FORM 10-K/A 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 (ss.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.
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-30
Principal Unconsolidated Affiliates............................................................. U-31
Supplementary Information....................................................................... U-31
Five-Year Operating Summary-- Marathon Group.................................................... U-39
Five-Year Operating Summary-- U. S. Steel Group................................................. U-41
Five-Year Financial Summary..................................................................... U-42
Management's Discussion and Analysis............................................................ U-43
Quantitative and Qualitative Disclosures About Market Risk...................................... U-65
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-29 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
$38 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.
Property, plant and equipment - USX uses the successful
efforts method of accounting for oil and gas producing
activities. Costs to acquire mineral interests in oil
and gas properties, to drill and equip exploratory wells
that find proved reserves, and to drill and equip
development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying
and retaining unproved properties are expensed.
Capitalized costs of producing oil and gas
properties are depreciated and depleted by the
unit-of-production method. Support equipment and other
property, plant and equipment are depreciated over their
estimated useful lives.
USX evaluates its oil and gas producing properties
for impairment of value on a field-by-field basis or, in
certain instances, by logical grouping of assets if
there is significant shared infrastructure, using
undiscounted future cash flows based on total proved
reserves. Oil and gas producing properties deemed to be
impaired are written down to their fair value, as
determined by discounted future cash flows based on
total proved and risk-adjusted probable and possible
reserves or, if available, comparable market values.
Unproved oil and gas properties that are individually
significant are periodically assessed for impairment of
value, and a loss is recognized at the time of
impairment. Other unproved properties are amortized over
their remaining holding period.
For property, plant and equipment unrelated to oil
and gas producing activities, depreciation is generally
computed on the straight-line method over their
estimated useful lives. 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, which is considered to be the normal long-range
level.
Depletion of mineral properties, other than oil and
gas, is based on rates that are expected to amortize
capitalized costs over the estimated tonnage of minerals
to be removed.
Assets unrelated to oil and gas producing
activities are evaluated for impairment of value on an
individual asset basis or by logical groupings of
assets. Assets deemed to be impaired are written down to
their fair value, as determined by discounted future
cash flows or, if available, comparable market values.
When property, plant and equipment depreciated on
an individual basis are sold or otherwise disposed of,
any gains or losses are reflected in income. Gains on
disposal of property, plant and equipment are recognized
when earned, which is generally at the time of closing.
If a loss on disposal is expected, such losses are
recognized when the assets are reclassified as held for
sale. Proceeds from disposal of property, plant and
equipment depreciated on a group basis are credited to
accumulated depreciation, depletion and amortization
with no immediate effect on income.
Major maintenance activities - 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
U-9
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.
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.
U-10
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.
The following unaudited pro forma data for USX
includes the results of operations of USSK for 2000 and
1999, giving effect to the acquisition as if it had been
consummated at the beginning of the years presented. The
pro forma data is based on historical information and
does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of
future results of operations. In addition, VSZ did not
historically provide carve-out financial information for
its steel operations in accordance with generally
accepted accounting principles in the United States.
Therefore, USX made certain estimates and assumptions
regarding revenues and costs in the preparation of the
following unaudited pro forma data.
(In millions, except per share amounts) 2000 1999
-----------------------------------------------------------------------------------------------------------
Revenues and other income $ 40,876 $ 30,121
Net income 489 683
Applicable to Steel Stock:
Income before extraordinary losses/(a)/ 49 27
- Per share - basic and diluted .55 .31
Net income/(a)/ 49 20
- Per share - basic and diluted .55 .23
-----------------------------------------------------------------------------------------------------------
/(a)/ Amounts are net of dividends on preferred stock of
$8 million and $9 million in 2000 and 1999,
respectively.
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.
U-11
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 63/4% 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
---------------------------------------------------------------------------------------------------------
In 2000, Marathon exchanged its investment in
Sakhalin Energy for a working interest in the Foinaven
field located in the Atlantic Margin offshore the United
Kingdom and an overriding royalty interest in an eight
block area in the Gulf of Mexico, which includes the
Ursa field. Additionally, Marathon received
reimbursement for amounts advanced to Sakhalin Energy in
2000 and a cash settlement for certain other activities
in 2000. The transaction was recorded at fair value and
resulted in a pretax gain on disposal of assets of $58
million.
