred credits and other liabilities (Note 23) 412 414 Preferred stock of subsidiary (Note 9) 184 184 Minority interest in Marathon Ashland Petroleum LLC (Note 5) 1,840 1,753 Common Stockholders' Equity (Note 17) 4,845 4,800 -------- -------- Total liabilities and common stockholders' equity $ 15,232 $ 15,674 - -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. M-3 Statement of Cash Flows
(Dollars in millions) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents Operating activities: Net income $ 432 $ 654 $ 310 Adjustments to reconcile to net cash provided from operating activities: Minority interest in income of Marathon Ashland Petroleum LLC 498 447 249 Depreciation, depletion and amortization 1,245 950 941 Exploratory dry well costs 86 109 186 Inventory market valuation charges (credits) - (551) 267 Pensions and other postretirement benefits 69 36 34 Deferred income taxes (240) 105 26 Gain on ownership change in Marathon Ashland Petroleum LLC (12) (17) (245) Net (gains) losses on disposal of assets 785 - (28) Changes in: Current receivables (377) (844) 240 Inventories 17 (63) (13) Current accounts payable and accrued expenses 717 1,106 (233) All other - net (62) 84 (92) ------- ------- ------- Net cash provided from operating activities 3,158 2,016 1,642 ------- ------- ------- Investing activities: Capital expenditures (1,425) (1,378) (1,270) Acquisition of Tarragon Oil and Gas Limited - - (686) Disposal of assets 539 356 65 Restricted cash - withdrawals 271 45 11 - deposits (268) (44) (32) Investees - investments (65) (59) (42) - loans and advances (6) (70) (103) - returns and repayments 10 1 71 All other - net 21 (25) (18) ------- ------- ------- Net cash used in investing activities (923) (1,174) (2,004) ------- ------- ------- Financing activities (Note 9): Increase (decrease) in Marathon Group's portion of USX consolidated debt (1,200) (296) 329 Specifically attributed debt: Borrowings 273 141 366 Repayments (279) (144) (389) Marathon Stock - issued - 89 613 - repurchased (105) - - Treasury common stock reissued 1 - - Dividends paid (274) (257) (246) Distributions to minority shareholder of Marathon Ashland Petroleum LLC (420) (400) (211) ------- ------- ------- Net cash provided from (used in) financing activities (2,004) (867) 462 ------- ------- ------- Effect of exchange rate changes on cash (2) (1) 1 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 229 (26) 101 Cash and cash equivalents at beginning of year 111 137 36 ------- ------- ------- Cash and cash equivalents at end of year $ 340 $ 111 $ 137 - ---------------------------------------------------------------------------------------------------------------------
See Note 13 for supplemental cash flow information. The accompanying notes are an integral part of these financial statements. M-4 Notes to Financial Statements 1. Basis of Presentation USX Corporation (USX) has two classes of common stock: USX - Marathon Group Common Stock (Marathon Stock) and USX - U. S. Steel Group Common Stock (Steel Stock), which are intended to reflect the performance of the Marathon Group and the U. S. Steel Group, respectively. The financial statements of the Marathon Group include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. The Marathon Group financial statements are prepared using the amounts included in the USX consolidated financial statements. For a description of the Marathon Group's operating segments, see Note 10. Although the financial statements of the Marathon Group and the U. S. Steel Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the Marathon Group and the U. S. Steel Group for the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Marathon Stock and Steel Stock are holders of common stock of USX and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the Marathon Group financial information. - -------------------------------------------------------------------------------- 2. Summary of Principal Accounting Policies Principles applied in consolidation - These financial statements include the accounts of the businesses comprising the Marathon Group. The Marathon Group and the U. S. Steel Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in unincorporated oil and gas joint ventures, undivided interest pipelines and jointly owned gas processing plants are consolidated on a pro rata basis. Investments in entities over which the Marathon Group has significant influence are accounted for using the equity method of accounting and are carried at the Marathon Group's share of net assets plus loans and advances. Investments in companies whose stock is publicly traded are carried at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Dividend and investee income includes the Marathon Group's proportionate share of income from equity method investments and dividend income from other investments. Dividend income is recognized when dividend payments are received. Gains or losses from a change in ownership of a consolidated subsidiary or an unconsolidated investee are recognized in the period of change. Use of estimates - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. M-5 Revenue recognition - Revenues are recognized generally when products are shipped or services are provided to customers, the sales price is fixed and determinable, and collectibility is reasonably assured. Costs associated with revenues, including shipping and other transportation costs, are recorded in cost of revenues. Matching buy/sell transactions settled in cash are recorded in both revenues and cost of revenues as separate sales and purchase transactions, with no net effect on income. The Marathon Group follows the sales method of accounting for gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover the current imbalance situation. Cash and cash equivalents - Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments - The Marathon Group uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management is authorized to use futures, forwards, swaps and options related to the purchase, production or sale of crude oil, natural gas, refined products and electricity. While the Marathon Group's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies which assume price risk. Commodity-Based Hedging Transactions - For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, as a component of revenues or cost of revenues, in the same period as the underlying physical transaction. To qualify for hedge accounting, derivative positions cannot remain open if the underlying physical market risk has been removed. If such derivative positions remain in place, they would be marked-to-market and accounted for as trading or other activities. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities, as appropriate. Commodity-Based Trading and Other Activities - Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period within income from operations. This category also includes the use of derivative instruments that have no offsetting underlying physical market risk. Foreign Currency Transactions - The Marathon Group uses forward exchange contracts to manage currency risks. Gains or losses related to firm commitments are deferred and recognized concurrent with the underlying transaction. All other gains or losses are recognized in income in the current period as revenues, cost of revenues, interest income or expense, or other income, as appropriate. Forward exchange contracts are recorded as receivables or payables, as appropriate. Exploration and development - The Marathon Group follows the successful efforts method of accounting for oil and gas exploration and development. Long-lived assets - Depreciation and depletion of oil and gas producing properties are computed using predetermined rates based upon estimated proved oil and gas reserves applied on a units-of- production method. Other items of property, plant and equipment are depreciated principally by the straight-line method. The Marathon Group evaluates impairment of its oil and gas producing assets primarily on a field-by-field basis using undiscounted cash flows based on total proved reserves. Other assets are evaluated on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when long-lived assets are reclassified as assets held for sale. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. M-6 Major maintenance activities - The Marathon Group incurs planned major maintenance costs primarily for refinery turnarounds. Such costs are expensed in the same annual period as incurred; however, estimated annual turnaround costs are recognized in income throughout the year on a pro rata basis. Environmental liabilities - The Marathon Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. If recoveries of remediation costs from third parties are probable, a receivable is recorded. Estimated abandonment and dismantlement costs of offshore production platforms are accrued based upon estimated proved oil and gas reserves on a units-of-production method. Insurance - The Marathon Group is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications - Certain reclassifications of prior years' data have been made to conform to 2000 classifications. - -------------------------------------------------------------------------------- 3. New Accounting Standards In the fourth quarter of 2000, USX adopted the following accounting pronouncements primarily related to the classification of items in the statement of operations. The adoption of these new pronouncements had no net effect on the financial position or results of operations of the Marathon Group, although they required reclassifications of certain amounts in the statement of operations, including all prior periods presented. . In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements," which summarizes the SEC staff's interpretations of generally accepted accounting principles related to revenue recognition and classification. . In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent," which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which addresses the classification of costs incurred for shipping goods to customers. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which later was amended by SFAS Nos. 137 and 138. This Standard requires recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. The Marathon Group may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards. The Marathon Group will adopt the Standard effective January 1, 2001. The transition adjustment resulting from the adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of tax, is expected to approximate $9 million. The unfavorable cumulative effect on other comprehensive income, net of tax, will approximate $7 million. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations. M-7 - -------------------------------------------------------------------------------- 4. Corporate Activities Financial activities - As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the Marathon Group and the U. S. Steel Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of all groups. See Note 9, for the Marathon Group's portion of USX's financial activities attributed to all groups. However, transactions such as leases, certain collaterized financings, certain indexed debt instruments, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. Corporate general and administrative costs - Corporate general and administrative costs are allocated to the Marathon Group and the U. S. Steel Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and revenues. The costs allocated to the Marathon Group were $36 million in 2000, $26 million in 1999 and $28 million in 1998, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Income taxes - All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated between the Marathon Group and the U. S. Steel Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses and various tax credits), which cannot be utilized by one of the groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. To the extent that one of the groups is allocated a consolidated tax attribute which, as a result of expiration or otherwise, is not ultimately utilized on the consolidated tax return, the prior years' allocation of such attribute is adjusted such that the effect of the expiration is borne by the group that generated the attribute. Also, if a tax attribute cannot be utilized on a consolidated basis in the year generated or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. As a result, the allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns. - -------------------------------------------------------------------------------- 5. Business Combinations In August 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Securityholders of Tarragon received, at their election, Cdn$14.25 for each Tarragon share, or the economic equivalent in Exchangeable Shares of an indirect Canadian subsidiary of Marathon, which are exchangeable solely on a one-for-one basis into Marathon Stock. The purchase price included cash payments of $686 million, issuance of 878,074 Exchangeable Shares valued at $29 million and the assumption of $345 million in debt. The Exchangeable Shares are exchangeable at the option of the holder at any time and automatically redeemable on August 11, 2003 (and, in certain circumstances, as early as August 11, 2001). The holders of Exchangeable Shares are entitled to receive declared dividends equivalent to dividends declared from time to time by USX on Marathon Stock. USX accounted for the acquisition using the purchase method of accounting. The 1998 results of operations include the operations of Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998. M-8 During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $245 million in 1998. In accordance with MAP closing agreements, Marathon and Ashland have made capital contributions to MAP for environmental improvements. The closing agreements stipulate that ownership interests in MAP will not be adjusted as a result of such contributions. Accordingly, Marathon recognized a gain on ownership change of $12 million in 2000 and $17 million in 1999. In connection with the formation of MAP, Marathon and Ashland entered into a Limited Liability Company Agreement dated January 1, 1998 (the LLC Agreement). The LLC Agreement provides for an initial term of MAP expiring on December 31, 2022 (25 years from its formation). The term will automatically be extended for ten-year periods, unless a termination notice is given by either party. Also in connection with the formation of MAP, the parties entered into a Put/Call, Registration Rights and Standstill Agreement (the Put/Call Agreement). The Put/Call Agreement provides that at any time after December 31, 2004, Ashland will have the right to sell to Marathon all of Ashland's ownership interest in MAP, for an amount in cash and/or Marathon or USX debt or equity securities equal to the product of 85% (90% if equity securities are used) of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. Payment could be made at closing, or at Marathon's option, in three equal annual installments, the first of which would be payable at closing. At any time after December 31, 2004, Marathon will have the right to purchase all of Ashland's ownership interests in MAP, for an amount in cash equal to the product of 115% of the fair market value of MAP at that time, multiplied by Ashland's percentage interest in MAP. - -------------------------------------------------------------------------------- 6. Other Items
(In millions) 2000 1999 1998 ---------------------------------------------------------------------------- Net interest and other financial costs Interest and other financial income/(a)/: Interest income $ 26 $ 15 $ 30 Other (2) (13) 4 ----- ----- ----- Total 24 2 34 ----- ----- ----- Interest and other financial costs/(a)/: Interest incurred 240 281 285 Less interest capitalized 16 20 40 ----- ----- ----- Net interest 224 261 245 Interest on tax issues 6 5 5 Financial costs on preferred stock of subsidiary 17 17 17 Amortization of discounts 2 2 4 Other 11 5 - ----- ----- ----- Total 260 290 271 ----- ----- ----- Net interest and other financial costs/(a)/ $ 236 $ 288 $ 237 ---------------------------------------------------------------------------- /(a)/ See Note 4, for discussion of USX net interest and other financial costs attributable to the Marathon Group. ----------------------------------------------------------------------------
Foreign currency transactions For 2000, 1999 and 1998, the aggregate foreign currency transaction gains (losses) included in determining net income were $30 million, $(12) million and $13 million, respectively. Consumer excise taxes Included in revenues and costs and expenses for 2000, 1999 and 1998 were $4,344 million, $3,973 million and $3,824 million, respectively, representing consumer excise taxes on petroleum products and merchandise. - -------------------------------------------------------------------------------- 7. Income Per Common Share The method of calculating net income per share for the Marathon Stock and the Steel Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. M-9 Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes exercise of stock options, provided the effect is not antidilutive.
2000 1999 1998 ------------------ ------------------ ------------------ Computation of Income Per Share Basic Diluted Basic Diluted Basic Diluted ------------------------------- -------- -------- -------- -------- -------- -------- Net income (millions) $ 432 $ 432 $ 654 $ 654 $ 310 $ 310 ======== ======== ======== ======== ======== ======== Shares of common stock outstanding (thousands): Average number of common shares outstanding 311,531 311,531 309,696 309,696 292,876 292,876 Effect of dilutive securities - Stock options - 230 - 314 - 559 -------- -------- -------- -------- -------- -------- Average common shares and dilutive effect 311,531 311,761 309,696 310,010 292,876 293,435 ======== ======== ======== ======== ======== ======== Net income per share $ 1.39 $ 1.39 $ 2.11 $ 2.11 $ 1.06 $ 1.05 ======== ======== ======== ======== ======== ========
- -------------------------------------------------------------------------------- 8. Transactions Between MAP and Ashland At December 31, 2000 and 1999, MAP had current receivables from Ashland of $35 million and $26 million, respectively, and current payables to Ashland of $2 million. MAP has a $190 million revolving credit agreement with Ashland. Interest on borrowings is based on defined short-term market rates. At December 31, 2000 and 1999, there were no borrowings against this facility. During 2000, 1999 and 1998, MAP's sales to Ashland, consisting primarily of petroleum products, were $285 million, $198 million and $190 million, respectively, and MAP's purchases of products and services from Ashland were $26 million, $22 million and $47 million, respectively. These transactions were conducted under terms comparable to those with unrelated parties. - -------------------------------------------------------------------------------- 9. Financial Activities Attributed to Groups The following is the portion of USX financial activities attributed to the Marathon Group. These amounts exclude amounts specifically attributed to the Marathon Group.
Marathon Group Consolidated USX/(a)/ ------------------ ---------------------- (In millions) December 31 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------ Cash and cash equivalents $ 193 $ 8 $ 364 $ 9 Other noncurrent assets 4 7 7 8 ------ ------ ------ ------ Total assets $ 197 $ 15 $ 371 $ 17 ------------------------------------------------------------------------------------------------ Notes payable $ 80 $ - $ 150 $ - Accrued interest 50 82 95 95 Long-term debt due within one year (Note 12) 147 47 277 54 Long-term debt (Note 12) 1,930 3,305 3,734 3,771 Preferred stock of subsidiary 184 184 250 250 ------ ------ ------ ------ Total liabilities $2,391 $3,618 $4,506 $4,170 ------------------------------------------------------------------------------------------------ Marathon Group/(b)/ Consolidated USX -------------------- -------------------- (In millions) 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------ Net interest and other financial costs (Note 6) $250 $295 $295 $309 $334 $324 ------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of subsidiary, see Notes 14 and 22, respectively, to the USX consolidated financial statements. /(b)/ The Marathon Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all groups. - -------------------------------------------------------------------------------- 10. Segment Information The Marathon Group's operations consist of three reportable operating segments: 1) Exploration and Production - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through MAP; and 3) Other Energy Related Businesses. Other Energy Related Businesses is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third-party natural gas and crude oil in the United States; and 2) Power Generation - develops, constructs and operates independent electric power projects worldwide. Revenues by product line are: (In millions) 2000 1999 1998 ----------------------------------------------------------------- Refined products $22,514 $15,181 $12,852 Merchandise 2,441 2,194 1,941 Liquid hydrocarbons 6,856 4,587 5,023 Natural gas 2,518 1,429 1,187 Transportation and other products 158 199 271 ----------------------------------------------------------------- M-10 Segment income represents income from operations allocable to operating segments. USX corporate general and administrative costs are not allocated to operating segments. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Certain general and administrative costs related to all Marathon Group operating segments in excess of amounts billed to MAP under service contracts and amounts charged out to operating segments under Marathon's shared services procedures also are not allocated to operating segments. Additionally, the following items are not allocated to operating segments: inventory market valuation adjustments, gain on ownership change in MAP and certain other items not allocated to operating segments for business performance reporting purposes (see (a) in reconcilement table on page M-12). Information on assets by segment is not provided as it is not reviewed by the chief operating decision maker.
Refining, Other Exploration Marketing Energy and and Related (In millions) Production Transportation Businesses Total - ----------------------------------------------------------------------------------------------------------------------- 2000 Revenues and other income: Customer $ 4,184 $ 28,693 $ 1,550 $34,427 Intersegment/(a)/ 412 83 78 573 Intergroup/(a)/ 30 1 29 60 Equity in earnings of unconsolidated investees 47 22 15 84 Other 21 50 12 83 ----------- ------------ ---------- ------- Total revenues and other income $ 4,694 $ 28,849 $ 1,684 $35,227 =========== ============ ========== ======= Segment income $ 1,535 $ 1,273 $ 38 $ 2,846 Significant noncash items included in segment income - Depreciation, depletion and amortization/(b)/ 723 315 3 1,041 Capital expenditures/(c)/ 742 656 2 1,400 - ----------------------------------------------------------------------------------------------------------------------- 1999 Revenues and other income: Customer $ 2,856 $ 19,962 $ 731 $23,549 Intersegment/(a)/ 202 47 40 289 Intergroup/(a)/ 19 - 22 41 Equity in earnings (losses) of unconsolidated investees (2) 17 26 41 Other 30 50 15 95 ----------- ------------ ---------- ------- Total revenues and other income $ 3,105 $ 20,076 $ 834 $24,015 =========== ============ ========== ======= Segment income $ 618 $ 611 $ 61 $ 1,290 Significant noncash items included in segment income - Depreciation, depletion and amortization/(b)/ 638 280 5 923 Capital expenditures/(c)/ 744 612 4 1,360 - ----------------------------------------------------------------------------------------------------------------------- 1998 Revenues and other income: Customer $ 1,905 $ 19,018 $ 306 $21,229 Intersegment/(a)/ 144 10 17 171 Intergroup/(a)/ 13 - 7 20 Equity in earnings of unconsolidated investees 2 12 14 28 Other 26 40 11 77 ----------- ------------ ---------- ------- Total revenues and other income $ 2,090 $ 19,080 $ 355 $21,525 =========== ============ ========== ======= Segment income $ 278 $ 896 $ 33 $ 1,207 Significant noncash items included in segment income - Depreciation, depletion and amortization/(b)/ 581 272 6 859 Capital expenditures/(c)/ 839 410 8 1,257 - -----------------------------------------------------------------------------------------------------------------------
/(a)/ Intersegment and intergroup revenues and transfers were conducted under terms comparable to those with unrelated parties. /(b)/ Differences between segment totals and group totals represent amounts included in administrative expenses and international and domestic oil and gas property impairments. /(c)/ Differences between segment totals and group totals represent amounts related to corporate administrative activities. M-11 The following schedules reconcile segment amounts to amounts reported in the Marathon Group financial statements:
(In millions) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- Revenues and Other Income: Revenues and other income of reportable segments $35,227 $24,015 $21,525 Items not allocated to segments: Joint venture formation charges (931) - - Gain on ownership change in MAP 12 17 245 Other 124 (36) 24 Elimination of intersegment revenues (573) (289) (171) ------- ------- ------- Total Group revenues and other income $33,859 $23,707 $21,623 ======= ======= ======= Income: Income for reportable segments $ 2,846 $ 1,290 $ 1,207 Items not allocated to segments: Joint venture formation charges (931) - - Gain on ownership change in MAP 12 17 245 Administrative expenses (136) (108) (106) Inventory market valuation adjustments - 551 (267) Other/(a)/ (143) (37) (141) ------- ------- ------- Total Group income from operations $ 1,648 $ 1,713 $ 938 - ---------------------------------------------------------------------------------------------------
/(a)/ Represents in 2000, certain oil and gas property impairments, net gains on certain asset sales and reorganization charges. Represents in 1999, primarily certain domestic oil and gas property impairments, net losses on certain asset sales and costs of a voluntary early retirement program. Represents in 1998, certain international oil and gas property impairments, certain suspended exploration well write-offs, a gas contract settlement and MAP transition charges. Geographic Area: The information below summarizes the operations in different geographic areas. Transfers between geographic areas are at prices which approximate market.
Revenues and Other Income --------------------------------------------- Within Between (In millions) Year Geographic Areas Geographic Areas Total Assets/(a)/ - --------------------------------------------------------------------------------------------------- United States 2000 $32,239 $ - $32,239 $ 6,711 1999 22,716 - 22,716 7,555 1998 20,837 - 20,837 7,659 Canada 2000 856 899 1,755 940 1999 426 521 947 1,112 1998 209 368 577 1,094 United Kingdom 2000 567 - 567 1,698 1999 459 - 459 1,581 1998 462 - 462 1,739 Other Foreign Countries 2000 197 188 385 310 1999 106 88 194 735 1998 115 52 167 468 Eliminations 2000 - (1,087) (1,087) - 1999 - (609) (609) - 1998 - (420) (420) - Total 2000 $33,859 $ - $33,859 $ 9,659 1999 23,707 - 23,707 10,983 1998 21,623 - 21,623 10,960 - ---------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments. - -------------------------------------------------------------------------------- 11. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases ------------------------------------------------------------------------------------ 2001 $ 1 $ 94 2002 1 83 2003 1 58 2004 1 50 2005 1 112 Later years 5 109 Sublease rentals - (18) ------- -------- Total minimum lease payments 10 $ 488 ------- ======== Less imputed interest costs 3 ------- Present value of net minimum lease payments included in long-term debt $ 7 ------------------------------------------------------------------------------------ Operating lease rental expense: (In millions) 2000 1999 1998 ------------------------------------------------------------------------------------ Minimum rental $ 156 $ 149 $ 157 Contingent rental 13 11 10 Sublease rentals (13) (13) (7) ----- ----- ------ Net rental expense $ 156 $ 147 $ 160 ------------------------------------------------------------------------------------
M-12 The Marathon Group leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. In the event of a change in control of USX, as defined in the agreements, or certain other circumstances, operating lease obligations totaling $104 million may be declared immediately due and payable. - -------------------------------------------------------------------------------- 12. Long-Term Debt The Marathon Group's portion of USX's consolidated long-term debt is as follows:
Marathon Group Consolidated USX/(a)/ -------------------- --------------------- (In millions) December 31 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------ Specifically attributed debt/(b)/: Receivables facility $ - $ - $ 350 $ 350 Sale-leaseback financing and capital leases 7 15 95 107 Other 1 1 4 1 ------ ------ ------ ------ Total 8 16 449 458 Less amount due within one year 1 1 10 7 ------ ------ ------ ------ Total specifically attributed long-term debt $ 7 $ 15 $ 439 $ 451 ------------------------------------------------------------------------------------------------------ Debt attributed to groups/(c)/ $2,090 $3,375 $4,036 $3,852 Less unamortized discount 13 23 25 27 Less amount due within one year 147 47 277 54 ------ ------ ------ ------ Total long-term debt attributed to groups $1,930 $3,305 $3,734 $3,771 ------------------------------------------------------------------------------------------------------ Total long-term debt due within one year $ 148 $ 48 $ 287 $ 61 Total long-term debt due after one year 1,937 3,320 4,173 4,222 ------------------------------------------------------------------------------------------------------
/(a)/ See Note 14, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. /(b)/ As described in Note 4, certain financial activities are specifically attributed only to the Marathon Group and the U. S. Steel Group. /(c)/ Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 4, 9 and 13). - -------------------------------------------------------------------------------- 13. Supplemental Cash Flow Information
(In millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------- Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (270) $ (289) $ (260) Income taxes paid, including settlements with the U. S. Steel Group (468) (101) (154) ------------------------------------------------------------------------------------------------------------- USX debt attributed to all groups - net: Commercial paper - issued $ 3,362 $ 6,282 $ - - repayments (3,450) (6,117) - Credit agreements - borrowings 437 5,529 17,486 - repayments (437) (5,980) (16,817) Other credit arrangements - net 150 (95) 55 Other debt - borrowings - 319 671 - repayments (54) (87) (1,053) -------- -------- -------- Total $ 8 $ (149) $ 342 ------------------------------------------------------------------------------------------------------------- Marathon Group activity $ (1,200) $ (296) $ 329 U. S. Steel Group activity 1,208 147 13 -------- -------- -------- Total $ 8 $ (149) $ 342 ------------------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Marathon Stock issued for dividend reinvestment and employee stock plans $ 10 $ 4 $ 3 Marathon Stock issued for Exchangeable Shares - 7 11 Investee preferred stock received in conversion of investee loan - 142 - Disposal of assets: Exchange of Sakhalin Energy Investment Company Ltd. 410 - - Notes received 6 19 - Business combinations: Acquisition of Tarragon: Exchangeable Shares issued - - 29 Liabilities assumed - - 433 Acquisition of Ashland RM&T net assets: 38% interest in MAP - - 1,900 Liabilities assumed - - 1,038 Other acquisitions - liabilities assumed - 16 - -------------------------------------------------------------------------------------------------------------
M-13 - -------------------------------------------------------------------------------- 14. Pensions and Other Postretirement Benefits The Marathon Group has noncontributory defined benefit pension plans covering substantially all employees. Benefits under these plans are based primarily upon years of service and final average pensionable earnings. Certain subsidiaries provide benefits for employees covered by other plans based primarily upon employees' service and career earnings. The Marathon Group also has defined benefit retiree health care and life insurance plans (other benefits) covering most employees upon their retirement. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to certain nonunion and most union represented retiree beneficiaries primarily based on employees' annual base salary at retirement. Other benefits have not been prefunded.
Pension Benefits Other Benefits --------------------- ---------------------- (In millions) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligations at January 1 $ 868 $ 1,080 $ 478 $ 597 Service cost 52 65 14 17 Interest cost 67 67 37 36 Plan amendments 6 18 1 (44) Actuarial (gains) losses 121 (197) 46 (108) Plan merger and acquisition - 14 - 4 Settlements, curtailments and termination benefits (99) (122) 22 - Benefits paid (77) (57) (23) (24) ------- -------- -------- -------- Benefit obligations at December 31 $ 938 $ 868 $ 575 $ 478 -------------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at January 1 $ 1,310 $ 1,331 Actual return on plan assets (8) 136 Plan merger and acquisition - 12 Employer contributions 1 2 Trustee distributions/(a)/ (18) (16) Settlements paid (134) (99) Benefits paid from plan assets (72) (56) ------- -------- Fair value of plan assets at December 31 $ 1,079 $ 1,310 -------------------------------------------------------------------------------------------------------- Funded status of plans at December 31 $ 141/(b)/ $ 442 /(b)/ $ (575) $ (478) Unrecognized net gain from transition (18) (26) - - Unrecognized prior service costs (credits) 59 63 (59) (72) Unrecognized actuarial (gains) losses (37) (306) 115 68 Additional minimum liability (19) (8) - - ------- -------- -------- -------- Prepaid (accrued) benefit cost $ 126 $ 165 $ (519) $ (482) -------------------------------------------------------------------------------------------------------- /(a)/ Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code. /(b)/ Includes several plans that have accumulated benefit obligations in excess of plan assets: Aggregate accumulated benefit obligations $ (34) $ (24) Aggregate projected benefit obligations (43) (37) Aggregate plan assets - - -------------------------------------------------------------------------------------------------------- Pension Benefits Other Benefits ----------------------------- ------------------------- (In millions) 2000 1999 1998 2000 1999 1998 -------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost (credit) Service cost $ 52 $ 65 $ 48 $ 14 $ 17 $ 12 Interest cost 67 67 57 37 36 31 Expected return on plan assets (117) (114) (107) - - - Amortization - net transition gain (4) (5) (5) - - - - prior service costs (credits) 4 4 3 (10) (8) (3) - actuarial (gains) losses (9) 1 - 3 7 3 Multiemployer and other plans 5 5 5 - - - Settlement and termination (gain) loss 32/(a)/ (7)/(a)/ - 21/(a)/ - - ----- ----- ----- ----- ----- ----- Net periodic benefit cost $ 30 $ 16 $ 1 $ 65 $ 52 $ 43 -------------------------------------------------------------------------------------------------------- /(a)/ Includes voluntary early retirement programs. Pension Benefits Other Benefits --------------------- ---------------------- 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------- Weighted average actuarial assumptions at December 31: Discount rate 7.5% 8.0% 7.5% 8.0% Expected annual return on plan assets 9.5% 9.5% n/a n/a Increase in compensation rate 5.0% 5.0% 5.0% 5.0% --------------------------------------------------------------------------------------------------------
M-14 For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5% for 2007 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease -------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 9 $ (7) Effect on other postretirement benefit obligations 71 (58) --------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 15. Dividends In accordance with the USX Restated Certificate of Incorporation, dividends on the Marathon Stock and Steel Stock are limited to the legally available funds of USX. Net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Marathon Stock based on the financial condition and results of operations of the Marathon Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Marathon Stock, the Board of Directors considers among other things, the long-term earnings and cash flow capabilities of the Marathon Group as well as the dividend policies of similar publicly traded energy companies. - -------------------------------------------------------------------------------- 16. Property, Plant and Equipment
(In millions) December 31 2000 1999 -------------------------------------------------------------------------------------------------------- Production $ 12,266 $ 14,568 Refining 2,800 2,439 Marketing 2,286 2,197 Transportation 1,402 1,374 Other 312 282 --------- --------- Total 19,066 20,860 Less accumulated depreciation, depletion and amortization 9,691 10,567 --------- --------- Net $ 9,375 $ 10,293 --------------------------------------------------------------------------------------------------------
Property, plant and equipment at December 31, 2000 and 1999, includes gross assets acquired under capital leases of $8 million and $20 million, respectively, with no related amounts in accumulated depreciation, depletion and amortization. During 2000, the Marathon Group recorded $193 million of impairments of certain E&P segment oil and gas properties, primarily located in Canada. The impairments were recorded due to reserve revisions as a result of production performance and disappointing drilling results. The charge is included in depreciation, depletion and amortization. - -------------------------------------------------------------------------------- 17. Common Stockholders' Equity
(In millions, except per share data) 2000 1999 1998 -------------------------------------------------------------------------------------------------------- Balance at beginning of year $4,800 $4,312 $3,618 Net income 432 654 310 Marathon Stock - issued 9 96 617 - repurchased (105) - - Treasury stock reissued 1 - - Exchangeable Shares - issued - - 29 - exchanged for Marathon Stock - (7) (12) Dividends on Marathon Stock (per share $.88 in 2000 and $.84 in 1999 and 1998) (274) (261) (248) Deferred compensation (5) - 2 Accumulated other comprehensive income (loss)/(a)/: Foreign currency translation adjustments 1 (1) 2 Minimum pension liability adjustments (Note 14) (14) 7 (3) Unrealized holding losses on investments - - (3) ------ ------ ------ Balance at end of year $4,845 $4,800 $4,312 - -----------------------------------------------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements relative to the annual activity of these adjustments and losses. Total comprehensive income for the Marathon Group for the years 2000, 1999 and 1998 was $419 million, $660 million and $306 million, respectively. M-15 - -------------------------------------------------------------------------------- 18. Income Taxes Income tax provisions and related assets and liabilities attributed to the Marathon Group are determined in accordance with the USX group tax allocation policy (Note 4). Provisions (credits) for income taxes were:
2000 1999 1998 ------------------------------ ---------------------------- ---------------------------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total - ----------------------------------------------------------------------------------------------------------------------- Federal $ 614 $ (144) $ 470 $ 191 $ 158 $ 349 $ 83 $ 19 $ 102 State and local 53 (46) 7 3 (7) (4) 30 9 39 Foreign 55 (50) 5 25 (46) (21) 3 (2) 1 ------ ------ ------ ------- ------ ------ ------ ------ ------ Total $ 722 $ (240) $ 482 $ 219 $ 105 $ 324 $ 116 $ 26 $ 142 - -----------------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total provisions follows:
(In millions) 2000 1999 1998 -------------------------------------------------------------------------------------------------------- Statutory rate applied to income before income taxes $ 320 $ 342 $ 158 Effects of foreign operations: Impairment of deferred tax benefits 235 - - Adjustments to foreign valuation allowances (30) - - All other, including foreign tax credits (30) (18) (26) State and local income taxes after federal income tax effects 5 (3) 25 Credits other than foreign tax credits (7) (7) (9) Effects of partially owned companies (5) (5) (4) Dispositions of subsidiary investments - 7 - Adjustment of prior years' federal income taxes (11) 4 (5) Other 5 4 3 ------- ------- ------- Total provisions $ 482 $ 324 $ 142 --------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 2000 1999 -------------------------------------------------------------------------------------------------------- Deferred tax assets: State tax loss carryforwards (expiring in 2001 through 2020) $ 70 $ 57 Foreign tax loss carryforwards (portion of which expire in 2001 through 2015) 269 408 Employee benefits 246 206 Receivables, payables and debt 41 14 Expected federal benefit for: Crediting certain foreign deferred income taxes 315 530 Deducting state deferred income taxes 20 36 Contingency and other accruals 155 150 Investments in foreign subsidiaries 39 52 Investments in subsidiaries and equity investees 30 20 Other 60 34 Valuation allowances: Federal - (30) State (16) (11) Foreign (252) (282) -------- -------- Total deferred tax assets/(a)/ 977 1,184 -------- -------- Deferred tax liabilities: Property, plant and equipment 1,642 2,091 Inventory 320 324 Prepaid pensions 119 127 Other 160 111 -------- -------- Total deferred tax liabilities 2,241 2,653 -------- -------- Net deferred tax liabilities $ 1,264 1,469 --------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of the Marathon Group's deferred tax assets. In addition, the ability to realize the benefit of foreign tax credits is based upon certain assumptions concerning future operating conditions (particularly as related to prevailing oil prices), income generated from foreign sources and USX's tax profile in the years that such credits may be claimed. During 2000, the amount of net deferred tax assets expected to be realized was reduced as a result of the change in the amount and timing of future foreign source income due to the exchange of Marathon's interest in Sakhalin Energy Investment Company Ltd. for other oil and gas producing interests. Additionally, gross deferred tax assets and the associated valuation allowance were reduced by a change in management's intent regarding the permanent reinvestment of the earnings from certain foreign subsidiaries. The consolidated tax returns of USX for the years 1990 through 1997 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. M-16 Pretax income (loss) included $237 million, $66 million and $(75) million attributable to foreign sources in 2000, 1999 and 1998, respectively. Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 2000, amounted to $205 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because the Marathon Group intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $72 million would have been required. - -------------------------------------------------------------------------------- 19. Investments and Long-Term Receivables
(In millions) December 31 2000 1999 --------------------------------------------------------------------------------------------- Equity method investments $ 250 $ 658 Other investments 34 32 Receivables due after one year 54 46 Deposits of restricted cash 16 20 Other 8 6 ------ ------ Total $ 362 $ 762 ---------------------------------------------------------------------------------------------
Summarized financial information of investees accounted for by the equity method of accounting follows:
(In millions) 2000 1999 1998 --------------------------------------------------------------------------------------------- Income data - year: Revenues and other income $ 417 $ 422 $ 347 Operating income 174 152 132 Net income 123 119 79 --------------------------------------------------------------------------------------------- Balance sheet data - December 31: Current assets $ 328 $ 387 Noncurrent assets 1,247 2,606 Current liabilities 256 300 Noncurrent liabilities 650 1,066 ---------------------------------------------------------------------------------------------
Dividends and partnership distributions received from equity investees were $46 million in 2000, $44 million in 1999 and $23 million in 1998. Marathon Group purchases from equity investees totaled $61 million, $50 million and $64 million in 2000, 1999 and 1998, respectively. Marathon Group revenues for sales to USX equity investees were $28 million in 2000 and $22 million in 1999 and 1998. - -------------------------------------------------------------------------------- 20. Inventories
(In millions) December 31 2000 1999 --------------------------------------------------------------------------------------------- Crude oil and natural gas liquids $ 701 $ 729 Refined products and merchandise 1,069 1,046 Supplies and sundry items 97 109 --------- --------- Total (at cost) 1,867 1,884 Less inventory market valuation reserve - - --------- --------- Net inventory carrying value $ 1,867 $ 1,884 ---------------------------------------------------------------------------------------------
Inventories of crude oil and refined products are valued by the LIFO method. The LIFO method accounted for 92% and 90% of total inventory value at December 31, 2000 and 1999, respectively. Current acquisition costs were estimated to exceed the above inventory values at December 31, by approximately $500 million and $200 million in 2000 and 1999, respectively. Cost of revenues was reduced and income from operations was increased by $14 million in 2000 as a result of liquidations of LIFO inventories. The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. During 2000, there were no charges or credits to costs and expenses. - -------------------------------------------------------------------------------- 21. Stock-Based Compensation Plans and Stockholder Rights Plan USX Stock-Based Compensation Plans and Stockholder Rights Plan are discussed in Note 17, and Note 19, respectively, to the USX consolidated financial statements. The Marathon Group's actual stock-based compensation expense (credit) was $5 million in 2000, $(4) million in 1999 and $(3) million in 1998. Incremental compensation expense, as determined under a fair value model, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. M-17 - -------------------------------------------------------------------------------- 22. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 24, by individual balance sheet account. As described in Note 4, the Marathon Group's specifically attributed financial instruments and the Marathon Group's portion of USX's financial instruments attributed to all groups are as follows:
2000 1999 ---------------- --------------- Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount --------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 340 $ 340 $ 111 $ 111 Receivables 2,267 2,267 1,887 1,887 Investments and long-term receivables 171 107 166 109 ------ ------ ------ ------ Total financial assets $2,778 $2,714 $2,164 $2,107 --------------------------------------------------------------------------------------------- Financial liabilities: Notes payable $ 80 $ 80 $ - $ - Accounts payable (including intergroup payables) 3,385 3,385 2,751 2,751 Accrued interest 61 61 92 92 Long-term debt (including amounts due within one year) 2,174 2,078 3,443 3,353 Preferred stock of subsidiary 175 184 176 184 ------ ------ ------ ------ Total financial liabilities $5,875 $5,788 $6,462 $6,380 ---------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short-term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Fair value of preferred stock of subsidiary was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. The Marathon Group's only unrecognized financial instruments are financial guarantees and commitments to extend credit. It is not practicable to estimate the fair value of these forms of financial instrument obligations because there are no quoted market prices for transactions which are similar in nature. For details relating to financial guarantees, see Note 25. - -------------------------------------------------------------------------------- 23. Intergroup Transactions Revenues and purchases - Marathon Group revenues for sales to the U. S. Steel Group totaled $60 million, $41 million and $21 million in 2000, 1999 and 1998, respectively. Marathon Group purchases from the U. S. Steel Group totaled $17 million in both 2000 and 1999 and $2 million in 1998. At December 31, 2000 and 1999, Marathon Group receivables included $1 million and $5 million, respectively, related to transactions with the U. S. Steel Group. At December 31, 2000 and 1999, Marathon Group accounts payable included $2 million related to transactions with the U. S. Steel Group. These transactions were conducted under terms comparable to those with unrelated parties. Income taxes receivable from/payable to the U. S. Steel Group - At December 31, 2000 and 1999, amounts receivable or payable for income taxes were included in the balance sheet as follows:
(In millions) December 31 2000 1999 --------------------------------------------------------------------------------------------- Current: Receivables $ 4 $ 1 Income taxes payable 364 97 Noncurrent: Deferred credits and other liabilities 97 97 ---------------------------------------------------------------------------------------------
These amounts have been determined in accordance with the tax allocation policy described in Note 4. Amounts classified as current are settled in cash in the year succeeding that in which such amounts are accrued. Noncurrent amounts represent estimates of intergroup tax effects of certain issues for years that are still under various stages of audit and administrative review. Such tax effects are not settled between the groups until the audit of those respective tax years is closed. The amounts ultimately settled for open tax years will be different than recorded noncurrent amounts based on the final resolution of all of the audit issues for those years. M-18 - -------------------------------------------------------------------------------- 24. Derivative Instruments The Marathon Group remains at risk for possible changes in the market value of derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. The Marathon Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit-worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument:
Recognized Fair Carrying Trading Recorded Value Amount Gain or Deferred Aggregate Assets Assets (Loss) for Gain or Contract (In millions) (Liabilities)/(a)(b)/ (Liabilities) the Year (Loss) Values/(c)/ - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2000: Exchange-traded commodity futures: Trading $ - $ - $ (19) $ - $ - Other than trading - - - 7 897 Exchange-traded commodity options: Trading - - - - - Other than trading (6)/(d)/ (6) - (1) 971 OTC commodity swaps/(e)/: Trading - - - - - Other than trading 35 /(f)/ 35 - 25 408 OTC commodity options: Trading - - - - - Other than trading (52)/(g)/ (52) - (40) 94 ------------ ------------ ---------- -------- --------- Total commodities $ (23) $ (23) $ (19) $ (9) $ 2,370 ============ ============ ========== ======== ========= Forward exchange contracts/(h)/: - receivable $ 14 $ 14 $ - $ - $ 14 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 1999: Exchange-traded commodity futures: Trading $ - $ - $ 4 $ - $ 8 Other than trading - - - 28 344 Exchange-traded commodity options: Trading - - 4 - 179 Other than trading (6)/(d)/ (6) - (10) 1,262 OTC commodity swaps: Trading - - - - - Other than trading 3 /(f)/ 3 - 2 156 OTC commodity options: Trading - - - - - Other than trading 4 /(g)/ 4 - 5 238 ------------ ------------ ---------- -------- --------- Total commodities $ 1 $ 1 $ 8 $ 25 $ 2,187 ============ ============ ========== ======== ========= Forward exchange contracts: - receivable $ 52 $ 52 $ - $ - $ 51 - ------------------------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts for OTC positions are based on various indices or dealer quotes. The fair value amounts for currency contracts are based on dealer quotes of forward prices covering the remaining duration of the forward exchange contract. The exchange-traded futures contracts and certain option contracts do not have a corresponding fair value since changes in the market prices are settled on a daily basis. /(b)/ The aggregate average fair value of all trading activities for the years 2000 and 1999 were $(5) million and $3 million, respectively. Detail by class of instrument was not available. /(c)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. The contract or notional amounts do not reflect the extent to which positions may offset one another. /(d)/ Includes fair values as of December 31, 2000 and 1999, for assets of $10 million and $11 million and for liabilities of $(16) million and $(17) million, respectively. /(e)/ The OTC swap arrangements vary in duration with certain contracts extending into 2008. /(f)/ Includes fair values as of December 31, 2000 and 1999, for assets of $84 million and $8 million and for liabilities of $(49) million and $(5) million, respectively. /(g)/ Includes fair values as of December 31, 2000 and 1999, for assets of $1 million and $5 million and for liabilities of $(53) million and $(1) million, respectively. /(h)/ The forward exchange contracts relating to USX's foreign operations have various maturities ending in March 2001. - -------------------------------------------------------------------------------- 25. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. M-19 Environmental matters - The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At December 31, 2000 and 1999, accrued liabilities for remediation totaled $75 million and $69 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $57 million at December 31, 2000, and $52 million at December 31, 1999. For a number of years, the Marathon Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 2000 and 1999, such capital expenditures totaled $73 million and $46 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At December 31, 2000 and 1999, accrued liabilities for platform abandonment and dismantlement totaled $162 million and $152 million, respectively. Guarantees - Guarantees by USX and its consolidated subsidiaries of the liabilities of unconsolidated entities of the Marathon Group totaled $131 million at December 31, 1999. There were no guarantees at December 31, 2000. At December 31, 2000 and 1999, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline investees secured by throughput and deficiency agreements totaled $119 million and $146 million, respectively. Under the agreements, the Marathon Group is required to advance funds if the investees are unable to service debt. Any such advances are prepayments of future transportation charges. Commitments - At December 31, 2000 and 1999, the Marathon Group's contract commitments to acquire property, plant and equipment and long- term investments totaled $457 million and $485 million, respectively. The Marathon Group is a party to a 15-year transportation services agreement with a natural gas transmission company. The contract requires the Marathon Group to pay minimum annual demand charges of approximately $5 million starting in December 2000 and concluding in 2015. The payments are required even if the transportation facility is not utilized. Demand charges paid in 2000 were less than $1 million. - -------------------------------------------------------------------------------- 26. Joint Venture Formation In December 2000, Marathon and Kinder Morgan Energy Partners, L.P. signed a definitive agreement to form a joint venture combining certain of their oil and gas producing activities in the U.S. Permian Basin, including Marathon's interest in the Yates Field. This transaction will allow Marathon to expand its interests in the Permian Basin and will improve access to materials for use in enhanced recovery techniques in the Yates Field. The joint venture named MKM Partners L.P., commenced operations in January 2001 and will be accounted for under the equity method of accounting. As a result of the agreement to form this joint venture, Marathon recognized a pretax charge of $931 million in the fourth quarter 2000, which is included in net gains (losses) on disposal of assets, and reclassified the remaining book value associated with the Yates Field from property, plant and equipment to assets held for sale. Upon completion of this transaction in January 2001, the book value will be transferred from assets held for sale to investments and long-term receivables. - -------------------------------------------------------------------------------- 27. Subsequent Event - Business Combination On February 7, 2001, Marathon acquired 87% of the outstanding common stock of Pennaco Energy Inc., a natural gas producer. Marathon plans to acquire the remaining Pennaco shares through a merger in which each share of Pennaco common stock, not purchased in the offer and not held by stockholders who have properly exercised dissenters rights under Delaware law, will be converted into the right to receive the tender offer price in cash, without interest. The purchase price is expected to approximate $500 million. The acquisition will be accounted for using the purchase method of accounting. M-20 Selected Quarterly Financial Data (Unaudited)
