FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Delaware 3312 25-0996816
(State or other (Primary Standard Industrial
jurisdiction of (I.R.S. Employer
Identification No.)
Classification Code Number)
incorporation or
organization)
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600 Grant Street
Pittsburgh, PA 15219-4776
(412) 433-1121
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Dan D. Sandman, Esq.
General Counsel, Secretary and
Senior Vice President -- Human Resources & Public Affairs
USX Corporation
600 Grant Street
Pittsburgh, PA 15219-4776
(412) 433-1121
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Proposed maximum
Title of each class of Amount to be Proposed maximum aggregate
securities to be registered offering price per offering price Amount of
registered (1) share (2) registration fee(2)(3)
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Common Stock, par value
$1.00 per share........ 89,196,332 [N/A] $1,611,968,417 $402,992
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(1) Based upon the number of shares of USX-U. S. Steel Group Common Stock
issued and outstanding or held in the treasury of USX or by any subsidiary
of USX as of September 6, 2001, each of which shall be converted in the
Merger into one share of United States Steel Corporation common stock.
(2) The registration fee was computed pursuant to rule 457(f) under the
Securities Act of 1933, as amended, as (i) the product of $19.42 (the
average of the high and low price per share of the USX-U. S. Steel Group
Common Stock on September 6, 2001) and 89,196,332 (the total number of
shares of USX-U. S. Steel Group Common Stock issued and outstanding or held
in the treasury of USX or by a subsidiary of USX as of September 6, 2001,
less (ii) $120,224,350, which is the amount of cash to be paid in the
Merger to holders of 6.50% Cumulative Convertible Preferred Stock of USX.
The result was then multiplied by 0.00025.
(3) $403,770 was paid by USX Corporation in connection with the filing of
preliminary proxy materials of USX Corporation on June 15, 2001. In
accordance with Rule 0-11(a)(2) under the Securities Exchange Act of 1934
and Section 6(b) under the Securities Act of 1933, since the prior filing
fee is greater than the applicable registration fee, no filing fee is being
submitted herewith.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.
Revised Preliminary Proxy Materials
[LOGO OF USX]
USX Corporation Thomas J. Usher
600 Grant Street Chairman, Board of
Pittsburgh, PA 15219-4776 Directors &
Chief Executive Officer
, 2001
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Dear USX Stockholder:
A special meeting of stockholders of USX Corporation will be held on October 16, 2001, at 9:00 a.m., local time, at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware.
At this special meeting, you will be asked to approve the separation of the Marathon Group and the U. S. Steel Group into two independent companies. If the separation is completed, the business of the U. S. Steel Group will be owned and operated by United States Steel Corporation, which will be a publicly traded company, wholly owned by the holders of the then outstanding USX--U. S. Steel Group Common Stock, and the business of the Marathon Group will be owned and operated by Marathon Oil Corporation, which will be a separate publicly traded company, wholly owned by the holders of the then outstanding USX-- Marathon Group Common Stock. At this special meeting, we will also be asking you to approve the United States Steel Corporation 2002 Stock Plan and the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan. These plans would not go into effect unless and until the separation is completed.
The separation is intended to be tax-free to USX and our stockholders. We have submitted a request to the Internal Revenue Service for a private letter ruling as to the tax-free status of the separation, and completion of the separation is conditioned upon receipt of a favorable private letter ruling.
Your board of directors has unanimously approved the separation and recommends that you vote FOR approval of the separation and adoption of the Agreement and Plan of Reorganization, which is the legal document governing the separation. The board believes that the separation will create two strong, independent companies prepared to grow and prosper in each of their rapidly changing industries. In reaching this conclusion, the board considered many factors, including the opinions of Credit Suisse First Boston Corporation and Salomon Smith Barney Inc. that the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization, are fair, from a financial point of view, to the holders of USX--U. S. Steel Group Common Stock and the holders of the USX--Marathon Group Common Stock.
Your vote is very important. We cannot complete the separation without the affirmative vote of the holders of a majority of the outstanding USX--Marathon Group Common Stock, voting as a separate class, the holders of a majority of the outstanding USX--U. S. Steel Group Common Stock, voting as a separate class, and the holders of a majority of the outstanding USX--Marathon Group Common Stock and USX--U. S. Steel Group Common Stock, voting together as a single class. In the combined class vote, holders of USX-Marathon Group Common Stock will be entitled to one vote per share and holders of USX-U. S. Steel Group Common Stock will be entitled to 0.653 votes per share, which was calculated in accordance with the formula required by the USX Restated Certificate of Incorporation. Whether or not you plan to attend the special meeting in person, please take the time to vote by signing and returning your proxy card in the enclosed postage-paid envelope or you may take advantage of our telephone or Internet voting procedures. If you do not return your proxy card or vote by telephone or Internet or vote in person at the special meeting, it will have the same effect as a vote against the separation.
This proxy statement/prospectus provides you with detailed information about the separation. We encourage you to read the entire document carefully. In particular, you should carefully consider the discussion in the section entitled "Risk Factors" beginning on page 14.
Very truly yours,
Thomas J. Usher
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the shares of United States Steel Corporation to be issued in the separation or passed upon the accuracy or adequacy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated , 2001 and is first being mailed to USX stockholders on or about , 2001.
[LOGO OF USX CORPORATION]
USX Corporation
600 Grant Street
Pittsburgh, PA 15219-4776
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 16, 2001
Notice is hereby given that a special meeting of the stockholders of USX
Corporation, a Delaware corporation, will be held on October 16, 2001 at 9:00
a.m. local time, at the Hotel du Pont, 11th and Market Streets, Wilmington,
Delaware to consider and vote upon the following proposals:
1. To approve and adopt the Agreement and Plan of Reorganization, dated as of July 31, 2001, between USX Corporation and United States Steel LLC, providing for the separation of the U. S. Steel Group and the Marathon Group into two independent companies, pursuant to which (1) a wholly owned subsidiary of USX will be merged with and into USX, with USX continuing as the surviving corporation, (2) each outstanding share of USX--U. S. Steel Group Common Stock will be converted into the right to receive one share of common stock of United States Steel Corporation, which will own and operate the business of the U. S. Steel Group, and (3) the USX--Marathon Group Common Stock will remain outstanding, unaffected by the separation and will be the sole outstanding shares of common stock of USX, which will change its name to Marathon Oil Corporation and will own and operate the business of the Marathon Group.
2. To approve the United States Steel Corporation 2002 Stock Plan.
3. To approve the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan.
4. To adjourn the special meeting, if necessary.
Only holders of USX--Marathon Group Common Stock and USX--U. S. Steel Group Common Stock at the close of business on August 31, 2001 are entitled to notice of, and to vote at, the special meeting.
Your board of directors unanimously recommends that you vote FOR approval and adoption of the Agreement and Plan of Reorganization, and FOR approval of the other proposals listed above. Your vote is very important. Adoption of the Plan of Reorganization requires the affirmative vote of the holders of a majority of the outstanding USX--Marathon Group Common Stock, voting as a separate class, the holders of a majority of the outstanding USX--U. S. Steel Group Common Stock, voting as a separate class, and the holders of a majority of the outstanding USX--Marathon Group Common Stock and USX--U. S. Steel Group Common Stock, voting together as a single class.
The Agreement and Plan of Reorganization and the separation are explained in the accompanying proxy statement/prospectus, which you are urged to read carefully. A copy of the Agreement and Plan of Reorganization is attached as Annex A to this proxy statement/prospectus.
By Order of the Board of Directors,
Dan D. Sandman Secretary
Pittsburgh, Pennsylvania
, 2001
Whether or not you plan to attend the special meeting, please complete, sign, date and return the accompanying proxy in the enclosed self-addressed stamped envelope or vote by telephone or Internet.
Additional Information
This proxy statement/prospectus incorporates by reference important business and financial information about USX Corporation that is not included in or delivered with this proxy statement/prospectus. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in this proxy statement/prospectus by requesting them in writing or by telephone from USX Corporation at the following address and telephone number:
USX Corporation
Shareholder Services
600 Grant Street, Room 611
Pittsburgh, Pennsylvania 15219-4776
(412) 433-4801
(866) 433-4801 (toll free)
(412) 433-4818 (fax)
Any request for documents should be made by October 8, 2001 to ensure timely delivery of the documents prior to the special meeting.
See the section entitled "Where You Can Find More Information" on page 135.
Table of Contents
Questions and Answers About the Separation................................ 1 Summary................................................................... 3 Selected Historical Financial Information for USX Corporation ............ 9 Selected Historical Financial Information for the U. S. Steel Group....... 10 Selected Historical Financial Information for the Marathon Group.......... 11 Selected Unaudited Pro Forma Information for United States Steel Corporation.............................................................. 12 Selected Unaudited Pro Forma Information for Marathon Oil Corporation..... 13 Risk Factors.............................................................. 14 Special Note Regarding Forward-Looking Statements......................... 26 Recent Developments....................................................... 27 Market Price and Dividend Information of Marathon Group Shares and U. S. Steel Group Shares....................................................... 32 Proposal One: The Separation.............................................. 34 Structure of the Separation............................................. 34 Background of the Separation............................................ 35 Reasons for the Separation.............................................. 38 Factors Considered by the Board of Directors in Approving the Separation............................................................. 38 Recommendation of the USX Board of Directors............................ 40 Opinions of Financial Advisors.......................................... 40 Financing Arrangements Relating to the Separation....................... 47 Treatment of Employee Stock Options in the Separation................... 53 Treatment of USX Corporate Employees in the Separation.................. 53 Assignment of Other USX Corporate Assets and Certain Liabilities in the Separation............................................................. 53 Federal Securities Law Consequences..................................... 54 Accounting Treatment.................................................... 54 Material U.S. Federal Income Tax Consequences........................... 54 Stock Exchange Listing.................................................. 56 No Appraisal Rights..................................................... 56 Interests of Officers and Directors in the Separation................... 56 The Special Meeting....................................................... 60 Date, Time and Place of the Special Meeting............................. 60 Proposals to be Considered at the Special Meeting....................... 60 Record Date............................................................. 60 Quorum.................................................................. 61 Vote Required........................................................... 61 Voting Rights........................................................... 61 Voting and Revocation of Proxies........................................ 62 Revocation.............................................................. 62 Solicitation of Proxies................................................. 63 Adjournments............................................................ 63 The Plan of Reorganization................................................ 64 Transactions............................................................ 64 No Exchange of Marathon Group Stock Certificates........................ 66 Redemption of Shares of Trust Preferred in Connection with the Separation............................................................. 66 |
Listing of New U. S. Steel Shares and Marathon Shares.................... 66 Conditions to the Completion of the Separation........................... 66 Stockholders' Meeting and Board Recommendation........................... 67 Indemnification.......................................................... 68 Expenses................................................................. 68 Amendment................................................................ 68 Termination.............................................................. 68 Information About United States Steel...................................... 69 Description of the Business of United States Steel....................... 69 Properties of United States Steel........................................ 80 United States Steel Legal Proceedings.................................... 80 Management of United States Steel Corporation Following the Separation... 85 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 96 Information About Marathon................................................. 112 Management of Marathon Oil Corporation Following the Separation.......... 112 Liquidity of Marathon Oil Corporation Following the Separation........... 116 Relationship Between United States Steel Corporation and Marathon Oil Corporation Following the Separation...................................... 118 Tax Sharing Agreement.................................................... 118 Transition Services Agreement............................................ 119 Financial Matters Agreement.............................................. 120 License Agreement........................................................ 120 Insurance Assistance Agreement........................................... 120 Description of Capital Stock of Marathon Oil Corporation Following the Separation................................................................ 121 Authorized Share Capital................................................. 121 Marathon Shares.......................................................... 121 Marathon Oil Corporation Preferred Stock................................. 121 Marathon Oil Corporation Rights Agreement................................ 121 Description of Capital Stock of United States Steel Corporation Following the Separation............................................................ 123 Authorized Share Capital................................................. 123 New U. S. Steel Shares................................................... 123 United States Steel Corporation Preferred Stock.......................... 123 United States Steel Corporation Rights Agreement......................... 123 Comparison of the Rights of Stockholders................................... 125 Voting Rights............................................................ 125 Dividends................................................................ 125 Liquidation.............................................................. 125 Rights on Disposition.................................................... 126 Separation of Groups and Exchange of Stock............................... 126 Certain Anti-takeover Considerations..................................... 126 Proposal Two: Approval of the United States Steel Corporation 2002 Stock Plan...................................................................... 128 Recommendation of the USX Board of Directors............................. 128 Summary of the Plan...................................................... 128 Proposal Three: Approval of the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan...................... 131 Recommendation of the USX Board of Directors............................. 132 Summary of the Plan...................................................... 132 |
Security Ownership of Certain Beneficial Owners......................... 133 Security Ownership of Directors and Executive Officers.................. 133 Other Matters........................................................... 134 Legal Matters......................................................... 134 Experts............................................................... 134 Where You Can Find More Information..................................... 135 ANNEX A: Agreement and Plan of Reorganization........................... ANNEX B: Opinions of Financial Advisors Opinion of Credit Suisse First Boston Corporation..................... B-1-1 Opinion of Salomon Smith Barney....................................... B-2-1 ANNEX C: Unaudited Condensed Pro Forma Financial Statements............. C-1 Unaudited Pro Forma Condensed Combined Financial Statements for United States Steel Corporation............................................. C-1 Unaudited Pro Forma Condensed Financial Statements for Marathon Oil Corporation.......................................................... C-9 ANNEX D: Historical Financial Information for United States Steel....... D-1 Report of Independent Accountants..................................... D-2 Audited Combined Financial Statements................................. D-3 Unaudited Combined Financial Information.............................. D-32 Unaudited Interim Combined Financial Information...................... D-36 ANNEX E: Historical Financial Information for USX Corporation........... E-1 Management's Report................................................... E-2 Report of Independent Accountants..................................... E-3 Audited Financial Statements.......................................... E-4 Unaudited Financial Information....................................... E-43 Management's Discussion and Analysis.................................. E-56 Unaudited Interim Financial Statements................................ E-82 Management's Discussion and Analysis.................................. E-102 ANNEX F: United States Steel Corporation 2002 Stock Plan................ F-1 ANNEX G: United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan............................................ G-1 |
QUESTIONS AND ANSWERS ABOUT THE SEPARATION
Q: What is the proposed transaction?
A: USX is being separated into two independent companies, United States Steel Corporation and Marathon Oil Corporation. The separation is being effected by a merger of USX with a newly formed subsidiary of USX. As a result of the separation, the business of the U. S. Steel Group will be owned and operated by United States Steel Corporation, which will be wholly owned by the holders of the then outstanding USX--U. S. Steel Group Common Stock, and the business of the Marathon Group will be owned and operated by Marathon Oil Corporation, which will be wholly owned by the holders of the then outstanding USX--Marathon Group Common Stock. The separation includes a $900 million value transfer from the Marathon Group to the U. S. Steel Group.
Q: What will I receive in the separation?
A: In the separation, each outstanding share of USX--U. S. Steel Group Common Stock will be converted into the right to receive one share of United States Steel Corporation common stock ("New U. S. Steel Shares"), and the outstanding USX--Marathon Group Common Stock will remain outstanding, unaffected by the separation and will be the sole outstanding shares of common stock of USX ("Marathon Shares"), and USX will change its name to Marathon Oil Corporation and will own and operate the business of the Marathon Group.
Q: Will my shares of stock continue to be traded on the New York Stock Exchange, Pacific Stock Exchange and Chicago Stock Exchange?
A. Yes. Following the separation, both the Marathon Shares and the New U. S.
Steel Shares will be traded on the NYSE, PSE and CSE under their current
symbols. We have applied to the NYSE, the PSE and the CSE for approval of
the listing of the New U. S. Steel Shares to be issued in the Separation
under the symbol "X", and the closing of the Separation is conditioned upon
the approval of such listing. The NYSE has approved the listing subject to
stockholder approval of the Agreement and Plan of Reorganization and
official notice of issuance.
Q: What am I being asked to vote upon?
A: You are being asked to approve and adopt the Agreement and Plan of Reorganization, which is the legal document governing the separation.
Q: What does our board of directors recommend?
A: Your board of directors unanimously recommends that you vote FOR approval and adoption of the Agreement and Plan of Reorganization.
Your board has carefully reviewed the terms of the Separation, and has received opinions of two independent financial advisors, that the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization, are fair, from a financial point of view, to the holders of USX--Marathon Group Common Stock and the holders of USX--U. S. Steel Group Common Stock.
Your board has determined that the Separation is advisable and in the best interests of USX and the holders of the USX--Marathon Group Common Stock and the USX--U. S. Steel Group Common Stock.
Q: What vote is required to approve the separation?
A: The Agreement and Plan of Reorganization must be approved by both the holders of a majority of the outstanding USX--Marathon Group Common Stock and USX--U. S. Steel Group Common Stock, voting together as a single class, and by the holders of a majority of the outstanding USX--Marathon Group Common Stock and the holders of a majority of the outstanding USX--U. S. Steel Group Common Stock, each voting as a separate class.
Q: Who is entitled to vote?
A: You are entitled to vote if you were a holder of either USX--Marathon Group Common Stock or USX--U. S. Steel Group Common Stock at the close of business on August 31, 2001.
Q: How do I vote?
A: You may vote by telephone or over the Internet by following the instructions on the enclosed proxy card (or, if you own your shares through a broker or other intermediary, on the enclosed voting instruction card). You may also vote by marking, signing and dating the enclosed proxy card or voting instruction card, and returning it in the enclosed prepaid envelope. The proxy committee will vote your shares in accordance with your directions. If you sign and return a proxy card but do not mark the boxes showing how you wish to vote, the proxy committee will vote your shares FOR the adoption of the Agreement and Plan of Reorganization. Unsigned proxy cards will not be voted at all and will have the same effect as a vote against
the separation. If you are a stockholder of record (that is, if you are registered on our books), you may also vote in person by attending the meeting.
Q: Can I change my vote?
A: Yes. If you are a stockholder of record, you may change your vote or revoke your proxy at any time before your shares are voted at the special meeting by:
. voting again by telephone or over the Internet;
. sending us a proxy card dated later than your last vote;
. notifying the Secretary of USX in writing; or
. voting at the special meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my shares for me?
A: Your broker will vote your shares only if you provide instructions to your broker on how to vote. You should follow the directions provided by your broker regarding how to instruct your broker to vote your shares. Without instructions to your broker, your shares will not be voted on the separation and will have the same effect as a vote against the separation.
Q: Is the separation taxable?
A: The separation generally will be tax-free to both USX and our stockholders.
We have requested a private letter ruling from the IRS that the separation
will be tax-free, and completion of the separation is conditioned upon
receipt of such private letter ruling. In the event that this condition is
waived, we will distribute supplemental proxy materials and resolicit
proxies from our stockholders. The material U. S. federal income tax
consequences of the separation are described in more detail beginning on
page 54. The tax consequences to you will depend on the facts of your own
situation. We urge you to consult your tax advisor for a full understanding
of the tax consequences to you of the separation.
Q: Am I entitled to appraisal rights?
A: No. You will not be entitled to appraisal rights in connection with the separation.
Q: When do you expect to complete the separation?
A: Completion of the separation is subject to a number of conditions, which are described on pages 66 and 67, including the receipt of a private letter ruling from the IRS that the separation will be tax-free. Although we cannot predict the timing of receipt of such private letter ruling or satisfaction of such other conditions, we presently expect to complete the separation on or about December 31, 2001.
Q: Should I send my stock certificates now?
A: No. After we complete the separation, we will send instructions explaining how to exchange your certificates representing shares of USX--U. S. Steel Group Common Stock. Certificates representing shares of USX--Marathon Group Common Stock will not be exchanged in the separation and will represent Marathon Shares after the separation.
Q: Whom can I call with questions?
A: If you have any questions about the separation or would like copies of any of the documents we refer to in this proxy statement/prospectus, you should call Innisfree M&A Incorporated at 1-888-750-5835.
SUMMARY
This summary highlights the material information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the separation, and for a more complete description of the legal terms of these transactions, you should read this entire document carefully, as well as those additional documents to which we refer you. See "Where You Can Find More Information" on page 135. In this proxy statement/prospectus, the term "United States Steel," refers to the U. S. Steel Group for all periods prior to completion of the separation and to United States Steel Corporation and its direct and indirect subsidiaries for all periods following completion of the separation, in each case, unless the context otherwise requires. In addition, in this proxy statement/prospectus, the term "Marathon" refers to the Marathon Group for all periods prior to completion of the separation and to Marathon Oil Corporation and its direct and indirect subsidiaries for all periods following completion of the separation, in each case, unless the context otherwise requires.
The Businesses
The U. S. Steel Group
The U. S. Steel Group, through its domestic steel segment, is engaged in the
production, sale and transportation of steel mill products, coke, taconite
pellets and coal; the management of mineral resources; real estate development;
and engineering and consulting services and, through its U. S. Steel Kosice
segment, primarily located in the Slovak Republic, in the production and sale
of steel mill products and coke. Certain business activities are conducted
through joint ventures and partially owned companies. Following the Separation,
the business of the U. S. Steel Group will be owned and operated by United
States Steel Corporation, which will have its principal executive offices at
600 Grant Street, Pittsburgh, PA 15219-4776, and its telephone number will be
(412) 433-1121. For a description of the business of United States Steel, see
"INFORMATION ABOUT UNITED STATES STEEL" on page 69.
The Marathon Group
The Marathon Group includes Marathon Oil Company and certain other subsidiaries of USX, which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy-related businesses. Following the Separation, the business of the Marathon Group will be owned and operated by Marathon Oil Corporation. Marathon's principal executive offices will be at 5555 San Felipe Road, Houston, TX 77056-2723, and its telephone number will be 713-629-6600.
The Holding Company Reorganization (see page 27)
On July 2, 2001, we completed a corporate reorganization to implement a new holding company structure. As a result, USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio corporation which, directly and indirectly, owns and operates the business of the Marathon Group, and of United States Steel LLC, a Delaware limited liability company which, directly and indirectly, owns and operates the business of the U. S. Steel Group. This reorganization is referred to as the "HoldCo Merger."
No action is or was required to be taken by any stockholder in connection with the HoldCo Merger. Your stock certificates continue to represent shares of USX--Marathon Group Common Stock ("Marathon Group Shares") or USX--U. S. Steel Group Common Stock ("U. S. Steel Group Shares"), as applicable. No changes were made to the rights of any stockholder.
The Separation (see page 34)
USX will be separated into two independent, publicly traded companies:
United States Steel Corporation and Marathon Oil Corporation. This transaction
is called the "Separation." As a result of the Separation:
. the business of the U. S. Steel Group will be owned and operated by United States Steel Corporation, which will be an independent, publicly traded company, wholly owned by the holders of the then outstanding U. S. Steel Group Shares; and
. the business of the Marathon Groupwill be owned and operated by Marathon Oil Corporation, which will be
wholly owned by the holders of the then outstanding Marathon Group Shares.
Your board has unanimously approved the Separation and adopted the Plan of Reorganization.
Your board has determined that the Separation is advisable and in the best interests of USX and the holders of Marathon Group Shares and U.S. Steel Group Shares and unanimously recommends that you vote FOR approval and adoption of the Agreement and Plan of Reorganization. In considering the recommendation of the USX board of directors to vote in favor of the Separation, you should be aware that some of our directors and executive officers have interests in the Separation that are in addition to or different from the interests of stockholders generally. These interests include aggregate ownership of a significantly greater amount of Marathon Group Shares than U. S. Steel Group Shares, ownership of options, stock appreciation rights and restricted shares, contractual rights to severance payments in connection with a change in control and certain other contractual rights and payments. Following the Separation, Thomas J. Usher, the current chairman of the USX board of directors, will serve as the chairman, chief executive officer and president of United States Steel Corporation and as the non-executive chairman of the board of directors of Marathon Oil Corporation. Mr. Usher will receive compensation from both United States Steel Corporation and Marathon Oil Corporation for serving in these capacities. In connection with the Separation, USX has entered into a completion and retention agreement with Mr. Usher that, among other things, provides for the payment of a $6 million bonus. Mr. Usher is the only officer or director who will receive quantifiable compensation as a result of the Separation. As of June 30, 2001, USX directors beneficially owned an aggregate of 2.6 million Marathon Group Shares (0.83% of Marathon Group Shares) with an aggregate market value of approximately $76.7 million on that date and 1.4 million U. S. Steel Group Shares (1.55% of U. S. Steel Group Shares) with an aggregate market value of approximately $28.2 million on that date. The USX board of directors was aware of these interests and considered them, among other factors, in approving the Separation. See "THE SEPARATION--Interest of Officers and Directors in the Separation" on page 56.
Structure of the Separation (see page 34)
The Separation will be implemented by merging a newly formed corporate subsidiary of USX with and into USX, with USX continuing as the surviving corporation. USX will change its name to Marathon Oil Corporation, and will continue to own its subsidiary, Marathon Oil Company, which, together with its subsidiaries, presently owns and operates the business of the Marathon Group. At the effective time of the Separation, United States Steel LLC, which, together with its subsidiaries, presently owns and operates the business of the U. S. Steel Group, will be converted into a Delaware corporation named United States Steel Corporation.
Conversion of Securities in the Separation (see page 65)
At the effective time of the Separation:
. each issued and outstanding U. S. Steel Group Share will be converted into the right to receive one New U. S. Steel Share;
. Marathon Group Shares will remain outstanding and will be the sole outstanding shares of common stock of USX, and USX will change its name to Marathon Oil Corporation;
. each outstanding share of USX 6.50% Cumulative Convertible Preferred Stock will be converted into the right to receive, in cash, $50.00 plus accrued but unpaid dividends thereon;
. each option to purchase U. S. Steel Group Shares, each stock appreciation right with respect to U. S. Steel Group Shares, and each restricted U. S. Steel Group Share, which has been granted and is outstanding, will be converted into an option to purchase New U. S. Steel Shares, a stock appreciation right of United States Steel Corporation with respect to New U. S. Steel Shares or a restricted New U. S. Steel Share, respectively, subject to the same terms and conditions as were applicable to such options, stock appreciation rights or restricted shares, respectively, prior to the Separation.
. each option to purchase Marathon Group Shares, each stock appreciation right with respect to Marathon Group Shares and each restricted Marathon Group Share, which has been granted and is outstanding, will remain outstanding and represent an option to
purchase Marathon Shares, a stock appreciation right of Marathon Oil Corporation with respect to Marathon Shares or a restricted Marathon Share, respectively, subject to the same terms and conditions as were applicable to such options, stock appreciation rights or restricted shares, respectively, prior to the Separation.
The Value Transfer (see pages 34 to 39)
Following the Separation, USX, which will be renamed Marathon Oil Corporation, will remain responsible for substantially all of our indebtedness. In connection with the Separation, a portion of the indebtedness and other obligations of USX will be repaid or retired and United States Steel Corporation will incur indebtedness and other obligations and agree to repay a portion of the indebtedness and other obligations of USX, such that the amount of indebtedness and other obligations for which United States Steel Corporation will be responsible is $900 million less than the net amounts attributed to the U. S. Steel Group immediately prior to the Separation. Conversely, the amount of indebtedness and other obligations for which Marathon Oil Corporation will be responsible is $900 million more than the net amounts attributed to the Marathon Group immediately prior to the Separation. We refer to this series of transactions as the "Value Transfer."
If the Separation had occurred on June 30, 2001, after giving effect to the Value Transfer, Marathon Oil Corporation's total outstanding debt would have been $3.5 billion and United States Steel Corporation's total outstanding debt would have been $1.8 billion.
Redemption of Shares in Connection With the Separation (see page 66)
In connection with the Separation, each outstanding share of 6.75% Convertible Quarterly Income Preferred Security of USX Capital Trust I, a subsidiary of USX, will be redeemed for $50.00, plus accrued but unpaid dividends thereon, in cash.
Reasons for the Separation (see page 38)
The USX board of directors believes that the Separation will, among other things, allow Marathon Oil Corporation and United States Steel Corporation to focus on their core businesses and make critical acquisitions and investments needed to grow their respective businesses and will enhance stockholder value for all of our stockholders through the creation of two strong, independent companies.
Opinions of Financial Advisors (see page 40)
The USX board of directors received written opinions of two independent investment banking firms, Credit Suisse First Boston Corporation ("CSFB") and Salomon Smith Barney Inc. ("SSB"), as to the fairness of the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization from a financial point of view, to the holders of Marathon Group Shares and to the holders of U. S. Steel Group Shares. The full text of these investment banking opinions is included in Annexes B-1 and B-2 to this proxy statement/prospectus. You are urged to read these opinions carefully in their entirety.
Accounting Treatment (see page 54)
Marathon Oil Corporation, as successor to USX, will account for the Separation as a discontinuance of the businesses comprising United States Steel. If the historical carrying value of USX's investment in United States Steel exceeds its fair value, a non-recurring non-cash charge on the Separation will be recognized by Marathon Oil Corporation. Following the Separation, United States Steel Corporation will account for its assets and liabilities based on historical values at which they were carried by USX immediately prior to the Separation.
The Compensation Plans Being Voted Upon (see pages 128 to 132)
You are being asked to approve two compensation plans for United States Steel Corporation:
. The United States Steel Corporation 2002 Stock Plan is an equity compensation plan providing for stock options, restored options, stock appreciation rights and restricted stock
which may be granted to executive officers and other persons in responsible positions with United States Steel Corporation. This plan is intended to provide United States Steel Corporation employees with benefits comparable to those provided under the USX Corporation 1990 Stock Plan and is described on page 128.
. The United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan provides for cash bonus awards to senior executive officers of United States Steel Corporation based on pre-
established performance measures. This plan is intended to provide United States Steel Corporation senior executive officers with benefits comparable to those provided under the USX Corporation Senior Executive Officer Annual Incentive Compensation Plan and is described on page 131.
The proposals to approve the United States Steel Corporation 2002 Stock Plan and the United States Steel Corporation Senior Executive Officer Annual Incentive Stock Plan will require (i) the affirmative vote of a majority of the votes cast at the special meeting by holders of Marathon Group Shares and U. S. Steel Group Shares, voting together as a single class, and (ii) the affirmative vote of a majority of the votes cast at the special meeting by holders of U. S. Steel Group Shares, voting as a separate class. Notwithstanding such approvals, these plans will not be implemented unless the Plan of Reorganization is adopted by our stockholders and the Separation is completed.
Your board unanimously recommends that holders of Marathon Group Shares and U. S. Steel Group Shares vote FOR the proposal to approve the United States Steel Corporation 2002 Stock Plan and the proposal to approve the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan.
Following the Separation, the USX compensation plans referred to above will be amended to eliminate references to U. S. Steel Group Shares and will remain in effect with respect to directors, officers and employees of Marathon.
The Special Meeting (see page 60)
The special meeting of USX stockholders will be held on October 16, 2001 at 9:00 a.m., local time, at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware. At the special meeting, you will be asked to:
. adopt the Agreement and Plan of Reorganization providing for the Separation;
. approve the United States Steel Corporation 2002 Stock Plan; and
. approve the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan.
Record Date (see page 60)
Only holders of Marathon Group Shares and U. S. Steel Group Shares at the close of business on August 31, 2001 are entitled to vote at the special meeting.
Voting Rights (see page 61)
In the separate class votes described above, each holder of Marathon Group Shares or U. S. Steel Group Shares is entitled to one vote per share at the special meeting. In the combined votes described above of Marathon Group Shares and U. S. Steel Group Shares, voting together as a single class, holders of Marathon Group Shares are entitled to one vote per share and holders of U. S. Steel Group Shares are entitled to 0.653 votes per share. We calculated the number of votes to which each U. S. Steel Group Share is entitled by using the formula required by USX's Restated Certificate of Incorporation. It is based on the ratio of the market value of one U. S. Steel Group Share to one Marathon Group Share over the 20 business-day period ending on August 24, 2001, the fifth business day prior to the record date.
Conditions to Completion of the Separation (see page 66)
USX will not complete the Separation unless conditions to completion of the Separation are satisfied or waived, to the extent permitted by law, in the sole discretion of the USX board of directors. These conditions include:
. Adoption of the Plan of Reorganization by the required votes of USX stockholders;
. Receipt of a private letter ruling from the IRS, in form and substance satisfactory to the USX board of directors, that the Separation will qualify as a tax-free transaction;
. Receipt of financing by or for United States Steel Corporation in amount, form and substance satisfactory to the USX board of directors, and completion of the $900 million Value Transfer;
. Approval of the New U. S. Steel Shares to be issued in the Separation for listing on the NYSE, the PSE and the CSE, subject to official notice of issuance; and
. The absence of any injunction or legal restraint blocking the Separation.
On July 2, 2001, we filed with the IRS a request for such private letter ruling. Receipt of the private letter ruling is the only remaining material federal or state regulatory requirement in connection with the Separation.
Termination (see page 68)
The Separation may be terminated and abandoned at any time prior to the effective date of the Separation, whether prior to or following the special meeting, by and in the sole discretion of the USX board of directors.
Effects of the Separation on the Rights of Stockholders (see page 125)
Because the Marathon Shares and the New U. S. Steel Shares will not be "targeted" shares as are Marathon Group Shares and U. S. Steel Group Shares, there will be differences in the rights of holders of the Marathon Shares and New U. S. Steel Shares from their rights as holders of Marathon Group Shares and U. S. Steel Group Shares, respectively. See "COMPARISON OF THE RIGHTS OF STOCKHOLDERS" on page 125.
The organization of USX before and after the Separation is illustrated below:
[GRAPH]
BEFORE THE SEPARATION
U.S. Steel Group Marathon Group
Stockholders Stockholders
USX
Corporation
United States Marathon Oil
Steel LLC Company
AT THE SEPARATION
--U.S. Steel Group Marathon Group
Stockholders-- Stockholders
USX
##Corporation
--United States USX MERGER Marathon Oil
Steel LLC ##Corporation Company
**
AFTER THE SEPARATION
United States Marathon Oil
Steel Corporation Corporation
Stockholders Stockholders
(formerly U.S. Steel (formerly Marathon
Group Stockholders Group Stockholders
United States Steel Marathon Oil
Corporation Corporation
(formerly (formerly
United States Steel LLC) USX Corporation)
Marathon Oil
Company
--------------------------------
|
**United States Steel LLC is converted into United states Steel Corporation
--U.S. Steel Group shares are converted into shares of United States Steel
Corporation common stock
##USX Merger Corporation, a newly formed corporate subsidiary of USX, is merged
with and into USX Corporation
SELECTED HISTORICAL FINANCIAL INFORMATION FOR USX CORPORATION
The following table sets forth selected historical financial information for
USX Corporation. This information should be read in conjunction with USX
Corporation's consolidated financial statements, including the notes thereto,
which are in Annex E. This information does not give effect to the transactions
contemplated by the Plan of Reorganization. For such information, see "MARATHON
OIL CORPORATION UNAUDITED PRO FORMA CONDENSED BALANCE SHEET" and "MARATHON OIL
CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS" on pages C-
10 and C-15 in Annex C.
Six Months
Ended
June 30
----------------
2001 2000 2000 1999 1998 1997 1996
------- ------- ------- ------- ------- ------- -------
Dollars in millions (except per share data)
Statement of Operations
Data:
Revenues and other
income(a)(b)........... $21,188 $19,779 $39,914 $29,119 $28,077 $22,824 $22,938
Income from
operations(b).......... 2,039 1,588 1,752 1,863 1,517 1,705 1,779
Includes:
Inventory market
valuation credits
(charges)............. -- -- -- 551 (267) (284) 209
Gain (loss) on
ownership change in
MAP................... (6) 8 12 17 245 -- --
Income from continuing
operations............. $1,069 $ 720 $ 411 $ 705 $ 674 $ 908 $ 946
Income from discontinued
operations............. -- -- -- -- -- 80 6
Extraordinary losses.... -- -- -- (7) -- -- (9)
Cumulative effect of
change in accounting
principle.............. (8) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income.............. $ 1,061 $ 720 $ 411 $ 698 $ 674 $ 988 $ 943
Noncash credit from
exchange of preferred
stock.................. -- -- -- -- -- 10 --
Dividends on preferred
stock.................. (4) (4) (8) (9) (9) (13) (22)
------- ------- ------- ------- ------- ------- -------
Net income applicable to
common stocks.......... $ 1,057 $ 716 $ 403 $ 689 $ 665 $ 985 $ 921
======= ======= ======= ======= ======= ======= =======
Common Share Data:
Marathon Stock:
Income before
extraordinary losses
and cumulative effect
of change in accounting
principle.............. $ 1,090 $ 621 $ 432 $ 654 $ 310 $ 456 $ 671
Per share--basic....... 3.53 1.99 1.39 2.11 1.06 1.59 2.33
--diluted........... 3.52 1.99 1.39 2.11 1.05 1.58 2.31
Net income.............. 1,082 621 432 654 310 456 664
Per share--basic....... 3.50 1.99 1.39 2.11 1.06 1.59 2.31
--diluted........... 3.50 1.99 1.39 2.11 1.05 1.58 2.29
Dividends paid per
share.................. .46 .42 .88 .84 .84 .76 .70
Common Stockholders'
Equity per share....... 18.89 16.92 15.70 15.38 13.95 12.53 11.62
Steel Stock:
Income (loss) before
extraordinary losses... $ (25) $ 95 $ (29) $ 42 $ 355 $ 449 $ 253
Per share--basic....... (.28) 1.08 (.33) .48 4.05 5.24 3.00
--diluted........... (.28) 1.07 (.33) .48 3.92 4.88 2.97
Net income (loss)....... (25) 95 (29) 35 355 449 251
Per share--basic....... (.28) 1.08 (.33) .40 4.05 5.24 2.98
--diluted........... (.28) 1.07 (.33) .40 3.92 4.88 2.95
Dividends paid per
share.................. .35 .50 1.00 1.00 1.00 1.00 1.00
Common Stockholders'
Equity per share....... 20.83 23.59 21.58 23.23 23.66 20.56 18.37
Balance Sheet Data--at
period end:
Capital expenditures.... $ 769 $ 1,669 $ 1,665 $ 1,580 $ 1,373 $ 1,168
Total assets............ 24,514 23,401 22,931 21,133 17,284 16,980
Capitalization:
Notes payable.......... $ 250 $ 150 $ -- $ 145 $ 121 $ 81
Total long-term debt... 4,109 4,460 4,283 3,991 3,403 4,212
Preferred stock of
subsidiary............ 250 250 250 250 250 250
Trust preferred
securities............ 183 183 183 182 182 --
Minority interest in
MAP................... 2,010 1,840 1,753 1,590 -- --
Redeemable Delhi
Stock(c).............. -- -- -- -- 195 --
Preferred stock........ 2 2 3 3 3 7
Common stockholders'
equity................ 7,692 6,762 6,853 6,402 5,397 5,015
------- ------- ------- ------- ------- -------
Total
capitalization...... $14,496 $13,647 $13,325 $12,563 $ 9,551 $ 9,565
======= ======= ======= ======= ======= =======
|
SELECTED HISTORICAL FINANCIAL INFORMATION FOR THE U. S. STEEL GROUP
The following table sets forth selected historical information for the U. S. Steel Group. This information does not present the financial information for United States Steel Corporation as if it were a separate entity for the periods presented. For financial information for United States Steel Corporation which gives effect to the transactions contemplated by the Plan of Reorganization, see "UNITED STATES STEEL CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET" and "UNITED STATES STEEL CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS" on pages C-2 and C-6 in Annex C. This information should be read in conjunction with USX Corporation's consolidated financial statements, including the notes thereto, which are in Annex E.
Six Months
Ended June 30
-------------
2001 2000 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------ ------
Dollars in millions
Statement of Operations
Data:
Revenues and other
income(a).............. $3,301 $3,244 $6,132 $5,470 $6,477 $7,156 $6,872
Income (loss) from
operations............. (128) 203 104 150 579 773 483
Income (loss) before
extraordinary losses... (21) 99 (21) 51 364 452 275
Net income (loss)....... (21) 99 (21) 44 364 452 273
Noncash credit from
exchange of preferred
stock.................. -- -- -- -- -- 10 --
Dividends on preferred
stock.................. (4) (4) (8) (9) (9) (13) (22)
Net income (loss)
applicable to Steel
Stock.................. (25) 95 (29) 35 355 449 251
Balance Sheet Data--at
period end:
Capital expenditures.... $ 141 $ 244 $ 287 $ 310 $ 261 $ 337
Total assets............ 8,954 8,711 7,525 6,749 6,694 6,580
Capitalization:
Notes payable......... $ 123 $ 70 $ -- $ 13 $ 13 $ 18
Total long-term debt.. 2,309 2,375 915 476 510 1,087
Preferred stock of
subsidiary........... 66 66 66 66 66 64
Trust Preferred
Securities........... 183 183 183 182 182 --
Preferred stock....... 2 2 3 3 3 7
Common stockholders'
equity............... 1,858 1,917 2,053 2,090 1,779 1,559
------ ------ ------ ------ ------ ------
Total
capitalization..... $4,541 $4,613 $3,220 $2,830 $2,553 $2,735
====== ====== ====== ====== ====== ======
|
SELECTED HISTORICAL FINANCIAL INFORMATION FOR THE MARATHON GROUP
The following table sets forth selected historical information for the Marathon Group. This information does not present the financial information for Marathon Oil Corporation as if it were a separate entity for the periods presented. For financial information for Marathon Oil Corporation which gives effect to the transactions contemplated by the Plan of Reorganization, see "MARATHON OIL CORPORATION UNAUDITED PRO FORMA CONDENSED BALANCE SHEET" and "MARATHON OIL CORPORATION UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS" on pages C-10 and C-15 in Annex C. This information should be read in conjunction with USX Corporation's consolidated financial statements, including the notes thereto, which are in Annex E.
Six Months
Ended June 30
----------------
2001 2000 2000 1999 1998 1997 1996
------- ------- ------- ------- ------- ------- -------
Dollars in millions
Statement of Operations
Data:
Revenues and other
income(a).............. $17,911 $16,565 $33,859 $23,707 $21,623 $15,775 $16,153
Income from operations.. 2,167 1,385 1,648 1,713 938 932 1,296
Includes:
Inventory market
valuation credits
(charges)............ -- -- -- 551 (267) (284) 209
Gain (loss) on
ownership change in
MAP.................. (6) 8 12 17 245 -- --
Income before
extraordinary losses
and cumulative effect
of change in accounting
principle.............. 1,090 621 432 654 310 456 671
Net income.............. 1,082 621 432 654 310 456 664
Balance Sheet Data--at
period end:
Capital expenditures.... $ 628 $ 1,425 $ 1,378 $ 1,270 $ 1,038 $ 751
Total assets............ 16,004 15,232 15,674 14,544 10,565 10,151
Capitalization:
Notes payable......... $ 127 $ 80 $ -- $ 132 $ 108 $ 59
Total long-term debt.. 1,800 2,085 3,368 3,515 2,893 2,906
Preferred stock of
subsidiary........... 184 184 184 184 184 182
Minority interest in
MAP.................. 2,010 1,840 1,753 1,590 -- --
Common stockholders'
equity............... 5,834 4,845 4,800 4,312 3,618 3,340
------- ------- ------- ------- ------- -------
Total
capitalization..... $ 9,955 $ 9,034 $10,105 $ 9,733 $ 6,803 $ 6,487
======= ======= ======= ======= ======= =======
|
SELECTED UNAUDITED PRO FORMA INFORMATION FOR UNITED STATES STEEL CORPORATION
The following selected unaudited pro forma financial information of United States Steel Corporation gives effect to the $900 million Value Transfer, new financing arrangements, the assignment of certain USX corporate assets and liabilities and the payment of certain costs and expenses in connection with the Separation. The selected unaudited pro forma financial information has been derived from, or prepared on a basis consistent with, the unaudited pro forma condensed combined financial statements of United States Steel Corporation, including the notes thereto, included in Annex C of this proxy statement/prospectus. This information is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial position that would have occurred at the beginning of each period presented or on the dates indicated, nor is it necessarily indicative of the future operating results or financial position of United States Steel Corporation. This information should also be read in conjunction with the unaudited pro forma condensed combined financial statements of United States Steel, including the notes thereto, included in Annex C of this proxy statement/prospectus.
Six Months Ended Year Ended
or as of or as of
June 30, 2001 December 31, 2000
---------------- -----------------
(Dollars in millions except per
share amounts)
Statement of Operations Information:
Revenues and other income.................... $3,301 $6,132
Income (loss) from operations................ (128) 104
Net income (loss)............................ (9) 23
Per Common Share Data:
Net income (loss)
--basic.................................... $ (.10) $ 0.26
--diluted.................................. (.10) 0.26
Balance Sheet Data:
Total Assets................................. $8,821
Capitalization:
Debt....................................... $1,791
Equity..................................... 2,680
------
Total capitalization..................... $4,471
======
|
SELECTED UNAUDITED PRO FORMA INFORMATION FOR MARATHON OIL CORPORATION
The following selected unaudited pro forma financial information of Marathon Oil Corporation gives effect to the discontinuance of the businesses of United States Steel, the $900 million Value Transfer, the assignment of certain USX corporate assets and liabilities to United States Steel Corporation, the payment of certain costs and expenses in connection with the Separation, and the distribution of New U. S. Steel Shares to the holders of U. S. Steel Group Shares. The selected unaudited pro forma financial information has been derived from, or prepared on a basis consistent with, the unaudited pro forma condensed financial statements of Marathon Oil Corporation, including the notes thereto, included in Annex C of this proxy statement/prospectus. This information is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial position that would have occurred at the beginning of each period presented or on the dates indicated, nor is it necessarily indicative of the future operating results or financial position of Marathon Oil Corporation. This information should also be read in conjunction with the unaudited pro forma condensed financial statements of Marathon Oil Corporation, including the notes thereto, included in Annex C of this proxy statement/prospectus.
Six Months Ended Year Ended
or as of or as of
June 30, 2001 December 31, 2000
---------------- -----------------
(Dollars in millions except per
share amounts)
Statement of Operations Information:
Revenues and other income.................... $17,911 $33,859
Income from operations....................... 2,153 1,630
Net income................................... 1,041 364
Per Common Share Data:
Net income
--basic.................................... $ 3.37 $1.17
--diluted.................................. 3.37 1.17
Balance Sheet Data:
Total Assets................................. $16,662
Capitalization:
Debt....................................... $ 3,538
Preferred stock of subsidiary.............. 250
Minority interest in MAP................... 2,010
Equity..................................... 4,853
-------
Total capitalization..................... $10,651
=======
|
RISK FACTORS
In addition to the other information included and incorporated by reference in this proxy statement/prospectus, you should consider the following matters in deciding whether to vote in favor of the Separation.
Risks Related to Separation
United States Steel Corporation and Marathon Oil Corporation Will Be Subject to Continuing Contingent Liabilities of the Other Company Following the Separation
After the Separation, there will be several significant areas where the liabilities of Marathon or United States Steel may become an obligation of the other company following the Separation.
Under the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder (the "Code"), each corporation that was a member of the USX consolidated group during any taxable period or portion thereof ending on or before the effective time of the Separation is jointly and severally liable for the federal income tax liability of the entire USX consolidated group for such taxable period. See "RELATIONSHIP BETWEEN NEW UNITED STATES STEEL CORPORATION AND MARATHON OIL CORPORATION FOLLOWING THE SEPARATION--Tax Sharing Agreement" on page 118. Other provisions of federal law establish similar liability for other matters, including laws governing tax qualified pension plans as well as other contingent liabilities.
In addition, following the Separation, United States Steel Corporation will remain contingently liable for debt, available revolving credit and other obligations of Marathon Oil Corporation in the amount of approximately $1.0 billion as of June 30, 2001. Pursuant to the Financial Matters Agreement, Marathon Oil Corporation will indemnify United States Steel Corporation for any payments it would be required to make in respect of these obligations. Similarly, Marathon Oil Corporation will remain contingently liable for debt and certain guarantee and lease obligations of United States Steel Corporation in the amount of approximately $702 million as of June 30, 2001. Pursuant to the Financial Matters Agreement, United States Steel Corporation will indemnify Marathon Oil Corporation for any payments it would be required to make in respect of such obligations.
The Separation May Be Challenged by Creditors as a Fraudulent Transfer or Conveyance
If a court in a suit by an unpaid creditor or representative of creditors of either United States Steel Corporation or Marathon Oil Corporation, such as a trustee in bankruptcy, or United States Steel Corporation or Marathon Oil Corporation, as debtor-in-possession, in a reorganization case under title 11 of the United States Code, were to find that:
. the Separation and the related transactions were undertaken for the purpose of hindering, delaying or defrauding creditors, or
. Marathon Oil Corporation or United States Steel Corporation received
less than reasonably equivalent value or fair consideration in
connection with the Separation and the transactions related thereto and
(i) USX was insolvent immediately prior to, or Marathon Oil Corporation
or United States Steel Corporation was insolvent at the effective time
of the Separation and after giving effect thereto, (ii) USX immediately
prior to, or Marathon Oil Corporation or United States Steel Corporation
as of the effective time of the Separation and after giving effect
thereto, intended or believed that it would be unable to pay its debts
as they became due, or (iii) the capital of USX immediately prior to, or
Marathon Oil Corporation or United States Steel Corporation, at the
effective time of the Separation and after giving effect thereto, was
inadequate to conduct its business,
then such court could determine that the Separation and the related transactions violated applicable provisions of the United States Bankruptcy Code and/or applicable state fraudulent transfer or conveyance laws. Such a determination would permit the bankruptcy trustee or debtor-in-possession or unpaid creditors to rescind the Separation.
The measure of insolvency for purposes of the foregoing considerations will vary depending upon the law of the jurisdiction that is being applied. Generally, however, an entity would be considered insolvent if, either:
. the sum of its liabilities, including contingent liabilities, is greater than its assets, at a fair valuation; or
. the present fair saleable value of its assets is less than the amount required to pay the probable liability on its total existing debts and liabilities, including contingent liabilities, as they become absolute and matured.
United States Steel Corporation and Marathon Oil Corporation May Be Unable to Achieve All of the Benefits Sought by the Separation
The full strategic and financial benefits of the Separation may be delayed or may never occur at all. The following are factors that may prevent Marathon Oil Corporation and United States Steel Corporation from realizing these benefits:
. competitors in the steel industry and the oil and gas industry may have greater financial resources to make such investments or participate in such consolidation on more attractive terms;
. substantial indebtedness of Marathon Oil Corporation and United States Steel Corporation may impede either Marathon Oil Corporation or United States Steel Corporation or both of them from participating in certain investment or consolidation transactions; and/or
. domestic and international economic conditions may make such investments and consolidation more costly.
Additionally, many factors may affect future results of Marathon Oil
Corporation and United States Steel Corporation. See "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" on page 26.
Following the Separation, Marathon Oil Corporation and United States Steel Corporation Will Not Be Consolidated for Tax Purposes and United States Steel Corporation's Recognition of the Benefits of Its Tax Losses May Be Delayed
Prior to the Separation, USX filed consolidated, combined and unitary tax returns for federal and many states' income taxes, which included the results of operations of the U. S. Steel Group and the Marathon Group. As a result of the Separation, United States Steel Corporation will not be able to join with Marathon Oil Corporation in any consolidated, combined, or unitary tax returns for taxable periods ending after the effective time of the Separation. Consequently, for federal and state income tax purposes, taxable income or losses, and other tax attributes of United States Steel Corporation for taxable periods ending after the effective time of the Separation generally cannot offset, or be offset by, taxable income or losses and other tax attributes of Marathon Oil Corporation.
Additionally, the present USX tax allocation policy requires the Marathon Group and the U. S. Steel Group to pay the other for tax benefits resulting from tax attributes which cannot be utilized currently by the group to which such attributes are attributable on a stand-alone basis but which can be utilized on a consolidated, combined, or unitary basis. The net amount of cash payments paid by Marathon to United States Steel under the tax allocation policy for prior tax years, subject to adjustment, was $21 million, $(2) million, $91 million and $379 million during the years 1998, 1999, 2000 and the first six months of 2001, respectively.
Such payments allow the group generating the tax attributes to currently realize the tax benefits. After the Separation, if United States Steel Corporation generates losses or other tax attributes, it would generally benefit from those losses or other tax attributes only if and when it generated sufficient taxable income in future years to utilize those losses or other tax attributes on a stand-alone basis. Such a delay will affect cash flows, which may require reduction or postponement of capital expenditures or acquisitions.
The Separation May Become Taxable Under Section 355(e) of the Code if 50% or More of the Marathon Shares or New U. S. Steel Shares Are Acquired as Part of a Plan
The Separation may become taxable to USX pursuant to Section 355(e) of the
Code if 50% or more of either the Marathon Shares or New U. S. Steel Shares are
acquired, directly or indirectly, as part of a plan or series of related
transactions that include the Separation. See "THE SEPARATION--Material U.S.
Federal Income Tax Consequences" on page 54. If Section 355(e) applies, USX
would be required to pay a corporate tax based on the excess of the fair market
value of the shares distributed over USX's tax basis for such shares. The
amount of such tax would be materially greater if the Separation were deemed to
be a distribution of Marathon Shares. If an acquisition occurs which results in
the Separation being taxable under Section 355(e), the Tax Sharing Agreement
provides that the resulting corporate tax liability will be borne by the
entity, either United States Steel Corporation or Marathon Oil Corporation,
with respect to which the acquisition has occurred. See the discussion in
"RELATIONSHIP BETWEEN UNITED STATES STEEL CORPORATION AND MARATHON OIL
CORPORATION FOLLOWING THE SEPARATION--Tax Sharing Agreement" on page 118.
Anti-takeover Provisions Could Deter Takeover Attempts of Marathon Oil Corporation and United States Steel Corporation and Limit Appreciation of Stock Market Prices for Marathon Shares and New U. S. Steel Shares
The certificate of incorporation and by-laws of United States Steel Corporation and of USX, which will be renamed Marathon Oil Corporation, contain identical provisions that may have the impact of delaying or precluding an acquisition of United States Steel Corporation or Marathon Oil Corporation without the approval of the board of directors of such company. Such provisions may limit the price that investors might be otherwise willing to pay in the future for New U. S. Steel Shares and Marathon Shares. Such provisions include a classified board of directors, a provision prohibiting stockholder action by written consent, and a provision prohibiting stockholders from calling special meetings. In addition, under the stockholder rights plan of USX Corporation (which will be renamed Marathon Oil Corporation) and under the new United States Steel Corporation rights plan, disinterested stockholders may acquire additional Marathon Shares or New U. S. Steel Shares, respectively, or of an acquiring company at a substantial discount in the event of certain described changes of control. In addition, there are provisions of Delaware law that may also have the effect of precluding an acquisition of United States Steel Corporation or Marathon Oil Corporation without the approval of the board of directors of such company. See "COMPARISON OF THE RIGHTS OF STOCKHOLDERS-- Certain Anti-takeover Considerations" on page 126.
Marathon Oil Corporation Will Continue to Have Financial Exposure to United States Steel Corporation
Pursuant to the financial matters agreement to be entered into by Marathon Oil Corporation and United States Steel Corporation in connection with the Separation (the "Financial Matters Agreement"), if the Separation had occurred on June 30, 2001, United States Steel Corporation would have assumed $702 million of financial obligations of Marathon in connection with the Separation, including, $479 million of industrial revenue bonds, $90 million of capitalized leases and $133 million of certain guarantee and operating lease obligations, which guarantee and lease obligations are not reflected in the financial statements of Marathon. Marathon (as the successor to USX) will remain contingently responsible for repayment of these obligations. The Financial Matters Agreement does not contain any financial covenants and United States Steel Corporation will remain free to incur additional debt and grant mortgages or security interests. United States Steel
Corporation will be more highly leveraged than USX, will have a non-investment grade credit rating and has granted or likely will be granting security interests in certain assets. If United States Steel Corporation were to default under these assumed obligations, Marathon will be responsible for them. See "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
Certain Obligations to Be Assumed by United States Steel Corporation in the Separation May Be Accelerated in the Event of the Bankruptcy of Marathon Oil Corporation
Pursuant to the Financial Matters Agreement, upon the Separation, United States Steel Corporation will become responsible for certain industrial revenue bonds and certain guarantee and lease obligations (which on June 30, 2001 totaled approximately $702 million). Additionally, United States Steel Corporation is contingently liable for debt, available revolving credit and other obligations of Marathon Oil Corporation in the amount of approximately $1.0 billion as of June 30, 2001. Marathon Oil Corporation is not limited by agreement with United States Steel as to the amount of indebtedness that it may incur and, in the event of the bankruptcy of Marathon Oil Corporation, the holders of the industrial revenue bonds and such other obligations may declare them immediately due and payable. If such event occurs, United States Steel Corporation may not be able to satisfy such obligations. See "RISK FACTORS-- Following the Separation, United States Steel Corporation Will Not Have Access to the Financial and Other Resources of USX Corporation" on page 21.
Risks Related to the Business of United States Steel
Overcapacity in the Steel Industry May Negatively Affect United States Steel's Results of Operations
On a global basis, there is an excess of steel-making capacity over global consumption of steel products, including sheet, plate, tin mill and tubular products. Under these conditions, shipment and production levels for United States Steel's domestic operations have varied from year to year and quarter to quarter, affecting United States Steel's results of operations and cash flows. Many factors influence these results, including demand in the domestic market, international currency conversion rates, and government actions, both domestic and international. In addition, in many applications, steel competes with many materials, including aluminum, cement, composites, glass, plastic and wood. The emergence of additional substitutes for steel products could adversely affect future market prices and demand for steel products. See "INFORMATION ABOUT UNITED STATES STEEL--Management's Discussion & Analysis of Financial Condition and Results of Operations" on page 96.
Imports of Steel Could Negatively Affect United States Steel's Results of Operations
Imports of steel into the United States constituted 23%, 27%, 26% and 30% of the domestic steel market demand for the first six months of 2001, and the years 2000, 1999 and 1998, respectively. See "INFORMATION ABOUT UNITED STATES STEEL --Management's Discussion & Analysis of Financial Condition and Results of Operations" on page 96. We believe that steel imports into the United States involve widespread dumping and subsidy abuses, and that the remedies provided by United States law to private litigants are insufficient to correct these problems. Imports of steel involving dumping and subsidy abuses depress domestic price levels, which has an adverse effect upon United States Steel's revenue and income. See "INFORMATION ABOUT UNITED STATES STEEL--United States Steel Legal Proceedings" on page 80.
Many of United States Steel's International Competitors Are Larger and Have Higher Credit Ratings
Many of United States Steel's larger competitors have investment grade credit ratings and, due to their superior size and credit ratings, United States Steel may be at a disadvantage in participating in consolidations. In addition, terms of United States Steel's indebtedness contain covenants that may limit United States Steel's ability to participate in certain consolidations.
Competition From Mini-Mill Producers Could Result in Reduced Selling Prices and Shipment Levels for United States Steel
Domestic integrated producers, such as United States Steel, have lost market share in recent years to domestic mini-mill producers. Mini-mills generally produce a narrower range of steel products than integrated producers, but typically enjoy certain competitive advantages such as lower capital expenditures for construction of facilities and non-unionized work forces with lower employment costs and more flexible work rules. An increasing number of mini-mills utilize thin slab casting technology to produce flat-rolled products. Through the use of thin slab casting, mini-mill competitors are increasingly able to compete directly with integrated producers of flat-rolled products, especially hot-rolled and plate products. Depending on market conditions, the additional production generated by flat-rolled mini-mills could have an adverse effect on United States Steel's selling prices and shipment levels. See "INFORMATION ABOUT UNITED STATES STEEL--Description of the Business of United States Steel" on page 69.
High Energy Costs Can Adversely Impact United States Steel's Results of Operations
United States Steel's operations consume large amounts of energy, a significant amount of which is natural gas. Domestic natural gas prices have significantly increased from an average of $2.27 per million BTUs in 1999 to an average of $5.88 per million BTUs in the first half of 2001. At current consumption levels, a $1.00 change in domestic natural gas prices would result in an estimated $50 million change in United States Steel's annual domestic pretax operating costs.