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
-------------------------------------------------------------------------------------------------------------------
U-24
--------------------------------------------------------------------------------
21. Property, Plant and Equipment
(In millions) December 31 2000 1999
-----------------------------------------------------------------------------------------------------------
Marathon Group:
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
--------- ---------
U. S. Steel Group:
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
--------- ---------
USX Corporation:
Total property, plant and equipment 28,336 29,608
Less accumulated depreciation, depletion and amortization:
Marathon Group 9,691 10,567
U. S. Steel Group 6,531 6,232
--------- ---------
Net property, plant and equipment $ 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.
The fair value of the properties was determined using a
discounted cash flow model, unless an indicative offer to
purchase was available. The Marathon Group used pricing
assumptions based on forecasted prices applicable for the
remaining life of the assets derived from current market
conditions and long-term forecasts. The discounted cash flow
calculation included risk-adjusted probable and possible
reserve quantities.
In 1998, the Marathon Group recorded a $60 million
impairment charge on its oil and gas properties in Libya.
The deterioration of U.S. relations with Libya at the time
created an unstable environment that caused the Marathon
Group to reevaluate its stance with its investment in Libya.
The Marathon Group impaired the value of these assets
because it could not reasonably predict with a high degree
of certainty if government sanctions which prevented the
Marathon Group from operating these assets would ever be
lifted.
All impairment charges were included in depreciation,
depletion and amortization.
U-25
--------------------------------------------------------------------------------
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-26
--------------------------------------------------------------------------------
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-27
--------------------------------------------------------------------------------
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-28
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-29
Selected Quarterly Financial Data (Unaudited)
2000 1999
----------------------------------------------- -----------------------------------------------
(In millions, except per share
data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
---------------------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues(a) $10,293 $10,607 $10,293 $ 9,307 $8,725 $ 7,713 $ 6,649 $ 5,981
Other income (loss) (837) 72 57 122 53 (13) 35 (24)
------- ------- ------- ------- ------- ------- ------- -------
Total 9,456 10,679 10,350 9,429 8,778 7,700 6,684 5,957
Income (loss) from operations (625) 789 972 616 425 535 502 401
Includes:
Joint venture
formation charges (931) - - - - - - -
Inventory market
valuation credits - - - - - 136 66 349
Income (loss) before
extraordinary losses (449) 140 423 297 205 201 189 110
Net income (loss) (449) 140 423 297 205 199 189 105
---------------------------------------------------------------------------------------------------------------------------------
Marathon Stock data:
--------------------
Net income (loss) $ (310) $ 121 $ 367 $ 254 $ 171 $ 230 $ 134 $ 119
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
---------------------------------------------------------------------------------------------------------------------------------
Steel Stock data:
-----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ (141) $ 17 $ 54 $ 41 $ 32 $ (31) $ 52 $ (11)
- Per share:basic (1.59) .19 .62 .45 .35 (.35) .60 (.13)
diluted (1.59) .19 .62 .45 .35 (.35) .59 (.13)
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel Stock(b):
- Low 12-11/16 14-7/8 18-1/4 20-5/8 21-3/4 24-9/16 23-1/2 22-1/4
- High 18-5/16 19-11/16 26-7/8 32-15/16 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-30
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 Other Than Oil and Gas (Unaudited)
USX operates two underground coal mining complexes, the #50 Mine and Pinnacle
Preparation Plant in West Virginia, and the Oak Grove Mine and Concord
Preparation Plant in Alabama. USX also operates one iron ore surface mining
complex consisting of the open pit Minntac Mine and Pellet Plant in Minnesota.
Production History
The following table provides a summary, by mining complex, of minerals
production in millions of tons for each of the last three years:
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
Coal:
#50 Mine/Pinnacle Preparation Plant 3.3 4.1 4.5
Oak Grove Mine/Concord Preparation Plant 2.2 2.1 2.8
----- ----- -----
Total coal production 5.5 6.2 7.3
===== ===== =====
Iron Ore Pellets:
Minntac Mine and Pellet Plant 16.3 14.3 15.8
---------------------------------------------------------------------------------------------------------------------------------
Adverse mining conditions in the form of unforeseen geologic conditions
occurred at both coal mining operations in the year 2000. Coal production was
diminished and mining costs were elevated. Force majeure conditions were
declared with respect to contracted coal deliveries with certain contracts
fulfilled by purchased substitutes and other contracts fulfilled by extension of
delivery time into 2001. These adverse mining conditions did not affect reserves
reported as of December 31, 2000.
No recent adverse events affected iron ore pellet production other than
fluctuations in market demand.