2000 1999 ---------------------------------------------- ----------------------------------------------- (In millions, except per 4th 3rd 2nd 1st 4th 3rd 2nd 1st share data) Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. - --------------------------------------------------------------------------------------------------------------------------------- Revenues and other income: Revenues/(a)/ $ 8,899 $9,169 $ 8,680 $7,739 $7,250 $6,312 $5,324 $ 4,704 Other income (loss) (833) 59 30 116 45 27 34 11 ------- ------- ------- ------- ------- ------- ------- -------- Total 8,066 9,228 8,710 7,855 7,295 6,339 5,358 4,715 Income (loss) from operations (466) 729 860 525 350 561 399 403 Includes: Joint venture formation charges (931) - - - - - - - Inventory market valuation credits - - - - - 136 66 349 Net income (loss) (310) 121 367 254 171 230 134 119 - --------------------------------------------------------------------------------------------------------------------------------- Marathon Stock data: - -------------------- Net income (loss) per share - Basic and diluted $ (1.00) $ .38 $ 1.18 $ .81 $ .55 $ .74 $ .43 $ .38 Dividends paid per share .23 .23 .21 .21 .21 .21 .21 .21 Price range of Marathon Stock/(b)/: - Low 25-1/4 23-1/2 22-13/16 20-11/16 23-5/8 28-1/2 25-13/16 19-5/8 - High 30-3/8 29-5/8 29-3/16 27-1/2 30-5/8 33-7/8 32-3/4 31-3/8 - ----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Certain items have been reclassified between revenues and cost of revenues, primarily to give effect to new accounting standards as disclosed in Note 3 of the Notes to Financial Statements. Amounts reclassified in the first, second and third quarters of 2000 were $(106) million, $(183) million and $(59) million, respectively, and for the first, second, third and fourth quarters of 1999 were $(136) million, $(123) million, $(151) million and $(210) million, respectively. /(b)/ Composite tape. Principal Unconsolidated Investees (Unaudited)
December 31, 2000 Company Country Ownership Activity - ---------------------------------------------------------------------------------------------------------------- CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production Kenai LNG Corporation United States 30% Natural Gas Liquification LOCAP, Inc. United States 50% /(a)/ Pipeline & Storage Facilities LOOP LLC United States 47% /(a)/ Offshore Oil Port Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission Minnesota Pipe Line Company United States 33% /(a)/ Pipeline Facility Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission Odyssey Pipeline LLC United States 29% Pipeline Facility Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation - ----------------------------------------------------------------------------------------------------------------
/(a)/ Represents the ownership of MAP. Supplementary Information on Oil and Gas Producing Activities (Unaudited) See the USX consolidated financial statements for Supplementary Information on Oil and Gas Producing Activities relating to the Marathon Group, pages U-30 through U-34. M-21 Five-Year Operating Summary
2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Net Liquid Hydrocarbon Production (thousands of barrels per day) United States (by region) Alaska - - - - 8 Gulf Coast 62 74 55 29 30 Southern 5 5 6 8 9 Central 4 4 4 5 4 Mid-Continent 34 38 44 46 45 Rocky Mountain 26 24 26 27 26 ----------------------------------------------- Total United States 131 145 135 115 122 ----------------------------------------------- International Canada 19 17 6 - - Egypt 1 5 8 8 8 Gabon 16 9 5 - - Norway - - 1 2 3 United Kingdom 29 31 41 39 48 ----------------------------------------------- Total International 65 62 61 49 59 ----------------------------------------------- Consolidated 196 207 196 164 181 Equity investee/(a)/ 11 1 - - - ----------------------------------------------- Total 207 208 196 164 181 Natural gas liquids included in above 22 19 17 17 17 - ---------------------------------------------------------------------------------------------------------------------------- Net Natural Gas Production (millions of cubic feet per day) United States (by region) Alaska 160 148 144 151 145 Gulf Coast 88 107 84 78 88 Southern 147 178 208 189 161 Central 156 134 117 119 109 Mid-Continent 133 129 125 125 122 Rocky Mountain 47 59 66 60 51 ----------------------------------------------- Total United States 731 755 744 722 676 ----------------------------------------------- International Canada 143 150 65 - - Egypt - 13 16 11 13 Ireland 115 132 168 228 259 Norway - 26 27 54 87 United Kingdom - equity 212 168 165 130 140 - other/(b)/ 11 16 23 32 32 ----------------------------------------------- Total International 481 505 464 455 531 ----------------------------------------------- Consolidated 1,212 1,260 1,208 1,177 1,207 Equity investee/(c)/ 29 36 33 42 45 ----------------------------------------------- Total 1,241 1,296 1,241 1,219 1,252 - ---------------------------------------------------------------------------------------------------------------------------- Average Sales Prices Liquid Hydrocarbons (dollars per barrel)/(d)(e)/ United States $25.11 $15.44 $10.42 $16.88 $18.58 International 26.54 16.90 12.24 18.77 20.34 Natural Gas (dollars per thousand cubic feet)/(d)(e)/ United States $ 3.30 $ 1.90 $ 1.79 $ 2.20 $ 2.09 International 2.76 1.90 1.94 2.00 1.97 - ---------------------------------------------------------------------------------------------------------------------------- Net Proved Reserves at year-end (developed and undeveloped) Liquid Hydrocarbons (millions of barrels) United States 458 520 549 590 570 International 259 277 316 187 203 ----------------------------------------------- Consolidated 717 797 865 777 773 Equity investee/(a)/ - 77 80 82 - ----------------------------------------------- Total 717 874 945 859 773 Developed reserves as % of total net reserves 76% 81% 71% 77% 80% - ---------------------------------------------------------------------------------------------------------------------------- Natural Gas (billions of cubic feet) United States 1,914 2,057 2,163 2,232 2,251 International 1,091 1,607 1,796 1,071 1,199 ----------------------------------------------- Consolidated 3,005 3,664 3,959 3,303 3,450 Equity investee/(c)/ 89 123 110 111 132 ----------------------------------------------- Total 3,094 3,787 4,069 3,414 3,582 Developed reserves as % of total net reserves 78% 75% 79% 83% 83% - ----------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents Marathon's equity interest in Sakhalin Energy Investment Company Ltd. and CLAM Petroleum B.V. /(b)/ Represents gas acquired for injection and subsequent resale. /(c)/ Represents Marathon's equity interest in CLAM Petroleum B.V. /(d)/ Prices exclude gains/losses from hedging activities. /(e)/ Prices exclude equity investees and purchase/resale gas. M-22 Five-Year Operating Summary continued
2000/(a)/ 1999/(a)/ 1998/(a)/ 1997 1996 --------------------------------------------------------------------------------------------------------------------------- U.S. Refinery Operations (thousands of barrels per day) In-use crude oil capacity at year-end 935 935 935 575 570 Refinery runs - crude oil refined 900 888 894 525 511 - other charge and blend stocks 141 139 127 99 96 In-use crude oil capacity utilization rate 96% 95% 96% 92% 90% --------------------------------------------------------------------------------------------------------------------------- Source of Crude Processed (thousands of barrels per day) United States 400 349 317 202 229 Canada 102 92 98 24 18 Middle East and Africa 346 363 394 241 193 Other International 52 84 85 58 73 -------------------------------------------------- Total 900 888 894 525 513 --------------------------------------------------------------------------------------------------------------------------- Refined Product Yields (thousands of barrels per day) Gasoline 552 566 545 353 345 Distillates 278 261 270 154 155 Propane 20 22 21 13 13 Feedstocks and special products 74 66 64 36 35 Heavy fuel oil 43 43 49 35 30 Asphalt 74 69 68 39 36 -------------------------------------------------- Total 1,041 1,027 1,017 630 614 --------------------------------------------------------------------------------------------------------------------------- Refined Products Yields (% breakdown) Gasoline 53% 55% 54% 56% 56% Distillates 27 25 27 24 25 Other products 20 20 19 20 19 -------------------------------------------------- Total 100% 100% 100% 100% 100% --------------------------------------------------------------------------------------------------------------------------- U.S. Refined Product Sales Volumes (thousands of barrels per day) Gasoline 746 714 671 452 468 Distillates 352 331 318 198 192 Propane 21 23 21 12 12 Feedstocks and special products 69 66 67 40 37 Heavy fuel oil 43 43 49 34 31 Asphalt 75 74 72 39 35 -------------------------------------------------- Total 1,306 1,251 1,198 775 775 Matching buy/sell volumes included in above 52 45 39 51 71 --------------------------------------------------------------------------------------------------------------------------- Refined Products Sales Volumes by Class of Trade (as a % of total sales volumes) Wholesale - independent private-brand marketers and consumers 65% 66% 65% 61% 62% Marathon and Ashland brand jobbers and dealers 12 11 11 13 13 Speedway SuperAmerica retail outlets 23 23 24 26 25 -------------------------------------------------- Total 100% 100% 100% 100% 100% --------------------------------------------------------------------------------------------------------------------------- Refined Products (dollars per barrel) Average sales price $ 38.24 $ 24.59 $ 20.65 $ 26.38 $ 27.43 Average cost of crude oil throughput 29.07 18.66 13.02 19.00 21.94 --------------------------------------------------------------------------------------------------------------------------- Petroleum Inventories at year-end (thousands of barrels) Crude oil, raw materials and natural gas liquids 33,720 34,255 35,630 19,351 20,047 Refined products 34,386 32,853 32,334 20,598 21,283 --------------------------------------------------------------------------------------------------------------------------- U.S. Refined Product Marketing Outlets at year-end MAP operated terminals 91 93 88 51 51 Retail - Marathon and Ashland brand outlets 3,728 3,482 3,117 2,465 2,392 - Speedway SuperAmerica outlets 2,242 2,433 2,257 1,544 1,592 --------------------------------------------------------------------------------------------------------------------------- Pipelines (miles of common carrier pipelines)/(b)/ Crude Oil - gathering lines 419 557 2,827 1,003 1,052 - trunklines 4,623 4,720 4,859 2,665 2,665 Products - trunklines 2,834 2,856 2,861 2,310 2,310 -------------------------------------------------- Total 7,876 8,133 10,547 5,978 6,027 --------------------------------------------------------------------------------------------------------------------------- Pipeline Barrels Handled (millions)/(c)/ Crude Oil - gathering lines 22.7 30.4 47.8 43.9 43.2 - trunklines 563.6 545.7 571.9 369.6 378.7 Products - trunklines 329.7 331.9 329.7 262.4 274.8 -------------------------------------------------- Total 916.0 908.0 949.4 675.9 696.7 --------------------------------------------------------------------------------------------------------------------------- River Operations Barges - owned/leased 158 169 169 - - Boats - owned/leased 6 8 8 - - ---------------------------------------------------------------------------------------------------------------------------
/(a)/ 1998-2000 statistics include 100% of MAP and should be considered when compared to prior periods. /(b)/ Pipelines for downstream operations also include non-common carrier, leased and equity investees. /(c)/ Pipeline barrels handled on owned common carrier pipelines, excluding equity investees. M-23 Five-Year Financial Summary
(Dollars in millions, except as noted) 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------------------------------- Revenues and Other Income Revenues by product: Refined products $22,514 $15,181 $12,852 $10,300 $10,437 Merchandise 2,441 2,194 1,941 1,099 1,051 Liquid hydrocarbons 6,856 4,587 5,023 2,755 3,166 Natural gas 2,518 1,429 1,187 1,368 1,222 Transportation and other products 158 199 271 167 180 Gain on ownership change in MAP 12 17 245 - - Other/(a)/ (640) 100 104 86 97 ----------------------------------------------- Total revenues and other income/(b)/ $33,859 $23,707 $21,623 $15,775 $16,153 --------------------------------------------------------------------------------------------------------------------- Income From Operations Exploration and production (E&P) Domestic $ 1,115 $ 494 $ 190 $ 500 $ 547 International 420 124 88 273 353 ----------------------------------------------- Income for E&P reportable segment 1,535 618 278 773 900 Refining, marketing and transportation 1,273 611 896 563 249 Other energy related businesses 38 61 33 48 57 ----------------------------------------------- Income for reportable segments 2,846 1,290 1,207 1,384 1,206 Items not allocated to reportable segments: Administrative expenses (136) (108) (106) (168) (133) Joint venture formation charges (931) - - - - Inventory market valuation adjustments - 551 (267) (284) 209 Gain on ownership change & transition charges - MAP 12 17 223 - - Int'l. & domestic oil & gas impairments & gas contract settlement (197) (16) (119) - - Other items 54 (21) - - 14 ----------------------------------------------- Income from operations 1,648 1,713 938 932 1,296 Minority interest in income of MAP 498 447 249 - - Net interest and other financial costs 236 288 237 260 305 Provision for income taxes 482 324 142 216 320 ----------------------------------------------- Income Before Extraordinary Loss $ 432 $ 654 $ 310 $ 456 $ 671 Per common share - basic (in dollars) 1.39 2.11 1.06 1.59 2.33 - diluted (in dollars) 1.39 2.11 1.05 1.58 2.31 --------------------------------------------------------------------------------------------------------------------- Net Income $ 432 $ 654 $ 310 $ 456 $ 664 Per common share - basic (in dollars) 1.39 2.11 1.06 1.59 2.31 - diluted (in dollars) 1.39 2.11 1.05 1.58 2.29 --------------------------------------------------------------------------------------------------------------------- Balance Sheet Position at year-end Current assets $ 4,985 $ 4,081 $ 2,976 $ 2,018 $ 2,046 Net property, plant and equipment 9,375 10,293 10,429 7,566 7,298 Total assets 15,232 15,674 14,544 10,565 10,151 Short-term debt 228 48 191 525 323 Other current liabilities 3,784 3,096 2,419 1,737 1,819 Long-term debt 1,937 3,320 3,456 2,476 2,642 Minority interest in MAP 1,840 1,753 1,590 - - Common stockholders' equity 4,845 4,800 4,312 3,618 3,340 Per share (in dollars) 15.70 15.38 13.95 12.53 11.62 --------------------------------------------------------------------------------------------------------------------- Cash Flow Data Net cash from operating activities $ 3,158 $ 2,016 $ 1,642 $ 1,246 $ 1,503 Capital expenditures 1,425 1,378 1,270 1,038 751 Disposal of assets 539 356 65 60 282 Dividends paid 274 257 246 219 201 --------------------------------------------------------------------------------------------------------------------- Employee Data/(c)/ Marathon Group: Total employment costs $ 1,474 $ 1,421 $ 1,054 $ 854 $ 790 Average number of employees 31,515 33,086 24,344 20,695 20,461 Number of pensioners at year-end 3,255 3,402 3,378 3,099 3,203 Speedway SuperAmerica LLC (SSA): (Included in Marathon Group totals) Total employment costs $ 489 $ 452 $ 283 $ 263 $ 241 Average number of employees 21,649 22,801 12,831 12,816 12,474 Number of pensioners at year-end 211 209 212 215 207 --------------------------------------------------------------------------------------------------------------------- Stockholder Data at year-end Number of common shares outstanding (in millions) 308.3 311.8 308.5 288.8 287.5 Registered shareholders (in thousands) 65.0 71.4 77.3 84.0 92.1 Market price of common stock $27.750 $24.688 $30.125 $33.750 $23.875 ---------------------------------------------------------------------------------------------------------------------
/(a)/ Includes dividend and investee income, net gains (losses) on disposal of assets and other income. /(b)/ 1996-1999 reclassified to conform to 2000 classifications. /(c)/ Employee Data for 1998 includes Ashland employees from the date of their payroll transfer to MAP, which occurred at various times throughout 1998. These employees were contracted to MAP in 1998, prior to their payroll transfer. M-24 Management's Discussion and Analysis The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy related businesses. The Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Notes to Financial Statements. The Marathon Group's 2000 financial performance was primarily affected by the strong recovery in worldwide liquid hydrocarbon and natural gas prices and stronger refining margins. During 2000, Marathon focused on the acquisition of assets with a strong strategic fit, the disposal of non-core properties, and workforce reductions through a voluntary early retirement program. Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of the Marathon Group. These statements typically contain words such as "anticipates", "believes", "estimates", "expects", "targets" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the Marathon Group, see Supplementary Data - Disclosures About Forward-Looking Statements in USX's 2000 Form 10- K. Management's Discussion and Analysis of Income and Operations Revenues and Other Income for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Exploration & production ("E&P") $ 4,694 $ 3,105 $ 2,090 Refining, marketing & transportation ("RM&T")/(a)/ 28,849 20,076 19,080 Other energy related businesses/(b)/ 1,684 834 355 ------- ------- ------- Revenues and other income of reportable segments 35,227 24,015 21,525 Revenues and other income not allocated to segments: Joint venture formation charges/(c)/ (931) - - Gain on ownership change in MAP 12 17 245 Other/(d)/ 124 (36) 24 Elimination of intersegment revenues (573) (289) (171) ------- ------- ------- Total Group revenues and other income $33,859 $23,707 $21,623 ======= ======= ======= Items included in both revenues and costs and expenses, resulting in no effect on income: Consumer excise taxes on petroleum products and merchandise $ 4,344 $ 3,973 $ 3,824 ---------------------------------------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP. /(b)/ Includes domestic natural gas and crude oil marketing and transportation, and power generation. /(c)/ Represents a pretax charge related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. /(d)/ Represents net gains/(losses) on certain asset sales. E&P segment revenues increased by $1,589 million in 2000 from 1999 following an increase of $1,015 million in 1999 from 1998. The increase in 2000 was primarily due to higher worldwide liquid hydrocarbon and natural gas prices, partially offset by lower domestic liquid hydrocarbon and worldwide natural gas production. The increase in 1999 was primarily due to higher worldwide liquid hydrocarbon prices, increased domestic liquid hydrocarbon production and higher E&P crude oil buy/sell volumes. RM&T segment revenues increased by $8,773 million in 2000 from 1999 following an increase of $996 million in 1999 from 1998. The increase in 2000 primarily reflected higher refined product prices and increased refined product sales volumes. The increase in 1999 was mainly due to higher refined M-25 Management's Discussion and Analysis continued product prices, increased volumes of refined product sales and higher merchandise sales, partially offset by reduced crude oil sales revenues following the sale of Scurlock Permian LLC. Other energy related businesses segment revenues increased by $850 million in 2000 from 1999 following an increase of $479 million in 1999 from 1998. The increase in 2000 reflected higher natural gas and crude oil resale activity accompanied by higher crude oil and natural gas prices. The increase in 1999 was primarily due to increased crude oil and natural gas purchase and resale activity. For additional discussion of revenues, see Note 10 to the Marathon Group Financial Statements. Income from operations for each of the last three years is summarized in the following table:
(Dollars in millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------ E&P Domestic $1,115 $ 494 $ 190 International 420 124 88 ------ ------ ------ Income of E&P reportable segment 1,535 618 278 RM&T/(a)/ 1,273 611 896 Other energy related businesses 38 61 33 ------ ------ ------ Income for reportable segments 2,846 1,290 1,207 Items not allocated to reportable segments: Joint venture formation charges/(b)/ (931) - - Administrative expenses/(c)/ (136) (108) (106) IMV reserve adjustment/(d)/ - 551 (267) Gain on ownership change & transition charges - MAP/(e)/ 12 17 223 Impairment of oil and gas properties, assets held for sale, and gas contract settlement/(f)/ (197) (16) (119) Gain/(loss) on disposal of assets/(g)/ 124 (36) - Reorganization charges including pension settlement (loss)/gain & benefit accruals/(h)/ (70) 15 - ------ ------ ------ Total income from operations $1,648 $1,713 $ 938 ------------------------------------------------------------------------------------------------
/(a)/ Amounts include 100 percent of MAP. /(b)/ Represents a pretax charge related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. /(c)/ Includes the portion of the Marathon Group's administrative costs not charged to the operating segments and the portion of USX corporate general and administrative costs allocated to the Marathon Group. /(d)/ The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. For additional discussion of the IMV, see Note 20 to the Marathon Group Financial Statements. /(e)/ The gain on ownership change and one-time transition charges in 1998 relate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 5 to the Marathon Group Financial Statements. /(f)/ Represents in 2000, an impairment of certain oil and gas properties, primarily in Canada, and assets held for sale. Represents in 1999, an impairment of certain domestic properties. Represents in 1998, a write-off of certain non-revenue producing international investments and several exploratory wells which had encountered hydrocarbons but had been suspended pending further evaluation. It also includes in 1998 a gain from the resolution of a contract dispute with a purchaser of Marathon's natural gas production from certain domestic properties. /(g)/ The net gain in 2000 represents a gain on the disposition of Angus/Stellaria, a gain on the Sakhalin exchange, a gain on the sale of Speedway SuperAmerica LLC ("SSA") non-core stores, and a loss on the sale of the Howard Glasscock field. The net loss in 1999 represents a loss on the sale of Scurlock Permian LLC, certain domestic production properties, Carnegie Natural Gas Company and affiliated subsidiaries and a gain on certain Egyptian properties. /(h)/ Amounts in 2000 and 1999 represent pension settlement gains/(losses) and various benefit accruals resulting from retirement plan settlements, the voluntary early retirement program, and reorganization charges. M-26 Management's Discussion and Analysis continued Income for reportable segments increased by $1,556 million in 2000 from 1999, mainly due to higher worldwide liquid hydrocarbon and natural gas prices, and higher refined product margins, partially offset by decreased natural gas volumes. Income for reportable segments increased by $83 million in 1999 from 1998, mainly due to higher worldwide liquid hydrocarbon prices, partially offset by lower refined product margins. Income from operations includes 100 percent of MAP beginning in 1998, and results from Marathon Canada Limited (formerly known as Tarragon) commencing August 12, 1998. Average Volumes and Selling Prices
2000 1999 1998 ----------------------------------------------------------------------------------------------------------- (thousands of barrels per day) Net liquids production/(a)/ - U.S. 131 145 135 - International/(b)/ 65 62 61 ------ ------ ------ - Total consolidated 196 207 196 - Equity investees/(c)/ 11 1 - ------ ------ ------ - Worldwide 207 208 196 (millions of cubic feet per day) Net natural gas production - U.S. 731 755 744 - International - equity 470 489 441 - International - other/(d)/ 11 16 23 ------ ------ ------ - Total consolidated 1,212 1,260 1,208 - Equity investee/(e)/ 29 36 33 ------ ------ ------ - Worldwide 1,241 1,296 1,241 ----------------------------------------------------------------------------------------------------------- (dollars per barrel) Liquid hydrocarbons/(a)(f)/ - U.S. $25.11 $15.44 $10.42 - International 26.54 16.90 12.24 (dollars per mcf) Natural gas/(f)/ - U.S. $ 3.30 $ 1.90 $ 1.79 - International - equity 2.76 1.90 1.94 (thousands of barrels per day) Refined products sold/(g)/ 1,306 1,251 1,198 Matching buy/sell volumes included in above 52 45 39 -----------------------------------------------------------------------------------------------------------
/(a)/ Includes crude oil, condensate and natural gas liquids. /(b)/ Represents equity tanker liftings, truck deliveries and direct deliveries. /(c)/ Represents Marathon's equity interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy") and CLAM Petroleum B.V. ("CLAM") for 2000 and 1999. /(d)/ Represents gas acquired for injection and subsequent resale. /(e)/ Represents Marathon's equity interest in CLAM. /(f)/ Prices exclude gains/losses from hedging activities, equity investees and purchase/resale gas. /(g)/ Refined products sold and matching buy/sell volumes include 100 percent of MAP. Domestic E&P income increased by $621 million in 2000 from 1999 following an increase of $304 million in 1999 from 1998. The increase in 2000 was primarily due to higher liquid hydrocarbon and natural gas prices, partially offset by lower liquid hydrocarbon and natural gas volumes due to natural field declines and asset sales, and derivative losses from other than trading activities. The increase in 1999 was primarily due to higher liquid hydrocarbon and natural gas prices, increased liquid hydrocarbon volumes resulting from new production in the Gulf of Mexico and lower exploration expense. International E&P income increased by $296 million in 2000 from 1999 following an increase of $36 million in 1999 from 1998. The increase in 2000 was mainly due to higher liquid hydrocarbon and natural gas prices, higher liquid hydrocarbon liftings, primarily in Russia and Gabon, and lower dry well expense, partially offset by lower natural gas volumes. The increase in 1999 was primarily due to higher liquid hydrocarbon prices, partially offset by lower liquid hydrocarbon and natural gas production in Europe and higher exploration expense. M-27 Management's Discussion and Analysis continued RM&T segment income increased by $662 million in 2000 from 1999 following a decrease of $285 million in 1999 from 1998. The increase in 2000 was primarily due to higher refined product margins, partially offset by higher operating expenses for SSA, higher administrative expenses including increased variable pay plan costs, and higher transportation costs. The decrease in 1999 was primarily due to lower refined product margins, partially offset by recognized mark-to-market derivative gains, increased refined product sales volumes, higher merchandise sales at SSA and the realization of additional operating efficiencies as a result of forming MAP. Other energy related businesses segment income decreased by $23 million in 2000 from 1999 following an increase of $28 million in 1999 from 1998. The decrease in 2000 was primarily a result of derivative losses from other than trading activities and lower equity earnings as a result of decreased pipeline throughput. The increase in 1999 was primarily due to higher equity earnings as a result of increased pipeline throughput and a reversal of abandonment accruals of $10 million in 1999. Items not allocated to reportable segments: IMV reserve adjustment - When U. S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, the Marathon Group's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, the Marathon Group has established an IMV reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the Marathon Group's combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded was also lowered. These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, many of which do not have such adjustments. Therefore, the Marathon Group reports separately the effects of the IMV reserve adjustments on financial results. In management's opinion, the effects of such adjustments should be considered separately when evaluating operating performance. In 1999, the IMV reserve adjustment resulted in a credit to income from operations of $551 million compared to a charge of $267 million in 1998, or a change of $818 million. The favorable 1999 IMV reserve adjustment, which is almost entirely recorded by MAP, was primarily due to the significant increase in refined product prices experienced during 1999. For additional discussion of the IMV reserve, see Note 20 to the Marathon Group Financial Statements. Joint venture formation charges represent a pretax charge of $931 million in 2000 related to the joint venture formation between Marathon and Kinder Morgan Energy Partners, L.P. The formation of the joint venture included contribution of interests in the Yates and SACROC assets. Marathon holds an 85 percent economic interest in the combined entity which commenced operations in January 2001. Impairment of oil and gas properties, assets held for sale, and gas contract settlement includes in 2000, the impairments of certain oil and gas properties primarily in Canada and assets held for sale totaling $197 million. In 1999, the $16 million charge relates to the impairment of certain domestic properties. In 1998, the $119 million charge relates to a write-off of certain non-revenue producing international investments and several exploratory wells, partially offset by a gain from the resolution of a contract dispute with a purchaser of Marathon's natural gas production from certain domestic properties. Gain/(loss) on disposal of assets represents in 2000 a net gain on the sale of Marathon's interest in the Angus/Stellaria development in the Gulf of Mexico, a gain on the Sakhalin exchange, a loss on the sale of the Howard Glasscock Field, and a gain on the sale of non-core SSA stores. In 1999, M-28 Management's Discussion and Analysis continued the net loss represents losses on the sale of Scurlock Permian LLC, certain domestic production properties, Carnegie Natural Gas Company and affiliated subsidiaries and a gain on certain Egyptian properties. Reorganization charges including pension settlement (loss)/gain and benefit accruals represent charges related to a reorganization program initiated by Marathon for its upstream business during 2000. Net interest and other financial costs decreased by $52 million in 2000 from 1999, following an increase of $51 million in 1999 from 1998. The decrease in 2000 was primarily due to lower average debt levels and increased interest income. The increase in 1999 was primarily due to lower interest income and lower capitalized interest on upstream projects. For additional details, see Note 6 to the Marathon Group Financial Statements. The minority interest in income of MAP, which represents Ashland's 38 percent ownership interest, increased by $51 million in 2000 from 1999, primarily due to much higher RM&T segment income and the absence of the favorable 1999 IMV reserve adjustment, as discussed above. The provision for income taxes of $482 million in 2000 included a $235 million one-time, noncash deferred tax charge as a result of the change in the amount and timing of future foreign source income due to the exchange of Marathon's interest in Sakhalin Energy Investment Company Ltd. for other oil and gas producing interests. The 1999 income tax provision included a $23 million favorable adjustment to deferred federal income taxes related to the outcome of a United States Tax Court case. For additional discussion of income taxes, see Note 18 to the Marathon Group Financial Statements. Net income decreased by $222 million in 2000 from 1999, following an increase of $344 million in 1999 from 1998, primarily reflecting the factors discussed above. Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity Current assets increased $904 million from year-end 1999, primarily due to an increase in cash, receivables, and assets held for sale. The increase in assets held for sale was mainly due to the reclassification of the Yates field from property, plant, and equipment. The receivables increase was mainly due to higher year-end commodity prices. Current liabilities increased $868 million from year-end 1999, primarily due to an increase in accounts payable due to higher year-end commodity prices and the recording of an intergroup income tax payable. Investments and long-term receivables decreased $400 million from year-end 1999, primarily due to the exchange of Marathon's interest in Sakhalin Energy Investment Company Ltd. Net property, plant and equipment decreased $918 million from year-end 1999, primarily due to the impairment and reclassification of assets held for sale, the impairment of reserves, and the sale of certain domestic production properties. This was partially offset by increases from properties received from the Sakhalin exchange. Net property, plant and equipment for each of the last three years is summarized in the following table: (Dollars in millions) 2000 1999 1998 -------------------------------------------------------------------- E&P Domestic $2,229 $ 3,435 $ 3,688 International 2,924 2,987 3,027 ------ ------- ------- Total E&P 5,153 6,422 6,715 RM&T/(a)/ 4,035 3,712 3,517 Other/(b)/ 187 159 197 ------ ------- ------- Total $9,375 $10,293 $10,429 -------------------------------------------------------------------- /(a)/ Amounts include 100 percent of MAP. /(b)/ Includes other energy related businesses and other miscellaneous corporate net property, plant and equipment. Total long-term debt and notes payable at December 31, 2000 were $2,165 million, a decrease of $1,203 million from year-end 1999. This decrease in debt is mainly due to higher cash flow provided from operating activities. Most of the debt is a direct obligation of, or is guaranteed by, USX. M-29 Management's Discussion and Analysis continued Stockholders' equity increased $45 million from year-end 1999, mainly reflecting net income of $432 million offset by dividends declared of $274 million and Marathon Stock repurchases of $105 million. In July 2000, the USX Board of Directors authorized spending up to $450 million to repurchase shares of Marathon Stock. This repurchase program will continue from time to time as the Corporation's financial condition and market conditions warrant. Net cash provided from operating activities totaled $3,158 million in 2000, compared with $2,016 million in 1999 and $1,642 million in 1998. Net cash from operating activities increased $1,142 million in 2000 from 1999 and increased $374 million in 1999 from 1998. The increase in 2000 mainly reflects the favorable effects of improved net income (excluding noncash items) and net favorable working capital changes, including an increased allocation for income tax payments and an income tax settlement with the Steel Group in accordance with the group tax allocation policy. The increase in 1999 mainly reflected favorable working capital changes. Capital expenditures for each of the last three years are summarized in the following table: Dollars in millions) 2000 1999 1998 - ---------------------------------------------------------------------------- E&P Domestic $ 516 $ 356 $ 652 International/(a)/ 226 388 187 ------ ------ ------ Total E&P 742 744 839 RM&T/(b)/ 656 612 410 Other/(c)/ 27 22 21 ------ ------ ------ Total $1,425 $1,378 $1,270 - ----------------------------------------------------------------------------- /(a)/ Amount for 1998 excludes the Tarragon acquisition. /(b)/ Amounts include 100 percent of MAP. /(c)/ Includes other energy related businesses and other miscellaneous corporate capital expenditures. During 2000, domestic E&P capital spending mainly included the completion of the Viosca Knoll Block 786 (Petronius) development in the Gulf of Mexico, various producing property acquisitions, and natural gas developments in East Texas and other gas basins throughout the western United States. International E&P projects included the completion of the Tchatamba West development, located offshore Gabon, and continued oil and natural gas developments in Canada. RM&T spending by MAP primarily consisted of refinery modifications, including the initiation of the delayed coker unit project at the Garyville refinery, and upgrades and expansions of retail marketing outlets. Contract commitments for property, plant and equipment acquisitions and long-term investments at year-end 2000 were $457 million, compared with $485 million at year-end 1999. Capital expenditures in 2001 are expected to be approximately $1.5 billion, which is consistent with 2000 levels. Domestic E&P projects planned for 2001 will focus on gas projects and include various producing property acquisitions. Planned capital expenditures in 2001 do not include the capital requirements related to the acquisition of Pennaco Energy, Inc. ("Pennaco"). International E&P projects include the continued development of the Foinaven area in the U.K. Atlantic Margin and continued oil and natural gas developments in Canada. RM&T spending by MAP will primarily consist of refinery improvements, including the completion of the delayed coker unit project at the Garyville refinery, upgrades and expansions of retail marketing outlets, and expansion and enhancement of logistics systems. Other Marathon spending will include funds for development and installation of SAP software, which is an enterprise resource planning system that will allow the integration of processes among business units and with outside enterprises. Investments in investees were $65 million in 2000, compared with $59 million in 1999. The amounts in both periods mainly reflected development spending for the Sakhalin II project in Russia. Loans and advances to investees were $6 million in 2000, compared with $70 million in 1999. Cash outflows in both periods primarily reflected funding provided to equity investees for capital projects. In 2000, the cash outflow was primarily related to the Centennial Pipeline project, and in 1999, the outflow was primarily related to the Sakhalin II project. M-30 Management's Discussion and Analysis continued Repayments of loans and advances to investees were $10 million in 2000, compared with $1 million in 1999. The 2000 amount primarily was a result of repayments by a foreign power subsidiary of advances made by Marathon. The above statements with respect to future capital expenditures and investments are forward-looking statements, reflecting management's best estimates, based on information currently available. To the extent this information proves to be inaccurate, the timing and levels of future spending could differ materially from those included in the forward-looking statements. Factors that could cause future capital expenditures to differ materially from present expectations include price volatility, worldwide supply and demand for petroleum products, general worldwide economic conditions, levels of cash flow from operations, available business opportunities, unforeseen hazards such as weather conditions, and/or delays in obtaining government or partner approvals. The acquisition of Tarragon Oil and Gas Limited in 1998 included cash payments of $686 million. For further discussion of Tarragon, see Note 5 to the Marathon Group Financial Statements. Cash from disposal of assets was $539 million in 2000, compared with $356 million in 1999 and $65 million in 1998. Proceeds in 2000 were mainly from the Sakhalin exchange, the disposition of Marathon's interest in the Angus/Stellaria development in the Gulf of Mexico, the sale of non-core SSA stores and other domestic production properties. Proceeds in 1999 were mainly from the sale of Scurlock Permian LLC, over 150 non-strategic domestic and international production properties and Carnegie Natural Gas Company and affiliated subsidiaries. Proceeds in 1998 were mainly from the sales of domestic production properties and equipment. The net change in restricted cash was a net withdrawal of $3 million in 2000 compared to a net withdrawal of $1 million in 1999. Restricted cash in both periods primarily reflected the net effects of cash deposited and withdrawn from domestic production property dispositions and acquisitions. Net cash changes related to financial obligations, which consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt specifically attributed to the Marathon Group, decreased by $1,206 million in 2000. Financial obligations decreased primarily because cash from operating activities and asset sales exceeded capital expenditures, distributions to the minority shareholder of MAP and dividend payments. For further details, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Marathon Stock repurchased was $105 million in 2000. In July 2000, the USX Board of Directors authorized spending up to $450 million to repurchase shares of Marathon Stock. This repurchase program will continue from time to time as the Corporation's financial condition and market conditions warrant. Distributions to minority shareholder of MAP were $420 million in 2000, compared with $400 million in 1999. The 1999 amount included a distribution of $103 million in the first quarter 1999, which related to fourth quarter 1998 MAP activity. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for a discussion of derivative instruments and associated market risk. Liquidity For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and M-31 Management's Discussion and Analysis continued regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business, power business or the marine transportation of crude oil and refined products. Marathon Group environmental expenditures for each of the last three years were/(a)/: (Dollars in millions) 2000 1999 1998 --------------------------------------------------------------------------- Capital $ 73 $ 46 $ 83 /(b)/ Compliance Operating & maintenance 139 117 126 Remediation/(c)/ 30 25 10 ----- ----- ----- Total $ 242 $ 188 $ 219 --------------------------------------------------------------------------- /(a)/ Amounts are determined based on American Petroleum Institute survey guidelines and include 100 percent of MAP. /(b)/ Reclassified to conform to 1999 classifications. /(c)/ These amounts include spending charged against remediation reserves, net of recoveries, where permissible, but do not include noncash provisions recorded for environmental remediation. The Marathon Group's environmental capital expenditures accounted for five percent of total capital expenditures in 2000, three percent in 1999, and seven percent in 1998 (excluding the acquisition of Tarragon). During 1998 through 2000, compliance expenditures represented one percent of the Marathon Group's total operating costs. Remediation spending during this period was primarily related to retail marketing outlets which incur ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping. USX has been notified that it is a potentially responsible party ("PRP") at 13 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 2000. In addition, there are 6 sites related to the Marathon Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 115 additional sites, excluding retail marketing outlets, related to the Marathon Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 15 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 25 to the Marathon Group Financial Statements. New or expanded environmental requirements, which could increase the Marathon Group's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, the Marathon Group does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2001. The Marathon Group's environmental capital expenditures are expected to be approximately $100 million in 2001. Predictions beyond 2001 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new M-32 Management's Discussion and Analysis continued technologies, among other matters. Based upon currently identified projects, the Marathon Group anticipates that environmental capital expenditures will be approximately $92 million in 2002; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. New Tier II Fuels regulations were proposed in late 1999. The gasoline rules, which were finalized by the U.S. Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel rule which was finalized in January 2001, require substantially reduced sulfur levels. The combined capital cost to achieve compliance with the gasoline and diesel regulations could amount to approximately $700 million between 2003 and 2005. This is a forward-looking statement and can only be a broad-based estimate due to the ongoing evolution of regulatory requirements. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating considerations, and unforeseen hazards such as weather conditions. In October 1998, the National Enforcement Investigations Center and Region V of the EPA conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. MAP has been advised, in ongoing discussions with the EPA, as to certain compliance issues regarding MAP's Detroit and Robinson refineries. Thus far, MAP has been served with two Notices of Violation ("NOV") and three Findings of Violation in connection with the multi-media inspections at its Detroit refinery. The Detroit notices allege violations of the Michigan State Air Pollution Regulations, the EPA New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants for Benzene. On March 6, 2000, MAP received its first NOV arising out of the multi-media inspection of the Robinson refinery conducted in November 1998. The NOV is for alleged Resource Conservation and Recovery Act (hazardous waste) violations. MAP has responded to information requests from the EPA regarding New Source Review ("NSR") compliance at its Garyville and Texas City refineries. In addition, the scope of the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries included NSR compliance. NSR requires new major stationary sources and major modifications at existing major stationary sources to obtain permits, perform air quality analysis and install stringent air pollution control equipment at affected facilities. The current EPA initiative appears to target many items that the industry has historically considered routine repair, replacement and maintenance or other activity exempted from the NSR requirements. MAP is engaged in ongoing discussions with the EPA on these issues concerning all of MAP's refineries. While MAP has not been notified of any formal findings or violations resulting from either the information requests or inspections regarding NSR compliance, MAP has been informed during discussions with the EPA of potential non-compliance concerns of the EPA based on these inspections and other information identified by the EPA. Recently, discussions with the EPA have included commitment to some specific control technologies and implementation schedules, but not penalties. In addition, MAP anticipates that some or all of the non-NSR related issues arising from the multi-media inspections may also be resolved as part of the current discussions with the EPA. A negotiated resolution with the EPA could result in increased environmental capital expenditures in future years, in addition to as yet, undetermined penalties. During 1999 an EPA advisory panel on oxygenate use in gasoline issued recommendations to the EPA, calling for the improved protection of drinking water from methyl tertiary butyl ether ("MTBE") impacts, a substantial reduction in the use of MTBE, and action by Congress to remove the oxygenate requirements for reformulated gasoline under the Clean Air Act. The panel reviewed public health and environmental issues that have been raised by the use of MTBE in gasoline, and specifically by the discovery of MTBE in water supplies. State and federal environmental regulatory agencies could implement the majority of the recommendations, while some would require Congressional legislative action. California has acted to ban MTBE use by December 31, 2002 and has requested a waiver from M-33 Management's Discussion and Analysis continued the EPA of California state oxygenate requirements. In addition, a number of states have passed laws which limit or require the phase out of MTBE in gasoline, including states in MAP's marketing area such as Michigan and Minnesota. Many other states are considering bills which require similar limitations or the phase out of MTBE. MAP has a non-material investment in MTBE units at its Robinson, Catlettsburg and Detroit refineries. Approximately seven percent of MAP's refinery gasoline production includes MTBE. Potential phase-outs or restrictions on the use of MTBE would not be expected to have a material impact on MAP and its operations, although it is not possible to reach any conclusions until further federal or state actions, if any, are taken. USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 25 to the Marathon Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Outlook The outlook regarding the results of operations for the Marathon Group's upstream segment is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on the Marathon Group's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. At year-end 2000, Marathon revised its estimate of proved developed and undeveloped oil and gas reserves downward by 167 million barrels of oil equivalent ("BOE"). These revisions were principally in Canada, the North Sea and United States and are the result of production performance and disappointing drilling results. BOE is a combined measure of worldwide liquid hydrocarbon and natural gas production, measured in barrels per day and cubic feet per day, respectively. For purposes of determining BOE, natural gas volumes are converted to approximate liquid hydrocarbon barrels by dividing the natural gas volumes expressed in thousands of cubic feet ("mcf") by 6. The liquid hydrocarbon volume is added to the barrel equivalent of gas volume to obtain BOE. Marathon intends to disclose total production estimates on a BOE basis from this point forward. In 2001, worldwide production is expected to average 430,000 BOE per day, split evenly between liquid hydrocarbons and natural gas, including production from Marathon's share of investees and future acquisitions. On December 28, 2000, Marathon signed a definitive agreement to form a joint venture with Kinder Morgan Energy Partners, L.P., which commenced operations in January 2001. The formation of the joint venture included contribution of interests in the Yates and SACROC assets. This transaction will allow Marathon to expand its interests in the Permian Basin and will improve access to materials for use in enhanced recovery techniques in the Yates Field. Marathon holds an 85 percent economic interest in the combined entity, which will be accounted for under the equity method of accounting. On December 22, 2000, Marathon announced its plans to acquire Pennaco. This acquisition will enhance Marathon's presence in a core area, the North American gas market, and will provide an opportunity for possible new reserves to be developed. The tender offer expired on February 5, 2001 at 12:00 midnight, Eastern time. Marathon acquired approximately 17.6 million shares of Pennaco common stock which were validly tendered and not withdrawn in the offer, representing approximately 87 percent of the outstanding Pennaco shares. M-34 Management's Discussion and Analysis continued Marathon plans to acquire the remaining Pennaco shares through a merger in which each share of Pennaco common stock, not purchased in the offer and not held by stockholders who have properly exercised dissenters rights under Delaware law, will be converted into the right to receive the tender offer price in cash, without interest. Marathon plans to drill six deepwater Gulf of Mexico exploratory wells in 2001. To support this increased drilling activity, Marathon has contracted two new deepwater rigs, capable of drilling in water depths beyond 6,500 feet. Other major upstream projects, which are currently underway or under evaluation and are expected to improve future income streams, include the Mississippi Canyon Block 348 in the Gulf of Mexico and various North American natural gas fields. Also, Marathon expects continued development in the Foinaven area in the U.K. Atlantic Margin. Marathon acquired an interest in this location through the exchange of its Sakhalin interests with Shell Oil in the fourth quarter of 2000 Marathon E&P is currently on target for achieving $150 million in annual repeatable pre-tax operating efficiencies by year-end 2001. Marathon initiated a reorganization program for its upstream business units which will contribute to an overall workforce reduction of 24% compared to 1999 levels. In addition, regional production offices in Lafayette, Louisiana and Tyler, Texas have been closed along with the Petroleum Technology Center in Littleton, Colorado. The above discussion includes forward-looking statements with respect to 2001 worldwide liquid hydrocarbon production and natural gas volumes, the acquisition of Pennaco, commencement of upstream projects, and the Gulf of Mexico drilling program. Some factors that could potentially affect worldwide liquid hydrocarbon production/gas volumes, upstream projects, and the drilling program include: pricing, worldwide supply and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, reserve estimates, reserve replacement rates, production decline rates of mature fields, timing of commencing production from new wells, timing and results of future development drilling, drilling rig availability, the completion of the merger with Pennaco, future acquisitions of producing properties, and other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the timing and economics of projects. A factor that could affect the Pennaco acquisition is successful completion of the merger. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. Downstream income of the Marathon Group is largely dependent upon refined product margins, which reflect the difference between the selling prices of refined products and the cost of raw materials refined and manufacturing costs. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, crude oil costs, manufacturing costs, logistical limitations and the available supply of crude oil and refined products. In 2000, MAP, CMS Energy Corporation, and TEPPCO Partners, L.P. formed a limited liability company with equal ownership to operate an interstate refined petroleum products pipeline extending from the U.S. Gulf of Mexico to the Midwest. The new company plans to build a 74-mile, 24-inch diameter pipeline connecting TEPPCO's facility in Beaumont, Texas, with an existing 720-mile, 26-inch diameter pipeline extending from Longville, Louisiana to Bourbon, Illinois. In addition, a two million barrel terminal storage facility will be constructed. The system will be called Centennial Pipeline and will connect with existing MAP transportation assets and other common carrier lines. Construction is expected to be completed in the fourth quarter of 2001. A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline is expected to initially move about 50,000 bpd of refined petroleum into the central Ohio region. The pipeline is currently expected to be operational in mid-2002. The startup of this pipeline is largely dependent on obtaining the final regulatory approvals, obtaining the necessary rights-of-way, of which approximately 95 percent have been obtained to date, and completion of construction. ORPL is still negotiating with a few landowners to obtain the M-35 Management's Discussion and Analysis continued remaining rights-of-way. Where necessary, ORPL has filed condemnation actions to acquire some rights-of-way. These actions are at various stages of litigation and appeal with several recent decisions supporting ORPL's use of eminent domain. MAP is constructing a delayed coker unit at its Garyville, Louisiana refinery. This unit will allow for the use of heavier, lower cost crude and reduce the production of heavy fuel oil. To supply this new unit, MAP reached an agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy Mayan crude oil. This is a multi-year contract, which will begin upon completion of the delayed coker unit which is scheduled in the fall of 2001. In addition, a project to increase light product output is underway at MAP's Robinson, Illinois refinery and is expected to be completed in the second quarter of 2001. MAP initiated a program for 2000 to dispose of approximately 270 non- core SSA retail outlets in the Midwest and Southeast. At the end of this program through December 31, 2000, 159 stores, which comprise about 7 percent of MAP's owned and operated SSA retail network, had been sold. MAP will continue to sell additional SSA stores as part of its ongoing store development process. The above discussion includes forward-looking statements with respect to pipeline and refinery improvement projects. Some factors that could potentially cause actual results to differ materially from present expectations include the price of petroleum products, levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions, obtaining the necessary rights-of-way, outcome of pending litigation, and regulatory approval constraints. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. Accounting Standards In the fourth quarter of 2000, USX adopted the following accounting pronouncements primarily related to the classification of items in the statement of operations. The adoption of these new pronouncements had no net effect on the financial position or results of operations of the Marathon Group, although they required reclassifications of certain amounts in the statement of operations, including all prior periods presented. . In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements", which summarizes the SEC staff's interpretations of generally accepted accounting principles related to revenue recognition and classification. . In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent", which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs", which addresses the classification of costs incurred for shipping goods to customers. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities: (SFAS No. 133), which later was amended by SFAS Nos. 137 and 138. This Standard requires recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. The Marathon Group may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards. The Marathon Group will adopt the Standard effective January 1, 2001. The transition adjustment resulting from the adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of tax, is expected to approximate $9 million. The unfavorable cumulative effect on other comprehensive income, net of tax, will approximate $7 million. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations. M-36 Quantitative and Qualitative Disclosures About Market Risk Management Opinion Concerning Derivative Instruments USX uses commodity-based and foreign currency derivative instruments to manage its price risk. Management has authorized the use of futures, forwards, swaps and options to manage exposure to price fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products, and nonferrous metals. For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, in the same period as the underlying physical transaction. Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period in income from operations. While USX's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies that assume price risk. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose the Marathon Group to material risk. The use of derivative instruments could materially affect the Marathon Group's results of operations in particular quarterly or annual periods. However, management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of accounting policies related to derivative instruments, see Note 2 to the Marathon Group Financial Statements. Commodity Price Risk and Related Risks In the normal course of its business, the Marathon Group is exposed to market risk or price fluctuations related to the purchase, production or sale of crude oil, natural gas and refined products. To a lesser extent, the Marathon Group is exposed to the risk of price fluctuations on natural gas liquids and petroleum feedstocks used as raw materials. The Marathon Group's market risk strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, the Marathon Group uses fixed-price contracts and derivative commodity instruments to manage a relatively small portion of its commodity price risk. The Marathon Group uses fixed-price contracts for portions of its natural gas production to manage exposure to fluctuations in natural gas prices. Certain derivative commodity instruments have the effect of restoring the equity portion of fixed-price sales of natural gas to variable market-based pricing. These instruments are used as part of the Marathon Group's overall risk management programs. M-37 Quantitative and Qualitative Disclosures About Market Risk continued Sensitivity analyses of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of December 31, 2000 and December 31, 1999, are provided in the following table:/(a)/
(Dollars in millions) ------------------------------------------------------------------------------------------ Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of/(a)/ 2000 1999 Derivative Commodity Instruments 10% 25% 10% 25% ------------------------------------------------------------------------------------------- Marathon Group/(b)(c)/: Crude oil/(d)/ Trading $ - $ - /(e)/ $ 1.3 $ 7.7 /(e)/ Other than trading 9.1 27.2 /(e)/ 16.5 54.0 /(e)/ Natural gas/(d)/ Trading - - /(e)/ - - /(f)/ Other than trading 20.2 50.6 /(e)/ 4.7 16.8 /(f)/ Refined products/(d)/ Trading - - /(e)/ - - /(e)/ Other than trading 6.1 16.5 /(e)/ 8.4 23.8 /(e)/ -------------------------------------------------------------------------------------------
/(a)/ Gains and losses on derivative commodity instruments are generally offset by price changes in the underlying commodity. Effects of these offsets are not reflected in the sensitivity analyses. Amounts reflect the estimated incremental effect on pretax income of hypothetical 10% and 25% changes in closing commodity prices for each open contract position at December 31, 2000 and December 31, 1999. Marathon Group management evaluates their portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to December 31, 2000, would cause future pretax income effects to differ from those presented in the table. /(b)/ The number of net open contracts varied throughout 2000, from a low of 12,252 contracts at July 5, to a high of 34,554 contracts at October 25, and averaged 21,875 for the year. The derivative commodity instruments used and hedging positions taken also varied throughout 2000, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. /(c)/ The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. /(d)/ The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. /(e)/ Price increase. /(f)/ Price decrease. In total, Marathon's exploration and production operations recorded net pretax other than trading activity losses of approximately $34 million in 2000, gains of $3 million in 1999 and losses of $3 million in 1998. Marathon's refining, marketing and transportation operations generally use derivative commodity instruments to lock-in costs of certain crude oil and other feedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. Marathon's refining, marketing and transportation operations recorded net pretax other than trading activity losses, net of the 38% minority interest in MAP, of approximately $116 million in 2000, and net pretax other than trading activity gains, net of the 38% minority interest in MAP, of $8 million in 1999 and $28 million in 1998. Marathon's refining, marketing and transportation operations used derivative instruments for trading activities and recorded net pretax trading activity losses, net of the 38% minority interest in MAP, of $11 million in 2000 and net pretax trading activity gains, net of the 38% minority interest in MAP, of $5 million in 1999. The Marathon Group is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange ("NYMEX") contracts for natural gas are priced at Louisiana's Henry Hub, while the underlying quantities of natural gas may be produced and sold in the Western United States at prices M-38 Quantitative and Qualitative Disclosures About Market Risk continued that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk. The Marathon Group is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions. Interest Rate Risk USX is subject to the effects of interest rate fluctuations on certain of its non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10% decrease in year-end 2000 and 1999 interest rates on the fair value of the Marathon Group's specifically attributed non-derivative financial instruments and the Marathon Group's portion of USX's non-derivative financial instruments attributed to both groups, is provided in the following table:
(Dollars in millions) ----------------------------------------------------------------------------------------------- As of December 31, 2000 1999 Incremental Incremental Increase in Increase in Fair Fair Fair Fair Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(c)/ Value/(b)/ Value/(c)/ ----------------------------------------------------------------------------------------------- Financial assets: Investments and long-term receivables/(d)/ $ 171 $ - $ 166 $ - Financial liabilities: Long-term debt/(e)(f)/ $2,174 $ 86 $3,443 $144 Preferred stock of subsidiary/(g)/ 175 15 176 16 ------ ---------- ---------- ----------- Total liabilities $2,349 $ 101 $3,619 $160 -----------------------------------------------------------------------------------------------
/(a)/ Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest, approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. /(b)/ See Note 22 to the Marathon Group Financial Statements for carrying value of instruments. /(c)/ Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at December 31, 2000 and December 31, 1999, on the fair value of USX's non- derivative financial instruments. For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of USX's long-term debt at December 31, 2000 and December 31, 1999. /(d)/ For additional information, see Note 19 to the Marathon Group Financial Statements. /(e)/ Includes amounts due within one year. /(f)/ Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. For additional information, see Note 12 to the Marathon Group Financial Statements. /(g)/ See Note 22 to the USX Consolidated Financial Statements. At December 31, 2000, USX's portfolio of long-term debt was comprised primarily of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $86 million increase in the fair value of long-term debt assuming a hypothetical 10% decrease in interest rates. However, USX's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect USX's results and cash flows only to the extent that USX elected to repurchase or otherwise retire all or a portion of its fixed- rate debt portfolio at prices above carrying value. Foreign Currency Exchange Rate Risk USX is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than U.S. dollars. USX has not generally used derivative instruments to manage this risk. However, USX has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At December 31, 2000, USX had open Canadian dollar forward purchase M-39 Quantitative and Qualitative Disclosures About Market Risk continued contracts with a total carrying value of approximately $14 million compared to $52 million at December 31, 1999. A 10% increase in the December 31, 2000, Canadian dollar to U.S. dollar forward rate, would result in a charge to income of approximately $1 million. Last year, a 10% increase in the December 31, 1999, Canadian dollar to U.S. dollar forward rate, would have resulted in a charge to income of $5 million. The entire amount of these contracts is attributed to the Marathon Group. Equity Price Risk At December 31, 2000, the Marathon Group had no material exposure to equity price risk. Safe Harbor The Marathon Group's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with the Marathon Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for crude oil, natural gas, refined products and other feedstocks. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the Marathon Group's hedging programs may differ materially from those discussed in the forward-looking statements. M-40 U. S. Steel Group Index to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk
Page ---- Management's Report....................................................... S-1 Audited Financial Statements: Report of Independent Accountants........................................ S-1 Statement of Operations.................................................. S-2 Balance Sheet............................................................ S-3 Statement of Cash Flows.................................................. S-4 Notes to Financial Statements............................................ S-5 Selected Quarterly Financial Data......................................... S-22 Principal Unconsolidated Affiliates....................................... S-22 Supplementary Information................................................. S-22 Five-Year Operating Summary............................................... S-23 Five-Year Financial Summary............................................... S-24 Management's Discussion and Analysis...................................... S-25 Quantitative and Qualitative Disclosures About Market Risk................ S-38
Management's Report The accompanying financial statements of the U. S. Steel Group are the responsibility of and have been prepared by USX Corporation (USX) in conformity with accounting principles generally accepted in the United States. They necessarily include some amounts that are based on best judgments and estimates. The U. S. Steel Group financial information displayed in other sections of this report is consistent with these financial statements. USX seeks to assure the objectivity and integrity of its financial records by careful selection of its managers, by organizational arrangements that provide an appropriate division of responsibility and by communications programs aimed at assuring that its policies and methods are understood throughout the organization. USX has a comprehensive formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that financial records are reliable. Appropriate management monitors the system for compliance, and the internal auditors independently measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the financial statements, USX's independent accountants, who are elected by the stockholders, review and test the internal accounting controls selectively to establish a basis of reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This Committee, composed solely of nonmanagement directors, regularly meets (jointly and separately) with the independent accountants, management and internal auditors to monitor the proper discharge by each of its responsibilities relative to internal accounting controls and the consolidated and group financial statements. Thomas J. Usher Robert M. Hernandez Larry G. Schultz Chairman, Board of Directors & Vice Chairman & Vice President- Chief Executive Officer Chief Financial Officer Accounting
Report of Independent Accountants To the Stockholders of USX Corporation: In our opinion, the accompanying financial statements appearing on pages S-2 through S-21 present fairly, in all material respects, the financial position of the U. S. Steel Group at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of USX's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The U. S. Steel Group is a business unit of USX Corporation (as described in Note 1, page S-5); accordingly, the financial statements of the U. S. Steel Group should be read in connection with the consolidated financial statements of USX Corporation. PricewaterhouseCoopers LLP 600 Grant Street, Pittsburgh, Pennsylvania 15219-2794 February 7, 2001 S-1 Statement of Operations
(Dollars in millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------ Revenues and other income: Revenues $6,090 $5,536 $6,378 Income (loss) from investees (8) (89) 46 Net gains on disposal of assets 46 21 54 Other income (loss) 4 2 (1) ------ ------ ------ Total revenues and other income 6,132 5,470 6,477 ------ ------ ------ Costs and expenses: Cost of revenues (excludes items shown below) 5,656 5,084 5,604 Selling, general and administrative expenses (credits) (Note 12) (223) (283) (201) Depreciation, depletion and amortization 360 304 283 Taxes other than income taxes 235 215 212 ------ ------ ------ Total costs and expenses 6,028 5,320 5,898 ------ ------ ------ Income from operations 104 150 579 Net interest and other financial costs (Note 7) 105 74 42 ------ ------ ------ Income (loss) before income taxes and extraordinary losses (1) 76 537 Provision for income taxes (Note 15) 20 25 173 ------ ------ ------ Income (loss) before extraordinary losses (21) 51 364 Extraordinary losses (Note 6) - 7 - ------ ------ ------ Net income (loss) (21) 44 364 Dividends on preferred stock 8 9 9 ------ ------ ------ Net income (loss) applicable to Steel Stock $ (29) $ 35 $ 355 ----------------------------------------------------------------------------------------------------------------
Income Per Common Share Applicable to Steel Stock
2000 1999 1998 ---------------------------------------------------------------------------------------------------------------- Basic: Income (loss) before extraordinary losses $ (.33) $ .48 $ 4.05 Extraordinary losses - .08 - ----- ----- ------ Net income (loss) $ (.33) $ .40 $ 4.05 Diluted: Income (loss) before extraordinary losses $ (.33) $ .48 $ 3.92 Extraordinary losses - .08 - ----- ----- ------ Net income (loss) $ (.33) $ .40 $ 3.92 ----------------------------------------------------------------------------------------------------------------
See Note 21, for a description and computation of income per common share. The accompanying notes are an integral part of these financial statements. S-2 Balance Sheet
(Dollars in millions) December 31 2000 1999 ------------------------------------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 219 $ 22 Receivables, less allowance for doubtful accounts of $57 and $10 627 488 Receivables subject to a security interest (Note 11) 350 350 Income taxes receivable (Note 13) 364 97 Inventories (Note 14) 946 743 Deferred income tax benefits (Note 15) 201 281 Other current assets 10 - ------- ------- Total current assets 2,717 1,981 Investments and long-term receivables, less reserves of $28 and $3 (Notes 13 and 16) 536 572 Property, plant and equipment - net (Note 23) 2,739 2,516 Prepaid pensions (Note 12) 2,672 2,404 Other noncurrent assets 47 52 ------- ------- Total assets $8,711 $7,525 ------------------------------------------------------------------------------------------------------------- Liabilities Current liabilities: Notes payable $ 70 $ - Accounts payable 760 757 Payroll and benefits payable 202 322 Accrued taxes 173 177 Accrued interest 47 15 Long-term debt due within one year (Note 11) 139 13 ------- ------- Total current liabilities 1,391 1,284 Long-term debt (Note 11) 2,236 902 Deferred income taxes (Note 15) 666 348 Employee benefits (Note 12) 1,767 2,245 Deferred credits and other liabilities 483 441 Preferred stock of subsidiary (Note 10) 66 66 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust holding solely junior subordinated convertible debentures of USX (Note 18) 183 183 Stockholders' Equity (Note 19) Preferred stock 2 3 Common stockholders' equity 1,917 2,053 ------- ------- Total stockholders' equity 1,919 2,056 ------- ------- Total liabilities and stockholders' equity $ 8,711 $ 7,525 -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. S-3 Statement of Cash Flows
(Dollars in millions) 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents Operating activities: Net income (loss) $ (21) $ 44 $ 364 Adjustments to reconcile to net cash provided from (used in) operating activities: Extraordinary losses - 7 - Depreciation, depletion and amortization 360 304 283 Pensions and other postretirement benefits (847) (256) (215) Deferred income taxes 389 107 158 Net gains on disposal of assets (46) (21) (54) Changes in: Current receivables- sold - (320) (30) - operating turnover (263) (242) 232 Inventories (63) (14) 7 Current accounts payable and accrued expenses (262) 239 (285) All other - net 126 72 (80) ------ ----------- ----------- Net cash provided from (used in) operating activities (627) (80) 380 ------ ----------- ----------- Investing activities: Capital expenditures (244) (287) (310) Acquisition of U. S. Steel Kosice s.r.o., net of cash acquired of $59 (10) - - Disposal of assets 21 10 21 Restricted cash - withdrawals 2 15 35 - deposits (2) (17) (35) Investees - investments (35) (15) (73) - loans and advances (10) - (1) All other - net 8 - 14 ------ ----------- ----------- Net cash used in investing activities (270) (294) (349) ------ ----------- ----------- Financing activities (Note 10): Increase in U. S. Steel Group's portion of USX consolidated debt 1,208 147 13 Specifically attributed debt: Borrowings - 350 - Repayments (6) (11) (4) Steel Stock issued - - 55 Preferred stock repurchased (12) (2) (8) Dividends paid (97) (97) (96) ------ ----------- ----------- Net cash provided from (used in) financing activities 1,093 387 (40) ------ ----------- ----------- Effect of exchange rate changes on cash 1 - - ------ ----------- ----------- Net increase (decrease) in cash and cash equivalents 197 13 (9) Cash and cash equivalents at beginning of year 22 9 18 ------ ----------- ----------- Cash and cash equivalents at end of year $ 219 $ 22 $ 9 -----------------------------------------------------------------------------------------------------------------
See Note 9, for supplemental cash flow information. The accompanying notes are an integral part of these financial statements. S-4 Notes to Financial Statements 1. Basis of Presentation USX Corporation (USX) has two classes of common stock: USX - U. S. Steel Group Common Stock (Steel Stock) and USX - Marathon Group Common Stock (Marathon Stock), which are intended to reflect the performance of the U. S. Steel Group and the Marathon Group, respectively. The financial statements of the U. S. Steel Group include the financial position, results of operations and cash flows for all businesses of USX other than the businesses, assets and liabilities included in the Marathon Group, and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX. The U. S. Steel Group financial statements are prepared using the amounts included in the USX consolidated financial statements. For a description of the U. S. Steel Group's operating segments, see Note 8. Although the financial statements of the U. S. Steel Group and the Marathon Group separately report the assets, liabilities (including contingent liabilities) and stockholders' equity of USX attributed to each such Group, such attribution of assets, liabilities (including contingent liabilities) and stockholders' equity between the U. S. Steel Group and the Marathon Group for the purpose of preparing their respective financial statements does not affect legal title to such assets or responsibility for such liabilities. Holders of Steel Stock and Marathon Stock are holders of common stock of USX, and continue to be subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts arising from one Group that affect the overall cost of USX's capital could affect the results of operations and financial condition of the other Group. In addition, net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Accordingly, the USX consolidated financial information should be read in connection with the U. S. Steel Group financial information. - -------------------------------------------------------------------------------- 2. Summary of Principal Accounting Policies Principles applied in consolidation - These financial statements include the accounts of the U. S. Steel Group. The U. S. Steel Group and the Marathon Group financial statements, taken together, comprise all of the accounts included in the USX consolidated financial statements. Investments in entities over which the U. S. Steel Group has significant influence are accounted for using the equity method of accounting and are carried at the U. S. Steel Group's share of net assets plus loans and advances. Investments in companies whose stock is publicly traded are carried generally at market value. The difference between the cost of these investments and market value is recorded in other comprehensive income (net of tax). Investments in companies whose stock has no readily determinable fair value are carried at cost. Income from investees includes the U. S. Steel Group's proportionate share of income from equity method investments. Also, gains or losses from a change in ownership of an unconsolidated investee are recognized in the period of change. Use of estimates - Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year-end and the reported amounts of revenues and expenses during the year. Significant items subject to such estimates and assumptions include the carrying value of long-lived assets; valuation allowances for receivables, inventories and deferred income tax assets; environmental liabilities; liabilities for potential tax deficiencies and potential litigation claims and settlements; and assets and obligations related to employee benefits. Additionally, certain estimated liabilities are recorded when management commits to a plan to close an operating facility or to exit a business activity. Actual results could differ from the estimates and assumptions used. S-5 Revenue recognition - Revenues are recognized generally when products are shipped or services are provided to customers, the sales price is fixed and determinable, and collectibility is reasonably assured. Costs associated with revenues, including shipping and other transportation costs, are recorded in cost of revenues. Cash and cash equivalents - Cash and cash equivalents include cash on hand and on deposit and investments in highly liquid debt instruments with maturities generally of three months or less. Inventories - Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method. Derivative instruments - The U. S. Steel Group uses commodity-based derivative instruments to manage its exposure to price risk. Management is authorized to use futures, forwards, swaps and options related to the purchase of natural gas, refined products and nonferrous metals used in steel operations. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities, as appropriate. Long-lived assets - Depreciation is generally computed using a modified straight-line method based upon estimated lives of assets and production levels. The modification factors for domestic steel producing assets range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level. Depletion of mineral properties is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed. The U. S. Steel Group evaluates impairment of its long- lived assets on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values. When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when long-lived assets are reclassified as assets held for sale. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income. Major maintenance activities - The U. S. Steel Group incurs planned major maintenance costs primarily for blast furnace relines. Such costs are separately capitalized in property, plant and equipment and are amortized over their estimated useful life, which is generally the period until the next scheduled reline. Environmental remediation - The U. S. Steel Group provides for remediation costs and penalties when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. Generally, the timing of remediation accruals coincides with completion of a feasibility study or the commitment to a formal plan of action. Remediation liabilities are accrued based on estimates of known environmental exposure and are discounted in certain instances. Postemployment benefits - The U. S. Steel Group recognizes an obligation to provide postemployment benefits, primarily for disability-related claims covering indemnity and medical payments to certain employees. The obligation for these claims and the related periodic costs are measured using actuarial techniques and assumptions, including an appropriate discount rate, analogous to the required methodology for measuring pension and other postretirement benefit obligations. Actuarial gains and losses are deferred and amortized over future periods. Insurance - The U. S. Steel Group is insured for catastrophic casualty and certain property and business interruption exposures, as well as those risks required to be insured by law or contract. Costs resulting from noninsured losses are charged against income upon occurrence. Reclassifications - Certain reclassifications of prior years' data have been made to conform to 2000 classifications. S-6 ________________________________________________________________________________ 3. New Accounting Standards In the fourth quarter of 2000, USX adopted the following accounting pronouncements primarily related to the classification of items in the financial statements. The adoption of these new pronouncements had no net effect on the financial position or results of operations of the U. S. Steel Group, although they required reclassifications of certain amounts in the financial statements, including all prior periods presented. . In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements," which summarizes the SEC staff's interpretations of generally accepted accounting principles related to revenue recognition and classification. . In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent," which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which addresses the classification of costs incurred for shipping goods to customers. . In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. USX adopted certain recognition and reclassification provisions of SFAS 140, which were effective for fiscal years ending after December 15, 2000. The remaining provisions of SFAS 140 are effective after March 31, 2001. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which later was amended by SFAS Nos. 137 and 138. This Standard requires recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. The U. S. Steel Group may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards. The U. S. Steel Group will adopt the Standard effective January 1, 2001. The transition adjustment resulting from the adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The transition adjustment for the U. S. Steel Group is expected to be immaterial. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations. ________________________________________________________________________________ 4. Corporate Activities Financial activities - As a matter of policy, USX manages most financial activities on a centralized, consolidated basis. Such financial activities include the investment of surplus cash; the issuance, repayment and repurchase of short-term and long-term debt; the issuance, repurchase and redemption of preferred stock; and the issuance and repurchase of common stock. Transactions related primarily to invested cash, short-term and long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to the U. S. Steel Group and the Marathon Group based upon the cash flows of each group for the periods presented and the initial capital structure of each group. Most financing transactions are attributed to and reflected in the financial statements of the groups. See Note 10, for the U. S. Steel Group's portion of USX's financial activities attributed to the groups. However, transactions such as leases, certain collateralized financings, certain indexed debt instruments, financial activities of consolidated entities which are less than wholly owned by USX and transactions related to securities convertible solely into any one class of common stock are or will be specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate. S-7 Corporate general and administrative costs - Corporate general and administrative costs are allocated to the U. S. Steel Group and the Marathon Group based upon utilization or other methods management believes to be reasonable and which consider certain measures of business activities, such as employment, investments and revenues. The costs allocated to the U. S. Steel Group were $25 million in 2000, $17 million in 1999 and $24 million in 1998, and primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. Income taxes - All members of the USX affiliated group are included in the consolidated United States federal income tax return filed by USX. Accordingly, the provision for federal income taxes and the related payments or refunds of tax are determined on a consolidated basis. The consolidated provision and the related tax payments or refunds have been reflected in the U. S. Steel Group and the Marathon Group financial statements in accordance with USX's tax allocation policy. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated between the U. S. Steel Group and the Marathon Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses and various tax credits), which cannot be utilized by one of the groups on a separate return basis but which can be utilized on a consolidated basis in that year or in a carryback year, are allocated to the group that generated the attributes. To the extent that one of the groups is allocated a consolidated tax attribute which, as a result of expiration or otherwise, is not ultimately utilized on the consolidated tax return, the prior years' allocation of such attribute is adjusted such that the effect of the expiration is borne by the group that generated the attribute. Also, if a tax attribute cannot be utilized on a consolidated basis in the year generated or in a carryback year, the prior years' allocation of such consolidated tax effects is adjusted in a subsequent year to the extent necessary to allocate the tax benefits to the group that would have realized the tax benefits on a separate return basis. As a result, the allocated group amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if the groups had filed separate tax returns. ________________________________________________________________________________ 5. Business Combination On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. (USSK), which is located in the Slovak Republic. USSK was formed in June 2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The cash purchase price was $69 million. Additional payments to VSZ of not less than $25 million and up to $75 million are contingent upon the future performance of USSK. Additionally, $325 million of debt was included with the acquisition. The acquisition was accounted for under the purchase method of accounting. The 2000 results of operations include the operations of USSK from the date of acquisition. Prior to this transaction, USX and VSZ were equal partners in VSZ U. S. Steel s.r.o. (VSZUSS), a tin mill products manufacturer. The assets of USSK included VSZ's interest in VSZUSS. The acquisition of the remaining interest in VSZUSS was accounted for under the purchase method of accounting. Previously, USX had accounted for its investment in VSZUSS under the equity method of accounting. VSZ did not provide historical carve-out financial information for its steel activities prepared in accordance with generally accepted accounting principles in the United States. USX was unable to fully determine the effects of transfer pricing, intercompany eliminations and expense allocations in order to prepare such carve-out information from Slovak statutory reports and VSZ internal records. USX broadly estimates that the unaudited pro forma effect on its 2000 and 1999 revenues, giving effect to the acquisition as if it had been consummated at the beginning of those periods, would have been to increase revenues in each period by approximately $1 billion. USX cannot determine the unaudited pro forma effect on its 2000 and 1999 net income. In any event, historical pro forma information is not necessarily indicative of future results of operations. S-8 ________________________________________________________________________________ 6. Extraordinary Losses In 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee exchanged one RTI share for each note at maturity. All shares were required for satisfaction of the indexed debt; therefore, none reverted back to USX. As a result of the above transaction, USX recorded in 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in net gains on disposal of assets. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. In 1999, Republic Technologies International, LLC, an equity investee of USX, recorded an extraordinary loss related to the early extinguishment of debt. As a result, the U. S. Steel Group recorded an extraordinary loss of $2 million, net of a $1 million income tax benefit, representing its share of the extraordinary loss. ________________________________________________________________________________ 7. Other Items
(In millions) 2000 1999 1998 ---------------------------------------------------------------------------- Net interest and other financial costs Interest and other financial income/(a)/: Interest income $ 3 $ 1 $ 5 Other 7 - - ----- ----- ----- Total 10 1 5 ----- ----- ----- Interest and other financial costs/(a)/: Interest incurred 88 45 40 Less interest capitalized 3 6 6 ----- ----- ----- Net interest 85 39 34 Interest on tax issues 11 15 16 Financial costs on trust preferred securities 13 13 13 Financial costs on preferred stock of subsidiary 5 5 5 Amortization of discounts 1 1 2 Expenses on sales of accounts receivable - 15 21 Adjustment to settlement value of indexed debt - (13) (44) ----- ----- ----- Total 115 75 47 ----- ----- ----- Net interest and other financial costs/(a)/ $ 105 $ 74 $ 42
------------------------------------------------------------------- /(a)/ See Note 4, for discussion of USX net interest and other financial costs attributable to the U. S. Steel Group. ------------------------------------------------------------------- Foreign currency transactions For 2000, the aggregate foreign currency transaction gain included in determining net income was $7 million. There were no foreign currency transaction gains or losses in 1999 and 1998. ________________________________________________________________________________ 8. Segment Information The U. S. Steel Group consists of two reportable operating segments: 1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the United States operations of U. S. Steel, while USSK includes the U. S. Steel Kosice operations in the Slovak Republic. Domestic Steel is engaged in the domestic production and sale of steel mill products, coke and taconite pellets; the management of mineral resources; coal mining; engineering and consulting services; and real estate development and management. USSK is engaged in the production and sale of steel mill products and coke and primarily serves European markets. Segment income represents income from operations allocable to both operating segments and does not include net interest and other financial costs and provisions for income taxes. Additionally, the following items are not allocated to operating segments: . Net pension credits associated with pension plan assets and liabilities . Certain costs related to former U. S. Steel Group business activities . USX corporate general and administrative costs. These costs primarily consist of employment costs including pension effects, professional services, facilities and other related costs associated with corporate activities. . Certain other items not allocated to operating segments for business performance reporting purposes (see reconcilement schedule on S-10) Information on assets by segment is not provided as it is not reviewed by the chief operating decision maker. S-9 The following represents the operations of the U. S. Steel Group:
(In millions) Domestic Steel USSK Total --------------------------------------------------------------------------------------- 2000 Revenues and other income: Customer $5,981 $92 $6,073 Intergroup/(a)/ 17 - 17 Equity in losses of unconsolidated investees (8) - (8) Other 50 - 50 ------ ---- ------ Total revenues and other income $6,040 $92 $6,132 ====== ==== ====== Segment income $ 23 $ 2 $ 25 Significant noncash items included in segment income - Depreciation, depletion and amortization/(b)/ 285 4 289 Capital expenditures 239 5 244 --------------------------------------------------------------------------------------- 1999 Revenues and other income: Customer $5,519 $ - $5,519 Intergroup/(a)/ 17 - 17 Equity in losses of unconsolidated investees (43) - (43) Other 46 - 46 ------ ---- ------ Total revenues and other income $5,539 $ - $5,539 ====== ==== ====== Segment income $ 91 $ - $ 91 Significant noncash items included in segment income - Depreciation, depletion and amortization 304 - 304 Capital expenditures/(c)/ 286 - 286 --------------------------------------------------------------------------------------- 1998 Revenues and other income: Customer $6,374 $ - $6,374 Intergroup/(a)/ 2 - 2 Equity in earnings of unconsolidated investees 46 - 46 Other 55 - 55 ------ ---- ------ Total revenues and other income $6,477 $ - $6,477 ====== ==== ====== Segment income $ 517 $ - $ 517 Significant noncash items included in segment income - Depreciation, depletion and amortization 283 - 283 Capital expenditures/(c)/ 305 - 305 ---------------------------------------------------------------------------------------
/(a)/ Intergroup revenues and transfers were conducted under terms comparable to those with unrelated parties. /(b)/ Difference between segment total and group total represents amounts for impairment of coal assets. /(c)/ Differences between segment total and group total represent amounts related to corporate administrative activities. The following schedules reconcile segment amounts to amounts reported in the U. S. Steel Group's financial statements:
(In millions) 2000 1999 1998 ----------------------------------------------------------------------------------------------- Revenues and Other Income: Revenues and other income of reportable segments $6,132 $5,539 $6,477 Items not allocated to segments: Impairment and other costs related to an investment in an equity investee - (47) - Loss on investment in RTI stock used to satisfy indexed debt obligations - (22) - ------ ------ ------ Total Group revenues and other income $6,132 $5,470 $6,477 ====== ====== ====== Income: Income for reportable segments $ 25 $ 91 $ 517 Items not allocated to segments: Impairment of coal assets (71) - - Impairment and other costs related to an investment in an equity investee - (47) - Loss on investment in RTI stock used to satisfy indexed debt obligations - (22) - Administrative expenses (25) (17) (24) Net pension credits 266 228 186 Costs related to former businesses activities (91) (83) (100) ------ ------ ------ Total Group income from operations $ 104 $ 150 $ 579 -----------------------------------------------------------------------------------------------
S-10
Revenues by Product: (In millions) 2000 1999 1998 ------------------------------------------------------------------------------- Sheet and semi-finished steel products $3,288 $3,433 $3,598 Tubular, plate and tin mill products 1,731 1,140 1,546 Raw materials (coal, coke and iron ore) 626 549 744 Other/(a)/ 445 414 490 -------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by- products, engineering and consulting services, real estate development and resource management. Geographic Area: The information below summarizes the operations in different geographic areas.
Revenues and Other Income ---------------------------------- Within Between Geographic Geographic (In millions) Year Areas Areas Total Assets/(a)/ ---------------------------------------------------------------------------------------- United States 2000 $6,027 $ - $6,027 $2,745 1999 5,452 - 5,452 2,889 1998 6,460 - 6,460 3,043 Slovak Republic 2000 95 - 95 376 1999 3 - 3 60 1998 6 - 6 66 Other Foreign Countries 2000 10 - 10 10 1999 15 - 15 3 1998 11 - 11 3 Total 2000 $6,132 $ - $6,132 $3,131 1999 5,470 - 5,470 2,952 1998 6,477 - 6,477 3,112 ----------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments. ________________________________________________________________________________ 9. Supplemental Cash Flow Information
(In millions) 2000 1999 1998 --------------------------------------------------------------------------------------------------------- Cash provided from (used in) operating activities included: Interest and other financial costs paid (net of amount capitalized) $ (71) $ (77) $ (76) Income taxes refunded (paid), including settlements with the Marathon Group 81 3 (29) --------------------------------------------------------------------------------------------------------- USX debt attributed to all groups - net: Commercial paper: Issued $ 3,362 $ 6,282 $ - Repayments (3,450) (6,117) - Credit agreements: Borrowings 437 5,529 17,486 Repayments (437) (5,980) (16,817) Other credit arrangements - net 150 (95) 55 Other debt: Borrowings - 319 671 Repayments (54) (87) (1,053) ------- ------- -------- Total $ 8 $ (149) $ 342 --------------------------------------------------------------------------------------------------------- U. S. Steel Group activity $ 1,208 $ 147 $ 13 Marathon Group activity (1,200) (296) 329 ------- ------- -------- Total $ 8 $ (149) $ 342 --------------------------------------------------------------------------------------------------------- Noncash investing and financing activities: Steel Stock issued for dividend reinvestment and employee stock plans $ 5 $ 2 $ 2 Disposal of assets: Deposit of RTI common shares in satisfaction of indexed debt - 56 - Interest in USS/Kobe contributed to Republic - 40 - Other disposals of assets - notes or common stock received 14 1 2 Business combinations: Acquisition of USSK: Liabilities assumed 568 - - Contingent consideration payable at present value 21 - - Investee liabilities consolidated in step acquisition 3 - - Other acquisitions: Liabilities assumed - 26 - Investee liabilities consolidated in step acquisition - 26 - ---------------------------------------------------------------------------------------------------------
S-11 - -------------------------------------------------------------------------------- 10. Financial Activities Attributed to Groups The following is the portion of USX financial activities attributed to the U. S. Steel Group. These amounts exclude amounts specifically attributed to the U. S. Steel Group.
U. S. Steel Group Consolidated USX/(a)/ ------------------------- ------------------------ (In millions) December 31 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 171 $ 1 $ 364 $ 9 Other noncurrent assets 3 1 7 8 ------ ----- ------ -------- Total assets $ 174 $ 2 $ 371 $ 17 -------------------------------------------------------------------------------------------------------------- Notes payable $ 70 $ - $ 150 $ - Accrued interest 45 13 95 95 Long-term debt due within one year (Note 11) 130 7 277 54 Long-term debt (Note 11) 1,804 466 3,734 3,771 Preferred stock of subsidiary 66 66 250 250 ------ ----- ------ -------- Total liabilities $ 2,115 $ 552 $ 4,506 $ 4,170 -------------------------------------------------------------------------------------------------------------- U. S. Steel Group/(b)/ Consolidated USX ------------------ ---------------------- (In millions) 2000 1999 1998 2000 1999 1998 -------------------------------------------------------------------------------------------------------------- Net interest and other financial costs (Note 7) $ 59 $ 39 $ 29 $ 309 $ 334 $ 324 --------------------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of subsidiary, see Notes 14 and 22, respectively, to the USX consolidated financial statements. /(b)/ The U. S. Steel Group's net interest and other financial costs reflect weighted average effects of all financial activities attributed to all groups. - ------------------------------------------------------------------------------- 11. Long-Term Debt The U. S. Steel Group's portion of USX's consolidated long-term debt is as follows:
U. S. Steel Group Consolidated USX/(a)/ ------------------ --------------------- (In millions) December 31 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------- Specifically attributed debt/(b)/: Receivables facility $ 350 $ 350 $ 350 $ 350 Sale-leaseback financing and capital leases 88 92 95 107 Other 3 - 4 1 ------ ------ ------ ------ Total 441 442 449 458 Less amount due within one year 9 6 10 7 ------ ------ ------ ------ Total specifically attributed long-term debt $ 432 $ 436 $ 439 $ 451 -------------------------------------------------------------------------------------------------------------------- Debt attributed to groups/(c)/ $1,946 $ 477 $4,036 $3,852 Less unamortized discount 12 4 25 27 Less amount due within one year 130 7 277 54 ------ ------ ------ ------ Total long-term debt attributed to groups $1,804 $ 466 $3,734 $3,771 -------------------------------------------------------------------------------------------------------------------- Total long-term debt due within one year $ 139 $ 13 $ 287 $ 61 Total long-term debt due after one year 2,236 902 4,173 4,222 --------------------------------------------------------------------------------------------------------------------
/(a)/ See Note 14, to the USX consolidated financial statements for details of interest rates, maturities and other terms of long-term debt. /(b)/ As described in Note 4, certain financial activities are specifically attributed only to the U. S. Steel Group and the Marathon Group. /(c)/ Most long-term debt activities of USX Corporation and its wholly owned subsidiaries are attributed to all groups (in total, but not with respect to specific debt issues) based on their respective cash flows (Notes 4, 9 and 10). S-12 - -------------------------------------------------------------------------------- 12. Pensions and Other Postretirement Benefits The U. S. Steel Group has noncontributory defined benefit pension plans covering substantially all U.S. employees. Benefits under these plans are based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, pension benefits are also provided to most U.S. salaried employees based upon a percent of total career pensionable earnings. Certain of these plans provide benefits to USX corporate employees, and the related costs or credits for such employees are allocated to all groups (Note 4). The U. S. Steel Group also participates in multiemployer plans, most of which are defined benefit plans associated with coal operations. The U. S. Steel Group also has defined benefit retiree health care and life insurance plans (other benefits) covering most U.S. employees upon their retirement. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to nonunion retiree beneficiaries primarily based on employees' annual base salary at retirement. These plans provide benefits to USX corporate employees, and the related costs for such employees are allocated to all groups (Note 4). For U.S. union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions.