United States Steel's Operations Are Subject to Business Interruptions and Casualty Losses
Steel making and raw material operations are subject to unplanned events such as explosions, fires, inclement weather, accidents and transportation interruptions. To the extent not covered by insurance, United States Steel's costs, revenues and cash flows may be adversely impacted.
Environmental Compliance and Remediation Could Result in Substantially Increased Capital Requirements and Operating Costs
The domestic businesses of United States Steel are subject to numerous
federal, state and local laws and regulations relating to the protection of the
environment. These environmental laws and regulations include the Clean Air Act
("CAA") with respect to air emissions; the Clean Water Act ("CWA") with respect
to water discharges; the Resource Conservation and Recovery Act ("RCRA") with
respect to solid and hazardous waste treatment, storage and disposal; and the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
with respect to releases and remediation of hazardous substances. In addition,
all states where United States Steel operates have similar laws dealing with
the same matters. These laws are constantly evolving and becoming increasingly
stringent. The ultimate impact of complying with existing laws and regulations
is not always clearly known or determinable due in part to the fact that
certain implementing regulations for laws such as RCRA and the CAA have not yet
been promulgated or in certain instances are undergoing revision. These
environmental laws and regulations, particularly the CAA, could result in
substantially increased capital, operating and compliance costs. See
"INFORMATION ABOUT UNITED STATES STEEL--Description of the Business of United
States Steel: Environmental Matters" on page 77. In addition, United States
Steel is involved in a number of environmental remediation projects relating to
the remediation of former and present operating locations and is involved in a
number of other remedial actions under federal and state law. See "INFORMATION
ABOUT UNITED STATES STEEL--Description of the Business of United States Steel:
Environmental Matters" on page 77. United States Steel's environmental
expenditures were $230 million in 2000, $253 million in 1999 and $266 million
in 1998.
To the extent that competitors, particularly foreign steel producers and manufacturers of competitive products, are not required to undertake equivalent costs, the competitive position of United States Steel could be adversely impacted.
U. S. Steel Kosice, s.r.o. ("USSK") is subject to the national laws of the Slovak Republic. The environmental laws of the Slovak Republic generally follow the requirements of the European Union, which are comparable to domestic standards. In addition, USSK has entered into agreements with the government to bring its facilities into European Union environmental compliance. See "INFORMATION ABOUT UNITED STATES STEEL--Description of the Business of United States Steel" on page 69.
United States Steel's Retiree Employee Health Care and Retiree Life Insurance Costs Are Higher Than Those of Many of its Competitors
United States Steel maintains defined benefit retiree health care and life insurance plans covering most domestic 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. For domestic union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions. As of December 31, 2000, United States Steel reported an unfunded obligation for such matters in the amount of $1,307 million. Mini- mills, foreign competitors and many producers of products that compete with steel are obligated to provide lesser benefits to their employees and retirees and this difference in costs could adversely impact United States Steel's competitive position.
Bankruptcies of Domestic Competitors Have Resulted in Lowered Operating Costs of Such Competitors
Since 1998, more than eighteen domestic steel companies have sought protection under Chapter 11 of the United States Bankruptcy Code. Many of these companies have continued to operate and have enjoyed significant cost advantages over United States Steel. In some cases, they have even expanded and modernized while in bankruptcy. Upon emergence from bankruptcy, these companies, or new entities that purchase their facilities through the bankruptcy process, have been relieved of certain environmental, retiree and other obligations. As a result, they are able to operate with lower costs than United States Steel.
Many Lawsuits Have Been Filed Against United States Steel Involving Asbestos- Related Injuries
United States Steel has been and is a defendant in a large number of cases in which plaintiffs allege injury resulting from exposure to asbestos. Many of these cases involve multiple plaintiffs and most have multiple defendants. These cases fall into three major groups: (1) claims made under federal and general maritime law by employees of the Great Lakes or Intercoastal Fleets, former operations of United States Steel; (2) claims by persons who performed work at United States Steel facilities; and (3) claims made by industrial workers allegedly exposed to an electrical cable product formerly manufactured by United States Steel. If adversely determined, these lawsuits could have a material adverse effect on United States Steel's financial position. See "INFORMATION ABOUT UNITED STATES STEEL--United States Steel Legal Proceedings" on page 80.
United States Steel's International Operations Expose United States Steel to Uncertainties and Risks From Abroad Which Could Negatively Affect Its Results of Operations
USSK, located in the Slovak Republic, constitutes 28% of United States Steel's total raw steel capability and also accounted for 16% of revenues for the first half of 2001. USSK exports more than 80% of its product, with the majority of its sales to other European countries. USSK is subject to economic conditions in the European Union and global markets it serves. It is also subject to political factors, including taxation, nationalization, inflation, currency fluctuations, increased regulation and protectionist measures. In addition, USSK is subject to foreign currency exchange risks because its revenues are primarily in euro-denominated currencies and its costs are primarily in Slovak crowns and United States dollars.
Following the Separation, United States Steel Corporation Will Have a Substantial Amount of Indebtedness and Other Obligations, Which Could Limit Its Operating Flexibility and Otherwise Adversely Affect Its Financial Condition
If the Separation had occurred on June 30, 2001, United States Steel Corporation would be liable for indebtedness in a total amount equal to approximately $1.8 billion. United States Steel Corporation will also agree to be responsible for certain guarantee and lease obligations of Marathon Oil Corporation not reflected in its financial statements. As of June 30, 2001, these obligations were estimated to be $133 million. In addition, United States Steel Corporation may incur other obligations for working capital, refinancing of a portion of the $1.8 billion referred to above or for other purposes. See "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47. This substantial amount of indebtedness could limit United States Steel's operating flexibility and could otherwise adversely affect United States Steel's financial condition.
United States Steel's high degree of leverage could have important consequences, including the following:
. its ability to satisfy its debt obligations may be impaired in the future;
. its ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions or general corporate or other purposes may be impaired in the future;
. a substantial portion of its cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to it for other purposes;
. some of its borrowings are and are expected to be at variable rates of interest (including borrowings under its expected inventory and accounts receivable credit facilities), which will expose it to the risk of increased interest rates; and
. its substantial leverage may limit its flexibility to adjust to changing economic or market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions.
If indebtedness is incurred in the future, it may exacerbate the consequences described above and could have other important consequences.
United States Steel's Business Requires Substantial Debt Service, Capital Investment and Maintenance Expenditures Which United States Steel May Be Unable to Meet
Based on United States Steel's pro forma debt levels, United States Steel anticipates that its scheduled interest payments for the twelve months immediately following the Separation will be approximately $148 million, assuming an annual weighted average interest rate of 8.25%. The amortization and maturities of the anticipated accounts receivable facility and inventory revolving credit facility have not yet been negotiated with lenders. Additionally, United States Steel's operations are capital intensive. For the five-year period ended December 31, 2000, total capital expenditures were $1,439 million and United States Steel plans capital expenditures of $325 million in 2001. United States Steel's business also requires substantial expenditures for routine maintenance. United States Steel may be unable to raise such amounts through internally generated cash or from external sources. See "RISK FACTORS--Following the Separation, United States Steel Corporation Will Not Have Access to the Financial and Other Resources of USX Corporation" on page 21 and "--United States Steel Has Incurred Operating and Cash Losses and Will Have Fewer Sources of Cash" on page 20 below.
United States Steel Has Incurred Operating and Cash Losses and Will Have Fewer Sources of Cash
For the six months ended June 30, 2001 and the year ended December 31, 2000, United States Steel had segment income (loss) from operations of $(138) million and $25 million, respectively. Additionally, for the
year ended December 31, 2000, United States Steel generated negative cash from operations of $494 million after investing activities and dividends, excluding the $500 million elective VEBA funding. United States Steel may not realize positive operating income or cash flows from continuing operations in the foreseeable future.
Historically, United States Steel funded its negative operating cash flow with cash supplied by USX, a portion of which was reflected as a payment from Marathon under the tax allocation policy and the remainder of which was represented by increased amounts of debt attributed by USX. As a stand-alone company, United States Steel Corporation will need to fund any of its negative operating cash flow from external sources and adequate sources may be unavailable or the cost of such funding may adversely impact United States Steel.
Following the Separation, United States Steel Corporation Will Not Have Access to the Financial and Other Resources of USX Corporation
Prior to the Separation, the U.S. Steel Group has been and will continue to be operated under the control of USX. Following the Separation, United States Steel Corporation will not be able to rely on USX for financial support or benefit from a relationship with USX to obtain credit. Immediately following the Separation, United States Steel Corporation's credit ratings will be lower than USX's current ratings. See "THE SEPARATION--Background of the Separation" beginning on page 35. This will result in higher interest rates and make obtaining necessary capital more difficult. Following the Separation, the annual weighted average interest rate of United States Steel Corporation's debt and other obligations is estimated to be approximately 8.25%. During the six months ended June 30, 2001, the annual weighted average interest rate of USX's debt and other obligations was 7.11%. See "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
The Terms of Indebtedness Entered Into and to Be Entered Into by United States Steel Corporation in Connection With the Separation Will Contain Restrictive Covenants that May Limit United States Steel Corporation's Operating Flexibility
If the Separation had occurred on June 30, 2001, the amount of financing that United States Steel Corporation would have incurred in connection with the Separation, not including assumption of existing obligations, is $897 million. This includes the $535 million of indebtedness (reduced by a $5 million discount) evidenced by the 10.75% Senior Notes due August 1, 2008, recently issued by United States Steel (the "Senior Notes"). The Senior Notes impose significant restrictions on United States Steel Corporation compared to the terms of the current financial obligations of USX. These restrictions, among other things may:
. impose restrictions on payment of dividends;
. limit additional borrowings by United States Steel Corporation, including limiting the amount of borrowings secured by inventories or accounts receivable;
. limit asset sales and sale of the stock of subsidiaries; and
. restrict the ability to make capital expenditures or certain acquisitions.
Moreover, additional anticipated financing may also include the restrictions above and may:
. require security interests in accounts receivable and inventory;
. impose certain financial ratios; and
. require maintenance of net asset levels.
If these covenants are breached, creditors would be able to declare their obligations immediately due and payable and foreclose on any collateral. Additional indebtedness that United States Steel may incur in the future may also contain similar covenants, as well as other restrictive provisions.
See "THE SEPARATION--Financing Arrangements Relating to the Separation" and "INFORMATION ABOUT UNITED STATES STEEL--Management's Discussion & Analysis of Financial Condition and Results of Operations" on pages 47 and 96, respectively.
United States Steel's Business Could Be Adversely Affected by Strikes or Work Stoppages by Its Unionized Employees
Currently, substantially all domestic hourly employees of United States Steel's steel, coke and taconite pellet facilities are covered by a collective bargaining agreement with the United Steelworkers of America which expires in August 2004 and includes a no-strike provision. Other hourly employees (for example, those engaged in coal mining and transportation activities) are represented by the United Mine Workers of America, the United Steelworkers of America and other unions. In addition, the majority of USSK employees are represented by a union under a collective bargaining agreement expiring in February 2004, which is subject to annual wage negotiations. Strikes or work stoppages and the resultant adverse impact on its relationship with its customers could have a material adverse effect on United States Steel's business, financial condition or results of operations. In addition, mini-mill producers and certain foreign competitors and producers of comparable products do not have unionized work forces. This may place United States Steel at a competitive disadvantage.
United States Steel's Business Is Cyclical
Demand for most of United States Steel's products is cyclical in nature and sensitive to general economic conditions. The financial condition and results of operations of United States Steel are significantly affected by fluctuations in the U.S. and global economies. Because integrated steel makers have high fixed costs, reduced volumes result in operating inefficiencies, such as those experienced in the first half of 2001. Over the past five years, United States Steel's net income has varied from a high of $452 million in 1997 to a loss of $21 million in 2000. Future economic downturns, a stagnant economy or currency fluctuations may adversely affect United States Steel's business, results of operations and financial condition.
Risks Related to the Business of Marathon
A Substantial or Extended Decline in Oil or Gas Prices Would Have a Material Adverse Effect on Marathon
Prices for oil and gas fluctuate widely. Marathon's revenues, operating results and future rate of growth are highly dependent on the prices it receives for its oil, gas and refined products. Historically, the markets for oil, gas and refined products have been volatile and may continue to be volatile in the future. Many of the factors influencing prices of oil, gas and refined products are beyond the control of Marathon. These factors include:
. worldwide and domestic supplies of oil and gas,
. weather conditions,
. the ability of the members of OPEC to agree to and maintain oil price and production controls,
. political instability or armed conflict in oil-producing regions,
. the price and level of foreign imports,
. the level of consumer demand,
. the price and availability of alternative fuels,
. the availability of pipeline capacity, and
. domestic and foreign governmental regulations and taxes.
The long-term effects of these and other conditions on the prices of oil and gas are uncertain. For example, oil prices declined significantly in 1998 and, for an extended period of time, remained substantially below prices obtained in previous years. In late 1999, oil and natural gas prices increased significantly and have remained at higher levels.
Lower oil and gas prices may reduce the amount of oil and gas that Marathon produces, which may adversely affect its revenues and operating income. Significant reductions in oil and gas prices may require Marathon to reduce its capital expenditures.
Oil and Gas Reserve Data and Future Net Revenue Estimates of Marathon Are Uncertain
Estimates of reserves by necessity are projections based on engineering data, the projection of future rates of production and the timing of future expenditures. Estimates of Marathon's proved oil and gas reserves and projected future net revenues are based on reserve reports which it prepares. The process of estimating oil and gas reserves requires substantial judgment on the part of the petroleum engineers, resulting in imprecise determinations, particularly with respect to new discoveries. Different reserve engineers may make different estimates of reserve quantities and revenues attributable thereto based on the same data. Future performance that deviates significantly from the reserve reports could have a material adverse effect on the business and prospects of Marathon.
Fluctuations in the price of oil and natural gas have the effect of significantly altering reserve estimates as the economic projections inherent in the estimates may reduce or increase the quantities of recoverable reserves. Such prices may not be realized or the estimated production volumes may not be produced during the periods indicated. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves most likely will vary from our estimates.
If Marathon Fails to Acquire or Find Additional Reserves, Its Reserves and Production Will Decline Materially From Their Current Levels
The rate of production from oil and gas properties generally declines as reserves are depleted. Except to the extent that Marathon acquires additional properties containing proved reserves, conducts successful exploration and development activities or, through engineering studies, identifies additional behind-pipe zones or secondary recovery reserves, its proved reserves will decline materially as reserves are produced. Future oil and gas production is, therefore, highly dependent upon our level of success in acquiring or finding additional reserves. Because Marathon is smaller than many of its competitors, it has fewer reserves and will be at an even greater disadvantage to its competitors if it fails to acquire or find additional reserves.
Marathon's Refined Product Margins Can Be Adversely Affected by Rising Crude Oil Prices and Environmental Regulations
Marathon conducts domestic refining, marketing and transportation operations primarily through its 62% owned consolidated subsidiary, Marathon Ashland Petroleum LLC ("MAP"). MAP's operations are conducted mainly in the Midwest, Southeast, Ohio River Valley and the upper Great Plains. The profitability of these operations depends largely on the margin between the cost of crude oil and other feedstocks refined and the selling prices of refined products. MAP is a purchaser of crude oil in order to satisfy its refinery throughput requirements. As a result, its overall profitability could be adversely affected by availability of supply and rising crude oil and other feedstock prices which are not recovered in the marketplace. Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, logistical capabilities and the available supply of refined products.
In addition, environmental regulations, particularly the 1990 Amendments to the CAA, have imposed, and are expected to continue to impose, increasingly stringent and costly requirements on refining and marketing operations which may have an adverse effect on margins.
The Oil and Gas Exploration and Production Industry Is Very Competitive
There is strong competition relating to all aspects of the oil and natural gas industry, and in particular in the exploration and development of new oil and natural gas reserves. Marathon competes with major integrated
and independent oil and gas companies for the acquisition of oil and gas properties and leases, for the equipment and labor required to develop and operate these properties, and in the marketing of natural gas to end-users. Many of these competitors have financial and other resources substantially greater than that available to Marathon. In addition, many of Marathon's larger competitors may be better able to respond to factors that affect the demand for oil and natural gas production, such as changes in worldwide oil and natural gas prices and levels of production, the cost and availability of alternative fuels and the application of government regulations. Marathon also competes in attracting and retaining personnel, including geologists, geophysicists and other specialists and generalists. Marathon may not be able to attract or retain technical personnel in the future.
Many of Marathon's Competitors in Exploration and Production Have Greater Resources Than Marathon
The oil and gas industry is characterized by a large number of companies, none of which is dominant within the industry, but a number of which have greater resources than Marathon. As a consequence, Marathon may find itself at a competitive disadvantage in bidding for drilling rights and in completing projects.
Environmental Compliance and Remediation Could Result in Increased Capital Requirements and Operating Costs
The businesses of Marathon are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations include: the CAA, with respect to air emissions; CWA, with respect to water discharges; RCRA, with respect to solid and hazardous waste treatment, storage and disposal; CERCLA, with respect to releases and remediation of hazardous substances; and the Oil Pollution Act of 1990, with respect to oil pollution and response. In addition, many states where Marathon operates have similar laws dealing with the same matters. These laws and their associated regulations are constantly evolving and many of them have become more stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been finalized or in certain instances are undergoing revision. These environmental laws and regulations, particularly the 1990 Amendments to the CAA, new water quality standards and stricter fuel regulations could result in increased capital, operating and compliance costs.
Marathon has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of Marathon's products and services, operating results will be adversely affected. The specific impact of these laws and regulations on each of Marathon's competitors may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil or refined products.
Of particular significance to MAP are the new Tier II Fuels regulations 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 be only 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. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of Marathon's products and services, operating results will be adversely affected.
Marathon's Reliance on Foreign Production of Oil and Gas Exposes Marathon to Risks From Abroad Which Could Negatively Affect Its Results of Operations
Marathon's oil and gas producing activities rely heavily upon production outside of the United States. For the years 2000, 1999 and 1998, international production accounted for 48%, 33% and 34%, respectively. Development of new production properties in countries outside the United States may require protracted negotiations with host governments, national oil companies and third parties and are frequently subject to economic and political considerations, such as taxation, nationalization, inflation, currency fluctuations, increased regulation and approval requirements and governmental regulation, which could adversely affect the economics of projects.
Marathon's Exploration and Production Operations Are Subject to Business Interruptions and Casualty Losses
Exploration and production operations are subject to unplanned occurrences, including, without limitation, blowouts, explosions, fires, loss of well control and spills, adverse weather, labor disputes, and maritime accidents. To the extent not covered by insurance, Marathon's costs, revenues and cash flows could be adversely impacted.
Marathon's Refining, Marketing and Transportation Operations Are Subject to Business Interruptions and Casualty Losses
Refining, marketing and transportation operations are subject to business interruptions due to unplanned events such as explosions, fires, pipeline interruptions, crude oil or refined product spills, inclement weather or labor disputes. They are also subject to the additional hazards of marine operations, such as capsizing, collision and damage or loss from severe weather conditions. To the extent not covered by insurance, Marathon's costs, revenues and cash flows could be adversely impacted.
Marathon Does Not Insure Against All Potential Losses and Could Be Seriously Harmed by Unexpected Liabilities
As discussed above, both the exploration and production and the refining, marketing and transportation operations of Marathon are subject to business interruptions and casualty losses. Marathon maintains insurance against many, but not all, potential losses or liabilities arising from its operations in accordance with customary industry practices and in amounts that it believes to be prudent. Losses and liabilities arising from such events could reduce Marathon's revenues and increase its costs to the extent not covered by insurance. The occurrence of any of the aforementioned events and any payments made as a result of such events and the liabilities related thereto, would reduce the funds available for exploration, drilling and production and could have a material adverse effect on Marathon's financial position or results of operations.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes "forward-looking statements," which are identified by the use of forward-looking words or phrases, including, but not limited to, "intended," "expects," "expected," "anticipates," and "anticipated." These forward-looking statements are based on (1) a number of assumptions made by management concerning future events and (2) information currently available to management. Readers are cautioned not to put undue reliance on such forward-looking statements, which are not a guarantee of performance and are subject to a number of uncertainties and other facts, many of which are outside USX's control, that could cause actual events to differ materially from such statements. All statements other than statements of historical factors included in this proxy statement/prospectus, including those regarding the financial position, results of operations, cash flows, business strategy, projected costs, growth opportunities, strategic and other benefits of the Separation, and plans regarding financing in connection with the Separation, are forward-looking statements. Although we believe that our expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") include prices of oil and natural gas; refined product margins; prices and volumes of sale of steel products; levels of imports of steel products into the United States; prevailing interest rates; and general economic and financial market conditions, as well as those factors disclosed under "RISK FACTORS" on page 14 and elsewhere in this proxy statement/prospectus and in our SEC filings listed under "WHERE YOU CAN FIND MORE INFORMATION" on page 135. These forward-looking statements represent our judgment as of the date of this proxy statement/prospectus. All subsequent written and oral forward-looking statements are expressly qualified in their entirety by the Cautionary Statements. Unless otherwise required by law, we disclaim any intent or obligation to update the respective forward-looking statements.
RECENT DEVELOPMENTS
The Holding Company Reorganization
On July 2, 2001, we completed a corporate reorganization to implement a new holding company structure. As a result, USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio corporation which, directly and indirectly, owns and operates the business of the Marathon Group, and of United States Steel LLC, a Delaware limited liability company which, directly and indirectly, owns and operates the business of the U. S. Steel Group.
No action is or was required to be taken by any stockholder in connection with the HoldCo Merger. Your stock certificates continue to represent Marathon Group Shares or U. S. Steel Group Shares, as applicable. No changes were made to the rights of any stockholder. References in this proxy statement/prospectus to "Old USX" refer to USX Corporation, as it existed prior to the HoldCo Merger.
The organization of USX before and after the HoldCo Merger is illustrated below:
[GRAPH]
BEFORE THE
U.S. Steel Group HOLDCO MERGER Marathon Group Stockholders Stockholders |
USX Corporation
(owns the assets of the U.S. Steel Group)
Marathon Oil Company
THE HOLDCO
U.S. Steel Group MERGER Marathon Group
Stockholders Stockholders
USX Corporation
USX HoldCo, Inc.
United States Steel LLC Marathon Oil Company
AFTER THE
U.S. Steel Group HOLDCO MERGER Marathon Group
Stockholders Stockholders
USX Corporation
(formerly USX HoldCo, Inc.)
United States Steel LLC Marathon Oil Company
|
Fairless Works Shutdown
On August 14, 2001, United States Steel announced its intention to permanently close the cold rolling and tin mill operations at Fairless Works, with a combined annual finishing capability of 1.5 million tons, on or after November 12, 2001. Under its labor agreement, United States Steel is required to discuss the proposed shutdown with the United Steel Workers of America before making a final decision. United States Steel also announced that, subject to market conditions, it currently intends to continue operating the hot dip galvanizing line at Fairless Works. The anticipated financial impact of the shutdown will be recorded in the second half of 2001 and is estimated to be a pretax charge of $35 million to $45 million. The near-term cash impact will be minimal since half of the charge is for depreciation or impairment of fixed assets and the balance is related to employee benefits that will be paid from trust funds which will be funded over a period of years if required.
Voluntary Early Retirement Program
On August 14, 2001, USX and United States Steel informed their headquarters employees that, in connection with the Separation, a voluntary early retirement program will be offered to employees of most USX headquarters departments and to designated groups of United States Steel employees whose work is functionally related to USX. The financial impact of this program is being treated as a Separation Cost and an estimate of these costs has been included in the Separation Costs set forth in the pro forma financial information included in the "UNAUDITED PRO FORMA FINANCIAL STATEMENTS" in Annex C.
Outlook of United States Steel
Over the last few months, domestic orders for steel have strengthened and prices have stabilized. In the third quarter, we expect Domestic Steel shipments to be somewhat higher and realized prices to be flat or modestly higher. On the cost side, there has been a declining trend in natural gas prices compared to the same period last year. Continuation of this trend could provide a significant positive impact on our costs over the balance of the year.
On May 31, 2001 a major fire damaged the cold-rolling mill at USS-POSCO, which is fifty percent owned by United States Steel. Damage was predominantly limited to the cold-rolling mill area of the plant. USS-POSCO maintains insurance coverage against such losses, including coverage for business interruption. The mill is expected to resume production in the first quarter of 2002, although full-production may not be achieved until mid-2002. Until such time, the plant will continue customer shipments using cold-rolled coils from United States Steel and POSCO as substitute feedstock.
For USSK, United States Steel expects third quarter shipments to be slightly lower than the second quarter and third quarter average realized prices to be flat compared to the second quarter. Based on continued improvement in production performance since acquisition, USSK raw steel production capability for the second half of 2001 will be increased to 2.5 million net tons, for an annualized rate of 5.0 million net tons.
For the full year 2001, total shipments are expected to be approximately 14.0 to 14.5 million net tons with Domestic Steel shipments of approximately 10.5 to 11 million net tons and USSK shipments of approximately 3.5 million net tons.
United States Steel owns a 16% equity method investment in Republic Technologies International, LLC ("Republic") through USX's ownership in Republic Technologies International Holdings, LLC, which is the sole owner of Republic. Republic is a major purchaser of raw materials from United States Steel and the primary supplier of rounds for Lorain Tubular. On April 2, 2001, Republic filed to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Republic has continued to supply the Lorain mill since filing for bankruptcy and no supply interruptions are anticipated. United States Steel's carrying value of this investment in Republic has been reduced to zero. Upon Republic's filing for bankruptcy, United States Steel accrued a charge for a
substantial portion of the receivables due from Republic. At June 30, 2001, United States Steel's remaining pre-petition financial exposure to Republic, after recording various losses and reserves, totaled approximately $30 million.
The above discussion includes forward-looking statements concerning shipments, pricing, and equity investee performance. These statements are based on assumptions as to future product demand, prices and mix, and production. Steel shipments and prices can be affected by imports and actions of the U.S. Government and its agencies pertaining to trade, domestic and international economies, domestic production capacity, and customer demand. Factors which may affect USSK results are similar to domestic factors, including excess world supply and foreign currency fluctuations, and also can be influenced by matters peculiar to international marketing such as tariffs. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated.
Outlook of Marathon
The outlook regarding the Marathon Group's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on 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.
On August 23, 2001, Marathon announced plans to develop a strategic alliance with Yukos Oil Company, the second largest oil company in Russia. As part of the alliance, a joint business development group is planned to be located in London to evaluate international investment opportunities. We anticipate that this relationship could lead to investment by Marathon in energy opportunities in Russia. On August 29, 2001, Marathon announced agreements with Statoil, Norsk Hydro and TotalFinaElf, to acquire varied interests in five licenses in the Norwegian Sector of the North Sea. The portfolio additions include several undeveloped discoveries close to Marathon's existing infrastructure positions in the Heimdal and Brae areas of the North Sea. The transactions are subject to necessary approvals from the Norwegian authorities.
Marathon's third quarter and full year 2001 production is expected to be approximately 392 and 420 thousand barrels of oil equivalent per day, respectively. The full year estimate reflects reduced heavy oil investment in Canada, a higher than expected level of asset sales and delays in new project start-ups.
Marathon's high impact drilling program in the Gulf of Mexico will be delayed due to the cancellation of the contract for the Cajun Express rig. With the Cajun Express rig, Marathon expected to drill two deepwater Gulf of Mexico wells before year-end 2001. Marathon has contracted the Max Smith rig, which is on location, to drill the Deep Ozona prospect with the Paris Carver prospect expected to follow in the fourth quarter of 2001.
For the longer term, Marathon has targeted a 3% annual production growth rate at a time when we see worldwide production growth rates of 1% to 2%. We plan to continue our program of exploration and business development to meet our target. Our exploration program is targeted on high impact projects and our business development team is pursuing growth opportunities through purchases, exchanges and joint ventures. We also anticipate that at some point we will exceed the 3% annual growth rate which could present us with the opportunity of selling less attractive reserves and production thereby improving the production profile.
The above discussion includes forward-looking statements with respect to the expected levels of Marathon's worldwide liquid hydrocarbon and natural gas production and the drilling program. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production include pricing, supply
and demand for petroleum products, amount of capital available for exploration and development, regulatory constraints, timing of commencing production from new wells, and other geological, operating and economic considerations. Some factors that affect the drilling program include the timing and results of future development drilling and drilling rig availability.
Downstream income of the Marathon Group is largely dependent upon the refining and wholesale marketing margin for refined products and the retail gross margin for gasoline and distillates. The refining and wholesale marketing margin reflects the difference between the wholesale selling prices of refined products and the cost of raw materials refined, purchased product costs and manufacturing expenses. Refining and wholesale marketing margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, the seasonal pattern of certain product sales, crude oil costs, manufacturing costs, the available supply of crude oil and refined products, and logistical constraints. The retail gross margin for gasoline and distillates reflects the difference between the retail selling prices of these products and their wholesale cost. Retail gasoline and distillate margins have also been historically volatile, but tend to be counter cyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations which impact driving conditions.
In June 2001, MAP acquired an interest in approximately 50 convenience stores located in Indiana and Michigan from Welsh, Inc. The acquisition of these retail outlets increases MAP's presence in these markets and should provide more than 80 million gallons of new annual gasoline sales.
On September 1, 2001, MAP and Pilot Corporation commenced operation of their previously announced transaction to form Pilot Travel Centers LLC. MAP and Pilot each have a 50 percent interest in Pilot Travel Centers LLC, in what is the largest travel center network in the nation with more than 235 locations. The new venture, based in Knoxville, Tennessee, has approximately 11,000 employees.
MAP is also working to improve its logistics network and has been designated operator of the Centennial Pipeline, owned jointly by Panhandle Eastern Pipe Line Company, a subsidiary of CMS Energy Corporation, MAP, and TE Products Pipe Line Company, Limited Partnership. All of the permits and rights-of-way have been obtained for the new pipeline, which will connect the Gulf Coast refiners with the Midwest market. The Centennial Pipeline system is expected to be operational in first quarter 2002.
A MAP subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline will be named Cardinal Pipeline and is expected to initially move about 50,000 barrels per day of refined petroleum into the central Ohio region. MAP has secured over 95 percent of the rights-of-way required to build the pipeline and negotiations are continuing with most of the remaining landowners. Eminent domain proceedings are in progress in several cases as well. Permitting issues have been encountered which could delay the start-up of this pipeline until the first quarter of 2003. MAP continues to vigorously pursue the permits and remaining rights-of-way required to complete this project.
The Garyville, Louisiana coker project is nearing completion and is anticipated to be at full production during the fourth quarter of this year. The total cost of this major improvement program is approximately $280 million.
In connection with the proposed Separation, described beginning on page 34, Standard & Poor's reported that they had assigned a BBB+ corporate credit rating, which is investment grade, to Marathon Oil Corporation with a stable outlook assuming the proposed Separation is completed.
The above discussion includes forward-looking statements with respect to the expected completion of the Centennial Pipeline system, the expected completion of the Cardinal Pipeline, the coker project and the Proposed Separation. Some factors which could impact the Centennial Pipeline system include delivery of
equipment and materials, contractor performance and unforeseen hazards such as weather conditions. Some factors which could impact the Cardinal Pipeline include obtaining the necessary permits and remaining rights-of-way, and completion of construction. Some factors which could impact the coker project include unforeseen hazards such as weather conditions, and unanticipated commissioning and start-up issues. Some factors that could affect the Proposed Separation include approval of a majority of the outstanding shares of each class of the current USX common stock, receipt of a favorable tax ruling from the IRS on the tax-free nature of the transaction, completion of necessary financing arrangements, receipt of necessary regulatory and third party consents, any materially adverse changes in business conditions for the energy and/or steel businesses or other unfavorable circumstances. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
MARKET PRICE AND DIVIDEND INFORMATION OF
MARATHON GROUP SHARES AND U. S. STEEL GROUP SHARES
The principal trading market for the Marathon Group Shares and the U. S. Steel Group Shares is the NYSE. Marathon Group Shares and U. S. Steel Group Shares are also listed on the Pacific Stock Exchange ("PSE") and the Chicago Stock Exchange ("CSE"). The following tables set forth, for the periods indicated, the high and low closing sale price per share on the NYSE, based on published financial sources.
U. S. Steel
Marathon Group Shares Group Shares
--------------------- --------------
High Low High Low
--------------------- ------- ------
1999:
First Quarter........................... $ 31.38 $ 19.63 $ 29.13 $22.25
Second Quarter.......................... 32.75 25.81 34.25 23.50
Third Quarter........................... 33.88 28.50 30.06 24.56
Fourth Quarter.......................... 30.63 23.63 33.00 21.75
2000:
First Quarter........................... $ 27.50 $ 20.69 $ 32.94 $20.63
Second Quarter.......................... 29.19 22.81 26.88 18.25
Third Quarter........................... 29.63 23.50 19.69 14.88
Fourth Quarter.......................... 30.38 25.25 18.31 12.69
2001:
First Quarter........................... $ 29.99 $ 25.85 $ 18.00 $14.00
Second Quarter.......................... 33.73 26.23 22.00 13.72
Third Quarter (through
September [ ]).......................
|
On November 29, 2000, the last full trading day prior to the announcement that our board of directors authorized an in-depth study of our targeted stock structure, the last reported sales prices of U. S. Steel Group Shares and Marathon Group Shares on the NYSE Composite Tape were $13.81 per share and $27.50 per share, respectively. On April 23, 2001, the last full trading day prior to the announcement that our board of directors authorized management to take steps necessary to implement the Separation, the last reported sales prices of U. S. Steel Group Shares and Marathon Group Shares on the NYSE Composite Tape were $15.89 per share and $31.37 per share, respectively. On July 30, 2001, the last full trading day prior to the announcement that our board of directors approved the Plan of Reorganization, the last reported sales of U. S. Steel Group Shares and Marathon Group Shares on the NYSE Composite Tape were $19.61 per share and $29.76 per share, respectively. On , 2001, the last full trading day prior to the printing of this proxy statement/prospectus, the last reported sales prices of U. S. Steel Group Shares and Marathon Group Shares on the NYSE Composite Tape were $ per share and $ per share, respectively. Stockholders are urged to obtain a current market quotation for the U. S. Steel Group Shares and the Marathon Group Shares.
In recent years, USX paid a quarterly dividend on the U. S. Steel Group Shares of $0.25 per share. On April 24, 2001 and July 31, 2001, the USX board of directors declared reduced dividends on U. S. Steel Group Shares of $0.10 per share.
For the periods indicated above through June 10, 2000, USX paid a quarterly dividend on the Marathon Group Shares of $0.21 per share. Since September 9, 2000, USX has paid a quarterly dividend on the Marathon Group Shares of $0.23 per share.
Current Dividend Policy. The USX board of directors declares and pays dividends on Marathon Group Shares and U. S. Steel Group Shares based on the financial condition and results of operations of the Marathon Group and the U. S. Steel Group, long-term earnings and cash flow capabilities of the Marathon Group and the U. S. Steel Group as well as the dividend policies of similar publicly traded oil and gas and steel companies.
In determining its dividend policy with respect to Marathon Group Shares and U. S. Steel Group Shares, the USX board of directors has relied on the separate financial statements of the Marathon Group and the U. S. Steel Group.
As set forth in the USX Restated Certificate of Incorporation, dividends on Marathon Group Shares and U. S. Steel Group Shares are limited to legally available funds of USX, which are determined on the basis of the entire corporation. Dividends on U. S. Steel Group Shares are further limited to the "Available Steel Dividend Amount," an amount similar to the amount that would be legally available for the payment of dividends on the U. S. Steel Group Shares under Delaware law if the U. S. Steel Group were a separate company.
Post-Separation Dividend Policy. Following the Separation, the declaration of dividends on New U. S. Steel Shares and Marathon Shares will be at the discretion of the boards of directors of United States Steel Corporation and Marathon Oil Corporation, respectively, and will be determined after consideration of various factors, including, without limitation, in each case the earnings and financial condition of United States Steel Corporation and Marathon Oil Corporation and their subsidiaries. The boards of directors of United States Steel Corporation and Marathon Oil Corporation will have the right to change the amount of dividends at any time. The terms of indebtedness entered into and to be entered into in connection with the Separation will limit the ability of United States Steel Corporation to pay dividends following the Separation. See "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
PROPOSAL ONE: THE SEPARATION
Structure of the Separation
Under the Plan of Reorganization, the Separation will be implemented by merging a newly formed corporate subsidiary of USX ("Merger Sub") with and into USX, with USX continuing as the surviving corporation (the "Separation Merger").
As a result of the Separation Merger:
. the business of the U. S. Steel Group will be owned and operated by United States Steel Corporation, which will be an independent, publicly traded company, wholly owned by the holders of the then outstanding U. S. Steel Group Shares;
. the business of the Marathon Group will be owned and operated by Marathon Oil Corporation, which will be an independent, publicly traded company, wholly owned by the holders of the then outstanding Marathon Group Shares;
. each issued and outstanding U. S. Steel Group Share will be converted into the right to receive one share of common stock, par value $1.00 per share, of United States Steel Corporation ("New U. S. Steel Shares");
. Marathon Group Shares will remain outstanding and will be the sole outstanding shares of USX common stock ("Marathon Shares"), and USX will change its name to Marathon Oil Corporation; and
. each outstanding share of 6.50% Cumulative Convertible Preferred Stock, no par value, of USX ("6.50% Preferred Stock") will be converted into the right to receive, in cash, $50.00 plus accrued but unpaid dividends thereon.
For information regarding the material differences between the New U. S. Steel Shares and the U. S. Steel Group Shares and between the Marathon Shares and the Marathon Group Shares, see "COMPARISON OF THE RIGHTS OF STOCKHOLDERS" beginning on page 125.
In connection with the Separation, certain indebtedness and other obligations of USX will be repaid or retired and United States Steel Corporation will incur indebtedness and other obligations and agree to repay certain indebtedness and other obligations of USX, such that the amount of indebtedness and other obligations for which United States Steel Corporation is responsible immediately following the Separation is $900 million less than the net amounts attributed to the U. S. Steel Group immediately prior to the Separation. Conversely, the amount of indebtedness and other obligations for which Marathon Oil Corporation will be responsible immediately following the Separation is $900 million more than the net amounts attributed to the Marathon Group immediately prior to the Separation. For a more detailed description of the financial arrangements affected by the Value Transfer, see "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
In connection with the Separation, each outstanding share of the 6.75% Convertible Quarterly Income Preferred Security of USX Capital Trust I, a subsidiary of USX, will be redeemed for a cash payment of $50.00 plus accrued but unpaid dividends thereon.
The Separation will become effective at such time after the satisfaction or waiver, to the extent permitted by law, of all of the conditions to the Separation set forth in the Plan of Reorganization, as determined by the USX board of directors, upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or such later time as specified in the certificate of merger (the "Separation Effective Time"). Completion of the Separation is subject to a number of conditions including the receipt of a private letter ruling from the IRS. For a description of such conditions, see "THE PLAN OF REORGANIZATION--Conditions to the Completion of the Separation" on page 66. Although we cannot predict the timing of receipt of such ruling or satisfaction of such other conditions, we presently expect to complete the Separation on or about December 31, 2001. The date upon which the Separation actually occurs is referred to in this proxy statement/prospectus as the "Separation Date."
Your board may terminate the Plan of Reorganization and determine not to proceed with the Separation at any time prior to its completion, even if it is approved by our stockholders and all of the other conditions to the Separation are satisfied. In the event that any of the conditions to the Separation are not satisfied, such as failure to receive the IRS private letter ruling, inability to complete the financing in amount, form and substance satisfactory to the board or failure to receive stockholder approval of the Separation, or if the board decides not to proceed with the Separation, USX will continue to exist in its present form with two classes of common stock outstanding representing the Marathon Group and the U. S. Steel Group.
Background of the Separation
In May 1991, stockholders of Old USX approved an amendment to the certificate of incorporation of Old USX to provide for the issuance of two classes of common stock--sometimes referred to as targeted stock-- intended to separately reflect the performance of our steel and energy businesses without diminishing the benefits of remaining a single corporation or restricting our future restructuring options. Our targeted stock structure was designed to give stockholders an opportunity to separately evaluate and invest in our steel and energy businesses while allowing Old USX to finance its extensive capital requirements on a consolidated basis.
Since that time, Old USX enjoyed lower capital and operating costs than it believes would have been incurred by the Marathon Group and the U. S. Steel Group had they been held by two separate corporations. Although our board of directors believes that the existing structure has benefitted both classes of our common stockholders over the past ten years, the board has, from time to time, reviewed our capital structure and the performance of our targeted stock and has considered alternative structures to enhance stockholder value for all of our stockholders. On November 30, 2000, we announced that our board of directors authorized management to retain financial, tax and legal advisors to perform an in-depth study of our targeted stock structure and all alternative structures which may be in the best interest of all of our stockholders.
In December 2000, we engaged CSFB and SSB as our financial advisors in connection with our review of the targeted stock structure and available alternative structures. Immediately thereafter, CSFB and SSB began their due diligence investigation of our business and capital structure and commenced their review of available alternatives. Since that time, your board has met five times with CSFB, SSB and other advisors to consider a number of matters impacting the Separation.
On February 27, 2001, at a meeting of the board of directors, CSFB and SSB reported to the board their preliminary findings with respect to their review of our targeted stock structure and its impact on stockholder value, as well as industry and business conditions facing the Marathon Group and the U. S. Steel Group. At that meeting, CSFB and SSB reviewed for the board potential restructuring alternatives available to USX. Such alternatives included a spin- off of Marathon or of United States Steel; a sale of Marathon or United States Steel to a third party for stock and/or cash; creation of a single class of USX stock for both Marathon and United States Steel; strategic acquisitions by Marathon or United States Steel; and a restructuring of Marathon. CSFB and SSB discussed the potential advantages and disadvantages of such alternatives. Management, together with legal counsel, then reviewed for the board issues to be considered in connection with any contemplated separation of the Marathon Group and the U. S. Steel Group, including tax implications and structural considerations.
On April 3, 2001, our board of directors again met with its financial, legal and tax advisors to discuss the proposed Separation. At this meeting, CSFB and SSB updated the board as to their preliminary advice that a separation of the Marathon Group and the U. S. Steel Group would establish two strong, independent companies and would create stockholder value for both classes of our stockholders, assuming an appropriate value transfer from the Marathon Group to the U. S. Steel Group. CSFB and SSB also advised the board that a value transfer of $900 million would establish United States Steel as a financially independent company. CSFB and SSB described for the board the proposed capital structure of Marathon and United States Steel following the Separation. Legal counsel then reviewed with the board alternative separation structures and described for the board the considerations in selecting a separation structure, including the tax implications of the Separation, required stockholder approvals and corporate governance considerations.
On April 23, 2001, at a meeting of our board of directors, its financial, legal and tax advisors, together with our management team, presented the board of directors with the conclusions drawn from their studies undertaken to review our targeted stock structure. Management presented the board with updated business plans for both businesses and revenue trends in the two businesses including, for the Marathon Group, an annual 3% production growth rate in exploration and production operations and a 1% growth in volume in refining and marketing operations and for U. S. Steel a continuation of the current weak commercial environment through mid-2002 with strengthening prices and volumes from mid-2002 through 2003. At that meeting, CSFB and SSB outlined business reasons for a separation, including increasing the ability of the Marathon Group and the U. S. Steel Group to focus on their core businesses, make critical investments and stock-based acquisitions and attract a broader range of research coverage and prospective investors, providing appropriate capital structures for each business, increasing financial flexibility and access to financial markets and aligning the liabilities of each business. At this meeting, CSFB and SSB confirmed that, in their experience, in transactions involving equity securities as a substantial part of the overall consideration, many parties, particularly international persons and corporations, strongly prefer a so-called "asset based" stock of an issuer that has a single class of common stock, as compared to a targeted stock. Among the reasons expressed by such parties are concerns about the impact of actual and contingent liabilities of the other business, concerns over whether one business is favored or disfavored by executive management and directors and the combination of different credit profiles into a single borrower. CSFB and SSB also confirmed that a value transfer of approximately $900 million would be appropriate to establish United States Steel as a strong, independent company. CSFB and SSB each advised the board that, based on the information available as of the date thereof, it would be prepared to render a fairness opinion to the board of directors to the effect that the financial effects of the transactions, taken as a whole, contemplated by the Plan of Reorganization are fair to the holders of Marathon Group Shares and U. S. Steel Group Shares from a financial point of view, subject to the approval of its investment banking fairness committee and subject to completion and review of the definitive documents to effect the Separation.
Legal counsel then reviewed with the board the proposed structure of the Separation. CSFB and SSB then briefly outlined the proposed refinancing of a portion of our indebtedness and presented a proposed timetable to complete the Separation. After full discussion, the board of directors unanimously determined to authorize management to proceed with the necessary steps to implement the Separation, subject to the later approval by the board of the Separation and review and approval by the board of the terms of the definitive documents to effect the Separation. We issued a press release on April 24, 2001 announcing that our board had authorized management to take such steps.
On May 29, 2001, the board of directors met with its legal, tax and financial advisors. Legal counsel reviewed for the board the structure of the Separation and the terms of the draft Plan of Reorganization, and discussed the preliminary proxy statement/prospectus and the anticipated IRS private letter ruling request. The terms of the draft Plan of Reorganization resulted from discussions among management and our legal, tax and financial advisors and were not arrived at through negotiations. The amount of the $900 million Value Transfer was determined by the board of directors, after review of all of the factors described under "THE SEPARATION--Factors Considered by the Board of Directors in Approving the Separation." After full discussion, the board of directors unanimously determined to approve the filing of the preliminary proxy statement/prospectus with the SEC and the private letter ruling request with the IRS.
On July 31, 2001, our board of directors again met with its legal, tax and financial advisors to review the final terms of the Separation and to consider and vote upon the Separation. Legal counsel reviewed for the board the structure of the Separation and the terms of the Plan of Reorganization. CSFB and SSB reviewed for the board their financial analysis of the Separation and delivered their opinions to the board that the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization, are fair, from a financial point of view, to the holders of Marathon Group Shares and the holders of U. S. Steel Group Shares. Management updated the board on the steel and energy businesses including the latest financial outlook for the two businesses. After full discussion, the board of directors unanimously approved the Separation, including the $900 million Value Transfer, adopted the Plan of Reorganization and determined to recommend that our stockholders vote to adopt the Plan of Reorganization and approve the transactions contemplated thereby.
Based upon all of the above, the board believes that the businesses of the Marathon Group and the U. S. Steel Group will improve, and stockholder value will therefore increase, if both businesses grow and are
positioned to participate in consolidation opportunities in their respective industries and markets. Over the past two years, the Marathon Group and the U. S. Steel Group have engaged in major growth transactions. Marathon acquired Pennaco Energy Inc. and acquired interests in producing properties from Shell U.K. Limited in exchange for its 37.5% interest in Sakhalin Energy Investment Company Ltd. MAP is participating in Centennial Pipeline, has acquired Midwest convenience stores from Welsh Inc. and formed a joint venture with Pilot Corporation to expand its nationwide participation in the travel center market. The U. S. Steel Group acquired an integrated steel facility in Kosice, Slovakia, tin mill operations of LTV Steel and the remaining 50% interest in Lorain Tubular Company, LLC. Each of the U. S. Steel Group and the Marathon Group has identified a need to participate in industry consolidation, but has found that our targeted stock structure has been an impediment to such participation, as many potential acquisition candidates are reluctant to accept a targeted stock as consideration.
In considering the Separation, the board was aware that the capital structure of each company and the availability and cost of borrowings would be a key factor for both companies. USX manages most financial activity on a centralized consolidated basis, including issuance, repayment and repurchase of debt. The financial impact of these centralized financial activities are then attributed to the two groups based upon their respective cash flows. Both businesses, but particularly the U. S. Steel Group, have benefited from the borrowing power of USX.
The board believes that it is imperative that both companies going forward be strong and competitive in their respective industries. This, in turn, requires that each have adequate access to the capital markets. The board and management consulted with its financial advisors and credit rating agencies concerning the likely credit ratings of the two companies going forward and their ability to raise necessary capital on appropriate terms and rates. Based upon these discussions, the board concluded that if the U. S. Steel Group were separated into an independent company with the debt level currently attributed to it, it may be unable to raise necessary capital at competitive rates to allow it to accomplish its business objectives. The board also concluded that if the Marathon Group were separated with more debt than is currently attributed to it, it would not adversely impact its ability to raise necessary capital at competitive rates to allow it to accomplish its business objectives. The board concluded, therefore, to adjust the amount of debt that will be assumed by each company from amounts attributed to the two groups immediately prior to the Separation.
The board and its advisors considered a range of possible adjustments and evaluated each in the context of impact on business plans, possible business conditions and credit ratings, following consultations with Moody's and Standard & Poor's. Based upon these factors, the board determined that a value transfer of $900 million is appropriate. To accomplish this, certain indebtedness and other obligations of USX will be repaid or retired and United States Steel Corporation will incur indebtedness and other obligations and agree to repay certain indebtedness and other obligations of USX, such that the amount of indebtedness and other obligations for which United States Steel Corporation is responsible immediately following the Separation is $900 million less than the net amounts attributed to the U. S. Steel Group immediately prior to the Separation. Conversely, the amount of indebtedness and other obligations for which Marathon Oil Corporation will be responsible immediately following the Separation will be $900 million more than the net amounts attributed to the Marathon Group immediately prior to the Separation. The board believes that the Value Transfer will help establish United States Steel Corporation as a strong, independent entity. After giving effect to this Value Transfer, United States Steel Corporation will have less debt and more stockholders' equity than U. S. Steel Group's current balance sheet and Marathon Oil Corporation will have more debt and less stockholders' equity than Marathon Group's current balance sheet.
Based upon our discussions with the two rating agencies, it was anticipated that the credit ratings of Marathon Oil Corporation would remain investment grade and United States Steel Corporation would have non-investment grade credit ratings following the Separation, which would be expected to reduce United States Steel's ability to access the credit markets, as compared to the access available to it currently as part of USX.
In considering the recommendation of the USX board to vote in favor of the Separation, you should be aware that directors and executive officers of USX have interests in the Separation that are in addition to or different
from the interests of stockholders generally, including disproportionate
ownership of Marathon Group Shares and U. S. Steel Group Shares, ownership of
options, stock appreciation rights and restricted shares, and contractual
rights to severance payments in connection with a change in control and certain
other contractual rights and payments. Additionally, certain directors will be
directors of both Marathon Oil Corporation and United States Steel Corporation
after the Separation and be entitled to receive directors' allowances and
attendance fees from both companies, in the amounts set forth on pages 86 and
113. The USX board of directors was aware of these interests and considered
them, among other things, in approving the Separation. See "THE SEPARATION--
Interest of Officers and Directors in the Separation" on page 56.
Reasons for the Separation
Our board of directors believes that the Separation is in the best interest of all of USX's stockholders and will create two strong, independent companies.
We believe that the Separation will:
. allow Marathon Oil Corporation and United States Steel Corporation to focus on their core businesses;
. allow Marathon Oil Corporation and United States Steel Corporation to make critical acquisitions and investments needed to grow their respective businesses, including removing impediments to participation in industry consolidation;
. provide each of Marathon Oil Corporation and United States Steel Corporation with an appropriate capital structure for its business and independent access to financial markets;
. align the liabilities and risks of each business with the company that owns such business; and
. facilitate broader equity research coverage of each company, thereby expanding the range of prospective investors in both the Marathon Shares and the New U. S. Steel Shares, as certain analysts focus on companies with businesses in one particular industry, such as steel, and do not cover companies that have a tracking stock structure.
Factors Considered by the Board of Directors in Approving the Separation
In recommending that USX stockholders approve the Separation and adopt the Plan of Reorganization, our board of directors considered a number of factors which they believe support their recommendation, including:
. the information and presentations regarding the historical and projected industry and business conditions facing each of Marathon and United States Steel.
. the historical results of operations, financial condition, assets, liabilities, and cash flows of each of Marathon and United States Steel.
. the internally generated business plans for Marathon and United States Steel prepared by our management and the assumptions underlying those business plans: Included in those business plans was a base case scenario and a down-side scenario, which assumed that business conditions would not improve due to a failure of the economy to regain momentum in the predicted time period.
. the likelihood that the Separation will result in United States Steel Corporation and Marathon Oil Corporation, as independent companies, being more focused on their respective businesses.
. the perceived impact of our targeted stock structure depressing the historical and projected trading prices of Marathon Group Shares and U. S. Steel Group Shares.
. the likelihood that the Separation would create stockholder value for all of our stockholders and the opportunities to create similar value for all of our stockholders under the current or alternative structures.
. the likelihood that the Separation would enable Marathon and United States Steel to participate in industry consolidation, thereby enhancing stockholder value.
. the opinions of CSFB and SSB that as of July 31, 2001, the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization, were fair, from a financial point of view, to the holders of the Marathon Group Shares and to the holders of the U. S. Steel Group Shares.
. the portion of the information set forth on pages 27 through 31 under the caption "RECENT DEVELOPMENTS--Outlook of United States Steel" and "--Outlook of Marathon", which was available on July 31, 2001, the date of the board meeting.
. the effect that the Value Transfer of $900 million would have on the financial condition of United States Steel Corporation and Marathon Oil Corporation.
. the opinion of American Appraisal Associates, Inc. (with respect to USX prior to the Separation and with respect to each of Marathon Oil Corporation and United States Steel Corporation after the Separation) that the present fair saleable value of its assets would exceed its probable liabilities; that its cash flows would be adequate to pay its debts as they come due; and that it has, and would have, adequate capital to conduct its business operations.
. The terms of the Plan of Reorganization which provide that our board of directors has the right to terminate the Plan of Reorganization at any time prior to completion of the Separation, whether before or after stockholder approval.
. The terms of the Plan of Reorganization which require the approval of the holders of a majority of the outstanding Marathon Group Shares and the holders of a majority of the outstanding U. S. Steel Group Shares, each voting as a separate class.
In its consideration of the proposed Separation, the board also considered the following potentially negative factors:
. The continuation of contingent liability of each of Marathon and United States Steel for certain liabilities of the other company following the Separation.
. The possibility that some or all of the desired benefits of the Separation may not be achieved.
. Loss of potential benefits flowing from consolidation of Marathon and United States Steel for federal income and certain other tax purposes.
. Loss of access by United States Steel to USX's borrowing capabilities and investment grade credit ratings.
. Risk of potential tax liabilities relating to the Separation under
Section 355(e) of the Code.
The board of directors also considered many of the other risks described under the caption "RISK FACTORS", beginning on page 14, as potentially negative factors in its evaluation of the proposed Separation. The board considered both the positive and the potentially negative factors described above as they relate to both the holders of Marathon Group Shares and the holders of U. S. Steel Group Shares. In particular, the effect of the $900 million Value Transfer was considered by the board to be a positive factor for the U. S. Steel Group and important to provide for two strong, financially independent companies. Although the Value Transfer might be viewed as negative by some Marathon Group stockholders because Marathon's allocated debt will be increased by $900 million, the board of directors believes that this potentially negative factor is outweighed by the potential advantages of the Separation, particularly in light of the fact that both groups are currently burdened by all of the debt of USX.
Our targeted stock structure was implemented to provide our stockholders with separate securities reflecting the performance of USX's steel and energy businesses, while retaining the benefits of a single corporation. While the interests of the holders of each targeted class of USX common stock may, under some circumstances, diverge or appear to diverge, under Delaware law, the USX board of directors must act with due care and in the best interest of all its common stockholders, including the holders of the shares of each class of USX common stock. The same standard applies to the discharge of the board's fiduciary duties in the context of matters having disparate impacts upon holders of Marathon Group Shares and U. S. Steel Group Shares. Accordingly, in approving the Separation, the board of directors considered the interests of all its stockholders as a whole and the separate interests of the holders of each class of its common stock.
The foregoing discussion of the information and factors considered by the board of directors includes all of the material factors considered by the board in reaching its conclusions and recommendations but is not meant to be exhaustive. In view of the variety of factors considered in reaching its determination, the board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching its conclusions and recommendations. In addition, individual members of the board of directors may have given different weights to different factors.
Recommendation of the USX Board of Directors
The USX board of directors has determined that the Separation is advisable and in the best interests of USX and the holders of Marathon Group Shares and U. S. Steel Group Shares. Our board has unanimously approved the Separation and approved and declared the advisability of the Plan of Reorganization, and recommends that holders of Marathon Group Shares and U. S. Steel Group Shares vote FOR adoption of the Plan of Reorganization.
In considering the recommendation of the USX board to vote in favor of the Separation, you should be aware that directors and executive officers of USX have interests in the Separation that are in addition to or different from the interests of stockholders generally, including disproportionate ownership of Marathon Group Shares and U. S. Steel Group Shares, ownership of options, stock appreciation rights and restricted shares, and contractual rights to severance payments in connection with a change in control and certain other contractual rights and payments. Additionally, certain directors will become directors of both Marathon Oil Corporation and United States Steel after the Separation and become entitled to receive directors' allowances and attendance fees from both companies, in the amounts set forth on pages 86 and 113. The USX board of directors was aware of these interests and considered them, among other things, in approving the Separation. See "THE SEPARATION--Interest of Officers and Directors in the Separation" on page 56.
Opinions of Financial Advisors
CSFB and SSB (the "Financial Advisors") have acted as USX's financial advisors in connection with the Separation. USX selected the Financial Advisors based on their experience, expertise, reputation and familiarity with USX's businesses. As the decision to separate the U. S. Steel Group and the Marathon Group into two independent companies was critical to the future of USX and its respective businesses, the USX board of directors determined that the analysis and advice of two internationally respected financial advisors was appropriate. Each of CSFB and SSB is an internationally recognized investment banking firm that is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions, complex strategic transactions, negotiated underwritings, private placements and other purposes.
USX requested that the Financial Advisors evaluate the fairness, from a financial point of view, of the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization to each of (1) the holders of Marathon Group Shares and (2) the holders of U. S. Steel Group Shares. On July 31, 2001, at a meeting of the USX Board of Directors held to consider the Separation, each of CSFB and SSB delivered to the USX Board of Directors a written opinion to the effect that, as of that date and based on and subject to the matters described therein, the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization are fair, from a financial point of view, to the holders of Marathon Group Shares and to the holders of U. S. Steel Group Shares. The opinions of the Financial Advisors do not address any other aspect of the transaction or any related transaction and do not constitute a recommendation to any stockholders with respect to any matters relating to the proposed transaction. While each of CSFB and SSB provided USX with independent guidance and advice during the course of their engagement, CSFB and SSB worked together and jointly evaluated the fairness, from a financial point of view, of the financial effects, taken as a whole, of the transactions contemplated by the Plan of Reorganization and issued separate but identical fairness opinions to the USX board of directors with respect to the Separation.
The full text of the written opinions of the Financial Advisors dated July 31, 2001 to the USX board of directors is attached hereto as Annexes B-1 and B- 2 and is incorporated into this proxy statement/prospectus by reference. Holders of Marathon Group Shares and holders of U. S. Steel Group Shares are urged to read the opinions carefully in their entirety. This summary of opinions of the Financial Advisors in this proxy statement/prospectus, including the summary of the procedures followed, assumptions made, matters considered and limitations on the review undertaken by the Financial Advisors, which describes the material provisions of the opinions, is qualified in its entirety by reference to the full text of each opinion.
In arriving at its opinion, each of the Financial Advisors reviewed, among
other things, (1) historical financial statements of USX, including the
separate financial statements for the Marathon Group and the U. S. Steel Group,
and certain other historical financial and operating data of USX, including the
Marathon Group and the U. S. Steel Group, (2) certain publicly available
information with respect to USX, including the Marathon Group and the U. S.
Steel Group, (3) certain projected financial data with respect to USX,
including the Marathon Group and the U. S. Steel Group, without giving effect
to the Separation, and with respect to United States Steel Corporation and
Marathon Oil Corporation, giving effect to the Separation, in each case as
prepared by the management of USX, including the management of the Marathon
Group and the management of the U. S. Steel Group (collectively, "Management"),
(4) reported prices and trading activity for the Marathon Group Shares and the
U. S. Steel Group Shares, (5) drafts of the Plan of Reorganization, the
Financial Matters Agreement and the Tax Sharing Agreement, (6) the preliminary
proxy materials filed by USX with the Securities and Exchange Commission in
connection with the Separation, (7) the letter dated July 2, 2001 from USX to
the Internal Revenue Service requesting a private letter ruling that the
Separation will qualify as a tax-free distribution under Section 355 of the
Internal Revenue Code and (8) the terms of the Marathon Group Shares and the U.