U-31
Supplementary Information on Mineral Reserves Other Than Oil and Gas (Unaudited)
continued
Coal Reserves
USX had 786.6 million short tons of recoverable coal reserves classified as
proven and probable at December 31, 2000. Proven and probable reserves are
defined by sites for inspection, sampling, and measurement generally less than 1
mile apart, such that continuity between points and subsequent economic
evaluation can be assured.
Independent outside entities have reviewed USX's coal reserve estimates on
properties comprising approximately 70% of the stated coal reserves.
The following table summarizes our proven and probable coal reserves as of
December 31, 2000, the status of the reserves as assigned or unassigned, our
property interest in the reserves, and certain characteristics of the reserves:
Proven and
Probable Reserve Control Coal Characteristics As Received/(c)/
------------------------------------------------- BTU's Per As Received/(c)/
Location Reserves/(a)(b)/ Owned Leased Grade Volatility Pound % Sulfur
------------------------------------------------------------------------------------------------------------------------------------
Assigned Reserves/(d)/:
Oak Grove Mine, AL 52.1 52.1 - Metallurgical Low greater than 12,000 less than 1.0%
#50 Mine, WV 88.2 76.0 12.2 Metallurgical Low greater than 12,000 less than 1.0%
----- ----- -----
Total assigned 140.3 128.1 12.2
----- ----- -----
Unassigned Reserves/(e)/:
Alabama 123.4 123.4 - Metallurgical Low to High greater than 12,000 less than 1.0%
Alabama/(b)(f)/ 47.6 47.6 - Steam Low to High greater than 12,000 0.7%-2.5%
Alabama 31.9 - 31.9 Metallurgical Medium greater than 12,000 less than 1.0%
Illinois/(f)/ 374.8 374.8 - Steam High 11,600 2.3%
Indiana, Pennsylvania,
Tennessee, West Virginia/(f)/ 68.6 68.6 - Metallurgical/Steam Low to High 11,600-13,000 1.0%-3.0%
----- ----- -----
Total unassigned 646.3 614.4 31.9
----- ----- -----
Total Proven and Probable 786.6 742.5 44.1
------------------------------------------------------------------------------------------------------------------------------------
/(a)/ The amounts in this column reflect recoverable tons. Recoverable tons
represent the amount of product that could be used internally or delivered
to a customer after considering mining and preparation losses. Neither
inferred reserves nor resources which exist in addition to proven and
probable reserves were included in these figures.
/(b)/ All of USX's recoverable reserves would be recovered utilizing underground
mining methods, with the exception of 17.2 million short tons of owned,
unassigned, recoverable, steam grade reserves in Alabama which would be
recovered utilizing surface mining methods.
/(c)/ "As received" means the quality parameters stated are with the expected
product moisture content and quality values that a customer can reasonably
expect to receive upon delivery.
/(d)/ Assigned Reserves means recoverable coal reserves which have been
committed by USX to our operating mines and plant facilities.
/(e)/ Unassigned Reserves represent coal which has not been committed, and which
would require new mines and or plant facilities before operations could
begin on the property.
/(f)/ Represents non-compliance steam coal as defined by Phase II of the Clean
Air Act, having sulfur content in excess of 1.2 pounds per million BTU's.
U-32
Supplementary Information on Mineral Reserves Other Than Oil and Gas (Unaudited)
Continued
Iron Ore Reserves
USX had 709.8 million short tons of recoverable iron ore reserves classified as
proven and probable at December 31, 2000. Proven and probable reserves are
defined by sites for inspection, sampling, and measurement generally less than
1,000 feet apart, such that continuity between points and subsequent economic
evaluation can be assured. Recoverable tons mean the tons of product that can be
used internally or delivered to a customer after considering mining and
benefication or preparation losses. Neither inferred reserves nor resources
which exist in addition to proven and probable reserves were included in these
figures.
All 709.8 million tons of proven and probable reserves are assigned, which
means that they have been committed by USX to its one operating mine, and are of
blast furnace pellet grade. USX owns 219.2 million of these tons and leases the
remaining 490.6 million tons. USX does not own, or control by lease, any
unassigned iron ore reserves.
Independent outside entities, including lessors, have reviewed USX's
estimates on approximately 75% of the stated iron ore reserves.
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-33
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-34
Supplementary Information on Oil and Gas Producing Activities
(Unaudited) Continued
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/(b)/ 6.00 10.02 3.99
Worldwide 4.35 3.83 3.56
----------------------------------------------------------------------------------------------------------------------------------
/(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)/ Represents CLAM and Sakhalin Energy for 2000 and 1999, and CLAM for 1998.