Pension Benefits Other Benefits ------------------------- --------------------------- (In millions) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------- Change in benefit obligations Benefit obligations at January 1 $ 6,716 $ 7,549 $ 1,896 $ 2,113 Service cost 76 87 12 15 Interest cost 505 473 147 133 Plan amendments - 381/(a)/ - 14 Actuarial (gains) losses 430 (822) 260 (225) Plan merger and acquisition - 42 - 7 Settlements, curtailments and termination benefits - (207) - - Benefits paid (806) (787) (166) (161) ------- ------- -------- -------- Benefit obligations at December 31 $ 6,921 $ 6,716 $ 2,149 $ 1,896 -------------------------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at January 1 $ 9,995 $10,243 $ 281 $ 265 Actual return on plan assets 139 729 26 20 Acquisition (1) 26 - 1 Employer contributions - - 576/(b)/ 34 Trustee distributions/(c)/ (16) (14) - - Settlements paid - (207) - - Benefits paid from plan assets (805) (782) (41) (39) ------- ------- -------- -------- Fair value of plan assets at December 31 $ 9,312 $ 9,995 $ 842 $ 281 --------------------------------------------------------------------------------------------------------------------- Funded status of plans at December 31 $ 2,391/(d)/ $ 3,279/(d)/ $(1,307) $(1,615) Unrecognized net gain from transition (2) (69) - - Unrecognized prior service cost 719 817 12 19 Unrecognized actuarial gains (462) (1,639) (241) (526) Additional minimum liability (19) (16) - - ------- ------- -------- -------- Prepaid (accrued) benefit cost $ 2,627 $ 2,372 $(1,536) $(2,122) --------------------------------------------------------------------------------------------------------------------
/(a)/ Results primarily from a five-year labor contract with the United Steelworkers of America ratified in August 1999. /(b)/ Includes contributions of $530 million to a Voluntary Employee Benefit Association trust, comprised of $30 million in contractual requirements and an elective contribution of $500 million. Also includes a $30 million elective contribution to the non-union retiree life insurance trust. /(c)/ Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code. /(d)/ Includes a plan that has accumulated benefit obligations in excess of plan assets: Aggregate accumulated benefit obligations $(40) $(29) Aggregate projected benefit obligations (49) (39) Aggregate plan assets - - ------------------------------------------------------------------- S-13
Pension Benefits Other Benefits --------------------------- ------------------------------ (In millions) 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------- Components of net periodic benefit cost (credit) Service cost $ 76 $ 87 $ 71 $ 12 $ 15 $ 15 Interest cost 505 473 487 147 133 141 Expected return on plan assets (841) (781) (769) (24) (21) (21) Amortization - net transition gain (67) (67) (69) - - - - prior service costs 98 83 72 4 4 4 - actuarial (gains) losses (44) 6 6 (29) (12) (16) Multiemployer and other plans - - 1 9/(a)/ 7/(a)/ 13/(a)/ Settlement and termination (gains) losses - (35)/(b)/ 10/(b)/ - - - ------ ----- ------ ----- ----- ------ Net periodic benefit cost (credit) $(273) $(234) $ (191) $ 119 $ 126 $ 136 -------------------------------------------------------------------------------------------------------------------
/(a)/ Represents payments to a multiemployer health care benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $84 million, including the effects of future medical inflation, and this amount could increase if additional beneficiaries are assigned. /(b)/ Relates primarily to the 1998 voluntary early retirement program.
Pension Benefits Other Benefits ------------------ ---------------- 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------- Weighted average actuarial assumptions at December 31: Discount rate 7.5% 8.0% 7.5% 8.0% Expected annual return on plan assets 8.9% 8.5% 8.5% 8.5% Increase in compensation rate 4.0% 4.0% 4.0% 4.0% --------------------------------------------------------------------------------------------------------------
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5% for 2006 and remain at that level thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage- (In millions) Point Increase Point Decrease ----------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 16 $ (14) Effect on other postretirement benefit obligations 177 (151) -----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 13. Intergroup Transactions Revenues and purchases - U. S. Steel Group revenues for sales to the Marathon Group totaled $17 million in both 2000 and 1999 and $2 million in 1998. U. S. Steel Group purchases from the Marathon Group totaled $60 million, $41 million and $21 million in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, U. S. Steel Group receivables included $2 million related to transactions with the Marathon Group. At December 31, 2000 and 1999, U. S. Steel Group accounts payable included $1 million and $5 million, respectively, related to transactions with the Marathon Group. These transactions were conducted under terms comparable to those with unrelated parties. Income taxes receivable from/payable to the Marathon Group - At December 31, 2000 and 1999, amounts receivable or payable for income taxes were included in the balance sheet as follows:
(In millions) December 31 2000 1999 -------------------------------------------------------------------------------------------------------------- Current: Income tax receivable $ 364 $ 97 Accounts payable 4 1 Noncurrent: Investments and long-term receivables 97 97 --------------------------------------------------------------------------------------------------------------
These amounts have been determined in accordance with the tax allocation policy described in Note 4. Amounts classified as current are settled in cash in the year succeeding that in which such amounts are accrued. Noncurrent amounts represent estimates of intergroup tax effects of certain issues for years that are still under various stages of audit and administrative review. Such tax effects are not settled between the groups until the audit of those respective tax years is closed. The amounts ultimately settled for open tax years will be different than recorded noncurrent amounts based on the final resolution of all of the audit issues for those years. S-14 - -------------------------------------------------------------------------------- 14. Inventories
(In millions) December 31 2000 1999 --------------------------------------------------------------------------------------------------------------- Raw materials $ 214 $ 101 Semi-finished products 429 392 Finished products 210 193 Supplies and sundry items 93 57 ------ ------ Total $ 946 $ 743 ---------------------------------------------------------------------------------------------------------------
At December 31, 2000 and 1999, respectively, the LIFO method accounted for 91% and 93% of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $380 million and $370 million in 2000 and 1999, respectively. Cost of revenues was reduced and income from operations was increased by $3 million in 2000 as a result of liquidations of LIFO inventories. - -------------------------------------------------------------------------------- 15. Income Taxes Income tax provisions and related assets and liabilities attributed to the U. S. Steel Group are determined in accordance with the USX group tax allocation policy (Note 4). Provisions (credits) for income taxes were:
2000 1999 1998 ---------------------------- --------------------------- -------------------------------- (In millions) Current Deferred Total Current Deferred Total Current Deferred Total ---------------------------------------------------------------------------------------------------------------- Federal (357) $ 340 $ (17) $ (84) $ 99 $ 15 $ 19 $ 149 $ 168 State and local (12) 49 37 1 8 9 3 9 12 Foreign - - - 1 - 1 (7) - (7) ------- ----- ----- ----- ----- ----- ----- ----- ------ Total $ (369) $ 389 $ 20 $ (82) $ 107 $ 25 $ 15 $ 158 $ 173 ----------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to total provisions follows:
(In millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------ Statutory rate applied to income before income taxes $ - $ 27 $ 188 Excess percentage depletion (3) (7) (11) Effects of foreign operations, including foreign tax credits (5) (2) (11) State and local income taxes after federal income tax effects 24 6 8 Credits other than foreign tax credits (3) (3) (3) Adjustments of prior years' federal income taxes 5 - - Other 2 4 2 ----- ----- ------ Total provisions $ 20 $ 25 $ 173 ------------------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 2000 1999 ------------------------------------------------------------------------------------------------------------------ Deferred tax assets: $ 39 $ 131 Minimum tax credit carryforwards 55 65 State tax loss carryforwards (expiring in 2001 through 2020) 782 998 Employee benefits 52 68 Receivables, payables and debt 16 - Expected federal benefit for deducting state deferred income taxes 71 52 Contingency and other accruals 2 11 Other (34) (41) Valuation allowances - state -------- --------- 983 1,284 Total deferred tax assets/(a)/ -------- --------- Deferred tax liabilities: 248 274 Property, plant and equipment 1,046 921 Prepaid pensions 15 16 Inventory 82 96 Investments in subsidiaries and equity investees 61 44 Other -------- --------- 1,452 1,351 Total deferred tax liabilities -------- --------- Net deferred tax liabilities $ 469 $ 67 ------------------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to realize the benefit of the U. S. Steel Group's deferred tax assets. The consolidated tax returns of USX for the years 1990 through 1997 are under various stages of audit and administrative review by the IRS. USX believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled. Pretax income in 2000 included $8 million attributable to foreign sources. S-15 Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 2000, amounted to $18 million. No provision for deferred U.S. income taxes has been made for these subsidiaries because the U. S. Steel Group intends to permanently reinvest such earnings in those foreign operations. If such earnings were not permanently reinvested, a deferred tax liability of $6 million would have been required. - -------------------------------------------------------------------------------- 16. Investments and Long-Term Receivables
(In millions) December 31 2000 1999 ------------------------------------------------------------------------------------------------------------------ Equity method investments $ 325 $ 397 Other investments 67 39 Receivables due after one year 5 11 Income taxes receivable 97 97 Deposits of restricted cash 3 2 Other 39 26 ------ ------ Total $ 536 $ 572 ------------------------------------------------------------------------------------------------------------------
Summarized financial information of investees accounted for by the equity method of accounting follows:
(In millions) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------ Income data - year: Revenues and other income $ 3,484 $ 3,027 $ 3,163 Operating income (loss) 112 (57) 193 Net income (loss) (166) (193) 97 ------------------------------------------------------------------------------------------------------------------ Balance sheet data - December 31: Current assets $ 911 $ 995 Noncurrent assets 2,196 2,402 Current liabilities 1,171 1,181 Noncurrent liabilities 1,307 1,251 ------------------------------------------------------------------------------------------------------------------
USX acquired a 25% interest in VSZ during 2000. VSZ does not provide its shareholders with financial statements prepared in accordance with generally accepted accounting principles in the United States (USGAAP). Although shares of VSZ are traded on the Bratislava Stock Exchange, those securities do not have a readily determinable fair value as defined under USGAAP. Accordingly, USX accounts for its investment in VSZ under the cost method of accounting. In 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a transaction that combined the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone Capital Partners II. The combined entity was named Republic Technologies International, LLC and is a wholly owned subsidiary of Republic Technologies International Holdings, LLC (Republic). As a result of this transaction, the U. S. Steel Group recorded $47 million in charges related to the impairment of the carrying value of its investment in USS/Kobe and costs related to the formation of Republic. These charges were included in income (loss) from investees in 1999. In addition, USX made a $15 million equity investment in Republic. USX owned 50% of USS/Kobe and now owns 16% of Republic. USX accounts for its investment in Republic under the equity method of accounting. The seamless pipe business of USS/Kobe was excluded from this transaction. That business, now known as Lorain Tubular Company, LLC, became a wholly owned subsidiary of USX at the close of business on December 31, 1999. Dividends and partnership distributions received from equity investees were $10 million in 2000, $2 million in 1999 and $19 million in 1998. U. S. Steel Group purchases of transportation services and semi-finished steel from equity investees totaled $566 million, $361 million and $331 million in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, U. S. Steel Group payables to these investees totaled $66 million and $60 million, respectively. U. S. Steel Group revenues for steel and raw material sales to equity investees totaled $958 million, $831 million and $725 million in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, U. S. Steel Group receivables from these investees were $177 million. Generally, these transactions were conducted under long-term, market- based contractual arrangements. S-16 - -------------------------------------------------------------------------------- 17. Leases Future minimum commitments for capital leases (including sale- leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:
Capital Operating (In millions) Leases Leases -------------------------------------------------------------------------------------------- 2001 $ 11 $ 79 2002 11 56 2003 11 40 2004 11 37 2005 11 29 Later years 84 64 Sublease rentals - (62) ----- ----- Total minimum lease payments 139 $ 243 ===== Less imputed interest costs 51 ----- Present value of net minimum lease payments included in long-term debt $ 88 --------------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 2000 1999 1998 -------------------------------------------------------------------------------------------- Minimum rental $ 132 $ 124 $ 131 Contingent rental 17 18 19 Sublease rentals (6) (6) (7) ----- ------ ----- Net rental expense $ 143 $ 136 $ 143 --------------------------------------------------------------------------------------------
The U. S. Steel Group leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. - -------------------------------------------------------------------------------- 18. Trust Preferred Securities In 1997, USX exchanged approximately 3.9 million 6.75% Convertible Quarterly Income Preferred Securities (Trust Preferred Securities) of USX Capital Trust I, a Delaware statutory business trust (Trust), for an equivalent number of shares of its 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred Stock) (Exchange). The Exchange resulted in the recording of Trust Preferred Securities at a fair value of $182 million. USX owns all of the common securities of the Trust, which was formed for the purpose of the Exchange. (The Trust Common Securities and the Trust Preferred Securities are together referred to as the Trust Securities.) The Trust Securities represent undivided beneficial ownership interests in the assets of the Trust, which consist solely of USX 6.75% Convertible Junior Subordinated Debentures maturing March 31, 2037 (Debentures), having an aggregate principal amount equal to the aggregate initial liquidation amount ($50.00 per security and $203 million in total) of the Trust Securities issued by the Trust. Interest and principal payments on the Debentures will be used to make quarterly distributions and to pay redemption and liquidation amounts on the Trust Preferred Securities. The quarterly distributions, which accumulate at the rate of 6.75% per annum on the Trust Preferred Securities and the accretion from fair value to the initial liquidation amount, are charged to income and included in net interest and other financial costs. Under the terms of the Debentures, USX has the right to defer payment of interest for up to 20 consecutive quarters and, as a consequence, monthly distributions on the Trust Preferred Securities will be deferred during such period. If USX exercises this right, then, subject to limited exceptions, it may not pay any dividend or make any distribution with respect to any shares of its capital stock. S-17 The Trust Preferred Securities are convertible at any time prior to the close of business on March 31, 2037 (unless such right is terminated earlier under certain circumstances) at the option of the holder, into shares of Steel Stock at a conversion price of $46.25 per share of Steel Stock (equivalent to a conversion ratio of 1.081 shares of Steel Stock for each Trust Preferred Security), subject to adjustment in certain circumstances. The Trust Preferred Securities may be redeemed at any time at the option of USX, at a premium of 101.95% of the initial liquidation amount through March 31, 2001, and thereafter, declining annually to the initial liquidation amount on April 1, 2003, and thereafter. They are mandatorily redeemable at March 31, 2037, or earlier under certain circumstances. Payments related to quarterly distributions and to the payment of redemption and liquidation amounts on the Trust Preferred Securities by the Trust are guaranteed by USX on a subordinated basis. In addition, USX unconditionally guarantees the Trust's Debentures. The obligations of USX under the Debentures, and the related indenture, trust agreement and guarantee constitute a full and unconditional guarantee by USX of the Trust's obligations under the Trust Preferred Securities. - ------------------------------------------------------------------------------- 19. Stockholders' Equity
(In millions, except per share data) 2000 1999 1998 ----------------------------------------------------------------------------------------------- Preferred stock: Balance at beginning of year $ 3 $ 3 $ 3 Repurchased (1) - - ------- ------- ------- Balance at end of year $ 2 $ 3 $ 3 ----------------------------------------------------------------------------------------------- Common stockholders' equity: Balance at beginning of year $ 2,053 $ 2,090 $ 1,779 Net income (loss) (21) 44 364 Repurchase of 6.50% preferred stock (11) (2) (8) Steel Stock issued 6 2 59 Dividends on preferred stock (8) (9) (9) Dividends on Steel Stock (per share $1.00) (89) (88) (88) Deferred compensation (3) 1 - Accumulated other comprehensive income (loss)/(a)/: Foreign currency translation adjustments (13) (5) (5) Minimum pension liability adjustments (Note 12) 3 20 (2) ------- ------- ------- Balance at end of year $ 1,917 $ 2,053 $ 2,090 ----------------------------------------------------------------------------------------------- Total stockholders' equity $ 1,919 $ 2,056 $ 2,093 -----------------------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements relative to the annual activity of these adjustments. Total comprehensive income (loss) for the U. S. Steel Group for the years 2000, 1999 and 1998 was $(31) million,$59 million and $357 million, respectively. - -------------------------------------------------------------------------------- 20. Dividends In accordance with the USX Restated Certificate of Incorporation, dividends on the Steel Stock and Marathon Stock are limited to the legally available funds of USX. Net losses of either Group, as well as dividends and distributions on any class of USX Common Stock or series of preferred stock and repurchases of any class of USX Common Stock or series of preferred stock at prices in excess of par or stated value, will reduce the funds of USX legally available for payment of dividends on both classes of Common Stock. Subject to this limitation, the Board of Directors intends to declare and pay dividends on the Steel Stock based on the financial condition and results of operations of the U. S. Steel Group, although it has no obligation under Delaware law to do so. In making its dividend decisions with respect to Steel Stock, the Board of Directors considers, among other things, the long-term earnings and cash flow capabilities of the U. S. Steel Group as well as the dividend policies of similar publicly traded steel companies. Dividends on the Steel Stock are further limited to the Available Steel Dividend Amount. At December 31, 2000, the Available Steel Dividend Amount was at least $3,161 million. The Available Steel Dividend Amount will be increased or decreased, as appropriate, to reflect U. S. Steel Group net income, dividends, repurchases or issuances with respect to the Steel Stock and preferred stock attributed to the U. S. Steel Group and certain other items. S-18 - -------------------------------------------------------------------------------- 21. Income Per Common Share The method of calculating net income (loss) per share for the Steel Stock and the Marathon Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the U. S. Steel Group and the Marathon Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends to the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive.
2000 1999 1998 ------------------- ---------------- ----------------- Basic Diluted Basic Diluted Basic Diluted ------ ------- ------- ------- ------- ------- Computation of Income Per Share ------------------------------- Net income (loss) (millions): Income (loss) before extraordinary losses $ (21) $ (21) $ 51 $ 51 $ 364 $ 364 Dividends on preferred stock 8 8 9 9 9 - Extraordinary losses - - 7 7 - - ------- ------- ------- ------- ------- ------- Net income (loss) applicable to Steel Stock (29) (29) 35 35 355 364 Effect of dilutive securities - Trust preferred securities - - - - - 8 ------- ------- ------- ------- ------- ------- Net income (loss) assuming conversions $ (29) $ (29) $ 35 $ 35 $ 355 $ 372 ======= ======= ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,613 88,613 88,392 88,392 87,508 87,508 Effect of dilutive securities: Trust preferred securities - - - - - 4,256 Preferred stock - - - - - 3,143 Stock options - - - 4 - 36 ------- ------- ------- ------- ------- ------- Average common shares and dilutive effect 88,613 88,613 88,392 88,396 87,508 94,943 ======= ======= ======= ======= ======= ======= Per share: Income (loss) before extraordinary losses $ (.33) $ (.33) $ .48 $ .48 $ 4.05 $ 3.92 Extraordinary losses - - .08 .08 - - ------- ------- ------- ------- ------- ------- Net income (loss) $ (.33) $ (.33) $ .40 $ .40 $ 4.05 $ 3.92 ======= ======= ======= ======= ======= =======
- -------------------------------------------------------------------------------- 22. Stock-Based Compensation Plans and Stockholder Rights Plan USX Stock-Based Compensation Plans and Stockholder Rights Plan are discussed in Note 17, and Note 19, respectively, to the USX consolidated financial statements. The U. S. Steel Group's actual stock-based compensation expense was $1 million in 2000 and 1999, and none in 1998. Incremental compensation expense, as determined under a fair value model, was not material ($.02 or less per share for all years presented). Therefore, pro forma net income and earnings per share data have been omitted. - -------------------------------------------------------------------------------- 23. Property, Plant and Equipment
(In millions) December 31 2000 1999 ---------------------------------------------------------------------------------------------------- Land and depletable property $ 161 $ 152 Buildings 602 484 Machinery and equipment 8,409 8,007 Leased assets 98 105 -------- -------- Total 9,270 8,748 Less accumulated depreciation, depletion and amortization 6,531 6,232 -------- -------- Net $ 2,739 $ 2,516 -----------------------------------------------------------------------------------------------------
Amounts in accumulated depreciation, depletion and amortization for assets acquired under capital leases (including sale-leasebacks accounted for as financings) were $79 million and $81 million at December 31, 2000 and 1999, respectively. During 2000, the U. S. Steel Group recorded $71 million of impairments relating to coal assets located in West Virginia and Alabama. The impairment was recorded as a result of a reassessment of long-term prospects after adverse geological conditions were encountered. The charge is included in depreciation, depletion and amortization. S-19 - -------------------------------------------------------------------------------- 24. Derivative Instruments The U. S. Steel Group remains at risk for possible changes in the market value of derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. The U. S. Steel Group is also exposed to credit risk in the event of nonperformance by counterparties. The credit-worthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical, and full performance is anticipated. The following table sets forth quantitative information by class of derivative instrument:
Fair Carrying Recorded Value Amount Deferred Aggregate Assets Assets Gain or Contract (In millions) (Liabilities)/(a)/ (Liabilities) (Loss) Values/(b)/ --------------------------------------------------------------------------------------------------------------- December 31, 2000: OTC commodity swaps - other than trading/(c)/ $ - $ - $ - $ 18 --------------------------------------------------------------------------------------------------------------- December 31, 1999: OTC commodity swaps - other than trading $ 3 $ 3 $ 3 $ 37 ---------------------------------------------------------------------------------------------------------------
/(a)/ The fair value amounts are based on exchange-traded index prices and dealer quotes. /(b)/ Contract or notional amounts do not quantify risk exposure, but are used in the calculation of cash settlements under the contracts. /(c)/ The OTC swap arrangements vary in duration with certain contracts extending into 2001. - -------------------------------------------------------------------------------- 25. Fair Value of Financial Instruments Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 24, by individual balance sheet account. As described in Note 4, the U. S. Steel Group's specifically attributed financial instruments and the U. S. Steel Group's portion of USX's financial instruments attributed to all groups are as follows:
2000 1999 ------------------ ------------------ Fair Carrying Fair Carrying (In millions) December 31 Value Amount Value Amount ----------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 219 $ 219 $ 22 $ 22 Receivables (including intergroup receivables) 1,341 1,341 935 935 Investments and long-term receivables 137 137 122 122 ------ ------ ------ ------ Total financial assets $1,697 $1,697 $1,079 $1,079 ---------------------------------------------------------------------------------------------------- Financial liabilities: Notes payable $ 70 $ 70 $ - $ - Accounts payable 760 760 739 739 Accrued interest 47 47 15 15 Long-term debt (including amounts due within one year) 2,375 2,287 835 823 Preferred stock of subsidiary and trust preferred securities 182 249 232 249 ------ ------ ------ ------ Total financial liabilities $3,434 $3,413 $1,821 $1,826 ----------------------------------------------------------------------------------------------------
Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short- term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. Certain foreign cost method investments are excluded from investments and long-term receivables because the fair value is not readily determinable. The U. S. Steel Group is subject to market risk and liquidity risk related to its investments; however, these risks are not readily quantifiable. Fair value of preferred stock of subsidiary and trust preferred securities was based on market prices. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities. Financial guarantees are the U. S. Steel Group's only unrecognized financial instrument. It is not practicable to estimate the fair value of this form of financial instrument obligation because there are no quoted market prices for transactions which are similar in nature. For details relating to financial guarantees, see Note 26. S-20 - -------------------------------------------------------------------------------- 26. Contingencies and Commitments USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Environmental matters - The U. S. Steel Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Accrued liabilities for remediation totaled $137 million and $101 million at December 31, 2000 and 1999, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 2000 and 1999, such capital expenditures totaled $18 million and $32 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. Guarantees - Guarantees by USX of the liabilities of unconsolidated entities of the U. S. Steel Group totaled $82 million at December 31, 2000, and $88 million at December 31, 1999. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the investees to reduce potential U. S. Steel Group losses resulting from these guarantees. As of December 31, 2000, the largest guarantee for a single such entity was $59 million. Commitments - At December 31, 2000 and 1999, the U. S. Steel Group's contract commitments to acquire property, plant and equipment totaled $206 million and $83 million, respectively. USSK has a commitment to the Slovak government for a capital improvements program of $700 million, subject to certain conditions, over a period commencing with the acquisition date and ending on December 31, 2010. USSK is required to report periodically to the Slovak government on its status toward meeting this commitment. The first reporting period ends on December 31, 2003. USX entered into a 15-year take-or-pay arrangement in 1993, which requires the U. S. Steel Group to accept pulverized coal each month or pay a minimum monthly charge of approximately $1 million. Charges for deliveries of pulverized coal totaled $23 million in 2000, 1999 and 1998. If USX elects to terminate the contract early, a maximum termination payment of $96 million, which declines over the duration of the agreement, may be required. S-21 Selected Quarterly Financial Data (Unaudited)
2000 --------------------------------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ----------------------------------------------------------------------------------------- Revenues and other income: Revenues/(a)/ $ 1,417 $ 1,462 $ 1,629 $ 1,582 Other income (loss) (4) 13 27 6 ------- ------- ------- ------- Total 1,413 1,475 1,656 1,588 Income (loss) from operations (159) 60 112 91 Income (loss) before extraordinary losses (139) 19 56 43 Net income (loss) (139) 19 56 43 - ----------------------------------------------------------------------------------------- Steel Stock data: - ----------------- Income (loss) before extraordinary losses applicable to Steel Stock $ (141) $ 17 $ 54 $ 41 - Per share: basic (1.59) .19 .62 .45 diluted (1.59) .19 .62 .45 Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(b)/: - Low 12-11/16 14-7/8 18-1/4 20-5/8 - High 18-5/16 19-11/16 26-7/8 32-15/16 - ----------------------------------------------------------------------------------------------- 1999 ------------------------------------------------------- (In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. - ------------------------------------------------------------------------------------------------ Revenues and other income: Revenues/(a)/ $ 1,492 $ 1,415 $ 1,344 $ 1,285 Other income (loss) 8 (40) 1 (35) ------- ------- ------- ------- Total 1,500 1,375 1,345 1,250 Income (loss) from operations 75 (26) 103 (2) Income (loss) before extraordinary losses 34 (29) 55 (9) Net income (loss) 34 (31) 55 (14) - ------------------------------------------------------------------------------------------------ Steel Stock data: - ----------------- Income (loss) before extraordinary losses applicable to Steel Stock $ 32 $ (31) $ 52 $ (11) - Per share: basic .35 (.35) .60 (.13) diluted .35 (.35) .59 (.13) Dividends paid per share .25 .25 .25 .25 Price range of Steel Stock/(b)/: - Low 21-3/ 4 24-9/16 23-1/2 22-1/4 - High 33 30-1/16 34-1/4 29-1/8 - ------------------------------------------------------------------------------------------------
/(a)/ Certain items have been reclassified between revenues and cost of revenues, primarily to give effect to new accounting standards as disclosed in Note 3 of the Notes to Financial Statements. Amounts reclassified in the first, second and third quarters of 2000 were $41 million, $45 million and $45 million, respectively, and for the first, second, third and fourth quarters of 1999 were $39 million, $41 million, $38 million and $38 million, respectively. /(b)/ Composite tape. Principal Unconsolidated Investees (Unaudited)
December 31, 2000 Company Country Ownership Activity - --------------------------------------------------------------------------------------------------------- Clairton 1314B Partnership, L.P. United States 10% Coke & Coke By-Products Double Eagle Steel Coating Company United States 50% Steel Processing PRO-TEC Coating Company United States 50% Steel Processing Republic Technologies International, LLC United States 16% Steel Products Transtar, Inc. United States 46% Transportation USS-POSCO Industries United States 50% Steel Processing Worthington Specialty Processing United States 50% Steel Processing - ---------------------------------------------------------------------------------------------------------
Supplementary Information on Mineral Reserves (Unaudited) See the USX consolidated financial statements for Supplementary Information on Mineral Reserves relating to the U. S. Steel Group, page U-30. S-22 Five-Year Operating Summary
(Thousands of net tons, unless otherwise noted) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------- Raw Steel Production Gary, IN 6,610 7,102 6,468 7,428 6,840 Mon Valley, PA 2,683 2,821 2,594 2,561 2,746 Fairfield, AL 2,069 2,109 2,152 2,361 1,862 Kosice, Slovak Republic 382 - - - - ------------------------------------------- Total 11,744 12,032 11,214 12,350 11,448 ---------------------------------------------------------------------------------------------- Raw Steel Capability Domestic Steel 12,800 12,800 12,800 12,800 12,800 U. S. Steel Kosice/(a)/ 467 - - - - ------------------------------------------- Total 13,267 12,800 12,800 12,800 12,800 Total production as % of total capability 88.5 94.0 87.6 96.5 89.4 ---------------------------------------------------------------------------------------------- Hot Metal Production Domestic Steel 9,904 10,344 9,743 10,591 9,716 U. S. Steel Kosice 340 - - - - ------------------------------------------- Total 10,244 10,344 9,743 10,591 9,716 ---------------------------------------------------------------------------------------------- Coke Production Domestic Steel/(b)/ 5,003 4,619 4,835 5,757 6,777 U. S. Steel Kosice 188 - - - - ------------------------------------------- Total 5,191 4,619 4,835 5,757 6,777 ---------------------------------------------------------------------------------------------- Iron Ore Pellets - Minntac, MN Shipments 15,020 15,025 15,446 16,403 14,962 ---------------------------------------------------------------------------------------------- Coal Production 6,195 6,632 8,150 7,528 7,283 ---------------------------------------------------------------------------------------------- Coal Shipments 6,779 6,924 7,670 7,811 7,117 ---------------------------------------------------------------------------------------------- Steel Shipments by Product - Domestic Steel Sheet and semi-finished steel products 7,409 8,114 7,608 8,170 8,677 Tubular, plate and tin mill products 3,347 2,515 3,078 3,473 2,695 ------------------------------------------- Total 10,756 10,629 10,686 11,643 11,372 Total as % of domestic steel industry 9.8 10.0 10.5 10.9 11.3 ---------------------------------------------------------------------------------------------- Steel Shipments by Product - U. S. Steel Kosice Sheet and semi-finished steel products 207 - - - - Tubular, plate and tin mill products 110 - - - - ------------------------------------------- Total 317 - - - - ---------------------------------------------------------------------------------------------- Steel Shipments by Market - Domestic Steel Steel service centers 2,315 2,456 2,563 2,746 2,831 Transportation 1,466 1,505 1,785 1,758 1,721 Further conversion: Joint ventures 1,771 1,818 1,473 1,568 1,542 Trade customers 1,174 1,633 1,140 1,378 1,227 Containers 702 738 794 856 874 Construction 936 844 987 994 865 Oil, gas and petrochemicals 973 363 509 810 746 Export 544 321 382 453 493 All other 875 951 1,053 1,080 1,073 ------------------------------------------- Total 10,756 10,629 10,686 11,643 11,372 ---------------------------------------------------------------------------------------------- Average Steel Price Per Ton Domestic Steel $ 450 $ 420 $ 469 $ 479 $ 467 U. S. Steel Kosice 269 - - - - ----------------------------------------------------------------------------------------------
/(a)/ Represents the operations of U. S. Steel Kosice s.r.o., following the acquisition of the steelmaking operations and related assets of VSZ a.s. on November 24, 2000. /(b)/ The reduction in coke production after 1996 reflected U. S. Steel's entry into a strategic partnership with two limited partners on June 1, 1997, to acquire an interest in three coke batteries at its Clairton (Pa.) Works. S-23 Five-Year Financial Summary
(Dollars in millions, except as noted) 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------------------------- Revenues and Other Income Revenues by product: Sheet and semi-finished steel products $ 3,288 $ 3,433 $ 3,598 $ 3,923 $ 3,774 Tubular, plate and tin mill products 1,731 1,140 1,546 1,793 1,671 Raw materials (coal, coke and iron ore) 626 549 744 796 824 Other/(a)/ 445 414 490 517 466 Income (loss) from investees (8) (89) 46 69 66 Net gains on disposal of assets 46 21 54 57 16 Other income (loss) 4 2 (1) 1 55 ------- ------- ------- ------- ------- Total revenues and other income/(b)/ $ 6,132 $ 5,470 $ 6,477 $ 7,156 $ 6,872 -------------------------------------------------------------------------------------------------------------------- Income From Operations Segment income: Domestic Steel/(b)/ $ 23 $ 91 $ 517 $ 787 $ 420 U. S. Steel Kosice 2 - - - - Items not allocated to segments: Net pension credits/(b)/ 266 228 186 144 158 Costs of former businesses (91) (83) (100) (125) (120) Administrative expenses (25) (17) (24) (33) (28) Other/(c)/ (71) (69) - - 53 ------- ------- ------- -------- ------- Total income from operations 104 150 579 773 483 Net interest and other financial costs 105 74 42 87 116 Provision for income taxes 20 25 173 234 92 -------------------------------------------------------------------------------------------------------------------- Income (Loss) Before Extraordinary Losses $ (21) $ 51 $ 364 $ 452 $ 275 Per common share - basic (in dollars) (.33) .48 4.05 5.24 3.00 - diluted (in dollars) (.33) .48 3.92 4.88 2.97 Net Income (Loss) $ (21) $ 44 $ 364 $ 452 $ 273 Per common share - basic (in dollars) (.33) .40 4.05 5.24 2.98 - diluted (in dollars) (.33) .40 3.92 4.88 2.95 -------------------------------------------------------------------------------------------------------------------- Balance Sheet Position at year-end Current assets $ 2,717 $ 1,981 $ 1,275 $ 1,531 $ 1,428 Net property, plant and equipment 2,739 2,516 2,500 2,496 2,551 Total assets 8,711 7,525 6,749 6,694 6,580 Short-term debt 209 13 25 67 91 Other current liabilities 1,182 1,271 991 1,267 1,208 Long-term debt 2,236 902 464 456 1,014 Employee benefits 1,767 2,245 2,315 2,338 2,430 Trust preferred securities and preferred stock of subsidiary 249 249 248 248 64 Common stockholders' equity 1,917 2,053 2,090 1,779 1,559 Per share (in dollars) 21.58 23.23 23.66 20.56 18.37 -------------------------------------------------------------------------------------------------------------------- Cash Flow Data Net cash from operating activities $ (627) $ (80) $ 380 $ 476 $ 92 Capital expenditures 244 287 310 261 337 Disposal of assets 21 10 21 420 161 Dividends paid 97 97 96 96 104 -------------------------------------------------------------------------------------------------------------------- Employee Data Total employment costs $ 1,197/(d)/ $ 1,148 $ 1,305 $ 1,417 $ 1,372 Average domestic employment cost (dollars per hour) 28.70 28.35 30.42 31.56 30.35 Average number of domestic employees 19,353 19,266 20,267 20,683 20,831 Number of U. S. Steel Kosice s.r.o. employees at year-end 16,244 - - - - Number of pensioners at year-end 94,339 97,102/(e)/ 92,051 93,952 96,510 -------------------------------------------------------------------------------------------------------------------- Stockholder Data at year-end Number of common shares outstanding (in millions) 88.8 88.4 88.3 86.6 84.9 Registered shareholders (in thousands) 50.3 55.6 60.2 65.1 71.0 Market price of common stock $18.000 $33.000 $23.000 $31.250 $31.375 --------------------------------------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by-products, engineering and consulting services, real estate development and resource management. /(b)/ 1996-1999 reclassified to conform to 2000 classifications. /(c)/ Includes impairment of coal assets in 2000, losses related to investments in equity investees in 1999 and gain on investee stock offering in 1996. /(d)/ Includes U. S. Steel Kosice s.r.o. from date of acquisition. /(e)/ Includes approximately 8,000 surviving spouse beneficiaries added to the U. S. Steel pension plan in 1999. S-24 Management's Discussion and Analysis The U. S. Steel Group is engaged in the production and sale of steel mill products, coke, and taconite pellets; the management of mineral resources; coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, and Republic Technologies International, LLC ("Republic"). On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which held the steel and related assets of VSZ a.s. ("VSZ"), headquartered in the Slovak Republic. Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements. Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates," "believes," "estimates," "expects" or similar words indicating that future outcomes are not known with certainty and subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the U. S. Steel Group, see Supplementary Data - Disclosures About Forward-Looking Information in USX Form 10-K. Management's Discussion and Analysis of Income Revenues and Other Income for each of the last three years are summarized in the following table:
(Dollars in millions) 2000 1999 1998 ----------------------------------------------------------------------------------------- Revenues by product: Sheet and semi-finished steel products $3,288 $3,433 $3,598 Tubular, plate, and tin mill products 1,731 1,140 1,546 Raw materials (coal, coke and iron ore) 626 549 744 Other/(a)/ 445 414 490 Income (loss) from investees (8) (89) 46 Net gains on disposal of assets 46 21 54 Other income (loss) 4 2 (1) ------ ------ ------ Total revenues and other income $6,132 $5,470 $6,477 -----------------------------------------------------------------------------------------
/(a)/ Includes revenue from the sale of steel production by- products, real estate development, resource management, and engineering and consulting services. Total revenues and other income increased by $662 million in 2000 from 1999 primarily due to the consolidation of Lorain Tubular Company, LLC, ("Lorain Tubular") effective January 1, 2000, higher average realized prices, particularly tubular product prices, and lower losses from investees, which, in 1999, included a $47 million charge for the impairment of U. S. Steel's investment in USS/Kobe Steel Company. Total revenues and other income in 1999 decreased by $1,007 million from 1998 primarily due to lower average realized prices and lower income from investees. S-25 Management's Discussion and Analysis continued Income from operations for the U. S. Steel Group for the last three years was:
(Dollars in millions) 2000 1999 1998 ----------------------------------------------------------------------------------------------------- Segment income for Domestic Steel/(a)/ $ 23 $ 91 $ 517 Segment income for U. S. Steel Kosice/(b)/ 2 - - ----- ----- ----- Income for reportable segments $ 25 $ 91 $ 517 Items not allocated to segments: Net pension credits 266 228 186 Administrative expenses (25) (17) (24) Costs related to former business activities/(c)/ (91) (83) (100) Asset impairments - Coal (71) - - Impairment of USX's investment in USS/Kobe and costs related to formation of Republic - (47) - Loss on investment in RTI stock used to satisfy indexed debt obligations/(d)/ - (22) - ----- ----- ----- Total income from operations $ 104 $ 150 $ 579 -----------------------------------------------------------------------------------------------------