S. Steel Group Shares as set forth in USX's certificate of incorporation as
currently in effect.
In addition, the Financial Advisors held discussions with Management with respect to, among other things (1) the operations and financial condition of USX, including the Marathon Group and the U. S. Steel Group, and the plans of Management with respect to the business and affairs of USX, including the Marathon Group and the U. S. Steel Group, prior to the Separation, and of United States Steel Corporation and Marathon Oil Corporation after the Separation, (2) certain projected financial data with respect to USX, including the Marathon Group and the U. S. Steel Group, without giving effect to the Separation, and with respect to United States Steel Corporation and Marathon Oil Corporation, giving effect to the Separation, in each case as prepared by Management, (3) the benefits and detriments to USX of continued ownership of both the Marathon Group and the U. S. Steel Group, (4) the expected impact of the Separation and related transactions, including the $900 million reduction in the net amounts of indebtedness and other obligations attributed to the U. S. Steel Group and the corresponding increase on the Marathon Group immediately prior to the Separation (collectively referred to as the "Transactions") on the operations and the financial and strategic flexibility of United States Steel Corporation and Marathon Oil Corporation after the Separation, (5) certain terms of the proposed Plan of Reorganization and (6) the effect of the Separation on the business, results of operations and financial condition of each of United States Steel Corporation and Marathon Oil Corporation.
In addition, each of the Financial Advisors undertook such other studies, analyses and investigations as it deemed appropriate for the purpose of rendering its opinion.
In arriving at its opinion, each of the Financial Advisors has assumed and relied upon the accuracy and completeness of all of the financial and other information used by it without assuming any responsibility for independent verification of such information and has further relied upon the assurances of Management that they are not aware of any facts that would make such information inaccurate or misleading. Each of the Financial Advisors has assumed that the Transactions will be consummated in accordance with the terms of the Plan of Reorganization, without waiver, amendment or modification of any material term, condition or agreement set forth therein. Each of the Financial Advisors has also assumed that the Plan of Reorganization, the Financial Matters Agreement and the Tax Sharing Agreement, when executed, will conform to the drafts reviewed by the Financial Advisors in all respects material to the analyses. With respect to the projected financial data of USX, including the Marathon Group and the U. S. Steel Group, and of United States Steel Corporation and Marathon Oil Corporation after the Separation prepared by Management, upon the advice of Management and with Management's consent each of the Financial Advisors has assumed that such projections have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of Management as to the expected future prospects and financial performance of USX, including the Marathon Group and the U. S. Steel Group, and of United States Steel Corporation and Marathon Oil Corporation after the Separation, and each of the Financial Advisors has relied on such projections in rendering its opinion. With respect to the estimates
prepared by Management of the value of certain benefits and detriments of the Separation to each of United States Steel Corporation and Marathon Oil Corporation, with Management's consent, each of the Financial Advisors has relied on such estimates and assumed that they were reasonably prepared and reflected the best currently available judgments of Management as to such benefits and detriments.
The board of directors of USX may terminate the Plan of Reorganization and determine not to proceed with the Separation at any time prior to its completion. Although the board has not requested updated fairness opinions from our Financial Advisors, if a material event or development occurs that causes the board to question the appropriateness of the Separation, or the terms thereof, including the Value Transfer, the board will evaluate such information and determine if it is appropriate to seek additional or updated advice from our Financial Advisors.
***
The following paragraphs contain a summary of the material financial and comparative analyses performed by the Financial Advisors in connection with the preparation of the fairness opinions. The Financial Advisors believe that the analyses must be considered as a whole and that selecting portions of the analyses and of the factors considered, without considering all such factors and analyses, could create an incomplete view of the processes underlying the opinions. The Financial Advisors did not assign relative weights to any of the analyses in preparing the opinions. The preparation of a fairness opinion is a complex process and is not readily susceptible to summary description. In performing the analyses, the Financial Advisors made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of USX, the Marathon Group, the U. S. Steel Group, United States Steel Corporation and Marathon Oil Corporation. In addition, certain elements of the Separation are not susceptible to precise quantification and, in preparing the opinions, the Financial Advisors made judgments and estimates that they considered reasonable and appropriate under the circumstances. Any estimates incorporated in the analyses performed by the Financial Advisors are not necessarily indicative of actual past or future values or results, which may be significantly more or less favorable than suggested by such estimates or analyses. Because such estimates are inherently subject to uncertainty, none of the Financial Advisors, USX Management, Marathon, United States Steel or any other person assumes responsibility for their accuracy. In addition, analyses relating to the value of businesses do not purport to be appraisals and do not necessarily reflect the prices at which businesses may be sold in the future or at which their shares of capital stock may trade in the future.
The financial analyses summarized below include information presented in tabular format. In order to fully understand the following financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses of the Financial Advisors.
Marathon Group Stock Performance
The Financial Advisors reviewed data regarding the stock price performance of the Marathon Group Shares relative to a group of selected companies the Financial Advisors deemed comparable to the Marathon Group or relevant to their analyses (the "Marathon Peer Group") from April 20, 2001, two trading days prior to the April 24 public announcement that the USX board of directors had authorized management to pursue the Separation, to July 25, 2001. Each of the companies considered as comparable to the Marathon Group and included in the Marathon Peer Group, Conoco, Inc., Phillips Petroleum Company and Amerada Hess Corporation, was selected because of its similar business (integrated petroleum), size and capital structure, U.S. domicile and scope of international operations. However, none of the public companies in the Marathon Peer Group is identical to the
Marathon Group. The Financial Advisors noted that, during the period from April 20, 2001 to July 25, 2001, although the stock price per share of the Marathon Group declined from $29.70 to $28.85, the stock of the Marathon Group performed consistently with an index of the Marathon Peer Group, as illustrated below.
Marathon Group Marathon Peer Group
-------------- -------------------
April 20, 2001............................... 100.0% 100.0%
May 25, 2001................................. 109.0% 110.5%
June 29, 2001................................ 99.4% 100.0%
July 25, 2001................................ 97.1% 98.4%
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The Financial Advisors performed their analyses and rendered their opinions several weeks following the public announcement of the board's determination to proceed with the Separation, subject to final approval by the board of the Separation and review and approval by the board of definitive documents to effect the Separation, and the Financial Advisors deemed it relevant to consider the stock price per share of the Marathon Group relative to the Marathon Peer Group during the period from April 20, 2001 to July 25, 2001 in order to evaluate the potential market reaction to the Separation.
Separation Impact on the Marathon Group--Comparable Company Trading Analysis
The Financial Advisors reviewed data regarding the following ratios, for the Marathon Group compared to the same ratios of the Marathon Peer Group for the 20 trading days ended July 25, 2001, using estimated earnings for 2001 and 2002:
. adjusted market value (equity market value plus total debt, preferred stock and minority interest minus cash) to EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration expense) ratio,
. equity market value to after-tax cash flow (earnings plus depreciation and amortization) ratio and
. equity market value to net income.
None of the public companies used in the comparable company trading analysis is identical to the Marathon Group. Accordingly, an analysis of comparable companies is not entirely mathematical. Rather, the analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public trading value of the comparable companies.
For the 20 trading days ended July 25, 2001, the ratios obtained for the Marathon Group and the mean ratios obtained for the Marathon Peer Group were as follows:
Ratio Marathon Group Marathon Peer Group Mean ----- -------------- ------------------------ Adjusted Market Value/2001E EBITDAX... 3.2x 4.1x Adjusted Market Value/2002E EBITDAX... 3.7x 4.5x Market Value/2001E After-Tax Cash Flow................................. 3.0x 3.9x Market Value/2002E After-Tax Cash Flow................................. 3.4x 4.2x Market Value/2001E Net Income......... 6.0x 7.6x Market Value/2002E Net Income......... 8.8x 10.2x |
The Financial Advisors then selected ranges of multiples of estimated 2001 and 2002 EBITDAX, after-tax cash flow and net income derived from the Marathon Peer Group and applied these multiple ranges to the corresponding financial data of the Marathon Group. This analysis indicated an implied potential value benefit reference range of $1,200,000,000 to $2,700,000,000, which was derived by comparing the equity value implied by the above analysis to the equity value based on the historical 20-day public trading value of the Marathon Group. The Financial Advisors noted that this potential value benefit range did not reflect the change in value already realized in the market price of the Marathon Group Shares.
Separation Impact on the Marathon Group--Precedent Premium Analysis
The Financial Advisors analyzed the implied transaction premiums paid in the
following selected merger and acquisition transactions involving major
integrated petroleum companies announced since 1998 (acquiror/target):
Chevron/Texaco (October 2000), TOTAL Fina/Elf Aquitaine (July 1999), Repsol/YPF
(April 1999), BP Amoco/Atlantic Richfield (April 1999), Exxon/Mobil (December
1998), TOTAL/PetroFina (December 1998) and British Petroleum/Amoco (August
1998). Each of the transactions listed for this analysis was selected because
it was a corporate transaction involving major integrated petroleum companies
and was announced within a three-year period prior to the analysis. None of the
precedent transactions used in the precedent premiums analysis is identical to
the Separation. Accordingly, an analysis of precedent transactions is not
entirely mathematical. Rather, the analysis involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies involved in the precedent transactions and other factors that
could affect the premiums paid in the precedent transactions. The Financial
Advisors then selected a range of premiums derived from these transactions
based on the closing stock prices of the target company one day and thirty days
prior to the public announcement of the transaction and applied this premium
range to:
. the average equity market value of the Marathon Group for the 20 trading days ended July 25, 2001 and
. an adjusted equity market value of the Marathon Group, computed by adding the mean implied potential benefit range from the Comparable Companies Trading Analysis to the average equity market value of the Marathon Group for the 20 trading days ended July 25, 2001.
In applying the premium range to the adjusted equity market value of the Marathon Group, the Financial Advisors discounted the resulting implied equity value by 10% per year over a one-year and a two-year period. This analysis indicated an implied potential value benefit reference range of $1,600,000,000 to $3,000,000,000, which was derived by comparing the equity value implied by the above analysis to the equity value based on the historical 20-day public trading value of the Marathon Group. The Financial Advisors noted that this potential value benefit range did not reflect the change in value already realized in the market price of the Marathon Group Shares. The Financial Advisors noted that the Separation may provide an increased opportunity for Marathon and its stockholders to participate in industry consolidation.
Separation Impact on the Marathon Group--Discounted Cash Flow Analysis
Using discounted cash flow analysis, the Financial Advisors calculated a range of value of the Marathon Group based on the implied total net present value of the estimated future unlevered free cash flows (EBITDAX minus unlevered cash taxes minus capital expenditures and changes in working capital) that the Marathon Group could produce. The Financial Advisors performed the analysis based on two scenarios, a pre-Separation case and a post-Separation case. The pre-Separation case was based on internal estimates provided by and discussed with the Marathon Group's management to reflect the reasonable long- term growth prospect for the Marathon Group under the existing USX corporate structure. The pre-Separation case reflected a 3% annual production growth rate in the Marathon Group's exploration and production business. In developing the post-Separation case, the Financial Advisors used a 6% annual production growth rate in the Marathon Group's exploration and production business, a growth rate consistent with the publicly available production growth rate targets of the Marathon Group's peers. The Financial Advisors also increased capital spending to fund this increased production growth rate. The post-Separation case also assumed incremental debt for the Value Transfer and reflected the financial effects of the arrangements contained in the Separation Agreements. The Financial Advisors determined an implied total net present value reference range for each case based on the sum of the following:
. the discounted value (using discount rates ranging from 9.0% to 10.0% for the pre-Separation case and discount rates ranging from 8.5% to 9.5% for the post-Separation case) of the estimated free cash flows of the Marathon Group for the 10 year period of 2001 through 2010 and
. the net present value of the estimated free cash flows of the Marathon Group after 2010 (using a terminal value multiple range of 3.5x to 4.5x TV/EBITDAX for both the pre-Separation and the post-Separation case).
The difference in the discount rates applied in the pre- and post-Separation cases reflected the Financial Advisors' assessment of potential changes in the credit rating, cost of debt and capitalization at the Marathon Group before and after the Separation. This analysis resulted in an implied potential value benefit reference range of $700,000,000 to $1,200,000,000, which was derived by comparing the equity value produced by the pre-Separation case to the equity value produced by the post-Separation case of the Marathon Group.
Separation Impact on the Marathon Group--Peer Credit Statistics Analysis
The Financial Advisors considered the capitalization of the Marathon Group pro forma for the Separation and compared it to its peers. The Financial Advisors reviewed data regarding the debt to book capitalization ratio and the debt to LTM (last twelve months) EBITDAX ratio of the Marathon Group and its peers. Pro forma for the Separation and inclusive of the Value Transfer, the Marathon Group's debt to book capitalization ratio was 41% and debt to LTM EBITDAX ratio was 1.2x. The Financial Advisors noted that these ratios were consistent with those of the Marathon Group's peers.
U. S. Steel Group Stock Performance
The Financial Advisors reviewed data regarding the stock price performance of the U. S. Steel Group Shares relative to a group of selected companies the Financial Advisors deemed comparable to the U. S. Steel Group or relevant to their analyses (the "U. S. Steel Peer Group") from April 20, 2001 to July 25, 2001. Each of the companies in the U. S. Steel Peer Group, AK Steel Corporation, Bethlehem Steel Corporation, Dofasco Inc. and National Steel Corporation, was selected on the basis that it was in a similar business and similar location (North American integrated steel producers) as the U. S. Steel Group. None of the public companies in the U. S. Steel Peer Group is identical to the U. S. Steel Group. The Financial Advisors noted that, during that period, the U. S. Steel Group had outperformed the U. S. Steel Peer Group by approximately 23 percentage points. The Financial Advisors performed their analyses and rendered their opinions several weeks following the public announcement of the board's determination to proceed with the Separation, subject to final approval by the board of the Separation and review and approval by the board of definitive documents to effect the Separation, and the Financial Advisors deemed it relevant to consider the stock price per share of the U. S. Steel Group relative to the U. S. Steel Peer Group during the period from April 20, 2001 to July 25, 2001.
Separation Impact on the U. S. Steel Group--Comparable Company Trading Analysis
The Financial Advisors reviewed data regarding the following ratios, in each case for the U. S. Steel Group compared to the same ratios of the U. S. Steel Peer Group for the 20 trading days ended July 25, 2001, using estimated earnings for 2001and 2002:
. the adjusted market value to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio and
. the adjusted market value to EBIT (earnings before interest and taxes) ratio.
None of the public companies used in the comparable company trading analysis is identical to the U. S. Steel Group. Accordingly, an analysis of comparable companies is not entirely mathematical. Rather, the analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public trading value of the comparable companies.
For the 20 trading days ended July 25, 2001, the ratios obtained for the U. S. Steel Group and the mean ratios obtained for the U. S. Steel Peer Group were as follows:
Ratio U. S. Steel Group U. S. Steel Peer Group Mean
----- ----------------- ---------------------------
Adjusted Market Value/2001E
EBITDA......................... 22.8x 6.5x
Adjusted Market Value/2002E
EBITDA......................... 4.5x 4.0x
Adjusted Market Value/2001E
EBIT........................... Not Meaningful 18.1x
--------------
Adjusted Market Value/2002E
EBIT........................... 9.8x 9.0x
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The Financial Advisors then selected a range of multiples of estimated 2002 EBITDA derived from the U. S. Steel Peer Group and applied this multiple range to the corresponding financial data of the U. S. Steel
Group. This analysis indicated an implied potential value (detriment)/benefit reference range of ($300,000,000) to $300,000,000, which was derived by comparing the equity value implied by the above analysis to the equity value based on the historical 20-day public trading value of the U. S. Steel Group. The Financial Advisors noted that this potential value benefit range did not reflect the change in value already realized in the market price of the U. S. Steel Group Shares.
Separation Impact on the U. S. Steel Group--Precedent Transaction Analysis
The Financial Advisors analyzed the implied transaction multiples paid in the following selected merger and acquisition transactions involving major steel companies announced since 1995 (acquiror/target): Usinor/Aceralia (February 2001), Usinor/Arbed (February 2001), USX/steel assets of VSZ (March 2000), British Steel/Hoogevens (June 1999), Usinor/Cockerill (October 1998), Sambre Usinor/CST (May 1998), Ispat International/Inland Steel (March 1998), Bethlehem Steel/Lukens Steel (December 1997), Grupo Amazonia/Sidor (December 1997), Thyssen/Krupp (November 1997), Arbed/Aceralia (July 1997), Renco Group/WCI Steel (October 1996), Acesita/CST (June 1996), Watermill Ventures/Gulf States Steel (April 1995). Each of the precedent transactions was selected because it involved the acquisition of a global integrated or mini- mill steel producer. None of the precedent transactions is identical to the Separation. Accordingly, an analysis of precedent transactions is not entirely mathematical. Rather, the analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies involved in the precedent transactions and other factors that could affect the multiples paid in the precedent transactions.
The Financial Advisors compared adjusted market values in the selected transactions as multiples of EBITDA and EBIT for the twelve-month period preceding the announcement of the transaction. Adjusted market values were calculated by multiplying the announced transaction price per share for the relevant transaction by the diluted number of target company shares outstanding, after taking into account option proceeds, plus total debt, preferred stock and minority interest, minus cash.
The Financial Advisors then selected ranges of multiples of LTM EBITDA and EBIT derived from these transactions and applied these multiple ranges to:
. the LTM EBITDA of the U. S. Steel Group, adjusted to include an annualized twelve months of EBITDA of the U. S. Steel Group's Kosice business segment, acquired in November 2000 and
. the average annual EBITDA and EBIT of the U. S. Steel Group for the calendar years 1994 to 2000, adjusted to include an annualized twelve months of EBITDA and EBIT, respectively, of the U. S. Steel Group's Kosice business segment.
This analysis indicated an implied potential value benefit reference range of $700,000,000 to $1,400,000,000, which was derived by comparing the equity value implied by the above analysis to the equity value based on the historical 20-day public trading value of the U. S. Steel Group. The Financial Advisors noted that this potential value benefit range did not reflect the change in value already realized in the market price of the U. S. Steel Group Shares.
Separation Impact on the U. S. Steel Group--Discounted Cash Flow Analysis
Using a discounted cash flow analysis, the Financial Advisors calculated a range of value of the U. S. Steel Group based on the implied total net present value of the estimated future unlevered free cash flows that the U. S. Steel Group could produce. The Financial Advisors performed the analysis based on two scenarios, a pre-Separation case and a post-Separation case. The pre-Separation case and the post-Separation case were based on identical internal estimates provided by and discussed with the U. S. Steel Group's Management and reflecting the reasonable long-term prospect for the U. S. Steel Group under the existing USX corporate
structure and for United States Steel Corporation assuming completion of the Separation. The post-Separation case also assumed a reduction of debt from the Value Transfer and reflected the financial effects of the arrangements contained in the Separation Agreements. The Financial Advisors noted that post- Separation the U. S. Steel Group's weighted average cost of capital may increase by approximately 2.5 percentage points. The Financial Advisors determined an implied total net present value reference range for each case based on the sum of the following:
. the discounted value (using discount rates ranging from 7.25% to 7.75% for the pre-Separation case and discount rates ranging from 9.50% to 10.50% for the post-Separation case) of the estimated free cash flows of the U. S. Steel Group for the 10 year period of 2001 through 2010 and
. the net present value of the estimated free cash flows of the U. S. Steel Group after 2010 (using a terminal value multiple range of 4.0x to 5.0x TV/EBITDA for both the pre-Separation case and the post-Separation case).
The difference in the discount rates applied in the pre- and post-Separation cases reflected the Financial Advisors' assessment of potential changes in the credit rating, cost of debt and capitalization at the U. S. Steel Group before and after the Separation. This analysis resulted in an implied potential value benefit reference range of $400,000,000 to $450,000,000, which was derived by comparing the equity value produced by the pre-Separation case to the equity value produced by the post-Separation case of the U. S. Steel Group.
Separation Impact on the U. S. Steel Group- Peer Credit Statistics Analysis
The Financial Advisors considered the capitalization of the U. S. Steel Group pro forma for the Separation and compared it to its peers. The Financial Advisors reviewed data regarding the debt to book capitalization ratio and the debt to 2002 estimated EBITDA ratio of the U. S. Steel Group and its peers. Pro forma for the Separation and inclusive of the Value Transfer, the U. S. Steel Group's debt to book capitalization ratio was 37.3% and debt to 2002 estimated EBITDA ratio was 2.4x. The Financial Advisors noted that these ratios were lower than with those of the U. S. Steel Group's peers.
***
USX has agreed to pay a fee to each of the Financial Advisors for its services in connection with the Transactions. USX has agreed to pay $8,000,000 to CSFB, $2,000,000 of which is payable upon consummation of the Separation and $2,000,000 of which is payable upon approval of the Separation by the stockholders of USX. Also, USX has agreed to pay $8,000,000 to SSB, $2,000,000 of which is payable upon consummation of the Separation and $2,000,000 of which is payable upon approval of the Separation by the stockholders of USX. USX has further agreed to reimburse each of the Financial Advisors for its reasonable out-of-pocket expenses, including fees and expenses of legal counsel and any other advisor retained by each of the Financial Advisors, and to indemnify each of the Financial Advisors and related parties against liabilities, including liabilities under the U.S. federal securities law, arising out of its engagement.
Each of the Financial Advisors and its affiliates has performed and may perform other investment banking financial advisory services for USX, Marathon Oil Corporation, United States Steel Corporation and their respective affiliates, including in connection with the offering by United States Steel of the Senior Notes. For services performed in the past two years that are unrelated to its fairness opinion and advising on the Separation, CSFB has been or will be paid approximately $5,300,000 and SSB has been or will be paid approximately $1,400,000. In the ordinary course of business, each of the Financial Advisors and its affiliates may actively trade the debt and equity securities of the Marathon Group and the U. S. Steel Group for its own accounts and for the accounts of customers, and, accordingly, may at any time hold long or short positions in those securities.
Financing Arrangements Relating to the Separation
Current USX Financial Arrangements
USX manages most of its 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 that relate 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. 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 Marathon Group Shares or the U. S. Steel Group Shares are specifically attributed to and reflected in their entirety in the financial statements of the group to which they relate.
These are attributions for accounting purposes and do not reflect legal ownership of cash or legal obligation to pay and discharge such obligations. USX is the issuer of the 6.50% Preferred Stock, although it is attributed solely to the U. S. Steel Group, and subsidiaries of USX are the issuers of other Preferred Obligations. Subject to a limited number of exceptions, USX is the legal obligor of long-term debt and other financial instruments, including many--such as leases--that are not reflected as liabilities on the consolidated or group balance sheets.
After the Separation, United States Steel Corporation will own and operate the business of the U. S. Steel Group and United States Steel Corporation or its subsidiaries will incur indebtedness and other obligations in an amount approximately equal to all of the liabilities of or attributed to the U. S. Steel Group immediately prior to the Separation, both absolute and contingent, less the amount of the $900 million Value Transfer. Upon consummation of the Separation, the name of USX Corporation will be changed to Marathon Oil Corporation, and Marathon Oil Corporation and its subsidiary Marathon Oil Company will own and operate the business of the Marathon Group and will remain responsible for all of the liabilities of or attributed to the Marathon Group immediately prior to the Separation, both absolute and contingent, plus $900 million.
USX is presently the legal obligor for most of the obligations attributed to both groups, and, therefore, Marathon Oil Corporation will remain legally obligated for these obligations after the Separation. Accordingly, to effect the Value Transfer, United States Steel will incur new indebtedness in an amount equal to the net amount of indebtedness and other obligations attributed to the U.S. Steel Group immediately prior to the Separation, less $900 million, and the proceeds of such indebtedness will be used to repay a portion of USX's indebtedness. The indebtedness and other obligations to be incurred by United States Steel in connection with the Separation are referred to herein as the "Financing." In addition to the Financing necessary to effect the Value Transfer, the indenture governing the Senior Notes requires United States Steel to have at least $400 million of availability through cash and undrawn credit facilities at the time of the Separation.
After giving effect to the Financing required to complete the Separation, and assuming the Separation had occurred on June 30, 2001, United States Steel Corporation and its subsidiaries
. would be the direct obligor of the $325 million USSK Loan Facility;
. would assume $569 million of debt and capital leases of USX and $133 million of certain guarantee and lease obligations (which guarantee and operating lease obligations are not reflected in the financial statements of Marathon Oil Corporation);
. would incur new indebtedness in the amount of approximately $897 million, including the Senior Notes, and would pay $868 million of the net proceeds thereof to Marathon Oil Corporation to be used to repay a portion of the indebtedness attributed to United States Steel by USX prior to the Separation.
In addition, United States Steel expects to enter into new credit facilities, including a secured accounts receivable facility and a secured inventory facility. Undrawn amounts under these facilities will provide liquidity to United States Steel following the Separation.
Assuming the Separation had occurred on June 30, 2001, and that United States Steel had completed all the financing required to complete the Separation, United States Steel's sources and uses would have been:
(Dollars in
Sources: millions)
-------- -----------
Assumed industrial revenue
bonds...................... $ 479
Assumed capital leases...... 90
USSK Loan Facility.......... 325
Senior Notes(/1/)........... 530
Additional financing(/2/)... 367
Value Transfer.............. 900
Invested cash(/3/).......... 189
------
Total Sources............... $2,880
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(Dollars in
Uses: millions)
----- -----------
Debt attributed to United
States Steel.............. $ 2,432
Preferred securities of
subsidiaries.............. 249
6.5% Preferred Stock....... 121
Separation costs........... 29
Other...................... 49
-------
Total Uses................. $ 2,880
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(1) On July 27 and September 11, 2001, United States Steel completed private placements in the aggregate of $535 million principal amount (reduced by a $5 million discount) of 10 3/4% Senior Notes due August 1, 2008.
(2) We currently anticipate that United States Steel will satisfy the need for the $367 million in additional financing using the preliminary tax settlement from Marathon, which is expected to be at least $300 million and will be received on or before the Separation Effective Time, and a combination of financings which may include additional senior notes, lease financings and new preferred or other security offerings (including an exchange of existing securities for new securities). In addition, United States Steel expects to enter into new credit facilities, including a secured accounts receivable facility and a secured inventory facility. Undrawn amounts under these facilities are expected to be at least $300 million in order to provide necessary liquidity. The amount of additional financing at Separation may vary as a result of a number of factors including the operating performance of United States Steel, its working capital position and the amount of the tax settlement with Marathon.
(3) Invested cash represents amounts attributed to United States Steel by USX. This cash will be retained by Marathon and be used to reduce debt attributed to United States Steel.
Following the Separation, the annual weighted average interest rate of these obligations is estimated to be approximately 8.25%. A one-eighth ( 1/8) percent change in that rate is expected to have an annual impact of about $2 million of interest expense. Completion of this Financing in amount, form and substance satisfactory to our board of directors is a condition to completion of the Separation.
Obligations for Which United States Steel Corporation or Its Subsidiaries Will Be the Direct Obligor
The following obligations of the U. S. Steel Group will continue as obligations of United States Steel Corporation or its subsidiaries following the Separation, and United States Steel or its subsidiaries will continue to be the obligor:
Senior Notes. On July 27 and September 11, 2001, United States Steel completed the sale of an aggregate of $535 million principal amount of Senior Notes. The Senior Notes, which mature on August 1, 2008 and pay interest at an annual rate of 10.75%, represent an unsecured senior obligation of United States Steel. Interest on the Senior Notes is payable in cash on a semiannual basis, beginning on February 1, 2002. The Senior Notes rank equally in right of payment with all existing and future unsecured indebtedness of United States Steel and will rank senior in right of payment to all of its existing and future subordinated indebtedness. USX has initially guaranteed the Senior Notes, however USX will be released from the guarantee if the Separation occurs on or before December 31, 2002.
The indenture governing the Senior Notes (the "Senior Note Indenture") contains covenants which, among other things, limit or prevent United States Steel and its subsidiaries from collateralizing assets to secure indebtedness, borrowing additional funds, issuing or selling capital stock of its subsidiaries, making certain payments and distributions, paying dividends, transferring or selling assets and engaging in certain transactions, including mergers or sales of substantially all of its assets. After the Separation, if the Senior Notes receive and maintain an investment grade rating from both Standard & Poor's and Moody's, United States Steel will no
longer be subject to certain of the covenants referred to above. The Senior Note Indenture also contains several conditions to the completion of the Separation, including, among others, a requirement that immediately following the Separation, United States Steel shall have at least $400 million available in undrawn credit facilities and cash, of which at least $300 million shall be available under facilities with terms extending at least three years after the date such facilities are put in place.
If the board of directors of USX decides not to proceed with the Separation or the Separation does not occur on or before December 31, 2002, the Senior Notes may be redeemed in whole or part at 101% of the principal amount plus accrued but unpaid interest. Up to 35% of the aggregate principal amount of the Senior Notes may be redeemed at any time prior to August 1, 2004, at a price of 110.75% of the principal amount plus accrued interest with the proceeds of public equity offerings.
USSK Loan Facility. On November 24, 2000, USX acquired USSK which has a loan facility with a group of financial institutions aggregating $325 million. The facility, which is non-recourse to USX, bears interest at a fixed rate of 8.5% per year. The loan is subject to annual repayments of $20 million beginning in 2003, with the balance due in 2010. Additional mandatory prepayments of the loan may be required based upon a cash flow formula or a change in control of USX. USSK also has a short-term $50 million credit facility that expires in November 2001. The facility, which is non-recourse to USX, bears interest at prevailing short-term market rates plus 1%. USSK is obligated to pay a .25% commitment fee on undrawn amounts. At June 30, 2001, there were no borrowings against this facility.
Operating Lease Obligations. United States Steel is the lessee under several equipment leases and office building leases which, for accounting purposes, are treated as operating leases. Total future lease payments under these leases as of June 30, 2001 were approximately $250 million, with varying maturities.
USX Obligations to Be Assumed by United States Steel Corporation
The following obligations of USX will continue as direct obligations of Marathon Oil Corporation, although United States Steel Corporation will agree in the Financial Matters Agreement to assume and pay all liabilities for these obligations following the Separation:
Industrial Revenue Bonds. As of June 30, 2001, USX had outstanding $479 million of obligations under industrial revenue bonds related to environmental projects for current and former U. S. Steel Group facilities, $9 million of which will be repaid on or prior to December 31, 2001. Pursuant to the Financial Matters Agreement, United States Steel Corporation will assume all obligations under these instruments. Only $1.8 million of the industrial revenue bonds mature from 2002 to 2012. Pursuant to the Financial Matters Agreement, United States Steel must provide for the discharge of Marathon Oil Corporation from the remaining liability under the assumed industrial revenue bonds on or before the tenth anniversary of the Separation. Such discharge may be accomplished by refinancing, paying to Marathon Oil Corporation the then remaining principal amount of the obligations or a combination of the foregoing.
Fairfield Caster Lease. United States Steel Corporation is the lessee of a slab caster at the Fairfield Works facility in Alabama with a term through 2012. This lease is treated as a capitalized lease and, as of June 30, 2001, the amount of such obligation was $84 million. USX is the obligor under this lease. Under the Financial Matters Agreement, United States Steel will assume and discharge all obligations under this lease. This lease is an amortizing financing with a final maturity of 2012, subject to additional extensions.
Operating Lease Obligations and Guarantees. In connection with past sales of various plants and operations, United States Steel assigned and the purchasers assumed certain leases of major equipment used in the divested plants and operations. In the event of a default by any of the purchasers, United States Steel remains contingently liable for payments under these leases. In addition, United States Steel is assuming certain other obligations and guarantees of USX related to the business of United States Steel. As of June 30, 2001, the total exposure for all of these matters totaled $133 million.
New Financing Arrangements of United States Steel Corporation
United States Steel Corporation will incur additional indebtedness in connection with the Separation. Assuming the Separation occurred on June 30, 2001, United States Steel Corporation would have to incur new indebtedness in the amount of $367 million (in addition to the indebtedness relating to the Senior Notes) and enter into new agreements to provide the liquidity required by the Senior Note Indenture. Such financings may include a combination of additional senior notes, lease financings and new preferred or other security offerings (including an exchange of existing securities for new securities) with terms and conditions consistent with United States Steel Corporation's credit rating. Approximately $868 million of the proceeds from these financings and from the Senior Notes financing would have been paid to Marathon Oil Corporation upon the Separation, assuming the Separation had occurred on June 30, 2001. It is also expected that United States Steel Corporation will enter into new credit facilities, including a secured accounts receivable facility and a secured inventory facility. Undrawn amounts under these facilities are expected to be at least $300 million in order to provide necessary liquidity. The Separation is conditioned upon the successful implementation of this financing.
USX Obligations to Be Repaid or Retired
6.50% Preferred Stock Obligations. USX is the issuer of 2,404,487 shares of the 6.50% Preferred Stock, which is presently convertible into U. S. Steel Group Shares at a price of $46.125 per share and is attributed entirely to the U. S. Steel Group. At the Separation Effective Time, each issued and outstanding share of 6.50% Preferred Stock will be converted in the Separation Merger into the right to receive, in cash, $50.00 plus accrued but unpaid dividends thereon, or an aggregate of $120,224,350 (assuming there are no unpaid dividends).
Redeemable Convertible Stock of a Subsidiary Trust. USX Capital Trust I, a Delaware business trust and a subsidiary of USX, has outstanding 3,937,163 shares of 6.75% Convertible Quarterly Income Preferred Securities(TM) (the "Trust Preferred"). The Trust Preferred has an initial liquidation amount of $50.00 per share and is convertible into U. S. Steel Group Shares at a price of $46.25 per share. In connection with the Separation, each issued and outstanding share of Trust Preferred will be redeemed for $50.00, in cash, plus accrued but unpaid dividends thereon, or an aggregate of $196,858,150 (assuming there are no unpaid dividends).
General Terms of the Financial Matters Agreement
The Financial Matters Agreement governs the assumption by United States Steel Corporation of the industrial revenue bonds and other financial obligations of USX specified above. The agreement provides that United States Steel Corporation will assume and discharge all principal, interest and other duties of USX under these assumed obligations, including any amounts due upon any defaults or accelerations of any of the obligations, other than defaults or accelerations caused by any action of Marathon Oil Corporation. The agreement also provides that on or before the tenth anniversary of the Separation, United States Steel Corporation will provide for the discharge of Marathon Oil Corporation from any remaining liability under any of the assumed industrial revenue bonds. Such discharge may be accomplished by refinancing, paying to Marathon Oil Corporation the then remaining principal amount of the obligations or a combination of the foregoing.
The Financial Matters Agreement prohibits Marathon Oil Corporation from taking any action that would create a default under the assumed obligations or otherwise accelerate the payment obligations thereunder. The agreement also obligates Marathon Oil Corporation to provide any letters of credit required under any of these obligations provided that United States Steel Corporation shall reimburse Marathon Oil Corporation in advance for the costs of such letters of credit and shall indemnify and hold Marathon Oil Corporation harmless against any draws under the letters of credit.
The Financial Matters Agreement provides for a general unsecured obligation of United States Steel Corporation to Marathon Oil Corporation and ranks equal to accounts payable and other obligations. The Financial Matters Agreement does not contain any financial covenants and United States Steel Corporation and Marathon Oil Corporation will remain free to incur additional debt, grant mortgages or security interests in its property and sell or transfer assets without the consent of Marathon Oil Corporation. The Financial Matters Agreement also provides that Marathon Oil Corporation will indemnify United States Steel Corporation against any claims arising out of USX financings not assumed by United States Steel Corporation.
The Financial Matters Agreement is a contract between United States Steel Corporation and Marathon Oil Corporation. It does not grant any rights to the holders of the industrial revenue bonds or of any other obligation. Among other things, United States Steel Corporation and Marathon Oil Corporation may amend or modify the Financial Matters Agreement upon mutual agreement, and payments by United States Steel Corporation to Marathon Oil Corporation do not create an obligation on the part of Marathon Oil Corporation to redeem or repurchase any of these instruments.
Financing Arrangements of USX to Be Continued by Marathon Oil Corporation
Revolving Credit Facility. In November 2000, USX entered into a $1,354 million 5-year revolving credit agreement, expiring in November 2005, with a group of financial institutions. Interest on the facility is based on defined short-term market rates. During the term of the credit agreement, USX is obligated to pay a variable facility fee on total commitments, which at June 30, 2001 was 0.125%. On June 30, 2001, there were no borrowings against this facility. This facility will remain outstanding as an obligation of Marathon Oil Corporation following the Separation. USX also has a similar $451 million short-term credit facility expiring on November 29, 2001 with the same financial institutions as the 5-year revolving credit agreement. On June 30, 2001, there were no borrowings under this facility. We expect that we will renew this facility in 2001.
USX has from time to time issued commercial paper which it has classified as long-term debt because it is supported by the unused and available credit on the $1,354 million facility. On June 30, 2001, no commercial paper was outstanding. We anticipate that Marathon Oil Corporation may issue commercial paper in the future under similar circumstances.
Long and Short-Term USX Obligations to Be Continued. Marathon Oil Corporation will continue to be the obligor on the obligations of USX. The principal components of these obligations are:
Amount
Interest Rates Maturity (in millions) as of
Obligations % Range June 30, 2001
----------- -------------- --------- -------------------
Obligations relating to
Industrial Revenue Bonds (1)... 3.30 to 6.875% 2009-2033 $ 508
Fairfield Caster Lease(2)....... 8.04% 2012 $ 84
Bank Term Loan.................. 6.57% 2006 $ 29
Guaranteed Notes and Loans of
Subsidiaries................... 7.00 to 9.05% 2002-2006 $ 320
Preferred Obligations of a
Subsidiary..................... 8.75% 2044 $ 250
Operating Leases and
Guarantees..................... 5.00 to 11.75% 2002-2017 $ 747
Other long and short term
obligations.................... 6.65 to 9.80% 2001-2023 $2,505
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Treatment of Employee Stock Options in the Separation
In the Separation, all outstanding and unexercised options to purchase U. S. Steel Group Shares will be converted into options to purchase New U. S. Steel Shares, subject to the same terms and conditions as the options to purchase U. S. Steel Group Shares immediately before the Separation Effective Time. All outstanding and unexercised options to purchase Marathon Group Shares will remain outstanding and represent an option to purchase Marathon Shares, subject to the same terms and conditions as the options to purchase Marathon Group Shares immediately before the Separation Effective Time. The options to purchase New U. S. Steel Shares and Marathon Shares will have the same expiration dates and will be subject to the same vesting requirements as the options to purchase U. S. Steel Group Shares and options to purchase Marathon Group Shares, respectively, and will cover the same number of shares as the options to purchase U. S. Steel Group Shares and Marathon Group Shares, respectively, provided that the number of shares and/or the exercise prices will be adjusted, if necessary, so that (i) the aggregate intrinsic value of the options to purchase New U. S. Steel Shares and options to purchase Marathon Shares immediately after the Separation Effective Time is not greater than the aggregate intrinsic value of the options being converted immediately before the Separation Effective Time, and (ii) the ratio of the exercise prices per share to the market values per share is not reduced. Any such adjustments will be based on the last closing price per share reported on the NYSE Composite Tape of U. S. Steel Group Shares or Marathon Group Shares immediately prior to the Separation Effective Time relative to the first opening price per share reported on the NYSE Composite Tape of New U. S. Steel Shares or Marathon Shares, respectively, immediately following the Separation Effective Time.
Treatment of USX Corporate Employees in the Separation
Currently, USX personnel employed at the Pittsburgh corporate headquarters provide accounting, audit, corporate finance, government affairs, investor relations, public affairs, strategic planning, legal, stock transfer and tax services that primarily relate to corporate-wide matters and for which the costs are allocated between the Marathon Group and the U. S. Steel Group based upon USX's present allocation policy, which takes into account employment, investments and revenues. Effective upon the Separation, Marathon Oil Corporation and United States Steel Corporation will be responsible for their own needs in these areas, and USX corporate personnel will be assigned to, and will be employed by, either Marathon Oil Corporation or United States Steel Corporation. All such USX employees currently participate in the Steel Pension Plan as well as health and other insurance benefit programs. Following the Separation Effective Time, such USX corporate employees will participate in the pension plans, health and other insurance benefit programs of the corporation by which they are employed.
Assignment of Other USX Corporate Assets and Certain Liabilities in the Separation
There are certain assets and liabilities of USX (which include such items as headquarters property, plant, and equipment; pension, health and life insurance and other employee benefit matters relating to employees of USX headquarters) which were used to support the businesses of both groups, as well as assets and liabilities relating to pension, insurance and other employee benefit matters for employees and retirees of one group who have prior service under plans that, after the Separation, will be maintained by the other company. However, for administrative and operational reasons, it is impractical to divide many of these assets and liabilities. Therefore, certain of these assets and liabilities as well as the ongoing requirement to maintain such assets have been designated by our board of directors for assignment to United States Steel Corporation and the remainder of which will be retained by Marathon Oil Corporation. The board believes that this division of these assets and liabilities is fair in the aggregate to both groups of stockholders. The impact of this assignment is reflected in the Unaudited Condensed Pro Forma Balance Sheets for United States Steel Corporation and Marathon Oil Corporation, included on pages C-2 and C-10 in Annex C.
Federal Securities Law Consequences
The issuance of the New U. S. Steel Shares in the Separation Merger to holders of U. S. Steel Group Shares has been registered under the Securities Act of 1933, as amended. Upon issuance, these New U. S. Steel Shares may be traded freely and without restriction, except that New U. S. Steel Shares received by persons who are deemed to be "affiliates" (as such term is defined under the Securities Act) of USX prior to the Separation may be resold by them only in transactions permitted by the resale provisions of Rule 145 promulgated under the Securities Act (or Rule 144, in the case of such persons who become affiliates of United States Steel Corporation) or as otherwise permitted under the Securities Act. Persons who may be deemed to be affiliates of USX or United States Steel Corporation are generally defined as individuals or entities that control, are controlled by, or are under common control with, USX or United States Steel Corporation and may include certain executive officers and directors of USX or United States Steel Corporation.
Accounting Treatment
Marathon Oil Corporation will account for the Separation as a discontinuance of the businesses comprising United States Steel. The measurement date for discontinued operations accounting purposes will be on or about the date when all conditions of the Separation have been satisfied. If the historical carrying value of USX's investment in United States Steel exceeds its fair value, as measured by the aggregate market value of the U. S. Steel Group Shares at the Separation Effective Time, a non-recurring, non-cash charge on the Separation will be recognized by Marathon Oil Corporation. Total costs relating to the Separation, including financing costs, lease termination costs, severance costs and fees and other expenses (collectively, "Separation Costs") are estimated at $100 million, of which $67 million will be paid by Marathon Oil Corporation and $33 million will be paid by United States Steel Corporation. USX has paid $11 million of these costs through June 30, 2001. Of the remaining $89 million, the pro forma financial statements reflect that $60 million will be paid by Marathon and $29 million will be paid by United States Steel.
Annex C of this proxy statement/prospectus includes unaudited pro forma condensed financial information for Marathon Oil Corporation which gives effect to the discontinuance of the businesses of United States Steel, the $900 million Value Transfer, the assignment of certain USX corporate assets and liabilities to United States Steel Corporation, the payment of Separation Costs, and the distribution of New U. S. Steel Shares to the holders of U. S. Steel Group Shares.
Following the Separation, United States Steel Corporation will account for its assets and liabilities based on the historical values at which they were carried by USX immediately prior to the Separation. Annex D of this proxy statement/prospectus includes historical combined financial information for United States Steel.
In addition, the unaudited pro forma condensed combined financial information for United States Steel Corporation included on pages C-1 to C-8 in Annex C of this proxy statement/prospectus gives effect to the $900 million Value Transfer, new financing arrangements, the assignment of certain USX corporate assets and liabilities, and the payment of Separation Costs.
Material U.S. Federal Income Tax Consequences
The following discussion prepared by Miller & Chevalier, Chartered, special tax counsel to USX, summarizes the material U. S. federal income tax consequences of the Separation. It does not purport to cover all income tax consequences to USX and its stockholders and may not apply to stockholders who acquired their Marathon Group Shares or U. S. Steel Group Shares in connection with a grant of such shares as compensation, who are not citizens or residents of the United States, or who are otherwise subject to special treatment under the Code. In addition, this discussion does not address the tax consequences to stockholders who do not hold their Marathon Group Shares or U. S. Steel Group Shares as a capital asset. This discussion assumes that the U. S. Steel Group Shares and the Marathon Group Shares are treated as stock of USX for federal income tax purposes. This discussion is based on provisions of the Code and the regulations promulgated thereunder, and on current administrative rulings and court decisions, in effect as of the date of this proxy statement/prospectus, all of which are subject to change.
We urge each USX stockholder to consult his or her own tax advisor as to the particular tax consequences of the Separation to such stockholder, including the application of state, local, and foreign tax laws, and the effect of possible changes in the tax law that may affect the tax consequences described below.
USX has requested a private letter ruling from the IRS that the exchange of U. S. Steel Group Shares for New U. S. Steel Shares in the Separation will qualify as a tax-free distribution of the New U. S. Steel Shares under Section 355 of the Code. The receipt of a private letter ruling to that effect, in form and substance satisfactory to the board, is a condition to completion of the Separation.
It is expected that the private letter ruling, if issued, will provide, in part, that for U.S. federal income tax purposes:
. No gain or loss will be recognized by (and no amount will be included in the income of) a holder of U. S. Steel Group Shares as a result of the Separation;
. The basis of New U. S. Steel Shares in the hands of a holder of U. S. Steel Group Shares will equal the basis of the holder's U. S. Steel Group Shares immediately before the Separation;
. The holding period of the New U. S. Steel Shares in the hands of a holder of U. S. Steel Group Shares will include the holding period of the U. S. Steel Group Shares that are exchanged in the Separation;
. Holders of Marathon Group Shares will have no tax consequences resulting from the Separation with respect to the Marathon Shares; and
. No gain or loss will be recognized by USX on the distribution of New U. S. Steel Shares to the holders of U. S. Steel Group Shares.
Holders of U. S. Steel Group Shares who have blocks of U. S. Steel Group Shares with different per share tax bases are urged to consult their tax advisors regarding the possible tax basis consequences of the Separation to them.
The IRS private letter ruling, if issued, will be based on the facts presented and representations made by USX in the ruling request. Generally, an IRS private letter ruling will not be revoked or modified retroactively unless there has been an omission or misstatement of a material fact or a breach of a material representation. USX intends to present all relevant facts and is not aware of any facts or circumstances that would cause those representations to be incorrect or incomplete in a material respect. In addition, Marathon Oil Corporation and United States Steel Corporation will agree in the Tax Sharing Agreement not to take actions, or to fail to take actions, that are inconsistent with the representations upon which the IRS private letter ruling is based. If, however, in the remote circumstance that those facts or representations were found to be incorrect or incomplete in a material respect or if the facts at the time of the Separation were materially different from the facts upon which the IRS private letter ruling was based, USX could not rely on the IRS private letter ruling and the Separation might not qualify as a tax-free distribution under Section 355 of the Code.
If the IRS private letter ruling were determined to be inapplicable and the Separation were found to be a taxable distribution of New U. S. Steel Shares or Marathon Shares, the tax consequences to the USX stockholders would depend on which shares were deemed to be distributed for federal income tax purposes. The stockholders deemed to receive the distribution, either the holders of U. S. Steel Group Shares or the holders of Marathon Group Shares, as the case may be, would be treated as receiving a taxable distribution in an amount equal to the fair market value of the shares deemed to be received. The difference between the amount of the distribution and the stockholder's basis in the shares deemed to be exchanged would be treated as a capital gain or loss to such stockholder. The tax consequences to stockholders who hold both U. S. Steel Group Shares and Marathon Group Shares, however, may differ from those described above. Such stockholders may have dividend, return of capital, or capital gain/loss treatment and are urged to consult their tax advisors. Neither Marathon nor United States Steel Corporation will indemnify any USX stockholders with respect to taxes that may be incurred as a result of the Separation.
If the IRS private letter ruling were determined to be inapplicable and the Separation were found to be a taxable distribution of New U. S. Steel Shares or Marathon Shares, a corporate-level tax would be payable by USX. Such tax would be based on the excess, if any, of the fair market value of the shares deemed to be distributed over USX's tax basis for such shares. The amount of USX's tax liability would be materially greater if the Separation were deemed to be a distribution of Marathon Shares. The party which would bear the burden of the corporate tax would be determined under the Tax Sharing Agreement. See the discussion below in "RELATIONSHIP BETWEEN UNITED STATES STEEL CORPORATION AND MARATHON OIL CORPORATION FOLLOWING THE SEPARATION--Tax Sharing Agreement" on page 118.
Even if the Separation otherwise qualifies for tax-free treatment under
Section 355 of the Code, the Separation may become taxable to USX pursuant to
Section 355(e) of the Code if 50% or more of either the Marathon Shares or New
U. S. Steel Shares are acquired, directly or indirectly, as part of a plan or
series of related transactions that include the Separation. For this purpose,
acquisitions (including acquisitions which are neither planned nor accepted or
recommended by the management of the company whose stock is acquired) of
Marathon Shares or New U. S. Steel Shares within the two years before or after
the Separation are presumed to be part of such a plan. Marathon Oil Corporation
or United States Steel Corporation may be able to rebut that presumption,
however, by establishing that the Separation and any preceding or subsequent
acquisition were not part of a plan or series of related transactions. If an
acquisition occurs pursuant to a plan or series of related transactions that
includes the Separation, USX would have to pay a corporate tax based on the
excess of the fair market value of the shares deemed to be distributed, either
New U. S. Steel Shares or Marathon Shares, over USX's tax basis for such
shares. The amount of such tax would be materially greater if the Separation
were deemed to be a distribution of Marathon Shares. The party who would bear
the burden of the corporate tax would be determined under the Tax Sharing
Agreement. See the discussion below in "RELATIONSHIP BETWEEN UNITED STATES
STEEL CORPORATION AND MARATHON OIL CORPORATION FOLLOWING THE SEPARATION--Tax
Sharing Agreement" on page 118. Even if Section 355(e) were to apply to cause
the Separation to be taxable to USX, it would remain tax-free to the USX
stockholders.
United States Treasury regulations require each holder of U. S. Steel Group Shares that receives New U. S. Steel Shares in the Separation to attach to the stockholder's U.S. federal income tax return for the year in which such stock is received a detailed statement setting forth such data as may be appropriate to show the applicability of Section 355 of the Code to the Separation. Subsequent to the Separation, United States Steel Corporation will provide its stockholders who received New U. S. Steel Shares pursuant to the Separation with the information necessary to comply with such requirement.
Stock Exchange Listing
We have applied to the NYSE, the PSE and the CSE for approval of the listing of the New U. S. Steel Shares to be issued in the Separation under the symbol "X" on the NYSE, the PSE and the CSE, and completion of the Separation is conditioned upon the approval of such listing. The Marathon Shares will continue to be listed and traded on the NYSE, the PSE and the CSE after the Separation under the symbol "MRO." The NYSE has approved the listing subject to stockholder approval of the Agreement and Plan of Reorganization and official notice of issuance.
No Appraisal Rights
Stockholders of USX will not be entitled to exercise dissenter's or appraisal rights under Delaware law or to demand payment for their shares in connection with the Separation.
Interests of Officers and Directors in the Separation
In considering the recommendation of the USX board to vote in favor of the Separation, stockholders of USX should be aware that directors and executive officers of USX have interests in the Separation, of which the only quantifiable interest is the payment to Mr. Usher (described below), that are in addition to or different from the interests of stockholders generally. The USX board of directors was aware of these interests and considered them, among other factors, in approving the Separation.
Stock Ownership
All of our directors and executive officers currently own U. S. Steel Group
Shares and/or Marathon Group Shares and will receive New U. S. Steel Shares
and/or Marathon Shares in the Separation. Some of these individuals currently
own a greater number of U. S. Steel Group Shares or Marathon Group Shares, as
the case may be. Accordingly, these directors and executive officers will have
a larger proportionate interest in United States Steel Corporation or Marathon
Oil Corporation, as the case may be, after the Separation. See "SECURITY
OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS" on page 133.
Treatment of Options, Stock Appreciation Rights and Restricted Shares
Some of our officers and directors hold options to purchase Marathon Group Shares and/or U. S. Steel Group Shares and/or own restricted Marathon Group Shares and/or U. S. Steel Group Shares issued under the USX Corporation 1990 Stock Plan. As of June 30, 2001, our executive officers and directors beneficially owned an aggregate of 3,871,179 Marathon Group Shares and 3,089,472 U. S. Steel Group Shares, including options to purchase Marathon Group Shares or U. S. Steel Group Shares. See "SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS" on page 133. Under the Plan of Reorganization, each unexercised and unexpired option to purchase U. S. Steel Group Shares will be converted into an option to purchase New U. S. Steel Shares and each unexercised and unexpired option to purchase Marathon Group Shares will remain outstanding and represent an option to purchase Marathon Shares. Each option to purchase New U. S. Steel Shares and Marathon Shares, will be subject to the same terms and conditions (including vesting) as the option to purchase U. S. Steel Group Shares and Marathon Group Shares, respectively.
In addition, some of our directors and executive officers hold stock appreciation rights ("SARs") with respect to Marathon Group Shares and U. S. Steel Group Shares. Such SARs will become SARs with respect to Marathon Shares and New U. S. Steel Shares, respectively, on the same terms and conditions as were applicable to the SARs immediately prior to the Separation.
In the Separation, each restricted U. S. Steel Group Share will be converted into a restricted New U. S. Steel Share and each restricted Marathon Group Share will remain outstanding and represent a restricted Marathon Share. After the Separation Effective Time, such restricted New U. S. Steel Shares and Marathon Shares will be subject to the same terms and conditions (including with respect to vesting) as were applicable to the restricted U. S. Steel Group Shares or restricted Marathon Group Shares, respectively, immediately prior to the Separation.
Change in Control Agreements
USX has entered into change in control agreements, all of which are substantially the same, with its executive officers and with executive officers of the U. S. Steel Group and the Marathon Group. The agreements with the executive officers who will become employees of United States Steel Corporation in connection with the Separation will become obligations of United States Steel Corporation. The agreements with the other executive officers will remain obligations of USX, which, in connection with the Separation, will be renamed Marathon Oil Corporation. For a description of such arrangements, see "INFORMATION ABOUT UNITED STATES STEEL--Management of United States Steel Corporation Following the Separation: Change in Control Agreements" on page 90.
Completion and Retention Agreement With Thomas J. Usher
In connection with the Separation, USX entered into a Completion and Retention Agreement with Thomas J. Usher, its current Chairman & Chief Executive Officer. To facilitate the Separation and to maintain continuity in both businesses, the board of directors asked Mr. Usher to serve as the Chairman & Chief Executive Officer and President of United States Steel Corporation, the Chairman of the board of directors of Marathon Oil Corporation and Chairman of the board of managers of MAP. In deciding to ask Mr. Usher to
serve in these three roles, the board of directors determined that Mr. Usher's unique experience and talents will bring value to both groups of stockholders. Mr. Usher has over 35 years experience in the steel industry, and with the recent death of Paul Wilhelm, the former President of United States Steel, the board of directors believes that the stockholders will be best served if Mr. Usher becomes the full time Chief Executive Officer of United States Steel Corporation. The board of directors also believes that since Clarence Cazalot, Philip G. Behrman, and Steven Lowden all joined Marathon in 2000, there is a need to provide them, and the board of directors of Marathon Oil Corporation, with Mr. Usher's knowledge of past activities, decisions and developments concerning the business of Marathon Oil Company and the Marathon Group. As non- employee Chairman of the board of directors of Marathon Oil Corporation, Mr. Usher will be able to draw upon his experience as Chairman & Chief Executive Officer of USX and as a member of the board of directors of Marathon Oil Company to provide these insights. Similarly in his role as Chairman of the board of managers of MAP, Mr. Usher brings a familiarity with MAP. Among other things, Mr. Usher is the only Marathon appointed member to have served on the board of managers of MAP since its formation. He also has a working relationship with the members appointed by Ashland, the owner of 38% of MAP, and this relationship will benefit Marathon Oil Corporation and its stockholders after the Separation.
The Completion and Retention Agreement provides that Mr. Usher will receive, or has received:
. A salary from USX of $1,400,000 for 2001 and if the Separation occurs, a salary of $1,100,000 annually from United States Steel Corporation for 2002-2004, subject to adjustment by the board of directors and the Compensation and Organization Committee of United States Steel Corporation. This $300,000 reduction reflects the lower levels of salaries in the steel and metal industries as compared to the energy industry.
. If the Separation occurs, a $25,000 annual fee from Marathon Oil Corporation for serving as Chairman of the board of directors of Marathon Oil Corporation and of the board of managers of MAP. This fee is in addition to regular fees paid by Marathon Oil Corporation to non-employee directors.
. A grant of 90,000 restricted shares of USX--Marathon Group Common Stock on August 8, 2001 with 30,000 shares vesting on August 8, 2002, May 1, 2003, and May 1, 2004, based upon the achievement of performance objectives for 2001, 2002 and 2003, respectively.
. If the Separation occurs, a grant of stock appreciation rights for 500,000 shares of Marathon Oil Corporation common stock. The exercise price of 150,000 shares is based on the average of the high and low market price of USX--Marathon Group Common Stock on the last trading day before the Separation Effective Time and the exercise price of 350,000 shares is based on the average of the high and low market price of Marathon Oil Corporation common stock on the first trading day after the Separation Effective Time. The effective date of each grant is the same date as the determination of the exercise price. These stock appreciation rights vest on the effective date of the grant and expire on the earlier of ten years from the effective date of grant, nine years following retirement or three years following death while employed.
. A separation completion bonus, if the Separation occurs, of $6,000,000 will be payable by Marathon Oil Corporation on the first business day after the Separation Effective Time and a retention bonus, of up to $3,000,000, that is subject to a number of performance measures, will be paid by United States Steel Corporation on the third anniversary of the Separation.
. If the Separation occurs, and if Mr. Usher elects to receive his non- qualified pension as a lump sum, the lump sum will be calculated using the interest rates and mortality tables in effect for retirements on December 31, 2001, instead of the rates and mortality tables in effect at Mr. Usher's retirement, which could result in a greater or lesser pension.
The Completion and Retention Agreement was negotiated on behalf of USX by the Compensation Committee of the board of directors which is composed solely of non-employee directors and is intended to provide an incentive to Mr. Usher to serve in his three roles. Among the factors considered by the Compensation Committee were the unique background Mr. Usher brings to each role, his past performance in
guiding both the steel and energy businesses, compensation levels and practices at other steel and energy companies as well as other companies of similar size and complexity as USX, Marathon and United States Steel and the fact that as a non-employee director Mr. Usher will not be eligible to receive compensation (salary, bonuses, options or other stock based compensation) from Marathon Oil Corporation or MAP even though it is expected that he will make major contributions to the future success of Marathon Oil Corporation and MAP in his roles as chairman of the governing bodies of each.
Dual Directorships
Upon completion of the Separation, Shirley Ann Jackson, Charles Lee, Seth Schofield and Douglas Yearley, each of whom is currently a director of USX, are expected to become directors of both United States Steel Corporation and Marathon Oil Corporation. As such, they will be entitled to receive directors' allowances and attendance fees from both United States Steel Corporation and Marathon Oil Corporation in the amount that each company provides to its other non-employee directors. For a description of such amounts to be paid by United States Steel Corporation and Marathon Oil Corporation, see "INFORMATION ABOUT UNITED STATES STEEL--Management of United States Steel Corporation Following the Separation" on page 85 and "INFORMATION ABOUT MARATHON--Management of Marathon Oil Corporation Following the Separation" on page 112.
Also, upon completion of the Separation, Thomas J. Usher, the present Chairman of the board of directors and Chief Executive Officer of USX, will be Chairman of the board of directors, Chief Executive Officer and President of United States Steel Corporation and will also serve as Chairman of the board of directors of Marathon Oil Corporation.