Average Sales Prices
Crude Oil and
Condensate Natural Gas Liquids Natural Gas
------------------------- ------------------------- -------------------------
Average Sales Prices 2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- ------- ------- ------- -------
(excluding results of hedging) (Dollars per Barrel) (Dollars per Thousand Cubic Feet)
----------------------------------------------------------------------------------------------------------------------------------
United States $ 25.96 $ 15.78 $ 10.60 $ 19.20 $ 12.30 $ 8.64 $ 3.30 $ 1.90 $ 1.79
International - Europe 27.90 17.59 12.87 24.98 13.84 11.49 2.56 2.03 2.07
- Other International 25.77 16.77 11.31 23.48 13.49 8.38 3.20 1.64 1.34
Total Consolidated 26.22 16.21 11.14 20.35 12.67 9.32 3.08 1.90 1.85
- Equity Investees/(a)/ 29.64 23.43 - 28.74 13.22 12.65 2.75 1.87 2.37
Worldwide 26.42 16.25 11.14 20.37 12.67 9.33 3.08 1.90 1.86
Crude Oil and
Condensate Natural Gas Liquids Natural Gas
------------------------- ------------------------- -------------------------
Average Sales Prices 2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- ------- ------- ------- -------
(including results of hedging) (Dollars per Barrel) (Dollars per Thousand Cubic Feet)
----------------------------------------------------------------------------------------------------------------------------------
United States $ 25.49 $ 15.68 $ 10.60 $ 19.20 $ 12.30 $ 8.64 $ 3.21 $ 1.92 $ 1.79
International - Europe 27.90 17.59 12.87 24.98 13.84 11.49 2.56 2.03 2.07
- Other International 25.77 16.63 11.31 23.48 13.49 8.38 3.14 1.66 1.34
Total Consolidated 25.91 16.12 11.14 20.35 12.67 9.32 3.02 1.91 1.85
- Equity Investees/(a)/ 29.64 23.43 - 28.74 13.22 12.65 2.75 1.87 2.37
Worldwide 26.13 16.16 11.14 20.37 12.67 9.33 3.02 1.91 1.86
----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents CLAM and Sakhalin Energy for 2000 and 1999, and CLAM for 1998.
U-35
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-36
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-37
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-38
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-39
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-40
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 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-41
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-42
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-43
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-44
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 minority interest in income of MAP, which
represents Ashland's 38% ownership interest, was $498
million in 2000, $447 million in 1999, and $249 million
in 1998. The increase of $51 million from 1999 to 2000
was primarily due to much higher RM&T segment income,
largely offset by the absence of the favorable 1999
inventory market valuation ("IMV") reserve adjustment.
The increase of $198 million from 1998 to 1999 was
primarily due to the favorable effect of the IMV reserve
adjustment, partially offset by lower RM&T segment
income.
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.
U-45
Management's Discussion and Analysis continued
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.
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
----------------------------------------------------------------------------------------------------------
U-46
Management's Discussion and Analysis continued
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.
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.
Costs incurred for the periods ended December 31,
2000, 1999 and 1998 relating to the development of
proved undeveloped oil and gas reserves, including
equity investees, were $316 million, $333 million, and
$496 million, respectively. As of December 31, 2000,
estimated future development costs relating to the
development of proved undeveloped oil and gas reserves
for the years 2001 through 2003 are projected to be $337
million, $115 million, and $97 million.
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.
U-47
Management's Discussion and Analysis continued
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.
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.
U-48
Management's Discussion and Analysis continued
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.
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.
U-49
Management's Discussion and Analysis continued
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.
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
U-50
Management's Discussion and Analysis continued
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.
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.
U-51
Management's Discussion and Analysis continued
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 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
U-52
Management's Discussion and Analysis continued
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.
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. 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 the EPA and the
U.S. Department of Justice. On January 19, 2001, USX
signed a consent decree with the EPA to remediate this
site.
In 1987, the California Department of Health
Services ("DHS") issued a remedial action order for the
GBF/Pittsburg landfill near Pittsburg, California. 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. In 2000, the parties reached a buyout
arrangement with a third party remediation firm, whereby
the firm agreed to take title to and remediate the site
and also indemnify the PRPs. This commitment was backed
by pollution insurance. USX's share to participate in
the buyout was approximately $1.1 million. Payment of
the USX buyout amount was made December 2000. Title to
the site was transferred to the remediation firm on
January 31, 2001.