/(a)/ Includes income from the sale and domestic production of steel mill products, coke and taconite pellets; the management of mineral resources; coal mining; real estate development and management; and engineering and consulting services. /(b)/ Includes the sale and production of steel products from facilities primarily located in the Slovak Republic commencing November 24, 2000. For further details, see Note 5 to the U. S. Steel Group Financial Statements. /(c)/ Includes the portion of postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. /(d)/ For further details, see Note 6 to the U. S. Steel Group Financial Statements. Segment income for Domestic Steel Domestic Steel operations recorded segment income of $23 million in 2000 versus segment income of $91 million in 1999, a decrease of $68 million. The 2000 segment income included $36 million for certain environmental and legal accruals, a $34 million charge to establish reserves against notes and receivables from financially distressed steel companies and a $10 million charge for USX's share of Republic special charges. Results in 1999 included $17 million in charges for certain environmental and legal accruals and $7 million in various non-recurring investee charges. Excluding these items, the decrease in segment income for Domestic Steel was primarily due to higher costs related to energy and inefficient operating levels due to lower throughput, lower income from raw materials operations, particularly coal operations and lower sheet shipments resulting from high levels of imports that continued in 2000. Segment income for Domestic Steel operations in 1999 decreased $426 million from 1998. Results in 1998 included a net favorable $30 million for an insurance litigation settlement and charges of $10 million related to a voluntary workforce reduction plan. Excluding these items, the decrease in segment income for Domestic Steel was primarily due to lower average steel prices, lower income from raw materials operations, a less favorable product mix and lower income from investees. Segment income for U. S. Steel Kosice USSK segment income for the period following the November 24, 2000 acquisition was $2 million. Items not allocated to segments: Net pension credits, which are primarily noncash, totaled $266 million in 2000, $228 million in 1999 and $186 million in 1998. Net pension credits in 1999 included $35 million for a one-time favorable pension settlement primarily related to the voluntary early retirement program for salaried employees. For additional information on pensions, see Note 12 to the U. S. Steel Group Financial Statements. S-26 Management's Discussion and Analysis continued Asset impairments - Coal, were for asset impairments at U. S. Steel Mining's coal mines in Alabama and West Virginia in 2000 following a reassessment of long-term prospects after adverse geological conditions were encountered. In 1999, an impairment of USX's investment in USS/Kobe and costs related to the formation of Republic totaled $47 million. Income from operations in 1999 also included a loss on investment in RTI stock used to satisfy indexed debt obligations of $22 million from the termination of ownership in RTI International Metals, Inc. For further discussion, see Note 6 to the U. S. Steel Group Financial Statements. Net interest and other financial costs for each of the last three years are summarized in the following table: (Dollars in millions) 2000 1999 1998 ------------------------------------------------------------------ Net interest and other financial costs $ 105 $ 74 $ 42 Less: Favorable adjustment to carrying value of Indexed Debt/(a)/ - 13 44 ----- ----- ----- Net interest and other financial costs adjusted to exclude above item $ 105 $ 87 $ 86 ------------------------------------------------------------------- /(a)/ In December 1996, USX issued $117 million of 6-3/4% Exchangeable Notes Due February 1, 2000 ("Indexed Debt") indexed to the price of RTI common stock. The carrying value of Indexed Debt was adjusted quarterly to settlement value, based on changes in the value of RTI common stock. Any resulting adjustment was credited to income and included in interest and other financial costs. For further discussion of Indexed Debt, see Note 6 to the U. S. Steel Group Financial Statements. Adjusted net interest and other financial costs increased $18 million in 2000 as compared with 1999, primarily due to higher average debt levels. Adjusted net interest and other financial costs were $87 million in 1999 as compared with $86 million in 1998. The provision for income taxes in 2000 decreased compared to 1999 primarily due to a decline in income from operations, offset by higher state income taxes as certain previously recorded state tax benefits will not be utilized. The provision for income taxes in 1999 decreased compared to 1998 due to a decline in income from operations. For further discussion on income taxes, see Note 15 to the U. S. Steel Group Financial Statements. The extraordinary loss on extinguishment of debt of $7 million, net of income tax benefit, in 1999 included a $5 million loss resulting from the satisfaction of the indexed debt and a $2 million loss for U. S. Steel's share of Republic's extraordinary loss related to the early extinguishment of debt. For additional information, see Note 6 to the U. S. Steel Group Financial Statements. The U. S. Steel Group recorded a 2000 net loss of $21 million, compared with net income of $44 million in 1999 and $364 million in 1998. Net income decreased $65 million in 2000 from 1999, and decreased $320 million in 1999 from 1998. The decreases in net income primarily reflect the factors discussed above. S-27 Management's Discussion and Analysis continued Management's Discussion and Analysis of Financial Condition, Cash Flows and Liquidity Current assets at year-end 2000 increased $736 million from year-end 1999 primarily due to an increase in cash and cash equivalents, a larger inter-group income tax receivable, and increased trade receivables and inventories resulting from the acquisition of USSK. Net property, plant and equipment at year-end 2000 increased $223 million from year-end 1999 primarily due to the acquisition of USSK. Current liabilities in 2000 increased $107 million from 1999 primarily due to increased notes payable and increased debt due within one year, partially offset by a decrease in payroll and benefits payable. Total long-term debt and notes payable at December 31, 2000 of $2,445 million was $1,530 million higher than year-end 1999. USX debt attributed to the U. S. Steel Group increased partially due to a $500 million elective contribution to a Voluntary Employee Benefit Association ("VEBA"), a trust established by contract in 1994 covering United Steelworkers of America retirees' health care and life insurance benefits, and the acquisition of USSK. Excluding the impact of these items, the increase in debt was primarily due to lower cash flow provided from operating activities partially offset by reduced capital expenditures. For further discussion of the VEBA contribution, see Note 12 to the U. S. Steel Group Financial Statements. Most of the debt is a direct obligation of, or is guaranteed by, USX. Employee benefits at December 31, 2000 decreased $478 million primarily due to the $500 million elective contribution to a VEBA. Net cash used in operating activities in 2000 was $627 million and reflected the $500 million elective contribution to a VEBA and a $30 million elective contribution to a non-union retiree life insurance trust, partially offset by an income tax settlement with the Marathon Group in accordance with the group tax allocation policy. Net cash used in operating activities was $80 million in 1999 including a net payment of $320 million upon the expiration of the accounts receivable program. Excluding these non-recurring items in both years, net cash provided from operating activities decreased $434 million in 2000 due mainly to decreased profitability and an increase in working capital. Net cash provided from operating activities was $380 million in 1998 and included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace explosion and the payment of $30 million for the repurchase of sold accounts receivable, partially offset by an income tax settlement with the Marathon Group in accordance with the group tax allocation policy. Excluding these non-recurring items in both years, net cash provided from operating activities decreased $110 million in 1999 due mainly to decreased profitability. Capital expenditures in 2000 included exercising an early buyout option of a lease for approximately half of the Gary Works No. 2 Slab Caster; the continued replacement of coke battery thruwalls at Gary Works; installation of the remaining two coilers at Gary's hot strip mill; a blast furnace stove replacement at Gary Works; and the continuation of an upgrade to the Mon Valley cold reduction mill. Capital expenditures in 1999 included the completion of the new 64" pickle line at Mon Valley Works; the replacement of one coiler at the Gary hot strip mill; an upgrade to the Mon Valley S-28 Management's Discussion and Analysis continued cold reduction mill; replacement of coke battery thruwalls at Gary Works; several projects at Gary Works allowing for production of specialized high strength steels, primarily for the automotive market; and completion of the conversion of the Fairfield pipemill to use rounds instead of square blooms. Contract commitments for capital expenditures at year-end 2000 were $206 million, compared with $83 million at year-end 1999. Capital expenditures for 2001 are expected to be approximately $425 million including exercising an early buyout option of a lease for the balance of the Gary Works No. 2 Slab Caster; work on the No. 3 blast furnace at Mon Valley Works; work on the No. 2 stove at the No. 6 blast furnace at Gary Works; the completion of the replacement of coke battery thruwalls at Gary Works; the completion of an upgrade to the Mon Valley cold reduction mill; mobile equipment purchases; systems development project; and projects at USSK, including the completion of the tin mill upgrade. The preceding statement concerning expected 2001 capital expenditures is a forward-looking statement. This forward-looking statement is based on assumptions, which can be affected by (among other things) levels of cash flow from operations, general economic conditions, whether or not assets are purchased or financed by operating leases, unforeseen hazards such as weather conditions, explosions or fires, which could delay the timing of completion of particular capital projects. Accordingly, actual results may differ materially from current expectations in the forward-looking statement. Investments in investees in 2000 of $35 million largely reflected an investment in stock of VSZ in which USX now holds a 25 percent interest. Investments in investees in 1999 of $15 million was an investment in Republic. Investments in investees in 1998 of $73 million mainly reflects funding for entry into a joint venture in the Slovak Republic with VSZ. The acquisition of U. S. Steel Kosice s.r.o. totaled $10 million in 2000 which reflected a $69 million purchase price net of cash acquired in the transaction of $59 million. Net cash changes related to financial obligations increased by $1,202 million, $486 million and $9 million in 2000, 1999 and 1998, respectively. Financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups as well as debt and financing agreements specifically attributed to the U. S. Steel Group. The increase in 2000 primarily reflected the net effects of cash used in operating activities, including a VEBA contribution, cash used in investing activities, dividend payments and preferred stock repurchases. The increase in 1999 primarily reflected the net effects of cash used in operating and investing activities and dividend payments. For a discussion of USX financing activities attributed to both groups, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for discussion of derivative instruments and associated market risk for U. S. Steel Group. Liquidity For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. S-29 Management's Discussion and Analysis continued Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. To the extent that competitors are not required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. In addition, the U. S. Steel Group expects to incur capital expenditures to meet environmental standards under the Slovak Republic's environmental laws for its USSK operation. The U. S. Steel Group's environmental expenditures for the last three years were/(a)/: (Dollars in millions) 2000 1999 1998 --------------------------------------------------------------- Capital $ 18 $ 32 $ 49 Compliance Operating & maintenance 194 199 198 Remediation/(b)/ 18 22 19 ----- ----- ----- Total U. S. Steel Group $ 230 $ 253 $ 266 --------------------------------------------------------------- /(a)/ Based on previously established U. S. Department of Commerce survey guidelines. /(b)/ These amounts include spending charged against remediation reserves, net of recoveries where permissible, but do not include noncash provisions recorded for environmental remediation. The U. S. Steel Group's environmental capital expenditures accounted for 7%, 11% and 16% of total capital expenditures in 2000, 1999 and 1998, respectively. Compliance expenditures represented 4% of the U. S. Steel Group's total costs and expenses in 2000, 1999 and 1998. Remediation spending during 1998 to 2000 was mainly related to remediation activities at former and present operating locations. These projects include remediation of contaminated sediments in a river that receives discharges from the Gary Works and the closure of permitted hazardous and non-hazardous waste landfills. The Resource Conservation and Recovery Act ("RCRA") establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. The U. S. Steel Group is in the study phase of RCRA corrective action programs at its Fairless Works and its former Geneva Works. A RCRA corrective action program has been initiated at its Gary Works and its Fairfield Works. Until the studies are completed at these facilities, USX is unable to estimate the total cost of remediation activities that will be required. S-30 Management's Discussion and Analysis continued USX has been notified that it is a potential responsible party (``PRP'') at 25 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act (``CERCLA'') as of December 31, 2000. In addition, there are 17 sites related to the U. S. Steel Group where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability or make any judgment as to the amount thereof. There are also 29 additional sites related to the U. S. Steel Group where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 26 to the U. S. Steel Group Financial Statements. In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U. S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a pre-assessment screen pursuant to federal regulations and have determined to perform a Natural Resource Damages Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. The trustees notified the public of their plan for assessment and later adopted the plan. In 2000, the trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group is discussing settlement opportunities with the trustees and the U.S. Environmental Protection Agency ("EPA"). In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture between USX and Kobe Steel, Ltd. ("Kobe"), was the subject of a multi-media audit by the EPA that included an air, water and hazardous waste compliance review. USS/Kobe and the EPA entered into a tolling agreement pending issuance of the final audit and commenced settlement negotiations in July 1999. In August 1999, the steelmaking and bar producing operations of USS/Kobe were combined with companies controlled by Blackstone Capital Partners II to form Republic. The tubular operations of USS/Kobe were transferred to a newly formed entity, Lorain Tubular Company, LLC ("Lorain Tubular"), which operated as a joint venture between USX and Kobe until December 31, 1999 when USX purchased all of Kobe's interest in Lorain Tubular. Republic and Lorain Tubular are continuing negotiations with the EPA. Most of the matters raised by the EPA relate to Republic's facilities; however, air discharges from Lorain Tubular's #3 seamless pipe mill have also been cited. Lorain Tubular will be responsible for matters relating to its facilities. The final report and citations from the EPA have not been issued. S-31 Management's Discussion and Analysis continued In 1998, USX entered into a consent decree with the EPA which resolved alleged violations of the Clean Water Act National Pollution Discharge Elimination System ("NPDES") permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. In 1999, USX paid civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs. In addition, USX will pay the public trustees $1 million at the end of the remediation project for future monitoring costs and USX is obligated to purchase and restore several parcels of property that have been or will be conveyed to the trustees. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $36.4 million over the next five years. Estimated remediation and monitoring costs for this project have been accrued. In February 1999, the U.S. Department of Justice and EPA issued a letter demanding a cash payment of approximately $4 million to resolve a Finding of Violation issued in 1997 alleging improper sampling of benzene waste streams at Gary Coke. On September 18, 2000, a Consent Decree was entered which required USX to pay a civil penalty of $587,000 and to replace PCB transformers as a Supplemental Environmental Program at a cost of approximately $2.2 million. Payment of the civil penalty was made on October 13, 2000. New or expanded environmental requirements, which could increase the U. S. Steel Group's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, the U. S. Steel Group does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2001. The U. S. Steel Group's capital expenditures for environmental are expected to be approximately $20 million in 2001 and are expected to be spent on projects primarily at Gary Works and USSK. Predictions beyond 2001 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies to remediate sites, among other matters. Based upon currently identified projects, the U. S. Steel Group anticipates that environmental capital expenditures will be approximately $51 million in 2002; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. S-32 Management's Discussion and Analysis continued USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 26 to the U. S. Steel Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Management's Discussion and Analysis of Operations Despite a strong start, 2000 turned out to be a difficult year for the domestic steel industry. Steel imports to the United States accounted for an estimated 27%, 26% and 30% of the domestic steel market for 2000, 1999 and 1998, respectively. In 2000, steel imports of pipe increased 37% and imports of hot rolled sheets increased 19%, compared to 1999. For the U. S. Steel Group in 2000, domestic sheet and semi- finished product shipments decreased 9% compared to 1999. In addition, higher natural gas prices increased production cost by approximately $70 million over 1999. Nevertheless, average realized steel prices were 7.1% higher in 2000 versus 1999 due primarily to a strong tubular market and a better product mix from including Lorain Tubular shipments, effective January 1, 2000. However, sheet prices deteriorated during the second half of the year to fourth quarter levels which were among the lowest in the last 20 years. By year-end, several competitors had filed for Chapter 11 bankruptcy, adding more uncertainty to already weak steel markets. Total steel shipments were 11.1 million tons in 2000, 10.6 million tons in 1999, and 10.7 million tons in 1998. Domestic Steel shipments comprised approximately 9.8% of the domestic steel market in 2000. Domestic Steel shipments were negatively affected by high import levels in 1998, 1999 and 2000 and by weak tubular markets in 1999 and 1998. Exports accounted for approximately 5% of Domestic Steel shipments in 2000, 3% in 1999 and 4% in 1998. Domestic raw steel production was 11.4 million tons in 2000, compared with 12.0 million tons in 1999 and 11.2 million tons in 1998. Domestic raw steel production averaged 89% of capability in 2000, compared with 94% of capability in 1999 and 88% of capability in 1998. In 2000, domestic raw steel production was negatively impacted by a planned reline at Gary Works No. 4 blast furnace in July 2000. Because of market conditions, U. S. Steel Group limited its domestic production by keeping the Gary Works No. 4 blast furnace out of service through year-end 2000. In 1998, domestic raw steel production was negatively affected by a planned reline at Gary Works No. 6 blast furnace, an unplanned blast furnace outage at the Gary Works No. 13 blast furnace, and the idling of certain facilities as a result of the increase in imports. Because of market conditions, U. S. Steel Group curtailed its domestic production by keeping the Gary Works No. 6 blast furnace out of service until February 1999, after a scheduled reline was completed in mid-August 1998. In addition, domestic raw steel production was cut back at Mon Valley Works and Fairfield Works during 1998. U. S. Steel's stated annual domestic raw steel production capability was 12.8 million tons in 2000, 1999 and 1998. USSK's stated annual raw steel production capability for 2000 was 4.5 million net tons. After the acquisition, raw steel production at USSK in 2000 averaged 82% of capability. S-33 Management's discussion and Analysis continued On November 13, 2000, U. S. Steel Group joined with eight other producers and the Independent Steelworkers Union to file trade cases against hot-rolled carbon steel flat products from 11 countries (Argentina, India, Indonesia, Kazakhstan, the Netherlands, the People's Republic of China, Romania, South Africa, Taiwan, Thailand and Ukraine). Three days later, the USWA also entered the cases as a petitioner. Antidumping ("AD") cases were filed against all the countries and countervailing duty ("CVD") cases were filed against Argentina, India, Indonesia, South Africa, and Thailand. On December 28, 2000, the U.S. International Trade Commission ("ITC") made a preliminary determination that there is a reasonable indication that the domestic industry is being materially injured by the imports in question. As a result, both the ITC and U.S. Department of Commerce ("Commerce") will continue their investigations in these cases. U. S. Steel Group believes that the remedies provided by U.S. law to private litigants are insufficient to correct the widespread dumping and subsidy abuses that currently characterize steel imports into our country. U. S. Steel Group, nevertheless, intends to file additional AD and CVD petitions against unfairly traded imports that adversely impact, or threaten to adversely impact, the results of the U. S. Steel Group and is urging the U.S. government to take additional steps. On July 3, 2000, Commerce and the ITC initiated mandatory five- year "sunset" reviews of AD orders issued in 1995 against seamless pipe from Argentina, Brazil, Germany and Italy and oil country tubular goods ("OCTG") from Argentina, Italy, Japan, Mexico and South Korea. The reviews also encompass the 1995 CVD orders against the same two products from Italy. The "sunset" review procedures require that an order must be revoked after five years unless Commerce and the ITC determine that, if the orders would be discontinued, dumping or a countervailable subsidy would be likely to continue or recur and material injury to the domestic industry would be likely to continue or recur. Of the 11 orders, 8 are the subject of expedited review at Commerce because there was no response, inadequate response, or waiver of participation by the respondent parties. Therefore, at Commerce, only three of the orders (AD: OCTG from Mexico; and CVD: OCTG and seamless pipe from Italy) are the subject of a full review. The ITC is conducting full reviews of all the cases, despite the fact that responses by some of the respondent countries were inadequate. The U. S. Steel Group depreciates domestic steel assets by modifying straight-line depreciation based on the level of production. Depreciation charges for 2000, 1999, and 1998 were 94%, 99%, and 93%, respectively, of straight-line depreciation based on production levels for each of the years. See Note 2 to the U. S. Steel Group Financial Statements. Outlook for 2001 Domestic Steel's order book and prices remain soft due to continued high import volumes (which in 2000 were second only to record-year 1998 levels), a draw-down of inventories by spot purchasers and increasing evidence that the growth in the domestic economy is slowing. In addition to these factors, our plate products business is being impacted by recently added domestic capacity. Although domestic shipments for the first quarter of 2001 are projected to be somewhat better than fourth quarter 2000 levels, we expect that sheet and plate pricing, which declined markedly in the fourth quarter, will continue to be depressed as a result of the factors cited above. The tubular business, however, remains strong. For the year 2001, domestic shipments are expected to be approximately 11 million net tons, excluding any shipments from the potential acquisition of LTV Corporation tin operations. For the year 2001, USSK shipments are expected to be approximately 3.3 million to 3.6 million net tons. S-34 Management's discussion and Analysis continued High natural gas prices adversely affected our results in 2000 and are expected to persist for some time. The blast furnace idled at Gary Works in July 2000 for a planned 10-day outage remained down until late February 2001 due to business conditions. The U. S. Steel Group has continued its cost reduction efforts, and has recently requested from its current suppliers an immediate, temporary eight percent price reduction from existing levels to help weather this difficult period. Several domestic competitors recently have filed for Chapter 11 bankruptcy protection. This provides them with certain competitive advantages and further demonstrates the very difficult economic circumstances faced by the domestic industry. U. S. Steel Group's income from operations includes net pension credits, which are primarily noncash, associated with all of U. S. Steel's pension plans. Net pension credits were $266 million in 2000. At the end of 2000, U. S. Steel's main pension plans' transition asset was fully amortized, decreasing the pension credit by $69 million annually in future years for this component. In addition, for the year 2001, low marketplace returns on trust assets in the year 2000 and pending business combinations in the current year are expected to further reduce net pension credits to approximately $160 million. The above includes forward-looking statements concerning net pension credits which can vary depending upon the market performance of plan assets, changes in actuarial assumptions regarding such factors as the selection of a discount rate and rate of return on plan assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels, business combinations and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent net pension credits decline in the future, income from operations would be adversely affected. The U. S. Steel Group includes a 16 percent equity method investment in Republic (through an ownership interest in Republic Technologies International Holdings, LLC ("Republic Holdings"), which is the sole owner of Republic). In the third quarter of 2000, Republic announced that it had completed a financial restructuring to improve its liquidity position. Republic raised approximately $30 million in loans from certain of its direct and indirect equity partners in exchange for notes of Republic and warrants to purchase Class D common stock of Republic Technologies International, Inc., Republic's majority owner. The U. S. Steel Group's portion was approximately $6 million and the U. S. Steel Group also agreed to certain deferred payment terms into the year 2002, up to a maximum of $30 million, with regard to Republic's obligations relating to iron ore pellets supplied to Republic. In its Form 10-Q for the period ended September 30, 2000, which was filed with the SEC on October 31, 2000, Republic Holdings stated that "Notwithstanding these efforts, [Republic Holdings] may need to obtain additional financing to meet its cash flow requirements, including financing from the sale of additional debt or equity securities." Republic Holdings also stated "As a result of the factors mentioned above, [Republic Holdings] is highly leveraged and could be considered a risky investment." At December 31, 2000, the U. S. Steel Group's financial exposure to Republic totaled approximately $131 million, consisting of amounts owed by Republic to the U. S. Steel Group and debt obligations assumed by Republic. S-35 Management's discussion and Analysis continued In early October 2000, the U. S. Steel Group announced an agreement with LTV Corporation ("LTV") to purchase LTV's tin mill products business, including its Indiana Harbor, Indiana tin operations. This acquisition recently closed and was effective March 1, 2001. Terms of this noncash transaction call for the U. S. Steel Group to assume certain employee-related obligations of LTV. The U. S. Steel Group intends to operate these facilities as an ongoing business and tin mill employees at Indiana Harbor became U. S. Steel Group employees. The U. S. Steel Group and LTV also entered into 5-year agreements for LTV to supply the U. S. Steel Group with pickled hot bands and for the U. S. Steel Group to provide LTV with processing of cold rolled steel. In October 2000, Transtar announced it had entered into a Reorganization and Exchange Agreement with its two voting shareholders. Upon closing, Transtar and certain of its subsidiaries, namely, the Birmingham Southern Railroad Company; the Elgin, Joliet and Eastern Railway Company; the Lake Terminal Railroad Company; the McKeesport Connecting Railroad Company; the Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior & Gulf Navigation Company; and Tracks Traffic and Management Services, Inc., will become subsidiaries within the U. S. Steel Group. The other shareholder, Transtar Holdings, L.P., an affiliate of Blackstone Capital Partners L.P., will become the owner of the other subsidiaries. The preceding statements concerning anticipated steel demand, steel pricing, and shipment levels are forward-looking and are based upon assumptions as to future product prices and mix, and levels of steel production capability, production and shipments. These forward-looking statements can be affected by imports, domestic and international economies, domestic production capacity, the completion of the LTV and Transtar transactions, and customer demand. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. Accounting Standards In the fourth quarter of 2000, USX adopted the following accounting pronouncements primarily related to the classification of items in the financial statements. The adoption of these new pronouncements had no net effect on the financial position or results of operations of USX, although they required reclassifications of certain amounts in the financial statements, including all prior periods presented. . In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," which summarizes the SEC staff's interpretations of generally accepted accounting principles related to revenue recognition and classification. . In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board ("EITF") issued EITF consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent", which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which addresses the classification of costs incurred for shipping goods to customers. S-36 Management's discussion and Analysis continued . In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. USX adopted certain recognition and reclassification provisions of SFAS 140, which were effective for fiscal years ending after December 15, 2000. The remaining provisions of SFAS 140 are effective after March 31, 2001. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which later was amended by SFAS Nos. 137 and 138. This Standard requires recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. The U. S. Steel Group may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards. The U. S. Steel Group will adopt the Standard effective January 1, 2001. The transition adjustment resulting from adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The transition adjustment for the U. S. Steel Group is expected to be immaterial. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations. S-37 Quantitative and Qualitative Disclosures About Market Risk Management Opinion Concerning Derivative Instruments USX uses commodity-based and foreign currency derivative instruments to manage its price risk. Management has authorized the use of futures, forwards, swaps and options to manage exposure to price fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products, and nonferrous metals. For transactions that qualify for hedge accounting, the resulting gains or losses are deferred and subsequently recognized in income from operations, in the same period as the underlying physical transaction. Derivative instruments used for trading and other activities are marked-to-market and the resulting gains or losses are recognized in the current period in income from operations. While USX's risk management activities generally reduce market risk exposure due to unfavorable commodity price changes for raw material purchases and products sold, such activities can also encompass strategies that assume price risk. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose the U. S. Steel Group to material risk. The use of derivative instruments could materially affect the U. S. Steel Group's results of operations in particular quarterly or annual periods. However, management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. For a summary of accounting policies related to derivative instruments, see Note 2 to the U. S. Steel Group Financial Statements. Commodity Price Risk and Related Risks In the normal course of its business, the U. S. Steel Group is exposed to market risk or price fluctuations related to the purchase, production or sale of steel products. To a lesser extent, the U. S. Steel Group is exposed to price risk related to the purchase, production or sale of coal and coke and the purchase of natural gas, steel scrap and certain nonferrous metals used as raw materials. The U. S. Steel Group's market risk strategy has generally been to obtain competitive prices for its products and services and allow operating results to reflect market price movements dictated by supply and demand. However, the U. S. Steel Group uses derivative commodity instruments (primarily over-the-counter commodity swaps) to manage exposure to fluctuations in the purchase price of natural gas, heating oil and certain nonferrous metals. The use of these instruments has not been significant in relation to the U. S. Steel Group's overall business activity. The U. S. Steel Group recorded net pretax other than trading activity gains of $2 million in 2000, losses of $4 million in 1999 and losses of $6 million in 1998. These gains and losses were offset by changes in the realized prices of the underlying hedged commodities. For additional quantitative information relating to derivative commodity instruments, including aggregate contract values and fair values, where appropriate, see Note 24 to the U. S. Steel Group Financial Statements. S-38 Quantitative and Qualitative Disclosures About Market Risk continued Interest Rate Risk USX is subject to the effects of interest rate fluctuations on certain of its non-derivative financial instruments. A sensitivity analysis of the projected incremental effect of a hypothetical 10% decrease in year-end 2000 and 1999 interest rates on the fair value of the U. S. Steel Group's specifically attributed non-derivative financial instruments and the U. S. Steel Group's portion of USX's non-derivative financial instruments attributed to both groups, is provided in the following table:
(Dollars in millions) ----------------------------------------------------------------------------------------------- As of December 31, 2000 1999 Incremental Incremental Increase in Increase in Fair Fair Fair Fair Non-Derivative Financial Instruments/(a)/ Value/(b)/ Value/(c)/ Value/(b)/ Value/(c)/ ----------------------------------------------------------------------------------------------- Financial assets: Investments and long-term receivables/(d)/ $ 137 $ - $ 122 $ - Financial liabilities: Long-term debt/(e)(f)/ $ 2,375 $ 80 $ 835 $ 20 Preferred stock of subsidiary/(g)/ 63 5 63 5 USX obligated mandatorily redeemable convertible preferred securities of a subsidiary trust/(g)/ 119 10 169 15 -------- ------- ------ ----- Total liabilities $ 2,557 $ 95 $1,067 $ 40
/(a)/ Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest, approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. /(b)/ See Note 25 to the U. S. Steel Group Financial Statements for carrying value of instruments. /(c)/ Reflects, by class of financial instrument, the estimated incremental effect of a hypothetical 10% decrease in interest rates at December 31, 2000 and December 31, 1999, on the fair value of USX's non-derivative financial instruments. For financial liabilities, this assumes a 10% decrease in the weighted average yield to maturity of USX's long-term debt at December 31, 2000 and December 31, 1999. /(d)/ For additional information, see Note 16 to the U. S. Steel Group Consolidated Financial Statements. /(e)/ Includes amounts due within one year. /(f)/ Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. For additional information, see Note 11 to the U. S. Steel Group Financial Statements. /(g)/ See Note 22 to the USX Consolidated Financial Statements. At December 31, 2000, USX's portfolio of long-term debt was comprised primarily of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $80 million increase in the fair value of long-term debt assuming a hypothetical 10% decrease in interest rates. However, USX's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect USX's results and cash flows only to the extent that USX elected to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value. S-39 Quantitative and Qualitative Disclosures About Market Risk continued Foreign Currency Exchange Rate Risk USX is subject to the risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities denominated in currencies other than U.S. dollars, in particular the Euro and Slovak koruna. USX has not generally used derivative instruments to manage this risk. However, USX has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At December 31, 2000, the U. S. Steel Group had no open forward currency contracts. Equity Price Risk USX is subject to equity price risk and liquidity risk related to its investment in VSZ, which is attributed to the U. S. Steel Group. These risks are not readily quantifiable. Safe Harbor The U. S. Steel Group's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with the U. S. Steel Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply of and demand for steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the U. S. Steel Group's hedging programs may differ materially from those discussed in the forward-looking statements. S-40 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of USX required by this item is incorporated by reference to the material appearing under the heading "Election of Directors"in USX's Proxy Statement dated March 12, 2001, for the 2001 Annual Meeting of Stockholders. The executive officers of USX or its subsidiaries and their ages as of February 1, 2001, are as follows: USX - Corporate Albert G. Adkins............... 53 Comptroller Albert E. Ferrara, Jr.......... 52 Vice President-Strategic Planning Edward F. Guna................. 52 Vice President & Treasurer Robert M. Hernandez............ 56 Vice Chairman & Chief Financial Officer Kenneth L. Matheny............. 53 Vice President-Investor Relations Dan D. Sandman................. 52 General Counsel, Secretary and Senior Vice President-Human Resources & Public Affairs Larry G. Schultz............... 51 Vice President-Accounting Terrence D. Straub............. 55 Vice President-Governmental Affairs Thomas J. Usher................ 58 Chairman of the Board & Chief Executive Officer USX - Marathon Group Philip G. Behrman.............. 50 Senior Vice President-Worldwide Exploration-Marathon Oil Company Clarence P. Cazalot, Jr........ 50 Vice Chairman-USX Corporation and President-Marathon Oil Company J. Louis Frank................. 64 Executive Vice President G. David Golder................ 53 Senior Vice President-Commercialization and Development-Marathon Oil Company Steven B. Hinchman............. 52 Senior Vice President-Production Operations Steven J. Lowden............... 41 Senior Vice President-Business Development-Marathon Oil Company John T. Mills.................. 53 Senior Vice President-Finance & Administration-Marathon Oil Company William F. Schwind, Jr......... 56 General Counsel & Secretary-Marathon Oil Company USX - U. S. Steel Group Charles G. Carson, III......... 58 Vice President-Environmental Affairs Roy G. Dorrance................ 55 Executive Vice President Charles C. Gedeon.............. 60 Executive Vice President-Raw Materials & Diversified Businesses Gretchen R. Haggerty........... 45 Vice President-Accounting & Finance Bruce A. Haines................ 56 Vice President-Technology & Management Services J. Paul Kadlic................. 59 Executive Vice President-Sheet Products James D. Garraux............... 48 Vice President-Employee Relations Stephan K. Todd................ 55 General Counsel Paul J. Wilhelm................ 58 Vice Chairman-USX Corporation and President-U. S. Steel Group With the exception of Mr. Cazalot, Mr. Behrman and Mr. Lowden mentioned above, all of the executive officers have held responsible management or professional positions with USX or its subsidiaries for more than the past five years. 54 Item 11. MANAGEMENT REMUNERATION Information required by this item is incorporated by reference to the material appearing under the heading "Executive Compensation" in USX's Proxy Statement dated March 12, 2001, for the 2001 Annual Meeting of Stockholders. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated by reference to the material appearing under the headings, "Security Ownership of Certain Beneficial Owners"and "Security Ownership of Directors and Executive Officers" in USX's Proxy Statement dated March 12, 2001, for the 2001 Annual Meeting of Stockholders. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference to the material appearing under the heading "Transactions" in USX's Proxy Statement dated March 12, 2001, for the 2001 Annual Meeting of Stockholders. 55 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. Documents Filed as Part of the Report 1. Financial Statements Financial Statements filed as part of this report are listed on the Index to Financial Statements, Supplementary Data, Management's Discussion and Analysis, and Quantitative and Qualitative Disclosures About Market Risk of USX Consolidated, the Marathon Group and the U. S. Steel Group, immediately preceding pages U-1, M-1 and S-1, respectively. 2. Financial Statement Schedules and Supplementary Data Financial Statement Schedules are omitted because they are not applicable or the required information is contained in the applicable financial statements or notes thereto. Supplementary Data - Summarized Financial Information of Marathon Oil Company is provided on page 63. Disclosures About Forward-Looking Statements are provided beginning on page 64. B. Reports on Form 8-K Form 8-K dated October 19, 2000, reporting under Item 5. Other Events and Regulation FD Disclosure, that the Marathon Group Earnings Release reported that Marathon has signed a definitive agreement with Shell to transfer its 37.5 percent interest in Sakhalin Energy Investment Company Ltd. The increased likelihood of closing this transaction triggered a one-time, noncash deferred tax charge of $235 million in the third quarter. Form 8-K dated November 22, 2000, reporting under Item 9. Regulation FD Disclosure, the press release titled "U. S. Steel Group Experiencing Coal Production Problems at Two Mines". Form 8-K dated November 29, 2000, reporting under Item 9. Regulation FD Disclosure, the press releases titled "Surma Named President of Marathon Ashland Petroleum LLC"and "Marathon Announces new Executive Vice President". Form 8-K dated November 30, 2000, reporting under Item 9. Regulation FD Disclosure, the press release titled "USX to Retain Advisors to Study its Capital Structure". Form 8-K dated November 30, 2000, reporting under Item 9. Regulation FD Disclosure, the press release titled "Marathon Reviews Progress of Upstream and Downstream Businesses". Form 8-K dated December 6, 2000, reporting under Item 9. Regulation FD Disclosure, the press release titled "Marathon Sakhalin Limited and Shell Sakhalin Holdings B.V. complete exchange agreement". Form 8-K dated December 28, 2000, reporting under Item 9. Regulation FD Disclosure, the press release titled "Marathon and Kinder Morgan agree to form Permian Basin joint venture". Form 8-K dated December 28, 2000, reporting under Item 9. Regulation FD Disclosure, that in December 2000, USX-U. S. Steel Group made a voluntary $500 million contribution to the Voluntary Employee Benefit Association (VEBA), which was established as part of the 1994 agreement with the United Steelworkers of America to pay retiree health care and life insurance benefits for steelworker retirees. Form 8-K dated December 29, 2000, reporting under Item 9. Regulation FD Disclosure, the press release titled "Marathon Oil to Acquire Pennaco Energy". Form 8-K dated January 24, 2001, reporting under Item 9. Regulation FD Disclosure, the USX-Marathon Group and USX-U. S. Steel Group Earnings Releases". 56 Form 8-K dated February 27, 2001, reporting under Item 5. Other Events, the filing of the audited Financial Statements and Supplementary Data for the fiscal year ended December 31, 2000, reports of independent accountants. C. Exhibits
Exhibit No. 2. Plan of Acquisition, Reorganization, Arrangement Liquidation or Succession None 3. Articles of Incorporation and By-Laws (a) USX Restated Certificate of Incorporation dated May 1, 1999............. Incorporated by reference to Exhibit 3.1 to the USX Report on Form 10-Q for the quarter ended June 30, 1999. (b) USX By-Laws, effective as of May 1, 1999........................... Incorporated by reference to Exhibit 3.2 to the USX Report on Form 10-Q for the quarter ended June 30, 1999. 4. Instruments Defining the Rights of Security Holders, Including Indentures (a) Five-Year Credit Agreement dated as of November 30, 2000..................... (b) Rights Agreement, dated as of September 28, 1999, between USX Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights Agent..................... Incorporated by reference to Exhibit 4 to USX's Form 8-K filed on September 28, 1999. (c) Pursuant to 17 CFR 229.601(b)(4)(iii), instruments with respect to long-term debt issues have been omitted where the amount of securities authorized under such instruments does not exceed 10% of the total consolidated assets of USX. USX hereby agrees to furnish a copy of any such instrument to the Commission upon its request.
57 10. Material Contracts (a) USX 1990 Stock Plan, As Amended April 28, 1998................... Incorporated by reference to Annex II to the USX Proxy Statement dated March 9, 1998. (b) USX Annual Incentive Compensation Plan, As Amended July 25, 2000.............. (c) USX Senior Executive Officer Annual Incentive Compensation Plan, As Amended April 28, 1998................... Incorporated by reference to Annex I to the USX Proxy Statement dated March 9, 1998. (d) Marathon Oil Company Annual Incentive Compensation Plan, As Amended November 23, 1999........................... Incorporated by reference to Exhibit 10(d) of USX Form 10-K for the year ended December 31, 1999. (e) USX Executive Management Supplemental Pension Program, As Amended January 1, 1999.................. Incorporated by reference to Exhibit 10(e) of USX Form 10-K for the year ended December 31, 1999. (f) USX Supplemental Thrift Program, As Amended January 1, 1999.................. Incorporated by reference to Exhibit 10(f) of USX Form 10-K for the year ended December 31, 1999. (g) Amended and Restated Limited Liability Company Agreement of Marathon Ashland Petroleum LLC, dated as of December 31, 1998............... Incorporated by reference to Exhibit 10(h) of USX Form 10-Q for the quarter ended June 30, 1999. (h) Amendment No. 1 dated as of December 31, 1998 to the Put/Call, Registration Rights and Standstill Agreement of Marathon Ashland Petroleum LLC dated as of January 1, 1998............................. Incorporated by reference to Exhibit 10.2 of USX Form 8-K dated January 1, 1998, and Exhibit 10(i) of USX Form 10-Q for the quarter ended June 30, 1999. (i) Form of Severance Agreements between the Corporation and Various Officers........ Incorporated by reference to Exhibit 10 of USX Form 10-Q for the quarter ended September 30, 1999. (j) USX Deferred Compensation Plan For Non-Employee Directors Amended as of January 1, 1998...............
58 (k) Agreement between Marathon Oil Company and Clarence P. Cazalot, Jr., executed February 28, 2000.................. Incorporated by reference to Exhibit 10(k) of USX Form 10-K for the year ended December 31, 1999. (l) USX Non-Officer Restricted Stock Plan, effective January 30, 2001.................. 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges 21. List of Significant Subsidiaries 23. Consent of Independent Accountants
59 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity indicated on March 12, 2001. USX CORPORATION By /s/ Larry G. Schultz ----------------------------------------- Larry G. Schultz Vice President - Accounting Signature Title --------- ----- Chairman of the Board & /s/ Thomas J. Usher Chief Executive Officer and Director - ---------------------------------------- Thomas J. Usher /s/ Robert M. Hernandez Vice Chairman & Chief Financial - ---------------------------------------- Officer and Director Robert M. Hernandez /s/ Larry G. Schultz Vice President - Accounting - ---------------------------------------- Larry G. Schultz /s/ Neil A. Armstrong Director - ---------------------------------------- Neil A. Armstrong /s/ Clarence P. Cazalot, Jr. Vice Chairman and Director - ---------------------------------------- Clarence P. Cazalot, Jr. /s/ J. Gary Cooper Director - ---------------------------------------- J. Gary Cooper /s/ Charles A. Corry Director - ---------------------------------------- Charles A. Corry /s/ Shirley Ann Jackson Director - ---------------------------------------- Shirley Ann Jackson /s/ Charles R. Lee Director - ---------------------------------------- Charles R. Lee /s/ Paul E. Lego Director - ---------------------------------------- Paul E. Lego /s/ John F. McGillicuddy Director - ---------------------------------------- John F. McGillicuddy /s/ Seth E. Schofield Director - ---------------------------------------- Seth E. Schofield /s/ John W. Snow Director - ---------------------------------------- John W. Snow /s/ Paul J. Wilhelm Vice Chairman and Director - ---------------------------------------- Paul J. Wilhelm /s/ Douglas C. Yearley Director - ---------------------------------------- Douglas C. Yearley 60 GLOSSARY OF CERTAIN DEFINED TERMS The following definitions apply to terms used in this document: bcfd.............................. billion cubic feet per day BOE............................... barrels of oil equivalent bpd............................... barrels per day CAA............................... Clean Air Act CERCLA............................ Comprehensive Environmental Response, Compensation, and Liability Act Clairton Partnership.............. Clairton 1314B Partnership, L.P. CLAM.............................. CLAM Petroleum B.V. CWA............................... Clean Water Act DD&A.............................. depreciation, depletion and amortization Delhi Companies................... Delhi Gas Pipeline Company and other subsidiaries of USX that comprised all of the Delhi Group Delhi Stock....................... USX-Delhi Group Common Stock DESCO............................. Double Eagle Steel Coating Company DOE............................... Department of Energy DOJ............................... U.S. Department of Justice downstream ....................... refining, marketing and transportation operations E&P............................... exploration and production EPA............................... U.S. Environmental Protection Agency exploratory....................... wildcat and delineation, i.e., exploratory wells Gulf.............................. Gulf of Mexico IMV............................... Inventory Market Valuation Indexed Debt...................... 6-3/4% Exchangeable Notes Due February 1, 2000 Kobe.............................. Kobe Steel Ltd. LNG............................... liquefied natural gas MACT.............................. Maximum Achievable Control Technology MAP............................... Marathon Ashland Petroleum LLC MTBE.............................. Methyl tertiary butyl ether Marathon.......................... Marathon Oil Company Marathon Power.................... Marathon Power Company, Ltd. Marathon Stock.................... USX-Marathon Group Common Stock mcf............................... thousand cubic feet Minntac........................... U. S. Steel's iron ore operations at Mt. Iron, Minn. MIPS.............................. 8-3/4% Cumulative Monthly Income Preferred Stock mmcfd............................. million cubic feet per day NOV............................... Notice of Violation OPA-90............................ Oil Pollution Act of 1990 PaDER............................. Pennsylvania Department of Environmental Resources Petronius......................... Viosca Knoll Block 786 POSCO............................. Pohang Iron & Steel Co., Ltd. PRO-TEC........................... PRO-TEC Coating Company, a USX and Kobe joint venture. PRP............................... potentially responsible party RCRA.............................. Resource Conservation and Recovery Act RFI............................... RCRA Facility Investigation RI/FS............................. Remedial Investigation and Feasibility Study RM&T.............................. refining, marketing and transportation RTI............................... RTI International Metals, Inc. (formerly RMI Titanium Company) Republic.......................... Republic Technologies International, LLC SAGE.............................. Scottish Area Gas Evacuation Sakhalin Energy................... Sakhalin Energy Investment Company Ltd. SG&A.............................. selling, general and administrative SSA............................... Speedway SuperAmerica LLC Steel Stock....................... USX-U. S. Steel Group Common Stock Tarragon.......................... Tarragon Oil and Gas Limited Trust Preferred Securities........ 6.75% Convertible Quarterly Income Preferred Securities of USX Capital Trust I 61 GLOSSARY OF CERTAIN DEFINED TERMS (CONTINUED) The following definitions apply to terms used in this document: upstream.......................... exploration and production operations USS-POSCO ........................ USS-POSCO Industries, USX and Pohang Iron & Steel Co., Ltd., joint venture. USS/Kobe ......................... USX and Kobe Steel Ltd. joint venture. USSK.............................. U. S. Steel Kosice s.r.o. USTs.............................. underground storage tanks VSZ............................... VSZ a.s. VSZ U. S. Steel s. r.o............ U. S. Steel and VSZ a.s. joint venture in Kosice, Slovakia 62 Supplementary Data Summarized Financial Information of Marathon Oil Company Included below is the summarized financial information of Marathon Oil Company, a wholly owned subsidiary of USX Corporation.