THE SPECIAL MEETING
This proxy statement/prospectus is being furnished in connection with the solicitation of proxies by our board of directors for use at a special meeting of USX stockholders in connection with the proposed Separation. This proxy statement/prospectus is first being mailed to USX stockholders on or about September [ ], 2001.
Date, Time and Place of the Special Meeting
The special meeting of USX stockholders will be held on October 16, 2001 at 9:00 a.m., local time, at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware 19801.
Proposals to be Considered at the Special Meeting
At the special meeting, USX stockholders will be asked to consider and vote upon the following proposals:
. A proposal to adopt the Agreement and Plan of Reorganization, which provides for the Separation of the U. S. Steel Group and the Marathon Group into two independent companies. The Separation will be effected by the merger of a wholly owned subsidiary of USX with and into USX, with USX continuing as the surviving corporation. Upon the effective time of the Separation:
- the business of the U. S. Steel Group will be owned and operated by United States Steel Corporation, which will be wholly owned by the holders of the then outstanding U. S. Steel Group Shares;
- the business of the Marathon Group will be owned and operated by USX, which will change its name to Marathon Oil Corporation and will be wholly owned by the holders of the then outstanding Marathon Group Shares;
- each outstanding U. S. Steel Group Share will be converted into the right to receive one New U. S. Steel Share;
- the Marathon Group Shares will remain outstanding, unaffected by the Separation, and will be the sole outstanding shares of common stock of USX, which will change its name to Marathon Oil Corporation; and
. each outstanding share of 6.50% Preferred Stock will be converted into the right to receive, in cash, $50.00 plus accrued but unpaid dividends thereon.
. A proposal to approve the United States Steel Corporation 2002 Stock Plan.
. A proposal to approve the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan.
. A proposal to adjourn the special meeting, if necessary.
The proposals to approve the United States Steel Corporation 2002 Stock Plan and the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan are conditioned upon the adoption of the Plan of Reorganization by USX stockholders and the consummation of the Separation. If the Separation is not approved and consummated, the proposals to approve the United States Steel Corporation 2002 Stock Plan and the United States Steel Senior Executive Officer Annual Incentive Compensation Plan will not be implemented.
Record Date
Our board of directors has established the close of business on August 31, 2001 as the record date for determination of USX stockholders entitled to notice of and to vote at the special meeting. As of the record
date, there were 309,267,418 Marathon Group Shares outstanding, held by approximately 70,744 holders of record, and 89,196,332 U. S. Steel Group Shares outstanding, held by approximately 53,324 holders of record.
Quorum
One-third of the voting power of the outstanding Marathon Group Shares and U. S. Steel Group Shares entitled to vote at the special meeting must be represented, either in person or by proxy, to constitute a quorum at the special meeting. Abstentions and "broker non-votes" will be counted for purposes of determining whether a quorum is present. Broker non-votes are shares held by brokers or nominees in "street name" that are represented at the meeting, but with respect to which the broker or nominee has not been instructed how to vote.
Vote Required
Adoption of the Plan of Reorganization will require:
. the affirmative vote of the holders of a majority of the outstanding Marathon Group Shares and U. S. Steel Group Shares as of the record date, voting together as a single class,
. the affirmative vote of the holders of a majority of the outstanding Marathon Group Shares as of the record date, voting as a separate class, and
. the affirmative vote of the holders of a majority of the outstanding U. S. Steel Group Shares as of the record date, voting as a separate class.
The proposals to approve the United States Steel Corporation 2002 Stock Plan and the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan will each require the affirmative vote of a majority of votes cast at the special meeting by holders of Marathon Group Shares and U. S. Steel Group Shares, voting together as a single class, and the affirmative vote of a majority of the votes cast at the special meeting by holders of U. S. Steel Group Shares, voting as a separate class.
The proposal to approve an adjournment of the special meeting will require the affirmative vote of a majority of the votes cast by holders of Marathon Group Shares and U. S. Steel Group Shares at the special meeting, voting together as a single class.
See "SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS" on page 133 for information concerning stock ownership of the current USX officers and directors.
Voting Rights
Only holders of Marathon Group Shares and U. S. Steel Group Shares at the close of business on August 31, 2001 are entitled to vote at the special meeting. In the separate class votes described above, each holder of Marathon Group Shares or U. S. Steel Group Shares is entitled to one vote per share at the special meeting. In the combined votes described above of Marathon Group Shares and U. S. Steel Group Shares, voting together as a single class, holders of Marathon Group Shares are entitled to one vote per share and holders of U. S. Steel Group Shares are entitled to 0.653 votes per share. We calculated the number of votes to which each U. S. Steel Group Share is entitled by using the formula required by the USX Restated Certificate. It is based on the ratio of the market value of one U. S. Steel Group Share to one Marathon Group Share over the 20 business-day period ending on August 24, 2001, the fifth business day prior to the record date.
Under the rules of the NYSE, brokers who hold shares in "street name" for customers are precluded from exercising their voting discretion with respect to the approval of non-routine matters, such as the Separation, and, therefore, absent specific instructions from the beneficial owner of such shares, brokers may not vote such shares at the special meeting. Your broker will vote your shares only if you provide instructions on how to vote by following the instructions provided to you by your broker.
Because the required vote for the adoption of the Plan of Reorganization is based on a percentage of the shares outstanding, abstentions and broker non- votes will have the same effect as a vote against the proposal to adopt the Plan of Reorganization.
Voting and Revocation of Proxies
There are three ways to vote your proxy:
. Vote by telephone--toll free--1-888-216-1303
Use any touch-tone telephone to vote your proxy 24 hours a day, 7 days a week. You will be prompted to enter your control number, which appears on the enclosed proxy card. Follow the simple instructions the voice provides you.
. Vote by Internet--https://www.proxyvotenow.com/usx
Access the above Internet site to vote your proxy 24 hours a day, 7 days a week. You will be prompted to enter your control number, which appears on the enclosed proxy card, and your complete address, exactly as it appears on the enclosed proxy card, to create an electronic ballot.
. Vote by mail
Mark, sign and date your proxy card and return it in the enclosed postage-paid envelope. If you vote by telephone or Internet, please do not return your proxy card.
Your telephone or Internet vote authorizes the proxies to vote your shares in the same manner as if you had marked, signed and returned your proxy card.
All shares represented by properly executed proxies received before or at the special meeting will, unless the proxies are revoked, be voted in accordance with the instructions indicated thereon. If no instructions are indicated on a properly executed proxy card, the shares will be voted FOR adoption of the Plan of Reorganization, approval of the United States Steel Corporation 2002 Stock Plan, approval of the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan and approval of the proposal to adjourn the special meeting. You are urged to mark the box on the proxy to indicate how to vote your shares.
If your shares are held in "street name" by your broker, do not follow the above instructions. Rather, follow the separate instructions provided by your broker.
Revocation
If you are a stockholder of record, you may revoke your proxy or change your vote at any time before it is voted at the special meeting by:
. voting again by telephone or the Internet;
. completing and mailing us a proxy card dated later than your last vote;
. submitting a written revocation to the Secretary of USX at 600 Grant Street, Pittsburgh, Pennsylvania 15219-4776; or
. appearing in person and voting at the special meeting.
If your shares are held in "street name" by your broker, you may only revoke your proxy or change your vote by following the separate instructions provided by your broker.
In order to vote in person at the special meeting, stockholders of record must attend the meeting and cast their votes in accordance with the voting provisions established for the special meeting. Attendance at the
special meeting without voting in accordance with the voting procedures will not in and of itself revoke a proxy.
Solicitation of Proxies
All expenses incurred in connection with solicitation of the enclosed proxy will be paid by USX. Officers and employees of USX may solicit proxies by telephone or in person, but they will not be paid for soliciting proxies. We also will request that brokerage houses and other nominees holding shares in their names or in the names of their nominees that are beneficially owned by others send proxy materials to and obtain proxies from those beneficial owners, and we will reimburse those brokerage houses and nominees for their reasonable expenses in performing those services. We have retained Innisfree M&A Incorporated to assist us in the solicitation of proxies, at an anticipated cost of $50,000, plus reimbursement of out-of-pocket expenses.
Adjournments
Although it is not expected, the special meeting may be adjourned for the purpose of soliciting additional proxies. Any adjournment of the special meeting may be made without notice, other than by an announcement made at the special meeting, by approval of the holders of a majority of the votes cast by holders of Marathon Group Shares and U. S. Steel Group Shares at the special meeting (voting together as a single class). Any proxies received by USX will be voted in favor of an adjournment of the special meeting if the purpose of the adjournment is to provide additional time to solicit votes to approve the Plan of Reorganization, unless the stockholder directs otherwise by voting against or abstaining from voting on the adjournment proposal included in the enclosed proxy card or by voting against the adoption of the Plan of Reorganization. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow USX stockholders who have already sent in their proxies to revoke them at any time prior to their use.
THE PLAN OF REORGANIZATION
The following summary describes the material terms of the Plan of Reorganization, but does not purport to describe all terms of the Plan of Reorganization. Because the Plan of Reorganization is the legal document that governs the Separation, we recommend that you read carefully the complete text of the Plan of Reorganization for its precise legal terms and other information that may be important to you. The Plan of Reorganization is included as Annex A to this proxy statement/prospectus and is incorporated by reference in this document.
Transactions
The Plan of Reorganization provides for the conversion of United States Steel LLC from a Delaware limited liability company into a Delaware corporation and provides for the Separation. The conversion of United States Steel LLC into a Delaware corporation does not require stockholder approval.
Conversion of United States Steel LLC into United States Steel Corporation
Pursuant to the Plan of Reorganization, at the Separation Effective Time, United States Steel LLC will convert from a Delaware limited liability company into a Delaware corporation named "United States Steel Corporation."
The United States Steel Corporation Certificate and the United States Steel Corporation By-Laws, which will be the certificate of incorporation and by-laws of United States Steel Corporation from and after the Separation Effective Time, are substantially the same as the USX Restated Certificate and the USX By-Laws. The only differences between the United States Steel Corporation Certificate and the USX Restated Certificate are that the United States Steel Corporation Certificate provides for the authorization of two hundred million shares of common stock and fourteen million shares of preferred stock and does not provide for classes of targeted common stock, as currently provided for in the USX Restated Certificate. The directors and officers of United States Steel Corporation immediately following the Separation Effective Time are expected to consist of the individuals named under "INFORMATION ABOUT UNITED STATES STEEL-- Management of United States Steel Corporation Following the Separation" on page 85.
The Separation Merger
Subject to the terms and conditions of the Plan of Reorganization, Merger Sub will merge with and into USX at the Separation Effective Time. The separate corporate existence of Merger Sub will cease. USX will be the surviving corporation in the Separation Merger and will change its name to "Marathon Oil Corporation" and continue to be governed by the laws of the State of Delaware.
Effective Time. Merger Sub and USX will complete the Separation Merger by filing a certificate of merger with the Secretary of State of the State of Delaware at such time as is determined by the USX board of directors following the satisfaction or waiver of the conditions to the Separation Merger. The Separation Merger will become effective on the date and time the certificate of merger is filed or such later time as specified in the certificate of merger.
Certificate of Incorporation and By-Laws. At the Separation Effective Time, the USX Restated Certificate will continue to be the restated certificate of incorporation of the surviving corporation, but will be amended to change the name of USX to Marathon Oil Corporation, to provide for the authorization of five hundred and fifty million shares of common stock and twenty-six million shares of preferred stock, and to delete the references to the classes of targeted common stock, currently provided for in the USX Restated Certificate. The by-laws of USX will be the by-laws of the surviving corporation.
Directors and Officers. The directors of USX immediately prior to the Separation Effective Time (who are expected to consist of the individuals listed on page 112) will be the initial directors of the surviving
corporation, and the officers of Merger Sub immediately prior to the Separation Effective Time will be the initial officers of the surviving corporation.
Conversion of Securities. The Plan of Reorganization provides that, at the Separation Effective Time, and without any action on the part of any holders of any of the securities listed below:
. Each U. S. Steel Group Share issued and outstanding or held in the treasury of USX or by any subsidiary of USX immediately prior to the Separation Effective Time will be converted into the right to receive one duly issued, fully paid and nonassessable New U. S. Steel Share;
. Each Marathon Group Share issued and outstanding or held in the treasury of USX or by any subsidiary of USX immediately prior to the Separation Effective Time will remain outstanding, unaffected by the Separation Merger and will be the sole outstanding shares of common stock of USX, which will change its name to Marathon Oil Corporation;
. Each outstanding share of 6.50% Preferred Stock will be converted into the right to receive, in cash, $50.00, plus accrued but unpaid dividends thereon;
. Each share of common stock, par value $1.00 per share, of Merger Sub issued and outstanding immediately prior to the Separation Effective Time will automatically be cancelled and retired and shall cease to exist, without payment of any consideration therefor;
. Each option to purchase U. S. Steel Group Shares, each stock appreciation right with respect to U. S. Steel Group Shares and each restricted U. S. Steel Group Share, which has been granted by USX and is outstanding immediately prior to the Separation Effective Time, will be converted as of the Separation Effective Time into an option to purchase New U. S. Steel Shares, a stock appreciation right of United States Steel Corporation with respect to New U. S. Steel Shares, or a restricted New U. S. Steel Share, respectively, subject to the same terms and conditions as were applicable to such options, stock appreciation rights or restricted shares being converted. With respect to options to purchase New U. S. Steel Shares, each new option will have the same expiration date and be subject to the same vesting requirements as the option being converted, and will cover the same number of shares and have the same exercise price as the option being converted, provided that the number of shares and/or the exercise price will be adjusted, if necessary, so that (i) the aggregate intrinsic value of the new option immediately after the Separation Effective Time is not greater than the aggregate intrinsic value of the option being converted immediately before the Separation Effective Time, and (ii) the ratio of the exercise price per share to the market value per share is not reduced. Any such adjustments will be based on the closing price per share of U. S. Steel Group Shares immediately prior to the Separation Effective Time relative to the first opening price per share of New U. S. Steel Shares immediately following the Separation Effective Time; and
. Each option to purchase Marathon Group Shares, each stock appreciation right with respect to Marathon Group Shares and each restricted Marathon Group Share which has been granted by USX and is outstanding immediately prior to the Separation Effective Time will remain outstanding as of the Separation Effective Time and represent an option to purchase Marathon Shares, a stock appreciation right of Marathon Oil Corporation with respect to Marathon Shares or a restricted Marathon Share, respectively, subject to the same terms and conditions as were applicable to such options, stock appreciation rights or restricted shares, respectively, prior to the Separation Merger. The number of shares and/or the exercise price of the options to purchase Marathon Shares will be adjusted, if necessary, so that (i) the aggregate intrinsic value of the option immediately after the Separation Effective Time is not greater than the aggregate intrinsic value of the option immediately before the Separation Effective Time, and (ii) the ratio of the exercise price per share to the market value per share is not reduced. Any such adjustments will be based on the closing price per share of Marathon Group Shares immediately prior to the Separation Effective Time relative to the first opening price per share of Marathon Shares immediately following the Separation Effective Time.
Exchange of U. S. Steel Group Stock Certificates. USX will appoint an exchange agent in connection with the Plan of Reorganization. Promptly after the Separation Effective Time, the exchange agent will mail a letter of transmittal and instructions for use in effecting the surrender of certificates and exchange of stock certificates to each registered holder of physical stock certificates representing U. S. Steel Group Shares. Only holders of U. S. Steel Group Shares holding physical stock certificates will receive such letter of transmittal from the exchange agent and be required to surrender their stock certificates in exchange for New U. S. Steel Shares. We request that you not surrender your certificates for exchange until you receive the letter of transmittal and instructions. No dividends or other distributions declared or made after the Separation Effective Time with respect to New U. S. Steel Shares will be paid to the holder of any unsurrendered certificates. However, the holder will be paid, without interest, upon surrender of such certificate, any dividends or distributions with a record date after the Separation Effective Time but a payment date between the Separation Effective Time and the time of surrender. No transfers of U. S. Steel Group Shares will be made after the Separation Effective Time.
No Exchange of Marathon Group Stock Certificates
Certificates representing shares of Marathon Group Shares will not be exchanged in connection with the Separation and will represent Marathon Shares for all corporate purposes following the Separation.
Redemption of Shares of Trust Preferred in Connection with the Separation
In connection with the Separation, each outstanding share of Trust Preferred will be redeemed for the right to receive, in cash, $50.00 plus accrued but unpaid dividends thereon.
Listing of New U. S. Steel Shares and Marathon Shares
United States Steel LLC and USX have agreed to use their reasonable efforts to cause the New U. S. Steel Shares to be issued in the Separation Merger to be approved for listing, under the symbol "X", on the NYSE, PSE and CSE, subject to official notice of issuance. The NYSE has approved the listing subject to stockholder approval of the Agreement and Plan of Reorganization and official notice of issuance. The listing of the New U. S. Steel Shares on the NYSE, PSE and CSE is a condition to the consummation of the Separation Merger.
Marathon Shares will continue to be listed on the NYSE, PSE and CSE under the symbol "MRO", and USX has agreed to amend its listing applications with the NYSE, PSE and CSE to provide for its name change to Marathon Oil Corporation.
Conditions to the Completion of the Separation
The consummation of the Separation is subject to the satisfaction or waiver (to the extent permitted by law) of each of the following conditions:
. Adoption of the Plan of Reorganization by the required votes of USX stockholders;
. Receipt of a private letter ruling from the IRS that the Separation will qualify as a tax-free transaction within the meaning of Section 355 of the Code, in a form and substance satisfactory to the USX board of directors;
. United States Steel LLC and USX having completed the Financing (in amount, form and substance satisfactory to the USX board) and the Value Transfer;
. Approval of the New U. S. Steel Shares to be issued in the Separation for listing on the NYSE, the PSE and the CSE, subject to official notice of issuance;
. This document having been declared effective by the SEC and not being the subject of any stop order or proceedings seeking a stop order;
. USX and United States Steel LLC having entered into the Separation Documents, including the Tax Sharing Agreement, Financial Matters Agreement, and Transition Services Agreement (in form and substance satisfactory to the USX board of directors);
. All of the actions and transactions required by the Plan of Reorganization to be performed or consummated prior to the Separation Effective Time having been performed or consummated (in form and substance satisfactory to the USX board of directors);
. Receipt of all material consents, authorizations and approvals required in connection with the Separation (in form and substance satisfactory to the USX board of directors); and
. No order, injunction or decree having been issued and remaining in effect which prohibits or prevents the consummation of the Separation;
All determinations as to satisfaction or waiver of the conditions to consummation of the Separation are to be made by the USX board, in its sole and absolute discretion. In addition, the Senior Note Indenture requires, as a condition to the Separation, that United States Steel must have at least $400 million available in undrawn credit facilities and cash, of which at least $300 million must be available under facilities with terms extending at least three years after the date such facilities are put in place.
On July 2, 2001, USX filed a request with the IRS for a private letter ruling as to the tax free status of the Separation. As of the date of this proxy statement/prospectus, none of the conditions to the Separation has been satisfied except that this proxy statement/prospectus has been declared effective by the SEC.
Stockholders' Meeting and Board Recommendation
USX has agreed to take all actions necessary to call, give notice of, convene and hold a special meeting of its stockholders (the "Stockholders' Meeting") as promptly as practicable to:
. obtain the approval and adoption of the Plan of Reorganization by the stockholders of USX;
. obtain the approval of the United States Steel Corporation 2002 Stock Plan by the stockholders of USX;
. obtain the approval of the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan by the stockholders of USX; and
. vote to adjourn the Stockholders' Meeting, if necessary.
USX has agreed to include in the proxy statement/prospectus the recommendation of the USX board of directors that stockholders of USX vote in favor of the adoption of the Plan of Reorganization.
In considering the recommendation of the USX board of directors to vote in favor of the Separation, you should be aware that directors and executive officers of USX have interests in the Separation that are in addition to or different from the interests of stockholders generally, including disproportionate ownership of Marathon Group Shares and U. S. Steel Group Shares, ownership of options, stock appreciation rights and restricted shares, contractual rights to severance payments in connection with a change in control and certain other contractual rights and payments. Additionally, certain directors will become directors of both Marathon Oil Corporation and United States Steel Corporation after the Separation and become entitled to receive directors' allowances and attendance fees from both companies, in the amounts set forth on pages 86 and 113. The USX board of directors was aware of these interests and considered them, among other things, in approving the Separation. See "THE SEPARATION--Interest of Officers and Directors in the Separation" on page 56.
USX has agreed to use its reasonable efforts to solicit from USX stockholders proxies in favor of the adoption of the Plan of Reorganization and to take all other actions necessary or advisable to secure, at the Stockholders' Meeting, the vote required to approve and adopt the Plan of Reorganization.
Indemnification
Marathon Oil Corporation has agreed to indemnify, defend and hold harmless United States Steel Corporation, and its directors, officers, employees, representatives, advisors, agents and affiliates from, against and in respect of any and all losses arising out of, relating to or resulting from, directly or indirectly:
. except as otherwise provided in the Tax Sharing Agreement or the Financial Matters Agreement (or any other Separation Document), any and all liabilities to the extent arising out of or relating to the business, assets or liabilities of the Marathon Group;
. Marathon Oil Corporation's failure to observe its obligations under the Plan of Reorganization or any of the Separation Documents; and
. except as otherwise provided in the Tax Sharing Agreement or the
Financial Matters Agreement (or any other Separation Document), sixty-
five percent (65%) of any and all (i) joint liabilities relating to USX
corporate assets, liabilities or businesses not related to the
businesses of the Marathon Group or the U. S. Steel Group and
(ii) liabilities arising from or related to the Separation or the
related transactions or agreements, including, but not limited to, the
filing of this proxy statement/prospectus with the SEC (together, (i)
and (ii) are referred to as "Joint Liabilities").
United States Steel Corporation has agreed to indemnify, defend and hold harmless Marathon Oil Corporation, and its directors, officers, employees, representatives, advisors, agents and affiliates, from, against and in respect of any and all losses arising out of, relating to or resulting from, directly or indirectly:
. except as otherwise provided in the Tax Sharing Agreement or the Financial Matters Agreement (or any other Separation Document), any and all liabilities to the extent arising out of or relating to the business, assets or liabilities of the U. S. Steel Group, which includes any businesses owned or previously owned by USX that do not fall within the definition of the Marathon Group (as determined pursuant to the USX Restated Certificate);
. United States Steel Corporation's failure to observe its obligations under the Plan of Reorganization or any of the Separation Documents; and
. except as otherwise provided in the Tax Sharing Agreement or the Financial Matters Agreement (or any other Separation Document), thirty- five percent (35%) of any and all Joint Liabilities.
Expenses
Except to the extent otherwise provided in the Separation Documents, all Separation Costs incurred in connection with the transactions contemplated by the Plan of Reorganization, including, without limitation the Financing, (i) incurred prior to the Separation Effective Time are to be borne thirty-five percent (35%) by United States Steel Corporation and sixty-five percent (65%) by Marathon Oil Corporation and (ii) incurred following the Separation Effective Time shall be borne by the party incurring such expenses. The Separation Costs are expected to total approximately $100 million.
Amendment
The terms of the Separation may be amended, modified or supplemented at any time as determined by the USX board of directors, and will be evidenced by a written agreement signed by all of the parties to the Plan of Reorganization. In the event that the board determines that any such amendments, modifications or supplements are material to the stockholders of USX, we will distribute supplemental proxy materials and resolicit proxies from our stockholders.
Termination
The Separation may be terminated and abandoned for any reason at any time prior to the Separation, whether prior to or following the Stockholders' Meeting, by and in the sole discretion of the USX board of directors. In the event of such termination, none of the parties to the Separation shall have any liability by reason of the Plan of Reorganization.
INFORMATION ABOUT UNITED STATES STEEL
DESCRIPTION OF THE BUSINESS OF UNITED STATES STEEL
United States Steel, through its Domestic Steel segment, is engaged in the production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; real estate development; and engineering and consulting services and, through its U. S. Steel Kosice 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"), Clairton 1314B Partnership, Republic Technologies International, LLC ("Republic") and Rannila Kosice, s.r.o.
A three-year summary of financial highlights for United States Steel is provided below.
Assets
Revenues and Income from Net at Capital
Other Income(a) Operations(b) Income (Loss) Year-End Expenditures
--------------- ------------- ------------- -------- ------------
(Millions)
United States Steel
2000.................. $6,132 $104 $(21) $8,711 $244
1999.................. 5,470 150 44 7,525 287
1998.................. 6,477 579 364 6,749 310
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The following table sets forth the total revenues of United States Steel for each of the last three years.
Revenues and Other Income
2000 1999 1998
------ ------ ------
(Millions)
Revenues by product:
Sheet and semi-finished steel products................ $3,288 $3,433 $3,598
Tubular, plate, and tin mill products................. 1,731 1,140 1,546
Raw materials (coal, coke and iron ore)............... 626 549 744
Other(a).............................................. 445 414 490
Income (loss) from affiliates........................... (8) (89) 46
Gain on disposal of assets.............................. 46 21 54
Other income (loss)..................................... 4 2 (1)
------ ------ ------
Total revenues and other income......................... $6,132 $5,470 $6,477
====== ====== ======
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Steel Industry Background and Competition
The steel industry is cyclical and highly competitive and is affected by excess world capacity, which has restricted price increases during periods of economic growth and led to price decreases during economic contraction. In addition, the domestic and international steel industries face competition from producers of materials such as aluminum, cement, composites, glass, plastics and wood in many markets.
United States Steel is the largest integrated steel producer in North America and, through its subsidiary USSK, the largest integrated flat-rolled producer in Central Europe. United States Steel competes with many domestic and foreign steel producers. Competitors include integrated producers which, like United States Steel, use iron ore and coke as primary raw materials for steel production, and mini-mills which primarily use steel scrap and, increasingly, iron bearing feedstocks as raw materials. Mini-mills generally produce a narrower range of steel products than integrated producers, but typically enjoy certain competitive advantages such as
lower capital expenditures for construction of facilities and non-unionized work forces with lower employment costs and more flexible work rules. An increasing number of mini-mills utilize thin slab casting technology to produce flat-rolled products. Through the use of thin slab casting, mini-mill competitors are increasingly able to compete directly with integrated producers of flat-rolled products. Depending on market conditions, the additional production generated by flat-rolled mini-mills could have an adverse effect on United States Steel's selling prices and shipment levels.
Steel imports to the United States accounted for an estimated 23%, 27%, 26% and 30% of the domestic steel market demand for the first six months of 2001, and for the years 2000, 1999 and 1998, respectively. Steel imports of pipe increased 37% and hot-rolled steel increased 19% in 2000, compared to 1999. Foreign competitors typically have lower labor costs and are often owned, controlled or subsidized by their governments, allowing their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. High levels of imported steel are expected to continue to have an adverse effect on future market prices and demand levels for domestic steel.
On November 13, 2000, United States Steel 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 ITC made a preliminary determination that there is a reasonable indication that the domestic industry is materially injured by the imports in question. As a result, both the ITC and Commerce will continue their investigations in these cases.
United States Steel 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. United States Steel, nevertheless, intends to file additional AD and CVD petitions against unfairly traded imports that adversely impact, or threaten to adversely impact, the results of United States Steel 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 countervailing subsidies would be likely to continue or recur. In all of the cases, Commerce determined that dumping or countervailing subsidies would be likely to continue or recur if the orders are discontinued. In the seamless pipe cases, the ITC voted on June 7, 2001 to continue the orders as to Argentina, Brazil and Germany and to discontinue the orders pertaining to Italy. The ITC voted on June 15, 2001 to continue the orders against all five countries pertaining to OCTG other than drill pipe. The ITC's votes on drill pipe will continue the order in effect against Japan and discontinue the orders against Argentina and Mexico.
United States Steel's domestic businesses are subject to numerous federal, state and local laws and regulations relating to the storage, handling, emission and discharge of environmentally sensitive materials. United States Steel believes that its major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such other competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on United States Steel's competitive position with regard to domestic mini-mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. For further information, see "United States Steel Legal Proceedings" on page 80, and INFORMATION ABOUT UNITED STATES STEEL--Management's Discussion and Analysis of Financial Condition and Results of Operations on page 96.
On June 5, 2001, President Bush announced a three-part program to address
the excessive imports of steel that have been depressing markets in the United
States. The program involves (1) negotiations with foreign governments seeking
near-term elimination of inefficient excess steel production capacity
throughout the world; (2) negotiations with foreign governments to establish
rules that will govern steel trade in the future and eliminate subsidies; and
(3) an investigation by the ITC under section 201 of the Trade Act of 1974 to
determine whether steel is being imported into the United States in such
quantities as to be a substantial cause of serious injury to the United States
steel industry. The timing of and parties to the negotiations remain to be
determined.
On June 22, 2001, the Bush Administration requested that the ITC initiate investigations under section 201 of the Trade Act of 1974. Products included in the request are in the following categories, subject to exclusion of certain products:
(1) Carbon and alloy flat products;
(2) Carbon and alloy long products;
(3) Carbon and alloy pipe and tube; and
(4) Stainless steel and alloy tool steel products.
USSK does business primarily in Central Europe and is subject to market conditions in this area which are similar to domestic factors, including excess world supply, and also can be influenced by matters peculiar to international marketing such as tariffs.
Business Overview
United States Steel produces raw steel at Gary Works in Indiana, Mon Valley Works in Pennsylvania, Fairfield Works in Alabama, and, through USSK, in Kosice, Slovak Republic.
United States Steel has responded to competition resulting from excess steel industry capability by eliminating less efficient facilities, modernizing those that remain and entering into joint ventures, all with the objective of focusing production on higher value-added products, where superior quality and special characteristics are of critical importance. These products include bake hardenable steels and coated sheets for the automobile and appliance industries, laminated sheets for the manufacture of motors and electrical equipment, higher strength plate products, improved tin mill products for the container industry and oil country tubular goods. Several recent modernization projects support United States Steel's objectives of providing value-added products and services to customers. These projects include, for the automotive industry--the degasser facility at Mon Valley Works, the second hot-dip galvanizing line at PRO-TEC, the Fairless Works galvanizing line upgrade and the cold reduction mill upgrades at Gary Works and Mon Valley Works; for the construction industry--the dual coating lines at Fairfield Works and Mon Valley Works; for the tubular market--the Fairfield Works pipemill upgrade and acquiring full ownership of Lorain Tubular Company LLC; and for the plate market--the heat treat facility at the Gary Works plate mill. Also, a new pickle line was built at the Mon Valley Works which replaced three older and less efficient facilities located at Fairless Works and Mon Valley Works.
Through its November 2000 purchase of USSK, which owns the steel producing operations and related assets formerly held by VSZ a.s. in the Slovak Republic, United States Steel took a major strategic step by expanding offshore and following many of its customers into the European market. The objective is to advance USSK to become a leader among European steel producers and the prime supplier of flat-rolled steel to the growing central European market. This globalization strategy is also being pursued through our Acero Prime joint venture in Mexico. The location of this joint venture allows for easy servicing and just-in-time delivery to customers throughout Mexico.
Effective March 1, 2001, United States Steel acquired from LTV Corporation ("LTV") the tin mill products business of LTV for the assumption of $66 million of employee-related liabilities. United States Steel is leasing the land and acquired title to the buildings, facilities and inventory at LTV's former tin mill operation in Indiana which we are operating as East Chicago Tin. United States Steel intends to operate these facilities as an ongoing business and East Chicago Tin employees became United States Steel employees. United States Steel and LTV also entered into 5-year agreements for LTV to supply United States Steel with pickled hot bands and for United States Steel to provide LTV with processing of cold-rolled steel.
On August 14, 2001, United States Steel announced its intention to permanently close the cold rolling and tin mill operations at Fairless Works, with a combined annual finishing capability of 1.5 million tons, on or after November 12, 2001. Under its labor agreement, United States Steel is required to discuss the proposed shutdown with the United Steelworkers of America before making a final decision. United States Steel also announced that, subject to market conditions, it currently intends to continue operating the hot dip galvanizing line at Fairless Works. The anticipated financial impact of the shutdown will be recorded in the second half of 2001 and is estimated to be a pretax charge of $35 million to $45 million. The near-term cash impact will be minimal since about half of the charge is for depreciation or impairment of fixed assets and the balance is related to employee benefits that will be paid from trust funds which will be funded over a period of years if required.
In addition to the modernization of its production facilities, United States Steel has entered into a number of joint ventures with domestic and foreign partners to take advantage of market or manufacturing opportunities in the sheet, tin mill, tubular, bar and plate consuming industries.
The following table lists products and services by facility or business unit:
Domestic Steel
Gary.................... Sheets; Tin Mill; Plates; Coke
Fairfield............... Sheets; Tubular
Mon Valley/Fairless..... Sheets
USS-POSCO(a)............ Sheets; Tin Mill
East Chicago Tin........ Tin Mill
Lorain Tubular Company
LLC.................... Tubular
Republic Technologies
International, LLC(a).. Bar
PRO-TEC(a).............. Galvanized Sheet
Clairton................ Coke
Clairton 1314B
Partnership(a)......... Coke
Transtar................ Transportation
Minntac................. Taconite Pellets
U. S. Steel Mining...... Coal
Resource Management..... Administration of Mineral, Coal and
Timber Properties
Realty Development...... Real estate sales, leasing and management
Engineers and
Consultants............ Engineering and Consulting Services
USSK
U. S. Steel Kosice...... Sheets; Tin Mill; Plates; Coke
Walzwerke Finow......... Precision steel tubes; specialty shaped sections
Rannila Kosice (a)...... Color coated profile and construction products
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Domestic Operations
United States Steel domestic operations includes plants which produce steel products in a variety of forms and grades. Raw steel production was 11.4 million tons in 2000, compared with 12.0 million tons in 1999 and 11.2 million tons in 1998. Raw steel produced was nearly 100% continuous cast in 2000, 1999 and 1998. Raw steel production averaged 89% of capability in 2000, compared with 94% of capability in 1999 and 88% of capability in 1998. United States Steel's stated annual domestic raw steel production capability was 12.8 millions tons for 2000 (7.5 million at Gary Works, 2.9 million at Mon Valley Works, and 2.4 million at Fairfield Works).
Steel shipments were 10.8 million tons in 2000, 10.6 million tons in 1999 and 10.7 million tons in 1998. United States Steel shipments comprised approximately 9.8% of domestic steel shipments in 2000. Exports accounted for approximately 5% of United States Steel shipments in 2000, 3% in 1999 and 4% in 1998.
The following tables set forth significant United States Steel domestic operations shipment data by major markets and products for each of the last three years. Such data does not include shipments by joint ventures and other affiliates of United States Steel accounted for by the equity method.
Steel Shipments By Market and Product (United States Production Only)
Sheets & Tubular,
Semi-finished Plate & Tin
Steel Mill Products Total
------------- ------------- ------
(Thousands of Net Tons)
Major Market--2000
Steel Service Centers....................... 1,636 679 2,315
Further Conversion:
Trade Customers........................... 742 432 1,174
Joint Ventures............................ 1,771 -- 1,771
Transportation (Including Automotive)....... 1,206 260 1,466
Containers.................................. 182 520 702
Construction and Construction Products...... 778 158 936
Oil, Gas and Petrochemicals................. -- 973 973
Export...................................... 346 198 544
All Other................................... 748 127 875
----- ----- ------
Total................................... 7,409 3,347 10,756
===== ===== ======
Major Market--1999
Steel Service Centers....................... 1,867 589 2,456
Further Conversion:
Trade Customers........................... 1,257 376 1,633
Joint Ventures............................ 1,818 -- 1,818
Transportation (Including Automotive)....... 1,280 225 1,505
Containers.................................. 167 571 738
Construction and Construction Products...... 660 184 844
Oil, Gas and Petrochemicals................. -- 363 363
Export...................................... 246 75 321
All Other................................... 819 132 951
----- ----- ------
Total................................... 8,114 2,515 10,629
===== ===== ======
Major Market--1998
Steel Service Centers....................... 1,867 696 2,563
Further Conversion:
Trade Customers........................... 706 434 1,140
Joint Ventures............................ 1,473 -- 1,473
Transportation (Including Automotive)....... 1,438 347 1,785
Containers.................................. 222 572 794
Construction and Construction Products...... 809 178 987
Oil, Gas and Petrochemicals................. -- 509 509
Export...................................... 226 156 382
All Other................................... 867 186 1,053
----- ----- ------
Total................................... 7,608 3,078 10,686
===== ===== ======
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United States Steel's sheet business produces hot-rolled, cold-rolled and galvanized products. We are committed to increasing our value-added shipments of cold-rolled, galvanized and other products processed from hot-rolled band. Value-added products comprised 78% of domestic shipments in 2000, including finishing performed by joint ventures. United States Steel's sheet customer base includes automotive, appliance, service center, industrial and construction customers. United States Steel has a long-standing relationship with many of them, as do the USS-POSCO, PRO-TEC and Acero Prime joint ventures.
In the last three years, United States Steel has made a number of key investments directed toward the automotive industry, including upgrades to our steel-making facilities to increase our capacity for both high strength and highly formable steels, upgrades to United States Steel's Fairless galvanizing line to produce automotive quality product and constructing an automotive technical center in Michigan. In addition, a number of United States Steel's joint ventures expanded their automotive capacity, most notably PRO-TEC, which added 400,000 tons of annual hot-dipped galvanized capacity to bring its total capacity to 1.0 million tons per year.
The tubular, tin mill products and plate businesses complement the larger steel sheet business by producing specialized products for specific markets.
United States Steel's tubular operations are located at Fairfield, Alabama, Lorain, Ohio, and McKeesport, Pennsylvania and produce both seamless and electric resistance weld ("ERW") tubular products. United States Steel enjoys over a 50% share of the domestic market for seamless standard and line pipe and a 25% share of the domestic market for oil country tubular goods ("OCTG"). With the successful conversion in 2000 of the Fairfield piercing mill to process rounds plus the acquisition of the remaining 50% interest in Lorain Tubular, United States Steel has the capability to produce 1.6 million tons of tubular products in the 5 million ton market for the tubular products it produces. With the continued high demand for energy, United States Steel believes it is well positioned to supply the oil and gas industry with OCTG.
With the recent acquisition of East Chicago Tin operations, United States Steel is one of the two largest tin mill products producers in North America. United States Steel supplies a full line of tin plate and tin-free steel ("TFS") products, primarily used in the container industry. United States Steel believes its reputation in the marketplace is enhanced through its attention to quality and customer service reliability and expects its acquisition of East Chicago Tin will provide significant operating synergies while providing it the opportunity to better serve its existing and newly acquired customers. United States Steel currently supplies over 25% of the domestic market, and coupled with USSK's tin capability, it anticipates being in a prime position to service customers who have a global presence.
United States Steel's plate business is located within the Gary Works complex and is a major supplier to the transportation market, and to the industrial, agricultural, and construction equipment market. United States Steel's modern plate heat-treating facilities allow it to offer its customers specialized plates for critical applications.
United States Steel and its wholly owned entity, U. S. Steel Mining LLC, have domestic coal properties with bituminous coal reserves of approximately 787 million net tons at year-end 2000 and at year-end 1999. The reserves are of metallurgical and steam quality in approximately equal proportions. They are located in Alabama, Illinois, Indiana, Pennsylvania, Tennessee and West Virginia. Approximately 93% of the reserves are owned, and the rest are leased. The leased properties are covered by leases which expire in 2005 and 2012. During 2000, United States Steel 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. U. S. Steel Mining's coal production was 5.5 million tons in 2000, compared with 6.2 million tons in 1999 and 7.3 million tons in 1998.
United States Steel controls domestic iron ore properties having iron ore reserves in grades subject to beneficiation processes in commercial use by United States Steel domestic operations of approximately 710 million tons at year-end 2000, substantially all of which are iron ore concentrate equivalents available from low-grade iron-bearing materials. All reserves are located in Minnesota. Approximately 31% of these reserves are owned and the remaining 69% are leased. Most of the leased reserves are covered by a lease expiring in 2058 and the remaining leases have expiration dates ranging from 2021 to 2026. United States Steel's iron ore operations at Mt. Iron, Minnesota ("Minntac") produced 16.3 million net tons of taconite pellets in 2000, 14.3 million net tons in 1999 and 15.8 million net tons in 1998. Taconite pellet shipments were 15.0 million tons in 2000, compared with 15.0 million tons in 1999 and 15.4 million tons in 1998.
On March 23, 2001, Transtar, Inc. ("Transtar") completed its previously announced reorganization with its two voting shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L. P. As a result of this transaction, United States Steel became the sole owner of Transtar and certain of its subsidiaries, namely, the Birmingham Southern Railroad Company; the Elgin, Joliet and Eastern Railway Company; the Lake Terminal Railroad Company; the McKeesport Connecting Railroad Company; the Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior & Gulf Navigation Company; and Tracks Traffic Management Services, Inc. and their subsidiaries. Holdings became the owner of the other subsidiaries.
A subsidiary of United States Steel sells technical services worldwide to the steel, mining, chemical and related industries. Together with its subsidiary companies, it provides engineering and consulting services for facility expansions and modernizations, operating improvement projects, integrated computer systems, coal and lubrication testing and environmental projects.
United States Steel develops real estate for sale or lease and manages retail and office space, business and industrial parks and residential and recreational properties. United States Steel also administers the remaining mineral lands and timber lands of United States Steel domestic operations and is responsible for the lease or sale of these lands and their associated resources, which encompass approximately 270,000 acres of surface rights and 1,500,000 acres of mineral rights in 13 states.
United States Steel participates directly and through subsidiaries in a number of joint ventures included in the Domestic Steel segment. All of the joint ventures are accounted for under the equity method. Certain of the joint ventures and other investments are described below, all of which are at least 50% owned except Republic, Acero Prime and the Clairton 1314B Partnership.
United States Steel and Pohang Iron & Steel Co., Ltd. ("POSCO") of South Korea participate in a joint venture, USS-POSCO, which owns and operates the former U. S. Steel Pittsburg, California plant. The joint venture markets high quality sheet and tin products, principally in the western United States. USS- POSCO produces cold-rolled sheets, galvanized sheets, tin plate and tin-free steel, with hot bands principally provided by United States Steel and POSCO. Total shipments by USS-POSCO were approximately 1.5 million tons in 2000. On May 31, 2001, a fire damaged USS-POSCO's facilities. Damage was predominantly limited to the cold-rolling mill. USS-POSCO maintains insurance coverage against such losses, including coverage for business interruption. The mill is expected to resume production in the first quarter of 2002, although full production may not be achieved until mid-2002. Until such time, the plant will continue customer shipments using cold-rolled coils from United States Steel and POSCO as substitute feedstock.
United States Steel has a 16% investment in Republic Technologies International LLC (Republic) which was accounted for under the equity method of accounting. During the first quarter of 2001, United States Steel discontinued applying the equity method since investments in and advances to Republic had been reduced to zero. Also, United States Steel has recognized certain debt obligations of $14 million previously assumed by Republic. On April 2, 2001, Republic filed a voluntary petition with the U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the first quarter of 2001, as a result of
Republic's actions, United States Steel recorded a pretax charge of $74 million for the potentially uncollectible receivables from Republic.
United States Steel and Kobe Steel, Ltd. ("Kobe") participate in a joint venture, PRO-TEC, which owns and operates two hot-dip galvanizing lines in Leipsic, Ohio. The first galvanizing line commenced operations in early 1993. In November 1998, operations commenced on a second hot-dip galvanized sheet line which expanded PRO-TEC's capacity nearly 400,000 tons a year to 1.0 million tons annually. Total shipments by PRO-TEC were approximately 1.0 million tons in 2000.
United States Steel and Worthington Industries Inc. participate in a joint venture known as Worthington Specialty Processing which operates a steel processing facility in Jackson, Michigan. The plant is operated by Worthington Industries, Inc. The facility contains state-of-the-art technology capable of processing master steel coils into both slit coils and sheared first operation blanks including rectangles, trapezoids, parallelograms and chevrons. It is designed to meet specifications for the automotive, appliance, furniture and metal door industries. In 2000, Worthington Specialty Processing shipments were approximately 300 thousand tons.
United States Steel and Rouge Steel Company participate in Double Eagle Steel Coating Company ("DESCO"), a joint venture which operates an electrogalvanizing facility located in Dearborn, Michigan. This facility enables United States Steel to supply the automotive demand for steel with corrosion resistant properties. The facility can coat both sides of sheet steel with zinc or alloy coatings and has the capability to coat one side with zinc and the other side with alloy. Availability of the facility is shared equally by the partners. In 2000, DESCO produced approximately 800 thousand tons of electrogalvanized steel.
United States Steel and Olympic Steel, Inc. participate in a 50-50 joint venture to process laser welded- sheet steel blanks at a facility in Van Buren, Michigan. The joint venture conducts business as Olympic Laser Processing. Startup began in 1998. In February 2000 an expansion project was announced adding two manually operated welding lines. The expansion will create the needed flexibility and capacity to service current and growing requirements for automotive laser weld applications. Laser welded blanks are used in the automotive industry for an increasing number of body fabrication applications. United States Steel is the venture's primary customer and is responsible for marketing the laser-welded blanks. In 2000, Olympic Laser Processing shipments were approximately 676 thousand parts.
United States Steel, through its subsidiary, United States Steel Export Company de Mexico, along with Feralloy Mexico, S.R.L. de C.V. and Intacero de Mexico, S.A. de C.V., participate in a joint venture, Acero Prime, for a slitting and warehousing facility in San Luis Potosi, Mexico. In May 2000, an expansion project was announced for the joint venture. The expansion project involved the construction of a 60,000 square-foot addition that doubled the current facility's size and total warehousing capacity. A second slitting line and an automatic packaging system were installed as part of the project. Also, a new 70,000 square-foot, in-bond warehouse facility was built in Coahuilla state in Ramos Arizpe. The warehouse stores and manages coil inventories. Startup began in the first quarter of 2001. In 2000, the joint venture processed approximately 95 thousand tons.
United States Steel's purchases of transportation services from Transtar and its subsidiaries and semi-finished steel from Republic, totaled $566 million, $361 million and $331 million in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, U. S. Steel's payables to these investees totaled $66 million and $60 million, respectively. United States Steel's revenues for steel and raw material sales to equity investees, primarily PRO-TEC, USS-POSCO and Republic, totaled $958 million, $831 million and $725 million in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, United States Steel's receivables from these investees were $177 million. These transactions were conducted under long-term, market-based contractual arrangements.
U. S. Steel Kosice
In November 2000, United States Steel acquired U. S. Steel Kosice, s.r.o. ("USSK"), headquartered in Kosice in the Slovak Republic, which owns the steel- making operations and related assets formerly held by VSZ, a.s., making United States Steel the largest flat-rolled producer in Central Europe. Currently, USSK has annual raw steel-making capability of 5.0 million tons and produces and sells sheet, tin, tubular, precision tube and specialty products, as well as coke. United States Steel's strategy is to serve its existing customers in Central Europe and to grow its customer base in this region.
USSK produces steel products in a variety of forms and grades. In the first half of 2001, USSK raw steel production was 2.1 million tons. USSK has three blast furnaces, two steel shops with two vessels each, a dual strand caster attached to each steel shop, a hot strip mill, cold rolling mill, pickling lines, galvanizing line, tin coating line and two coke batteries.
USSK shipped 1.8 million tons for the first half of 2001. These shipments included sheet products, galvanized sheet products and tin mill products. In addition, USSK owns Walzwerke Finow GmbH, located in eastern Germany, which produces about 90,000 tons per year of welded precision steel tubes from both cold rolled and hot rolled product as well as cold rolled specialty shaped sections. USSK also has facilities for manufacturing heating radiators and spiral weld pipe.
A majority of product sales by USSK are denominated in euros while only a small percent of expenditures are in euros. In addition, most interest and debt payments are in U.S. dollars and the majority of other spending is in U.S. dollars and Slovak crowns. This results in exposure to currency fluctuations.
Ranilla Kosice, s.r.o, which is 49% owned by USSK, processes coated sheets, both galvanized and painted, into various forms which are primarily used in the construction industry.
Employees
On December 31, 2000, the total number of active United States Steel domestic employees was 18,784, and the total number of active USSK employees was 16,244. Currently, substantially all domestic hourly employees of United States Steel's steel, coke and taconite pellet facilities are covered by a collective bargaining agreement with the United Steelworkers of America which expires in August 2004 and includes a no-strike provision. Other hourly employees (for example, those engaged in coal mining and transportation activities) are represented by the United Mine Workers of America, United Steelworkers of America and other unions. In addition, hourly employees of USSK are represented by the union OZ Metalurg under a collective bargaining agreement expiring February 2004, which is subject to annual wage negotiations.
Environmental Matters
United States Steel maintains a comprehensive environmental policy overseen by the Public Policy Committee of the USX Board of Directors. The Environmental Affairs organization has the responsibility to ensure that United States Steel's operating organizations maintain environmental compliance systems that are in accordance with applicable laws and regulations. The Executive Environmental Committee, which is comprised of officers of United States Steel, is charged with reviewing its overall performance with various environmental compliance programs. Also, United States Steel, largely through the American Iron and Steel Institute, continues its involvement in the negotiation of various air, water, and waste regulations with federal, state and local governments concerning the implementation of cost effective pollution reduction strategies.
The businesses of United States Steel are subject to numerous federal, state and local laws and regulations relating to the protection of the environment. These environmental laws and regulations include the Clean Air Act ("CAA") with respect to air emissions; the Clean Water Act ("CWA") with respect to water discharges; the Resource Conservation and Recovery Act ("RCRA") with respect to solid and hazardous waste treatment, storage and disposal; and the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to releases and remediation of hazardous substances. In addition, all states where
United States Steel operates have similar laws dealing with the same matters. These laws are constantly evolving and becoming increasingly stringent. The ultimate impact of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that certain implementing regulations for laws such as RCRA and the CAA have not yet been promulgated or in certain instances are undergoing revision. These environmental laws and regulations, particularly the CAA, could result in substantially increased capital, operating and compliance costs.
For a discussion of environmental capital expenditures and the cost of compliance for air, water, solid waste and remediation, see "--United States Steel Legal Proceedings" on page 80 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 96.
United States Steel has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet CAA obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of United States Steel's products and services, operating results will be adversely affected. United States Steel believes that its major domestic integrated steel competitors are confronted by substantially similar conditions and thus does not believe that its relative position with regard to such competitors is materially affected by the impact of environmental laws and regulations. However, the costs and operating restrictions necessary for compliance with environmental laws and regulations may have an adverse effect on United States Steel's competitive position with regard to domestic mini- mills and some foreign steel producers and producers of materials which compete with steel, which may not be required to undertake equivalent costs in their operations. In addition, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities and its production methods. For further information, see "--United States Steel Legal Proceedings" on page 80, and "--Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 96.
The 1997 Kyoto Global Climate Change Agreement ("Kyoto Protocol") produced by the United Nations convention on climate change, if ratified by the U. S. Senate, would require restrictions on greenhouse gas emissions in the United States. Options that could be considered by federal regulators to force the reductions necessary to meet these restrictions could escalate energy costs and thereby increase steel production costs. Until action is taken by the U. S. Senate to ratify or reject the Kyoto Protocol, it is not possible to estimate the effect of regulations that may be considered for implementation of emissions restrictions in the United States.
Air
The CAA imposed more stringent limits on air emissions, established a federally mandated operating permit program and allowed for enhanced civil and criminal enforcement sanctions. The principal impact of the CAA on United States Steel is on the coke-making and primary steel-making operations of United States Steel, as described in this section. The coal mining operations and sales of U. S. Steel Mining may also be affected.
The CAA requires the regulation of hazardous air pollutants and development and promulgation of Maximum Achievable Control Technology ("MACT") Standards. The amendment to the Chrome Electroplating MACT to include the chrome processes at Gary and Fairless is expected sometime in the next couple years. The EPA is also promulgating MACT standards for integrated iron and steel plants and taconite iron ore processing which are expected to be finalized in 2002. The impact of these new standards could be significant to United States Steel, but the cost cannot be reasonably estimated until the rules are finalized.
The CAA specifically addressed the regulation and control of coke oven batteries. The National Emission Standard for Hazardous Air Pollutants for coke oven batteries was finalized in October 1993, setting forth the MACT standard and, as an alternative, a Lowest Achievable Emission Rate ("LAER") standard. Effective
January 1998, United States Steel elected to comply with the LAER standards. United States Steel believes it will be able to meet the current LAER standards. The LAER standards will be further revised in 2010 and additional health risk-based standards are expected to be adopted in 2020. EPA is in the process of developing the Phase II Coke MACT for pushing, quenching and battery stacks which is scheduled to be finalized in 2002. This MACT will impact United States Steel, but the cost cannot be reasonably estimated at this time.
The CAA also mandates the nationwide reduction of emissions of acid rain precursors (sulfur dioxide and nitrogen oxides) from fossil fuel-fired electrical utility plants. United States Steel, like all other electricity consumers, will be impacted by increased electrical energy costs that are expected as electric utilities seek rate increases to comply with the acid rain requirements.
In September 1997, the EPA adopted revisions to the National Ambient Air Quality Standards for ozone and particulate matter which are significantly more stringent than prior standards. EPA has issued a Nitrogen Oxide ("NOx") State Implementation Plan ("SIP") call to require certain states to develop plans to reduce NOx emissions focusing on large utility and industrial boilers. The impact of these revised standards could be significant to United States Steel, but the cost cannot be reasonably estimated until the final revised standards and the NOx SIP call are issued and, more importantly, the states implement their SIPs covering their standards.
In 2000, all of the coal production of U. S. Steel Mining was metallurgical coal, which is primarily used in coke production. While USX believes that the new environmental requirements for coke ovens will not have an immediate effect on U. S. Steel Mining, the requirements may encourage development of steelmaking processes that reduce the usage of coke. The new ozone and particulate matter standards could be significant to U. S. Steel Mining, but the cost is not capable of being reasonably estimated until rules are proposed or finalized.
Water
United States Steel maintains the necessary discharge permits as required under the National Pollutant Discharge Elimination System ("NPDES") program of the CWA, and it is in compliance with such permits. In 1998, USX entered into a consent decree with the Environmental Protection Agency ("EPA") which resolved alleged violations of the Clean Water Act NPDES permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. In 1999, USX paid civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs. In addition, United States Steel will pay the public trustees $1 million at the end of the remediation project for future monitoring costs and United States Steel 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 the EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $36.4 million over the next five years. Estimated remediation and monitoring costs for this project have been accrued.
Solid Waste
United States Steel continues to seek methods to minimize the generation of hazardous wastes in its operations. RCRA establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks. Corrective action under RCRA related to past waste disposal activities is discussed below under "Remediation."
Remediation
A significant portion of United States Steel's currently identified environmental remediation projects relate to the remediation of former and present operating locations. These projects include the remediation of the
Grand Calumet River (discussed above), and the closure and remediation of permitted hazardous and non-hazardous waste landfills.
United States Steel is also involved in a number of remedial actions under CERCLA, RCRA and other federal and state statutes, and it is possible that additional matters may come to its attention which may require remediation. For a discussion of remedial actions related to United States Steel, see "--United States Steel Legal Proceedings".
PROPERTIES OF UNITED STATES STEEL
United States Steel or its predecessor USX has owned the vast majority of the domestic properties in excess of thirty years with no material adverse claim asserted. In the case of the real property and buildings of USSK, certified copies of the property registrations were obtained and examined by local counsel prior to the acquisition.
Several steel production facilities are leased. The caster facility at Fairfield, Alabama is subject to a lease expiring in 2012 with an option to purchase or to extend the lease. A coke battery at Clairton, Pennsylvania, which is subleased to the Clairton 1314B Partnership, is subject to a lease through 2004 with an option to purchase. The office space in Pittsburgh, Pennsylvania used by USX and United States Steel is leased through 2007.
For property, plant and equipment additions, including capital leases, see "--Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 96.
UNITED STATES STEEL LEGAL PROCEEDINGS
After the Separation, United States Steel will be a party to the following litigation:
Inland Steel Patent Litigation. In July 1991, Inland Steel Company ("Inland") filed an action against United States Steel and another domestic steel producer in the U.S. District Court for the Northern District of Illinois, Eastern Division, alleging defendants had infringed two of Inland's steel-related patents. Inland seeks monetary damages of up to approximately $50 million and an injunction against future infringement. United States Steel, in its answer and counterclaim, alleges the patents are invalid and not infringed and seeks a declaratory judgment to such effect. In May 1993, a jury found United States Steel to have infringed the patents. The District Court has yet to rule on the validity of the patents. In July 1993, the U.S. Patent Office rejected the claims of the two Inland patents upon a reexamination at the request of United States Steel and the other steel producer. A further request was submitted by United States Steel to the Patent Office in October 1993, presenting additional questions as to patentability which was granted and consolidated for consideration with the original request. In 1994, the Patent Office issued a decision rejecting all claims of the Inland patents. On September 21, 1999, the Patent Office Board of Appeals affirmed the decision of the Patent Office. Inland filed a notice of appeal with the Court of Appeals for the Federal Circuit on November 17, 1999. A hearing was held before the court on January 10, 2001, and the decision is pending.
Asbestos Litigation. United States Steel has been and is a defendant in a large number of cases in which plaintiffs allege injury resulting from exposure to asbestos. Many of these cases involve multiple plaintiffs and most have multiple defendants. These claims fall into three major groups: (1) claims made under certain federal and general maritime law by employees of the Great Lakes or Intercoastal Fleets, former operations of United States Steel; (2) claims made by persons who performed work at United States Steel facilities; and (3) claims made by industrial workers allegedly exposed to an electrical cable product formerly manufactured by United States Steel. To date, all actions resolved have been either dismissed or settled for immaterial amounts. It is not possible to predict with certainty the outcome of these matters; however, based upon present knowledge, management believes that it is unlikely that the resolution of the remaining actions will have a material adverse effect on its financial condition. This statement of belief is a forward-looking statement. Predictions as to the
outcome of pending litigation are subject to substantial uncertainties with respect to (among other things) factual and judicial determinations, and actual results could differ materially from those expressed in this forward- looking statement.
Environmental Proceedings. The following is a summary of the proceedings of United States Steel that were pending or contemplated as of June 30, 2001, under federal and state environmental laws. Except as described herein, it is not possible to accurately predict the ultimate outcome of these matters. Claims under CERCLA and related state acts have been raised with respect to the cleanup of various waste disposal and other sites. CERCLA is intended to expedite the cleanup of hazardous substances without regard to fault. Primary Responsible Parties ("PRPs") for each site include present and former owners and operators of, transporters to and generators of the substances at the site. Liability is strict and can be joint and several. Because of various factors including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the time period during which such costs may be incurred, it is impossible to reasonably estimate its ultimate cost of compliance with CERCLA.
Projections, provided in the following paragraphs, of spending for and/or timing of completion of specific projects are forward-looking statements. These forward-looking statements are based on certain assumptions, including, but not limited to, the factors provided in the preceding paragraph. To the extent that these assumptions prove to be inaccurate, future spending for, or timing of completion of, environmental projects may differ materially from those stated in forward-looking statements.
At June 30, 2001, United States Steel had been identified as a PRP at a total of 22 CERCLA sites. Based on currently available information, which is in many cases preliminary and incomplete, management believes that United States Steel liability for cleanup and remediation costs in connection with eight of these sites will be between $100,000 and $1 million per site and eight will be under $100,000.
At the remaining 6 sites, management expects that United States Steel share in the remaining cleanup costs at any single site will not exceed $5 million, although it is not possible to accurately predict the amount of sharing in any final allocation of such costs. The following is a summary of the status of these sites:
. At the former Duluth, Minn. Works, United States Steel spent a total of approximately $11.2 million through 2000. The Duluth Works was listed by the Minnesota Pollution Control Agency under the Minnesota Environmental Response and Liability Act on its Permanent List of Priorities. The Environmental Protection Agency ("EPA") has consolidated and included the Duluth Works site with the St. Louis River and Interlake sites on the EPA's National Priorities List. The Duluth Works cleanup has proceeded since 1989. United States Steel is conducting an engineering study of the estuary sediments and the construction of a breakwater in the estuary. Depending upon the method and extent of remediation at this site, future costs are presently unknown and indeterminable.