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.
U-53
Management's Discussion and Analysis continued
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 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.
U-54
Management's Discussion and Analysis continued
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 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.
U-55
Management's Discussion and Analysis continued
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-56
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-57
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-58
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
This outlook is as of the original filing date of
March 12, 2001. For an updated outlook, see subsequent
filings with the U.S. Securities and Exchange
Commission.
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 quied 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-59
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-60
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, through its Domestic Steel
segment, 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 and, through its U. S. Steel Kosice ("USSK")
segment, primarily located in the Slovak Republic, in
the production and sale of steel mill products and coke
for the central European market. 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,
Republic Technologies International, LLC ("Republic")
and Rannila Kosice s.r.o. 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 previous investment in USS/Kobe Steel
Company and costs related to the formation of Republic.
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-61
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)/ Primarily represents postretirement costs other
than pension (OPEB costs) related to all retirees
prior to January 1, 1987, and related to former
employees and retirees from the businesses sold or
closed after January 1, 1987. Also includes
certain other expenses (primarily litigation and
environmental remediation costs) associated to
lines of business in which USX is no longer
engaged as a result of sale or closure.
/(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 through year-end 2000 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.
U-62
Management's Discussion and Analysis continued
Administrative expenses are corporate general and
administrative costs allocated to the U. S. Steel Group
by USX 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, which
primarily consist of employment costs including pension
effects, professional services, facilities and other
related costs associated with corporate activities. The
increase from 1999 to 2000 primarily resulted from the
nonrecurrence of favorable 1999 franchise tax
settlements and employee compensation costs. The
decrease from 1998 to 1999 was largely the result of
lower franchise taxes, primarily due to settlements of
prior years' taxes.
Cost related to former business activities increased
$8 million in 2000 from 1999 primarily due to higher
litigation expenses. Costs related to former business
activities decreased $17 million in 1999 from 1998
primarily due to lower litigation expenses and lower
payments to a multiemployer health care benefit plan
created by the Coal Industry Retiree Health Benefit Act
of 1992.
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.
Outlook for 2001 - U. S. Steel Group
This outlook is as of the original filing date of
March 12, 2001. For an updated outlook, see subsequent
filings with the U.S. Securities and Exchange
Commission.
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
U-63
Management's Discussion and Analysis continued
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.
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-64
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-65
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-66
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-67
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
securities of 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-68
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-69
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-22
Principal Unconsolidated Affiliates............................................................ M-22
Supplementary Information...................................................................... M-22
Five-Year Operating Summary ................................................................... M-23
Five-Year Financial Summary.................................................................... M-25
Management's Discussion and Analysis........................................................... M-26
Quantitative and Qualitative Disclosures About Market Risk..................................... M-38
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-21 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.
Property, plant and equipment - The Marathon Group uses the
successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in
oil and gas properties, to drill and equip exploratory wells
that find proved reserves, and to drill and equip
development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed.
Capitalized costs of producing oil and gas properties
are depreciated and depleted by the unit-of-production
method. Support equipment and other property, plant and
equipment are depreciated over their estimated useful lives.
The Marathon Group evaluates its oil and gas producing
properties for impairment of value on a field-by-field basis
or, in certain instances, by logical grouping of assets if
there is significant shared infrastructure, using
undiscounted future cash flows based on total proved
reserves. Oil and gas producing properties deemed to be
impaired are written down to their fair value, as determined
by discounted future cash flows based on total proved and
risk-adjusted probable and possible reserves or, if
available, comparable market values. Unproved oil and gas
properties that are individually significant are
periodically assessed for impairment of value, and a loss is
recognized at the time of impairment. Other unproved
properties are amortized over their remaining holding
period.
When property, plant and equipment depreciated on an
individual basis are sold or otherwise disposed of, any
gains or losses are reflected in income. Gains on disposal
of property, plant and equipment are recognized when earned,
which is generally at the time of closing. If a loss or
disposal is expected, such losses are recognized when the
assets are reclassified as held for sale. Proceeds from
disposal of property, plant and equipment depreciated on a
group basis are credited to accumulated depreciation,
depletion and amortization with no immediate effect on
income.
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 fair value of the properties was
determined using a discounted cash flow model, unless an
indicative offer to purchase was available. The Marathon
Group used pricing assumptions based on forecasted
prices applicable for the remaining life of the assets
derived from current market conditions and long-term
forecasts. The discounted cash flow calculation included
risk-adjusted probable and possible reserve quantities.