Year Ended December 31 ------------------------------------- (In millions) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Income Data: Revenues and other income/(a)/....................... $ 33,859 $ 23,689 $ 21,596 Income from operations............................... 1,685 1,749 964 Net income........................................... 396 640 281 December 31 ----------------------- 2000 1999 - ---------------------------------------------------------------------------------------- Balance Sheet Data: Assets: Current assets.................................... $ 7,397 $ 6,045 Noncurrent assets................................. 10,135 11,489 --------- -------- Total assets................................... $ 17,532 $ 17,534 ========= ======== Liabilities and stockholder's equity: Current liabilities............................... $ 3,951 $ 3,288 Noncurrent liabilities............................ 8,110 9,250 Preferred stock of subsidiary..................... 9 10 Minority interest in Marathon Ashland Petroleum LLC 1,840 1,753 Stockholder's equity.............................. 3,622 3,233 --------- -------- Total liabilities and stockholder's equity..... $ 17,532 $ 17,534 - ---------------------------------------------------------------------------------------
/(a)/ Consists of revenues, dividend and investee income, gain on ownership change in MAP, net gains (losses) on disposal of assets and other income. 63 Supplementary Data Disclosures About Forward-Looking Statements USX includes forward-looking statements concerning trends, market forces, commitments, material events or other contingencies potentially affecting USX or the businesses of its Marathon Group or U. S. Steel Group in reports filed with the Securities and Exchange Commission, external documents or oral presentations. In order to take advantage of "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, USX is filing the following cautionary language identifying important factors (though not necessarily all such factors) that could cause actual outcomes to differ materially from information set forth in forward-looking statements made by, or on behalf of, USX, its representatives and its individual Groups. Cautionary Language Concerning Forward-Looking Statements USX Forward-looking statements with respect to USX may include, but are not limited to, comments about general business strategies, financing decisions or corporate structure. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements. Liquidity Factors USX's ability to finance its future business requirements through internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources is affected by the performance of each of its Groups (as measured by various factors, including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance and actions, the overall U.S. financial climate, and, in particular, with respect to borrowings, by USX's outstanding debt and credit ratings by investor services. On November 30, 2000, USX announced that the USX Board of Directors had authorized management to retain financial, tax and legal advisors to perform an in-depth study of the corporation's targeted stock structure. Until the study is complete, USX management believes it will be more difficult to access traditional debt and equity markets. To the extent that USX Management's assumptions concerning these factors prove to be inaccurate, USX's liquidity position could be materially adversely affected. Other Factors Holders of USX-Marathon Group Common Stock or USX-U. S. Steel Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from either of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of all groups. For further discussion of certain of the factors described herein, see Item 1. Business, Item 5. Market For Registrant's Common Equity and Related Stockholder Matters, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Information About Market Risk. USX - Marathon Group Forward-looking statements with respect to the Marathon Group may include, but are not limited to, levels of revenues, gross margins, income from operations, net income or earnings per share; levels of capital, exploration, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital, exploration or maintenance projects; volumes of production, sales, throughput or shipments of liquid hydrocarbons, natural gas and refined products; levels of worldwide prices of liquid hydrocarbons, natural gas and refined products; levels of reserves, proved or otherwise, of liquid hydrocarbons or natural gas; the acquisition or divestiture of assets; the effect of restructuring or reorganization of business components; the potential effect of judicial proceedings on the business and financial condition; and the anticipated effects of actions of third parties such as competitors, or federal, state or local regulatory authorities. 64 Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts" or "projects" or variations of these words, suggesting that future outcomes are uncertain. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements with respect to the Marathon Group. The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. Marathon must compete with these companies for the rights to explore for oil and gas. Marathon's expectations as to revenues, margins and income are based upon assumptions as to future prices and volumes of liquid hydrocarbons, natural gas and refined products. Prices have historically been volatile and have frequently been driven by unpredictable changes in supply and demand resulting from fluctuations in economic activity and political developments in the world's major oil and gas producing areas, including OPEC member countries. Any substantial decline in such prices could have a material adverse effect on Marathon's results of operations. A decline in such prices could also adversely affect the quantity of liquid hydrocarbons and natural gas that can be economically produced and the amount of capital available for exploration and development. The Marathon Group uses commodity-based and foreign currency derivative instruments such as futures, forwards, swaps, and options to manage exposure to price fluctuations. While commodity-based derivative instruments are generally used to reduce risks from unfavorable commodity price movements, they also may limit the opportunity to benefit from favorable movements. Levels of hedging activity vary among oil industry competitors and could affect the Marathon Group's competitive position with respect to those competitors. Factors Affecting Exploration and Production Operations Projected production levels for liquid hydrocarbons and natural gas are based on a number of assumptions, including (among others) prices, supply and demand, regulatory constraints, reserve estimates, production decline rates for mature fields, reserve replacement rates, drilling rig availability and geological and operating considerations. These assumptions may prove to be inaccurate. Exploration and production operations are subject to various hazards, including explosions, fires and uncontrollable flows of oil and gas. Offshore production and marine operations in areas such as the Gulf of Mexico, the U.K. North Sea, the U.K. Atlantic Margin and West Africa are also subject to severe weather conditions such as hurricanes or violent storms or other hazards. Development of new production properties in countries outside the United States may require protracted negotiations with host governments and are frequently subject to political considerations, such as tax regulations, which could adversely affect the economics of projects. Factors Affecting Refining, Marketing and Transportation Operations Marathon conducts domestic refining, marketing and transportation operations primarily through its consolidated subsidiary, Marathon Ashland Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest, Southeast, Ohio River Valley and the upper Great Plains. The profitability of these operations depends largely on the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. MAP is a purchaser of crude oil in order to satisfy its refinery throughput requirements. As a result, its overall profitability could be adversely affected by rising crude oil and other feedstock prices which are not recovered in the marketplace. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products. Gross margins on merchandise sold at retail outlets tend to moderate the volatility experienced in the retail sale of gasoline and diesel fuel. Environmental regulations, particularly the 1990 Amendments to the Clean Air Act, have imposed (and are expected to continue to impose) increasingly stringent and costly requirements on refining and marketing operations which may have an adverse effect on margins. Refining, marketing and transportation operations are subject to business interruptions due to unforeseen events such as explosions, fires, crude oil or refined product spills, inclement weather or labor disputes. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions. 65 Technology Factors Longer-term projections of corporate strategy, including the viability, timing or expenditures required for capital projects, can be affected by changes in technology, especially innovations in processes used in the exploration, production or refining of hydrocarbons. While specific future changes are difficult to project, recent innovations affecting the oil industry include the development of three-dimensional seismic imaging and deep-water and horizontal drilling capabilities. Other Factors Holders of USX-Marathon Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from either of the groups, which affect the overall cost of USX's capital could affect the results of operations and financial condition of both groups. For further discussion of certain of the factors described herein, and their potential effects on the businesses of the Marathon Group, see Item 1. Business, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk. USX - U. S. Steel Group Forward-looking statements with respect to the U. S. Steel Group may include, but are not limited to, projections of levels of revenues, income from operations or income from operations per ton, net income or earnings per share; levels of capital, environmental or maintenance expenditures; the success or timing of completion of ongoing or anticipated capital or maintenance projects; levels of raw steel production capability, prices, production, shipments, or labor and raw material costs; the acquisition, idling, shutdown or divestiture of assets or businesses; the effect of restructuring or reorganization of business components; the effect of potential judicial proceedings on the business and financial condition; and the effects of actions of third parties such as competitors, or foreign, federal, state or local regulatory authorities. Forward-looking statements typically contain words such as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts"or "projects", or variations of these words, suggesting that future outcomes are uncertain. The following discussion is intended to identify important factors (though not necessarily all such factors) that could cause future outcomes to differ materially from those set forth in forward-looking statements with respect to the U. S. Steel Group. Market Factors The U. S. Steel Group's expectations as to levels of production and revenues, gross margins, income from operations and income from operations per ton are based upon assumptions as to future product prices and mix, and levels of raw steel production capability, production and shipments. These assumptions may prove to be inaccurate. The steel industry is characterized by excess world supply which has restricted the ability of U. S. Steel and the industry to raise prices during periods of economic growth and resist price decreases during economic contraction. Domestic flat-rolled steel supply has increased in recent years with the completion and start-up of minimills that are less expensive to build than integrated facilities, and are typically staffed by non-unionized work forces with lower base labor costs and more flexible work rules. Through the use of thin slab casting technology, minimill competitors are increasingly able to compete directly with integrated producers of higher value-added products. Such competition could adversely affect the U. S. Steel Group's future product prices and shipment levels. 66 USSK does business primarily in Central Europe and is subject to market conditions in this area which are similar to domestic factors, including excess world supply, and also can be influenced by matters peculiar to international marketing such as tariffs. In addition, this subsidiary is also subject to foreign currency fluctuations which may affect results. The domestic steel industry has, in the past, been adversely affected by unfairly traded imports. Steel imports to the United States accounted for an estimated 27%, 26% and 30% of the domestic steel market in 2000, 1999 and 1998, respectively. Foreign competitors typically have lower labor costs, and are often owned, controlled or subsidized by their governments, allowing their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. Increases in levels of imported steel could adversely affect future market prices and demand levels for domestic steel. The U. S. Steel Group also competes in many markets with producers of substitutes for steel products, including aluminum, cement, composites, glass, plastics and wood. The emergence of additional substitutes for steel products could adversely affect future prices and demand for steel products. The businesses of the U. S. Steel Group are aligned with cyclical industries such as the automotive, appliance, containers, construction and energy industries. As a result, future downturns in the U.S. economy or any of these industries could adversely affect the profitability of the U. S. Steel Group. Operating and Cost Factors The operations of the U. S. Steel Group are subject to planned and unplanned outages due to maintenance, equipment malfunctions or work stoppages; and various hazards, including explosions, fires and severe weather conditions, which could disrupt operations or the availability of raw materials, resulting in reduced production volumes and increased production costs. Labor costs for the U. S. Steel Group are affected by collective bargaining agreements. U. S. Steel Group entered into a five year contract with the United Steel Workers of America, effective August 1, 1999, covering approximately 14,500 employees. The contract provided for increases in hourly wages phased over the term of the agreement beginning in 2000 as well as pension and benefit improvements for active and retired employees and spouses that will result in higher labor and benefit costs for the U.S. Steel Group each year throughout the term of the contract. In addition, most USSK employees are represented by OZ Metalurg, which on February 16, 2001 signed a Collective Labor Agreement with USSK which, for nonwage issues, covers the years 2001 to 2004 and covers all 2001 wage issues. Wage issues for the remainder of the term of the Collective Labor Agreement are expected to be renegotiated annually. The agreement includes improvements in the employees' social and wage benefits and work conditions. To the extent that increased costs are not recoverable through the sales prices of products, future income from operations would be adversely affected. Income from operations for the U. S. Steel Group includes periodic pension credits (which are primarily noncash). The resulting net pension credits totaled $266 million, $228 million and $186 million in 2000, 1999 and 1998, respectively. Future net pension credits can be volatile dependent upon the future marketplace performance of plan assets, changes in actuarial assumptions regarding such factors as a selection of a discount rate and rate of return on assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels, business combinations and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent that these credits decline in the future, income from operations would be adversely affected. The U. S. Steel Group provides health care and life insurance benefits to most employees upon retirement. Most of these benefits have not been prefunded. The accrued liability for such benefits as of December 31, 2000, was $1,538 million. To the extent that competitors do not provide similar benefits, or have been relieved of obligations to provide such benefits following bankruptcy reorganization, the competitive position of the U. S. Steel Group may be adversely affected, depending on future costs of health care. 67 Legal and Environmental Factors The profitability of the U. S. Steel Group's operations could be affected by a number of contingencies, including legal actions. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. The businesses of the U. S. Steel Group are subject to numerous environmental laws. Certain current and former U. S. Steel Group operating facilities have been in operation for many years and could require significant future accruals and expenditures to meet existing and future requirements under these laws. To the extent that competitors are not required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. Other Factors Holders of USX-U. S. Steel Group Common Stock are holders of common stock of USX and are subject to all the risks associated with an investment in USX and all of its businesses and liabilities. Financial impacts, arising from either of the groups, which affect the overall cost of USX's capital, could affect the results of operations and financial condition of both groups. For further discussion of certain of the factors described herein, and their potential effects on the businesses of the U.S. Steel Group, see Item 1. Business, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 68 EX-4.A 2 0002.txt FIVE YEAR CREDIT AGREEMENT DATED AS OF NOVEMBER 30, 2000 Exhibit 4(a) $1,353,750,000 FIVE-YEAR CREDIT AGREEMENT dated as of November 30, 2000 among USX Corporation The Co-Agents and Other Lenders Party Hereto Bank of America, N.A., as Syndication Agent Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, as Documentation Agents and Morgan Guaranty Trust Company of New York, as Administrative Agent _____________________________________________________ J.P. Morgan Securities Inc., Chase Securities Inc. and Banc of America Securities LLC, Joint Bookrunners and Co-Lead Arrangers Article 1 Definitions Section 1.01. Definitions................................................................ 1 Section 1.02. Accounting Terms And Determinations........................................ 10 Section 1.03. Classes And Types Of Borrowings............................................ 10 Article 2 The Credits Section 2.01. Commitments To Lend........................................................ 11 Section 2.02. Notice Of Committed Borrowing.............................................. 11 Section 2.03. Money Market Borrowings.................................................... 12 Section 2.04. Notice To Lenders; Funding Of Loans........................................ 15 Section 2.05. Notes...................................................................... 16 Section 2.06. Maturity Of Loans.......................................................... 17 Section 2.07. Interest Rates............................................................. 17 Section 2.08. Method of Electing Interest Rates.......................................... 19 Section 2.09. Fees....................................................................... 20 Section 2.10. Termination Or Reduction of Commitments.................................... 21 Section 2.11. Optional Prepayments....................................................... 21 Section 2.12. General Provisions as to Payments.......................................... 21 Section 2.13. Funding Losses............................................................. 22 Section 2.14. Computation of Interest and Fees........................................... 23 Section 2.15. Letters of Credit.......................................................... 23 Section 2.16. Stop Issuance Notice....................................................... 27 Section 2.17. Change of Control.......................................................... 27 Section 2.18. Optional Increase in Commitments........................................... 29 Article 3 Conditions Section 3.01. Effectiveness.............................................................. 30 Section 3.02. Borrowings and Issuances of Letters of Credit.............................. 31 Section 3.03. Existing Credit Agreement.................................................. 31 Article 4 Representations And Warranties Section 4.01. Corporate Existence and Power.............................................. 31 Section 4.02. Corporate and Governmental Authorization; Contravention.................... 32 Section 4.03. Binding Effect............................................................. 32 Section 4.04. Financial Information...................................................... 32 Section 4.05. Litigation................................................................. 32 Section 4.06. Environmental Matters...................................................... 33
Section 4.07. Taxes...................................................................... 33 Section 4.08. Compliance with Laws....................................................... 33 Section 4.09. Marathon................................................................... 33 Article 5 Covenants Section 5.01. Information................................................................ 34 Section 5.02. Consolidations and Mergers................................................. 35 Section 5.03. Use of Proceeds............................................................ 36 Section 5.04. Negative Pledge............................................................ 36 Section 5.05. Sale and Leaseback......................................................... 38 Article 6 Defaults Section 6.01. Events of Default.......................................................... 39 Section 6.02. Notice of Default.......................................................... 41 Section 6.03. Cash Cover................................................................. 41 Article 7 The Agents Section 7.01. Appointment and Authorization.............................................. 41 Section 7.02. Agents and Affiliates...................................................... 41 Section 7.03. Action by Administrative Agent............................................. 41 Section 7.04. Consultation with Experts.................................................. 42 Section 7.05. Liability of Agents........................................................ 42 Section 7.06. Indemnification............................................................ 42 Section 7.07. Credit Decision............................................................ 43 Section 7.08. Successor Administrative Agent............................................. 43 Section 7.09. Administrative Agent's Fee................................................. 43 Section 7.10. Other Agents............................................................... 43 Article 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair................... 43 Section 8.02. Illegality................................................................. 44 Section 8.03. Increased Cost and Reduced Return.......................................... 45 Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans.................. 48 Section 8.05. Substitution of Lender..................................................... 48 Section 8.06. Notice Mandatory........................................................... 48
ii Article 9 Miscellaneous Section 9.01. Notices.................................................................... 49 Section 9.02. No Waivers................................................................. 49 Section 9.03. Expenses; Indemnification.................................................. 49 Section 9.04. Sharing.................................................................... 50 Section 9.05. Amendments and Waivers..................................................... 50 Section 9.06. Successors and Assigns..................................................... 51 Section 9.07. Designated Lenders......................................................... 53 Section 9.08. No Reliance on Margin Stock................................................ 54 Section 9.09. Governing Law.............................................................. 54 Section 9.10. Counterparts; Integration.................................................. 54 Section 9.11. WAIVER OF JURY TRIAL....................................................... 55
COMMITMENT SCHEDULE PRICING SCHEDULE EXHIBIT A - NOTE EXHIBIT B - FORM OF MONEY MARKET QUOTE REQUEST EXHIBIT C - FORM OF INVITATION FOR MONEY MARKET QUOTES EXHIBIT D - FORM OF MONEY MARKET QUOTE EXHIBIT E - OPINION OF COUNSEL FOR THE BORROWER EXHIBIT F - OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE ADMINISTRATIVE AGENT EXHIBIT G - ASSIGNMENT AND ASSUMPTION AGREEMENT EXHIBIT H - DESIGNATION AGREEMENT iii AGREEMENT dated as of November 30, 2000 among USX CORPORATION, the CO- AGENTS and other LENDERS party hereto, BANK OF AMERICA, N.A., as Syndication Agent, CITIBANK, N.A., THE BANK OF NOVA SCOTIA and COMMERZBANK AG as Documentation Agents and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent. The parties hereto agree as follows: ARTICLE 1 Definitions Section 1.01. Definitions. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Administrative Agent" means Morgan Guaranty Trust Company of New York, in its capacity as administrative agent for the Lenders hereunder, and its successors in such capacity. "Administrative Questionnaire" means, with respect to each Lender, an administrative questionnaire in the form prepared by the Administrative Agent, completed by such Lender and returned to the Administrative Agent (with a copy to the Borrower). "Agents" means the Administrative Agent, the Documentation Agents and the Syndication Agent. "Applicable Lending Office" means, with respect to any Lender, (i) in the case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Approved Fund" means any Fund that is administered or managed by (i) a Lender, (ii) an affiliate of a Lender or (iii) an entity or an affiliate of an entity that administers or manages a Lender. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Committed Loan that bears interest at the Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election or the last sentence of Section 2.08(a) or Article 8. "Borrower" means USX Corporation, a Delaware corporation, and its successors. "Borrower's 1999 Form 10-K" means the Borrower's annual report on Form 10-K for 1999, as filed with the SEC pursuant to the Exchange Act. "Borrowing" has the meaning specified in Section 1.03. "Change of Control" has the meaning set forth in Section 2.17(a). "Class" refers to the determination whether a Loan is a Committed Loan or a Money Market Loan. "Closing Date" means the date on or after the Effective Date on which all of the conditions specified in Section 3.01 shall have been satisfied. "Co-Agent" means each Lender designated as a Co-Agent on the signature pages hereof. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Commitment" means (i) with respect to each Lender listed on the Commitment Schedule, the amount set forth opposite such Lender's name on the Commitment Schedule, (ii) with respect to any financial institution which becomes a Lender pursuant to Section 2.18, the amount of the Commitment thereby assumed by it and (iii) with respect to any assignee which becomes a Lender pursuant to Section 9.06(b), the amount of the transferor Lender's Commitment assigned to it pursuant to Section 9.06(b), in each case as such amount may be changed from time to time pursuant to Section 2.10, 2.18 or 9.06(b); provided that, if the context so requires, the term "Commitment" means the obligation of a Lender to extend credit up to such amount to the Borrower hereunder. "Commitment Schedule" means the Commitment Schedule attached hereto. "Committed Loan" means a loan made by a Lender pursuant to Section 2.01; provided that, if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Committed Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "Credit Exposure" means, with respect to any Lender at any time, (i) the amount of its Commitment (whether used or unused) at such time or (ii) if the Commitments have terminated in their entirety, the sum of the aggregate 2 outstanding principal amount of its Loans at such time plus the aggregate amount of its Letter of Credit Liabilities at such time. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Designated Lender" means, with respect to any Designating Lender, an Approved Fund designated by it pursuant to Section 9.07(a) as a Designated Lender for purposes of this Agreement. "Designating Lender" means, with respect to each Designated Lender, the Lender that designated such Designated Lender pursuant to Section 9.07(a). "Documentation Agent" means each of Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, in its capacity as a documentation agent in connection with the credit facility provided under this Agreement. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Domestic Lending Office" means, as to each Lender, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Lender may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Administrative Agent. "Effective Date" means the date the Commitments become effective in accordance with Section 3.01. "Eligible Assignee" means (i) a Lender; (ii) an affiliate of a Lender; (iii) an Approved Fund; and (iv) any other Person (other than a natural Person) approved by the Administrative Agent, the Issuing Banks and, unless an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or delayed). If the consent of the Borrower to an assignment or to an Eligible Assignee is required hereunder (including a consent to an assignment which does not meet the minimum assignment thresholds specified in paragraph (b)(i) of Section 9.06), the Borrower shall be deemed to have given its consent five Domestic Business Days after the date notice thereof has been delivered by the assigning Lender (through the Administrative Agent) and receipt thereof has been acknowledged by the Borrower, unless such consent is expressly refused by the Borrower prior to such fifth Domestic Business Day. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. 3 "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Lender, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro- Dollar Lending Office) or such other office, branch or affiliate of such Lender as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Administrative Agent. "Euro-Dollar Loan" means a Committed Loan that bears interest at a Euro- Dollar Rate pursuant to the applicable Notice of Committed Borrowing or Notice of Interest Rate Election. "Euro-Dollar Margin" has the meaning specified in the Pricing Schedule. "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.07(b) on the basis of a London Interbank Offered Rate. "Events of Default" has the meaning specified in Section 6.01. "Existing Credit Agreement" means the $2,325,000,000 Credit Agreement dated as of August 18, 1994 among the Borrower, the co-agents and other banks parties thereto, The Chase Manhattan Bank (successor to Chemical Bank), as managing agent, and Morgan Guaranty Trust Company of New York, as agent, as amended to the Effective Date. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day 4 shall be the average rate quoted to the Administrative Agent on such day on such transactions as determined by the Administrative Agent. "Fixed Rate Loans" means Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Prime Rate pursuant to Section 8.01) or any combination of the foregoing. "Fund" means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "Group of Loans" means, at any time, a group of Loans consisting of (i) all Committed Loans which are Base Rate Loans at such time or (ii) all Euro-Dollar Loans having the same Interest Period at such time; provided that, if a Committed Loan of any particular Lender is converted to or made as a Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "Indemnitee" has the meaning specified in Section 9.03(b). "Interest Period" means: (1) with respect to each Euro-Dollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in an applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in such notice; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day in a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day in a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each Money Market LIBOR Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.03(b); provided that: 5 (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day in a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day in a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; and (3) with respect to each Money Market Absolute Rate Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing and ending such number of days thereafter (but not less than 15 days) as the Borrower may elect in accordance with Section 2.03; provided that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Issuing Bank" means The Chase Manhattan Bank and any other Lender that may agree to issue letters of credit hereunder pursuant to an instrument in form satisfactory to the Administration Agent, in each case as issuer of a letter of credit hereunder. "Lender" means (i) each bank or other institution listed on the Commitment Schedule, (ii) each financial institution which becomes a Lender pursuant to Section 2.18, (iii) each assignee which becomes a Lender pursuant to Section 9.06(b) and (iv) their respective successors. "Lender Parties" means the Lenders, the Issuing Banks and the Agents. "Letter of Credit" means a letter of credit to be issued hereunder by an Issuing Bank. "Letter of Credit Liabilities" means, for any Lender and at any time, such Lender's ratable participation in the sum of (x) the aggregate amount then owing by the Borrower in respect of amounts drawn under Letters of Credit and (y) the aggregate amount then available for drawing under all Letters of Credit. 6 "Letter of Credit Termination Date" means the tenth Domestic Business Day prior to the Termination Date. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Loan" means a Committed Loan or a Money Market Loan and "Loans" means Committed Loans or Money Market Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning specified in Section 2.07(b). "Material Plan" means, at any time, a Plan or Plans having aggregate Unfunded Liabilities in excess of $50,000,000. "Money Market Absolute Rate" has the meaning specified in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan made or to be made by a Lender pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Lender, its Domestic Lending Office or such other office, branch or affiliate of such Lender as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Administrative Agent; provided that any Lender may from time to time by notice to the Borrower and the Administrative Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Lender shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan made or to be made by a Lender pursuant to a LIBOR Auction (including any such loan bearing interest at the Prime Rate pursuant to Section 8.01). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning specified in Section 2.03(d)(ii)(C). "Money Market Quote" means an offer by a Lender to make a Money Market Loan in accordance with Section 2.03. "Moody's" means Moody's Investors Service, Inc. 7 "Mortgage" has the meaning set forth in Section 5.04. "Multiemployer Plan" means, at any time, an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the Borrower's obligation to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Notice of Interest Rate Election" has the meaning specified in Section 2.08(a). "Notice of Issuance" has the meaning set forth in Section 2.15(b). "Outstanding Committed Amount" means, with respect to any Lender at any time, the sum of the aggregate outstanding principal amount of its Committed Loans plus the aggregate amount of its Letter of Credit Liabilities at such time, determined at such time after giving effect to any prior assignments by or to such Lender pursuant to Section 9.06(b). "Parent" means, with respect to any Lender, any Person controlling such Lender. "Participant" has the meaning specified in Section 9.06(d). "Payment Date" has the meaning specified in Section 2.15(c). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Percentage" means, with respect to any Lender at any time, the percentage which the amount of its Commitment at such time represents of the aggregate amount of all the Commitments at such time. At any time after the Commitments shall have terminated, the term "Percentage" shall refer to a Lender's Percentage immediately before such termination, adjusted to reflect any subsequent assignments pursuant to Section 9.06(b). "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. 8 "Plan" means, at any time, an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Pricing Schedule" means the Pricing Schedule attached hereto. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Quarterly Payment Dates" means each March 31, June 30, September 30, and December 31. "Reference Banks" means the principal London offices (or any successor offices) of The Bank of Nova Scotia, PNC Bank, National Association and Morgan Guaranty Trust Company of New York. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Reimbursement Obligation" has the meaning specified in Section 2.15(c). "Related Agreement" means the 364-Day Credit Agreement of even date herewith among the same initial parties as this Agreement, as amended, extended, renewed or replaced from time to time. "Required Lenders" means, at any time, Lenders having at least 67% in aggregate amount of the Credit Exposures at such time. "Revolving Credit Period" means the period from and including the Effective Date to but not including the Termination Date. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw- Hill Companies, Inc. "SEC" means the Securities and Exchange Commission. "Stop Issuance Notice" has the meaning specified in Section 2.16. "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar 9 functions are at the time directly or indirectly owned by such Person. Unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower. "Syndication Agent" means Bank of America, N.A., in its capacity as syndication agent in connection with the credit facility provided under this Agreement. "Termination Date" means November 30, 2005 or, if such day is not a Euro- Dollar Business Day, the next preceding Euro-Dollar Business Day. "Total Outstanding Amount" means, at any time, the sum of (i) the aggregate outstanding principal amount of the Loans (including both Committed Loans and Money Market Loans) determined at such time after giving effect, if one or more Loans are being made at such time, to any substantially concurrent application of the proceeds thereof to repay one or more other Loans plus (ii) the aggregate amount of the Letter of Credit Liabilities of all Lenders at such time. "Type" refers to the determination whether a Committed Loan is a Base Rate Loan or a Euro-Dollar Loan or whether a Money Market Loan is a Money Market Absolute Rate Loan or a Money Market LIBOR Loan. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Voting Power" has the meaning set forth in Section 2.17(a). "Voting Stock" has the meaning set forth in Section 2.17(a). Section 1.02. Accounting Terms And Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower delivered to the Administrative Agent. Section 1.03. Classes And Types Of Borrowings. The term "Borrowing" denotes the aggregation of Loans of the same Type and Class of one or more Lenders to be made to the Borrower pursuant to Article 2 on a single date and for 10 a single initial Interest Period. Borrowings are classified for purposes of this Agreement by reference to either or both the Class and Type of Loans comprising such Borrowing (e.g., a Euro-Dollar Borrowing is a Borrowing comprised of Euro- Dollar Loans while a Committed Borrowing is a Borrowing comprised of Committed Loans). ARTICLE 2 The Credits Section 2.01. Commitments To Lend. Each Lender severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section from time to time during the Revolving Credit Period; provided that, immediately after each such loan is made: (i) such Lender's Outstanding Committed Amount shall not exceed its Commitment; and (ii) the Total Outstanding Amount shall not exceed the aggregate amount of the Commitments. Each Borrowing under this Section shall be in an aggregate principal amount of $50,000,000 or any larger integral multiple of $10,000,000 (except that any such Borrowing may be in the aggregate amount available within the limitations in the foregoing proviso) and shall be made from the several Lenders ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, prepay Loans to the extent permitted by Section 2.11 and reborrow at any time during the Revolving Credit Period under this Section. Section 2.02. Notice Of Committed Borrowing. The Borrower shall give the Administrative Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (y) the date of each Base Rate Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing; (b) the aggregate amount of such Borrowing; (c) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or a Euro-Dollar Rate; and 11 (d) in the case of a Euro-Dollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.03. Money Market Borrowings. (a) The Money Market Option. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Lenders to make offers to make Money Market Loans to the Borrower from time to time during the Revolving Credit Period. The Lenders may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) Money Market Quote Request. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Administrative Agent by telex or facsimile a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received not later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day before the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day immediately before the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Lenders not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $50,000,000 or a larger integral multiple of $10,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Administrative Agent may agree) of any other Money Market Quote Request. (c) Invitation for Money Market Quotes. Promptly after receiving a Money Market Quote Request, the Administrative Agent shall send to each of the Lenders which shall have notified the Administrative Agent of its desire to 12 receive the same an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Lender to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) Submission and Contents of Money Market Quotes. (i) Each Lender to which an Invitation for Money Market Quotes is sent may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this Section 2.03(d) and must be submitted to the Administrative Agent by telex or facsimile at its address specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day before the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Lenders not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); provided that Money Market Quotes submitted by the Administrative Agent (or any affiliate of the Administrative Agent) in the capacity of a Lender may be submitted, and may only be submitted, if the Administrative Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour before the deadline for the other Lenders, in the case of a LIBOR Auction or (y) 15 minutes before the deadline for the other Lenders, in the case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made shall not be revocable except with the written consent of the Administrative Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be substantially in the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing; (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Lender, (x) must be $5,000,000 or a larger integral multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Lender may be accepted; (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the 13 "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate; (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan; and (E) the identity of the quoting Lender. A Money Market Quote may set forth up to five separate offers by the quoting Lender with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection 2.03(d)(ii) above; (B) contains qualifying, conditional or similar language (except as contemplated by subsection (d)(ii)(B)(z); (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes (except as contemplated by subsection (d)(ii)(B)(z); or (D) arrives after the time set forth in subsection 2.03(d)(i). (e) Notice to Borrower. The Administrative Agent shall promptly notify the Borrower of the terms of (i) any Money Market Quote submitted by a Lender that is in accordance with Section 2.03(d) and (ii) any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Lender with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Administrative Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Administrative Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. 14 (f) Acceptance and Notice by Borrower. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day before the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Administrative Agent shall have mutually agreed and shall have notified to the Lenders not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Administrative Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to Section 2.03(e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; provided that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request; (ii) the principal amount of each Money Market Borrowing must be $50,000,000 or a larger integral multiple of $10,000,000; (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be; (iv) the Borrower may not accept any offer that is described in subsection 2.03(d)(iii) or that otherwise fails to comply with the requirements of this Agreement; and (v) immediately after such Money Market Borrowing is made, the Total Outstanding Amount shall not exceed the aggregate amount of the Commitments. (g) Allocation by Administrative Agent. If offers are made by two or more Lenders with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Administrative Agent among such Lenders as nearly as possible (in integral multiples of $1,000,000, as the Administrative Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Administrative Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. Section 2.04. Notice To Lenders; Funding Of Loans. (a) Promptly after receiving a Notice of Borrowing, the Administrative Agent shall notify each Lender of the contents thereof and of such Lender's share (if any) of such 15 Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Lender participating therein shall make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address specified in or pursuant to. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Lenders available to the Borrower at the Administrative Agent's aforesaid address. (c) Unless the Administrative Agent shall have received notice from a Lender before the date of any Borrowing (or, in the case of a Base Rate Borrowing, prior to 12:00 Noon (New York City time) on the date of such Borrowing) that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on the date of such Borrowing in accordance with Section 2.04(b) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such share available to the Administrative Agent, such Lender and, if such Lender shall not have done so within five Domestic Business Days of demand therefor by the Administrative Agent, then the Borrower, each agrees to pay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) if such amount is repaid by the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable to such Borrowing pursuant to Section 2.07 and (ii) if such amount is repaid by such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, the Borrower shall not be required to repay such amount and the amount so repaid by such Lender shall constitute such Lender's Loan included in such Borrowing for purposes of this Agreement. Nothing in this subsection (c) shall relieve any Lender of its obligation to make Loans in accordance with the terms and conditions of this Agreement or relieve any Lender from responsibility for default by it in such obligation. Section 2.05. Notes. (a) The Loans of each Lender shall be evidenced by a single Note payable to the order of such Lender for the account of its Applicable Lending Office; provided that each Lender may, by notice to the Borrower and the Agent, request that its Loans of a particular Class or Type be evidenced by a separate Note. Each such separate Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant Class or Type. Each reference in this 16 Agreement to the "Note" of such Lender shall be deemed to refer to and include any or all of such Notes, as the context may require. (b) Upon receipt of each Lender's Note pursuant to Section 3.01, the Agent shall forward such Note to such Lender. Each Lender shall record the date, amount, Class, Type and maturity of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Lender so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the inaccuracy of, or the failure of any Lender to make, any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Lender is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.06. Maturity Of Loans. (a) Each Committed Loan shall mature, and the principal amount thereof shall be due and payable (together with interest accrued thereon), on the Termination Date. (b) Each Money Market Loan shall mature, and the principal amount thereof shall be due and payable (together with interest accrued thereon), on the last day of the Interest Period applicable thereto. Section 2.07. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Payment Date and on the Termination Date and, with respect to the principal amount of any Base Rate Loan that is prepaid or converted to a Euro- Dollar Loan, on the date of such prepayment or conversion. (b) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof and, with respect to the principal amount of any Euro-Dollar Loan that is prepaid or converted to a Base Rate Loan, on the date of such prepayment or conversion. The "London Interbank Offered Rate" applicable to any Interest Period means (a) the offered rate for dollar deposits, for a period approximately equal to such Interest Period and, if the amount is so quoted, in an amount approximately equal to the average principal amount of the applicable Loans, quoted on the second Euro-dollar Business Day prior to the first day of such Interest Period, as 17 such rate appears on the display designated as page "3750" on the Telerate service (or such other page as may replace page "3750" on the Telerate service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar deposits) ("Telerate Page 3750") as of 11:00 A.M. (London time) on such date, (b) if, as of 11:00A.M. (London time) on any such date such rate does not appear on the Telerate Page 3750, the arithmetic mean (adjusted, if necessary, to the nearest 1/16th of 1%), of the offered rates for dollar deposits, for a period approximately equal to such Interest Period quoted on the second Euro-Dollar Business Day prior to the first day of such Interest Period, as such rates appear on the display designated as page "LIBO" on the Reuters Monitor Money Rates Service (or such other page as may replace the "LIBO" page on that service for the purpose of displaying London interbank offered rates of major banks) ("Reuters Screen LIBO Page") as of 11:00 A.M. (London time) on such date, or (c) if neither of the above rates is available (and in the case of clause (b), if on any such date at least two such rates do not appear on the Reuters Screen LIBO page), the average (adjusted, if necessary, to the next higher 1/16th of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (c) Subject to Section 8.01, each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(b) as if the related Money Market LIBOR Borrowing were a Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Lender making such Loan in accordance with. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Lender making such Loan in accordance with. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. (d) Any overdue principal of and interest on any Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (e) The Administrative Agent shall determine each interest rate applicable to the Loans hereunder. The Administrative Agent shall promptly notify the Borrower and the participating Lenders of each rate of interest so 18 determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Administrative Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Administrative Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. Section 2.08. Method of Electing Interest Rates. (a) The Loans included in each Committed Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Committed Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject to Section 2.08(d) and the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day; and (ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans as of any Domestic Business Day, or may elect to continue such Loans as Euro-Dollar Loans, as of the end of any Interest Period applicable thereto, for an additional Interest Period, subject to Section 2.13 if any such conversion is effective on any day other than the last day of an Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Administrative Agent not later than 10:30 A.M. (New York City time) on the third Euro-Dollar Business Day before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each at least $50,000,000 (unless such portion is comprised of Base Rate Loans). If no such notice is timely received before the end of an Interest Period for any Group of Euro-Dollar Loans, the Borrower shall be deemed to have elected that such Group of Loans be converted to Base Rate Loans at the end of such Interest Period. (b) Each Notice of Interest Rate Election shall specify: 19 (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of Section 2.08(a); (iii) if the Loans comprising such Group are to be converted, the new Type of Loans and, if the Loans resulting from such conversion are to be Euro-Dollar Loans, the duration of the next succeeding Interest Period applicable thereto; and (iv) if such Loans are to be continued as Euro-Dollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Promptly after receiving a Notice of Interest Rate Election from the Borrower pursuant to Section 2.08(a), the Administrative Agent shall notify each Lender of the contents thereof and such notice shall not thereafter be revocable by the Borrower. (d) The Borrower shall not be entitled to elect to convert any Committed Loans to, or continue any Committed Loans for an additional Interest Period as, Euro-Dollar Loans if (i) the aggregate principal amount of any Group of Euro- Dollar Loans created or continued as a result of such election would be less than $50,000,000 or (ii) a Default shall have occurred and be continuing when the Borrower delivers notice of such election to the Administrative Agent. (e) If any Committed Loan is converted to a different Type of Loan, the Borrower shall pay, on the date of such conversion, the interest accrued to such date on the principal amount being converted. Section 2.09. Fees. (a) The Borrower shall pay to the Administrative Agent, for the account of the Lenders ratably in proportion to their Credit Exposures, a facility fee calculated for each day at the Facility Fee Rate for such day (determined in accordance with the Pricing Schedule) on the aggregate amount of the Credit Exposures on such day. Such facility fee shall accrue for each day from and including the Effective Date to but excluding the day on which the Credit Exposures are reduced to zero. (b) The Borrower shall pay to the Administrative Agent (i) for the account of the Lenders ratably a letter of credit fee accruing daily on the aggregate undrawn amount of all outstanding Letters of Credit at a rate per annum equal to the Euro-Dollar Margin for such day and (ii) for the account of each 20 Issuing Bank a letter of credit fronting fee accruing daily on the aggregate amount then available for drawing under all Letters of Credit issued by such Issuing Bank at a rate per annum equal to 1/8th of 1% or such other rate per annum as may be mutually agreed between the Borrower and such Issuing Bank from time to time. (c) Fees accrued for the account of the Lenders under this Section shall be payable quarterly in arrears on each Quarterly Payment Date and on the day on which the Commitments terminate in their entirety (and, if later, on the day on which the Credit Exposures are reduced to zero) Section 2.10. Termination Or Reduction of Commitments. (a) The Borrower may, upon at least three Domestic Business Days' notice to the Administrative Agent, (i) terminate the Commitments at any time, if no Loans or Letter of Credit Liabilities are outstanding at such time, or (ii) ratably reduce from time to time by an aggregate amount of $25,000,000 or any larger integral multiple thereof, the aggregate amount of the Commitments in excess of the Total Outstanding Amount. Promptly after receiving a notice pursuant to this subsection, the Administrative Agent shall notify each Lender of the contents thereof. (b) Unless previously terminated, the Commitments shall terminate in their entirety on the Termination Date. Section 2.11. Optional Prepayments. (a) Subject in the case of Fixed Rate Loans to Section 2.13, the Borrower may (i) upon at least one Domestic Business Day's notice to the Administrative Agent, prepay any Group of Base Rate Loans (or any Money Market Borrowing bearing interest at the Prime Rate pursuant to Section 8.01) or (ii) upon at least three Euro-Dollar Business Days' notice to the Administrative Agent, prepay any Group of Euro-Dollar Loans, in each case in whole at any time, or from time to time in part in amounts aggregating $50,000,000 or any larger integral multiple of $10,000,000, by paying the principal amount to be prepaid together with interest accrued thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Lenders included in such Group of Loans (or such Money Market Borrowing). (b) Except as provided in Section 2.11(a) or 2.17, the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan before the maturity thereof. (c) Promptly after receiving a notice of prepayment pursuant to this Section, the Administrative Agent shall notify each Lender of the contents thereof and of such Lender's ratable share (if any) of such prepayment, and such notice shall not thereafter be revocable by the Borrower. Section 2.12. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans, of Letter of Credit 21 Liabilities and interest thereon and of fees hereunder not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address specified in or pursuant to Section 9.01 and without reduction by reason of any set-off or counterclaim. The Administrative Agent will promptly distribute to each Lender its ratable share of each such payment received by the Administrative Agent for the account of the Lenders. Whenever any payment of principal of, or interest on, the Base Rate Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro- Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Borrower notifies the Administrative Agent before the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance on such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that such payment shall not have been so made by the Borrower, each Lender shall repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. Section 2.13. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a different type of Loan (whether such payment or conversion is pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or if the Borrower fails to borrow, prepay, convert or continue any Fixed Rate Loan after notice has been given to any Lender in accordance with Section 2.04(a), 2.08(c) or 2.11(c), the Borrower shall reimburse each Lender within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after such payment or conversion or failure to borrow, prepay, convert or 22 continue; provided that such Lender shall have delivered to the Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. Section 2.14. Computation of Interest and Fees. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.15. Letters of Credit. (a) Commitment to Issue Letters of Credit. Subject to the terms and conditions hereof, and so long as no Stop Issuance Notice is in effect, each Issuing Bank agrees to issue Letters of Credit from time to time before the Letter of Credit Termination Date upon the request of the Borrower; provided that, immediately after each Letter of Credit is issued (i) the Total Outstanding Amount shall not exceed the aggregate amount of the Commitments and (ii) the aggregate amount of the Letter of Credit Liabilities shall not exceed $100,000,000. Upon the date of issuance by an Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities in the proportion its respective Commitment bears to the aggregate Commitments. (b) Method for Issuance; Terms; Extensions. (i) The Borrower shall give the Issuing Bank notice at least three Domestic Business Days (or such shorter notice as may be acceptable to the Issuing Bank in its discretion) prior to the requested issuance of a Letter of Credit (or, in the case of renewal or extension, prior to the Issuing Bank's deadline for notice of nonextension) specifying the date such Letter of Credit is to be issued, and describing the terms of such Letter of Credit and the nature of the transactions to be supported thereby (such notice, including any such notice given in connection with the extension of a Letter of Credit, a "Notice of Issuance"). Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify the Administrative Agent, and the Administrative Agent shall promptly notify each Lender of the contents thereof and of the amount of such Lender's participation in such Letter of Credit. (ii) The obligation of the Issuing Bank to issue each Letter of Credit shall, in addition to the conditions precedent set forth in Section 3.02, be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be reasonably satisfactory 23 to the Issuing Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. The Borrower shall also pay to the Issuing Bank for its own account issuance, drawing, amendment and extension charges in the amounts and at the times as agreed between the Borrower and the Issuing Bank. (iii) The extension or renewal of any Letter of Credit shall be deemed to be an issuance of such Letter of Credit, and if any Letter of Credit contains a provision pursuant to which it is deemed to be extended unless notice of termination is given by the Issuing Bank, the Issuing Bank shall timely give such notice of termination unless it has theretofore timely received a Notice of Issuance and the other conditions to issuance of a Letter of Credit have also theretofore been met with respect to such extension. No Letter of Credit shall have a term of more than eighteen months; provided that a Letter of Credit may contain a provision pursuant to which it is deemed to be extended on an annual basis unless notice of termination is given by the Issuing Bank; provided further that no Letter of Credit shall have a term extending or be so extendible beyond the Letter of Credit Termination Date. (c) Payments; Reimbursement Obligations. (i) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall notify the Administrative Agent and the Administrative Agent shall promptly notify the Borrower and each other Lender as to the amount to be paid as a result of such demand or drawing and the date such payment is to be made by the Issuing Bank (the "Payment Date"). The Borrower shall be irrevocably and unconditionally obligated to reimburse the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. Such reimbursement shall be due on the Payment Date; provided that no such payment shall be due from the Borrower any earlier than the date of receipt by it of notice of its obligation to make such payment (or, if such notice is received by the Borrower after 1:00 P.M. (New York City time) on any date, on the next succeeding Domestic Business Day); and provided further that if and to the extent any such reimbursement is not made by the Borrower in accordance with this clause (i) or clause (ii) on the Payment Date, then (irrespective of when notice thereof is received by the Borrower), such reimbursement obligation shall bear interest, payable on demand, for each day from and including the Payment Date to but not including the date such reimbursement obligation is paid in full at a rate per annum equal to the rate applicable to Base Rate Loans for such day. 24 (ii) All such amounts paid by the Issuing Bank and remaining unpaid by the Borrower (a "Reimbursement Obligation") shall, if and to the extent that the amount of such Reimbursement Obligation would be permitted as a Borrowing pursuant to Section 3.02, and unless the Borrower otherwise instructs the Administrative Agent by not less than one Domestic Business Day's prior notice, convert automatically to Base Rate Loans on the date such Reimbursement Obligation arises. The Administrative Agent shall, on behalf of the Borrower (which hereby irrevocably directs the Administrative Agent so to act on its behalf), give notice no later than 10:30 A.M. (New York City time) on such date requesting each Lender to make, and each Lender hereby agrees to make, a Base Rate Loan, in an amount equal to such Lender's Percentage of the Reimbursement Obligation with respect to which such notice relates. Each Lender shall make such Loan available to the Administrative Agent at its address specified in or pursuant to Section 9.01 in immediately available funds, not later than 12:00 Noon (New York City time), on the date specified in such notice. The Administrative Agent shall pay the proceeds of such Loans to the Issuing Bank, which shall immediately apply such proceeds to repay the Reimbursement Obligation. (iii) To the extent the Reimbursement Obligation is not refunded by a Lender pursuant to clause (ii) above, such Lender will pay to the Administrative Agent, for the account of the Issuing Bank, immediately upon the Issuing Bank's demand at any time during the period commencing after such Reimbursement Obligation arises until reimbursement therefor in full by the Borrower, an amount equal to such Lender's Percentage of such Reimbursement Obligation, together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 1:00 P.M. (New York City time) on such date, from the next succeeding Domestic Business Day) to the date of payment by such Lender of such amount at a rate of interest per annum equal to the Federal Funds Rate for the first three Domestic Business Days after the date of such demand and thereafter at a rate per annum equal to the Base Rate for each additional day. The Issuing Bank will pay to each Lender ratably all amounts received from the Borrower for application in payment of its Reimbursement Obligations in respect of any Letter of Credit, but only to the extent such Lender has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto; provided that in the event such payment received by the Issuing Bank is required to be returned, such Lender will return to the Issuing Bank any portion thereof previously distributed to it by the Issuing Bank. (d) Obligations Absolute. The obligations of the Borrower and each Lender under subsection (c) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this 25 Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) any lack of validity or enforceability of this Agreement or any Letter of Credit or any document related hereto or thereto; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of this Agreement or any Letter of Credit or any document related hereto or thereto; (iii) the use which may be made of the Letter of Credit by, or any acts or omission of, a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting); (iv) the existence of any claim, set-off, defense or other rights that the Borrower may have at any time against a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting), any Lender (including the Issuing Bank) or any other Person, whether in connection with this Agreement or the Letter of Credit or any document related hereto or thereto or any unrelated transaction; (v) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (vi) payment under a Letter of Credit against presentation to the Issuing Bank of documents that do not comply with the terms of such Letter of Credit; provided, that this clause (vi) shall not limit the rights of the Borrower under Section 2.15(e)(ii); or (vii) any other act or omission to act or delay of any kind by any Lender (including the Issuing Bank), the Administrative Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this subsection (vii), constitute a legal or equitable discharge of or defense to the Borrower's or the Lender's obligations hereunder. (e) Indemnification; Expenses. (i) Borrower hereby indemnifies and holds harmless each Lender (including each Issuing Bank) and the Administrative Agent from and against any and all claims, damages, losses, liabilities, costs or expenses which it may reasonably incur in connection with a Letter of Credit issued pursuant to this Section 2.15; provided that the Borrower shall not be required to indemnify any Lender, or the Administrative Agent, for any claims, damages, losses, liabilities, costs or expenses, to the 26 extent found by a court of competent jurisdiction to have been caused by the gross negligence or willful misconduct of such Person. (ii) None of the Lenders (including an Issuing Bank) nor the Administrative Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in subsection (d) above; provided that, notwithstanding Section 2.15(d), the Borrower shall have a claim for direct (but not consequential) damage suffered by it, to the extent finally determined by a court of competent jurisdiction to have been caused by (x) subject to the following sentence, the Issuing Bank's wrongful determination whether documents presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) the Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of documents strictly complying with the terms and conditions of the Letter of Credit. The parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (iii) Nothing in this subsection (e) is intended to limit the obligations of the Borrower under any other provision of this Agreement. To the extent the Borrower does not indemnify an Issuing Bank as required by this subsection, the Lenders agree to do so ratably in accordance with their Commitments. Section 2.16. Stop Issuance Notice. If the Required Banks determine at any time that the conditions set forth in Section 3.02 would not be satisfied in respect of a Borrowing at such time, then the Required Banks may request that the Administrative Agent issue a "Stop Issuance Notice", and the Administrative Agent shall issue such notice to each Issuing Bank. Such Stop Issuance Notice shall be withdrawn upon a determination by the Required Banks that the circumstances giving rise thereto no longer exist. No Letter of Credit shall be issued while a Stop Issuance Notice is in effect. The Required Banks may request issuance of a Stop Issuance Notice only if there is a reasonable basis therefor, and shall consider reasonably and in good faith a request from the Borrower for withdrawal of the same on the basis that the conditions in Section 3.02 are satisfied; provided that the Administrative Agent and the Issuing Banks may and shall conclusively rely on any Stop Issuance Notice while it remains in effect. Section 2.17. Change of Control. (a) If a Change of Control shall occur the Borrower will, within ten days after the occurrence thereof, give the 27 Administrative Agent notice thereof, and the Administrative Agent shall promptly notify each Lender thereof. Such notice shall describe in reasonable detail the facts and circumstances giving rise thereto and the date of such Change of Control and each Lender may, by notice to the Borrower and the Administrative Agent given not later than fifty days after the date of such Change of Control, terminate its Commitment, which shall be terminated, and declare the Note held by it (together with accrued interest thereon) and any other amounts payable hereunder for its account to be, and such Note and such amounts shall become, due and payable, in each case on the sixtieth day after the date of such Change of Control (or if such day is not a Domestic Business Day, the next succeeding Domestic Business Day), without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. For purposes of this Section, the following terms have the following meanings: A "Change of Control" shall occur if (i) any "person" or "group" of persons shall have acquired "beneficial ownership" (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder), of shares of Voting Stock representing 35% or more of the Voting Power of the Borrower, (ii) during any period of twenty-five consecutive months, commencing before or after the date of this Agreement, individuals who at the beginning of such twenty-five month period were directors of the Borrower (together with any replacement or additional directors whose election was recommended by incumbent management of the Borrower or who were elected by a majority of directors then in office) cease to constitute a majority of the board of directors of the Borrower, or (iii) any Person or group of related Persons shall acquire all or substantially all of the assets of the Borrower; provided, that a Change of Control shall not be deemed to have occurred pursuant to clause (iii) above if the Borrower shall have merged or consolidated with or transferred all or substantially all of its assets to another corporation in compliance with the provisions of Section 5.02 and the surviving or successor or transferee corporation is no more leveraged than was the Borrower immediately prior to such event. For purposes of this definition, the term "leveraged" when used with respect to any corporation shall mean the percentage represented by the total assets of that corporation divided by its stockholders' equity, in each case determined and as would be shown in a consolidated balance sheet of such corporation prepared in accordance with generally accepted accounting principles in the United States of America. "Voting Power" as applied to the stock of any corporation means the total voting power represented by all outstanding Voting Stock of such corporation. "Voting Stock" as applied to the stock of any corporation means stock of any class or classes (however designated) having ordinary voting power for the election of the directors of such corporation, other than stock having such power only by reason of the happening of a contingency. 28 (b) If the Commitment of any Lender is terminated pursuant to this Section at a time when any Letter of Credit is outstanding, then (i) such Lender shall remain responsible to the Issuing Bank with respect to such Letter of Credit to the same extent as if its Commitment had not terminated and (ii) the Borrower shall pay to such Lender an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to such Lender) equal to such Lender's Percentage of the aggregate amount available for drawing under all Letters of Credit outstanding at such time. Section 2.18. Optional Increase in Commitments. At any time, if no Default shall have occurred and be continuing, the Borrower, may, if it so elects, increase the aggregate amount of the Commitments, either by designating a financial institution not theretofore a Lender to become a Lender (such designation to be effective only with the prior written consent of the Administrative Agent, which consent will not be unreasonably withheld or delayed), or by agreeing with an existing Lender that such Lender's Commitment shall be increased. Upon execution and delivery by the Borrower and such Lender or other financial institution of an instrument in form reasonably satisfactory to the Administrative Agent, such existing Lender shall have a Commitment as therein set forth or such other financial institution shall become a Lender with a Commitment as therein set forth and all the rights and obligations of a Lender with such a Commitment hereunder; provided: (a) that the Borrower shall provide prompt notice of such increase to the Administrative Agent, who shall promptly notify the Lenders; (b) that the amount of such increase, together with all other increases in the aggregate amount of the Commitments pursuant to this Section 2.18 since the date of this Agreement, does not exceed $300,000,000; and (c) that, for so long as the Related Agreement remains in effect, there shall be a simultaneous increase in the "Commitments" under the Related Agreement, and the Commitment of any Lender participating in an increase pursuant to this Section 2.18 shall bear the same relation to the aggregate amount of the Commitments hereunder as its "Commitment" under the Related Agreement bears to the aggregate amount of the "Commitments" thereunder, in each case after giving effect to the increases hereunder and thereunder. Upon any increase in the aggregate amount of the Commitments pursuant to this Section 2.18, within five Domestic Business Days, in the case of any Group of Base Rate Loans then outstanding, and at the end of the then current Interest Period with respect thereto, in the case of any Group of Euro-Dollar Loans then outstanding, the Borrower shall prepay such Group in its entirety and, to the extent the Borrower elects to do so and subject to the conditions specified in Article 3, the Borrower shall reborrow Committed Loans from the Lenders in proportion to their respective Commitments after giving effect to such increase, 29 until such time as all outstanding Committed Loans are held by the Lenders in such proportion. ARTICLE 3 Conditions Section 3.01. Effectiveness. The Commitments shall become effective only when all the following conditions have been satisfied: (a) the Administrative Agent shall have received, from each party listed on the signature pages hereof, either a counterpart hereof signed by such party or facsimile or other written confirmation satisfactory to the Administrative Agent confirming that such party has signed a counterpart hereof; (b) the Administrative Agent shall have received a duly executed Note for the account of each Lender dated on or before the Closing Date and complying with the provisions of Section 2.05; (c) the Administrative Agent shall have received an opinion of General Counsel of the Borrower (or such other counsel for the Borrower as may be acceptable to the Agent), substantially in the form of Exhibit E hereto, and covering such additional matters relating to the transactions contemplated hereby as the Required Lenders may reasonably request; (d) the Administrative Agent shall have received an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, substantially in the form of Exhibit F hereto, and covering such additional matters relating to the transactions contemplated hereby as the Required Lenders may reasonably request; (e) the Borrower shall have paid to the Administrative Agent for the account of each Lender a fee in the amount heretofore mutually agreed; (f) the Administrative Agent shall have received all documents the Administrative Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Administrative Agent; and (g) the Administrative Agent shall have received evidence satisfactory to it that all principal of any loans outstanding under, and all accrued interest and fees under, the Existing Credit Agreement shall have been paid in full; provided that the Commitments shall not become effective unless all of the foregoing conditions are satisfied not later than December 8, 2000. Promptly after the Effective Date occurs, the Administrative Agent shall notify the 30 Borrower and the Lenders thereof, and such notice shall be conclusive and binding on all parties hereto. Section 3.02. Borrowings and Issuances of Letters of Credit. The obligation of any Lender to make a Loan on the occasion of any Borrowing, and the obligation of an Issuing Bank to issue (or renew or extend the term of) any Letter of Credit, is subject to the satisfaction of the following conditions: (a) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, or receipt by the Issuing Bank of a Notice of Issuance as required by Section 2.15(b), as the case may be; (b) the fact that, immediately before and after such Borrowing or issuance, no Default shall exist; and (c) the fact that the representations and warranties of the Borrower contained in this Agreement shall be true in all material respects on and as of the date of such Borrowing or issuance. Each Borrowing and each issuance or extension of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing or issuance as to the facts specified in the foregoing clauses 3.02(b) and 3.02(c). Section 3.03. Existing Credit Agreement. (a) On the Effective Date, the commitments under the Existing Credit Agreement shall terminate, without further action by any party thereto. (b) The Lenders which are parties to the Existing Credit Agreement, comprising the "Required Banks" as defined therein, hereby waive any requirement of notice of termination of the commitments pursuant to the Existing Credit Agreement and of prepayment of loans to the extent necessary to give effect to the subsections 3.01(g) and 3.03(a), provided that any such prepayment of loans shall be subject to Section 2.13 of the Existing Credit Agreement. ARTICLE 4 Representations and Warranties The Borrower represents and warrants that: Section 4.01. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 31 Section 4.02. Corporate and Governmental Authorization; Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or result in the creation or imposition of any Mortgage on any asset of the Borrower or any of its Subsidiaries. Section 4.03. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower. Section 4.04. Financial Information. (a) The consolidated balance sheet of the Borrower as of December 31, 1999 and the related consolidated statements of income and cash flows for the fiscal year then ended, reported on by PricewaterhouseCoopers LLP, and included in the Borrower's 1999 Form 10-K, copies of which have been delivered to the Administrative Agent for each of the Lenders, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower as of such date and its consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower as of September 30, 2000 and the related unaudited consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's most recent report on Form 10-Q, copies of which have been delivered to the Administrative Agent for each of the Lenders, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in paragraph (a) of this Section, the consolidated financial position of the Borrower as of such date and its consolidated results of operations and cash flows for such nine month period (subject to normal year-end adjustments). (c) Since September 30, 2000 there has been no change in the consolidated financial position or operations of the Borrower, considered as a whole, which would materially and adversely affect the ability of the Borrower to perform its obligations hereunder and under the Notes. Section 4.05. Litigation. Except as set forth in the Borrower's 1999 Form 10-K and any subsequent quarterly report on Form 10-Q filed by the Borrower with the SEC prior to the date hereof, there is no action, suit, arbitration or other proceeding, inquiry or investigation, at law or in equity, or before or by any court, 32 public board or body, arbitrator or arbitral body, pending against the Borrower or of which the Borrower has otherwise received official notice or which to the knowledge of the Borrower is threatened against the Borrower, wherein there is a reasonable possibility of an unfavorable decision, ruling or finding which would materially adversely affect the Borrower's ability to perform its obligations under this Agreement and the Notes and since the dates of the respective descriptions of proceedings contained in the reports identified above, there has been no change in the status of such proceedings which would materially adversely affect the Borrower's ability to perform its obligations under this Agreement and the Notes. Section 4.06. Environmental Matters. The Borrower does not presently anticipate that remediation costs and penalties associated with environmental laws, to the extent not previously provided for, will have a material adverse effect on the Borrower's ability to perform its obligations under this Agreement and the Notes. Section 4.07. Taxes. United States Federal income tax returns of the Borrower have been examined and closed through the fiscal year ended December 31, 1989. The Borrower has filed all United States Federal income tax returns and all other material tax returns that are required to be filed by it and has paid all material taxes due pursuant to such returns or pursuant to any assessment received by it, except for any such taxes being diligently contested in good faith and by appropriate proceedings. Adequate reserves have been provided on the books of the Borrower in respect of all taxes or other governmental charges in accordance with generally accepted accounting principles, and no tax liabilities in excess of the amount so provided are anticipated that would materially and adversely affect the Borrower's ability to perform its obligations under this Agreement and the Notes. Section 4.08. Compliance with Laws. The Borrower and Marathon Oil Company are in compliance with all applicable laws, rules and regulations, other than such laws, rules or regulations (i) the validity or applicability of which the Borrower or Marathon Oil Company is contesting in good faith or (ii) failure to comply with which cannot reasonably be expected to have consequences which would materially and adversely affect the Borrower's ability to perform its obligations under this Agreement and the Notes. Section 4.09. Marathon. Marathon Oil Company is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 33 ARTICLE 5 Covenants The Borrower agrees that, so long as any Bank has a Commitment hereunder or any amount payable under any Note or any Letter of Credit Liability remains unpaid: Section 5.01. Information. The Borrower will deliver to the Administrative Agent for each of the Lenders: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower as of the end of such fiscal year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by PricewaterhouseCoopers LLP or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower as of the end of such quarter and the related consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year; (c) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower stating whether there exists on the date of such certificate any Default and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) forthwith upon the occurrence of any Default, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (f) promptly upon the filing thereof, copies of all annual, quarterly or other reports which the Borrower shall have filed with the Securities and Exchange Commission; and 34 (g) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries and affiliates as the Administrative Agent, at the request of any Lender, may reasonably request. Information required to be delivered pursuant to Sections 5.01(a), 5.01(b), 5.01(e) or 5.01(f) above shall be deemed to have been delivered on the date on which the Borrower provides notice to the Administrative Agent that such information has been posted on the Borrower's website on the Internet at the website address listed on the signature pages hereof, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Lenders without charge; provided that (i) such notice may be included in a certificate delivered pursuant to Section 5.01(c) and (ii) the Borrower shall deliver paper copies of the information referred to in Sections 5.01(a), 5.01(b), 5.01(e) or 5.01(f) to the Administrative Agent for any Lender which requests such delivery. Section 5.02. Consolidations and Mergers. So long as this Agreement shall remain in effect, the Borrower shall not consolidate or merge with or into any other Person or convey, transfer or lease all or substantially all of its assets as an entirety to any Person, unless: (i) either (x) the Borrower shall be the corporation surviving such merger or (y) the corporation formed by such consolidation or into which Borrower is merged or the Person which acquires by conveyance, transfer or lease all or substantially all of the assets of the Borrower as an entirety shall be a corporation organized and existing under the laws of the United States of America or any state or the District of Columbia and shall execute and deliver to each Bank an agreement, in form and substance satisfactory to each Bank, containing an assumption by such successor corporation of the due and punctual performance and observance of each covenant and condition of this Agreement to be performed or observed by the Borrower; (ii) the Borrower or such successor corporation, as the case may be, shall have a consolidated net worth (that is, total consolidated assets less total consolidated liabilities) of no less than the net worth (as so determined) of the Borrower immediately prior to such consolidation, merger or conveyance, transfer or lease of all or substantially all of the Borrower's assets as an entirety to such Person; and (iii) immediately after giving effect to such transaction, no Default shall have occurred and be continuing. Upon any consolidation or merger in which the Borrower is not the surviving corporation or any conveyance, transfer or lease of all or substantially all of the assets of the Borrower as an entirety in accordance with this Section, the successor corporation formed by such consolidation or into which the Borrower is 35 merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Borrower under this Agreement with the same effect as if such successor corporation had been named as the Borrower herein. No such conveyance, transfer or lease of all or substantially all of the assets of the Borrower as an entirety shall have the effect of releasing the Borrower or any successor corporation which shall theretofore have become such in the manner prescribed in this Section from any liability hereunder. The Borrower will not directly or indirectly convey, transfer or lease all or substantially all of its assets except pursuant to a transaction subject to and in compliance with this Section 5.02. Section 5.03. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for its general corporate purposes. None of such proceeds will be used in violation of any applicable law or regulation including, without limitation, Regulation U of the Board of Governors of the Federal Reserve System. Section 5.04. Negative Pledge. If the Borrower or any Subsidiary of the Borrower shall mortgage, pledge, encumber, or subject to a lien (hereinafter to "Mortgage" or a "Mortgage") as security for any indebtedness for money borrowed (x) any blast furnace facility or raw steel producing facility, or rolling mills which are a part of a plant which includes such a facility; or (y) any property capable of producing oil or gas; and, which in either case, is located in the United States and determined by the Board of Directors of the Borrower, in good faith, to be a principal property, the Borrower will secure or will cause such Subsidiary to secure the Borrower's obligations hereunder equally and ratably with all indebtedness or obligations secured by the Mortgage then being given and with any other indebtedness of the Borrower or such Subsidiary then entitled thereto; provided, however, this covenant shall not apply in the case of: (i) any Mortgage existing on the date of this Agreement (whether or not such Mortgage includes an after-acquired property provision); (ii) any Mortgage, including a purchase money Mortgage, incurred in connection with the acquisition of any property (for purposes hereof the creation of any Mortgage within 180 days after the acquisition or completion of construction of such property shall be deemed to be incurred in connection with the acquisition of such property), the assumption of any Mortgage previously existing on such acquired property or any Mortgage existing on the property of any corporation when such corporation becomes a Subsidiary of the Borrower; (iii) any Mortgage on such property in favor of the United States of America, any state, or any agency, department, political 36 subdivision or other instrumentality of either, to secure partial, progress or advance payments to the Borrower or any Subsidiary of the Borrower pursuant to the provisions of any contract or any statute; (iv) any Mortgage on such property in favor of the United States of America, any state, or any agency, department, political subdivision or other instrumentality of either, to secure borrowings by the Borrower or any Subsidiary of the Borrower for the purchase or construction of the property mortgaged; (v) any Mortgage in connection with a sale or other transfer of (i) oil or gas in place for a period of time or in an amount such that the purchaser will realize therefrom a specified amount of money or specified amount of minerals or (ii) any interest in property of the character commonly referred to as an "oil payment" or "production payment"; (vi) any Mortgage on any property arising in connection with or to secure all or any part of the cost of the repair, construction, improvement, alteration, exploration, development or drilling of such property or any portion thereof; (vii) any Mortgage on any pipeline, gathering system, pumping or compressor station, pipeline storage facility, other pipeline facility, drilling equipment, drilling platform, drilling barge, any movable railway, marine or automotive equipment, gas plant, office building, storage tank, or warehouse facility, any of which is located on any property included herein under clause (y) above; (viii) any Mortgage on any equipment or other personal property used in connection with any property included herein under clause (y) above; (ix) any Mortgage on any property included herein under clause (y) above arising in connection with the sale of accounts receivable resulting from the sale of oil or gas at the wellhead; or (x) any renewal of or substitution for any Mortgage permitted under the preceding clauses. Notwithstanding the foregoing restriction contained in this Section 5.04, the Borrower may and may permit its Subsidiaries to incur liens or grant Mortgages on property covered by the restriction above so long as the net book value of the property so encumbered together with all property subject to the restriction on sale and leasebacks contained in Section 5.05 does not at the time such lien or Mortgage is granted exceed 5% of Consolidated Net Tangible Assets. "Consolidated Net Tangible Assets" means the aggregate value of all assets of the Borrower and its Subsidiaries on a consolidated basis after deducting 37 therefrom (a) all current liabilities (excluding all long-term debt due within one year), (b) all investments in unconsolidated subsidiaries and all investments accounted for on the equity basis and (c) all goodwill, patent and trademarks, unamortized debt discount and other similar intangibles (all determined in conformity with generally accepted accounting principles and calculated on a basis consistent with the Borrower's most recent audited consolidated financial statements). Section 5.05. Sale and Leaseback. The Borrower will not, nor will it permit any Subsidiary of the Borrower to, sell or transfer (x) any blast furnace facility or raw steel producing facility, or rolling mills which are a part of a plant which includes such a facility; or (y) any property capable of producing oil or gas; which in either case is located in the United States and determined by the Board of Directors of the Borrower, in good faith, to be a principal property, with the intention of taking back a lease of such property; provided, however, this covenant shall not apply if: (i) the sale is to a Subsidiary of the Borrower (or to the Borrower in the case of a Subsidiary); (ii) the lease is for a temporary period by the end of which it is intended that the use of such property by the lessee will be discontinued; (iii) the Borrower or a Subsidiary of the Borrower could, in accordance with Section 5.04, Mortgage such property without equally and ratably securing the Borrower's obligations hereunder; (iv) the transfer is incident to or necessary to effect any operating, farm out, farm in, unitization, acreage exchange, acreage contributions, bottom hole or dry hole arrangements or pooling agreement or any other agreement of the same general nature relating to the acquisition, exploration, maintenance, development and operation of oil or gas properties in the ordinary course of business or as required by regulatory agencies having jurisdiction over the property; or (v) (A) the Borrower promptly informs the Administrative Agent of such sale, (B) the net proceeds of such sale are at least equal to the fair value (as determined by resolution adopted by the Board of Directors of the Borrower) of such property and (C) the Borrower shall, and in any such case the Borrower covenants that it will, within 180 days after such sale, apply an amount equal to the net proceeds of such sale to the retirement of debt of the Borrower, or of a Subsidiary of the Borrower in the case of property of such Subsidiary, maturing by its terms more than one year after the date on which it was originally incurred (herein called "funded debt"); provided that the amount to be applied to the retirement of funded debt of the Borrower or of a Subsidiary of the Borrower shall be reduced by the amount equal to the amount below if, within 75 days after 38 such sale, the Borrower shall deliver to the Administrative Agent an officer's certificate (1) stating that on a specified date after such sale the Borrower or a Subsidiary of the Borrower, as the case may be, voluntarily retired a specified principal amount of funded debt, (2) stating that such retirement was not effected by payment at maturity or pursuant to any applicable mandatory sinking fund or prepayment provision (other than provisions requiring retirement of any funded debt of the Borrower or a Subsidiary of the Borrower, as the case may be, under the circumstances referred to in this Section 5.05) and (3) stating the then optional redemption or prepayment price applicable to funded debt so retired or, if there is no such price applicable, the amount applied by the Borrower or a Subsidiary of the Borrower, as the case may be, to the retirement of such funded debt. The Borrower shall deliver to the Administrative Agent a certified copy of the resolution of the Board of Directors of the Borrower referred to in paragraph (v)(B) above and an officer's certificate setting forth all material facts under this. The term retirement of such funded debt shall include the in-substance defeasance of such funded debt in accordance with then applicable accounting rules. ARTICLE 6 Defaults Section 6.01. Events of Default. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay when due any principal of any Note or to reimburse any drawing under any Letter of Credit when required hereunder, or shall fail to pay within five Domestic Business Days after the due date thereof any interest or fees payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Section 5.02; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those contained in Section 5.04 or 5.05 or those covered by clauses (a) or (b) above) for 10 days after written notice thereof has been given to the Borrower by the Administrative Agent at the request of any Bank; (d) the Borrower shall fail to observe or perform any covenant contained in Section 5.04 or 5.05 for 30 days after written notice thereof has been given to the Borrower by the Administrative Agent at the request of any Lender; provided that the continuation of such failure for 30 days or longer after such notice shall not constitute an Event of Default if (i) such failure is curable but cannot be cured within 30 days, (ii) the Borrower, upon the aforesaid notice from the Administrative Agent, institutes curative action as promptly as practicable, 39 and (iii) the Borrower diligently pursues such action to completion within a reasonable period, which period shall not, in any event, continue for more than 90 days after the aforesaid notice from the Administrative Agent; (e) any representation, warranty, certification or statement made by the Borrower in this Agreement or in any certificate, financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made or deemed made; (f) the Borrower shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (g) an involuntary case or other proceeding shall be commenced against the Borrower seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower under the federal bankruptcy laws as now or hereafter in effect; or (h) notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or any member of the ERISA Group shall incur and not satisfy a withdrawal liability under Title IV of ERISA in respect of a Multiemployer Plan in excess of (i) $50,000,000 for any year or (ii) $250,000,000 in the aggregate; then, and in every such event, the Administrative Agent shall (i) if requested by Lenders having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Lenders holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) and any other amounts payable hereunder to be, and the Notes and such amounts shall thereupon become, immediately due and payable without presentment, demand, protest or other 40 notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in paragraph (f) or (g) above, without any notice to the Borrower or any other act by the Administrative Agent or the Lenders, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) and any other amounts payable hereunder shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. Section 6.02. Notice of Default. The Administrative Agent shall give notice to the Borrower under Section 6.01(c) or (d) promptly upon being requested to do so by any Lender and shall thereupon notify all the Lenders thereof. Section 6.03. Cash Cover. The Borrower agrees, in addition to the provisions of Section 6.01 hereof, that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Administrative Agent upon the instruction of Lenders having more than 50% of the Letter of Credit Liabilities, pay to the Administrative Agent an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Administrative Agent) equal to the aggregate amount available for drawing under all Letters of Credit outstanding at such time; provided that, upon the occurrence of any Event of Default specified in Section 6.01(f) or 6.01(g) with respect to the Borrower, the Borrower shall pay such amount forthwith without any notice or demand or any other act by the Administrative Agent or the Lenders. ARTICLE 7 The Agents Section 7.01. Appointment and Authorization. Each Lender irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with all such powers as are reasonably incidental thereto. Section 7.02. Agents and Affiliates. Each Agent shall have the same rights and powers under this Agreement as any other Lender and may exercise or refrain from exercising the same as though it were not one of the Agents. Each Agent and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not one of the Agents. Section 7.03. Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall 41 not be required to take any action with respect to any Default, except as expressly provided in Article 6. Section 7.04. Consultation with Experts. Each Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.05. Liability of Agents. None of the Agents, their affiliates and their respective directors, officers, agents and employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Lenders (or such different number of Lenders as any provision hereof expressly requires for such consent or request) or (ii) in the absence of its own gross negligence or willful misconduct; provided that the provisions of this sentence are for the sole benefit of the Agents, their affiliates and their respective directors, officers, agents and employees and shall not release any Bank from liability it would otherwise have to the Borrower. None of the Agents, their affiliates and their respective directors, officers, agents and employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3 except, in the case of the Administrative Agent, receipt of items required to be delivered to it; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. No Agent shall incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a bank wire, telex, facsimile or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to any Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. Section 7.06. Indemnification. The Lenders shall, ratably in proportion to their Credit Exposures, indemnify each Agent, and Issuing Bank, their respective affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any Letter of Credit or any action taken or omitted by such indemnitees hereunder or thereunder. 42 Section 7.07. Credit Decision. Each Lender acknowledges that it has, independently and without reliance on any other Lender Party, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance on any other Lender Party, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Section 7.08. Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Lenders and the Borrower. Upon any such resignation, the Borrower shall have the right to appoint a successor Administrative Agent from among the Lenders, subject to the approval of the Required Lenders, which shall not be unreasonably withheld. If no successor Administrative Agent shall have been so appointed by the Borrower and approved by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank organized or licensed under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent resigns as Administrative Agent hereunder, the provisions of this Article shall inure to its benefit as to actions taken or omitted to be taken by it while it was Administrative Agent. Section 7.09. Administrative Agent's Fee. The Borrower shall pay to the Administrative Agent for its own account fees in the amounts and at the times previously agreed upon by the Borrower and the Administrative Agent. Section 7.10. Other Agents. None of the Co-Agents, the Documentation Agents and the Syndication Agent, in their capacities as such, shall have any duties or obligations of any kind under this Agreement. ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or before the first day of any Interest Period for any Euro-Dollar Loans or Money Market LIBOR Loan: 43 (a) the Administrative Agent is advised by the Reference Lenders that deposits in dollars in the applicable amounts are not being offered to the Reference Lenders in the London interbank market for such Interest Period, or (b) in the case of Euro-Dollar Loans, Lenders having at least 50% in aggregate amount of the Commitments advise the Administrative Agent that the London Interbank Offered Rate as determined by the Administrative Agent will not adequately and fairly reflect the cost to such Lenders of funding their Euro-Dollar Loans for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Lenders, whereupon until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Lenders to make Euro-Dollar Loans, or to continue or convert outstanding Loans as or into Euro-Dollar Loans, shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Administrative Agent at least two Domestic Business Days before the date of any affected Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such affected Borrowing is a Euro-Dollar Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such affected Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Prime Rate for such day. Section 8.02. Illegality. (a) If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency, shall make it unlawful or impossible for any Lender (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Lender shall so notify the Administrative Agent, the Administrative Agent shall forthwith give notice thereof to the other Lenders and the Borrower, whereupon until such Lender notifies the Borrower and the Administrative Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Lender to make Euro-Dollar Loans, or to convert outstanding Loans into Euro-Dollar Loans or continue outstanding Loans as Euro-Dollar Loans, shall be suspended. Before giving any notice to the Administrative Agent pursuant to this Section, such Lender shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. 44 (b) If such notice is given, each Euro-Dollar Loan of such Lender then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Lender may lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day or (b) immediately if such Lender shall determine that it may not lawfully continue to maintain and fund such Loan as a Euro-Dollar Loan to such day. Interest and principal on any such Base Rate Loan shall be payable on the same dates as, and on a pro rata basis with, the interest and principal payable on the related Euro-Dollar Loans of the other Lenders. Section 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (A) shall subject any Lender (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans or its obligations hereunder in respect of Letters of Credit, or shall change the basis of taxation of payments to any Lender (or its Applicable Lending Office) of the principal of or interest on its Fixed Rate Loans or any other amounts due under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans or its obligations hereunder in respect of Letters of Credit (except for taxes based on or measured in whole or in part by the gross income, net income, gross revenue or gross receipts of such Lender or its Applicable Lending Office imposed by the jurisdiction in which such Lender's principal executive office or Applicable Lending Office is located); or (B) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (y) with respect to any Euro-Dollar Loan any such requirement with respect to which such Lender is entitled to compensation during the relevant Interest Period under Section 8.03(d) and (z) any such requirement with respect to which such Lender is entitled to compensation pursuant to Section 8.03(b)), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (or its Applicable Lending 45 Office) or shall impose on any Lender (or its Applicable Lending Office) or on the London interbank market any other condition affecting its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans or its obligations hereunder in respect of Letters of Credit; and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or of issuing or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Lender (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Lender to be material, then, within 15 days after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction. (b) If any Lender shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Lender (or its Parent) as a consequence of such Lender's obligations hereunder to a level below that which such Lender (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within 15 days after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender (or its Parent) for such reduction, provided that the Borrower shall not be obligated to compensate any Lender (or its Parent) in respect of any such reduction in respect of periods more than six months prior to the date on which such Lender shall have notified the Borrower of its intention to demand such compensation and setting forth the amount or the specific basis of computation thereof. (c) Each Lender will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to Section 8.03(a) or (b) and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to it. A certificate of any Lender claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods. 46 (d) The Borrower shall pay for the account of each Lender on the last day of each Interest Period with respect to any Euro-Dollar Loan (and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof), if at any time during such Interest Period such Lender shall be required to maintain (and shall maintain in amounts deemed by such Lender to be material) reserves against any category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined as provided in this Agreement or against any category of extensions of credit or other assets of such Lender which includes loans by a non-United States office of such Lender to United States residents (including without limitation reserves against "Eurocurrency liabilities" under Regulation D), an additional amount (determined by such Lender and notified to the Borrower and the Administrative Agent) equal to the product of the following for each day during such Interest Period: (i) the principal amount of the Euro-Dollar Loan of such Lender to which such Interest Period relates outstanding on such day; and (ii) the remainder of (x) a fraction the numerator of which is the applicable London Interbank Offered Rate (expressed as a decimal) and the denominator of which is one minus the stated rate (expressed as a decimal) at which such reserve requirements are imposed on such Lender on such day minus (y) such numerator; and (iii) 1/360. If a Lender which is entitled to require payment by the Borrower of the amount provided for in this Section 8.03(d) determines that a lesser amount is required to compensate it for the costs of the reserve requirements referred to therein, such Lender may, but shall not be obligated to, reduce the amount payable by the Borrower thereunder to a lesser amount specified in the notice delivered pursuant to this Section 8.03(d). (e) Each Lender organized under the laws of a jurisdiction outside the United States of America agrees that it shall deliver to the Borrower (with a copy to the Administrative Agent) (i) within 30 days after the date of execution of this Agreement, two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI, as appropriate, promulgated pursuant to the Code, indicating that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes as permitted by the Code, (ii) from time to time, such extensions or renewals of such forms (or successor forms) as may reasonably be requested by the Borrower but only to the extent such Lender determines that it may properly effect such extensions or renewals under applicable tax treaties, laws, regulations and directives and (iii) in the event of a transfer of any Loan to an affiliate of such Lender, a new Internal Revenue Service Form W-8BEN or W-8ECI (or any successor form), as the case may be, for such affiliate. The Borrower and the 47 Administrative Agent shall each be entitled to rely on such forms in its possession until receipt of any revised or successor form pursuant to the preceding sentence. Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Lender to make, or to continue or convert outstanding Loans as or to, Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Lender has demanded compensation under Section 8.03 with respect to its Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Lender through the Administrative Agent, have elected that the provisions of this Section shall apply to the Lender demanding such compensation, then, unless and until such Lender notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, all Loans which would otherwise be made by such Lender as (or continued as or converted to) Euro-Dollar Loans shall instead be Base Rate Loans on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Lenders. If such Lender notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist, the principal amount of each such Base Rate Loan shall be converted into a Euro-Dollar Loan on the first day of the next succeeding Interest Period applicable to the related Euro-Dollar Loans of the other Lenders. Section 8.05. Substitution of Lender. If (i) the obligation of any Lender to make or to convert or continue outstanding Loans as or into Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Lender has demanded compensation under Section 8.03, the Borrower shall have the right, with the assistance of the Administrative Agent, to designate a substitute bank or banks (which may be one or more of the Lenders) mutually satisfactory to the Borrower, the Administrative Agent and the Issuing Banks to purchase for cash, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto, the outstanding Loans and Letter of Credit Liabilities of such Lender and assume the Commitment of such Lender, without recourse to or warranty by, or expense to, such Lender, for a purchase price equal to the principal amount of all of such Lender's outstanding Loans and Reimbursement Obligations plus any accrued but unpaid interest thereon and the accrued but unpaid fees for the account of such Lender hereunder plus such amount, if any, as would be payable pursuant to Section 2.11 if the outstanding Loans of such Lender were prepaid in their entirety on the date of consummation of such assignment. Section 8.06. Notice Mandatory. The Administrative Agent or the affected Lender, as the case may be, shall promptly give notice to the Borrower when circumstances which gave rise to a suspension of the obligations of the Lenders or a Lender to make or maintain Euro-Dollar Loans pursuant to Section 8.01 or 8.02, or to a demand for compensation under Section 8.03, no longer exist. 48 ARTICLE 9 Miscellaneous Section 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile or similar writing) and shall be given to such party: (a) in the case of the Borrower or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (b) in the case of any Lender, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (c) in the case of any party, at such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when transmitted to the telex number referred to in this Section and the appropriate answerback is received, (ii) if given by facsimile, when transmitted to the facsimile number referred to in this Section and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address referred to in this Section; provided that notices to the Administrative Agent under Article 2 or Article 8 shall not be effective until received. Section 9.02. No Waivers. No failure or delay by any Lender Party in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.03. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable and documented (with itemized invoices) out-of-pocket expenses of the Administrative Agent, including fees and disbursements of special counsel for the Administrative Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable and documented (with itemized invoices) out-of-pocket expenses incurred by each Lender Party, including (without duplication) the fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, or any bankruptcy, insolvency, reorganization or other enforcement proceedings resulting therefrom. The Borrower shall indemnify each Lender Party against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement or the Notes. (b) The Borrower agrees to indemnify each Lender Party, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from 49 and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that (i) no Indemnitee shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct or for its breach of the express terms of this Agreement, in each case as determined by final judgment of a court of competent jurisdiction; (ii) the Borrower shall not, in connection with any such proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate law firm at any one time for the Indemnitees (which shall be selected by the Administrative Agent after consultation with the Borrower); (iii) each Indemnitee shall consult with the Borrower from time to time at the request of the Borrower regarding the conduct of the defense in any such proceeding; and (iv) the Borrower shall not be obligated to pay an amount of any settlement entered into without its consent (which shall not be unreasonably withheld). Section 9.04. Sharing. Each Lender agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest then due with respect to the Loans and Letter of Credit Liabilities held by it which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal and interest then due with respect to the Loans and Letter of Credit Liabilities held by such other Lender, the Lender receiving such proportionately greater payment shall purchase such participations in the Loans held by the other Lenders, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Loans and Letter of Credit Liabilities held by the Lenders shall be shared by the Lenders pro rata; provided that nothing in this Section shall impair the right of any Lender to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. Section 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Lenders (and, if the rights or duties of any Issuing Bank or Agent are affected thereby, by it); provided that no such amendment or waiver shall: (a) unless signed by all the Lenders, (i) increase or decrease the Commitment of any Lender (except for a ratable decrease in the Commitments of all the Lenders) or subject any Lender to any additional obligation, (ii) reduce the principal of or interest on any Loan or the amount to be reimbursed in respect of any Letter of Credit or any interest thereon or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or for 50 reimbursement in respect of any Letter of Credit or any fees hereunder or for the termination of any Commitment, or (except as expressly provided in Section 2.15) the expiry date of any Letter of Credit, (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans, or the number of Lenders, which shall be required for the Lenders or any of them to take any action under this Section or any other provision of this Agreement or (v) change this clause 9.05(a); or (b) unless signed by a Designated Lender or its Designating Lender, (i) subject such Designated Lender to any additional obligation, (ii) affect its rights hereunder (unless the rights of all the Lenders hereunder are similarly affected) or (iii) change this clause 9.05(b). For avoidance of doubt, the operation of Section 2.18 in accordance with its terms is not an amendment subject to this Section 9.05. Section 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). (b) Any Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans and Letter of Credit Liabilities at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender's Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) subject to each such assignment (determined as of the date the Assignment and Assumption Agreement, as hereinafter defined, with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000, unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consent (each such consent not to be unreasonably withheld or delayed), (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loan or the Commitment assigned, except that this clause (ii) shall not apply to rights in respect of outstanding Money Market Loans and (iii) the parties to each assignment shall execute and deliver to the Administrative Agent an agreement, substantially in the form of Exhibit G hereto (an "Assignment and Assumption Agreement"), together with a processing and recordation fee of $3,500, and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Subject to acceptance and recording thereof by the Administrative Agent pursuant to paragraph (c) of this Section, 51 from and after the effective date specified in each Assignment and Assumption Agreement, the Eligible Assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption Agreement, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption Agreement, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption Agreement covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 8.03, 8.04 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (d) of this Section. (c) The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in the State of Delaware or New York a copy of each Assignment and Assumption Agreement delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Any Lender may, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans and/or Letter of Credit Liabilities owing to it); provided that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in clause (i), (ii) or (iii) of Section 9.05(a) that affects such Participant. Subject to paragraph (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits 52 of Sections 9.05(a) and Article 8 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.04 as though it were a Lender, provided such Participant agrees to be subject to Section 9.04 as though it were a Lender. (e) A Participant shall not be entitled to receive any greater payment under Section 8.03 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant organized under the laws of a jurisdiction outside the United States shall not be entitled to the benefits of Section 8.03(a) unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 8.03(e) as though it were a Lender. (f) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. Section 9.07. Designated Lenders. (a) Subject to the provisions of this subsection (a), any Lender may at any time designate an Approved Fund to provide all or a portion of the Loans to be made by such Lender pursuant to this Agreement; provided that such designation shall not be effective unless the Borrower and the Administrative Agent consent thereto (which consents shall not be unreasonably withheld). When a Lender and its Approved Fund shall have signed an agreement substantially in the form of Exhibit H hereto (a "Designation Agreement") and the Borrower and the Administrative Agent shall have signed their respective consents thereto, such Approved Fund shall become a Designated Lender for purposes of this Agreement. The Designating Lender shall thereafter have the right to permit such Designated Lender to provide all or a portion of the Loans to be made by such Designating Lender pursuant to Section 2.01 or 2.03, and the making of such Loans or portion thereof shall satisfy the obligation of the Designating Lender to the same extent, and as if, such Loans or portion thereof were made by the Designating Lender. As to any Loans or portion thereof made by it, each Designated Lender shall have all the rights that a Lender making such Loans or portion thereof would have had under this Agreement and otherwise; provided that (x) its voting rights under this Agreement shall be exercised solely by its Designating Lender and (y) its Designating Lender shall remain solely responsible to the other parties hereto for the performance of such Designated Lender's obligations under this Agreement, including its obligations in respect of the Loans or portion thereof made by it. No additional Note shall be required to evidence the Loans or portion thereof made by a Designated Lender; and the 53 Designating Lender shall be deemed to hold its Note as agent for its Designated Lender to the extent of the Loans or portion thereof funded by such Designated Lender. Each Designating Lender shall act as administrative agent for its Designated Lender and give and receive notices and other communications on its behalf. Any payments for the account of any Designated Lender shall be paid to its Designating Lender as administrative agent for such Designated Lender and neither the Borrower nor the Administrative Agent shall be responsible for any Designating Lender's application of such payments. In addition, any Designated Lender may, with notice to (but without the prior written consent of) the Borrower and the Administrative Agent, (i) assign all or portions of its interest in any Loans to its Designating Lender or to any financial institutions consented to by the Borrower and the Administrative Agent that provide liquidity and/or credit facilities to or for the account of such Designated Lender to support the funding of Loans or portions thereof made by it and (ii) disclose on a confidential basis any non-public information relating to its Loans or portions thereof to any rating agency, commercial paper dealer or provider of any guarantee, surety, credit or liquidity enhancement to such Designated Lender. (b) Each party to this Agreement agrees that it will not institute against, or join any other person in instituting against, any Designated Lender any bankruptcy, insolvency, reorganization or other similar proceeding under any federal or state bankruptcy or similar law, for one year and a day after all outstanding senior indebtedness of such Designated Lender is paid in full. The Designating Lender for each Designated Lender agrees to indemnify, save, and hold harmless each other party hereto for any loss, cost, damage and expense arising out of its inability to institute any such proceeding against such Designated Lender. This subsection (b) shall survive the termination of this Agreement. Section 9.08. No Reliance on Margin Stock. Each Lender represents to the Administrative Agent and each of the other Lenders that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.09. Governing Law. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. Section 9.10. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. 54 Section 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 55 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. USX CORPORATION By: /s/ E.F. Guna ---------------------------------------------- Title: Vice President & Treasurer 600 Grant Street Pittsburgh, Pennsylvania 15219-4776 Attention: Treasurer Administrative Agent -------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent and as Lender By: /s/ Carl J. Mehldau, Jr. ---------------------------------------------- Title: Associate 60 Wall Street New York, New York 10260-0060 Facsimile: 212-648-5018 THE CHASE MANHATTAN BANK, N.A., as Lender By: /s/ James H. Ramage ---------------------------------------------- Title: Managing Director 56 Syndication Agent ----------------- BANK OF AMERICA, N.A., as Syndication Agent and as Lender By: /s/ Ronald E. McKaig -------------------------------------------- Title: Managing Director Documentation Agents -------------------- CITIBANK, N.A., as Documentation Agent and as Lender By: /s/ Gordon H. DeKuyper -------------------------------------------- Title: Vice President, Global Energy & Mining THE BANK OF NOVA SCOTIA, as Documentation Agent and as Lender By: /s/ F. C. H. Ashby -------------------------------------------- Title: Senior Manager - Loan Operations 57 COMMERZBANK AG, NEW YORK and GRAND CAYMAN BRANCHES, as Documentation Agent and as Lender By: /s/ M. Annette Hanami -------------------------------------------- Title: Vice President By: /s/ Andrew P. Lusk -------------------------------------------- Title: Assistant Vice President Senior Managing Agents ---------------------- MELLON BANK, N.A. By: /s/ Robert J. Reichenbach -------------------------------------------- Title: Assistant Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ David B. Gookin -------------------------------------------- Title: Vice President THE INDUSTRIAL BANK OF JAPAN LIMITED By: /s/ John Dippo -------------------------------------------- Title: Senior Vice President THE DAI-ICHI KANGYO BANK, LIMITED By: /s/ Timothy White -------------------------------------------- Title: Senior Vice President 58 Managing Agent -------------- NATIONAL CITY BANK By: /s/ Davis R. Bonner ---------------------------------------- Title: Senior Vice President Other Lenders ------------- COMERICA BANK By: /s/ Robert P. Wilson ---------------------------------------- Title: Assistant Vice President THE BANK OF NEW YORK By: /s/ Walter C. Parelli ---------------------------------------- Title: Vice President 59 THE NORTHERN TRUST COMPANY By: /s/ Craig Smith ------------------------------------------- Title: Vice President CREDIT SUISSE FIRST BOSTON By: /s/ Jay Chall ------------------------------------------- Title: Director By: /s/ William S. Lutkins ------------------------------------------- Title: Vice President LEHMAN COMMERCIAL PAPER INC. By: /s/ Michelle Swanson ------------------------------------------- Title: Authorized Signatory THE SANWA BANK, LIMITED By: /s/ Jean-Michel Fatovic ------------------------------------------- Title: Vice President FIFTH THIRD BANK By: /s/ David C. Gordley ------------------------------------------- Title: Vice President 60 THE TOKAI BANK, LIMITED By: /s/ Shinichi Nakatani ------------------------------------------ Title: Assistant General Manager THE SUMITOMO BANK, LIMITED By: /s/ C. Michael Garrido ------------------------------------------ Title: Senior Vice President 61 COMMITMENT SCHEDULE Lender Commitment Morgan Guaranty Trust Company of New York $ 75,000,000 The Chase Manhattan Bank, N.A. $ 75,000,000 The Bank of Nova Scotia $ 150,000,000 Bank of America, N.A. $ 150,000,000 Citibank, N.A. $ 150,000,000 Commerzbank AG $ 150,000,000 Mellon Bank, N.A. $ 93,750,000 PNC Bank National Association $ 93,750,000 National City Bank $ 56,250,000 The Industrial Bank of Japan, Limited $ 48,750,000 Comerica Bank $ 45,000,000 The Dai-Ichi Kangyo Bank, Limited $ 45,000,000 The Bank of New York $ 37,500,000 The Sumitomo Bank, Limited $ 37,500,000 The Northern Trust Company $ 30,000,000 Credit Suisse First Boston $ 26,250,000 Lehman Commercial Paper Inc. $ 26,250,000 The Sanwa Bank, Limited $ 26,250,000 Fifth Third Bank $ 18,750,000 The Tokai Bank, Limited $ 18,750,000 Total $1,353,750,000 FIVE YEAR PRICING SCHEDULE Each of "Facility Fee Rate" and "Euro-Dollar Margin" means, for any day, the rate per annum set forth below in the row opposite such term and in the column corresponding to the Pricing Level and Usage that apply on such day: Pricing Level Level I Level II Level III Level IV Level V Facility Fee Rate 0.100% 0.125% 0.150% 0.200% 0.250% Euro-Dollar Margin Usage * 50% 0.250% 0.375% 0.475% 0.675% 1.000% Usage ** 50% 0.350% 0.500% 0.600% 0.800% 1.125% * Less Than ** More Than or Equal To For purposes of this Schedule, the following terms have the following meanings, subject to the concluding paragraph of this Schedule: "Level I Pricing" applies on any day on which the Borrower's long-term debt is rated A- or higher by S&P or A3 or higher by Moody's. "Level II Pricing" applies on any day on which (i) the Borrower's long-term debt is rated BBB+ or higher by S&P or Baa1 or higher by Moody's and (ii) Level I Pricing does not apply. "Level III Pricing" applies on any day on which (i) the Borrower's long-term debt is rated BBB or higher by S&P or Baa2 or higher by Moody's and (ii) none of Level I Pricing and Level II Pricing applies. "Level IV Pricing" applies on any day on which (i) the Borrower's long-term debt is rated BBB- or higher by S&P or Baa3 or higher by Moody's and (ii) none of Level I Pricing, Level II Pricing and Level III Pricing applies. "Level V Pricing" applies on any day if no other Pricing Level applies on such day. "Pricing Level" refers to the determination of which of Level I, Level II, Level III, Level IV or Level V Pricing applies on any day. The "Usage" applicable to any date is the percentage equivalent of a fraction the numerator of which is the Total Outstanding Amount at such date and the denominator of which is the aggregate amount of the Commitments at such date. If for any reason any Total Outstanding Amount remains following the termination of the Commitments, Usage will be deemed to be more than 50%. 2 The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement, and any rating assigned to any other debt security of the Borrower shall be disregarded. The ratings in effect for any day are those in effect at the close of business on such day. In the case of split ratings from S&P and Moody's, the rating to be used to determine the applicable Pricing Level is the higher of the two (e.g., A-/Baa1 results in Level I Pricing); provided that if the split is more than one full rating category, the intermediate (or higher of the two intermediate ratings) will be used (e.g., A-/Baa2 results in Level II Pricing, as does A-/Baa3). 3 EXHIBIT A NOTE New York, New York ___________ __, ____ For value received, USX CORPORATION, a Delaware corporation (the "Borrower"), promises to pay to the order of ______________________ (the "Lender"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Lender to the Borrower pursuant to the Credit Agreement referred to below on the maturity date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, at 60 Wall Street, New York, New York. The date, amount and maturity of each Loan made by the Lender and all repayments of the principal thereof shall be recorded by the Lender and, if the Lender so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Lender on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Lender to make (or any error in making) any such recordation or endorsement shall not affect the Borrower's obligations hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Five-Year Credit Agreement dated as of November 30, 2000 among USX Corporation, the Lenders party thereto, Bank of America, N.A., as Syndication Agent, Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, as Documentation Agents and Morgan Guaranty Trust Company of New York, as Administrative Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. USX CORPORATION By: __________________________________ Name: Title: LOANS AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------------------------- Amount of Amount of Principal Date Loan Repaid Notation Made By - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A-2 EXHIBIT B FORM OF MONEY MARKET QUOTE REQUEST [Date] To: Morgan Guaranty Trust Company of New York (the "Administrative Agent") From: USX Corporation (the "Borrower") Re: Five-Year Credit Agreement (the "Credit Agreement") dated as of November 30, 2000 among the Borrower, the Lenders party thereto and the Agents party thereto. We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount/1/ Interest Period/2/ $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] ________________________ /1/ Amount must be $50,000,000 or a larger multiple of $10,000,000. /2/ Not less than one month (LIBOR Auction) or not less than 30 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Terms used herein have the meanings assigned to them in the Credit Agreement. USX Corporation By: ____________________________________ Name: Title: B-2 EXHIBIT C FORM OF INVITATION FOR MONEY MARKET QUOTES To: [Name of Lender] Re: Invitation for Money Market Quotes to USX Corporation (the "Borrower") Pursuant to Section 2.03 of the Five-Year Credit Agreement dated as of November 30, 2000 among the Borrower, the Lenders party thereto and the Agents party thereto, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ Principal Amount Interest Period $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. Morgan Guaranty Trust Company of New York, as Administrative Agent By: _____________________________________ Authorized Officer EXHIBIT D FORM OF MONEY MARKET QUOTE To: Morgan Guaranty Trust Company of New York, as Administrative Agent Re: Money Market Quote to USX Corporation (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, ____, we hereby make the following Money Market Quote on the following terms: 1. Quoting Lender: ________________________________ 2. Person to contact at Quoting Lender: ________________________________ 3. Date of Borrowing: ____________________/1/ 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Money Market Amount/2/ Interest Period/3/ [Margin]/4/ [Absolute Rate]/5/ $ $ _________________________ /1/ As specified in the related Invitation. /2/ Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Each bid must be made for $5,000,000 or a larger multiple of $1,000,000. /3/ Not less than one month or not less than 30 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. /4/ Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". /5/ Specify rate of interest per annum (to the nearest 1/10,000 of 1%). [provided that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.] We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Five-Year Credit Agreement dated as of November 30, 2000 among the Borrower, the Lenders party thereto and the Agents party thereto, irrevocably obligate(s) us to make the Money Market Loan(s) for which such offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF LENDER] By: ____________________________________ Authorized Officer D-2 EXHIBIT E OPINION OF COUNSEL FOR THE BORROWER [Effective Date] To the Banks and the Agents Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260-0060 Dear Sirs: I am the General Counsel of USX Corporation, a Delaware corporation (the "Borrower"). This opinion is being delivered pursuant to Section 3.01(c) of the $1,353,750,000 Five-Year Credit Agreement dated as of November 30, 2000 among the Borrower, the Lenders party thereto as listed on the signature pages thereof, Bank of America, N.A. as Syndication Agent, Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, as Documentation Agents, and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Agreement"). Capitalized terms used herein that are not otherwise defined shall have the meanings ascribed to them in the Agreement. I have examined, or caused to be examined, originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to conduct its business as now conducted. 2. The execution, delivery and performance by the Borrower of the Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the Restated Certificate of Incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or result in the creation or imposition of any Mortgage on any asset of the Borrower or any Subsidiary. 3. The Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute valid and binding obligations of the Borrower, in each case enforceable in accordance with its terms. 4. Except as set forth in the Borrower's 1999 Form 10-K and subsequent quarterly reports on Form 10-Q filed by the Borrower with the SEC, there is no action, suit, arbitration or other proceeding, inquiry or investigation, at law or in equity, or before or by any court, public board or body, arbitrator or arbitral body, pending against the Borrower or of which the Borrower has otherwise received official notice or which to my knowledge is threatened against the Borrower, wherein there is a reasonable possibility of an unfavorable decision, ruling or finding which would materially adversely affect the Borrower's ability to perform its obligations under the Agreement and the Notes. Since the dates of the respective descriptions of proceedings contained in the reports identified in the immediately preceding sentence there has been no change in the status of such proceedings that would materially adversely affect the Borrower's ability to perform its obligations under the Agreement and the Notes. The opinion set forth in paragraph 3 hereof is qualified by the effect of: (i) bankruptcy, insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights and remedies of creditors generally, (ii) general principles of equity, and (iii) applicable rules of law which: (A) limit or affect the enforcement of provisions of a contract that purport to require waiver of the obligations of good faith, fair dealing, diligence and reasonableness, (B) limit the availability of a remedy under certain circumstances where another remedy has been elected, (C) limit the enforceability of provisions releasing, exculpating, or exempting a party from, or requiring indemnification of a party for, liability for its own action or inaction, and (D) may, where less than all of a contract may be unenforceable, limit the enforceability of the balance of the contract to circumstances in which the unenforceable portion is not an essential part of the agreed exchange. The foregoing opinion is limited to the laws of the Commonwealth of Pennsylvania, the Federal laws of the United States of America and the General Corporation Law of the State of Delaware. As the Agreement and the Notes are by their terms governed by the laws of the State of New York, the foregoing opinion should be understood to conclude that (i) a Pennsylvania court or a Federal court sitting in Pennsylvania would give effect to the choice of New York law to govern the Agreement and the Notes and (ii) under the internal laws of the Commonwealth of Pennsylvania the Agreement constitutes a valid and binding agreement of the Borrower and the Notes constitute valid and binding obligations of the Borrower. Very truly yours, E-2 EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE ADMINISTRATIVE AGENT [Effective Date] To the Lenders and Agents Referred to Below c/o Morgan Guaranty Trust Company of New York, as Administrative Agent 60 Wall Street New York, New York 10260-0060 Dear Sirs: We have participated in the preparation of the Five-Year Credit Agreement dated as of November 30, 2000 (the "Credit Agreement") among USX Corporation, a Delaware corporation (the "Borrower"), the Lenders party thereto, Bank of America, N.A., as Syndication Agent, Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, as Documentation Agents and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Administrative Agent"), and have acted as special counsel for the Administrative Agent for the purpose of rendering this opinion pursuant to Section 3.01(d) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note issued thereunder today constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Lender is located which limits the rate of interest that such Lender may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other Person without our prior written consent. Very truly yours, F-2 EXHIBIT G ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of ________ __, ____ among [NAME OF ASSIGNOR] (the "Assignor") and [NAME OF ASSIGNEE] (the "Assignee"). WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Five-Year Credit Agreement dated as of November 30, 2000 (as amended from time to time, the "Credit Agreement") among the USX Corporation, the Lenders party thereto, Bank of America, N.A., as Syndication Agent, Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, as Documentation Agents and Morgan Guaranty Trust Company of New York, as Administrative Agent; WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $____________; WHEREAS, [Committed] Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of each of its outstanding [Committed] Loans, and the Assignee proposes to accept such assignment and assume the corresponding obligations of the Assignor under the Credit Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. All capitalized terms not otherwise defined herein have the respective meanings set forth in the Credit Agreement. Section 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount and a corresponding portion of each of its outstanding [Committed] Loans, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount. Upon the execution and delivery hereof by the Assignor and the Assignee [and the execution of the consent attached hereto by the Borrower and the Administrative Agent]/1/ and the payment of the amounts specified in Section 3 required to be paid on the date hereof, (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Lender under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount and acquire the rights of the Assignor with respect to a corresponding portion of each of its outstanding [Committed] Loans and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by the Assigned Amount, and the Assignor shall be released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. Section 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.2 Fees accrued before the date hereof with respect to amounts assigned to the Assignee hereunder are for the account of the Assignor and such fees accruing on and after the date hereof with respect to such amounts are for the account of the Assignee. Each of the Assignor and the Assignee agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and promptly pay the same to such other party. [Section 4. Consent of the Borrower, the Administrative Agent and each Issuing Bank. This Agreement is conditioned upon the consent of the Borrower, the Administrative Agent and each Issuing Bank pursuant to Section 9.06(b) of the Credit Agreement./3/] [Section 5. Note. The Borrower has agreed to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein.]/4/ Section 6. No Reliance on Assignor. The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned hereby and that such interest is free and clear of any other adverse claim created by it. The Assignor makes no representation or warranty (other than that ____________________________ /1/ Delete if consent is not required. /2/ Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically of by formula rather than as a fixed sum. /3/ Delete if consent is not required. /4/ Delete if execution and delivery of a Note is not required. G-2 mentioned immediately above) in connection with, and shall have no responsibility with respect to, the solvency, financial condition or statements of the Borrower, or the validity and enforceability of the Borrower's obligations under the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower. Section 7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 8. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [NAME OF ASSIGNOR] By: _________________________________ Name: Title: [NAME OF ASSIGNEE] By: _________________________________ Name: Title: G-3 The undersigned consent to the foregoing assignment. USX Corporation By: _________________________________ Name: Title: Morgan Guaranty Trust Company of New York, as Administrative Agent By: _________________________________ Name: Title: G-4 EXHIBIT H DESIGNATION AGREEMENT dated as of ________________ __, _____ Reference is made to the Five-Year Credit Agreement dated as of November 30, 2000 (as amended from time to time, the "Credit Agreement") among USX Corporation, a Delaware corporation (the "Borrower"), the Lenders party thereto, Bank of America, N.A., as Syndication Agent, Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, as Documentation Agents and Morgan Guaranty Trust Company of New York, as Administrative Agent (the "Administrative Agent"). Terms defined in the Credit Agreement are used herein with the same meaning. _________________ (the "Designator") and ________________ (the "Designee") agree as follows: 1. The Designator designates the Designee as its Designated Lender under the Credit Agreement and the Designee accepts such designation. 2. The Designator makes no representations or warranties and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto. 3. The Designee (i) confirms that it is an Approved Fund; (ii) appoints and authorizes the Designator as its administrative agent and attorney-in-fact and grants the Designator an irrevocable power of attorney to receive payments made for the benefit of the Designee under the Credit Agreement and to deliver and receive all communications and notices under the Credit Agreement, if any, that the Designee is obligated to deliver or has the right to receive thereunder; (iii) acknowledges that the Designator retains the sole right and responsibility to vote under the Credit Agreement, including, without limitation, the right to approve any amendment or waiver of any provision of the Credit Agreement; and (iv) agrees that the Designee shall be bound by all such votes, approvals, amendments and waivers and all other agreements of the Designator pursuant to or in connection with the Credit Agreement, all subject to Section 9.05(b) of the Credit Agreement. 4. The Designee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements referred to in Article 4 or delivered pursuant to Article 4 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Designation Agreement and (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Designator or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action it may be permitted to take under the Credit Agreement. 5. Following the execution of this Designation Agreement by the Designator and the Designee and the consent hereto by the Borrower, it will be delivered to the Administrative Agent for its consent. This Designation Agreement shall become effective when the Administrative Agent consents hereto or on any later date specified on the signature page hereof. 6. Upon the effectiveness hereof, the Designee shall have the right to make Loans or portions thereof as a Lender pursuant to Section 2.01 or 2.03 of the Credit Agreement and the rights of a Lender related thereto. The making of any such Loans or portions thereof by the Designee shall satisfy the obligations of the Designator under the Credit Agreement to the same extent, and as if, such Loans or portions thereof were made by the Designator. 7. This Designation Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties have caused this Designation Agreement to be executed by their respective officers hereunto duly authorized, as of the date first above written. Effective Date:______ __, ____ [NAME OF DESIGNATOR] By: _________________________________ Name: Title: [NAME OF DESIGNEE] By: _________________________________ Name: Title: H-2 The undersigned consent to the foregoing designation. USX Corporation By: _________________________________ Name: Title: Morgan Guaranty Trust Company of New York, as Administrative Agent By: _________________________________ Name: Title: H-3 EX-10.B 3 0003.txt USX ANNUAL INCENTIVE COMPENSATION PLAN Exhibit 10(b) USX CORPORATION ANNUAL INCENTIVE COMPENSATION PLAN AS AMENDED JULY 25, 2000 1. Purpose of the Plan ------------------- The objectives of the Plan are to advance the interests of the Corporation and its shareholders by providing officers and key employees incentive opportunities in order that the Corporation might attract, retain and motivate outstanding personnel by: a) providing compensation opportunities which are competitive with those of other major corporations of comparable size and in similar businesses; b) supporting the Corporation's goal-setting and strategic planning process; and c) motivating officers and key employees to achieve annual business goals and contribute to team performance by allowing them to share in the risks and rewards of the business. 2. Administration -------------- This Plan shall be administered by the Compensation Committee of the Board of Directors, which shall consist of not less than three directors of the Corporation who are appointed by the Board of Directors and who shall not be, and shall not have been, an officer or an employee of the Corporation. The Committee is authorized to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to delegate the granting of awards pursuant to guidelines established from time to time by the Committee, and to make all other determinations necessary for its administration. 3. Eligibility for Participation ----------------------------- Employees of the Corporation eligible to receive incentive compensation under the Plan are those in responsible positions whose performance may affect the Corporation's success. Participants shall include employees of USX or U. S. Steel Group as well as employees of any other division or subsidiary and/or joint ventures if such employee is specifically designated as a participant. 4. Amount Available for Plan ------------------------- The Board of Directors, upon the recommendation of the Compensation Committee, shall determine the aggregate amount which may be awarded with respect to each year. 5. Awards ------ Within the limits of the Plan, annual incentive awards stated in dollars may be made to any or all eligible participants. Determinations as to participation and award level shall be made on the basis of the positions, responsibilities and accomplishments of the eligible employees; the performance of the respective individuals, divisions, departments and subsidiaries of the Corporation; the overall performance and best interests of the Corporation; the recommendations of the Chairman; and other pertinent factors; such factors to be given such weight as is deemed appropriate. The guidelines established by the Compensation Committee shall provide that no participant shall have an annual target award in excess of 150% of his annual base salary; any exceptions to this limit shall be specifically approved by the Compensation Committee. If a participant retires during the year with respect to which awards are made, the Committee may grant him an award, but it shall be prorated based on the number of months of active employment. If a participant dies during the year, the Committee may grant a prorated award to the employee's estate. 6. Payment of Awards ----------------- In its discretion, the Compensation Committee may permit participants in the Plan to defer the receipt of all or any part of any award granted under the Plan for such period and under such conditions as the Committee may determine, including the payment of interest on deferred awards if the Committee so determines. Unless receipt is deferred, all awards will be paid in cash as soon as practicable following the grant. No award will be considered as part of a participant's salary and no award shall be used in the calculation of any other pay, allowance or benefit except for benefits under the Supplemental Pension Program. No award will be paid to a person who quits or is discharged prior to payment of the award. 7. Effective Date; Amendment, Suspension or Termination of the Plan ---------------------------------------------------------------- This Plan became effective as of January 1, 1984. The Board of Directors may, from time to time, amend, suspend or terminate the Plan in whole or in part. If it is suspended or terminated, the Board of Directors may reinstate any or all of the provisions of the Plan. 2 EX-10.J 4 0004.txt USX DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS Exhibit 10(j) USX CORPORATION DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (Amended as of January 1, 1998) 1. Purpose The USX Corporation Deferred Compensation Plan for Non-Employee Directors is intended to enable the Corporation to attract and retain non-employee Directors and to enhance the long-term mutuality of interest between such Directors and shareholders of the Corporation. 2. Definitions The following definitions apply to this Plan and to the Deferral Election Forms: (a) Beneficiary or Beneficiaries means a person or persons or other entity designated on a Beneficiary Designation Form by a Participant as allowed in subsection 8(c) of this Plan to receive Deferred Benefit payments. If there is no valid designation by the Participant, or if the designated Beneficiary or Beneficiaries fail to survive the Participant or otherwise fail to take the Benefit, the Participant's Beneficiary is the Participant's surviving spouse or, if there is no surviving spouse, the Participant's estate. (b) Beneficiary Designation Form means a form acceptable to the Committee or its designee and used by a Participant according to this Plan to name his/her Beneficiary or Beneficiaries. (c) Board means the board of directors of USX Corporation. (d) Committee means the Organization and Corporate Governance Committee of the Board. (e) Common Stock means the common stock of the Corporation. (f) Common Stock Unit shall have the meaning assigned to it in Section 7(a). (g) Corporation means USX Corporation. (h) Deferral Election Form means a document governed by the provisions of section 4 of this Plan, including the portion that is the Distribution Election Form and the related Beneficiary Designation Form. (i) Deferral Year means a calendar year for which a Participant has a Deferred Benefit. (j) Deferred Benefit means either a Deferred Cash Benefit or a Deferred Stock Benefit under the Plan. (k) Deferred Cash Account means that bookkeeping record established for each Participant who elects a Deferred Cash Benefit under this Plan. A Deferred Cash Account is established only for purposes of measuring a Deferred Cash Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Cash Benefit. A Deferred Cash Account will be credited with that portion of the Participant's Retainer Fee deferred as a Deferred Cash Benefit according to a Deferral Election Form and according to section 6 of this Plan. A Deferred Cash Account will be credited periodically with amounts as provided under section 6(b) of this Plan. (l) Deferred Cash Benefit means the Deferred Benefit elected by a Participant under section 4 that results in payments governed by sections 6 and 8. (m) Deferred Stock Account means that bookkeeping record established for each Participant to reflect the status of his/her Deferred Stock Benefits under this Plan. A Deferred Stock Account is established only for purposes of measuring a Deferred Stock Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Stock Benefit. A Deferred Stock Account will be credited with that portion of the Participant's Retainer Fee deferred as a Deferred Stock Benefit according to a Deferral Election Form and according to sections 3 and 7 of this Plan. A Deferred Stock Account will be credited periodically with amounts determined by the Committee under subsection 7(b) of this Plan. (n) Deferred Stock Benefit means the Deferred Benefit that results in distributions governed by sections 7 and 8. (o) Directors means those duly named members of the Board. (p) Distribution Election Form means that part of a Deferral Election Form used by a Participant according to this Plan to establish the post-Termination duration of deferral of a Deferred Cash Benefit or a Deferred Stock Benefit and the frequency of payments of any Deferred Cash Benefit. If a Deferred Benefit has no Distribution Election Form that is operative according to section 4, distribution of that Deferred Benefit is governed by section 8. (q) Election Date means the date established by this Plan as the date before which a Participant must submit a valid Deferral Election Form to the Committee. For each Deferral Year, the Election Date is December 31 of the preceding calendar year or, in the case of an individual who becomes a Participant during a Deferral Year, the date that he/she becomes a Participant. Despite the two preceding sentences, the Committee may set an earlier date as the Election Date for any Deferral Year. (r) Participant means a Director who is not simultaneously an employee of the Corporation. (s) Plan means the USX Corporation Deferred Compensation Plan for Non- Employee Directors. (t) Retainer Fee means that portion of a Participant's compensation that is fixed and paid without regard to his/her attendance at meetings. (u) Terminate, Terminating, or Termination, with respect to a Participant, means cessation of his/her relationship with the Corporation as a Director whether by retirement, death, disability or severance for any other reason. -2- 3. Minimum Stock-Based Compensation Each Person who becomes a Participant after October 29, 1996 shall receive at least 50 percent of his/her annual Retainer Fee in the form of Common Stock Units. 4. Deferral Election A deferral election is valid when a Deferral Election Form is completed, signed by the Participant, and received by the Committee or its designee. Deferral elections are governed by the provisions of this section. (a) A Participant may elect a Deferred Benefit for any Deferral Year if he/she is a Participant at the beginning of that Deferral Year or becomes a Participant during the Deferral Year. (b) Before each Deferral Year's Election Date, each Participant will be provided with a Deferral Election Form. Subject to Section 3, a Participant may elect on or before the Election Date to defer until after Termination the receipt of all or part of his/her Retainer Fee for the Deferral Year in the form of a Deferred Stock Benefit or a Deferred Cash Benefit. (c) A Participant may not elect to convert a Deferred Cash Benefit to a Deferred Stock Benefit or to convert a Deferred Stock Benefit to a Deferred Cash Benefit. (d) Each Distribution Election Form is part of the Deferral Election Form on which it appears or to which it states that it is related. The Committee may allow a Participant to file one Distribution Election Form for all of his/her Deferred Cash Benefits and one for all of his/her Deferred Stock Benefits. The provisions of subsection 2(p) apply to any Deferred Benefit under this Plan if there is no operative Distribution Election Form for that Deferred Benefit. (e) If it does so before the last business day of the Deferral Year, the Committee may reject any Deferral Election Form or any Distribution Election Form or both, and the Committee is not required to state a reason for any rejection. The Committee may modify any Distribution Election Form at any time to the extent necessary to comply with any laws or regulations. However, the Committee's rejection of any Deferral Election Form or any Distribution Election Form or the Committee's modification of any Distribution Election Form must be based upon action taken without regard to any vote of the Participant whose Deferral Election Form or Distribution Election Form is under consideration, and the Committee's rejections must be made on a uniform basis with respect to similarly situated Participants. If the Committee rejects a Deferral Election Form, the Participant must be paid the amounts he/she would then have been entitled to receive if he/she had not submitted the rejected Deferral Election Form. (f) A Participant may not revoke a Deferral Election Form or a Distribution Election Form after the Deferral Year begins. Any revocation before the beginning of the Deferral Year is the same as a failure to submit a Deferral Election Form or a Distribution Election Form. Any writing signed by a Participant expressing an intention to revoke his/her Deferral Election Form or a related Distribution Election Form and delivered to the Committee or its designee before the close of business on the relevant Election Date is a revocation. -3- 5. Effect of No Election A Participant who has not submitted a valid Deferral Election Form to the Committee or its designee on or before the relevant Election Date may not defer any part of the cash portion of his/her Retainer Fee for the Deferral Year under this Plan. In the case of a person who becomes a Participant after October 29, 1996 and who does not submit a valid Deferral Election Form on or before the relevant Election Date, fifty percent of such Participant's Retainer Fee will become a Deferred Stock Benefit pursuant to section 4 of this Plan. The Deferred Benefit of a Participant who submits a valid Deferral Election Form but fails to submit a valid Distribution Election Form for that Deferred Benefit before the relevant Election Date or who otherwise has no valid Distribution Election Form for that Deferred Benefit is governed by section 2(p). 6. Deferred Cash Benefits (a) Deferred Cash Benefits will be set up in a Deferred Cash Account for each Participant and credited with investment returns as provided in section 6(b). Deferred Cash Benefits are credited to the applicable Participant's Deferred Cash Account as of the day they would have been paid but for the deferral. (b) A Participant may select one or more investment options approved by the Committee for his/her Deferred Cash Benefits. Amounts will be credited to Deferred Cash Accounts to reflect the returns on such investment options at periods determined by the Committee. 7. Deferred Stock Benefits (a) Deferred Stock Benefits will consist of Common Stock Units and will be set up in a Deferred Stock Account for each Participant. "Common Stock Unit" shall mean a book-entry unit equal in value to a share of USX- Marathon Group Common Stock ("Marathon Stock") or USX-U.S. Steel Group Common Stock ("Steel Stock"), as the case may be. Common Stock Units will be credited as a combination of Marathon Stock and Steel Stock in the same ratio as the ratio that the outstanding shares of each class, on a fully diluted basis, bear to each other on the last trading day of the preceding calendar year. Each Common Stock Unit will increase or decrease in value by the same amount and with the same frequency as the fair market value of a share of the corresponding class of Common Stock. Each Deferred Stock Account will be credited on January 15th of each year (or, if such day is not a business day, on the next succeeding business day) with a quantity of Common Stock Units determined in accordance with this section. (b) Each Deferred Stock Account will be credited each calendar quarter, on the date on which dividends are reinvested under the Corporation's dividend reinvestment and stock purchase plans (the "Investment Date"), with additional Common Stock Units, including fractional units, in a quantity equal to the quotient of the dividends payable on the quantity of shares in such account divided by the Stock Purchase Price. "Stock Purchase Price" means the price, computed to three decimal places, obtained by averaging the daily high and low sales prices of the relevant class of common stock on the NYSE for the twelve days immediately preceding the Investment Date on which shares of the relevant class of common stock are reported on the NYSE. -4- (c) If a trust is established under section 9(b), an electing Participant may advise the trustee under the governing trust agreement as to the voting of shares of the Common Stock allocated to that Participant's separate account under the trust according to this subsection and provisions of the governing trust agreement. Before each annual or special meeting of the Corporation's shareholders, the trustee under the governing trust agreement must furnish each Participant with a copy of the proxy solicitation and other relevant material for the meeting as furnished to the trustee by the Corporation, and a form addressed to the trustee requesting the Participant's confidential advice as to the voting of shares of the Common Stock allocated to his/her account as of the valuation date established under the governing trust agreement preceding the record date. 8. Distributions (a) According to a Participant's Distribution Election Form, but subject to section 4(e), a Deferred Cash Benefit must be distributed in cash. Subject to section 4(e), a Deferred Stock Benefit will be distributed in shares of Common Stock corresponding to, and equal to the number of, the Common Stock Units credited to the Participant's Deferred Stock Account. However, cash must be paid in lieu of fractional shares of the Common Stock otherwise distributable. (b) Deferred Cash Benefits will be paid in a lump sum unless the Participant's Distribution Election Form specifies payment of a Deferred Cash Benefit in installment payments over ten years. For a Deferred Cash Benefit payable in installments, investment returns under section 6(b) will continue to accrue on the unpaid balance of a Deferred Cash Account. Any lump-sum cash payment will be paid or installment payments will begin to be paid or delivery of Common Stock will be made no later than five business days after the Participant's Termination, unless a later post-Termination date is specified in a Participant's Distribution Election Form. (c) Deferred Benefits may not be assigned by a Participant or Beneficiary. A Participant may use a Beneficiary Designation Form to designate one or more Beneficiaries for all of his/her Deferred Benefits; such designations are revocable. Each Beneficiary will receive his/her portion of the Participant's Deferred Cash Account and Deferred Stock Account on February 15 of the year following the Participant's death unless the Beneficiary's request for a different distribution schedule is received before distributions begin and is approved at the Committee's sole discretion. The Committee may require that multiple Beneficiaries agree upon a single distribution method. -5- (d) Upon the occurrence of a Change in Control resulting in a Participant's Termination, the Corporation shall pay such Participant, on the fifth day following such Termination, cash in an aggregate amount equal to the value of such Participant's Deferred Cash Account and Deferred Stock Account on the date of the Change in Control, as determined using the higher of the closing prices of the Common Stock on the New York Stock Exchange on such date or the highest per-share price actually paid in connection with such Change in Control. For purposes of this Plan, "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is then subject to such reporting requirement; provided, that, without limitation, such a change in control shall be deemed to have occurred if (A) any person (as defined in Sections 13(d) and 14(d) of the Exchange Act) (a "Person") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding voting securities; provided, however, that for purposes of this Agreement the term "Person" shall not include (i) the Corporation or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation; or (B) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved; or (C) there is consummated a merger or consolidation of the Corporation or a subsidiary thereof with any other corporation, other than a merger or consolidation which would result in the holders of the voting securities of the Corporation outstanding immediately prior thereto holding securities which represent immediately after such merger or consolidation at least 50% of the combined voting power of the voting securities of the entity surviving the merger or consolidation (or the parent of such surviving entity) or the shareholders of the Corporation approve a plan of complete liquidation of the Corporation, or there is consummated the sale or other disposition of all or substantially all of the Corporation's assets. -6- 9. Corporation's Obligation (a) The Plan is unfunded. A Deferred Benefit is at all times solely a contractual obligation of the Corporation. A Participant and his/her Beneficiaries have no right, title or interest in the Deferred Benefits or any claim against them. Except according to section 9(b), the Corporation will not segregate any funds or assets for Deferred Benefits nor issue any notes or security for the payment of any Deferred Benefit. (b) The Corporation may establish a grantor trust and transfer to that trust shares of the Corporation's common stock or other assets. The governing trust agreement must require a separate account to be established for each electing Participant. The governing trust agreement must also require that all Corporation assets held in trust remain at all times subject to the Corporation's judgment creditors. 10. Control by Participant A Participant has no control over Deferred Benefits except according to his/her Deferral Election Forms, Distribution Election Forms, and Beneficiary Designation Form. 11. Claims Against Participant's Deferred Benefits A Deferred Cash Account and Deferred Stock Account relating to a Participant under this Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so is void. A Deferred Benefit is not subject to attachment or legal process for a Participant's debts or other obligations. Nothing contained in this Plan gives any Participant any interest, lien or claim against any specific asset of the Company. A Participant or his/her beneficiary has no rights other than as a general creditor. 12. Amendment or Termination This Plan may be altered, amended, suspended, or terminated at any time by the Board. 13. Notices Notices and elections under this Plan must be in writing. A notice or election is deemed delivered if it is delivered personally or if it is mailed by registered or certified mail to the person at his/her last known business address. 14. Waiver The waiver of a breach of any provision in this Plan does not operate as and may not be construed as a waiver of any later breach. 15. Construction This Plan is created, adopted, maintained and governed according to the laws of the state of Delaware. Headings and captions are only for convenience; they do not have substantive meaning. If a provision of this Plan is not valid or not enforceable, the validity or enforceability of any other provision is not affected. Use of one gender includes all, and the singular and plural include each other. 16. Effective Date This Plan shall be effective January 1, 1997. -7- EX-10.L 5 0005.txt USX NON-OFFICER RESTRICTED STOCK PLAN Exhibit 10(l) USX Corporation Non-Officer Restricted Stock Plan ------------------------------------------------- (As Approved by the Board of Directors on January 30, 2001) 1. Purpose ------- The objective of the USX Corporation Non-Officer Restricted Stock Plan (the "Plan") is, through the issuance of restricted stock ("Shares"), to advance the interests of USX Corporation, its Groups, subsidiaries, affiliates and joint ventures (the "Corporation") (a) by promoting the retention of outstanding employees, (b) by rewarding specific noteworthy achievements on the part of an employee or a group of employees, (c) by motivating employees through growth-related incentives to achieve long-term goals and (d) by aligning the interests of employees with those of the stockholders. 2. Administration -------------- Except as noted below, the Plan shall be administered by the following Committees ("Administering Committees"): (1) the Marathon Oil Company Salary & Benefits Committee for Marathon Oil Company employees; (2) the Marathon Ashland Petroleum Salary & Benefits Committee for Marathon Ashland Petroleum LLC employees; (3) the U. S. Steel Group Salary & Benefits Committee for U. S. Steel Group employees; and (4) a Committee comprised of the Chairman of the USX Corporation Board of Directors and the top human resource executive for employees of USX Headquarters (the "USX Administering Committee"). Each Administering Committee shall establish its own guidelines for granting Shares and for general administration of grants made under the Plan. Such guidelines shall be subject to review by the Law, Tax and Accounting departments. Each such Committee shall have the power to cancel a grant made under the Plan when such cancellation is deemed appropriate. The Compensation Committee of the USX Corporation Board of Directors (the "Compensation Committee") shall create and authorize pools for specific numbers and classes of Shares to be granted by each Administering Committee. Authorizations shall be made every two years, and no authorization shall exceed 1 percent of the total shares of either class of stock outstanding on December 31 of the preceding year. In addition, Shares related to grants that are forfeited or cancelled before vesting shall immediately become available for grants, and these Shares, as well as any unused portion of the percentage limit of Shares available from previous authorizations, shall be carried forward and available for grants in succeeding calendar years. The USX Corporation Board of Directors (the "USX Board") shall approve the initial Plan and all material amendments to the Plan. 3. Eligibility for Participation ----------------------------- Participation in this Plan shall be limited to exempt employees below the officer level, up to and including the following salary grades: For Marathon Oil Company, Salary Grade 18 For Marathon Ashland Petroleum LLC, Salary Grade 18 For U. S. Steel Group, Salary Grade 48 For USX Headquarters, Salary Grade 48 4. Grants ------ Grants under the Plan shall be made in the class of stock relating to each grantee's employing unit. Individual grants to USX Headquarters employees shall be made in such ratios between the classes of stock as the USX Administering Committee shall, in its discretion, determine. All grants shall be subject to such forfeiture and transfer restriction provisions as may be established by the relevant 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 continue for at least two years following the date of the grant. 7. Adjustments ----------- In the event of any change in the outstanding common stock of USX by reason of a stock split, stock dividend, stock combination or reclassification, recapitalization or merger, or similar event, the Compensation Committee may appropriately adjust the number of Shares covered by a grant and make such other revisions to outstanding grants as it deems are equitably required. 8. Tax Withholding --------------- The Corporation shall have the right to condition the obligation to deliver or the vesting of Shares under this Plan upon the employee paying USX such amount as it may request to satisfy any liability for applicable withholding taxes. Employees may elect to have USX withhold Shares to satisfy all or part of their withholding liability in the manner and to the extent provided for by the relevant Administering Committee at the time of such election. -2- 9. Amendments ---------- Each Administering Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding grants as are consistent with the Plan, provided that, except for adjustments under Paragraph 7 hereof, no such action shall modify a grant in a manner adverse to the grantee without the grantee's prior consent, except as such modification is provided for or contemplated in the terms of the grant. 10. Effective Date -------------- This Plan shall become effective on the date it is approved by the USX Board. -3- EX-12.1 6 0006.txt COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES Exhibit 12.1 USX Corporation Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends TOTAL ENTERPRISE BASIS--Unaudited Continuing Operations (Dollars in Millions)
Year Ended December 31 -------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Portion of rentals representing interest...... $ 100 $ 95 $ 105 $ 82 $ 78 Capitalized interest.......................... 19 26 46 31 11 Other interest and fixed charges.............. 375 365 318 352 428 Pretax earnings which would be required to cover preferred stock dividend requirements of parent.................................... 12 14 15 20 37 ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends (A)................................ $ 506 $ 500 $ 484 $ 485 $ 554 ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B)................... $1,920 $2,098 $1,671 $1,761 $1,887 ====== ====== ====== ====== ====== Ratio of (B) to (A)........................... 3.79 4.20 3.45 3.63 3.41 ====== ====== ====== ====== ======
EX-12.2 7 0007.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12.2 Computation of Ratio of Earnings to Fixed Charges TOTAL ENTERPRISE BASIS--Unaudited Continuing Operations (Dollars in Millions)
Year Ended December 31 -------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Portion of rentals representing interest...... $ 100 $ 95 $ 105 $ 82 $ 78 Capitalized interest.......................... 19 26 46 31 11 Other interest and fixed charges.............. 375 365 318 352 428 ------ ------ ------ ------ ------ Total fixed charges (A)....................... $ 494 $ 486 $ 469 $ 465 $ 517 ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B)................... $1,920 $2,098 $1,671 $1,761 $1,887 ====== ====== ====== ====== ====== Ratio of (B) to (A)........................... 3.89 4.32 3.56 3.79 3.65 ====== ====== ====== ====== ======
- ------------------- EX-21 8 0008.txt LIST OF SIGNIFICANT SUBSIDIARIES Exhibit 21. List of Significant Subsidiaries The following subsidiaries were 100 percent owned, either directly or indirectly, and were consolidated by the Corporation at December 31, 2000: State or jurisdiction Name of Subsidiary in which incorporated Marathon Canada Limited Canada Marathon International Oil Company Delaware Marathon International Petroleum Ireland Limited Cayman Islands Marathon Oil Company Ohio Marathon Oil U.K., Ltd. Delaware Marathon Petroleum Gabon LDC Cayman Islands Marathon Petroleum Investment, Ltd. Delaware Marathon Sakhalin Limited Cayman Islands U. S. Steel Kosice s.r.o. Slovak Republic U. S. Steel Mining Company, LLC Delaware USX Portfolio Delaware, Inc. Delaware The following subsidiaries were 62 percent owned, directly or indirectly, by Marathon Oil Company and were consolidated by the Corporation at December 31, 2000: Marathon Ashland Petroleum LLC Delaware Speedway SuperAmerica LLC Delaware Names of particular subsidiaries have been omitted from the above list since, considered in the aggregate, they would not constitute a significant subsidiary at December 31, 2000. EX-23 9 0009.txt CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23. CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements listed below of our reports dated February 7, 2001, relating to the Consolidated Financial Statements of USX Corporation, the Financial Statements of the Marathon Group, and the Financial Statements of the U.S. Steel Group, which appear on pages U-1, M-1, and S-1 respectively, of this Form 10-K: On Form S-3: Relating to: File No. 33-57997 Marathon Group Dividend Reinvestment Plan 33-60172 U.S. Steel Group Dividend Reinvestment Plan 333-56867 USX Corporation Debt Securities, Preferred Stock and Common Stock 333-88947 Marathon Group and U.S. Steel Group Dividend Reinvestment and Direct Stock Purchase Plans 333-88797 USX Corporation Debt Securities, Preferred Stock and Common Stock On Form S-8: Relating to: File No. 33-41864 1990 Stock Plan 33-54333 Parity Investment Bonus 33-60667 Parity Investment Bonus 33-56828 Marathon Oil Company Thrift Plan 33-52917 Savings Fund Plan 333-00429 Savings Fund Plan 333-29699 1990 Stock Plan 333-29709 Marathon Oil Company Thrift Plan 333-52751 1990 Stock Plan 333-86847 1990 Stock Plan PricewaterhouseCoopers LLP Pittsburgh, PA March 12, 2001 -----END PRIVACY-ENHANCED MESSAGE-----