. The Buckeye Reclamation Landfill, near St. Clairsville, Ohio, has been used at various times as a disposal site for coal mine refuse and municipal and industrial waste. United States Steel was one of 15 PRPs that have entered into an agreed order with the EPA to perform a remediation of the site. Implementation of the remedial design plan, resulting in a long-term cleanup of the site, is estimated to cost approximately $28.5 million.
One of the PRPs filed suit against the EPA, the Ohio Environmental Protection Agency, and 13 PRPs including United States Steel. The EPA, in turn, filed suit against the PRPs to recover $1.5 million in oversight costs. In May 1996, United States Steel entered into a final settlement agreement to resolve this litigation and the overall allocation. United States Steel agreed to pay 4.8% of the estimated costs which would result in United States Steel paying an additional amount of approximately $1.1 million over a two- to three-year period. Through June 30, 2001, United States Steel has spent $982,000 at the site. Remediation commenced in 1999 and should be substantially completed in 2001.
. The D'Imperio and Ewan sites in New Jersey are waste disposal sites where a former subsidiary allegedly disposed of used paint and solvent wastes. USX has entered into a settlement agreement with the major PRPs at the sites which fixes USX's share of liability at approximately $1.2 million, $605,000 of which United States Steel has already paid. The balance, which is expected to be paid over the next several years, has been accrued.
. 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, United States Steel signed a consent decree to conduct a feasibility study at the site relating to the alternative remedy. In 1999, a new Record of Decision was approved by EPA and the DOJ. On January 19, 2001, United States Steel signed a consent decree with the EPA to remediate this site. On April 6, 2001, United States Steel paid its share of the consent decree obligation, which was $0.4 million. The only remaining outstanding claim is the natural resource damages claim filed by the Commonwealth of Pennsylvania.
. In 1988, United States Steel and three other PRPs agreed to the issuance of an administrative order by the EPA to undertake emergency removal work at the Municipal & Industrial Disposal Co. site in Elizabeth, Pa. The cost of such removal, which has been completed, was approximately $4.2 million, of which United States Steel paid $3.4 million. The EPA has indicated that further remediation of this site may be required in the future, but it has not conducted any assessment or investigation to support what remediation would be required. In October 1991, the Pennsylvania Department of Environmental Resources ("PaDER") placed the site on the Pennsylvania State Superfund list and began a Remedial Investigation ("RI") which was issued in 1997. It is not possible to estimate accurately the cost of any remediation or the shares in any final allocation formula; however, based on presently available information, USX may have been responsible for as much as 70% of the waste material deposited at the site. On October 10, 1995, the DOJ filed a complaint in the U.S. District Court for Western Pennsylvania against United States Steel and other Municipal & Industrial Disposal Co. defendants to recover alleged costs incurred at the site. In June 1996, United States Steel agreed to pay $245,000 to settle the government's claims for costs against it, American Recovery, and Carnegie Natural Gas. In 1996, United States Steel filed a cost recovery action against parties who did not contribute to the cost of the removal activity at the site. United States Steel reached a settlement in principle with all of the parties except the site owner. The PRPs are awaiting issuance of the State's Feasibility Study ("FS").
In addition, there are 16 sites related to United States Steel where information requests have been received or there are other indications that United States Steel may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability.
There are also 29 additional sites related to United States Steel where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Based on currently available information, which is in many cases preliminary and incomplete, management believes that liability for cleanup and remediation costs in connection with 4 of these sites will be under $100,000 per site, another 3 sites have potential costs between $100,000 and $1 million per site, and 7 sites may involve remediation costs between $1 million and $5 million. Another 3 sites, including the Grand Calumet River remediation at Gary Works, the Peters Creek Lagoon remediation at Clairton, and the potential claim for investigation, restoration and compensation of injuries to sediments in the East Branch of the Grand Calumet River near Gary Works, have or are expected to have costs for remediation, investigation, restoration or compensation in excess of $5 million. Potential costs associated with remediation at the remaining 12 sites are not presently determinable.
The following is a discussion of remediation activities at the major domestic United States Steel facilities:
Gary Works. In 1998, United States Steel 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, United States Steel 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. United States Steel will pay
the public trustees $1 million at the end of the remediation project for future
monitoring costs and United States Steel 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 the EPA, capital
improvements were made to upgrade plant systems to comply with the NPDES
requirements. In 1999, United States Steel 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, United States Steel purchased properties
which were conveyed to the trustees. 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 October 1996, United States Steel was notified by the Indiana Department of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U.S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a preassessment screen pursuant to federal regulations and have determined to perform a Natural Resource Damages Assessment. United States Steel was identified as a PRP along with 15 other companies owning property along the river and harbor canal. United States Steel and eight other PRPs have formed a joint defense group. In 2000, the trustees concluded their assessment of sediment injuries, which included a technical review of environmental conditions. The PRP joint defense group has proposed terms for the settlement of this claim which have been endorsed by representatives of the trustees and the EPA, to be included in a consent decree that United States Steel expects will resolve this claim. A reserve has been established for United States Steel's share of the anticipated settlement.
On October 23, 1998, a final Administrative Order on Consent was issued by EPA addressing Corrective Action for Solid Waste Management Units throughout Gary Works. This order requires United States Steel to perform a RCRA Facility Investigation ("RFI") and a Corrective Measure Study ("CMS") at Gary Works. The Current Conditions Report, United States Steel's first deliverable, was submitted to EPA in January 1997 and was approved by EPA in 1998. The Phase I RFI work plan was submitted to the EPA in July 1999.
IDEM issued notices of violations ("NOVs") relating to Gary Works in 1994 alleging various violations of air pollution requirements. In early 1996, United States Steel paid a $6 million penalty and agreed to install additional pollution control equipment and programs and implement programs costing over $100 million over a period of several years. In 1999, United States Steel entered into an Agreed Order with IDEM to resolve outstanding air issues. United States Steel paid a penalty of $207,400 and installed equipment at the No. 8 Blast Furnace and the No. 1 BOP to reduce air emissions. In November 1999, IDEM issued an NOV alleging various air violations at Gary Works. An agreed order is being negotiated.
Clairton. In 1987, USX and the PaDER entered into a Consent Order to resolve an incident in January 1985 involving the alleged unauthorized discharge of benzene and other organic pollutants from Clairton Works in Clairton, Pa. That Consent Order required USX to pay a penalty of $50,000 and a monthly payment of $2,500 for five years. In 1990, USX and the PaDER reached agreement to amend the Consent Order. Under the amended Order, USX agreed to remediate the Peters Creek Lagoon (a former coke plant waste disposal site); to pay a penalty of $300,000; and to pay a monthly penalty of up to $1,500 each month until the former disposal site is closed. As of June 30, 2001, remediation costs have amounted to $9.5 million with another $489,000 projected to complete the project.
Fairless Works. In January 1992, United States Steel commenced negotiations with the EPA regarding the terms of an Administrative Order on consent, pursuant to the RCRA, under which United States Steel would perform a RFI and a CMS at Fairless Works. A Phase I RFI report was submitted during the third quarter of 1997. A Phase II/III RFI will be submitted following EPA approval. The RFI/CMS will determine whether there is a need for, and the scope of, any remedial activities at Fairless Works.
Fairfield Works. In December 1995, United States Steel reached an agreement in principle with the EPA and the DOJ with respect to alleged RCRA violations at Fairfield Works. A consent decree was signed by United States Steel and the United States and filed with the court on December 11, 1997, under which United States Steel will pay a civil penalty of $1 million, implement two SEPs costing a total of $1.75 million and implement a RCRA corrective action at the facility. One SEP was completed during 1998 at a cost of $250,000. The second SEP is under way. The first RFI work plan for the site will be submitted for agency approval in the first quarter of 2001.
Mon Valley Works/Edgar Thomson Plant. In September 1997, USX received a draft consent decree addressing issues raised in an NOV issued by the EPA in January 1997. The NOV alleged air quality violations at United States Steel's Edgar Thomson Plant, which is part of Mon Valley Works. The draft consent decree addressed these issues, including various operational requirements, which EPA believed were necessary to bring the plant into compliance. USX has completed implementing the compliance requirements identified by EPA. USX has paid a cash penalty of $550,000 and implemented five SEPs valued at approximately $1.5 million in settlement of the government's allegations. On February 1, 2000, the U.S. District Court for Western Pennsylvania entered the consent decree.
In November 2000, an NOV was issued by the Jefferson County Health Department ("JCHD") alleging violation of the Halogenated Solvent National Emission Standards for Hazardous Air Pollutants and the JCHD volatile organic compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield Works. United States Steel proposed a civil penalty of $100,000 and a VOC emission limit, which have been agreed to by JHCD. A consent order was executed and approved by the court in May 2001. The penalty was paid by United States Steel in June 2001.
MANAGEMENT OF UNITED STATES STEEL CORPORATION FOLLOWING THE SEPARATION
Directors of United States Steel Corporation Following the Separation
Under Delaware law, the business and affairs of United States Steel Corporation will be managed under the direction of its board of directors. The certificate of incorporation and by-laws of United States Steel Corporation provide that the number of directors may be fixed by the board from time to time provided that there are always at least three directors. Upon the Separation, the board of directors of United States Steel Corporation is expected to consist of the individuals listed below (ages as of June 30, 2001). The present principal occupation or employment and five-year employment history of each individual follows the list below. Each of the individuals listed below is a citizen of the United States.
Name Age Position
---- --- --- --------
J. Gary Cooper(1)........... 64 Director
Robert J. Darnall........... 63 Director
Roy G. Dorrance............. 55 Vice Chairman and Chief Operating Officer
Dr. Shirley Ann 54 Director
Jackson(1)(2)..............
Charles R. Lee(1)(2)........ 61 Director
Paul E. Lego(1)............. 71 Director
John F. McGillicuddy(1)..... 70 Director
Dan D. Sandman.............. 53 Vice Chairman and Chief Legal &
Administrative Officer
Seth E. Schofield(1)(2)..... 61 Director
John W. Snow(1)............. 61 Director
John P. Surma, Jr........... 47 Vice Chairman and Chief Financial Officer
Thomas J. Usher(1)(2)....... 58 Chairman of the Board, Chief Executive
Officer and President
Douglas C. Yearley(1)(2).... 65 Director
|
J. Gary Cooper is Chairman and Chief Executive Officer, Commonwealth National Bank. He was the United States Ambassador to Jamaica from 1994 to 1997. Ambassador Cooper is a director of Gen Corp Inc. and Protective Life Corporation.
Robert J. Darnall is Chairman of Prime Advantage Corporation. From 1992 through 1998, he served as the Chairman and Chief Executive Officer at Inland Steel Industries and, in 1998, he joined Ispat International N.V. as head of its North American operations upon its acquisition of Inland Steel. He retired from that position. Mr. Darnall is a member of the board of directors of Household International, Inc., Cummins, Inc., Pactiv Corp., Sunoco, Inc., and the Federal Reserve Bank of Chicago, where he currently serves as Deputy Chairman.
Roy G. Dorrance is Executive Vice President of United States Steel. In January, 2001 he was named to this position. From 1997 to January 2001, he served as United States Steel's Executive Vice President with responsibility for production, sales and marketing of United States Steel's sheet product business. In 1995, he was appointed Vice President--Operations of United States Steel.
Dr. Shirley Ann Jackson is President of Rensselaer Polytechnic Institute. She was appointed President in 1999 and was Chairman of the U.S. Nuclear Regulatory Commission from 1995 to 1999. Dr. Jackson is a director of Albany Molecular Research, Inc., Federal Express Corporation, Newport News Shipbuilding, Sealed Air Corporation and UtiliCorp United, Inc. She is a member of the National Academy of Engineering, a Fellow of the American Academy of Arts and Sciences, and a Fellow of the American Physical Society.
Charles R. Lee is Chairman of the Board and Co-CEO, Verizon Communications since his election on June 30, 2000. Mr. Lee was elected Chairman of the Board and Chief Executive Officer of GTE, a predecessor of Verizon, in May 1992. Mr. Lee is a director of The Procter & Gamble Company, United Technologies Corporation, the Stamford Hospital Foundation, and the New American Schools Development Corporation.
Paul E. Lego is Retired Chairman and CEO Westinghouse Electric Corporation. Mr. Lego retired as Chairman and CEO of Westinghouse Electric Corporation in January 1993 after serving in that position since 1990. He is also Chairman of the Board of Commonwealth Industries, Inc. and a director of Dominion Resources Inc., Lincoln Electric Holdings, Inc. and Orlimar Golf Company.
John F. McGillicuddy is Retired Chairman Chemical Banking Corporation. Mr. McGillicuddy retired as Chairman and Chief Executive Officer of Chemical Banking Corporation in 1994, having served as Chairman and Chief Executive Officer of Chemical Banking Corporation and its predecessor Manufacturer's Hanover Corporation since 1979. He is a director of Empire HealthChoice, Inc., Southern Peru Copper Corporation, and UAL Corporation.
Dan D. Sandman is General Counsel, Secretary, and Senior Vice President-- Human Resources & Public Affairs of USX Corporation. Mr. Sandman was elected to this post in 1998. He was elected General Counsel and Secretary of USX Corporation in 1993. In 1996, Mr. Sandman's duties were expanded to include overall responsibility for human resources corporate wide, as well as direct responsibility for executive compensation as Senior Vice President--Human Resources for USX. Mr. Sandman is a director of Roppe Corporation.
Seth E. Schofield is Retired Chairman and Chief Executive Officer--USAir Group. Mr. Schofield retired as Chairman and Chief Executive Officer in 1996 after having served in such position since 1992. He is a director of Calgon Carbon Corp.
John W. Snow is Chairman, President and Chief Executive Officer, CSX Corporation, since 1991. He is a director of Circuit Cities Stores Inc., Verizon Communications and Johnson & Johnson.
John P. Surma, Jr. is Assistant to the Chairman of USX Corporation effective September 1, 2001 and has been the President of Marathon Ashland Petroleum LLC (MAP) since January 2001. Prior to that Mr. Surma served as the Senior Vice President, Supply & Transportation for MAP, the President of Speedway SuperAmerica LLC, and was named Senior Vice President, Finance & Accounting for Marathon Oil Company in 1997. Immediately prior to joining Marathon Oil Company, he was the Pittsburgh Price Waterhouse office leader for Audit and Business Advisory Services. Mr. Surma joined Price Waterhouse LLP in 1976 and was admitted to the partnership in 1987. He is a director of Calgon Carbon Corp.
Thomas J. Usher is Chairman of the Board & Chief Executive Officer of USX Corporation. Mr. Usher was elected to his current posts in July 1995 after being elected President and Chief Operating Officer of USX Corporation in 1994. In addition, he is on the board of directors of H. J. Heinz Company, PPG Industries, and PNC Financial Services Group.
Douglas C. Yearley is Chairman Emeritus of Phelps Dodge Corporation. Mr. Yearley retired in May, 2000 from Phelps Dodge Corporation after being elected President in 1991 and Chief Executive Officer in 1989. He is a director of Lockheed Martin Corporation.
The by-laws of United States Steel Corporation require that each non- employee director be paid allowances and attendance fees as the board may from time to time determine. Directors who are employees of United States Steel Corporation receive no compensation for their service on the board. It is expected that United States Steel Corporation will pay its non-employee directors as follows:
Annual Retainer................... $ 60,000 Committee Membership Fee.......... $ 5,000 ($6,000 for Committee Chairman) Meeting Fee (for each board or committee meeting)............... $ 2,000 |
Committees of United States Steel Corporation's Board of Directors Following the Separation
United States Steel Corporation is expected to have four standing committees: an Audit Committee, a Compensation and Organization Committee, a Financial Policy Committee and a Corporate Governance and Public Policy Committee. Each of these committees will consist of three or more directors who meet all requirements imposed by SEC rules and regulations or rules and regulations of any exchange or trading system on which United States Steel Corporation securities are listed.
The Audit Committee
All the members of the Audit Committee will be independent (as independence is defined in Sections 303.01(B)(2)(a) and (3) of the NYSE's listing standards, as may be modified or supplemented).
The Audit Committee is, among other things, responsible for:
. ensuring the integrity of United States Steel Corporation's financial reports,
. recommending to the board the independent accountants to be nominated for election by the stockholders,
. reviewing the independence of the independent accountants,
. reviewing the scope of the audit activities of the independent accountants and our internal auditors,
. providing direction to the internal audit staff and the independent accountants,
. approving the independent accountants' fees,
. reviewing audit results,
. reviewing and approving the annual financial statements, the annual report to stockholders, and the Annual Report on Form 10-K to be filed with the Securities and Exchange Commission,
. determining that appropriate controls are in place to ensure that United States Steel operates in accordance with its procedures and codes of conduct,
. reviewing compliance with business conduct policies,
. reviewing significant accounting, auditing and SEC pronouncements,
. reviewing, on an annual basis, a report outlining the activities undertaken by the committee over the past year to meet the requirements of the committee's charter, and
. assessing, and reporting annually to the United States Steel board on the activities of the committee and on the adequacy of the committee's charter.
The Compensation and Organization Committee
The Compensation and Organization Committee will be composed solely of directors who satisfy all criteria for independence under applicable rules of the New York Stock Exchange and who, in the opinion of the United States Steel Corporation board, are free of any relationship that would interfere with their exercise of independent judgment as members of the committee.
The Compensation and Organization Committee will be responsible for:
. making recommendations to the United States Steel Corporation board and to the boards of subsidiaries on all matters of policy and procedures relating to executive compensation,
. approving the salaries of officers (other than the officer-directors, whose salaries are approved by the United States Steel Corporation board),
. administering the Annual Incentive Compensation Plan and the Senior Executive Officer Annual Incentive Compensation Plan,
. administering the plans under which long-term incentives are granted and approving grants of options, stock appreciation rights, restricted stock and other incentives under those plans,
. the timely certification as to the meeting of applicable performance levels under the foregoing plans,
. approving the annual report on executive compensation for the proxy statement, and
. such other duties and responsibilities as may be assigned to the committee by the United States Steel board or as designated in plans approved by the shareholders.
The Compensation and Organization Committee will also be authorized to:
. adopt and amend employee benefit plans,
. review the activities of the United States Steel Corporation Pension Fund as administrator of certain benefit plans,
. make recommendations to the United States Steel Corporation board concerning policy matters relating to employee benefits,
. make recommendations to the United States Steel Corporation board concerning the appropriate size and composition of the United States Steel board, including
--candidates for election as directors,
--the composition and functions of United States Steel board committees,
--the compensation of non-employee directors, and
--all matters relating to the development and effective functioning of the United States Steel board,
. confer with management concerning plans for succession to executive management positions, and
. consider nominees recommended by stockholders for election as directors.
In recommending candidates for election as directors, the committee, among other considerations, will study the composition of the United States Steel Corporation board and try to identify candidates with broad knowledge and experience in business and society in general. Recommendations of candidates by stockholders of record must be sent, together with the nominee's qualifications and consent to be considered as a nominee, to the Secretary of United States Steel Corporation for presentation to the committee.
The Financial Policy Committee
The Financial Policy Committee will provide oversight with respect to the appropriate capital structure and financial policies of United States Steel. Its key responsibility in that role will be to make recommendations to the board concerning dividends. The board will also delegate to the committee the authority to:
. approve financings by United States Steel Corporation (except financings which involve the issuance of common stock), including the recommendation of action to subsidiaries, partnerships and joint ventures,
. authorize loans to outside entities, guarantees by United States Steel Corporation of the credit of others, and other uses of United States Steel Corporation credit, and
. approve United States Steel Corporation's funding policy for its pension and other post-employment benefit plans.
In addition, the committee is responsible for reviewing the performance of the United States Steel Pension Fund as investment manager and/or trustee of our employee benefit plans. It also receives reports and makes recommendations to the board on various financial matters.
The Corporate Governance and Public Policy Committee
The Corporate Governance and Public Policy Committee will concentrate on the following areas of emphasis: ownership of United States Steel Corporation, stockholder attitudes toward United States Steel Corporation, political- legislative developments affecting United States Steel Corporation, United States Steel Corporation policies on major public issues and corporate governance matters.
The committee will review the following matters and report to the board such observations and information thereon as the committee deems appropriate:
. matters bearing on the relationship between management and present or potential stockholders with emphasis on policy and major programs affecting ownership of United States Steel Corporation,
. communications to and from the investment community, particularly United States Steel Corporation's stockholders,
. legislative and regulatory issues affecting United States Steel Corporation's businesses and operations,
. public issues identified by United States Steel Corporation as likely to generate expectations of United States Steel Corporation by its constituencies, including stockholders, employees, customers, vendors, governments and the public, and United States Steel Corporation's position regarding identified public issues including, but not limited to, employee health and safety, environmental, energy and trade matters,
. United States Steel Corporation's efforts to affect identified public issues through research, analysis, lobbying efforts and participation in business and government programs, and
. codes of conduct applicable to employees of United States Steel Corporation and its principal operating units.
The committee also will assess and make recommendations concerning overall corporate governance to the extent specific matters are not the assigned responsibility of other board committees.
The board may establish other committees from time to time to facilitate the management of the business and affairs of United States Steel Corporation.
Officers of United States Steel Corporation Following the Separation
Upon completion of the Separation, the individuals listed below (with their ages as of June 30, 2001) are expected to be officers of United States Steel Corporation. Unless otherwise indicated, the business address of each of the individuals listed below is: 600 Grant Street, Pittsburgh, Pennsylvania 15219- 4776. Each of the individuals listed below is a citizen of the United States.
Name Age Position
---- --- --------
Charles G. Carson, III........... 59 Vice President--Environmental Affairs
John J. Connelly................. 54 Vice President--Strategic Planning
Roy G. Dorrance.................. 55 Vice Chairman and Chief Operating Officer
Albert E. Ferrara, Jr............ 52 Senior Vice President and Treasurer
James D. Garraux................. 48 Vice President--Employee Relations
Charles C. Gedeon................ 60 Executive Vice President--Raw Materials &
Diversified Business
Gretchen R. Haggerty............. 45 Senior Vice President and Controller
J. Paul Kadlic................... 59 Executive Vice President--Sheet Products
Dan D. Sandman................... 53 Vice Chairman and Chief Legal &
Adminstrative Officer
Larry G. Schultz................. 51 Vice President--Investor Relations and
Financial Analysis
Terrance D. Straub............... 55 Vice President--Governmental Affairs
(Washington, D.C.)
John P. Surma, Jr................ 47 Vice Chairman and Chief Financial Officer
Stephan K. Todd.................. 55 Deputy General Counsel
Thomas J. Usher.................. 58 Chairman of the Board, Chief Executive
Officer and President
|
For biographical information regarding Messrs. Dorrance, Sandman, Surma and Usher, see "Directors of United States Steel Corporation Following the Separation" on page 85.
Charles G. Carson, III, current United States Steel Vice President-- Environmental Affairs, was appointed to this position in January 1993.
John J. Connelly, current United States Steel Vice President--Business Development and Long Range Planning. From 1999 until January of 2001, Mr. Connelly served as United States Steel's Vice President-- Long Range Planning and International Business. In 1994, he was named Vice President--International Business for the U. S. Steel Group and served as President of USX Engineers and Consultants, Inc. from October 1994 to September 1996.
Albert E. Ferrara, Jr., is currently Vice President--Strategic Planning of USX, having assumed this position in 1997, and from 1994 to 1997 he was President of the USX Realty Division of the U. S. Steel Group.
James D. Garraux, current United States Steel Vice President--Employee Relations, assumed his position on August 1, 2000. He was appointed General Manager--Employee Relations in April of 1996.
Charles C. Gedeon, current United States Steel Executive Vice President--Raw Materials and Diversified Businesses, has served in this position since 1992. Mr. Gedeon is a member of the Board of Directors of RTI International Metals, Inc.
Gretchen R. Haggerty, current United States Steel Vice President--Accounting and Finance, was named to this position in 1998 after serving as Vice President & Treasurer of USX Corporation from 1991 to 1998.
J. Paul Kadlic, current United States Steel Executive Vice President--Sheet Products, assumed this position on January 1, 2001. He was named Vice President--Sales for sheet products in 1997. Prior to that, he served as General Manager of Sales for almost 15 years.
Larry G. Schultz, current USX Vice President--Accounting since 2000, after serving as Comptroller of U. S. Steel Group from 1992.
Terrance D. Straub, current USX Vice President--Governmental Affairs since 1991.
Stephan K. Todd, current United States Steel General Counsel, was elected to his current post in June 1998. He was named Assistant General Counsel in 1995.
Change in Control Agreements
USX has entered into change in control agreements, all of which are substantially the same, with its executive officers and with the executive officers of the U. S. Steel Group and the Marathon Group. The agreements with the executive officers who will become employees of United States Steel Corporation (the "United States Steel Agreements") will become obligations of United States Steel Corporation.
The United States Steel Agreements provide that, if an officer's employment is terminated under certain circumstances following a change in control, or after certain events associated with a change in control, the officer will be entitled to the following severance benefits:
. a cash payment of up to three times the sum of the officer's salary plus bonus,
. life and health insurance benefits for up to 3 years after termination,
. 3 years of additional credit towards eligibility for retiree medical and life insurance,
. a cash payment equal to the difference between amounts receivable by the officer under our pension plans and those which would be payable if the officer had worked for 3 more years at current pay rates,
. a cash payment equal to the difference between amounts receivable under our savings and thrift plans and amounts which would have been received if the officer's savings had been fully vested, and
. additional payments sufficient to compensate the officer for certain federal excise taxes.
The severance benefits are payable if the officer's employment is terminated by the officer for good reason or is terminated by United States Steel Corporation for other than cause or disability. Severance benefits are not payable if termination is due to the officer's death or occurs after the officer reaches age 65.
In addition, the United States Steel Agreements provide that upon a change in control all outstanding options, restored options, and stock appreciation rights previously granted to the officer will be fully vested and exercisable, and all restricted stock held by the officer will be fully vested.
Each United States Steel Agreement is automatically extended each year unless the officer is notified that United States Steel Corporation does not wish it extended. In any event, however, each agreement continues for two years after a change in control.
The definition of a change in control for purposes of these agreements is complex but is summarized as follows. It includes any change in control required to be reported in response to Item 6 (e) of Schedule 14A under the Securities Exchange Act of 1934 and provides that a change in control will have occurred if:
. any person not affiliated with United States Steel Corporation acquires 20 percent or more of the voting power of its outstanding securities,
. the United States Steel Corporation board of directors no longer has a majority made up of (1) individuals who were directors on the date of the agreements and (2) new directors (other than directors who join the board in connection with an election contest) approved by two-thirds of the directors then in office who (a) were directors on the date of the agreements or (b) were themselves previously approved by the board in this manner,
. United States Steel Corporation merges with another company and United States Steel Corporation's stockholders end up with less than 50 percent of the voting power of the new entity,
. stockholders approve a plan of complete liquidation of United States Steel Corporation, or
. there is a sale of all or substantially all of United States Steel Corporation's assets.
Neither the approval and adoption of the Agreement and Plan of Reorganization, nor the completion of the Separation will constitute a change in control for purposes of these agreements.
Compensation of United States Steel Corporation Executive Officers
The following table sets forth certain information concerning the compensation awarded to, earned by or paid to the chief executive officer and the other four most highly compensated individuals who are expected to serve as executive officers of United States Steel Corporation following the Separation for services rendered to USX or its subsidiaries in all capacities during 2000.
Summary Compensation Table
Restricted
Salary Stock Options All Other
and Bonus Other Annual Award(s) SARs Compensation
Name & Position Salary ($) Bonus ($) Total ($) Compensation ($) ($)(1) (#)(2) ($)(3)
--------------- ---------- --------- --------- ---------------- ---------- ------- ------------
T. J. Usher............. 1,325,000 2,500,000 3,825,000 7,729 4,925,000 400,000 112,406
Chairman of the Board,
Chief Executive Officer
and President
D. D. Sandman .......... 459,167 650,000 1,109,167 4,597 923,438 80,000 47,693
Vice Chairman and Chief
Legal and
Administrative Officer
J. P. Surma, Jr. ...... 350,000 650,000 1,000,000 1,781 0 30,000 41,375
Vice Chairman and Chief
Financial Officer
R. G. Dorrance.......... 328,333 340,000 668,333 1,677 345,000 50,000 32,115
Vice Chairman and
Chief Operating Officer
C. C. Gedeon............ 336,000 340,000 676,000 1,677 345,000 50,000 28,195
Executive Vice
President-Raw Materials
& Diversified
Businesses
|
(1) Grants of restricted stock under the USX Corporation 1990 Stock Plan are valued as of the date of grant. Grants are subject to conditions including continued employment and achievement of business performance standards. Dividends are paid on restricted stock. Shown below is the vesting schedule for restricted stock scheduled to vest less than three years from the date of grant, together with the number and value, as of December 31, 2000, of the aggregate holdings of restricted stock for each of the executive officers named in the Summary Compensation Table. Vesting shown assumes achievement of business performance at peer-group standard.
(2) All option shares listed except those granted to Mr. Surma were granted
with tandem stock appreciation rights ("SARs").
(3) This column includes amounts contributed by USX under the USX Savings Fund
Plan or the Marathon Thrift Plan and the related supplemental savings
plans. Such amounts for 2000 are $79,500, $27,550, $39,375, $19,700 and
$18,480 for Messrs. Usher, Sandman, Surma, Dorrance and Gedeon,
respectively. Also included are amounts attributable to split-dollar life
insurance provided by USX. (Marathon Oil Company does not provide split-
dollar life insurance.) For 2000, these amounts are $30,906, $18,143,
$10,415 and $7,715 for Messrs. Usher, Sandman, Dorrance and Gedeon,
respectively. Also included are amounts attributable to a mandatory tax
compliance program. For 2000, these amounts were $2,000 each for Messrs.
Usher, Sandman, Surma, Dorrance and Gedeon.
Options/SARs and Restricted Stock Granted in 2000
The following table sets forth certain information concerning restricted stock, stock options and stock appreciation rights ("SARs") granted during 2000 to each executive officer named in the Summary Compensation Table under the USX 1990 Stock Plan:
Restricted Stock Stock Options
------------------------- ---------------------------------------------------------------------
Number of % of Restricted Number of % of Stock Exercise
Class of Shares Stock Shares Option Shares Price per Expiration Assumed 5% Assumed
Name Stock Granted Shares Granted Granted Granted Share Date Gain 10% Gain
---- -------- --------- --------------- --------- ------------- --------- ------------ ---------- -----------
T.J. Usher...... Marathon 130,000 31.7% 260,000* 14.4% $25.5000 May 30, 2010 $4,169,568 $10,566,504
Steel
70,000 22.9% 140,000* 15.3% $23.0000 May 30, 2010 $2,025,044 $ 5,131,854
D.D. Sandman.... Marathon 24,375 5.9% 52,000* 2.9% $25.5000 May 30, 2010 $ 833,914 $ 2,113,301
Steel
13,125 4.3% 28,000* 3.1% $23.0000 May 30, 2010 $ 405,009 $ 1,026,371
J.P. Surma, Marathon 0 0 30,000 1.7% $25.5000 May 30, 2010 $ 481,104 $ 1,219,212
Jr............. Steel
0 0 0 0 -- -- -- --
R.G. Dorrance... Marathon 0 0 0 0 -- -- -- --
Steel
15,000 4.9% 50,000* 5.5% $23.0000 May 30, 2010 $ 723,230 $ 1,832,805
C.C. Gedeon..... Marathon 0 0 0 0 -- -- -- --
Steel
15,000 4.9% 50,000* 5.5% $23.0000 May 30, 2010 $ 723,230 $ 1,832,805
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Unvested Restricted Shares
Vesting Schedule for Restricted Stock Aggregate Holdings
--------------------------------------- --------------------------
Value as
of
December
Class of May 2002 May 2003 Class of 31, 2000
Date Granted Stock (Shares) (Shares) Stock Shares ($)
------------ -------- -------- -------- -------- ------- ---------
T.J. Usher.............. May 30, 2000 Marathon 26,000 26,000 Marathon 130,000 3,684,694
Steel Steel
May 30, 2000 14,000 14,000 70,000 1,255,625
------- ---------
200,000 4,940,319
D.D. Sandman............ May 30, 2000 Marathon 4,875 4,875 Marathon 24,375 690,880
Steel Steel
May 30, 2000 2,625 2,625 13,125 235,430
------- ---------
37,500 926,310
R.G. Dorrance........... May 30, 2000 Steel 3,000 3,000 Steel 15,000 269,063
C.C. Gedeon............. May 30, 2000 Steel 3,000 3,000 Steel 15,000 269,063
|
Options/SARs Exercised in 2000
Total Value
No. of Realized No. of
Shares for Both Unexercised Value of Unexercised In-
Underlying Classes of Options/SARs at The-Money Options/SARs
Options/SARs Stock December 31, at December 31, 2000
Name Exercised(1) ($)(1) 2000(1) for all Classes of Stock ($)(1)
---- ------------ ----------- --------------- -------------------------------
T.J. Usher.............. 0 -- 1,499,000 1,421,472
D.D. Sandman............ 0 -- 260,725 147,878
J.P. Surma, Jr.......... 0 -- 120,000 85,314
C.C. Gedeon............. 0 -- 162,500 0
R.G. Dorrance........... 0 -- 150,300 0
|
(1) Figures by class of stock are as follows:
No. of
Shares No. of
Underlying Unexercised
Class of Options/SARs Value Options/SARs at
Stock Exercised Realized ($) December 31, 2000
-------- ------------ ------------ -----------------
T.J. Usher................. Marathon 0 0 892,600
Steel 0 0 606,400
D.D. Sandman............... Marathon 0 0 153,400
Steel 0 0 107,325
J.P. Surma, Jr............. Marathon 0 0 120,000
Steel 0 0 0
C.C. Gedeon................ Marathon 0 0 0
Steel 0 0 162,500
R.G. Dorrance.............. Marathon 0 0 0
Steel 0 0 150,300
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Pension Benefits
The United States Steel Plan for Non-Union Employee Pension Benefits ("Steel Pension Plan") is comprised of two defined benefits. One is based on final earnings and the other on career earnings. Directors who have not been employees of United States Steel do not receive any benefits under the plan. The following table shows the annual final earnings pension benefits for retirement at age 65 (or earlier under certain circumstances) for various levels of eligible earnings which would be payable to employees retiring with the years of service shown. The benefits are based on a formula of a specified percentage (dependent on years of service) of average annual eligible earnings in the five consecutive years of the ten years prior to retirement in which such earnings were highest. As of the date of this proxy statement/prospectus Messrs. Usher, Sandman, Dorrance and Gedeon have 35, 8, 30 and 15 years of service, respectively. As of June 30, 2001, Mr. Surma had not accrued a benefit under any pension plan or program sponsored by United States Steel. If Mr. Gedeon retires with at least 16 credited years of service, he will receive from United States Steel Corporation an amount equivalent to a final earnings and a supplemental pension calculated as though he had an additional 14 years of service. In connection with the Separation and in order to induce Dan D. Sandman to serve as Vice Chairman and Chief Legal & Administrative Officer of United States Steel Corporation, USX and Mr. Sandman have entered into an agreement that provides if Mr. Sandman is employed by United States Steel Corporation for five years after the Separation, upon his retirement, Mr. Sandman will be offered the same enhanced retirement benefits as are being offered to USX employees under the Voluntary Early Retirement Benefits Package described on page 28 hereof.
15 20 25 30 35 40 45
Final Earnings Years Years Years Years Years Years Years
-------------- ------- ------- ------- ------- ------- ------- -------
$ 100,000 17,325 23,100 28,875 34,650 40,950 47,250 53,550
$ 300,000 51,975 69,300 86,625 103,950 122,850 141,750 160,650
$ 500,000 86,625 115,500 144,375 173,250 204,750 236,250 267,750
$ 700,000 121,275 161,700 202,125 242,550 286,650 330,750 374,850
$ 900,000 155,925 207,900 259,875 311,850 368,550 425,250 481,950
$1,100,000 190,575 254,100 317,625 381,150 450,450 519,750 589,050
$1,300,000 225,225 300,300 375,375 450,450 532,350 614,250 696,150
$1,500,000 259,875 346,500 433,125 519,750 614,250 708,750 803,250
|
Annual career earning benefits are equal to 1% of total career earnings plus a 30 percent supplement. The estimated annual career earnings benefits payable at normal retirement age 65, assuming no increase in annual earnings, will be $233,400 for Mr. Usher, $114,420 for Mr. Sandman, $80,902 for Mr. Dorrance and $69,562 for Mr. Gedeon. Earnings for the purpose of calculating both the final earnings and career earnings pensions are limited to base salary as reflected in the Summary Compensation table. They do not include any awards under any bonus programs.
As of June 30, 2001, Mr. Surma had 4.5 years of service with Marathon Oil Company and its subsidiaries and no service with USX or its other subsidiaries. In connection with his employment by Marathon in 1997, Marathon agreed to provide Mr. Surma with additional pension benefits by treating him as though he had an additional 15 years of pension service. As a result of this provision, if Mr. Surma retires at age 65, his total pension benefits from Marathon and its subsidiaries, assuming no pay increases, will be $19,631 monthly.
As of June 30, 2001, Mr. Sandman had 19 years of service under Marathon's pension plans. If Mr. Sandman retires at age 65, his total pension benefits from Marathon and its subsidiaries will be $25,181 monthly.
In addition to the pension benefit described above, Messrs. Usher, Sandman, Surma, Dorrance and Gedeon participate in the United States Steel Corporation Executive Management Supplemental Pension Plan and are entitled, upon retirement after age 60, or before age 60 with United States Steel's consent, to the benefits shown in the table below based on bonuses paid under applicable United States Steel plans. These bonuses are reported in the bonus column of the Summary Compensation Table.
Annual Bonus 15 Years 20 Years 25 Years 30 Years 35 Years 40 Years 45 Years ------ -------- -------- -------- -------- --------- --------- --------- $ 100,000 $ 23,100 $ 30,800 $ 38,500 $ 46,200 $ 53,900 $ 61,600 $ 69,300 300,000 69,300 92,400 115,500 138,600 161,700 184,800 207,900 500,000 115,500 154,000 192,500 231,000 269,500 308,000 346,500 700,000 161,700 215,600 269,500 323,400 377,300 431,200 485,100 900,000 207,900 277,200 346,500 415,800 485,100 554,400 623,700 1,100,000 254,100 338,800 423,500 508,200 592,900 677,600 762,300 1,300,000 300,000 400,400 500,500 600,600 700,700 800,800 900,900 1,500,000 346,500 462,200 577,500 693,000 808,500 924,000 1,039,500 1,700,000 392,700 523,600 654,500 785,400 916,300 1,047,200 1,178,100 1,900,000 438,900 585,200 731,500 877,800 1,024,100 1,170,400 1,316,700 |
For information regarding compensation to be paid to Mr. Usher following the Separation, see "THE SEPARATION--Completion and Retention Agreement with Thomas J. Usher" on page 57.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
United States Steel, through its Domestic Steel segment, is engaged in the production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; 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"), 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 United States Steel's Combined Financial Statements and Notes to Combined Financial Statements.
Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of United States Steel. These statements typically contain words such as "anticipates", "believes", "estimates", "expects", "intends" 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 United States Steel, see "RISK FACTORS" on page 14.
Results of Operations
Revenues and other income for the first six months of 2001 and 2000 and the years 2000, 1999 and 1998 are set forth in the following table:
Six Months
Ended June 30
-------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
(Dollars in Millions)
Revenues by product:
Sheet and semi-finished steel
products............................. $1,601 $1,790 $3,288 $3,433 $3,598
Tubular, plate, and tin mill
products............................. 1,096 884 1,731 1,140 1,546
Raw materials (coal, coke and iron
ore)................................. 254 268 626 549 744
Other(a).............................. 292 269 445 414 490
Income (loss) from affiliates........... 40 7 (8) (89) 46
Gain on disposal of assets.............. 16 28 46 21 54
Other income (loss)..................... 2 (2) 4 2 (1)
------ ------ ------ ------ ------
Total revenues and other income......... $3,301 $3,244 $6,132 $5,470 $6,477
====== ====== ====== ====== ======
|
Revenues and other income increased by $57 million in the first six months of 2001 compared with the first six months of 2000. The increase primarily reflected the inclusion of USSK revenues, partially offset by lower domestic shipment volumes (domestic steel shipments decreased 841,000 tons) and lower average domestic steel product prices (average prices decreased $11 per ton).
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
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
realized prices, particularly tubular product prices, and lower losses from investees, which, in 1999, included a $47 million charge for the impairment of United States 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.
Income (loss) from operations for the first six months of 2001 and 2000 and the years 2000, 1999 and 1998 are set forth in the following table:
Six Months
Ended June
30
------------
2001 2000 2000 1999 1998
----- ----- ---- ---- -----
(Dollars in millions)
Segment income (loss) for Domestic
Steel(a)(b).................................. $(220) $ 122 $ 23 $ 91 $ 517
Segment income for U. S. Steel Kosice(c)...... 82 -- 2 -- --
----- ----- ---- ---- -----
Income (loss) for reportable segments..... $(138) $ 122 $ 25 $ 91 $ 517
Items not allocated to segments:
Net pension credits......................... 72 132 266 228 186
Administrative expenses..................... (15) (11) (25) (17) (24)
Costs related to former business
activities(d).............................. (38) (40) (91) (83) (100)
Costs related to the Separation............. (9) -- -- -- --
Asset impairments--Coal..................... -- -- (71) -- --
Impairment of United States Steel's
investment in USS/Kobe and costs related to
formation of Republic...................... -- -- -- (47) --
Loss on investment in RTI stock used to
satisfy indexed debt obligation............ -- -- -- (22) --
----- ----- ---- ---- -----
Total income (loss) from operations....... $(128) $ 203 $104 $150 $ 579
===== ===== ==== ==== =====
|
Segment income for Domestic Steel
Segment income for Domestic Steel operations decreased $342 million in the first six months of 2001, compared with the first six months of 2000, primarily due to lower average steel prices, higher costs from operating inefficiencies primarily due to lower throughput for sheet products, higher energy costs, lower shipment volumes and lower results at iron ore and coal operations.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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 United States Steel'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
Segment income for USSK was $82 million for the first six months of 2001 and $2 million for the period following the November 24, 2000 acquisition through year-end 2000.
Items not allocated to segments
Net pension credits associated with all of United States Steel's domestic pension plans are not included in segment income for domestic operations. These net pension credits, which are primarily noncash, totaled $72 million in first six months of 2001, compared to $132 million in first six months of 2000. The $60 million decrease in net pension credits in the first six months 2001 is primarily due to the transition asset being fully amortized at the end of 2000. In addition, these net pension credits 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. Currently, the net pension credit for 2001 is expected to be approximately $145 million, excluding any potential impacts from the Proposed Separation. Future net pension credits will no longer benefit from the transition asset, which was fully amortized in 2000, and can vary depending upon the market performance of plan assets, changes in actuarial assumptions regarding such factors as a selection of a discount rate and rate of return on assets, changes in the amortization levels of prior period service costs, plan amendments affecting benefit payout levels, business combinations and profile changes in the beneficiary populations being valued. To the extent net pension credits decline in the future, income from operations would be adversely affected.
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 United States Steel 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 United States Steel were $15 million and $11 million for the six months ended June 30, 2001 and 2000, respectively, and $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
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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.
Costs 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.
Costs related to the Separation include professional fees and expenses and certain other costs.
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.
Net interest and other financial costs for the first six months of 2001 and 2000 and the years 2000, 1999 and 1998 are set forth in the following table:
Six Month
Ended
June 30
----------
2001 2000 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in millions)
Net interest and other financial costs (income).... $ 36 $48 $105 $74 $42
Less:
Favorable adjustment to carrying value of indexed
debt(a)......................................... -- -- -- (13) (44)
Favorable adjustment to interest related to prior
years' taxes(b)................................. (67) -- -- -- --
---- --- ---- --- ---
Net interest and other financial costs adjusted to
exclude above items............................... $103 $48 $105 $87 $86
==== === ==== === ===
|
Adjusted net interest and other financial costs increased by $55 million in the first six months of 2001 as compared with the same period in 2000. This increase was largely due to a higher average debt level, which primarily resulted from the elective funding for employee benefits and the acquisition of USSK, both of which occurred in the fourth quarter of 2000.
Adjusted net interest and other financial costs increased $18 million in 2000 as compared with 1999, primarily due to higher average debt levels. Adjusted net interest and other financial costs were $87 million in 1999 as compared with $86 million in 1998.
The credit for income taxes in the first six months of 2001 was $143 million. The credit contained a $33 million tax benefit associated with the Transtar reorganization and an unfavorable adjustment of $15 million related to the settlement of prior years' taxes. In addition, as a result of tax credit provisions of laws of the Slovak Republic and certain tax planning strategies, virtually no income tax provision is recorded for income related to USSK.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The provision for income taxes in 2000 decreased compared to 1999 primarily due to a decline in income from operations, partially 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.
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 United States Steel's share of Republic's extraordinary loss related to the early extinguishment of debt.
Net loss in the first six months of 2001 was $21 million, compared with net income of $99 million in the first six months of 2000, a decrease of $120 million. United States Steel 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. These decreases in net income primarily reflect the factors discussed above.
Operating Statistics
First six months 2001 United States Steel shipments were 6.9 million net tons. Domestic Steel shipments of 5.0 million tons and raw steel production of 5.2 million tons decreased 14% and 15%, respectively, from the same period in 2000. Domestic raw steel capability utilization in the first six months of 2001 averaged 83%, compared to 97% in the same period in 2000. At USSK, first six month 2001 shipments were 1.8 million net tons, raw steel production was 2.1 million net tons and raw steel capability utilization was 93% based on annual raw steel production capability which had been 4.5 million net tons.
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 2000, 1999 and 1998 and by weak tubular markets in 1999 and 1998. Exports accounted for approximately 5% of Domestic Steel shipments in 2000, 3% in 1999 and 4% in 1998.
Domestic raw steel production was 11.4 million tons in 2000, compared with 12.0 million tons in 1999 and 11.2 million tons in 1998. Domestic raw steel production averaged 89% of capability in 2000, compared with 94% of capability in 1999 and 88% of capability in 1998. In 2000, domestic raw steel production was negatively impacted by a planned reline at Gary Works No. 4 blast furnace in July 2000. Because of market conditions, United States Steel limited its domestic production by keeping the Gary Works No. 4 blast furnace out of service until February 2001. 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, United States Steel 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.
Financial Condition and Cash Flows
Current assets at June 30, 2001 decreased $41 million from year-end 2000 primarily due to decreases in inventories, deferred income tax benefits and income taxes receivable, partially offset by increases in cash and cash equivalents and accounts receivable. 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 income tax receivable from Marathon, and increased trade receivables and inventories resulting from the acquisition of USSK.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Net property, plant and equipment at June 30, 2001 increased $359 million from year-end 2000 primarily due to the consolidation of Transtar and the acquisition of East Chicago Tin. 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 at June 30, 2001 increased $269 million from year-end 2000 primarily due to increases in notes payable, debt due within one year and accrued taxes. 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 was $2,432 million at June 30, 2001, $13 million lower than year-end 2000. 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 United States Steel 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. Most of the debt is a direct obligation of, or is guaranteed by, USX.
Employee benefits at June 30, 2001 increased $149 million from year-end 2000 primarily due to additional liabilities resulting from the Transtar consolidation and the acquisition of the tin mill products business of LTV Corporation. Employee benefits at December 31, 2000 decreased $478 million from December 31, 1999 primarily due to the $500 million elective contribution to a VEBA.
Net cash provided from operating activities increased $126 million in the first six months of 2001, compared with the first six months of 2000. The increase was due primarily to favorable working capital changes, which included a favorable income tax settlement of $379 million with Marathon in the first six months of 2001 compared to a favorable settlement of $97 million in the first six months of 2000, partially offset by decreased net income (excluding noncash items).
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 Marathon in accordance with the group tax allocation policy. The $500 million VEBA contribution has provided United States Steel with the flexibility to fund the ongoing costs of providing USWA retiree health care and life insurance benefits from the VEBA instead of from corporate cash flow for at least the next several years. It is estimated that approximately $110 million of such obligations will be paid from the VEBA instead of from corporate cash in 2001. Net cash used in operating activities was $80 million in 1999 including a net payment of $320 million upon the expiration of the accounts receivable program. Excluding these non-recurring items in both years, net cash provided from operating activities decreased $434 million in 2000 due mainly to decreased profitability and an increase in working capital.
Net cash provided from operating activities was $380 million in 1998 and included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace explosion and the payment of $30 million for the repurchase of sold accounts receivable, partially offset by an income tax settlement with Marathon in accordance with the group tax allocation policy. Excluding these non-recurring items in both years, net cash provided from operating activities decreased $110 million in 1999 due mainly to decreased profitability.
Capital expenditures in the first six months of 2001 were $141 million, compared with $97 million in the same period in 2000. The increase of $44 million is primarily due to exercising a buyout option of a lease for the balance of the Gary Works No. 2 Slab Caster.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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 June 30, 2001 totaled $109 million compared with $206 million at year-end 2000 and $83 million at year-end 1999. In addition, 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.
Capital expenditures for 2001, which include expenditures related to the recently acquired facilities of USSK, Transtar and East Chicago Tin, are expected to be approximately $325 million, a reduction of over $100 million from the amount originally expected, primarily due to the substitution of leases for purchases and the delay or deferral of certain capital projects. Major expenditures 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; systems development projects; 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 expenditures 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 United States Steel 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. The first quarter 2001 acquisition of East Chicago Tin and consolidation of Transtar were noncash transactions.
Net cash changes related to financial obligations decreased by $32 million in the first six months of 2001, reflecting favorable cash from operations, partially offset by capital expenditures and dividend payments. Financial obligations consist of United States Steel'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 United States Steel.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Net cash changes related to financial obligations increased by $1,202 million, $486 million and $9 million in 2000, 1999 and 1998, respectively. 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.
Dividends paid decreased $13 million in the first six months of 2001 from the same period in 2000, due to a decrease in the dividend rate paid to U. S. Steel Group common stockholders.
Liquidity
Prior to Separation
As a matter of policy, USX has managed most financial activities on a centralized, consolidated basis, and will continue to do so until the Separation. 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 United States Steel based upon its cash flows for the periods presented and its initial capital structure. However, a portion of most financing transactions are attributed to and reflected in the combined financial statements of United States Steel. Transactions such as leases, certain collateralized financings, financial activities of consolidated entities that are less than wholly owned by USX and transactions related to securities convertible solely into USX-U. S. Steel Group Common Stock are or will be specifically attributed to and reflected in their entirety in the combined financial statements of United States Steel.
The cash requirements for United States Steel have been funded as part of USX's program of managing financial activities on a centralized consolidated basis. 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 June 30, 2001, USX had no borrowings against its $1,354 million long-term revolving credit agreement, no borrowings against its $451 million 364-day facility and no commercial paper borrowings. There were no borrowings against USX's short- term lines of credit totaling $115 million at June 30, 2001. At June 30, 2001, there were no borrowings against the USSK $50 million revolving credit agreement.
On April 24, 2001, USX announced that the Board had authorized management to proceed with the necessary steps to implement a plan of reorganization of the corporation in order to separate the energy and steel businesses. Until the plan of reorganization is implemented or abandoned, USX management believes that it will be more difficult to access traditional debt and equity markets.
Capital expenditures in the first half of 2001 were $141 million and are expected to be approximately $325 million for the full year, including expenditures related to the recently acquired facilities of USSK, Transtar, and East Chicago Tin. Contract commitments for capital expenditures at June 30, 2001 totaled $109 million. Based upon preliminary assumptions, capital expenditures are expected to be at least $260 million for the full year in 2002.
After Separation
Following the Separation, United States Steel will be an independent company and will no longer have access to the financial resources of USX Corporation. It is a condition to the Separation that United States Steel will have in place, at time of Separation, cash and undrawn credit facilities of at least $400 million.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Assuming the Separation had occurred on June 30, 2001, United States Steel Corporation and its subsidiaries would have had total outstanding debt of $1,791 million including:
--a USSK loan facility of $325 million
--assumed USX debt and capital leases of $569 million
--new financing arrangements of $897 million.
On July 27 and September 11, 2001, in partial satisfaction of the $897 million in new financings, United States Steel completed private placements in the aggregate of $535 million (reduced by a $5 million discount) of 10 3/4% Senior Notes which mature on August 1, 2008. At least $300 million of new financing arrangements is expected to be funded through the preliminary tax settlement with Marathon that will occur immediately prior to the Separation. United States Steel intends to enter, on or before the Separation, into various financing arrangements in order to, among other things, replace a portion of the indebtedness attributed to United States Steel by USX prior to the Separation and to provide necessary liquidity. The terms of such financings, including maturities and amortization schedules for payments of principal, interest rates, covenants or security, have not yet been determined and no commitments for any additional financing facilities are in place. The financings will be subject to market conditions and we cannot assure you that such financings will be available on commercially reasonable terms.
Based on United States Steel's pro forma debt levels as of June 30, 2001, United States Steel anticipates that its scheduled interest payments for the twelve months immediately following the Separation will be approximately $148 million, assuming an annual weighted average interest rate of 8.25 percent.
United States Steel management believes that its liquidity will be adequate to satisfy its obligations after Separation for the foreseeable future, including its obligations under the Financial Matters Agreement with Marathon Oil Corporation and any other financing transactions related to the Separation, and to complete currently authorized capital spending programs. Future requirements for United States Steel's business needs, including the funding of capital expenditures, debt service for the financing to be incurred in relation to the Separation, and any amounts that may ultimately be paid in connection with contingencies, are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources.
USX has elected to file a consolidated United States federal income tax return. 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 United States Steel financial statements in accordance with USX's Tax Allocation Policy.
For tax provision and settlement purposes, consolidated tax benefits or detriments resulting from attributes generated by United States Steel, principally net operating losses and minimum tax credits, which could not be utilized on a separate return basis for United States Steel, but which were utilized on the USX consolidated tax return were allocated to United States Steel. As a result, a tax receivable or payable was recorded reflecting the benefits or detriments accruing to United States Steel for the use of these attributes by USX. The tax receivable from USX established at December 31, 2000 was settled in the first quarter 2001 by a $364 million reduction to outstanding debt balances of United States Steel. Settlements were $379 million in the first six months of 2001, $91 million in 2000, $(2) million in 1999, and $21 million in 1998. For pre-separation tax years which have not been settled with the IRS, the Tax Sharing Agreement replaces the USX Tax Allocation Policy and generally provides for resettlement of these tax years on a basis similar to the USX Tax Allocation Policy. Following the Separation, United States Steel will no longer be a member of the USX consolidated group for tax purposes and, therefore, generally there is no provision for settlements under the Tax Sharing Agreement for these years.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
A preliminary settlement for the calendar year 2001 federal income taxes, which would be made in March 2002 under USX's current tax allocation policy, will be made immediately prior to the Separation at a discounted amount to reflect the time value of money. Under the preliminary settlement for calendar year 2001, it is expected that United States Steel will receive at least $300 million from Marathon immediately prior to Separation arising from USX's current Tax Allocation Policy.
United States Steel management's opinion concerning liquidity and United States Steel'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 could affect the availability of financing include the performance of United States Steel (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of United States Steel's outstanding debt and credit ratings by rating agencies.
Debt Rating
Standard and Poor's has assigned a BB corporate credit rating, which is non- investment grade, to United States Steel Corporation with a negative outlook, assuming the Plan of Reorganization is completed. Moody's has assigned a Ba1 senior implied rating, which is non-investment grade, to United States Steel with a stable outlook. Additionally, Standard & Poor's and Moody's have assigned BB and Ba2 credit ratings, respectively, to United States Steel's $535 million Senior Notes. Both of these ratings are non-investment grade.
Environmental Matters, Litigation and Contingencies
United States Steel has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, 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 United States Steel's products and services, operating results will be adversely affected. United States Steel 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 United States Steel could be adversely affected.
In addition, United States Steel expects to incur capital expenditures for its USSK operation to meet environmental standards under the Slovak Republic's environmental laws.
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.
United States Steel 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 at its Fairfield Works. Until the studies are completed at these facilities, United States Steel is unable to estimate the total cost of remediation activities that will be required.
United States Steel has been notified that it is a potential responsible party ("PRP") at 22 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 2001. In addition, there are 16 sites where United States Steel has received information requests or
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
other indications that United States Steel may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability or to make any judgment as to the amount thereof. There are also 29 additional sites related to United States Steel 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, United States Steel is one of a number of parties involved and the total cost of remediation, as well as United States Steel's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. United States Steel 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.
In October 1996, United States Steel 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 the 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. United States Steel was identified as a PRP along with 15 other companies owning property along the river and harbor canal. United States Steel and eight other PRPs have formed a joint defense group. In 2000, the trustees concluded their assessment of sediment injuries, which included a technical review of environmental conditions. The PRP joint defense group has proposed terms for the settlement of this claim which have been endorsed by representatives of the trustees and the U.S. Environmental Protection Agency ("EPA") to be included in a consent decree that United States Steel expects will resolve this claim. A reserve has been established for United States Steel's share of this anticipated settlement.
In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture between United States Steel and Kobe Steel, Ltd. ("Kobe"), was the subject of a multi-media audit by the EPA that included an air, water and hazardous waste compliance review. USS/Kobe and the EPA entered into a tolling agreement pending issuance of the final audit and commenced settlement negotiations in July 1999. In August 1999, the steelmaking and bar producing operations of USS/Kobe were combined with companies controlled by Blackstone Capital Partners II to form Republic. The tubular operations of USS/Kobe were transferred to a newly formed entity, Lorain Tubular Company LLC ("Lorain Tubular"), which operated as a joint venture between USX and Kobe until December 31, 1999 when USX purchased all of Kobe's interest in Lorain Tubular. Republic and Lorain Tubular are continuing negotiations with the EPA. Most of the matters raised by the EPA relate to Republic's facilities, however, air discharge 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, United States Steel 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, United States Steel 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, United States Steel 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, United States Steel will pay the public trustees $1 million at the end of the remediation project for future monitoring costs and United States Steel 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 the 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.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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, United States Steel 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, United States Steel signed a consent decree with the EPA to remediate this site. On April 6, 2001, United States Steel paid $0.4 million for costs associated with this site. The only remaining outstanding claim is the natural resource damages claim filed by the Commonwealth of Pennsylvania.
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. United States Steel'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.
In November 2000, a NOV was issued by the Jefferson County Health Department ("JCHD") alleging violation of the Halogenated Solvent National Emission Standards for Hazardous Air Pollutants and the JCHD Volatile Organic Compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield Works. U.S. Steel Group proposed a civil penalty of $100,000 and a VOC emission limit, which have been agreed to by JCHD. A consent order was executed and approved by the court in May 2001. The penalty was paid by United States Steel in June 2001.
New or expanded environmental requirements, which could increase United States Steel's environmental costs, may arise in the future. United States Steel intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, United States Steel does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2001. United States Steel'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, United States Steel 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.
United States Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to United States Steel Combined Financial Statements. However, management believes that United States Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to United States Steel.
Imports and Trade Issues
Steel imports to the United States accounted for an estimated 23%, 27%, 26% and 30% of the domestic steel market demand in the first six months of 2001, and for the years 2000, 1999 and 1998, respectively.
UNITED STATES STEEL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
On November 13, 2000, United States Steel 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. The ITC made a preliminary determination that there is a reasonable indication that the domestic industry is being materially injured by the imports in question. The U.S. Department of Commerce ("Commerce") made preliminary findings of margins in all of the cases. Commerce has also found final margins in the AD cases against Argentina and South Africa and in the CVD case against Argentina, while final determinations in the other cases will be made at a later date. Both the ITC and Commerce are continuing their investigations in all the cases in which final determinations have not yet been made.
On June 5, 2001, President Bush announced a three-part program to address
the excessive imports of steel that have been depressing markets in the United
States. The program involves (1) negotiations with foreign governments seeking
near-term elimination of inefficient excess steel production capacity
throughout the world, (2) negotiations with foreign governments to establish
rules that will govern steel trade in the future and eliminate subsidies, and
(3) an investigation by the ITC under section 201 of the Trade Act of 1974 to
determine whether steel is being imported into the United States in such
quantities as to be a substantial cause of serious injury to the United States
steel industry.