In 1998, the Marathon Group recorded a $60 million
impairment charge on its oil and gas properties in
Libya. The deterioration of U.S. relations with Libya at
the time created an unstable environment that caused the
Marathon Group to reevaluate its stance with its
investment in Libya. The Marathon Group impaired the
value of these assets because it could not reasonably
predict with a high degree of certainty if government
sanctions which prevented the Marathon Group from
operating these assets would ever be lifted.
All impairment charges were included in
depreciation, depletion and amortization.
M-15
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------
M-16
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.
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.
M-17
--------------------------------------------------------------------------------
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 86 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
----------------------------------------------------------------------------------------------------------
In 2000, Marathon exchanged its investment in
Sakhalin Energy for a working interest in the Foinaven
field located in the Atlantic Margin offshore the United
Kingdom and an overriding royalty interest in an eight
block area in the Gulf of Mexico, which includes the
Ursa field. Additionally, Marathon received
reimbursement for amounts advanced to Sakhalin Energy in
2000 and a cash settlement for certain other activities
in 2000. The transaction was recorded at fair value and
resulted in a pretax gain on disposal of assets of $58
million.
Dividends and partnership distributions received
from equity investees were $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-18
--------------------------------------------------------------------------------
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-19
--------------------------------------------------------------------------------
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-20
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-21
Selected Quarterly Financial Data (Unaudited)
2000 1999
-------------------------------------------------- -----------------------------------------------
(In millions, except per
share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
----------------------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues/(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-33
through U-38.
M-22
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-23
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-24
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-25
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-26
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-27
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-28
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-29
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-30
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.
Costs incurred for the periods ended December 31,
2000, 1999 and 1998 relating to the development of
proved undeveloped oil and gas reserves, including
equity investees, were $316 million, $333 million, and
$496 million, respectively. As of December 31, 2000,
estimated future development costs relating to the
development of proved undeveloped oil and gas reserves
for the years 2001 through 2003 are projected to be $337
million, $115 million, and $97 million.
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
M-31
Management's Discussion and Analysis continued
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.
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-32
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-33
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-34
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
This outlook is as of the original filing date of
March 12, 2001. For an updated outlook, see subsequent
filings with the U.S. Securities and Exchange
Commission.
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-35
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-36
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-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 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-38
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-39
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-40
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-41
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 $38 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.
Property, plant and equipment - Depreciation is
generally computed on the straight-line method based
upon estimated useful lives. The U. S. Steel Group's
method of calculating depreciation for domestic steel
producing assets modifies straight-line depreciation
based on the level of production. 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 to be 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 property, plant and equipment depreciated on
an individual basis are sold or otherwise disposed of,
any gains or losses are reflected in income. Gains on
disposal of 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 the assets are reclassified as assets held for
sale. Proceeds from disposal of property, plant and
equipment depreciated on a group basis are credited to
accumulated depreciation, depletion and amortization
with no immediate effect on income.
Major maintenance activities - 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 nest scheduled relines.
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.
The following unaudited pro forma data for the U.
S. Steel Group includes the results of operations of
USSK for 2000 and 1999, giving effect to the acquisition
as if it had been consummated at the beginning of the
years presented. The pro forma data is based on
historical information and does not necessarily reflect
the actual results that would have occurred nor is it
necessarily indicative of future results of operations.
In addition, VSZ did not historically provide carve-out
financial information for its steel operations in
accordance with generally accepted accounting principles
in the United States. Therefore, the U. S. Steel Group
made certain estimates and assumptions regarding revenue
and costs in the preparation of the following unaudited
pro forma data.