On June 22, 2001, the Bush Administration requested that the ITC initiate investigations under section 201 of the Trade Act of 1974. Products included in the request are in the following categories, subject to exclusion of certain products:
(1) Carbon and alloy flat products;
(2) Carbon and alloy long products;
(3) Carbon and alloy pipe and tube; and
(4) Stainless steel and alloy tool steel products.
United States Steel believes that the remedies provided by AD and CVD are insufficient to correct the widespread dumping and subsidy abuses that currently characterize steel imports into our country and has, therefore, urged the government to take actions such as those described above. United States Steel, nevertheless, intends to file additional AD and CVD petitions against unfairly traded imports that adversely impact, or threaten to adversely impact, the results of United States Steel 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 countervailing subsidy would be likely to continue or recur. In all of the cases, Commerce determined that dumping or countervailing subsidies would be likely to continue or recur if the orders are discontinued. In the seamless pipe cases, the ITC voted on June 7, 2001 to continue the orders as to Argentina, Brazil and Germany and to discontinue the orders pertaining to Italy. The ITC voted on June 15, 2001 to continue the orders against all five countries pertaining to OCTG other than drill pipe. The ITC's votes on drill pipe will continue the order in effect against Japan and discontinue the orders against Argentina and Mexico.
On June 29, 2001, various domestic producers of coke and the United Steelworkers of America filed antidumping cases against blast furnace coke producers from China and Japan. United States Steel produces coke and also imports coke from both China and Japan. United States Steel is not a petitioner in these cases.
UNITED STATES STEEL
Quantitative And Qualitative Disclosures About Market Risk
Commodity Price Risk and Related Risks
Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for commodity-based derivative instruments as of June 30, 2001 are provided in the following table(a):
Incremental
Decrease in
Income Before
Income Taxes
Assuming a
Hypothetical
Price Change
of:
-------------
10% 25%
------ ------
(Dollars in
millions)
Commodity-Based Derivative Instruments
Natural Gas..................................................... 0.9(b) 2.2(b)
Zinc............................................................ 1.8(b) 4.6(b)
Tin............................................................. 0.1(b) 0.3(b)
|
UNITED STATES STEEL
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 United States Steel's specifically attributed non-derivative financial instruments and the United States Steel's portion of USX's non-derivative financial instruments is provided in the following table:
As of December 31,
As of June 30, -----------------------------------------
2001 2000 1999
------------------ -------------------- --------------------
Incremental Incremental Incremental
Increase in Increase in Increase in
Fair Fair Fair Fair Fair Fair
Value Value(b) Value(c) Value(b) Value(c) Value(b)
------ ----------- -------- ----------- -------- -----------
(Dollars in millions)
Non-Derivative Financial
Instruments(a)
Financial assets:
Investments and long-
term receivables(d)... $ 86 $-- $ 137 $-- $ 122 $--
Financial liabilities:
Long-term debt (e)(f).. $2,415 $ 75 $2,375 $ 80 $ 835 $ 20
Preferred stock of
subsidiary............ 66 5 63 5 63 5
USX obligated
mandatorily redeemable
convertible preferred
securities of a
subsidiary trust...... 182 13 119 10 169 15
------ ---- ------ ---- ------ ----
Total liabilities..... $2,663 $ 93 $2,557 $ 95 $1,067 $ 40
====== ==== ====== ==== ====== ====
|
At June 30, 2001, 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 $75 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.
UNITED STATES STEEL
Quantitative And Qualitative Disclosures About Market Risk--(Continued)
Foreign Currency Exchange Rate Risk
United States Steel 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. United States Steel has not generally used derivative instruments to manage this risk. However, United States Steel has made limited use of forward currency contracts to manage exposure to certain currency price fluctuations. At June 30, 2001, United States Steel had open euro forward sale contracts for Slovak crowns with a total carrying value of approximately $20 million. A 10% increase in the June 30, 2001 euro forward rates would result in a $2 million charge to income.
Equity Price Risk
United States Steel is subject to equity price risk and liquidity risk related to its investment in VSZ. These risks are not readily quantifiable.
Safe Harbor
United States Steel's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with United States Steel's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to United States Steel's hedging programs may differ materially from those discussed in the forward-looking statements.
INFORMATION ABOUT MARATHON
MANAGEMENT OF MARATHON OIL CORPORATION FOLLOWING THE SEPARATION
Directors of Marathon Oil Corporation Following the Separation
Under Delaware law, the business and affairs of Marathon Oil Corporation will be managed under the direction of its board of directors. The Marathon Oil Corporation certificate of incorporation and by-laws provide that the number of directors may be fixed by the board from time to time, provided that there are always at least three directors. Upon the Separation, the board of directors of Marathon Oil Corporation is expected to consist of the individuals listed below (ages as of June 30, 2001). The present principal occupation or employment and five-year employment history of each individual follows the list below. Each of the individuals listed below is a citizen of the United States.
Name Age Position ---- --- -------- Neil A. Armstrong(1)................. 70 Director Clarence P. Cazalot, Jr.(1).......... 50 President and Chief Executive Officer Charles A. Corry(1).................. 69 Director David A. Daberko..................... 56 Director Dr. Shirley Ann Jackson(1)(2)........ 54 Director Charles R. Lee(1)(2)................. 61 Director Dennis H. Reilley.................... 48 Director Seth E. Schofield(1)(2).............. 61 Director Thomas J. Usher(1)(2)................ 58 Chairman of the Board Douglas C. Yearley(1)(2)............. 65 Director |
Neil A. Armstrong is Chairman, EDO Corporation, an electronic and electro- mechanical systems company. He was appointed in 2000. Mr. Armstrong was Chairman of AIL Systems Inc. from 1989 to 2000. He is a director of RTI International Metals, Inc.
Clarence P. Cazalot, Jr. is current Vice Chairman--USX Corporation and President--Marathon Oil Company. He was appointed to both positions on March 3, 2000. Prior to his employment by Marathon, he was employed by Texaco, Inc. Mr. Cazalot was named President--Worldwide Production Operations of Texaco, Inc. in 1999. In 1998, he was named President--International Production and Chairman of London-based Texaco Ltd. after serving as Texaco Exploration and Production Inc.'s President of International Marketing and Manufacturing for one year.
Charles A. Corry is Retired Chairman of the Board and Chief Executive Officer of USX Corporation. Mr. Corry retired in 1995 after serving as USX's Chairman of the Board and Chief Executive Officer since his election in 1989. Mr. Corry is a director of Mellon Financial Corp. and OMNOVA Solutions, Inc.
David A. Daberko is Chief Executive Officer, National City Corporation. Mr. Daberko assumed this role in 1995. Mr. Daberko is a director of OMNOVA Solutions, Inc.
Dr. Shirley Ann Jackson is President, Rensselaer Polytechnic Institute. She was appointed President in 1999 and was Chairman of the U.S. Nuclear Regulatory Commission from 1995 to 1999. Dr. Jackson is a director of Albany Molecular Research, Inc., Federal Express Corporation, Newport News Shipbuilding, Sealed Air Corporation and UtiliCorp United, Inc. She is a member of the National Academy of Engineering, a Fellow of the American Academy of Arts and Sciences, and a Fellow of the American Physical Society.
Charles R. Lee is Chairman of the Board and Co-CEO, Verizon Communications since June 30, 2000. Mr. Lee was elected Chairman of the Board and Chief Executive Officer of GTE Corporation, a predecessor of Verizon in 1992. Mr. Lee is a director of The Procter & Gamble Company, United Technologies Corporation, the Stamford Hospital Foundation, and the New American Schools Development Corporation.
Dennis H. Reilley is Chairman, President, and Chief Executive Officer of Praxair, Inc. He was appointed to these roles in March of 2000. Prior to his appointment at Praxair, and beginning in 1989, Mr. Reilley held a series of senior management positions including Vice President and General Manager in DuPont Chemical's Specialty Chemicals business. Mr. Reilley is a director of Entergy Corporation.
Seth E. Schofield is Retired Chairman and Chief Executive Officer--US Air Group, Inc. Mr. Schofield retired as Chairman and Chief Executive Officer of US Air Group in 1996 having served in such position since 1992. He is a director of Calgon Carbon Corp.
Thomas J. Usher is Chairman of the Board & Chief Executive Officer of USX Corporation. Mr. Usher was elected to his current posts in July 1995 after being elected President and Chief Operating Officer of USX Corporation in 1994. In addition, he is on the board of directors of H. J. Heinz Company, PPG Industries, and PNC Financial Services Group.
Douglas C. Yearley is Chairman Emeritus, Phelps Dodge Corporation. Mr. Yearley retired in May, 2000 from Phelps Dodge Corporation after being elected President in 1991 and Chief Executive Officer in 1989. He is a director of Lockheed Martin Corporation.
The by-laws of Marathon Oil Corporation require that each non-employee director be paid allowances and attendance fees as the board may from time to time determine. Directors who are employees of Marathon receive no compensation for their service on the board. Marathon Oil Corporation pays its non-employee directors as follows:
Annual Retainer...................... $ 60,000 Committee Membership Fee............. $ 5,000 ($6,000 for Committee Chairman) Meeting Fee (for each board or committee meeting).................. $ 2,000 |
Officers of Marathon Oil Corporation Following the Separation
Upon the Separation, the individuals listed below (with their ages as of June 30, 2001) are expected to be officers of Marathon Oil Corporation. The business address of each of the individuals listed below is 5555 San Felipe Road, Houston, Texas 77056-2723. Unless otherwise indicated below, each of the individuals listed below is a citizen of the United States.
Name Age Position
---- --- --------
Albert G. Adkins............. 53 Vice President--Accounting and Controller
Philip G. Behrman............ 50 Senior Vice President--Worldwide Exploration
Eileen M. Campbell........... 43 Vice President--Human Resources
Clarence P. Cazalot, Jr...... 50 President and Chief Executive Officer
G. David Golder.............. 53 Senior Vice President--Commercialization &
Development
Steven B. Hinchman........... 42 Senior Vice President--Production Operations
Jerry Howard................. 52 Senior Vice President--Corporate Affairs
A. Robert Kukla.............. 58 Vice President--Global Procurement
Patrick J. Kuntz............. 51 Vice President--Natural Gas & Crude Oil Sales
Steven J. Lowden............. 42 Senior Vice President--Business Development
Kenneth L. Matheny........... 53 Vice President--Investor Relations
James F. Meara............... 48 Vice President--Taxes
John T. Mills................ 53 Chief Financial Officer
L. Michael Mueller........... 48 Vice President--Drilling & Development
Kenneth J. Orlowski.......... 51 Vice President--Information Technology
Paul C. Reinbolt............. 45 Vice President--Finance and Treasurer
William F. Schwind, Jr....... 56 Vice President, General Counsel & Secretary
Daniel J. Sullenbarger....... 50 Vice President--Health, Environment & Safety
Timothy N. Tipton............ 45 Vice President--Technology
|
For biographical information regarding Mr. Cazalot, see "Directors of Marathon Oil Corporation Following the Separation" on page 112.
Albert G. Adkins is the Comptroller for USX Corporation. Mr. Adkins was elected to this position in 2000. He was named Assistant Comptroller for USX at the Pittsburgh headquarters in 1997 after serving as Vice President--Finance and Accounting for Delhi Gas Pipeline Corporation, a USX subsidiary, from 1996.
Eileen M. Campbell is Vice President--Human Resources for Marathon. She was appointed to her current post in September 2000. Ms. Campbell served as Director--Government Affairs for USX Corporation since 1998. Prior to that, from her appointment in 1991, she was the Manager--Government Affairs.
Philip G. Behrman is Senior Vice President--Worldwide Exploration, for Marathon. Mr. Behrman was elected to this post in October 2000. Prior to accepting this position, he was the Exploration Manager and Acting Vice President--Exploration and Land, at Vastar Resources, Inc., an independent oil and gas exploration and production company, from March 2000 to October 2000; Exploration Manager, Deepwater Gulf of Mexico, of Vastar from June 1996 to March 2000; Exploration Manager, Special Projects, of BP Exploration, an oil and gas exploration company, from January 1995 until June 1996.
G. David Golder is Senior Vice President--Commercialization and Development for Marathon. Mr. Golder had been Vice President--International Production with Marathon since 1999 and from 1996 to 1999 was Executive Vice President of Sakhalin Energy, which was partially owned by Marathon.
Steven B. Hinchman is Senior Vice President--Production Operations for Marathon. Mr. Hinchman was elected to this post in October 2000. Prior to accepting this position, he served as Marathon's Regional Manager, Mid- Continent Region, from November 1999 to October 2000; Production Manager, Mid- Continent Region, from November 1996 to November 1999; and Engineering Manager, International Production, from August 1994 to November 1996.
Jerry Howard is Vice President--Taxes for USX Corporation. Mr. Howard was elected to his current position in 1998. In 1997, he was named Marathon's Vice President--Human Resources and Environment. Prior to that, he was appointed to Director--Tax and Financial Planning for Marathon in 1993.
A. Robert Kukla is Vice President--Global Procurement for Marathon. Mr. Kukla was appointed to his current post in October 1997. Prior to that, he served as Vice President--Domestic Production and Manager--Alaska Production.
Patrick J. Kuntz is Vice President--Natural Gas & Crude Oil Sales for Marathon. He was appointed in January 2000. Mr. Kuntz served as Controller since July 1998. He joined Marathon in 1972 as a Financial Analyst and served in various staff supervisory and managerial capacities in international funds, industry and corporate affairs, real estate, financial planning, finance and administration and auditing.
Stephen J. Lowden is Senior Vice President--Business Development, for Marathon. Mr. Lowden was elected to this post in December 2000 and is a citizen of the United Kingdom. Prior to accepting this position, he was Director of Commercial and Business Development for Premier Oil PLC, a London oil and gas exploration, development, and production company, from 1996 to December 2000 and General Manager for International Exploration and Production of Premier Oil from 1994 to 1996.
Kenneth L. Matheny is Vice President--Investor Relations for USX. Mr. Matheny was appointed in 2000. He was Vice President and Comptroller for USX from 1997 through 2000. Prior to that, he served as Vice President--Human Resources for Marathon from 1994 until 1997.
James F. Meara is the Controller for Marathon and was named to this position in 2000. He was appointed as Tax Manager in 1997. Prior to that, he progressed through a series of management positions within the tax department before being appointed Commercial Director for Sakhalin Energy (a Marathon affiliate) in 1995.
John T. Mills is Senior Vice President--Finance and Administration for Marathon. Mr. Mills was elected to this post in 1998. He was appointed Vice President--Taxes for USX in 1987.
L. Michael Mueller is Vice President--Drilling & Development for Marathon. He was appointed to his current post in 2000. He had served as Vice President-- Domestic Production, Gulf of Mexico & Worldwide Deepwater Development since September 1999. Mr. Mueller joined Marathon in 1977 as a reservoir engineer and has held a wide range of engineering, supervisory and management positions.
Kenneth J. Orlowski is Vice President--Information Technology for Marathon. He was appointed to this position in 2000. Mr. Orlowski was named Assistant General Counsel, USX Corporation, in 1997. From 1992 to 1997, he was Senior Vice President--Administration, General Counsel and Secretary of Delhi Gas Pipeline Company.
Paul C. Reinbolt is the Comptroller for U. S. Steel Group and was named to his post in 2000. In 1998, Mr. Reinbolt was appointed Manager--Finance and Administration, Production, United Kingdom, for Marathon after serving for four years as USX's Assistant Treasurer--Corporate Finance.
William F. Schwind, Jr. is General Counsel and Secretary for Marathon. Mr. Schwind was named to this post in 1992.
Daniel J. Sullenbarger is Vice President--Health, Environment & Safety for Marathon. Mr. Sullenbarger was appointed to this position in September of 2000. In September of 1998, he was appointed Vice President--Human Resources and Environment. From 1994 to 1998, Mr. Sullenbarger served as Group Counsel-- Worldwide Exploration & Production.
Timothy N. Tipton is Vice President--Technology for Marathon. Mr. Tipton was appointed to his current post in September 2000. Prior to accepting this position, he served as Manager--Engineering & Technology, Reservoir Technology since September of 1999. Mr. Tipton became Production Manager--Rocky Mountain Region in 1996.
LIQUIDITY OF MARATHON OIL CORPORATION FOLLOWING THE SEPARATION
Prior to Separation
As a matter of policy, USX has managed most financial activities on a centralized, consolidated basis, and will continue to do so until the Separation. 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 Marathon based upon its cash flows for the periods presented and its initial capital structure. However, a portion of most financing transactions are attributed to and reflected in the financial statements of Marathon. Transactions such as leases, certain collateralized financings, financial activities of consolidated entities that are less than wholly owned by USX and transactions related to securities convertible solely into USX- Marathon Group Common Stock are or will be specifically attributed to and reflected in their entirety in the financial statements of Marathon.
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 June 30, 2001, USX had no borrowings against its $1,354 million long-term revolving credit agreement, no borrowings against its $451 million 364-day facility and no commercial paper borrowings. There were no borrowings against USX's short- term lines of credit totaling $115 million at June 30, 2001. At June 30, 2001, there were no borrowings against MAP's revolving credit agreement.
On April 24, 2001, USX announced that the Board had authorized management to proceed with the necessary steps to implement a plan of reorganization of the corporation in order to separate the energy and steel businesses. Until the plan of reorganization is implemented or abandoned, USX management believes that it will be more difficult to access traditional debt and equity markets.
After Separation
Upon Separation, Marathon will assume the financial resources of USX Corporation. Marathon will have access to a $1,354 million 5-year revolving credit agreement, expiring in November 2005. At June 30, 2001, there were no borrowings under this facility. Marathon also will have a short-term credit facility against which there were no borrowings as of June 30, 2001. In addition, Marathon will have the ability to issue commercial paper supported by the unused and available credit line on the $1,354 million facility. At June 30, 2001, no commercial paper was outstanding. Also, at June 30, 2001, there were no borrowings against MAP revolving credit agreements.
Capital and exploration expenditures for 2001 are expected to be approximately $1.8 billion, excluding the $0.5 billion acquisition of Pennaco.
Marathon management believes that its short-term and long-term liquidity will be adequate to satisfy its obligations after Separation, and to complete currently authorized capital spending programs. Future requirements for Marathon's business needs, including the funding of capital expenditures, debt service for the balance of 2001 and years 2002 and 2003, and any amounts that may ultimately be paid in connection with contingencies, are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources.
Marathon management's opinion concerning liquidity and Marathon's ability to
avail itself in the future of the financing options mentioned in the above
forward-looking statements are based on currently available information. To the
extent that this information proves to be inaccurate, future availability of
financing may be
adversely affected. Factors that could affect the availability of financing
include the performance of Marathon (as measured by various factors including
cash provided from operating activities), the state of worldwide debt
and equity markets, investor perceptions and expectations of past and future performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of Marathon's outstanding debt and credit ratings by rating agencies.
Debt Rating
Standard and Poor's has assigned an investment grade corporate credit rating to Marathon Oil Corporation with a stable outlook, assuming the Plan of Reorganization is completed.
RELATIONSHIP BETWEEN UNITED STATES STEEL CORPORATION AND MARATHON OIL
CORPORATION AFTER THE SEPARATION
Following consummation of the Separation, United States Steel Corporation and Marathon Oil Corporation will be independent companies and neither will have any ownership interest in the other, although some of the Marathon Oil Corporation directors will also serve as directors of United States Steel Corporation. See "Interests of Officers and Directors in the Separation" on page 56. In connection with the Separation and pursuant to the Plan of Reorganization, United States Steel Corporation and Marathon Oil Corporation and their respective subsidiaries will enter into a series of agreements ("Separation Documents") governing their relationship subsequent to the Separation and providing for the allocation of tax and certain other liabilities and obligations arising from periods prior to the Separation. Copies of the forms of such Separation Documents are filed as exhibits to the registration statement on Form S-4 of United States Steel Corporation registering the New U.S. Steel Shares to be issued in the Separation (the "Registration Statement"), of which this proxy statement/prospectus is a part. The Registration Statement and its exhibits are available for inspection and copying as set forth on page 136. Set forth below is a description of the material terms of such Separation Documents.
Tax Sharing Agreement
United States Steel Corporation and Marathon Oil Corporation will enter into a Tax Sharing Agreement on behalf of themselves and their respective consolidated groups, that reflects each party's rights and obligations relating to payments and refunds of income, sales, transfer, and other taxes that are attributable to periods beginning prior to and including the Separation Date and taxes resulting from transactions effected in connection with the Separation.
The Tax Sharing Agreement will incorporate the general tax sharing principles of USX's current tax allocation policy. In general, United States Steel Corporation and Marathon Oil Corporation, will make payments between them such that, with respect to any USX consolidated, combined, or unitary tax returns for any taxable period or portion thereof ending on or before the Separation Date, the amount of taxes to be paid by each of United States Steel Corporation and Marathon Oil Corporation will be determined, subject to certain adjustments, as if the U. S. Steel Group and the Marathon Group each filed its own consolidated, combined, or unitary tax return. The Tax Sharing Agreement also will provide for payments between United States Steel Corporation and Marathon Oil Corporation for certain tax adjustments which may be made after the Separation. Other provisions will address, but will not be limited to, the handling of tax audits, settlements, and return filing in cases where both United States Steel Corporation and Marathon Oil Corporation have an interest in the results of these activities.
A preliminary settlement for the calendar year 2001 federal income taxes, which would be made in March 2002 under USX's current tax allocation policy, will be made immediately prior to the Separation at a discounted amount to reflect the time value of money. Under the preliminary settlement for calendar year 2001, it is expected that United States Steel will receive at least $300 million from Marathon immediately prior to Separation arising from USX's current tax allocation policy. This policy provides that United States Steel receives the benefit of tax attributes (principally net operating losses, and various tax credits) that arise out of its business and which are used by USX on a consolidated basis.
Additionally, pursuant to the Tax Sharing Agreement, United States Steel Corporation and Marathon Oil Corporation will agree to protect the tax-free status of the Separation. United States Steel Corporation and Marathon Oil Corporation each will covenant that during the two-year period following the Separation, it will not cease to be engaged in an active trade or business. Each party also will represent that there is no plan or intention to liquidate such party, take any other actions inconsistent with the information and representations set forth in the ruling request filed with the IRS or sell or otherwise dispose of its assets (other than in the ordinary course of business) and will covenant that during the two-year period following the Separation, it will not do so. To the extent that a breach of a representation or covenant results in corporate tax being imposed on USX, the breaching party, either United States Steel Corporation or Marathon Oil Corporation, will be responsible for the payment of
the corporate tax. In the event that the Separation fails to qualify as a tax- free transaction through no fault of either United States Steel Corporation or Marathon Oil Corporation, the resulting corporate tax liability, if any, likely will be borne by United States Steel Corporation pursuant to the Tax Sharing Agreement.
The provisions of the Tax Sharing Agreement will only benefit Marathon Oil Corporation and United States Steel Corporation and will not confer any rights on USX stockholders or any other parties. The Tax Sharing Agreement may be amended or modified by Marathon Oil Corporation and United States Steel Corporation without the consent of any stockholder.
Even if the Separation otherwise qualifies for tax-free treatment under
Section 355 of the Code, the Separation may become taxable to USX pursuant to
Section 355(e) of the Code if 50% or more of either the Marathon Shares or New
U. S. Steel Shares are acquired, directly or indirectly, as part of a plan or
series of related transactions that include the Separation. See "THE
SEPARATION--Material U.S. Federal Income Tax Consequences" discussion above on
page 54. To minimize this risk, both United States Steel Corporation and
Marathon Oil Corporation will covenant in the Tax Sharing Agreement that they
will not enter into any transactions or make any change in their equity
structures that could cause the Separation to be treated as part of a plan or
series of related transactions to which Section 355(e) may apply. If an
acquisition occurs which results in the Separation being taxable under Section
355(e), the Tax Sharing Agreement provides that the resulting corporate tax
liability will be borne by the entity, either United States Steel Corporation
or Marathon Oil Corporation, with respect to which the acquisition has
occurred.
As discussed above in the section, "RISK FACTORS--Risks Related to Separation--United States Steel Corporation and Marathon Oil Corporation Will Be Subject to Continuing Contingent Liabilities of the Other Company Following the Separation" on page 14, although the Tax Sharing Agreement will allocate tax liabilities relating to taxable periods ending on or prior to the Separation Date, as between United States Steel Corporation and Marathon Oil Corporation, each corporation that was a member of the USX consolidated group during any portion of a taxable period ending on or prior to the Separation Date is jointly and severally liable under the Code for the federal income tax liability of the entire USX consolidated group for that year. Thus, even though the Tax Sharing Agreement will provide that one party (United States Steel Corporation or Marathon Oil Corporation) will be responsible for the payment of a tax, the taxing authorities may seek to collect the tax from the other party and consequently, that other party would be entitled to seek indemnification under the Tax Sharing Agreement. There can be no assurance that, in such circumstance, Marathon Oil Corporation or United States Steel Corporation would be able to satisfy its indemnification obligations under the Tax Sharing Agreement.
Transition Services Agreement
Currently, USX personnel at our Pittsburgh corporate headquarters provide accounting, audit, corporate finance, government affairs, investor relations, legal, stock transfer, strategic planning, public affairs and tax services that primarily relate to corporate-wide matters and for which the costs are allocated between the Marathon Group and the U. S. Steel Group. Effective upon the Separation, Marathon Oil Corporation and United States Steel Corporation will be responsible for their own needs in these areas, and USX corporate personnel will be assigned to, and will be employed by, either Marathon Oil Corporation or United States Steel Corporation. To the extent that one company or the other is not able to immediately service its own needs, United States Steel Corporation and Marathon Oil Corporation will enter into a transition services agreement whereby one company will provide such services to the other (to the extent requested) if the providing company is able to do so. Such agreement will be for a term of up to twelve months and will be on a cost- reimbursement basis. In addition, the company receiving such service shall release the other from any and all claims that may arise concerning the adequacy, timeliness or quality of the service provided.
Although both the Marathon Group and U. S. Steel Group maintain independent information technology and computer systems, USX headquarters relies on the two groups for many of its computer applications. The Transition Services Agreement provides that, to the extent that either group has been supplying computer or information services to USX headquarters or the other group, for a period of up to twelve months, Marathon Oil Corporation or United States Steel Corporation will continue to provide services to the other (to the extent
requested) on the same basis that it is currently provided on a cost- reimbursement basis. In addition, the company receiving services shall release the other from any and all claims that may arise concerning the adequacy, timeliness or other quality of the services provided.
The Transition Services Agreement also provides that Marathon Oil Corporation, as successor to USX, will grant to United States Steel Corporation a fully paid, worldwide, nonexclusive license, without right to sublicense or assign, in all computer programs, software, source code, and know-how (whether patented, trademarked, copyrighted or not) owned or licensed (to the extent permitted by the terms of such license) by USX in providing services used by USX on a corporate basis or provided by USX to the U. S. Steel Group. Such license will be granted without any representation or warranty whatsoever, including suitability, ownership, usefulness, non-infringement or existence. A similar grant of licenses will be made by United States Steel Corporation for the benefit of Marathon Oil Corporation.
The Transition Services Agreement further provides that if, at any time in the future, either Marathon Oil Corporation or United States Steel Corporation requires any records, documents or other information in the possession of the other relating to activities prior to the Separation, the party having possession of such records, documents or other information shall make it or copies available to the other party without charge.
Financial Matters Agreement
United States Steel Corporation and Marathon Oil Corporation will enter into the Financial Matters Agreement whereby United States Steel Corporation or its subsidiaries will agree to incur or assume indebtedness and other obligations of USX in connection with the Separation. The terms of the Financial Matters Agreement are described in "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
License Agreement
Upon consummation of the Separation, the License Agreement will provide that Marathon Oil Corporation will grant to United States Steel Corporation a fully- paid, worldwide, non-exclusive license to use the USX name rights and certain intellectual property with the right to sublicense the same.
Insurance Assistance Agreement
Prior to the time of the HoldCo Merger, the Marathon Group and the U. S. Steel Group maintained independent property and business interruption insurance policies. Other types of insurance, such as general liability, employer's liability, automobile liability, workers' compensation, boiler and machinery and executive risk, were purchased and held by Old USX, for the benefit of Old USX and all of its subsidiaries. Following the HoldCo Merger, separate policies of insurance for certain general liability, employer's liability, automobile liability, workers' compensation and aircraft were issued to cover: (1) USX, and Marathon and its subsidiaries; and (2) United States Steel LLC and its subsidiaries. The remaining policies of insurance were maintained for the benefit of USX and its subsidiaries.
At the Separation Effective Time, the insurance policies held for the benefit of USX and its subsidiaries will be truncated and separate policies of insurance will be purchased for Marathon Oil Corporation and its subsidiaries and for United States Steel Corporation and its subsidiaries. Marathon Oil Corporation and United States Steel Corporation will also enter into the Insurance Assistance Agreement. This agreement will provide for the division of responsibility for joint insurance arrangements and the associated payment of insurance claims and deductibles following the Separation for claims associated with pre-Separation periods. Under this agreement, Marathon Oil Corporation will be solely liable for pre-Separation claims associated with the business of the Marathon Group, and United States Steel Corporation will be solely liable for pre-Separation claims associated with the business of the U. S. Steel Group. Liability for pre-Separation claims associated with USX assets, directors and employees will be allocated 65% to Marathon Oil Corporation and 35% to United States Steel Corporation. The cost of extended reporting insurance for these pre-Separation periods will also be split between Marathon Oil Corporation and United States Steel Corporation on a 65%-35% basis, respectively. Finally, the agreement will address the sharing of policy limits for extended reporting insurances maintained jointly by Marathon and United States Steel prior to the Separation.
DESCRIPTION OF CAPITAL STOCK OF MARATHON OIL
CORPORATION FOLLOWING THE SEPARATION
The following is a summary of the material terms of the capital stock of Marathon Oil Corporation upon the Separation. This summary does not purport to be complete and is qualified in its entirety by reference to the complete text of such capital stock set forth in the Marathon Oil Corporation Restated Certificate of Incorporation (the "Marathon Certificate"). A copy of the full text of the Marathon Certificate is included as Exhibit 3.3 to the Registration Statement, and is incorporated herein by reference.
Authorized Share Capital
Marathon Oil Corporation will be authorized by the Marathon Certificate to issue (i) five hundred and fifty million (550,000,000) shares of Marathon Oil Corporation Common Stock, par value $1.00 per share, and (ii) twenty six million (26,000,000) shares of preferred stock, no par value, issuable in series. If the Separation had occurred as of July 31, 2001, there would be 308,913,392 Marathon Shares issued and outstanding (based on the number of Marathon Group Shares issued and outstanding as of such date) and no shares of preferred stock issued and outstanding.
Marathon Shares
The holders of Marathon Shares will be entitled to receive dividends when, as and if declared by the Marathon Oil Corporation board of directors out of funds legally available therefor, subject to the rights of any shares of Marathon Oil Corporation preferred stock at the time outstanding. The holders of Marathon Shares will be entitled to one vote for each share on all matters voted on generally by stockholders under the Marathon Certificate, including the election of directors. The holders of Marathon Shares will not have any cumulative voting, conversion, redemption or preemptive rights. In the event of dissolution, liquidation or winding up of Marathon Oil Corporation, holders of Marathon Shares will be entitled to share ratably in any assets remaining after the satisfaction in full of the prior rights of creditors, including holders of Marathon Oil Corporation's then outstanding indebtedness, and subject to the aggregate liquidation preference and participation rights of any Marathon Oil Corporation preferred stock then outstanding. The additional shares of authorized stock available for issuance by Marathon Oil Corporation may be issued at such times and under such circumstances as to have a dilutive effect on earnings per share and on the equity ownership of the holders of Marathon Shares.
Marathon Oil Corporation Preferred Stock
The Marathon Oil Corporation board of directors will be authorized to issue shares of Marathon Oil Corporation preferred stock, in one or more series, and to fix for each such series voting powers, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as are permitted by the Delaware General Corporation Law ("DGCL"). Although the Marathon Oil Corporation board of directors has no current plans to issue Marathon Oil Corporation preferred stock, the issuance of such shares could be used to discourage an unsolicited acquisition proposal. See "COMPARISON OF THE RIGHTS OF STOCKHOLDERS--Certain Anti-takeover Considerations" on page 126.
Marathon Oil Corporation Rights Agreement
USX is a party to a Rights Agreement, dated as of September 28, 1999 (the "USX Rights Agreement"), with ChaseMellon Shareholder Services, L.L.C, as Rights Agent. Pursuant to the USX Rights Agreement, a U. S. Steel Group Right is attached to each outstanding U. S. Steel Group Share and a Marathon Group Right is attached to each outstanding Marathon Group Share. In connection with the Separation, the USX Rights Agreement will be amended and restated (as so amended and restated, the "Marathon Oil Corporation Rights Agreement") to provide (i) that the U. S. Steel Group Rights and the Marathon Group Rights will not become exercisable, distributed or unredeemable as a result of the consummation of the Separation, and (ii) that the
U. S. Steel Group Rights will expire at the Separation Effective Time. Following the Separation, the Marathon Group Rights will be referred to as a Marathon Right. The following description of the terms of the Marathon Oil Corporation Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Marathon Oil Corporation Rights Agreement, the form of which is filed as an exhibit to the Registration Statement, and is incorporated herein by reference.
Each Marathon 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 Marathon Shares, except pursuant to a qualifying all-cash tender offer for all outstanding Marathon Shares which results in the offeror owning Marathon Shares, representing a majority of the voting power (other than Marathon Shares beneficially owned by the offeror immediately prior to the offer). Each Marathon 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 Marathon Shares (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 Marathon Oil Corporation engages in a merger or other business combination where it is not the surviving corporation or where it is the surviving corporation and the Marathon Shares are changed or exchanged, or if 50% or more of Marathon Oil Corporation's assets, earnings power or cash flow are sold or transferred, each Marathon Right entitles the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The Marathon Rights and the exercise price are subject to adjustment. The Marathon Rights will expire on October 9, 2009, unless such date is extended or the Marathon Rights are earlier redeemed by Marathon Oil Corporation for one cent per Marathon Right at any time prior to the point they become exercisable. Under certain circumstances, the Board of Directors of Marathon Oil Corporation has the option to exchange one Marathon Share for each exercisable Marathon Right.
DESCRIPTION OF CAPITAL STOCK OF UNITED STATES STEEL
CORPORATION FOLLOWING THE SEPARATION
The following is a summary of the material terms of the capital stock of United States Steel Corporation upon the Separation. This summary does not purport to be complete and is qualified in its entirety by reference to the complete text of such capital stock set forth in the United States Steel Corporation Certificate of Incorporation (the "United States Steel Corporation Certificate"). A copy of the full text of the United States Steel Corporation Certificate is included as Exhibit 3.2 to the Registration Statement, and is incorporated herein by reference.
Authorized Share Capital
United States Steel Corporation is authorized by the United States Steel
Corporation Certificate to issue (i) two hundred million (200,000,000) shares
of United States Steel Corporation Common Stock, par value $1.00 per share, and
(ii) fourteen million (14,000,000) shares of preferred stock, no par value,
issuable in series. If the Separation had occurred as of July 31, 2001, there
would be 89,141,345 New U. S. Steel Shares outstanding (based on the number of
U. S. Steel Group Shares issued and outstanding as of such date) and no shares
of preferred stock issued and outstanding.
New U. S. Steel Shares
The holders of New U. S. Steel Shares will be entitled to receive dividends when, as and if declared by the United States Steel Corporation board of directors out of funds legally available therefor, subject to the rights of any shares of United States Steel Corporation preferred stock at the time outstanding. The holders of New U. S. Steel Shares will be entitled to one vote for each share on all matters voted on generally by stockholders under the United States Steel Corporation Certificate, including the election of directors. The holders of New U. S. Steel Shares do not have any cumulative voting, conversion, redemption or preemptive rights. In the event of dissolution, liquidation or winding up of United States Steel Corporation, holders of the New U. S. Steel Shares will be entitled to share ratably in any assets remaining after the satisfaction in full of the prior rights of creditors, including holders of United States Steel Corporation's then outstanding indebtedness, and subject to the aggregate liquidation preference and participation rights of any United States Steel Corporation preferred stock then outstanding. The additional shares of authorized stock available for issuance by United States Steel Corporation may be issued at such times and under such circumstances as to have a dilutive effect on earnings per share and on the equity ownership of the holders of New U. S. Steel Shares.
United States Steel Corporation Preferred Stock
The United States Steel Corporation board of directors will be authorized to issue shares of United States Steel Corporation preferred stock, in one or more series, and to fix for each such series voting powers, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof as are permitted by the DGCL. The issuance of shares of United States Steel Corporation preferred stock could be used to discourage an unsolicited acquisition proposal. See "COMPARISON OF THE RIGHTS OF STOCKHOLDERS--Certain Anti-takeover Considerations" on page 126.
United States Steel Corporation Rights Agreement
Upon the Separation Effective Time, United States Steel Corporation will enter into a Rights Agreement (the "United States Steel Corporation Rights Agreement"). The following description of the terms of the United States Steel Corporation Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the United States Steel Corporation Rights Agreement, the form of which is filed as an exhibit to the Registration Statement and is incorporated in this summary description herein by reference.
Pursuant to the United States Steel Corporation Rights Agreement, one preferred stock purchase right (a "United States Steel Corporation Right") will be distributed with each New U. S. Steel Share issued in connection with the Separation. Each United States Steel Corporation Right becomes exercisable 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 New U. S. Steel Shares, except pursuant to a qualifying all-cash tender offer for all outstanding New U. S. Steel Shares which results in the offeror owning New U. S. Steel Shares, representing a majority of the voting power (other than New U. S. Steel Shares beneficially owned by the offeror immediately prior to the offer). Each United States Steel Corporation 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 New U. S. Steel Shares (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 United States Steel Corporation engages in a merger or other business combination where it is not the surviving corporation or where it is the surviving corporation and the New U. S. Steel Shares are changed or exchanged, or if 50% or more of U. S. Steel's assets, earnings power or cash flow are sold or transferred, each United States Steel Corporation Right entitles the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The United States Steel Corporation Rights and the exercise price are subject to adjustment. The United States Steel Corporation Rights will expire after 10 years, unless such date is extended or the United States Steel Corporation Rights are earlier redeemed by United States Steel Corporation for one cent per United States Steel Corporation Right at any time prior to the point they become exercisable. Under certain circumstances, the Board of Directors of United States Steel Corporation has the option to exchange one New U. S. Steel Share for each exercisable U. S. Steel Right.
COMPARISON OF THE RIGHTS OF STOCKHOLDERS
USX is a Delaware corporation and, following consummation of the Separation, Marathon Oil Corporation and United States Steel Corporation will be Delaware corporations. The rights of holders of Marathon Group Shares and U. S. Steel Group Shares are currently governed by the DGCL, the USX Restated Certificate and USX By-laws. Following consummation of the Separation, the rights of holders of Marathon Shares will be governed by the DGCL, the Marathon Certificate and the Marathon Oil Corporation By-laws, and the rights of holders of New U. S. Steel Shares will be governed by the DGCL, the United States Steel Corporation Certificate and the United States Steel Corporation By-laws. The terms of the Marathon Certificate and the United States Steel Corporation Certificate will be identical to the terms of the USX Restated Certificate (other than with respect to capitalization, since the Marathon Certificate and the United States Steel Corporation Certificate will each provide for only one class of common stock, and will not have the provisions contained in the USX Restated Certificate relating to the USX targeted stocks). The terms of the Marathon Oil Corporation By-laws and the United States Steel Corporation By- laws will be identical to the terms of the USX By-laws, except for the matters described below.
Voting Rights
Under the USX Restated Certificate, with respect to matters to be voted upon by both the holders of Marathon Group Shares and U. S. Steel Group Shares as a single class, the holder of each Marathon Group Share is entitled to one vote per share and the holder of each U. S. Steel Group Share is entitled to a number of votes per share (which may be greater than or less than one), as determined pursuant to the terms of the USX Restated Certificate, based on the ratio of the market value of one U. S. Steel Group Share to the market value of one Marathon Group Share, calculated over the 20-business day period ending on the fifth business day prior to the record date for determination of stockholders entitled to notice of, and to vote at, any meeting of stockholders. Under the Marathon Certificate, each Marathon Share will be entitled to one vote on all matters. Under the United States Steel Corporation Certificate, each New U. S. Steel Share will be entitled to one vote on all matters.
Dividends
Under the USX Restated Certificate, (i) dividends on the Marathon Group Shares are payable out of the funds of USX legally available for the payment of dividends and (ii) dividends on the U. S. Steel Group Shares are payable out of the lesser of (a) the funds of USX legally available for the payment of dividends and (b) the "Available Group Dividend Amount" (an amount similar to the amount that would be legally available for the payment of dividends on the U. S. Steel Group Shares under Delaware law if the U. S. Steel Group were a separate company). Holders of Marathon Shares and New U. S. Steel Shares will be entitled to receive dividends when, as and if declared by the respective boards of directors of Marathon Oil Corporation and United States Steel Corporation out of funds legally available therefor, subject to the terms of any preferred stock then outstanding and the terms of any covenants in indentures or other evidences of indebtedness.
Liquidation
Pursuant to the USX Restated Certificate, in the event of the liquidation of USX, holders of Marathon Group Shares and U. S. Steel Group Shares will be entitled to a portion of the assets remaining for distribution based on the average of their proportionate market values, using the market prices for the five business days prior to the date the liquidation is announced and the five business days after the liquidation is announced. Pursuant to the Marathon Certificate, in the event of a liquidation of Marathon Oil Corporation, holders of Marathon Shares will be entitled to share ratably in the assets of Marathon Oil Corporation remaining for distribution to holders of Marathon Shares. Pursuant to the United States Steel Corporation Restated Certificate, in the event of a liquidation of United States Steel Corporation, holders of New U. S. Steel Shares will be entitled to share ratably in the assets of United States Steel Corporation remaining for distribution to holders of New U. S. Steel Shares.
Rights on Disposition
Pursuant to the USX Restated Certificate, subject to certain exceptions, if USX disposes of all or substantially all of the properties and assets attributed to the U. S. Steel Group, USX is required to either (i) distribute to holders of U. S. Steel Group Shares an amount in cash and/or securities or other property equal to the fair value of the net proceeds of such disposition by special dividend, (ii) redeem a number of whole U. S. Steel Group Shares with an average value equal to the proceeds of the disposition, calculated over the ten-trading day period beginning on the first trading day after consummation of the disposition transaction, (iii) convert each U. S. Steel Group Share into a number of Marathon Group Shares equal to 110% of the ratio of the average market value of one U. S. Steel Group Share to the average market value of one Marathon Group Share, calculated over the ten-trading day period beginning on the first trading day after consummation of the disposition transaction. As a result of the Separation, the United States Steel Corporation Certificate will not provide for such rights upon the disposition of assets.
Separation of Groups and Exchange of Stock
Pursuant to the USX Restated Certificate, if USX were to transfer all of the assets and liabilities of the Marathon Group (and only such assets and liabilities) to a wholly owned subsidiary of USX, the USX board of directors has discretion, without the vote of any of the USX stockholders, to exchange the outstanding Marathon Group Shares for shares of the new subsidiary holding the Marathon Group assets and liabilities. The result of such an exchange would be the spinoff of the Marathon Group to the holders of Marathon Group Shares. Following the Separation, the Marathon Certificate will not provide the directors of Marathon Oil Corporation with such discretion, as Marathon Oil Corporation generally will hold only the assets and liabilities currently held by the Marathon Group.
Pursuant to the USX Restated Certificate, if USX were to transfer all of the assets and liabilities of the U. S. Steel Group (and only such assets and liabilities) to a wholly owned subsidiary of USX, the USX board of directors has discretion, without the vote of any of the USX stockholders, to exchange the outstanding U. S. Steel Group Shares for shares of the new subsidiary holding the U. S. Steel Group assets and liabilities. The result of such an exchange would be the spinoff of the U. S. Steel Group to the holders of U. S. Steel Group Shares. Following the Separation, the United States Steel Certificate will not provide the directors of United States Steel Corporation with such discretion, as United States Steel Corporation generally will hold only the assets and liabilities currently held by the U. S. Steel Group.
Certain Anti-takeover Considerations
The DGCL, the Marathon Certificate and the Marathon Oil Corporation By-laws, and the United States Steel Corporation Certificate and the United States Steel Corporation By-laws, contain provisions that could serve to discourage or make more difficult a change in control of Marathon Oil Corporation or United States Steel Corporation without the support of the Marathon Oil Corporation board of directors or the United States Steel Corporation board of directors, as the case may be, or without meeting various other conditions. All of these provisions are currently in effect with respect to USX, pursuant to the USX Restated Certificate, USX By-Laws and the DGCL. A summary of these provisions is set forth below.
The Marathon Certificate and the United States Steel Corporation Certificate each will provide for the issuance of preferred stock, at the discretion of the Marathon Oil Corporation board of directors or the United States Steel Corporation board of directors, as the case may be, from time to time, in one or more series, without further action by the stockholders of Marathon Oil Corporation or United States Steel Corporation, unless approval of the stockholders is deemed advisable by the Marathon Oil Corporation board of directors or the United States Steel Corporation board of directors or required by applicable law, regulation or stock exchange listing requirements. In addition, the authorized but unissued Marathon Shares will be available for issuance from time to time at the discretion of the Marathon Oil Corporation board of directors without the approval of the stockholders of Marathon Oil Corporation, and the authorized but unissued New U. S. Steel
Shares will be available for issuance from time to time at the discretion of the United States Steel Corporation board of directors without the approval of the stockholders of United States Steel Corporation, in each case, unless such approval is deemed advisable by the Marathon Oil Corporation board of directors or United States Steel Corporation board of directors, as the case may be, or required by applicable law, regulation or stock exchange listing requirements. One of the effects of the existence of authorized, unissued and unreserved Marathon Shares and New U. S. Steel Shares and preferred stock could be to enable the Marathon Oil Corporation board of directors or the United States Steel Corporation board of directors to issue shares to persons friendly to current management that could render more difficult or discourage an attempt to obtain control of Marathon Oil Corporation or United States Steel Corporation by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of Marathon Oil Corporation's or United States Steel Corporation's management. Such additional shares also could be used to dilute the stock ownership of persons seeking to obtain control of Marathon Oil Corporation or United States Steel Corporation.
The Marathon Oil Corporation Certificate and the United States Steel Corporation Certificate each provide for a classified board of directors under which one-third of the total number of directors are elected each year and will prohibit the removal of directors, unless such removal is for cause. Pursuant to the Marathon Oil Corporation Certificate and the United States Steel Corporation Certificate, stockholders will not be permitted to act by written consent. In addition, pursuant to the Marathon Oil Corporation Certificate and the United States Steel Corporation Certificate, only the board of directors, and not the stockholders, will be permitted to call a special meeting of stockholders.
The Marathon Oil Corporation By-laws and United States Steel Corporation By- laws each establish an advance notice procedure for stockholders to bring business before an annual or special meeting of stockholders. The Marathon Oil Corporation By-laws and United States Steel Corporation By-laws each will provide that a stockholder may present a proposal for action at an annual meeting of stockholders only if such stockholder delivers a written notice of the proposal, together with certain specified information relating to such stockholder's stock ownership and identity, to the Secretary of Marathon Oil Corporation or United States Steel Corporation, as applicable, at least 45 days, and, in certain situations, 90 days, before the meeting or within 10 days following the announcement of the date of the special meeting. In addition, the Marathon Oil Corporation By-laws and United States Steel Corporation By-laws each will provide that a stockholder may nominate individuals for election to the board of directors at any annual meeting or special meeting of stockholders at which directors are to be elected only if such stockholder delivers written notice, containing certain specified information with respect to the nominee and nominating stockholder, to the Secretary of Marathon Oil Corporation or United States Steel Corporation, as applicable, at least 45 days, and, in certain situations, 90 days, before the annual meeting or within 10 days following the announcement of the date of the special meeting.
The Marathon Oil Corporation Rights and the United States Steel Corporation
Rights will permit disinterested stockholders to acquire additional shares of
Marathon Oil Corporation or United States Steel Corporation, respectively, or
of an acquiring company, at a substantial discount in the event of certain
described changes in control. See "DESCRIPTION OF CAPITAL STOCK OF MARATHON OIL
CORPORATION FOLLOWING THE SEPARATION--Marathon Oil Corporation Rights
Agreement" on page 121 and "DESCRIPTION OF CAPITAL STOCK OF UNITED STATES STEEL
CORPORATION FOLLOWING THE SEPARATION--United States Steel Corporation Rights
Agreement" on page 123.
Certain provisions described above may have the effect of delaying stockholder actions with respect to certain business combinations. As such, the provisions could have the effect of discouraging open market purchases of the Marathon Shares or the New U. S. Steel Shares because such provisions may be considered disadvantageous by a stockholder who desires to participate in a business combination.
PROPOSAL TWO: APPROVAL OF THE UNITED STATES STEEL CORPORATION 2002 STOCK PLAN
Subject to the approval of stockholders, the USX board of directors has approved the United States Steel Corporation 2002 Stock Plan (the "Steel Stock Plan") effective as of the Separation Effective Time. The Steel Stock Plan is intended to provide United States Steel Corporation employees with benefits comparable to those provided under the USX Corporation 1990 Stock Plan (the "USX Stock Plan"). Principal differences between the two plans are summarized below under the caption "Differences Between the Steel Stock Plan and the Applicable Portions of the USX Stock Plan" on page 131. The USX Stock Plan was approved by USX stockholders on May 7, 1990, and, with stockholder approval, was amended and restated on April 28, 1998. As of the Separation Effective Time, the USX Stock Plan will be renamed the Marathon Oil Corporation 2002 Stock Plan, and, at that time, United States Steel employees will no longer be eligible to participate.
The Steel Stock Plan has the same objectives as the USX Stock Plan. The Steel Stock Plan is designed (a) to promote the long-term financial interests and growth of the United States Steel Corporation and its subsidiaries by attracting and retaining management personnel with the training, experience and ability to enable them to make a substantial contribution to the success of Unites States Steel Corporation's business, (b) to motivate management personnel by means of growth-related incentives to achieve long-range growth goals, and (c) to further the identity of interests of participants with those of the stockholders of United States Steel Corporation through opportunities for increased stock ownership.
Recommendation of the USX Board of Directors
Although USX has already approved the Steel Stock Plan as the sole member of United States Steel LLC, under the organizational documents of United States Steel LLC, any matter requiring approval of the members of United States Steel LLC also requires stockholder approval of USX. Thus, the Steel Stock Plan must be approved by the affirmative vote of a majority of the votes cast at the special meeting by holders of Marathon Group Shares and U. S. Steel Group Shares, voting together as a single class. Because the Steel Stock Plan will only relate to United States Steel Corporation, we are also seeking approval of the plan by a majority of the votes cast at the special meeting by holders of U. S. Steel Group Shares, voting as a separate class, since they will hold all of the common stock of United States Steel Corporation.
The USX board of directors unanimously recommends that holders of Marathon Group Shares and U. S. Steel Group Shares vote FOR the approval of the Steel Stock Plan.
Summary of the Plan
Following is a summary of the material features of the Steel Stock Plan, the full text of which is set forth as Annex F to this proxy statement/prospectus.
General
The Steel Stock Plan would permit the grant of any or all of the following types of awards in any combination or sequence: (a) stock options, (b) restored options, (c) stock appreciation rights and (d) restricted stock, in each case, in relation to New U. S. Steel Shares ("Grants"). Up to 10,000,000 New U. S. Steel Shares will be available for Grants during the period the Steel Stock Plan is in effect, of which up to 1,400,000 New U. S. Steel Shares may be granted as restricted shares. Shares related to Grants that are forfeited, terminated, cancelled, expired, unexercised, settled in cash in lieu of shares or in such manner that all or some of the shares covered by the Grant are not issued to a participant, shall immediately become available under the Steel Stock Plan.
The employees of United States Steel Corporation who are eligible for participation under the Steel Stock Plan are all executive officers and others in responsible positions whose performance in the judgment of the Compensation and Organization Committee affects United States Steel Corporation's success. It is expected that approximately 175 employees will be eligible for participation under the Steel Stock Plan in 2002. Over the term of the Steel Stock Plan, it is anticipated that other employees will become eligible for participation in the Steel Stock Plan.
The Compensation and Organization Committee of the United States Steel Corporation board of directors shall administer the Steel Stock Plan. It shall determine the type or types of Grants to be made under the Steel Stock Plan and shall set forth in each such Grant the terms, conditions and limitations applicable to it. The Compensation and Organization Committee shall have full and exclusive power to interpret the Steel Stock Plan, to adopt rules, regulations and guidelines relating to the Steel Stock Plan and to make all of the determinations necessary for its administration.
Types of Grants
Options. The Compensation and Organization Committee may grant options to purchase a specified number of New U. S. Steel Shares at not less than the fair market value on the date of the Grant. All options will be non-qualified options. Payment of the purchase price shall be made in cash or in such other form as approved by the Compensation and Organization Committee, including New U. S. Steel Shares valued at their fair market value on the date of the option exercise. No option will have a term exceeding eight years from the date of grant or be exercisable prior to the expiration of one year from the date of grant, and no option will be repriced except in the event of any change in the outstanding common stock of United States Steel Corporation by reason of a stock split, stock dividend, stock combination or reclassification, recapitalization or merger, or similar event. In the case of a change in control of United States Steel Corporation, all restrictions will terminate.
An employee receiving an option does not realize income under the Code upon the grant of the option. The employee will generally realize income at the time of exercise of the option in the amount of the difference between the option price and the fair market value of the New U. S. Steel Shares on the date of exercise. United States Steel Corporation will then be entitled to a tax deduction in an amount equal to the amount of income realized by the employee.
Restored Options. An employee may exercise an option by paying the purchase price in previously owned New U. S. Steel Shares. Upon such an exercise, a restored option will be granted equal to the number of shares presented plus any shares withheld for the payment of taxes. A restored option will have an exercise price equal to the fair market value of the New U. S. Steel Shares on the date of exercise, as well as the same expiration date as the original exercised option. No restored option will be exercisable prior to the expiration of one year from the date of grant.
Stock Appreciation Rights. The Compensation and Organization Committee may grant a participant the right to receive a payment in cash and/or New U. S. Steel Shares equal to the excess of the fair market value of a New U. S. Steel Share on the date the right is exercised over the fair market value of such share on the date the right is granted for a specified number of shares. No stock appreciation right will be exercisable prior to the expiration of one year from the date of grant.
An employee receiving a stock appreciation right does not realize income under the Code at the time of receipt of the right. The employee will realize income upon the exercise of the right in the amount of the cash received and the fair market value on the date of exercise of the New U. S. Steel Shares received. United States Steel Corporation will then be entitled to a tax deduction in the amount of such income realized by the employee.
Restricted Stock. The Compensation and Organization Committee may award New U. S. Steel Shares for no cash consideration or for such other consideration as may be determined by the Compensation and Organization Committee. Each award shall be subject to conditions including, but not limited to, continuous service with United States Steel Corporation of at least one year following the date of such award and vesting restrictions based on achievement of target levels under specified performance measures, and also subject to provisions for forfeiture and non-transfer. No shares of restricted stock will be vested prior to one year from the date of grant. In the case of a change in control of United States Steel Corporation, all restrictions will terminate. During the term of the Steel Stock Plan, the number of shares of restricted stock granted will not exceed 1,400,000.
Each award of restricted stock will remain unvested for a minimum of one year and until the Compensation and Organization Committee vests the shares. The Compensation and Organization Committee will base its vesting decisions on the achievement of target levels under the following performance measures:
. Income from operations as a percent of capital employed
. Income from operations per ton shipped
. Operating cash flow as a percent of capital employed
. Safety performance
An employee normally will not realize income under the Code upon the grant of restricted stock. Upon the termination of the restrictions applicable to such stock, the employee will realize taxable income equal to the fair market value of the shares of common stock at that time. United States Steel Corporation will be entitled to a deduction in the same amount and at the same time as the employee realizes income. Dividends paid to the employee with respect to restricted stock constitute compensation and are taxable to the employee and deductible by United States Steel Corporation.
Conversion of Options, Restored Options, Stock Appreciation Rights and Restricted Stock
Options and restored options to purchase U. S. Steel Group Shares, and stock appreciation rights with respect to U. S. Steel Group Shares that were granted under the USX Stock Plan and that remain unexercised at the Separation Effective Time, shall be converted into options and restored options to purchase, and stock appreciation rights with respect to New U. S. Steel Shares. Also, at the Separation Effective Time, all restricted U. S. Steel Group Shares awarded under the USX Stock Plan shall be converted into an equal number of New U. S. Steel Shares. These options, restored options, and stock appreciation rights relating to New U. S. Steel Shares, and the restricted New U. S. Steel Shares shall be subject to the same terms and conditions, including vesting requirements, as the options, restored options, stock appreciation rights and restricted stock being converted. With regard to options and restored options, each option or restored option to purchase New U. S. Steel Shares will cover the same number of shares and have the same exercise price as the option or restored option being converted, provided that the number of shares and/or the exercise price will be adjusted, if necessary, so that (i) the aggregate intrinsic value of the option to purchase New U. S. Steel Shares immediately after the Separation Effective Time is not greater than the aggregate intrinsic value of the option being converted immediately before the Separation Effective Time, and (ii) the ratio of the exercise price per share to the market value per share is not reduced. Any such adjustments will be based on the closing price per share of U. S. Steel Group Shares on the last trading day before the Separation Effective Time relative to the opening price per share of New U. S. Steel Shares on the first trading day following the Separation Effective Time.
As of June 30, 2001, options respecting 4,544,125 U. S. Steel Group Shares remained unexercised and outstanding. Such options had a weighted average exercise price of $28.1725, and a weighted average term to expiration of 7.5 years. As of that date, 243,580 U. S. Steel Group Shares represented restricted stock. There will be no further grants respecting U. S. Steel Group Shares under the USX Stock Plan.
During any calendar year, no participant will be awarded Grants with respect to more than 800,000 New U. S. Steel Shares.
It is not practical to predict the number of shares that will be awarded under Grants made to participants in the future because such numbers are, and will continue to be, within the discretion of the Compensation and Organization Committee under the terms of the United States Steel 2002 Stock Plan.
The Steel Stock Plan will terminate on December 31, 2006, subject to earlier termination by the Board.
Amendments
The board of directors of United States Steel Corporation may amend, suspend or terminate the Steel Stock Plan provided that no such action may, without stockholder approval, increase the aggregate number of shares available for Grants under the Steel Stock Plan, decrease the price of options, restored options or stock appreciation rights, change the requirements relating to the Compensation and Organization Committee or extend the term of the Steel Stock Plan. The Compensation and Organization Committee may amend the terms and conditions applicable to outstanding Grants consistent with the Steel Stock Plan, provided that no such action may modify the Grant in a manner adverse to the participant without the participant's consent.
This summary is qualified in its entirety by reference to the copy of the Steel Stock Plan attached as Annex F.
Differences Between the Steel Stock Plan and the Applicable Portions of the USX Stock Plan
The principal differences between the Steel Stock Plan and the USX Stock Plan, which are due in part to the fact that Marathon Shares will not be available for grants under the Steel Stock Plan are as follows: 1) the original term of the USX Stock Plan was for ten years and was extended with stockholder approval to expire in 2005; the term of the Steel Stock Plan is 5 years and expires in 2006; 2) the maximum term of options that can be granted under the USX Stock Plan is 10 years; the maximum term of options under the Steel Stock Plan is 8 years; 3) under the USX Stock Plan, up to 0.5% of outstanding Marathon Group Shares and up to 0.8% of outstanding U. S. Steel Group Shares are available for grants each year; under the Steel Stock Plan, up to 10,000,000 New U. S. Steel Shares are available for grants during the full term of the Steel Stock Plan; 4) grants of restricted stock are limited to 1,200,000 Marathon Group Shares and 800,000 U. S. Steel Group Shares during the term of the USX Stock Plan; grants of restricted stock are limited to 1,400,000 New U. S. Steel Shares during the term of the Steel Stock Plan; and 5) under the USX Stock Plan, individual per annum grants are limited to 500,000 Marathon Group and 500,000 U. S. Steel Group Common Shares; under the Steel Stock Plan, individual per annum grants are limited to 800,000 New U. S. Steel Shares.