(In millions) Year Ended December 31 2000 1999
-----------------------------------------------------------------------------------------------------------
Revenues and other income $ 7,094 $ 6,472
Income before extraordinary loss 57 36
Net income 57 29
-----------------------------------------------------------------------------------------------------------
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 63/4% 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:
Minimum tax credit carryforwards $ 39 $ 131
State tax loss carryforwards (expiring in 2001 through 2020) 55 65
Employee benefits 782 998
Receivables, payables and debt 52 68
Expected federal benefit for deducting state deferred income taxes 16 -
Contingency and other accruals 71 52
Other 2 11
Valuation allowances - state (34) (41)
-------- --------
Total deferred tax assets/(a)/ 983 1,284
-------- --------
Deferred tax liabilities:
Property, plant and equipment 248 274
Prepaid pensions 1,046 921
Inventory 15 16
Investments in subsidiaries and equity investees 82 96
Other 61 44
--------- ---------
Total deferred tax liabilities 1,452 1,351
--------- ---------
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 1999
------------------------------------------------ --------------------------------------------
(In millions, except per
share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
----------------------------------------------------------------------------------------------------------------------------
Revenues and other income:
Revenues/(a)/ $ 1,417 $1,462 $1,629 $1,582 $1,492 $1,415 $1,344 $1,285
Other income (loss) (4) 13 27 6 8 (40) 1 (35)
------ ------ ------ ------ ------ ------ ------ ------
Total 1,413 1,475 1,656 1,588 1,500 1,375 1,345 1,250
Income (loss)
from operations (159) 60 112 91 75 (26) 103 (2)
Income (loss) before
extraordinary losses (139) 19 56 43 34 (29) 55 (9)
Net income (loss) (139) 19 56 43 34 (31) 55 (14)
------------------------------------------------------------------------------------------------------------------------------
Steel Stock data:
-----------------
Income (loss) before
extraordinary losses
applicable to Steel Stock $ (141) $ 17 $ 54 $ 41 $ 32 $ (31) $ 52 $ (11)
- Per share: basic (1.59) .19 .62 .45 .35 (.35) .60 (.13)
diluted (1.59) .19 .62 .45 .35 (.35) .59 (.13)
Dividends paid per share .25 .25 .25 .25 .25 .25 .25 .25
Price range of Steel
Stock/(b)/:
- Low 12-11/16 14-7/8 18-1/4 20-5/8 21-3/4 24-9/16 23-1/2 22-1/4
- High 18-5/16 19-11/16 26-7/8 32-15/16 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 Other Than Oil and Gas
(Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Mineral Reserves Other Than Oil and Gas relating to the U. S. Steel Group, pages
U-31 through U-33.
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 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 2.95
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, through its Domestic Steel
segment, 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 and, through its U. S. Steel Kosice ("USSK")
segment, primarily located in the Slovak Republic, in
the production and sale of steel mill products and coke
for the central European market. 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,
Republic Technologies International, LLC ("Republic")
and Rannila Kosice s.r.o. 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 previous investment in USS/Kobe Steel
Company and costs related to the formation of Republic.
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)/ Primarily represents postretirement costs other
than pension (OPEB costs) related to all retirees
prior to January 1, 1987, and related to former
employees and retirees from the businesses sold or
closed after January 1, 1987. Also includes
certain other expenses (primarily litigation and
environmental remediation costs) associated to
lines of business in which USX is no longer
engaged as a result of sale or closure.
/(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 through year-end 2000 was
$2 million.
S-26
Management's Discussion and Analysis continued
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.
Administrative expenses are corporate general and
administrative costs allocated to the U. S. Steel Group
by USX 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, which
primarily consist of employment costs including pension
effects, professional services, facilities and other
related costs associated with corporate activities. The
increase from 1999 to 2000 primarily resulted from the
nonrecurrence of favorable 1999 franchise tax
settlements and employee compensation costs. The
decrease from 1998 to 1999 was largely the result of
lower franchise taxes, primarily due to settlements of
prior years' taxes.
Cost related to former business activities increased
$8 million in 2000 from 1999 primarily due to higher
litigation expenses. Costs related to former business
activities decreased $17 million in 1999 from 1998
primarily due to lower litigation expenses and lower
payments to a multiemployer health care benefit plan
created by the Coal Industry Retiree Health Benefit Act
of 1992.
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.
S-27
Management's Discussion and Analysis continued
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.
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.
S-28
Management's Discussion and Analysis continued
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 of $244 million 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 of $287 million 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 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. Capital expenditures of $310
million in 1998 included a reline of the Gary Works No.
6 blast furnace; an upgrade to the galvanizing line at
Fairless Works; replacement of coke battery thruwalls at
Gary Works; conversion of the Fairfield pipemill to use
round instead of square blooms; and additional
environmental expenditures primarily at Fairfield Works
and Gary Works. 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.
S-29
Management's Discussion and Analysis continued
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.
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 for its USSK operation to meet
environmental standards under the Slovak Republic's
environmental laws.
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.
S-30
Management's Discussion and Analysis continued
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.
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
S-31
Management's Discussion and Analysis continued
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.
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.