The USX board of directors unanimously recommends that you vote FOR approval of Proposal Two.
PROPOSAL THREE: APPROVAL OF THE UNITED STATES STEEL CORPORATION
SENIOR EXECUTIVE OFFICER ANNUAL INCENTIVE COMPENSATION PLAN
Subject to the approval of stockholders, the USX board of directors has adopted the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan (the "Steel Incentive Plan") effective as of the Separation Effective Time. The Steel Incentive Plan is intended to provide United States Steel Corporation senior executive officers with benefits comparable to those provided under the USX Corporation Senior Executive Officer Annual Incentive Compensation Plan (the "USX Incentive Plan"). The USX Incentive Plan was approved by USX stockholders on May 2, 1994, and, with stockholder approval, was amended and restated on April 28, 1998. The USX Incentive Plan will be renamed the Marathon Oil Corporation Senior Executive Officer Annual Incentive Compensation Plan effective as of the Separation Effective Time, and, at that time, United States Steel employees will no longer be eligible to participate.
Like the USX Incentive Plan, the Steel Incentive Plan provides for the
payment of cash bonus awards to senior executive officers of United States
Steel Corporation based on pre-established performance measures. The Steel
Incentive Plan's objectives are to advance the interests of the United States
Steel Corporation by providing participants with annual incentive opportunities
linked directly to specific business results. It is intended to (a) reinforce
United States Steel Corporation's goal-setting and strategic planning process,
(b) recognize the efforts of senior executive officers in achieving designated
objectives, and (c) aid in attracting and retaining competent senior executive
officers, thus ensuring the long-range success of United States Steel
Corporation. The Steel Incentive Plan is designed to preserve the tax
deductibility, under Section 162(m) of the Code, of the annual incentive
compensation paid to senior executive officers.
Recommendation of the USX Board of Directors
Although USX has already approved the Steel Incentive Plan as the sole member of United States Steel LLC, under the organizational documents of United States Steel LLC, any matter requiring approval of the members of United States Steel LLC also requires stockholder approval of USX. Thus, the Steel Incentive Plan must be approved by the affirmative vote of a majority of the votes cast at the special meeting by holders of Marathon Group Shares and U. S. Steel Group Shares, voting together as a single class. Because the Steel Incentive Plan will only relate to United States Steel Corporation, we are also seeking approval of the plan by a majority of the votes cast at the special meeting by holders of U. S. Steel Group Shares, voting as a separate class, since they will hold all of the common stock of United States Steel Corporation.
The USX board of directors unanimously recommends that holders of Marathon Group Shares and U. S. Steel Group Shares, vote FOR the approval of the Steel Incentive Plan.
Summary of the Plan
Following is a summary of the material features of the Steel Incentive Plan. The full text of the Steel Incentive Plan is set forth as Annex G to this proxy statement/prospectus.
The Steel Incentive Plan would authorize the Compensation and Organization Committee of the United States Steel Corporation board of directors to adopt, in accordance with regulations promulgated under the Code, applicable target levels under the performance measures described below, and the amounts to be awarded for attaining such target levels. The Committee will have the right to reduce the amount of an award or eliminate an award that would otherwise be payable to a participant, i.e. exercise "negative discretion". In no event will the amount of an award payable to a participant for a given year exceed $3,000,000.
Awards may be paid only after the Compensation and Organization Committee certifies that the applicable performance measures have been satisfied. It is impossible to determine the amounts that will be paid under the Steel Incentive Plan in the future since awards, and payment with respect thereto, are, and will continue to be, within the discretion of the Compensation and Organization Committee under the terms of the plan.
Individuals serving in one of the positions listed below for at least a portion of a calendar year will be eligible to participate in the Steel Incentive Plan:
United States Steel Corporation Chairman United States Steel Corporation Chief Executive Officer United States Steel Corporation President United States Steel Corporation Vice Chairmen United States Steel Corporation Chief Operating Officer United States Steel Corporation Chief Financial Officer United States Steel Corporation Chief Legal Officer United States Steel Corporation Executive Vice Presidents United States Steel Corporation Senior Vice Presidents
Set forth below are the performance measures under the Steel Incentive Plan:
Income from Operations Steel Shipments Worker Safety Toxic Emissions Improvements Work Force Diversity Common Stock Performance |
The USX board of directors unanimously recommends that you vote FOR approval of Proposal Three.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table furnishes information concerning all persons known to USX to beneficially own five percent or more of any class of the voting stock of USX:
Name and Address of Beneficial Amount and Nature of Percent of
Class Owner Beneficial Ownership Class
----- ------------------------------ -------------------- ----------
Marathon
Group
Shares Wellington Management Company, LLP 15,562,200(1) 5.05(1)
75 State Street
Boston, MA 02109
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SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the number of shares of each class of USX common stock beneficially owned as of June 30, 2001 by each director, by each executive officer and by all directors and executive officers as a group. No director or executive officer beneficially owned, as of June 30, 2001, any equity securities of USX other than those shown.
U. S.
Marathon Steel
Group Group
Name Shares Shares
---- --------- ---------
Neil A. Armstrong(1)...................................... 14,112 4,811
Clarence P. Cazalot, Jr.(2)(3)............................ 576,217 69,054
J. Gary Cooper(1)(2)...................................... 3,410 1,816
Charles A. Corry(1)(2)(3)................................. 3,923 81,337
Robert M. Hernandez(2)(3)(4).............................. 643,098 315,010
Shirley Ann Jackson(1)(2)................................. 2,806 1,771
Charles R. Lee(1)......................................... 13,781 5,388
Paul E. Lego(1)(2)........................................ 11,083 3,727
John F. McGillicuddy(1)................................... 13,349 4,482
Dan D. Sandman(2)(3)...................................... 275,498 166,217
Seth E. Schofield(1)(2)................................... 8,810 3,780
John W. Snow(1)........................................... 7,007 3,010
Thomas J. Usher(2)(3)..................................... 1,273,154 879,595
Douglas C. Yearley(1)..................................... 8,269 3,596
All Directors and Executive Officers as a group (35
persons)(1)(2)(3)(5)..................................... 3,871,179 3,089,472
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Marathon Group U. S. Steel Group
Common Stock Units Common Stock Units
------------------ ------------------
Neil A. Armstrong...................... 12,612 4,511
J. Gary Cooper......................... 2,378 770
Charles A. Corry....................... 3,923 1,377
Shirley Ann Jackson.................... 1,790 746
Charles R. Lee......................... 11,781 4,188
Paul E. Lego........................... 9,481 3,401
John F. McGillicuddy................... 11,349 4,082
Seth E. Schofield...................... 7,690 2,636
John W. Snow........................... 6,007 2,010
Douglas C. Yearley..................... 7,269 2,596
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(2) Includes shares held under the USX Savings Fund Plan, the Marathon Thrift Plan, the USX Dividend Reinvestment and Direct Stock Purchase Plans and the 1990 Stock Plan.
(3) Includes shares which may be acquired upon exercise of outstanding
options as follows (all options other than those granted on May 29, 2001
are currently exercisable): Mr. Usher: Marathon Group Shares 1,101,100,
U. S. Steel Group Shares 781,400; Mr. Sandman: Marathon Group Shares
218,400, U. S. Steel Group Shares 142,325; Mr. Cazalot: Marathon Group
Shares 520,000, U. S. Steel Group Shares 55,000; Mr. Hernandez: Marathon
Group Shares 562,625, U. S. Steel Group Shares 282,625; Mr. Corry: U. S.
Steel Group Shares 80,000; and all directors and executive officers as a
group: Marathon Group Shares 3,179,220, U. S. Steel Group Shares
2,688,705.
(4) As of January 31, 2001 the United States Steel and Carnegie Pension Fund,
trustee of the United States Steel Corporation Plan for Employee Pension
Benefits and the United States Steel Corporation Plan for Non-Union
Employee Pension Benefits, owned 587,680 shares of the Marathon Group
Shares. This stock was received in exchange for common stock of Texas Oil
& Gas Corp. Mr. Hernandez is chairman and one of seven members of the
Investment Committee of the trustee. The board of directors of the
trustee has by formal resolution delegated sole power to vote and dispose
of such stock to a subcommittee of the Investment Committee which is
composed of members who are not officers or employees of USX. Mr.
Hernandez disclaims beneficial ownership of such stock.
(5) Total shares beneficially owned in each case constitute less than one
percent of the outstanding shares of each class except that all directors
and executive officers as a group own 1.25 percent of the Marathon Group
Shares and 3.47 percent of the U. S. Steel Group Shares.
OTHER MATTERS
Legal Matters
The validity of the United States Steel Corporation common stock to be issued in connection with the Separation will be passed upon by Skadden, Arps, Slate, Meagher & Flom LLP.
Experts
The combined financial statements of United States Steel as of December 31, 2000 and December 31, 1999 and for each of the three years in the period ended December 31, 2000 included in this proxy statement/prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of USX Corporation as of December 31, 2000 and December 31, 1999 and for each of the three years in the period ended December 31, 2000 included in this proxy statement/prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
SUBMISSION OF STOCKHOLDER PROPOSALS
FOR THE 2002 ANNUAL MEETING
If the Separation does not occur, any USX stockholder who wishes to present a proposal at the USX Corporation 2002 annual meeting of stockholders, and who wishes to have such proposal included in the USX Corporation proxy statement for that meeting, must deliver a copy of such proposal to USX's Corporate Secretary no later than 5:00 P.M. Eastern Time on November 12, 2001. If a USX stockholder intends to present a proposal at the USX Corporation 2002 annual meeting of stockholders that is not included in USX Corporation's proxy statement for that meeting, and the USX stockholder fails to promptly notify USX of such proposal in writing on or after December 27, 2001 and no later than January 26, 2002, then such proposals shall be considered untimely. Article I of USX's bylaws governs submission of matters for presentation at USX stockholder meetings.
If the Separation does occur, any stockholder of Marathon Oil Corporation who wishes to present a proposal at the Marathon Oil Corporation 2002 annual meeting of stockholders, and who wishes to have such
proposal included in the Marathon Oil Corporation proxy statement for that meeting, must deliver a copy of such proposal to Marathon's Corporate Secretary no later than 5:00 P.M. Eastern Time on November 12, 2001. If a Marathon stockholder intends to present a proposal at the Marathon Oil Corporation 2002 annual meeting of stockholders that is not included in Marathon's proxy statement for that meeting, and the Marathon stockholder fails to promptly notify Marathon of such proposal in writing on or after December 27, 2001 and no later than January 26, 2002, then such proposals shall be considered untimely. Article I of Marathon's bylaws governs submission of matters for presentation at Marathon stockholder meetings.
WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus incorporates documents by reference which are not presented in or delivered with this proxy statement/prospectus.
The following documents, which were filed by USX with the Securities and Exchange Commission, are incorporated by reference:
SEC Filings Period
----------- ------
Annual Report on Year ended December 31, 2000, as filed on March
Form 10-K................ 12, 2001, as amended on September [ ], 2001
Quarterly Reports on Quarter ended March 31, 2001, as filed on May
Form 10-Q................ 11, 2001 Quarter ended June 30, 2001, as filed
on August 6, 2001
Current Reports on Form 8- Dated February 27, 2001, April 24, 2001, June
K........................ 15, 2001, July 2, 2001, July 31, 2001, August 1,
2001, August 2, 2001 and August 6, 2001
Proxy Statement on Filed on March 12, 2001
Schedule 14A.............
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USX incorporates by reference additional documents that it may file with the Securities and Exchange Commission between the date of this proxy statement/prospectus and the date of the special meeting of stockholders of USX. These documents include periodic reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy statements.
Any statement contained in a document incorporated or deemed to be incorporated by reference into this proxy statement/prospectus will be deemed to be modified or superseded for purposes of this proxy statement/prospectus to the extent that a statement contained in this proxy statement/prospectus or any other subsequently filed document that is deemed to be incorporated by reference into this proxy statement/prospectus modifies or supersedes the statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement/prospectus.
The documents incorporated by reference into this proxy statement/prospectus are available from us upon request. We will provide a copy of any and all of the information that is incorporated by reference in this proxy statement/prospectus to any person by first-class mail, without charge, upon written or oral request. Any request for documents should be made by October 8, 2001 to ensure timely delivery of the documents prior to the special meeting.
Requests for documents should be directed to:
USX Corporation
Shareholder Services
600 Grant Street, Room 611
Pittsburgh, Pennsylvania 15219-4776
(412) 433-4801
(866) 433-4801 (toll free)
(412) 433-4818 (fax)
USX Corporation files annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission under the Securities Exchange Act of 1934. You may read and copy this information at the following location of the Securities and Exchange Commission:
Public Reference Room 450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
You can also inspect reports, proxy statements and other information about USX Corporation at the offices of the National Association of Securities Dealers, Inc., 9513 Key West Avenue, Rockville, Maryland 20850.
The Securities and Exchange Commission also maintains an Internet worldwide web site that contains reports, proxy statements and other information about issuers, like USX Corporation, who file electronically with the Securities and Exchange Commission. The address of that site is http://www.sec.gov.
United States Steel LLC has filed a registration statement on Form S-4 under the Securities Act with the Securities and Exchange Commission with respect to New U. S. Steel Shares to be issued to holders of U. S. Steel Group Shares in the Separation. This proxy statement/prospectus constitutes the prospectus of United States Steel Corporation filed as part of that registration statement. This proxy statement/prospectus does not contain all of the information set forth in the registration statement because certain parts of the registration statement are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The registration statement and its exhibits are available for inspection and copying as set forth above.
If you have any questions about the merger, please call Innisfree M&A Incorporated at (888) 750-5835.
You should rely only on the information contained in this document or that we have referred you to. We have not authorized anyone to provide you with information that is different.
This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this proxy statement/prospectus, or the solicitation of a proxy, in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer, solicitation of an offer or proxy solicitation in such jurisdiction. Neither the delivery of this proxy statement/ prospectus nor any distribution of securities pursuant to this proxy statement/prospectus shall, under any circumstances, create any implication that there has been no change in the information set forth or incorporated into this proxy statement/prospectus by reference or in our affairs since the date of this proxy statement/prospectus.
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
USX CORPORATION
AND
UNITED STATES STEEL LLC
DATED AS OF
JULY 31, 2001
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions
Section 1.1 General.................................................. 2
Section 1.2 Other Definitional Provisions............................ 5
ARTICLE II
Terms Defined Elsewhere in this Agreement
Terms Defined Elsewhere in this Agreement.............................. 6
ARTICLE III
U. S. Steel Conversion
Section 3.1 U. S. Steel Conversion................................... 8
Section 3.2 Effective Time of U. S. Steel Conversion................. 8
Section 3.3 Closing of the U. S. Steel Conversion.................... 9
Section 3.4 Effects of the U. S. Steel Conversion.................... 9
Section 3.5 Certificate of Incorporation; By-laws.................... 9
Section 3.6 Directors................................................ 9
Section 3.7 Officers................................................. 9
Section 3.8 Conversion of Securities................................. 9
Section 3.9 Further Actions.......................................... 9
ARTICLE IV
Actions to be Taken Prior to the Separation
Section 4.1 Stockholders' Meeting.................................... 10
Section 4.2 Other Securities Matters................................. 11
Section 4.3 Listing.................................................. 11
Section 4.4 Boards of Directors...................................... 11
Section 4.5 Rights Agreement......................................... 11
Section 4.6 Preparation of Private Letter Ruling Request............. 11
Section 4.7 Treatment of USX Corporate Assets and Liabilities........ 12
Section 4.8 Financings and Value Transfer............................ 12
Section 4.9 Formation of Merger Sub.................................. 12
Section 4.10 Execution of Separation Documents........................ 12
Section 4.11 Other Securities Matters................................. 12
United States Steel Equity and Incentive Compensation
Section 4.12 Plans.................................................... 13
Section 4.13 Treatment of Tax-Qualified Pension Assets................ 13
ARTICLE V
The Separation
Section 5.1 The Separation........................................... 13
Separation Effective Time; Closing of the Separation
Section 5.2 Merger................................................... 13
Section 5.3 Determination of Cash Settlement Amount.................. 13
Section 5.4 Effects of the Separation Merger......................... 14
Section 5.5 Organizational Documents................................. 14
Section 5.6 Directors................................................ 14
Section 5.7 Officers................................................. 14
Section 5.8 Conversion of Securities................................. 14
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Page
----
Section 5.9 Rights of USX Stockholders.............................. 15
Section 5.10 Exchange of Steel Stock Certificates.................... 15
Section 5.11 Delivery of 6.50% Merger Consideration.................. 16
Treatment of USX Stock Options and Stock Appreciation
Section 5.12 Rights.................................................. 18
Section 5.13 Treatment of Restricted Stock........................... 19
Section 5.14 Post-Closing Adjustment to Cash Settlement Amount....... 19
ARTICLE VI
Conditions
Section 6.1 Conditions to the Separation Merger..................... 20
Section 6.2 Determination as to Fulfillment of Conditions........... 21
ARTICLE VII
Intercompany Business Relationships Following the Separation
Section 7.1 Transition Services..................................... 21
Section 7.2 Intellectual Property, Trademarks and Licenses.......... 21
Section 7.3 Litigation.............................................. 21
ARTICLE VIII
Employee Matters
Section 8.1 Employee Incentive Plans and Employee Arrangements...... 22
Section 8.2 Treatment of USX Corporate Employees.................... 22
ARTICLE IX
Insurance Matters
Section 9.1 General................................................. 23
Section 9.2 Policies to be Transferred.............................. 23
Section 9.3 Insurance Assistance Agreement.......................... 23
Section 9.4 Directors' and Officers' Insurance...................... 23
ARTICLE X
Tax Matters
Section 10.1 Tax Sharing Agreement................................... 23
ARTICLE XI
Additional Covenants
Section 11.1 Provision of Corporate Records.......................... 23
Section 11.2 Access to Information................................... 24
Section 11.3 Production of Witnesses................................. 25
Section 11.4 Confidentiality......................................... 25
Cooperation with Respect to Government Reports and
Section 11.5 Filings................................................. 25
Section 11.6 Certain Limitations with Respect to Information......... 25
Section 11.7 Protective Arrangements................................. 26
Section 11.8 Further Assurances...................................... 26
Section 11.9 Assignment of Contracts and Rights...................... 26
No Restrictions on Post-Separation Competitive
Section 11.10 Activities.............................................. 27
Section 11.11 Merger of United States Steel Financing Corp............ 27
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Page
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ARTICLE XII
Mutual Release--No Representations or Warranties
Section 12.1 Mutual Release............................................. 27
Section 12.2 No Representations or Warranties........................... 27
ARTICLE XIII
Indemnification
Section 13.1 USX's Agreement to Indemnify............................... 28
Section 13.2 SteelCo's Agreement to Indemnify........................... 28
Section 13.3 Procedure for Indemnification.............................. 29
ARTICLE XIV
Termination and Amendment
Section 14.1 Termination at any Time by the Board....................... 30
Section 14.2 Amendment.................................................. 30
ARTICLE XV
General Provisions
Section 15.1 Retention of Records....................................... 30
Section 15.2 Dispute Resolution......................................... 30
Section 15.3 Expenses................................................... 31
Section 15.4 Governing Law.............................................. 31
Section 15.5 Notices.................................................... 31
Section 15.6 Third-Party Beneficiaries.................................. 32
Section 15.7 Entire Agreement........................................... 32
Section 15.8 Headings................................................... 32
Section 15.9 Schedules.................................................. 32
Section 15.10 Counterparts............................................... 32
Section 15.11 Parties in Interest; Assignment; Successors................ 32
Section 15.12 Severability; Enforcement.................................. 32
Section 15.13 Remedies................................................... 33
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Annex A
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization ("Agreement"), dated as of July 31, 2001, by and between USX Corporation, a Delaware corporation, to be renamed "Marathon Oil Corporation"("USX"), and United States Steel LLC, a Delaware limited liability company and wholly owned subsidiary of USX, to be renamed "United States Steel Corporation" ("SteelCo").
W I T N E S S E T H:
Whereas, USX is a diversified company principally engaged in the energy business and the steel business;
Whereas, pursuant to the Restated Certificate of Incorporation of USX (the "Restated Certificate"), the businesses of USX are divided between two groups, the Marathon Group and the U. S. Steel Group (each, as defined in the Restated Certificate);
Whereas, USX has outstanding two classes of common stock, USX-Marathon Group Common Stock, par value $1.00 per share ("Marathon Group Shares"), which is intended to reflect the performance of the Marathon Group, and USX-U. S. Steel Group Common Stock, par value $1.00 per share ("U. S. Steel Group Shares"), which is intended to reflect the performance of the U. S. Steel Group;
Whereas, prior to the date hereof, USX implemented a holding company structure by merging the then-existing USX Corporation, a Delaware corporation ("Old USX"), with and into SteelCo, with SteelCo continuing as the surviving entity and a wholly owned subsidiary of USX (the "HoldCo Merger"), so that immediately following the effective time of the HoldCo Merger, USX became a holding company that owns all of the outstanding equity of Marathon Oil Company (which owns and operates the business of the Marathon Group) and of SteelCo (which owns and operates the business of the U. S. Steel Group);
Whereas, the board of directors of SteelCo has determined that it is advisable and in the best interests of SteelCo and its sole member to convert SteelCo into a Delaware corporation named "United States Steel Corporation" (the "U. S. Steel Conversion"), subject to the terms and conditions hereof, and pursuant to Section 265 of the General Corporation Law of the State of Delaware (as amended from time to time, the "DGCL") and Section 18-216 of the Delaware Limited Liability Company Act (as amended from time to time, the "DLLCA"), effective at the Separation Effective Time (as defined herein);
Whereas, the board of directors of USX (the "Board") has determined that it
is advisable and in the best interests of USX and its stockholders to separate
the respective businesses of the Marathon Group and the U. S. Steel Group
following the U. S. Steel Conversion, by merging USX Merger Corporation, a
Delaware corporation and a wholly owned subsidiary of USX ("Merger Sub"), with
and into USX, subject to the terms and conditions hereof, and pursuant to
Section 251 of the DGCL (the "Separation Merger"), with USX continuing as the
surviving corporation, so that immediately following the Separation Effective
Time, SteelCo (to be renamed United States Steel Corporation) shall own and
operate the business of the U. S. Steel Group and shall be wholly owned by the
holders of the U. S. Steel Group Shares immediately prior to the Separation
Effective Time, and the business of the Marathon Group shall be owned and
operated by USX (to be renamed Marathon Oil Corporation), which shall be a
separate and independent entity from SteelCo and shall be wholly owned by the
holders of the Marathon Group Shares immediately prior to the Separation
Effective Time (the "Separation");
Whereas, the Board has received the opinions of Credit Suisse First Boston Corporation and Salomon Smith Barney (collectively, the "Financial Advisors"), financial advisors to the Board, that, as of the date hereof, the financial effects, taken as a whole, of the transactions contemplated by this Agreement are fair, from a financial point of view, to the holders of the Marathon Group Shares and the holders of the U. S. Steel Group Shares;
Whereas, the Board has received an opinion of American Appraisal Associates, Inc. that, with respect to USX prior to the Separation and with respect to each of Marathon Oil Corporation and United States Steel Corporation both immediately before and after, and giving effect to, the Separation, the fair value of its aggregate assets exceed its total liabilities; the present fair saleable value of its aggregate assets exceeds the probable liability on its debts as they become absolute and matured; it will be able to pay its debts and other liabilities as they mature; and it will not have unreasonably small capital with which to conduct its business, as presently conducted and as proposed to be conducted;
Whereas, the Board has determined that the Separation Merger will, among other things, allow Marathon Oil Corporation and United States Steel Corporation to focus on their core businesses and make critical acquisitions and investments needed to grow their respective businesses and will enhance stockholder value for all of USX's stockholders through the creation of two strong, independent companies;
Whereas, the Board has, in light of and subject to the terms and conditions set forth herein, (i) determined that the Separation Merger is advisable and in the best interests of USX and the holders of each of the Marathon Group Shares and the U. S. Steel Group Shares, (ii) approved and declared the advisability of this Agreement and the transactions contemplated hereby and (iii) determined to recommend that the common stockholders of USX vote to adopt this Agreement;
Whereas, the respective boards of directors of SteelCo and Merger Sub have approved and declared the advisability of this Agreement and the transactions contemplated by this Agreement, including, without limitation, the U. S. Steel Conversion and the Separation Merger (collectively, the "Transactions"), and USX, as the sole stockholder of Merger Sub, has adopted this Agreement;
Whereas, it is the intention of the parties hereto that the transactions contemplated by this Agreement shall be a tax-free transaction under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), and the rules and regulations promulgated thereunder; and
Whereas, the parties hereto desire to make certain covenants and agreements and to allocate certain assets, liabilities and obligations in connection with the U. S. Steel Conversion, the Separation Merger and the other Transactions contemplated by this Agreement and to prescribe various conditions to the Transactions.
Now, Therefore, in furtherance of the foregoing and in consideration of the mutual promises and undertakings contained herein and in any other document executed in connection with this Agreement, the parties agree as follows:
ARTICLE I
Definitions
Section 1.1 General. For the purposes of this Agreement, the following terms shall have the meanings set forth below:
(a) "Action" shall mean any action, claim (whether or not filed), suit, arbitration, inquiry, demand, proceeding or investigation.
(b) "Affiliate" shall mean, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such specified Person; provided, however, that for purposes of this Agreement, from and after the Separation Effective Time, neither SteelCo nor any of its Subsidiaries shall be deemed to be an Affiliate of USX or any of its Subsidiaries, and neither USX nor any of its Subsidiaries shall be deemed to be an Affiliate of SteelCo or any of its Subsidiaries.
(c) "Applicable Law" shall mean, with respect to any Person, all statutes, laws, ordinances, rules, orders and regulations of any Governmental Authority applicable to such Person and its business, properties and assets.
(d) "Confidential Information" shall mean, with respect to either Group, Information regarding a member of such Group, or any of its operations, assets or Liabilities (whether in documents or stored in any other form or known to its employees or agents) which is not generally available to the public (other than as a result of a wrongful disclosure).
(e) "Contract" shall mean any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment, written or oral.
(f) "Disclosure Letter" shall mean the letter, dated as of the date hereof, delivered by USX to the other parties hereto, as the same may be amended or supplemented from time to time.
(g) "Employee Arrangements" shall mean all employment or consulting agreements or arrangements, all severance or change in control agreements or arrangements and all other agreements or arrangements with respect to the employment and termination of employment of any employee, officer or director.
(h) "Employee Incentive Plans" shall mean all incentive compensation, stock award, stock option or stock purchase plans and equity compensation arrangements.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.
(j) "Governmental Authority" shall mean any foreign, federal, state or local government, court, agency or commission or other governmental or regulatory body or authority.
(k) "Group" shall mean the Marathon Group and/or the U. S. Steel Group, as the case may be.
(l) "HoldCo Reorganization Agreement" shall mean the Holding Company Reorganization Agreement, dated as of July 1, 2001, among USX Corporation, USX HoldCo, Inc. and United States Steel LLC.
(m) "Indemnifiable Losses" shall mean, with respect to any claim by an Indemnified Party for indemnification under this Agreement, any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, fines, interest, costs and expenses (including, without limitation, the costs and expenses of any and all Actions, demands, assessments, judgments, settlements and compromises relating thereto and the reasonable costs and expenses of attorneys', accountants', consultants' and other professionals' fees and expenses incurred in the investigation or defense thereof or the enforcement of rights thereunder), including direct, consequential, exemplary, special and punitive damages and lost profits.
(n) "Indemnified Party" shall mean any Person that is seeking
indemnification from an Indemnifying Party pursuant to the provisions of
this Agreement.
(o) "Indemnifying Party" shall mean any party hereto from which any
Indemnified Party is seeking indemnification pursuant to the provisions of
this Agreement.
(p) "Information" shall mean all records, books, Contracts, instruments,
computer data and other data and information.
(q) "Insurance Arrangements" shall mean insurance policies and insurance Contracts of any kind, including, without limitation, primary and excess policies, commercial general liability policies, automobile policies, product liability policies, directors' and officers' liability policies, fiduciary liability policies, workers' compensation policies, and self- insurance programs and captive insurance company arrangements, together with the rights, benefits and privileges thereunder.
(r) "Insurance Proceeds" shall mean those monies received by an insured from an Insurer or paid by an Insurer on behalf of an insured, in either case net of any applicable premium adjustment, retrospectively rated premium, deductible, retention or cost of reserve paid or held by or for the benefit of such insured.
(s) "Insurer" shall mean a third-party insurance carrier.
(t) "Joint Insurance Arrangements" shall mean the Insurance Arrangements of USX existing at the Separation Effective Time and/or prior thereto that are (i) owned or maintained by or on behalf of USX or any of its predecessors and that relate to both (a) the U. S. Steel Group assets, business and/or Liabilities and (b) the Marathon Group assets, business and/or Liabilities and (ii) listed in Section 1.1(t) of the Disclosure Letter.
(u) "Liability" shall mean, with respect to any Person, except as otherwise expressly provided herein, any direct or indirect liability (whether absolute, accrued or unaccrued, contingent, liquidated or unliquidated, matured or unmatured or known or unknown), indebtedness, obligation, indemnification obligation, expense, claim, deficiency, guarantee or endorsement of or by such Person (including, without limitation, those arising under any Applicable Law or Action or under any award of any court, tribunal or arbitrator of any kind, and those arising under any Contract or undertaking).
(v) "Litigation Matters" shall mean actual, threatened or future Actions that have been or may be asserted against, or otherwise adversely affect, any member of either Group.
(w) "Marathon" shall mean Marathon Oil Company, an Ohio corporation and a wholly owned subsidiary of USX.
(x) "Marathon Employees" shall mean any Person employed by Marathon or its Subsidiaries.
(y) "Marathon Group Option" shall mean each option to purchase Marathon Group Shares granted under the USX Corporation 1990 Stock Plan.
(z) "Marathon Group SAR" shall mean each stock appreciation right of USX relating to Marathon Group Shares granted under the USX Corporation 1990 Stock Plan.
(aa) "Pension Assets" shall mean the assets of the USS Non-Union Plan.
(bb) "Person" or "Persons" shall mean and include any individual, partnership, joint venture, corporation, association, joint stock company, limited liability company, trust, unincorporated organization or similar entity.
(cc) "Privileged Information" shall mean, with respect to either Group, Information regarding a member of such Group, or any of its operations, assets or Liabilities (whether in documents or stored in any other form or known to its employees or agents) that is or may be protected from disclosure pursuant to the attorney-client privilege, the work-product doctrine or other applicable privileges.
(dd) "Representative" shall mean, with respect to any Person, any of such Person's directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives.
(ee) "SEC" shall mean the United States Securities and Exchange Commission.
(ff) "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
(gg) "Separation Documents" shall mean this Agreement, the Tax Sharing Agreement, the Transition Services Agreement, the Financial Matters Agreement, the Insurance Assistance Agreement, the License Agreement, the Fairfield Caster Sublease and documents, schedules, exhibits and appendices attached hereto or thereto or delivered pursuant hereto or thereto, including, without limitation, the Disclosure Letter, the deeds, lease assignments and assumptions, leases, subleases and sub-subleases, and the supplemental and other agreements and instruments relative thereto.
(hh) "Stockholder Rights Plan" shall mean the Rights Agreement, dated as of September 28, 1999, between Old USX and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, as amended from time to time.
(ii) "Subsidiary" shall mean, with respect to any Person, each corporation, partnership, limited liability company or other legal entity of which such Person owns, either directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or similar governing body of such corporation, partnership, limited liability company or other legal entity.
(jj) "Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and shall include any transferee liability in respect of Taxes.
(kk) "Trademarks" shall mean all registered and unregistered trademarks, service marks, service names, trade styles and trade names (including, without limitation, trade dress and other names, marks and slogans) and all associated goodwill and all applications for any of the foregoing, together with all rights to use any of the foregoing.
(ll) "U. S. Steel Group Option" shall mean each option to purchase U. S. Steel Group Shares granted under the USX Corporation 1990 Stock Plan.
(mm) "U. S. Steel Group SAR" shall mean each stock appreciation right of USX Corporation relating to U. S. Steel Group Shares granted under the USX Corporation 1990 Stock Plan.
(nn) "USX Corporate Assets" shall mean assets owned or leased by USX at the Separation Effective Time and which are not designated in the accounting records of USX as being solely attributable to either Group. Without limiting the foregoing, USX Corporate Assets shall include those assets listed in Section 1.1(nn) of the Disclosure Letter.
(oo) "USX Corporate Employees"shall mean all persons employed by USX or Old USX at any time on or after May 1991 up to the Separation Effective Time who are or were designated in the payroll records of USX or Old USX as employees of USX or Old USX headquarters.
Section 1.2 Other Definitional Provisions.
(a) The words "hereof", "herein", "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
ARTICLE II
Terms Defined Elsewhere in This Agreement
For the purposes of this Agreement, the following terms have the meanings set forth on the pages indicated:
6.50% Merger Consideration.................................................. 27 6.50% Preferred Stock....................................................... 24 6.50% Preferred Stock Certificates.......................................... 25 Action...................................................................... 4 Affiliate................................................................... 4 Agreement................................................................... 1 Applicable Law.............................................................. 4 Asserted Liability.......................................................... 48 Board....................................................................... 2 Cash Settlement Amount...................................................... 22 Certificate of Conversion................................................... 13 Claim Notice................................................................ 48 Closing Net Steel Liabilities............................................... 32 Code........................................................................ 3 Confidential Information.................................................... 4 Contract.................................................................... 4 Conversion Closing.......................................................... 13 Conversion Closing Date..................................................... 13 Conversion Effective Time................................................... 13 CSE......................................................................... 17 DGCL........................................................................ 2 Disclosure Letter........................................................... 4 Disputes.................................................................... 52 DLLCA....................................................................... 2 Employee Arrangements....................................................... 4 Employee Incentive Plans.................................................... 5 Estimated Cash Settlement Amount............................................ 22 Estimated Net Steel Liabilities............................................. 22 Exchange Act................................................................ 5 Exchange Agent.............................................................. 25 Fairfield Caster Sublease................................................... 19 Final Cash Settlement Amount................................................ 32 Final Net Steel Liabilities................................................. 32 Final Statement............................................................. 32 Financial Advisors.......................................................... 2 Financial Matters Agreement................................................. 19 Financings.................................................................. 19 Form 8-A.................................................................... 17 Form S-4.................................................................... 16 GAAP........................................................................ 22 Governmental Authority...................................................... 5 Group....................................................................... 5 HoldCo Merger............................................................... 1 HoldCo Reorganization Agreement............................................. 5 Indemnifiable Losses........................................................ 5 Indemnified Party........................................................... 5 |
Indemnifying Party.......................................................... 5 Independent Accounting Firm................................................. 33 Information................................................................. 6 Insurance Arrangements...................................................... 6 Insurance Assistance Agreement.............................................. 19 Insurance Proceeds.......................................................... 6 Insurer..................................................................... 6 Joint Insurance Arrangements................................................ 6 Joint Liabilities........................................................... 47 Letter of Transmittal....................................................... 28 Liability................................................................... 6 License Agreement........................................................... 19 Litigation Matters.......................................................... 6 Marathon.................................................................... 7 Marathon Action............................................................. 36 Marathon Corp. Common Stock................................................. 24 Marathon Corp. Option....................................................... 30 Marathon Corp. SAR.......................................................... 31 Marathon Employees.......................................................... 7 Marathon Group Liabilities.................................................. 47 Marathon Group Option....................................................... 7 Marathon Group SAR.......................................................... 7 Marathon Group Shares....................................................... 1 Merger Sub.................................................................. 2 Net Steel Liabilities....................................................... 22 Non-Permitted Names......................................................... 35 NYSE........................................................................ 17 Old USX..................................................................... 1 Payment Agent............................................................... 27 Payment Fund................................................................ 27 Pension Assets.............................................................. 7 Person...................................................................... 7 Privileged Information...................................................... 7 Proxy Statement............................................................. 16 PSE......................................................................... 17 Representative.............................................................. 7 Restated Certificate........................................................ 1 SEC......................................................................... 7 Securities Act.............................................................. 7 Separation.................................................................. 2 Separation Certificate of Merger............................................ 21 Separation Closing.......................................................... 21 Separation Closing Date..................................................... 21 Separation Committee........................................................ 52 Separation Date............................................................. 22 Separation Documents........................................................ 7 Separation Effective Time................................................... 21 Separation Merger........................................................... 2 Separation Surviving Corporation............................................ 21 Statement................................................................... 32 Steel Balance Sheet......................................................... 22 Steel DRIP Plan............................................................. 20 |
Steel Stock Certificates.................................................... 25 SteelCo..................................................................... 1 SteelCo Interests........................................................... 15 Stockholder Rights Plan..................................................... 8 Stockholders' Meeting....................................................... 15 Subsidiary.................................................................. 8 Tax......................................................................... 8 Tax Sharing Agreement....................................................... 19 Trademarks.................................................................. 8 Transactions................................................................ 3 Transition Services Agreement............................................... 19 U. S. Steel Action.......................................................... 36 U. S. Steel By-laws......................................................... 14 U. S. Steel Charter......................................................... 13 U. S. Steel Conversion...................................................... 2 U. S. Steel Corp. SAR....................................................... 30 U. S. Steel Group Liabilities............................................... 48 U. S. Steel Group Option.................................................... 8 U. S. Steel Group SAR....................................................... 9 U. S. Steel Group Shares.................................................... 1 U. S. Steel Indemnified Parties............................................. 47 U. S. Steel Right........................................................... 18 U. S. Steel Rights Agreement................................................ 18 United States Steel Corporation 2002 Stock Plan............................. 20 United States Steel Common Stock Certificates............................... 25 United States Steel Incentive Plan.......................................... 20 United States Steel Common Stock............................................ 24 United States Steel Option.................................................. 30 United States Steel Corporation............................................. 13 USS Non-Union Plan.......................................................... 20 USX......................................................................... 1 USX Corporate Assets........................................................ 9 USX Corporate Employees..................................................... 9 USX DRIP Plan............................................................... 20 USX Indemnified Parties..................................................... 48 USX Stockholder Approval.................................................... 16 Value Transfer.............................................................. 19 |
ARTICLE III
U. S. Steel Conversion
Section 3.1 U. S. Steel Conversion. At the Separation Effective Time, upon the terms and subject to the conditions of this Agreement and in accordance with Section 18-216 of the DLLCA and Section 265 of the DGCL, SteelCo shall be converted into a Delaware corporation named United States Steel Corporation ("United States Steel Corporation").
Section 3.2 Effective Time of U. S. Steel Conversion. Subject to the provisions of this Agreement, the parties shall cause the U. S. Steel Conversion to be consummated by filing (a) a certificate of conversion (the "Certificate of Conversion") in accordance with Section 265 of the DGCL and (b) a certificate of incorporation for United States Steel Corporation, substantially in the form of Appendix A hereto (the "U. S. Steel Charter") with the Secretary of State of the State of Delaware, each executed in accordance with the
relevant provisions of the DGCL and the DLLCA, as soon as practicable on or after the Conversion Closing Date (as defined in Section 3.3 below). The U. S. Steel Conversion shall become effective upon such filings or at such time thereafter as is provided in the Certificate of Conversion, which shall be at the Separation Effective Time (the "Conversion Effective Time").
Section 3.3 Closing of the U. S. Steel Conversion. The closing of the U. S. Steel Conversion (the "Conversion Closing") shall take place at the offices of USX, 600 Grant Street, Pittsburgh, Pennsylvania 15219-4776, at 10:00 a.m. (local time), on a date to be specified by the parties (the "Conversion Closing Date"), which shall be on the Separation Closing Date, unless the parties agree to another time, date or place in writing.
Section 3.4 Effects of the U. S. Steel Conversion. The U. S. Steel Conversion shall have the effects set forth in Section 265 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, from and after the Conversion Effective Time, United States Steel Corporation shall be a corporation governed by all of the provisions of the DGCL; provided that the U. S. Steel Conversion shall not affect any of the obligations or Liabilities of SteelCo incurred prior to the Conversion Effective Time, including, without limitation, any obligations of SteelCo arising under this Agreement. SteelCo hereby acknowledges and agrees that United States Steel Corporation shall remain responsible for all of such obligations and Liabilities following the Conversion Effective Time.
Section 3.5 Certificate of Incorporation; By-laws.
(a) The U. S. Steel Charter shall be the certificate of incorporation of United States Steel Corporation from and after the Conversion Effective Time, until thereafter amended as provided by the DGCL and such U. S. Steel Charter.
(b) The by-laws of United States Steel Corporation, substantially in the form of Appendix B hereto (the "U. S. Steel By-laws"), shall be the by-laws of United States Steel Corporation from and after the Conversion Effective Time, until thereafter amended in accordance with its terms and as provided by the DGCL and the U. S. Steel Charter.
Section 3.6 Directors. The directors of SteelCo immediately prior to the Conversion Effective Time shall be the directors of United States Steel Corporation from and after the Conversion Effective Time, and shall hold office until their respective successors are duly elected or appointed and qualified in the manner provided for in the U. S. Steel Charter and the U. S. Steel By- laws, or as otherwise provided by Applicable Law.
Section 3.7 Officers. The officers of SteelCo immediately prior to the Conversion Effective Time shall be the officers of United States Steel Corporation from and after the Conversion Effective Time, and shall hold office until the earlier of their resignation or removal or until their successors are duly elected or appointed and qualified in the manner provided in the U. S. Steel Charter and the U. S. Steel By-laws, or as otherwise provided by Applicable Law.
Section 3.8 Conversion of Securities. At the Conversion Effective Time, by virtue of the U. S. Steel Conversion and without any action on the part of any holder thereof, all of the limited liability company interests of SteelCo ("SteelCo Interests") issued and outstanding immediately prior to the Conversion Effective Time shall be converted into and thereafter represent an aggregate of one hundred (100) duly issued, fully paid and nonassessable shares of common stock, par value $1.00 per share, of United States Steel Corporation.
Section 3.9 Further Actions. If, at any time after the Conversion Effective Time, United States Steel Corporation shall determine or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in United States Steel Corporation its right, title or interest in, to or under any of the rights, properties or assets of SteelCo
acquired or to be acquired by United States Steel Corporation as a result of, or in connection with, the U. S. Steel Conversion or otherwise to carry out this Agreement, the officers and directors of United States Steel Corporation shall be authorized to execute and deliver, in the name and on behalf of either United States Steel Corporation or SteelCo, all such deeds, bills of sale, instruments of conveyance, assignments and assurances and to take and do, in the name and on behalf of United States Steel Corporation, SteelCo or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in United States Steel Corporation or otherwise to carry out this Agreement.
ARTICLE IV
Actions to be Taken Prior to the Separation
Section 4.1 Stockholders' Meeting. USX, acting through its Board, and subject to the right of the Board to terminate this Agreement and abandon the Transactions pursuant to Section 14.1 hereof, shall take all actions necessary in accordance with Applicable Law and USX's certificate of incorporation and by-laws to:
(a) call, give notice of, convene and hold a meeting of its stockholders (the "Stockholders' Meeting"), as promptly as practicable following the date of this Agreement, for the purpose of obtaining (i) the approval and adoption of this Agreement by the stockholders of USX, (ii) the approval of the United States Steel Corporation 2002 Stock Plan (as hereinafter defined) by the stockholders of USX and (iii) the approval of the United States Steel Incentive Plan (as hereinafter defined) by the stockholders of USX;
(b) prepare and file with the SEC, as promptly as practicable following the date of this Agreement, revised preliminary proxy material under the Exchange Act relating to the Stockholders' Meeting and a registration statement on Form S-4, in which such proxy material shall be included, as a prospectus (the "Form S-4") registering under the Securities Act the issuance of the shares of United States Steel Common Stock (as hereinafter defined) to holders of U. S. Steel Group Shares in the Separation Merger, and use its reasonable efforts to obtain and furnish the information required to be included in such Form S-4 and proxy material and respond promptly to any comments made by the SEC and its staff with respect to the Form S-4 and preliminary proxy material and cause the Form S-4 to be declared effective under the Securities Act and cause a definitive proxy statement relating to the Stockholders' Meeting (such proxy statement, together with any and all amendments or supplements thereto, the "Proxy Statement") to be mailed to USX stockholders at the earliest practicable time;
(c) include in the Proxy Statement the recommendation of the Board that stockholders of USX vote in favor of the adoption of this Agreement, approval of the United States Steel Corporation 2002 Stock Plan and approval of the United States Steel Incentive Plan; and
(d) use its reasonable efforts to solicit from USX stockholders proxies
in favor of the adoption of this Agreement, approval of the United States
Steel Corporation 2002 Stock Plan and approval of the United States Steel
Incentive Plan, and take all other actions necessary or advisable to
secure, at the Stockholders' Meeting, (x) the affirmative vote of (i) the
holders of a majority of the outstanding Marathon Group Shares (voting as a
separate class, with each Marathon Group Share having one vote), (ii) the
holders of a majority of the outstanding U. S. Steel Group Shares (voting
as a separate class, with each U. S. Steel Group Share having one vote),
and (iii) the holders of a majority of the outstanding Marathon Group
Shares and U. S. Steel Group Shares (voting together as a single class,
with each U. S. Steel Group Share having the number of a votes, as
determined pursuant to the terms of the Restated Certificate, and each
Marathon Group Share having one vote) in favor of the adoption of this
Agreement (the "USX Stockholder Approval") and (y) the affirmative vote of
(i) a majority of the votes cast at the special meeting by holders of U. S.
Steel Group Shares (voting as a separate class, with each U. S. Steel Group
Share having one vote) and (ii) the holders of a majority of the votes cast
at the special meeting by holders of Marathon Group Shares and U. S. Steel
Group Shares (voting together as a single class, with
each U. S. Steel Group Share having the number of votes, as determined pursuant to the terms of the Restated Certificate, and each Marathon Group Share having one vote) in favor of (A) approval of the United States Steel Corporation 2002 Stock Plan and (B) approval of the United States Steel Incentive Plan. USX shall cause all Marathon Group Shares and U. S. Steel Group Shares for which valid proxies have been submitted and not revoked to be voted at the Stockholders' Meeting in accordance with the instructions on such proxies.
Section 4.2 Other Securities Matters.
(a) Prior to the Separation Effective Time, USX shall prepare and file with the SEC a registration statement on Form 8-A registering under the Exchange Act the shares of United States Steel Common Stock to be issued in the Separation Merger (the "Form 8-A").
(b) Prior to the Separation Effective Time, the parties hereto shall cooperate in preparing and filing with the SEC and causing to be declared effective any registration statements or amendments thereto that are necessary or appropriate in order to reflect the establishment of, or amendments to, any Employee Incentive Plans contemplated by this Agreement or any other Separation Document requiring registration under the Securities Act.
Section 4.3 Listing.
(a) Prior to the Separation Effective Time, SteelCo shall prepare and submit to the New York Stock Exchange ("NYSE"), the Pacific Stock Exchange ("PSE") and the Chicago Stock Exchange ("CSE") an application for listing on the NYSE, the PSE and the CSE of the shares of United States Steel Common Stock to be issued to holders of U. S. Steel Group Shares in the Separation Merger, and shall use its reasonable efforts to obtain, prior to the Separation Effective Time, approval for the listing of such shares, subject to official notice of issuance.
(b) Prior to the Separation Effective Time, USX shall prepare and submit to the NYSE, the PSE and the CSE amendments to USX's listing applications with the NYSE, the PSE and the CSE to provide for the name change of USX to Marathon Oil Corporation and for the delisting of the U. S. Steel Group Shares.
Section 4.4 Boards of Directors. Prior to the Separation Effective Time, the parties hereto shall take all actions necessary so that, effective as of the Separation Effective Time, the boards of directors of Marathon Oil Corporation and United States Steel Corporation shall include all of the individuals so named in the Proxy Statement.
Section 4.5 Rights Agreement.
(a) Effective at the Separation Effective Time, United States Steel Corporation shall enter into a Rights Agreement (the "U. S. Steel Rights Agreement"), on substantially the same terms as the Stockholder Rights Plan, pursuant to which one Preferred Stock Purchase Right (as defined in the U. S. Steel Rights Agreement) of United States Steel Corporation (a "U. S. Steel Right") shall be attached to each share of United States Steel Common Stock issued to holders of U. S. Steel Group Shares in the Separation Merger. All references in this Agreement to United States Steel Common Stock shall be deemed to include such a U. S. Steel Right.
(b) Prior to the Separation Effective Time, the Stockholder Rights Plan shall be amended to provide that the Steel Rights shall expire at the Separation Effective Time.
Section 4.6 Preparation of Private Letter Ruling Request. Prior to the Separation Effective Time, USX shall have prepared and submitted to the Internal Revenue Service a request for a private letter ruling, and shall use its reasonable efforts to obtain, prior to the Separation Effective Time, such ruling, in form and substance satisfactory to the Board, that the Separation will qualify as a tax-free transaction within the meaning of Section 355 of the Code.
Section 4.7 Treatment of USX Corporate Assets and Liabilities. Prior to the Separation Effective Time, each of USX and SteelCo shall use reasonable efforts to take all actions necessary so that (a) all of USX's right, title and interest in and to the USX Corporate Assets listed on Section 4.7(a) of the Disclosure Letter shall be transferred and assigned to SteelCo, and (b) all of USX's Liabilities listed on Section 4.7(b) of the Disclosure Letter shall be assumed by SteelCo, in each case, effective as of the Separation Effective Time.
Section 4.8 Financings and Value Transfer. Prior to the Separation
Effective Time, each of USX and SteelCo shall use reasonable efforts to take
all actions necessary to effect (a) the repayment or retirement of certain
indebtedness and other obligations of USX; and (b) the incurrence of new
indebtedness and other obligations, in each case, in such amounts and on such
terms as the parties mutually agree (collectively, the "Financings"); provided
that, at the Separation Effective Time, the amount of indebtedness and other
obligations for which United States Steel Corporation is responsible
immediately following the Separation shall be $900 million less than the net
amounts attributed to the U. S. Steel Group immediately prior to the
Separation (the "Value Transfer"). The Value Transfer shall be effective at
the Separation Effective Time and shall be implemented in accordance with this
Section 4.8 and Sections 5.3 and 5.14 hereof.
Section 4.9 Formation of Merger Sub. USX has organized Merger Sub as a corporation, pursuant to the DGCL, wholly owned by USX. Merger Sub has no assets or Liabilities and shall conduct no business, other than in connection with its organization.
Section 4.10 Execution of Separation Documents. Prior to the Separation Effective Time, each of USX and SteelCo shall execute and deliver, or cause to be executed and delivered, each of the following documents and any other Separation Document reasonably requested by any party hereto:
(a) A financial matters agreement, substantially in the form of Appendix C hereto (the "Financial Matters Agreement");
(b) A tax sharing agreement, substantially in the form of Appendix D hereto (the "Tax Sharing Agreement");
(c) A transition services agreement, substantially in the form of Appendix E hereto (the "Transition Services Agreement");
(d) A license agreement, substantially in the form of Appendix F hereto (the "License Agreement");
(e) An insurance assistance agreement, substantially in the form of Appendix G hereto (the "Insurance Assistance Agreement"); and
(f) A sublease relating to the Fairfield Caster in the form of Appendix H hereto (the "Fairfield Caster Sublease").
Section 4.11 Other Securities Matters.
(a) QUIPS. In connection with the Separation, each issued and outstanding 6.75% Convertible Quarterly Income Preferred Security of USX Capital Trust I, a subsidiary of USX, will be redeemed for $50.00 in cash, plus accrued and unpaid dividends thereon through the Separation Effective Time.
(b) DRIP Plans.
(i) Effective at the Separation Effective Time, United States Steel Corporation shall adopt a direct stock purchase and dividend reinvestment plan with respect to United States Steel Common Stock (the "Steel DRIP Plan"), substantially on the terms of the USX direct stock purchase and dividend reinvestment plan presently in effect (the "USX DRIP Plan").
(ii) Prior to the Separation Effective Time, the USX DRIP Plan shall be amended to provide for USX's name change to Marathon Oil Corporation and to eliminate provisions relating to the U. S. Steel Group Shares. At the Separation Effective Time, all shares of United States Steel Common Stock in the USX DRIP Plan shall be transferred to the Steel DRIP Plan.
Section 4.12 United States Steel Equity and Incentive Compensation Plans. Prior to the date hereof, the USX board of directors has approved and recommended to SteelCo, as the sole member of SteelCo, that it adopt (i) an equity incentive compensation plan, substantially in the form of Appendix I hereto (the "United States Steel Corporation 2002 Stock Plan"), and (ii) the United States Steel Corporation Senior Executive Officer Annual Incentive Compensation Plan, substantially in the form of Appendix J hereto (the "United States Steel Incentive Plan"), in each case, effective as of the Separation Effective Time.
Section 4.13 Treatment of Tax-Qualified Pension Assets. USX Corporate Employees and U. S. Steel Group Employees will accrue benefits under the United States Steel Corporation Plan for Non-Union Employee Pension Benefits (Revision of 1998) (the "USS Non-Union Plan") for continuous service performed prior to the date on which they transfer employment to Marathon Oil Corporation or SteelCo. All assets under the USS Non-Union Plan that are attributable to the USX Corporate Employees and the U. S. Steel Group Employees will be retained by the trust under the USS Non-Union Plan. Benefit liabilities with respect to the USX Corporate Employees and the U. S. Steel Group Employees under the USS Non- Union Plan up to the date of transfer will remain liabilities of the USS Non- Union Plan and SteelCo.
ARTICLE V
The Separation
Section 5.1 The Separation. At the Separation Effective Time, upon the terms and subject to the conditions of this Agreement and in accordance with Section 251 of the DGCL, Merger Sub shall be merged with and into USX. Following the Separation Merger, USX shall continue as the surviving corporation (the "Separation Surviving Corporation") and the separate corporate existence of Merger Sub shall cease in accordance with the DGCL.
Section 5.2 Separation Effective Time; Closing of the Separation Merger.
(a) Subject to the provisions of this Agreement, the Separation Merger shall be consummated by filing an appropriate certificate of merger (the "Separation Certificate of Merger") with the Secretary of State of the State of Delaware in such form as required by, and executed in accordance with, the relevant provisions of the DGCL as soon as practicable on or before the Separation Closing Date (as defined in Section 5.2(b) hereof). The Separation Merger shall become effective upon such filing or at such time thereafter as is provided in the Separation Certificate of Merger (the "Separation Effective Time").
(b) The closing of the Separation Merger (the "Separation Closing") shall take place at the offices of USX, 600 Grant Street, Pittsburgh, Pennsylvania 15219-4776, at 10:00 a.m. (local time), on a date to be specified by the parties (the "Separation Closing Date"), which shall be as soon as practicable after satisfaction or waiver (to the extent and as permitted by this Agreement and Applicable Law) of all of the conditions set forth in Section 6.1 hereof (other than those conditions that by their nature are to be satisfied at the Separation Closing, but subject to the fulfillment or waiver of those conditions), unless the parties agree to another time, date or place in writing.
Section 5.3 Determination of Cash Settlement Amount.
(a) In connection with the Value Transfer, SteelCo shall pay to USX an
amount in cash equal to the Cash Settlement Amount (as hereinafter defined), in
accordance with the terms of this Section 5.3, subject to adjustment following
the Separation Effective Time pursuant to Section 5.14 hereof. Within thirty
(30) days after the date upon which the Separation Effective Time occurs (the
"Separation Date"), USX and SteelCo shall jointly prepare and mutually agree
upon an estimate of the Cash Settlement Amount (the "Estimated Cash Settlement
Amount"), based upon an estimate of the Net Steel Liabilities as of the close
of business on the Separation Date ("Estimated Net Steel Liabilities").
(b) Within five (5) Business Days following the date upon which USX and SteelCo mutually agree upon the Estimated Cash Settlement Amount pursuant to subsection (a) above, SteelCo shall deliver to USX an amount in cash equal to the Estimated Cash Settlement Amount by wire transfer in immediately available funds, together with interest thereon from the Separation Date through the date such payment is made, at the prime lending rate as reported as of the date of such payment by The Wall Street Journal.
(c) If USX and SteelCo are unable to mutually agree upon the Estimated Cash Settlement Amount pursuant to subsection (a) above, SteelCo shall deliver to USX an amount in cash equal to the undisputed portion of the Estimated Cash Settlement Amount by wire transfer in immediately available funds, together with interest thereon from the Separation Date through the date such payment is made, at the prime lending rate as reported as of the date of such payment by The Wall Street Journal.
(d) As used herein, "Cash Settlement Amount" shall mean the amount of Net Steel Liabilities less $900 million, and "Net Steel Liabilities" shall mean the net amount of indebtedness and other obligations of USX attributed to the U. S. Steel Group immediately prior to the Separation Effective Time which shall remain an obligation of USX following the Separation Effective Time, and are not otherwise assumed by SteelCo, pursuant to the terms hereof and of the Financial Matters Agreement. The Net Steel Liabilities shall be calculated in good faith in accordance with United States generally accepted accounting principles ("GAAP"), consistently applied, utilizing the same methodology and adjustments as were used in preparing the U. S. Steel Group balance sheet as of June 30, 2001 (the "Steel Balance Sheet").
Section 5.4 Effects of the Separation Merger. The Separation Merger shall have the effects set forth in Section 259 of the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Separation Effective Time, all properties, rights, privileges, powers and franchises of Merger Sub shall vest in USX, and all debts, Liabilities and duties of Merger Sub shall become the debts, Liabilities and duties of USX.
Section 5.5 Organizational Documents. The Restated Certificate and the by- laws of USX, each as in effect immediately prior to the Separation Effective Time, shall be the certificate of incorporation and by-laws of the Separation Surviving Corporation, until thereafter amended as provided by the DGCL and such Restated Certificate and by-laws; provided, however, that (a) Article I of such Restated Certificate shall be amended as of the Separation Effective Time to reflect that the name of the Separation Surviving Corporation shall, from and after the Separation Effective Time, be changed to "Marathon Oil Corporation" and (b) Article IV of such Restated Certificate shall be amended and restated as of the Separation Effective Time to provide that the authorized capital stock of Marathon Oil Corporation shall consist of five hundred and seventy-six million (576,000,000) shares of capital stock, of which five hundred and fifty million (550,000,000) shares shall be shares of common stock, par value $1.00 per share, without any specific class designation, and twenty- six million (26,000,000) shares shall be shares of preferred stock, without par value, as set forth in the Amended and Restated Certificate of Incorporation of USX attached as Appendix K hereto.
Section 5.6 Directors. The directors of USX immediately prior to the Separation Effective Time shall be the directors of the Separation Surviving Corporation from and after the Separation Effective Time and shall hold office until their respective successors are duly elected or appointed and qualified in the manner provided for in the certificate of incorporation and by-laws of the Separation Surviving Corporation, or as otherwise provided by Applicable Law.
Section 5.7 Officers. The officers of Merger Sub immediately prior to the Separation Effective Time shall be the officers of the Separation Surviving Corporation from and after the Separation Effective Time until the earlier of their resignation or removal or until their successors are duly elected or appointed and qualified in the manner provided for in the certificate of incorporation and by-laws of the Separation Surviving Corporation, or as otherwise provided by Applicable Law.
Section 5.8 Conversion of Securities. At the Separation Effective Time, by virtue of the Separation Merger and without any action on the part of any holder thereof:
(a) U. S. Steel Group Shares. Each U. S. Steel Group Share issued and outstanding or held in the treasury of USX or by any Subsidiary of USX immediately prior to the Separation Effective Time shall be converted into and thereafter represent one duly issued, fully paid and nonassessable share of common stock, par value $1.00 per share, of United States Steel Corporation ("United States Steel Common Stock").
(b) Marathon Group Shares. Each Marathon Group Share issued and outstanding or held in the treasury of USX or by any Subsidiary of USX immediately prior to the Separation Effective Time shall remain outstanding and represent one duly issued, fully paid and nonassessable share of common stock, par value $1.00 per share, of the Separation Surviving Corporation ("Marathon Corp. Common Stock").