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. 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 the EPA and the
U.S. Department of Justice. On January 19, 2001, USX
signed a consent decree with the EPA to remediate this
site.
In 1987, the California Department of Health
Services ("DHS") issued a remedial action order for the
GBF/Pittsburg landfill near Pittsburg, California. 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. In 2000, the parties reached a buyout
arrangement with a third party remediation firm, whereby
the firm agreed to take title to and remediate the site
and also indemnify the PRPs. This commitment was backed
by pollution insurance. USX's share to participate in
the buyout was approximately $1.1 million. Payment of
the USX buyout amount was made December 2000. Title to
the site was transferred to the remediation firm on
January 31, 2001.
S-32
Management's Discussion and Analysis continued
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.
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.
S-33
Management's Discussion and Analysis continued
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.
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.
S-34
Management's Discussion and Analysis continued
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
This outlook is as of the original filing date of
March 12, 2001. For an updated outlook, see subsequent
filings with the U.S. Securities and Exchange
Commission.
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
S-35
Management's Discussion and Analysis continued
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.
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.
S-36
Management's Discussion and Analysis continued
. 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 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 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
The financial statement Schedule II - Valuation and
Qualifying Accounts is included on page 60. All other
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, 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 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 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
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
(Millions of Dollars)
Additions
-------------------------------------
Balance at Charges to Charges Balance at
Beginning Costs and to Other Other End of
Description of Period Expenses Accounts Additions Deductions/(a)/ Period
------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2000:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Allowance for doubtful accounts $ 12 $ 19 $ - $ 37/(b)/ $ 8 $ 60
Inventory market valuation reserve - - - - - -
Investments and long-term
receivables reserve 3 - 36/(c)/ - 1 38
Tax valuation allowances:
Federal 30 - - - 30 -
State 52 - - - 2 50
Foreign 282 - - - 30 252
Year ended December 31, 1999:
Reserves deducted in the
balance sheet from the assets
to which they apply:
Allowance for doubtful accounts $ 12 $ 5 $ - $ 4/(d)/ $ 9 $ 12
Inventory market valuation reserve 551 - - - 551 -
Investments and long-term
receivabless reserve 10 - - - 7 3
Tax valuation allowances:
Federal 30 - - - - 30
State 52 - - - - 52
Foreign 260 - 22/(e)/ - - 282
------------------------------------------------------------------------------------------------------------------------
/(a)/ Deductions for the allowance for doubtful accounts and long-term
receivables include amounts written off as uncollectible, net of
recoveries. Deductions for the inventory market valuation reserve reflect
increases in market prices and inventory turnover, resulting in noncash
credits to costs and expenses. Reductions in the tax valuation allowances
reflect changes in the amount of deferred taxes expected to be realized,
resulting in credits to the provision for income taxes.
/(b)/ Includes $36 million relating to the acquisition of U. S. Steel Kosice
s.r.o. and $1 million reclassification from long-term reserves.
/(c)/ Includes $36 million classified to dividend and investee income relating
to a notes receivable from an equity investee.
/(d)/ Includes $2 million relating to the acquisition of Lorain Tubular LLC, and
$2 million reclassification from long-term reserves.
/(e)/ Additions to the tax valuation allowances are included in the provision
for income taxes.
60
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 September 14, 2001.
USX CORPORATION
By /s/ Larry G. Schultz
----------------------------------
Larry G. Schultz
Vice President - Accounting
Signature Title
--------- -----
Chairman of the Board &
* Chief Executive Officer and Director
----------------------------------------
Thomas J. Usher
Vice Chairman & Chief Financial Officer
* and Director
----------------------------------------
Robert M. Hernandez
/s/ Larry G. Schultz Vice President - Accounting
----------------------------------------
Larry G. Schultz
* Director
----------------------------------------
Neil A. Armstrong
* Vice Chairman and Director
----------------------------------------
Clarence P. Cazalot, Jr.
* Director
----------------------------------------
J. Gary Cooper
* Director
----------------------------------------
Charles A. Corry
* Director
----------------------------------------
Shirley Ann Jackson
* Director
----------------------------------------
Charles R. Lee
* Director
----------------------------------------
Paul E. Lego
* Director
----------------------------------------
John F. McGillicuddy
* Director
----------------------------------------
Seth E. Schofield
* Director
----------------------------------------
John W. Snow
* Director
----------------------------------------
Douglas C. Yearley
*By /s/ Larry G. Schultz
----------------------------------------
Larry G. Schultz, Attorney-in-Fact
61