(c) Merger Sub Shares. Each share of common stock, par value $1.00 per share, of Merger Sub issued and outstanding immediately prior to the Separation Effective Time shall automatically be cancelled and retired and shall cease to exist, without payment of any consideration therefor.
(d) 6.50% Preferred Stock. Each share of 6.50% Cumulative Convertible Preferred Stock of USX ("6.50% Preferred Stock") issued and outstanding immediately prior to the Separation Effective Time shall be converted into the right to receive, in cash, $50.00 plus accrued and unpaid dividends thereon, through the Separation Effective Time.
(e) United States Steel Common Stock. Each share of United States Steel Common Stock issued and outstanding immediately prior to the Separation Effective Time shall automatically be cancelled and retired and shall cease to exist, without payment of any consideration therefor.
Section 5.9 Rights of USX Stockholders.
(a) From and after the Separation Effective Time, holders of certificates
formerly evidencing U. S. Steel Group Shares ("Steel Stock Certificates") and
holders of certificates formerly evidencing 6.50% Preferred Stock ("6.50%
Preferred Stock Certificates") shall cease to have any rights as stockholders
of USX, except, however, that, until thereafter surrendered for transfer or
exchange, (i) each Steel Stock Certificate that, immediately prior to the
Separation Effective Time, evidenced U. S. Steel Group Shares, shall be deemed
and treated for all corporate purposes to evidence the ownership of the number
of shares of United States Steel Common Stock into which such U. S. Steel Group
Shares were converted pursuant to the provisions of Section 5.8(a) hereof and
(ii) each 6.50% Preferred Stock Certificate that, immediately prior to the
Separation Effective Time, evidenced shares of 6.50% Preferred Stock, shall
thereafter represent the right to receive the cash into which such shares were
converted pursuant to the provisions of Section 5.8(d) hereof.
(b) From and after the Separation Effective Time, each outstanding stock certificate that, immediately prior to the Separation Effective Time, evidenced a number of Marathon Group Shares shall remain outstanding and be deemed and treated for all corporate purposes to evidence ownership of the same number of shares of Marathon Corp. Common Stock.
Section 5.10 Exchange of Steel Stock Certificates.
(a) Exchange Agent. Prior to the Separation Effective Time, USX shall appoint an agent for the holders of U. S. Steel Group Shares (the "Exchange Agent") for the purpose of exchanging Steel Stock Certificates for certificates representing the shares of United States Steel Common Stock which such holders shall become entitled to receive pursuant to the provisions of Section 5.8(a) hereof. Immediately prior to the Separation Effective Time, USX shall deposit with the Exchange Agent, for the benefit of the holders of U. S. Steel Group Shares, for exchange in accordance with this Section 5.10, certificates representing the shares of United States Steel Common Stock ("United States Steel Common Stock Certificates") issuable upon the consummation of the Separation Merger.
(b) Exchange Procedure. As promptly as practicable after the Separation Effective Time, USX shall send, or shall cause to be sent, to each holder of record of U. S. Steel Group Shares as of the Separation Effective Time, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and
title to the Steel Stock Certificates shall pass, only upon delivery of the
Steel Stock Certificates to the Exchange Agent and shall be in customary form
and have such other customary provisions as USX reasonably specifies) providing
instructions for use in effecting the surrender of Steel Stock Certificates in
exchange for United States Steel Common Stock Certificates. Upon surrender of a
Steel Stock Certificate for cancellation to the Exchange Agent, together with
the letter of transmittal referred to in this Section duly executed and
completed in accordance with its terms, the holder of such Steel Stock
Certificate shall be entitled to receive in exchange therefor a United States
Steel Common Stock Certificate representing the number of shares of United
States Steel Common Stock into which the U. S. Steel Group Shares represented
by such Steel Stock Certificate shall have been converted in accordance with
Section 5.8(a) hereof. In the event of a transfer of ownership of U. S. Steel
Group Shares which is not registered in the transfer records of USX, a
certificate or certificates representing the United States Steel Common Stock
into which such U. S. Steel Group Shares have been converted in accordance with
Section 5.8(a) hereof may be issued to a transferee if the Steel Stock
Certificate representing such U. S. Steel Group Shares is presented to the
Exchange Agent accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer Taxes have
been paid by the stockholder. Until surrendered as contemplated by this Section
5.10(b), each Steel Stock Certificate shall, after the Separation Effective
Time, represent for all purposes only the right to receive that number of
shares of United States Steel Common Stock into which the U. S. Steel Group
Shares have been converted in accordance with Section 5.8(a) hereof.
(c) Distributions With Respect To Unexchanged Shares. No dividends or other distributions declared, made or paid after the Separation Effective Time with respect to United States Steel Common Stock with a record date on or after the Separation Effective Time shall be paid to the holder of any unsurrendered Steel Stock Certificate with respect to the United States Steel Common Stock represented thereby until the holder of record of such Steel Stock Certificate shall surrender such Steel Stock Certificate in accordance with this Section. Subject to the effect of Applicable Laws, following surrender of any such Steel Stock Certificate, there shall be paid to the record holder of the certificates representing United States Steel Common Stock, without interest, (i) promptly after the time of such surrender, the amount of dividends or other distributions, if any, with a record date on or after the Separation Effective Time which theretofore became payable, but which were not paid by reason of the immediately preceding sentence, with respect to such United States Steel Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date on or after the Separation Effective Time but prior to surrender and a payment date subsequent to surrender payable with respect to such United States Steel Common Stock. Dividends or other distributions with a record date on or after the Separation Effective Time, but prior to surrender of Steel Stock Certificates by holders thereof payable in respect of United States Steel Common Stock held by the Exchange Agent, shall be held in trust, without accruing any interest thereon, for the benefit of such holders of Steel Stock Certificates.
(d) No Further Ownership Rights in U. S. Steel Group Shares. All United States Steel Common Stock issued upon the surrender for exchange of Steel Stock Certificates in accordance with the terms hereof shall be deemed to have been issued at the Separation Effective Time in full satisfaction of all rights pertaining to the U. S. Steel Group Shares represented thereby. From and after the Separation Effective Time, there shall be no further registration of transfers thereon of the U. S. Steel Group Shares. If, after the Separation Effective Time, Steel Stock Certificates are presented to USX or United States Steel Corporation for any reason, they shall be canceled and exchanged as provided in this Section.
Section 5.11 Delivery of 6.50% Merger Consideration.
(a) At the Separation Effective Time, USX shall deposit or cause to be deposited in trust (the "Payment Fund") with an agent designated by USX (the "Payment Agent"), with USX having the right to appoint itself to be the Payment Agent, for the benefit of the holders of 6.50% Preferred Stock Certificates the aggregate amount of cash to be paid in respect of the shares of 6.50% Preferred Stock pursuant to Section 5.8(d) hereof
(the "6.50% Merger Consideration"). The Payment Fund shall not be used for any
other purpose. The Payment Fund shall be invested by the Payment Agent, as
directed by USX, in (i) obligations of or guaranteed by the United States, and
(ii) certificates of deposit, bank repurchase agreements and bankers'
acceptances of any bank or trust company organized under federal law or under
the law of any state of the United States or of the District of Columbia that
has capital, surplus and undivided profits of at least $1 billion or in money
market funds which are invested substantially in such investments. Any net
earnings with respect thereto shall be paid to USX as and when requested by
USX.
(b) As soon as reasonably practicable after the Separation Effective Time, USX shall instruct the Payment Agent to mail to each holder of record of shares of 6.50% Preferred Stock immediately prior to the Separation Effective Time:
(i) a letter of transmittal (the "Letter of Transmittal") (which shall specify that delivery shall be effected, and risk of loss and title to the 6.50% Preferred Stock Certificates shall pass, only upon delivery of such certificates to the Payment Agent and shall be in such form and have such other provisions as USX reasonably specifies), and
(ii) instructions for use in effecting the surrender of each 6.50% Preferred Stock Certificate in exchange for the 6.50% Merger Consideration with respect to each of the shares of 6.50% Preferred Stock formerly represented thereby.
(c) USX shall cause the Payment Agent to pay to the holders of a 6.50% Preferred Stock Certificate, as soon as practicable after receipt of any 6.50% Preferred Stock Certificate (or in lieu of any such 6.50% Preferred Stock Certificate which has been lost, stolen or destroyed, an affidavit of lost, stolen or destroyed share certificates (including customary indemnity or bond against loss) in form and substance reasonably satisfactory to USX) together with the Letter of Transmittal, duly executed, and such other documents as USX or the Payment Agent reasonably request, in exchange therefor a check in the amount equal to the 6.50% Merger Consideration multiplied by the number of shares of 6.50% Preferred Stock represented by such 6.50% Preferred Stock Certificate. No interest shall be paid or accrued on any cash payable upon the surrender of any 6.50% Preferred Stock Certificate. Each 6.50% Preferred Stock Certificate surrendered in accordance with the provisions of this Section 5.11(c) shall be cancelled forthwith.
(d) In the event of a transfer of ownership of shares of 6.50% Preferred Stock which is not registered in the transfer records of USX, the 6.50% Merger Consideration may be paid to the transferee only if (i) the 6.50% Preferred Stock Certificate representing such shares surrendered to the Payment Agent in accordance with Section 5.11(c) hereof is properly endorsed for transfer or is accompanied by appropriate and properly endorsed stock powers and is otherwise in proper form to effect such transfer, (ii) the Person requesting such transfer pays to the Payment Agent any transfer or other Taxes payable by reason of such transfer or establishes to the satisfaction of the Payment Agent that such Taxes have been paid or are not required to be paid, and (iii) such Person establishes to the reasonable satisfaction of USX that such transfer would not violate any applicable federal or state securities laws.
(e) Each holder of a 6.50% Preferred Stock Certificate that represented issued and outstanding shares of 6.50% Preferred Stock immediately prior to the Separation Effective Time shall cease to have any rights as a stockholder of USX, except for the right to surrender his or her 6.50% Preferred Stock Certificate in exchange for the 6.50% Merger Consideration multiplied by the number of shares of 6.50% Preferred Stock represented by such 6.50% Preferred Stock Certificate.
(f) The 6.50% Merger Consideration paid in the Separation Merger shall be net to the holders of shares of 6.50% Preferred Stock in cash, and without interest thereon, subject to reduction only for any applicable withholding Taxes.
(g) Promptly following the date which is 180 days after the Separation Closing Date, the Payment Agent shall deliver to USX all cash that remains unclaimed by holders of shares of 6.50% Preferred Stock (including
any interest received with respect thereto), and all 6.50% Preferred Stock Certificates and other documents in its possession relating to the transactions contemplated hereby, and the Payment Agent's duties shall terminate. Thereafter, each holder of a 6.50% Preferred Stock Certificate may surrender such 6.50% Preferred Stock Certificate only to USX and (subject to any applicable abandoned property, escheat or similar law) receive in consideration therefor (and only as general creditors thereof) the aggregate 6.50% Merger Consideration relating thereto, without any interest thereon. Notwithstanding the foregoing, none of USX, SteelCo, nor any of their respective Affiliates shall be liable to a holder of a 6.50% Preferred Stock Certificate for any 6.50% Merger Consideration properly delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any amounts remaining unclaimed by holders of 6.50% Preferred Stock three years after the Separation Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become the property of any governmental entity) shall, to the extent permitted by applicable law, become the property of USX free and clear of any liens, claims or interest of any Person previously entitled thereto.
Section 5.12 Treatment of USX Stock Options and Stock Appreciation Rights.
(a) U. S. Steel Group Options. Each of USX and SteelCo shall take all actions necessary so that each U. S. Steel Group Option which is outstanding and unexercised immediately prior to the Separation Effective Time shall be assumed as of the Separation Effective Time by United States Steel Corporation and deemed to constitute an option ("United States Steel Option") to purchase the same number of shares of United States Steel Common Stock as was subject to the U. S. Steel Group Option being assumed, at the same exercise price, for the same remaining period and subject to the same terms and conditions (including those relating to vesting) applicable to the U. S. Steel Group Option being assumed; provided, however, that the number of shares subject to, and/or the exercise price of, such option will be adjusted, if necessary, so that (i) the aggregate intrinsic value of the United States Steel Option immediately after the Separation Effective Time is not greater than the aggregate intrinsic value of the U. S. Steel Group Option being assumed immediately before the Separation Effective Time, and (ii) the ratio of the exercise price per share to the market value per share is not reduced. Any such adjustments will be based on the closing price per share reported on the composite tape of the NYSE (the "NYSE Composite Tape") of U. S. Steel Group Shares on the last NYSE trading day immediately prior to the Separation Effective Date relative to the first opening price per share reported on the NYSE Composite Tape of United States Steel Common Stock on the first NYSE trading day immediately following the Separation Effective Date.
(b) U. S. Steel Stock Appreciation Rights. Each of USX and SteelCo shall take all actions necessary so that each U. S. Steel Group SAR which is outstanding and unexercised immediately prior to the Separation Effective Time shall be assumed as of the Separation Effective Time by United States Steel Corporation and deemed to constitute a stock appreciation right of United States Steel Corporation with respect to United States Steel Common Stock ("U. S. Steel Corp. SAR"), subject to the same terms and conditions applicable to the U. S. Steel Group SAR being assumed.
(c) Marathon Group Options. USX shall take all actions necessary so that
each Marathon Group Option which is outstanding and unexercised immediately
prior to the Separation Effective Time shall remain outstanding following the
Separation Effective Time and represent an option ("Marathon Corp. Option") to
purchase the same number of shares of Marathon Corp. Common Stock as was
subject to such Marathon Group Option, subject to the same terms and conditions
(including those relating to vesting) applicable to such Marathon Group Option;
provided, however, that the number of shares subject to, and/or the exercise
price of, such option will be adjusted, if necessary, so that (i) the aggregate
intrinsic value of the Marathon Corp. Option immediately after the Separation
Effective Time is not greater than the aggregate intrinsic value of the
Marathon Group Option immediately before the Separation Effective Time, and
(ii) the ratio of the exercise price per share to the market value per share is
not reduced. Any such adjustments will be based on the closing price per share
reported on the NYSE Composite Tape of Marathon Group Shares on the last NYSE
trading day immediately prior to the Separation Effective Date relative to the
first opening price per share reported on
the NYSE Composite Tape of Marathon Corp. Common Stock on the first NYSE trading day immediately following the Separation Effective Date.
(d) Marathon Stock Appreciation Rights. USX shall take all actions necessary so that each Marathon Group SAR which is outstanding and unexercised immediately prior to the Separation Effective Time shall remain outstanding following the Separation Effective Time and represent a stock appreciation right with respect to Marathon Corp. Common Stock ("Marathon Corp. SAR"), subject to the same terms and conditions applicable to such Marathon Group SAR.
Section 5.13 Treatment of Restricted Stock.
(a) Effective as of the Separation Effective Time, all restricted U. S. Steel Group Shares granted and outstanding immediately prior to the Separation Effective Time shall be converted into restricted shares of United States Steel Common Stock pursuant to Sections 5.8(a). After the Separation Effective Time, such restricted shares shall be subject to the same terms and conditions (including those relating to vesting) as were applicable to such restricted shares prior to the Separation Merger.
(b) Effective as of the Separation Effective Time, all restricted Marathon Group Shares granted and outstanding immediately prior to the Separation Effective Time shall remain outstanding and represent restricted shares of Marathon Corp. Common Stock pursuant to Section 5.8(b). After the Separation Effective Time, such restricted shares shall be subject to the same terms and conditions (including those relating to vesting) as were applicable to such restricted shares prior to the Separation Merger.
Section 5.14 Post-Closing Adjustment to Cash Settlement Amount. The Estimated Cash Settlement Amount shall be adjusted following the Closing as follows (as so adjusted, the "Final Cash Settlement Amount"):
(a) Within seventy five (75) days after the Separation Date, USX and SteelCo shall jointly prepare and mutually agree upon a statement (the "Statement") setting forth the Net Steel Liabilities (the "Closing Net Steel Liabilities") as of the close of business on the Separation Date and setting forth in reasonable detail the calculation thereof. The Statement shall be prepared in accordance with GAAP, consistently applied, utilizing the same methodology and adjustments as were utilized in preparing the Steel Balance Sheet. USX and SteelCo and their respective representatives shall (i) have the right, upon reasonable request, to review all of the work papers and procedures used by SteelCo and USX, respectively, to prepare the Statement, (ii) have reasonable access to employees, accountants and other advisors of SteelCo and USX, respectively, responsible for the preparation of the Statement and (iii) have the right to perform reasonable procedures necessary to confirm the accuracy thereof. Upon the parties mutually agreeing to the amount of Closing Net Steel Liabilities, the Statement shall be the "Final Statement."
(b) In the event that USX and SteelCo are unable to mutually agree upon the amount of Closing Net Steel Liabilities within the time period provided by subsection (a) above, such dispute shall be resolved by an Independent Accounting Firm (as hereinafter defined); the determination of such Independent Accounting Firm shall be made as promptly as practicable and shall be final and binding on USX and SteelCo. Any expenses relating to engagement of the Independent Accounting Firm shall be shared equally by USX and SteelCo. In the event of a dispute, the Statement, as modified by resolution by USX and SteelCo, or by the Independent Accounting Firm, shall be the "Final Statement."
(c) If the amount of the Net Steel Liabilities, as set forth in the Final Statement (the "Final Net Steel Liabilities"), exceeds the amount of the Estimated Net Steel Liabilities, SteelCo shall pay to USX an amount equal to such excess. If the amount of the Final Net Steel Liabilities is less than the amount of the Estimated Net Steel Liabilities, USX shall pay to SteelCo an amount equal to such deficit.
(d) Any payments to be made by SteelCo or USX, as the case may be, pursuant to Section 5.14(c) hereof shall be made by wire transfer in immediately available funds within five Business Days after the date upon which the Statement becomes the Final Statement (either upon mutual agreement pursuant to subsection (a) above or by resolution of any dispute with respect to the Statement in accordance with subsection (b) hereof) in an amount determined pursuant to Section 5.14(c) hereof, together with interest thereon from the Separation Date through the date such payment is made, at the prime lending rate as reported as of the date of such payment by The Wall Street Journal.
(e) Notwithstanding anything to the contrary contained herein, in the event of a disagreement between SteelCo and USX with respect to the calculation of Final Net Steel Liabilities pursuant to Section 5.14(b) hereof, then, pending resolution of such disagreement, SteelCo or USX, as the case may be, shall pay to the other party, as applicable, the amount of any undisputed portion of the adjustment to the Cash Settlement Amount, if any, resulting from the calculation of the Final Net Steel Liabilities, after expiration of the ninety-day period referred to in subsection (a) above.
(f) As used herein "Independent Accounting Firm" shall mean an internationally recognized accounting firm mutually selected and agreed upon by USX and SteelCo.
ARTICLE VI
Conditions
Section 6.1 Conditions to the Separation Merger. The respective obligations of USX and Merger Sub to effect the Separation Merger are subject to the satisfaction or waiver (to the extent and as permitted by this Agreement and Applicable Law) of each of the following conditions:
(a) Consummation of Required Transactions. All of the actions and Transactions required by this Agreement to be performed or consummated prior to the Separation Effective Time shall have been performed or consummated.
(b) Separation Documents. Each of USX and SteelCo shall have entered into each of the Separation Documents.
(c) Registration. The Form S-4, and any required post-effective amendment thereto, and the Form 8-A shall have been declared effective under the Securities Act and the Exchange Act, respectively, and shall not be the subject of any stop order or proceeding to seek a stop order.
(d) Listing. The shares of United States Steel Common Stock to be issued in the Separation Merger shall have been approved for listing on the NYSE, the PSE and the CSE, subject to official notice of issuance.
(e) USX Stockholder Approval. The USX Stockholder Approval shall have been obtained at or prior to the Separation Effective Time in accordance with the DGCL.
(f) Financings and Value Transfer. SteelCo and USX shall have consummated the Financings and the Value Transfer contemplated by Section 4.8 hereof.
(g) Receipt of Private Letter Ruling. USX shall have obtained a private letter ruling from the Internal Revenue Service, in form and substance satisfactory to the Board, that the Separation will qualify as a tax-free transaction within the meaning of Section 355 of the Code, and such ruling shall be in full force and effect at the Separation Effective Time.
(h) Consents and Approvals. All material consents, authorizations and approvals of, and filings with, any Governmental Authority or any other Person required to consummate the Separation Merger shall have been obtained and be in full force and effect.
(i) No Injunctions. No order, injunction or decree shall have been issued by any Governmental Authority and remain in effect which prohibits or prevents the consummation of the Separation Merger.
Section 6.2 Determination as to Fulfillment of Conditions. All determinations to be made concerning satisfaction or waiver of the conditions set forth in this Article VI shall be made by the Board, in its sole discretion, on behalf of each of the parties hereto, and shall be final and conclusive.
ARTICLE VII
Intercompany Business Relationships
Following the Separation
Section 7.1 Transition Services. Pursuant to the terms of the Transition Services Agreement, from and after the Separation Effective Time, USX shall provide to SteelCo, and SteelCo shall provide to USX, such services as pro- vided for in the Transition Services Agreement and subject to the terms and conditions thereof.
Section 7.2 Intellectual Property, Trademarks and Licenses.
(a) License Agreement. Prior to the Separation Effective Time, USX and SteelCo shall enter into a License Agreement, substantially in the form of Appendix F hereto, with respect to the use of the Trademark for the name USX.
(b) USX Corporation Name. As soon as reasonably practicable, USX and SteelCo shall remove (or, if necessary, on an interim basis, cover up) any and all exterior and interior signs and identifiers which contain or pertain to (i) USX or "United States Steel," in the case of USX, or (ii) USX or "Marathon," in the case of SteelCo. After such reasonable period, (i) USX shall not use or display the names "USX" or "United States Steel" or any variations thereof, or other Trademarks, trade names, logos, or identifiers using such name or otherwise owned by or licensed to SteelCo which have not been assigned or licensed to USX, and (ii) SteelCo shall not use or display the names "USX" or "Marathon" or any variations thereof, or other Trademarks, trade names, logos, or identifiers using such name or otherwise owned by or licensed to USX which have not been assigned or licensed to SteelCo (collectively, "Non-Permitted Names"), without the prior written consent of the other; provided, however, that, notwithstanding the foregoing, nothing contained in this Agreement shall prevent USX or SteelCo from using the other's name in public filings with Governmental Authorities, materials intended for distribution to either party's stockholders or any other communication in any medium which describes the relationship between the parties.
(c) Products, Supplies and Documents. USX and SteelCo shall have the right to use their existing products, supplies, and documents (including, but not limited to, purchase orders, forms, labels, shipping materials, catalogues, stationery, sales brochures, operating manuals, instructional manuals, advertising materials and similar material) which have imprinted thereon or otherwise use a Non-Permitted Name following the Separation Closing Date; provided, however, that USX and SteelCo agree (i) to use only such supplies and documents existing in inventory as of the Separation Closing Date and (ii) not to order any additional supplies and documents which have imprinted thereon or otherwise use a Non-Permitted Name.
Section 7.3 Litigation.
(a) Subject to subsection (c) hereof and except as other-wise provided in the Tax Sharing Agreement, following the Separation Effective Time, USX shall have exclusive authority and control over the investigation, prosecution, defense and appeal of all pending Actions relating primarily to the Marathon Group Liabilities and/or the Joint Liabilities (each, as hereinafter defined), including, but not limited to, the pending Actions listed in Section 7.3(a) of the Disclosure Letter (each, a "Marathon Action"), and may settle or compromise, or consent to the entry of any judgment with respect to, any such Marathon Action without the consent of SteelCo.
(b) Subject to subsection (c) hereof, following the Separation Effective Time, SteelCo shall have exclusive authority and control over the investigation, prosecution, defense and appeal of all pending Actions relating primarily to the U. S. Steel Group Liabilities (as hereinafter defined), including, but not limited to, the pending Actions listed in Section 7.3(b) of the Disclosure Letter (each, a "U. S. Steel Action"), and may settle or compromise, or consent to the entry of any judgment with respect to, any such U. S. Steel Action without the consent of USX.
(c) Notwithstanding any provision of this Agreement, if USX or any of its respective directors, officers or employees is named as a party to a U. S. Steel Action or if SteelCo or any of its respective directors, officers or employees is named as a party to a Marathon Action, neither SteelCo nor USX, as the case may be, may settle or compromise, or consent to the entry of any judgment with respect to, any such Action without the prior written consent of such other named party (which consent may not be unreasonably withheld), unless such settlement (i) includes a complete release of such other named party and such party's directors, officers or employees (to the extent such directors, officers or employees are named in such Action) and (ii) does not require such other named party or such party's directors, officers or employees (to the extent such directors, officers or employees are named in such Action) to admit any Liability or make or forego any payment or forego or take any action. Each of SteelCo and USX shall cooperate fully with the other and its counsel in the investigation, defense and settlement of any U. S. Steel Action or Marathon Action.
ARTICLE VIII
Employee Matters
Section 8.1 Employee Incentive Plans and Employee Arrangements. SteelCo and USX shall take all actions necessary so that SteelCo has established, amended and/or assumed at or prior to the Separation Effective Time such Employee Incentive Plans and Employee Arrangements as the parties deem necessary and appropriate.
Section 8.2 Treatment of USX Corporate Employees.
(a) In connection with the Separation, there will be an assignment or reassignment of USX Corporate Employees who currently provide accounting, audit, corporate finance, government affairs, investor relations, public affairs, strategic planning, legal, stock transfer, Tax and other services primarily related to corporate-wide matters to either Marathon Oil Corporation or SteelCo. Marathon Oil Corporation and SteelCo will be responsible for their own needs in these areas. Such USX Corporate Employees to be assigned to Marathon Oil Corporation, including, without limitation, those to be set forth on Section 8.2(a)(i) of the Disclosure Letter, will be covered by employee benefit plans applicable to Marathon Oil Corporation employees. Such USX Corporate Employees to be reassigned to SteelCo, including without limitation, those to be set forth on Section 8.2(a)(ii) of the Disclosure Letter, will be covered by the same employee benefit plans they were provided while USX Corporate Employees.
(b) The assets relating to all qualified defined pension benefits earned by USX Corporate Employees while under the employment of USX and Old USX will be retained and the benefits paid for by the USS Non-Union Plan. With respect to the USX Corporation Executive Management Supplemental Pension Program, the USX Corporation Non Tax-Qualified Pension Plan, and the USX Corporation Supplemental Thrift Program, all non-qualified benefit plans, following the Separation, Marathon Oil Corporation and SteelCo will share liability, Marathon Oil Corporation (65%) and SteelCo (35%), for the payment of benefits earned by USX Corporate Employees that are attributable to service by such employees while employed as USX Corporate Employees prior to the Separation, as adjusted, where applicable, for subsequent increases in compensation, including increases following the Separation.
(c) With regard to change in control agreements entered into with USX Corporate Employees prior to the Separation, in the case of USX Corporate Employees assigned to Marathon, following the Separation such
agreements will be obligations of Marathon. In the case of USX Corporate Employees reassigned to SteelCo, following the Separation such agreements will be obligations of SteelCo.
ARTICLE IX
Insurance Matters
Section 9.1 General. Except as otherwise specifically provided for herein or pursuant to the terms of the Insurance Assistance Agreement, SteelCo and USX understand and agree that as of the Separation Effective Time, all Insurance Arrangements providing for coverage for the assets and Liabilities of the U. S. Steel Group and the Marathon Group on a combined basis shall have been modified such that the responsibility for insuring the assets, Liabilities and business of the U. S. Steel Group shall be borne by SteelCo, and the responsibility for insuring the assets, Liabilities and business of the Marathon Group shall be borne by USX.
Section 9.2 Policies to be Transferred. At or prior to the Separation Effective Time, SteelCo and USX shall take all actions necessary to transfer to SteelCo the Insurance Arrangements listed on Section 9.2 of the Disclosure Letter.
Section 9.3 Insurance Assistance Agreement. On or prior to the Separation Effective Time, SteelCo and USX shall enter into the Insurance Assistance Agreement providing for the treatment of Joint Insurance Arrangements and the payment of insurance claims and deductibles following the Separation Effective Time.
Section 9.4 Directors' and Officers' Insurance. On or before the Separation Effective Time, the directors and officers of SteelCo and its Subsidiaries shall become insureds under a separate directors' and officers' insurance program to be established by SteelCo, at its sole cost and expense.
ARTICLE X
Tax Matters
Section 10.1 Tax Sharing Agreement.
(a) On or before the Separation Effective Time, SteelCo and USX shall enter into the Tax Sharing Agreement providing for the allocation and payment, following the Separation Effective Time, of any and all Liabilities relating to Taxes.
(b) Except to the extent that this Section 10.1 or another provision of this Agreement expressly indicates, this Agreement shall not govern any Tax matters, and any and all Liabilities relating to Taxes shall be governed exclusively by the Tax Sharing Agreement.
ARTICLE XI
Additional Covenants
Section 11.1 Provision of Corporate Records.
(a) Prior to or as promptly as practicable after the Separation Effective Time, USX shall deliver to SteelCo all corporate books and records of the U. S. Steel Group in its possession and copies of the relevant portions of all corporate books and records of USX relating directly and primarily to the U. S. Steel Group, its assets, employees, businesses and Liabilities, including, without limitation, original corporate minute books, stock ledgers and certificates and the corporate seal of each corporation the capital stock of which is included in the U. S. Steel Group, copies of portions of the minute books of USX that are directly and primarily related
to the U. S. Steel Group and documentation relating to the Liabilities of the U. S. Steel Group, including, in each case, all active agreements, active litigation files and government filings. From and after the Separation Effective Time, all such books, records and copies shall be the property of SteelCo.
(b) Prior to or as promptly as practicable after the Separation Effective Time, SteelCo shall deliver to USX all corporate books and records of the Marathon Group in its possession and copies of the relevant portions of all corporate books and records of SteelCo relating directly and primarily to the Marathon Group, its assets, businesses and Liabilities and the Marathon Employees, including, without limitation, original corporate minute books, stock ledgers and certificates and the corporate seal of each corporation the capital stock of which is included in the Marathon Group, copies of portions of the minute books of Old USX that are directly and primarily related to the Marathon Group and documentation relating to the Liabilities of the Marathon Group, including, in each case, all active agreements, active litigation files and government filings. From and after the Separation Effective Time, all such books, records and copies shall be the property of USX.
Section 11.2 Access to Information. From and after the Separation Effective Time, each of SteelCo and USX shall afford to the other and to the other's Representatives reasonable access and duplicating rights, during normal business hours and upon reasonable advance notice, to all Information within the possession or control of such party relating to the other party's pre- Separation business, assets or Liabilities or relating to or arising in connection with the relationship between the Groups on or prior to the Separation Effective Time, insofar as such access is reasonably required for a reasonable purpose, subject to the provisions below regarding Privileged Information. Without limiting the foregoing and except as otherwise provided in the Separation Documents, Information may be requested under this Section 11.2 for audit, accounting, claims, litigation and Tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations.
In furtherance of the foregoing:
(a) Each party hereto acknowledges that:
(i) Each of SteelCo and USX has or may obtain Privileged Information;
(ii) there are a number of Litigation Matters affecting each or both of the U. S. Steel Group and the Marathon Group;
(iii) both SteelCo and USX have a common legal interest in Litigation Matters, in the Privileged Information, and in the preservation of the confidential status of the Privileged Information, in each case, relating to pre-Separation business of the U. S. Steel Group or the Marathon Group or relating to or arising in connection with the relationship between the Groups on or prior to the Separation Effective Time; and
(iv) both SteelCo and USX intend that the Transactions contemplated hereby and by the other Separation Documents and any transfer of Privileged Information in connection there-with shall not operate as a waiver of any applicable privilege.
(b) Each of SteelCo and USX agrees not to disclose or otherwise waive any privilege attaching to any Privileged Information relating to pre- Separation business of the U. S. Steel Group or the Marathon Group, respectively, or relating to or arising in connection with the relationship between the Groups on or prior to the Separation Effective Time, without providing prompt written notice to and obtaining the prior written consent of the other, which consent shall not be unreasonably withheld; provided, however, that SteelCo and USX may make such disclosure or waiver with respect to Privileged Information if such Privileged Information relates solely to the pre-Separation business of the U. S. Steel Group, in the case of SteelCo, or the Marathon Group, in the case of USX.
(c) Upon SteelCo or USX receiving any subpoena or other compulsory disclosure notice from a court, other Governmental Authority or otherwise that requests disclosure of Privileged Information, in each case, relating to pre-Separation business of the Marathon Group or the U. S. Steel Group, respectively, or relating to or arising in connection with the relationship between the Groups on or prior to
the Separation Effective Time, in the event the recipient of such notice
intends to disclose such Privileged Information, such recipient shall
promptly provide to the other party (following the notice provisions set
forth herein) a copy of such notice, the intended response, and all
materials or Information relating to the other Group that might be
disclosed. In the event of a disagreement as to the intended response or
disclosure, unless and until the disagreement is resolved as provided in
Section 15.2 hereof, the parties shall cooperate to assert all defenses to
disclosure claimed by either party, and shall not disclose any disputed
documents or Information until all legal defenses and claims of privilege
have been finally determined.
Section 11.3 Production of Witnesses. Subject to Section 11.2 hereof, after the Separation Effective Time, each of SteelCo and USX shall make available to the other party, upon written request of the other, such company's directors, officers, employees and agents as witnesses to the extent that any such Person may reasonably be required in connection with any Litigation Matters, administrative or other proceedings in which the requesting party may from time to time be involved and relating to the pre-Separation business of the U. S. Steel Group or the Marathon Group or relating to or in connection with the relationship between the parties on or prior to the Separation Effective Time; provided, however, that, notwithstanding the foregoing, neither SteelCo nor USX shall be required to make available such company's directors, officers, employees or witnesses in response to a subpoena received by any member of the other Group from a third party.
Section 11.4 Confidentiality. From and after the Separation Effective Time,
(i) each of SteelCo and USX shall, and shall use reasonable efforts to cause
its employees, Affiliates and Representatives to, preserve the confidentiality
of all Confidential Information concerning the other Group obtained by it prior
to the Separation Effective Time or furnished to it pursuant to this Agreement
or the other Separation Documents and (ii) neither SteelCo nor USX shall, and
each of SteelCo and USX shall use reasonable efforts to cause its employees,
Affiliates and Representatives not to, disclose or use the Confidential
Information concerning the other Group for any purpose other than as expressly
permitted pursuant to this Agreement or the other Separation Documents.
Section 11.5 Cooperation with Respect to Government Reports and Filings. USX agrees to provide SteelCo, and SteelCo agrees to provide USX, with such cooperation and Information as may be reasonably requested by the other in connection with the preparation or filing of any government report or other government filing contemplated by this Agreement or the other Separation Documents or in conducting any other government proceeding relating to pre- Separation business of the U. S. Steel Group or the Marathon Group, assets or Liabilities of either Group or relating to or in connection with the relationship between the Groups at or prior to the Separation Effective Time. Such cooperation and Information shall include, without limitation, promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any Governmental Authority which relate to the U. S. Steel Group, in the case of USX, or the Marathon Group, in the case of SteelCo. Each party shall make its employees and facilities available during normal business hours and on reasonable prior notice to provide explanation of any documents or Information provided hereunder.
Section 11.6 Certain Limitations with Respect to Information.
(a) Any Information owned by one company that is provided to a requesting party pursuant to this Agreement or any other Separation Document shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information.
(b) A party providing Information hereunder or under any other Separation Document shall be entitled to be reimbursed by the requesting party for the reasonable costs, if any, of creating, gathering and copying such Information, to the extent that such costs are incurred for the benefit of the requesting party. Except as may be otherwise specifically provided elsewhere in this Agreement or in any of the Separation Documents, such costs shall be computed solely in accordance with the providing party's standard methodology and procedures,
provided such methodology and procedures bear a reasonable relationship to the actual cost of providing such Information.
(c) No party shall have any Liability to any other party in the event that any Information exchanged or provided pursuant to this Article XI which is an estimate or forecast, or which is based on an estimate or forecast, is found to be inaccurate, in the absence of willful misconduct by the party providing such Information. No party shall have any Liability to any other party if any Information is destroyed after reasonable efforts by such party to comply with the provisions of Section 15.1 hereof.
(d) The rights and obligations granted under this Article XI are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in any other Separation Document.
Section 11.7 Protective Arrangements. In the event that any party either determines on the advice of its counsel that it is required to disclose any Information pursuant to Applicable Law or receives any demand under lawful process or from any Governmental Authority to disclose or provide Information concerning any other party (or any Affiliate of such party) that is subject to the confidentiality provisions hereof, such party shall notify the other party prior to disclosing or providing such Information and shall cooperate at the expense of the requesting party in seeking any reasonable protective arrangements requested by such other party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide Information to the extent required by such law (as so advised by counsel) or by lawful process or such Governmental Authority.
Section 11.8 Further Assurances. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under Applicable Laws, regulations and agreements to consummate and make effective the Transactions contemplated by this Agreement. Without limiting the foregoing, each party hereto shall cooperate with the other party, and execute and deliver, or use reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument, and take all such other actions as such party may reasonably be requested to take by the other party hereto from time to time, consistent with the terms of this Agreement and the Separation Documents, in order to effectuate the provisions and purposes of this Agreement and the transfers of assets and Liabilities and the other Transactions contemplated hereby.
Section 11.9 Assignment of Contracts and Rights.
(a) Notwithstanding anything contained herein to the contrary, this Agreement shall not constitute an agreement to transfer, convey or assign any Contract or any claim or right or any benefit arising under or resulting from such Contract if an attempted assignment thereof, without the consent of a third party, would constitute a breach or other contravention of the rights of such third party, or would in any way adversely affect the rights of the parties hereto under such asset. If any conveyance, transfer or assignment of any interest in, or Liability, obligation or commitment under, any Contract requires the consent of a third party, then such assignment or assumption shall be made subject to such consent being obtained.
(b) Subject to the satisfaction or waiver, to the extent permitted by Applicable Law, of the conditions to the Separation Merger set forth in Section 6.1, if any consent referred to in subsection (a) hereof is not obtained prior to the Separation Effective Time, USX and SteelCo shall cooperate (at their own expense) in any lawful and reasonable arrangement reasonably proposed by either party under which the party who is intended, under the terms of this Agreement, to receive an assignment of such Contract shall obtain the economic claims, rights and benefits under the Contract with respect to which the consent has not been obtained in accordance with this
Agreement. Such reasonable arrangement may include (i) the subcontracting, sublicensing or subleasing of any and all rights under such Contract and (ii) the enforcement by either party of such rights under such Contract.
Section 11.10 No Restrictions on Post-Separation Competitive Activities. It
is the explicit intent of each of the parties hereto that the provisions of
this Agreement shall not include any non-competition or other similar
restrictive arrangements with respect to the range of business activities which
may be conducted by the parties hereto. Accordingly, each of the parties hereto
acknowledges and agrees that nothing set forth in this Agreement shall be
construed to create any explicit or implied restriction or other limitation on
(a) the ability of any party hereto to engage in any business or other activity
which competes with the business of any other party hereto, or (b) the ability
of any party to engage in any specific line of business or engage in any
business activity in any specific geographic area.
Section 11.11 Merger of United States Steel Financing Corp. Following the Separation Effective Time, SteelCo shall take all actions necessary to cause United States Steel Financing Corp., a Delaware corporation and a wholly owned subsidiary of SteelCo, to be merged with and into SteelCo, with SteelCo continuing as the surviving entity, in accordance with Section 18-209 of the DLLCA and Section 264 of the DGCL.
ARTICLE XII
Mutual Release--No Representations or Warranties
Section 12.1 Mutual Release. Effective as of the Separation Effective Time and except as specifically set forth in this Agreement or any of the other Separation Documents, EACH OF STEELCO, ON THE ONE HAND, AND USX, ON THE OTHER HAND (ON ITS OWN BEHALF AND ON BEHALF ITS RESPECTIVE SUBSIDIARIES, SUCCESSORS AND ASSIGNS), RELEASES AND FOREVER DISCHARGES THE OTHER AND ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, AFFILIATES, RECORD AND BENEFICIAL SECURITY HOLDERS (INCLUDING, WITHOUT LIMITATION, TRUSTEES AND BENEFICIARIES OF TRUSTS HOLDING SUCH SECURITIES), ADVISORS AND REPRESENTATIVES (IN THEIR RESPECTIVE CAPACITIES AS SUCH) AND THEIR RESPECTIVE HEIRS, EXECUTORS, ADMINISTRATORS, SUCCESSORS AND ASSIGNS, OF AND FROM ALL DEBTS, DEMANDS, ACTIONS, CAUSES OF ACTION, SUITS, ACCOUNTS, COVENANTS, CONTRACTS, AGREEMENTS, DAMAGES, CLAIMS (INCLUDING, WITHOUT LIMITATION, CLAIMS FOR DIRECT, CONSEQUENTIAL, EXEMPLARY, TREBLE AND PUNITIVE DAMAGES) AND LIABILITIES WHATSOEVER OF EVERY NAME AND NATURE, BOTH IN LAW AND IN EQUITY, WHICH THE RELEASING PARTY HAS OR EVER HAD, WHICH ARISE OUT OF OR RELATE TO, IN WHOLE OR IN PART, (A) THE BUSINESS, ASSETS, LIABILITIES AND OPERATIONS OF THE OTHER PARTY'S GROUP AND (B) EVENTS, CIRCUMSTANCES OR ACTIONS, WHETHER KNOWN OR UNKNOWN, TAKEN BY SUCH OTHER PARTY OCCURRING OR FAILING TO OCCUR, OR ANY CONDITIONS EXISTING, ON OR PRIOR TO THE SEPARATION EFFECTIVE TIME; provided, however, that the foregoing general release shall not apply to any Liabilities assumed, transferred, assigned, allocated or arising under this Agreement or any of the other Separation Documents and shall not affect any party's rights to enforce this Agreement or any of the other Separation Documents in accordance with their terms. Nothing in this Agreement shall impair any of the rights of any directors, officers or employees of USX or SteelCo, or any of their respective Subsidiaries, to seek indemnification under any certificate of incorporation or by-laws of USX or any of its predecessors or Subsidiaries, or under any indemnification agreements, arising out of or relating to actions or inactions of such directors or officers prior to the Separation Effective Time. SteelCo and USX acknowledge that the foregoing general release shall not release any third party from any Liabilities, whether arising prior to or after the Separation Effective Time.
Section 12.2 No Representations or Warranties. STEELCO UNDERSTANDS AND
AGREES THAT USX IS NOT, AND USX UNDERSTANDS AND AGREES THAT STEELCO IS NOT, IN
THIS
AGREEMENT OR IN ANY OTHER AGREEMENT OR SEPARATION DOCUMENT, REPRESENTING OR WARRANTING TO THE OTHER IN ANY WAY AS TO SUCH GROUP'S ASSETS, BUSINESS OR LIABILITIES OR AS TO ANY CONSENTS OR APPROVALS REQUIRED IN CONNECTION WITH THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. Except as set forth in this Agreement and the other Separation Documents, both parties shall bear the economic and legal risk of the Transactions contemplated hereby, including, but not limited to, the Separation, that (a) the title of SteelCo or USX to any of their respective assets shall be other than good and marketable and free from encumbrances, (b) the title of SteelCo or USX to the shares of any Subsidiary of such party shall be other than good and marketable and free from encumbrances or (c) any party shall fail to obtain any consents or approvals relating to its business required in connection with the consummation of the Transactions contemplated by this Agreement.
ARTICLE XIII
Indemnification
Section 13.1 USX's Agreement to Indemnify. Subject to the terms and conditions set forth in this Agreement, from and after the Separation Effective Time, USX shall indemnify, defend and hold harmless SteelCo and its directors, officers, employees, Representatives, advisors, agents and Affiliates (collectively, the "U. S. Steel Indemnified Parties") from, against and in respect of any and all Indemnifiable Losses of the U. S. Steel Indemnified Parties arising out of, relating to or resulting from, directly or indirectly:
(a) Any and all Liabilities to the extent arising out of or relating to
the business, assets or Liabilities of the Marathon Group ("Marathon Group
Liabilities") (other than Liabilities relating to Taxes, which are
addressed in the Tax Sharing Agreement) and, except as expressly provided
otherwise herein, any Liabilities intended to be assumed by USX pursuant to
Section 2.1(g) of the HoldCo Reorganization Agreement;
(b) USX's failure to observe from and after the Separation Effective Time its obligations under this Agreement or any of the other Separation Documents; and
(c) Except as otherwise provided in the Tax Sharing Agreement, the Financial Matters Agreement or any other Separation Document, sixty-five percent (65%) of any and all Liabilities arising out of or relating to (i) USX Corporate Assets or USX Corporate Employees, to the extent relating to or arising out of events or conditions occurring prior to the Separation Effective Time, (ii) the businesses, assets or Liabilities of Old USX or USX prior to the Separation Effective Time, to the extent not relating to or arising out of the businesses, assets or Liabilities of the U. S. Steel Group or the Marathon Group (each, as defined in the Restated Certificate), and (iii) the Transactions, this Agreement or the Separation Documents (to the extent not arising out of the Indemnified Party's failure to perform its obligations hereunder or thereunder) or the Proxy Statement (collectively, (i), (ii) and (iii) above are referred to herein as "Joint Liabilities").
Section 13.2 SteelCo's Agreement to Indemnify. Subject to the terms and conditions set forth in this Agreement, from and after the Separation Effective Time, SteelCo shall indemnify, defend and hold harmless USX and each of its directors, officers, employees, representatives, advisors, agents and Affiliates (collectively, the "USX Indemnified Parties") from, against and in respect of any and all Indemnifiable Losses of the USX Indemnified Parties arising out of, relating to or resulting from, directly or indirectly:
(a) Any and all Liabilities to the extent arising out of or relating to the businesses, assets or Liabilities of the U. S. Steel Group to the extent not relating to the businesses of the Marathon Group (as defined in the Restated Certificate) ("U. S. Steel Group Liabilities") (other than Liabilities relating to Taxes, which are addressed in the Tax Sharing Agreement);
(b) SteelCo's failure to observe from and after the Separation Effective Time its obligations under this Agreement or any of the other Separation Documents; and
(c) Except as otherwise provided in the Tax Sharing Agreement, the Financial Matters Agreement or any other Separation Document, thirty-five percent (35%) of any and all Joint Liabilities.
Section 13.3 Procedure for Indemnification. All claims for indemnification under this Article XIII shall be asserted and resolved as follows:
(a) Third-Party Claims. In the event that any claim or demand for which an Indemnifying Party may be liable to an Indemnified Party hereunder is asserted against or sought to be collected by a third party from an Indemnified Party (an "Asserted Liability"), the Indemnified Party shall as soon as possible notify the Indemnifying Party in writing of such Asserted Liability, specifying the nature of such Asserted Liability (the "Claim Notice"); provided that no delay on the part of the Indemnified Party in giving any such Claim Notice shall relieve the Indemnifying Party of any indemnification obligation hereunder except to the extent that the Indemnifying Party is materially prejudiced by such delay. The Indemnifying Party shall have 60 days (or less if the nature of the Asserted Liability requires) from its receipt of the Claim Notice to notify the Indemnified Party whether or not the Indemnifying Party desires, at the Indemnifying Party's sole cost and expense and by counsel of its own choosing, to defend against such Asserted Liability; provided, however, that if, under applicable standards of professional conduct a conflict on any significant issue between the Indemnifying Party and any Indemnified Party exists in respect of such Asserted Liability, then the Indemnifying Party shall reimburse the Indemnified Party for the reasonable fees and expenses of one additional counsel.
If the Indemnifying Party undertakes to defend against such Asserted Liability, the Indemnified Party shall cooperate fully with the Indemnifying Party and its counsel in the investigation, defense and settlement thereof, but the Indemnifying Party shall control the investigation, defense and settlement thereof. If the Indemnified Party desires to participate in any such defense, it may do so at its sole cost and expense. If the Indemnifying Party elects not to defend against such Asserted Liability, then the Indemnifying Party shall have the right to participate in any such defense at its sole cost and expense, but the Indemnified Party shall control the investigation, defense and settlement thereof at the sole cost and expense of the Indemnifying Party. The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), consent to any settlement unless such settlement (i) includes a complete release of the Indemnified Party and (ii) does not require the Indemnified Party to admit any Liability or make or forego any payment or forego or take any action. The Indemnifying Party shall not be liable for any settlement of any Asserted Liability effected without its prior written consent (which consent shall not be unreasonably withheld).
(b) Non-Third-Party Claims. In the event that an Indemnified Party should have a claim against the Indemnifying Party hereunder that does not involve a claim or demand being asserted against or sought to be collected from it by a third party, the Indemnified Party shall send a notice with respect to such claim to the Indemnifying Party. The Indemnifying Party shall have 60 days from the date such notice is delivered during which to notify the Indemnified Party in writing of any good faith objections it has to the Indemnified Party's notice or claims for indemnification, setting forth in reasonable detail each of the Indemnifying Party's objections thereto. If the Indemnifying Party does not deliver such written notice of objection within such 60-day period, the Indemnifying Party shall be deemed to not have any objections to such claim. If the Indemnifying Party does deliver such written notice of objection within such 60-day period, the Indemnifying Party and the Indemnified Party shall attempt in good faith to resolve any such dispute within 60 days of the delivery by the Indemnifying Party of such written notice of objection. If the Indemnifying Party and the Indemnified Party are unable to resolve any such dispute within such 60-day period, such dispute shall be resolved in accordance with the procedures set forth in Section 15.2 hereof.
(c) Miscellaneous Indemnification Provisions.
(i) The Indemnifying Party agrees to indemnify any successors of the Indemnified Party to the same extent and in the same manner and on the same terms and conditions as the Indemnified Party is indemnified by the Indemnifying Party under this Article XIII.
(ii) The amount that an Indemnifying Party is required to pay to any Indemnified Party pursuant to this Article XIII shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered by or on behalf of such Indemnified Party in respect of the related Indemnifiable Loss. If an Indemnified Party shall have received the payment required by this Article XIII in respect of an Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Indemnifiable Loss, then such Indemnified Party shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Article XIII in respect of such Indemnifiable Loss.
(iii) In determining the amount of any indemnity payable under this Article XIII, such amount shall be reduced by any related Tax benefits if and when actually realized or received (but only after taking into account any Tax benefits (including, without limitation, any net operating losses or other deductions) to which the Indemnified Party would be entitled without regard to such item), except to the extent such Tax benefit has already been taken into account in determining the amount of any indemnity pay-able under this Article XIII in respect of the related Indemnifiable Loss. Any such Tax benefit shall be promptly repaid by the Indemnified Party to the Indemnifying Party following the time at which such recovery is realized or received pursuant to the previous sentence, minus all reasonably allocable costs, charges and expenses incurred by the Indemnified Party in obtaining such Tax benefit. Notwithstanding the foregoing, if (x) the amount of Indemnifiable Losses for which the Indemnifying Party is obligated to indemnify the Indemnified Party is reduced by any Tax benefit in accordance with the provisions of the previous sentence and (y) the Indemnified Party subsequently is required to repay the amount of any such Tax benefit or such Tax benefit is disallowed, then the obligation of the Indemnifying Party to indemnify with respect to such amounts shall be reinstated immediately and such amounts shall be paid promptly to the Indemnified Party in accordance with the provisions of this Agreement.
ARTICLE XIV
Termination and Amendment
Section 14.1 Termination at any Time by the Board. This Agreement may be terminated and the Transactions, including, without limitation, the Separation, may be abandoned at any time prior to the Separation Effective Time, whether prior to or following the Stockholders' Meeting, by and in the sole discretion of the Board, without the approval of any other party hereto or of USX's stockholders. In the event of such termination, no party hereto or to any other Separation Document shall have any Liability to any Person by reason of this Agreement or any other Separation Document.
Section 14.2 Amendment. This Agreement may be amended, modified or supplemented at any time as determined by the Board, and shall be evidenced by a written agreement signed by all of the parties hereto.
ARTICLE XV
General Provisions
Section 15.1 Retention of Records. Except as otherwise agreed in writing, or as otherwise provided in the Separation Documents, each of SteelCo and USX shall comply with the current records retention policy of USX with respect to all Information in such party's possession or under its control relating directly and primarily to the pre-Separation business, assets or Liabilities of the other party's Group.
Section 15.2 Dispute Resolution.
(a) As of the Separation Effective Time, USX and SteelCo shall form a committee (the "Separation Committee") comprised of one Representative designated from time to time by USX in its sole discretion and
one Representative designated from time to time by SteelCo in its sole discretion. Until the tenth anniversary of the Separation Effective Time, the Separation Committee shall be responsible for resolving any and all disputes between SteelCo and USX arising with respect to any matter, whether based in contract, tort, statute or otherwise (collectively, "Disputes"), including any dispute as to (i) whether any Action or other Liability is a Marathon Group Liability, or a U. S. Steel Group Liability, (ii) whether any asset belongs to the Marathon Group or the U. S. Steel Group, (iii) the interpretation of any provision of this Agreement or any other Separation Document and (iv) any other Disputes arising out of this Agreement or any other Separation Document, other than the Tax Sharing Agreement. In the event of any such Dispute, each of USX and SteelCo shall have the right to refer in writing such Dispute to the Separation Committee for resolution. The Separation Committee shall be required to render a written decision with respect to any Dispute within 30 days of its receipt of the referral. The decision of the Separation Committee with respect to any Dispute shall be binding on USX and SteelCo and their respective successors and assigns. All out-of-pocket expenses and costs incurred by USX or SteelCo in connection with the procedures set forth in this Section 15.2(a) shall be borne by the party incurring such expenses and costs.
(b) In the event that the Separation Committee is unable to reach a unanimous determination as to any Dispute pursuant to Section 15.2(a) hereof, each of USX and SteelCo shall have the right to bring an action to resolve such Dispute in the Court of Chancery of the State of Delaware, and each party hereby consents to, and waives any objections to, jurisdiction and venue in such court.
Section 15.3 Expenses. Except to the extent otherwise provided for in the Separation Documents, all out-of-pocket costs and expenses with respect to the Transactions contemplated hereby and by the other Separation Documents, including, without limitation, expenses relating to the Financings, (i) incurred at or prior to the Separation Effective Time, shall be borne sixty- five percent (65%) by USX and thirty-five percent (35%) by SteelCo, and (ii) incurred after the Separation Effective Time, shall be borne by the party incurring such expense.
Section 15.4 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of Delaware, without reference to choice of law principles, including matters of construction, validity and performance. Each of the parties hereto consents to the exclusive jurisdiction of the Court of Chancery of the State of Delaware in the event of any dispute arising out of this Agreement and agrees that it shall not attempt to deny or defeat such jurisdiction.
Section 15.5 Notices. Notices, requests, permissions, waivers, referrals and all other communications hereunder shall be in writing and shall be deemed to have been duly given if signed by the respective persons giving them (in the case of any corporation or limited liability company, the signature shall be by an officer thereof) and delivered by hand or by telecopy or on the date of receipt indicated on the return receipt if mailed (registered or certified, return receipt requested, properly addressed and postage prepaid):
If to SteelCo, to:
600 Grant Street
Pittsburgh, PA 15219-4776
Attention: General Counsel
Facsimile: (412) 433-1145
If to USX prior to the Separation, to:
600 Grant Street
Pittsburgh, PA 15219-4776
Attention: General Counsel
Facsimile: (412) 433-1145
If to USX after the Separation, to:
5555 San Felipe Road
Houston, TX 77056-2723
Attention: General Counsel
Facsimile: (713) 296-4375
Such names and addresses may be changed by notice given in accordance with this
Section 15.5. Copies of all notices, requests, permissions, waivers, referrals
and all other communications hereunder given prior to the Separation Effective
Time shall be given to:
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, NY 10036-6522
Attention: Roger S. Aaron, Esquire
Facsimile: (212) 735-2000
Section 15.6 Third-Party Beneficiaries. Except as provided in Article XIII hereof with respect to indemnification of U. S. Steel Indemnified Parties and USX Indemnified Parties hereunder, nothing in this Agreement shall confer any rights upon any Person or entity other than the parties hereto and their respective heirs, successors and permitted assigns.
Section 15.7 Entire Agreement. This Agreement and the other Separation Documents, together with the Disclosure Letter and all schedules, appendices, certificates, instruments and agreements delivered pursuant hereto and thereto, contain the entire understanding of the parties hereto and thereto with respect to the subject matter contained herein and therein, and supersede and cancel all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matter.
Section 15.8 Headings. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All references herein to "Articles", "Sections" or "Appendices" shall be deemed to be references to Articles or Sections hereof or Appendices hereto unless otherwise indicated. All references herein to "Sections" of the Disclosure Letter shall be deemed to be references to the Disclosure Letter unless otherwise indicated.
Section 15.9 Schedules. The Disclosure Letter and all Appendices referenced in this Agreement and attached hereto are incorporated into this Agreement by reference and made a part hereof. The parties hereto shall be entitled to supplement or amend the Disclosure Letter at any time prior to the Separation Effective Time.
Section 15.10 Counterparts. This Agreement may be executed in one or more counterparts and each counterpart shall be deemed to be an original, but all of which shall constitute one and the same original.
Section 15.11 Parties in Interest; Assignment; Successors. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon SteelCo and USX and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement.
Section 15.12 Severability; Enforcement. The invalidity of any portion hereof shall not affect the validity, force or effect of the remaining portions hereof. If it is ever held that any restriction hereunder is too broad to permit enforcement of such restriction to its fullest extent, each party agrees that a court of competent jurisdiction may enforce such restriction to the maximum extent permitted by law, and each party hereby
consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restriction.
Section 15.13 Remedies. The parties agree that money damages or other remedy at law would not be a sufficient or adequate remedy for any breach or violation of, or a default under, this Agreement by them and that in addition to all other remedies available to them, each of them shall be entitled to the fullest extent permitted by law to an injunction restraining such breach, violation or default or threatened breach, violation or default and to any other equitable relief, including specific performance, without bond or other security being required.
[SIGNATURE PAGE FOLLOWS]
In Witness Whereof, each of the parties has caused this Agreement and Plan of Reorganization to be duly executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written.
USX Corporation
/s/ E. F. Guna
By: _________________________________
Name: E. F. Guna
Title: Vice President & Treasurer
|
United States Steel LLC
/s/ L. G. Schultz
By: _________________________________
Name: L. G. Schultz
Title: Vice President
|
USX Merger Corporation
/s/ R. M. Stanton
By: _________________________________
Name: R. M. Stanton
Title: President
|
ANNEX B-1
[Letterhead of Credit Suisse First Boston]
July 31, 2001
Board of Directors
USX Corporation
600 Grant Street
Pittsburgh, Pennsylvania 15219-4776
Members of the Board:
We understand that the Board of Directors (the "Board") of USX Corporation ("USX") is considering the separation of its U. S. Steel Group and its Marathon Group into two independent companies (the "Separation"). The Separation will be accomplished through a merger of USX with a newly formed subsidiary of USX pursuant to the Agreement and Plan of Reorganization, to be dated as of the date hereof (the "Plan of Reorganization"), by and between USX and United States Steel LLC, a wholly owned subsidiary of USX that will be converted into a Delaware corporation named United States Steel Corporation ("United States Steel") in accordance with the Plan of Reorganization. As a result of the Separation, United States Steel will become an independent, publicly held company, wholly owned by the holders of the then outstanding shares of USX- U. S. Steel Group Common Stock ("U. S. Steel Group Shares"), which are currently traded under ticker symbol "X" and U. S. Steel Group Shares will cease to exist. Pursuant to the Plan of Reorganization, USX will change its name to Marathon Oil Corporation ("MOC") and will be wholly owned by the holders of the then outstanding shares of USX-Marathon Group Common Stock (which are currently traded under ticker symbol "MRO") ("Marathon Group Shares"). As a result of the Separation, the business of the U. S. Steel Group of USX (the "U. S. Steel Group") will be owned and operated by United States Steel and the business of the Marathon Group of USX (the "Marathon Group") will be owned and operated by MOC.
Immediately prior to and as a condition of the consummation of the Separation, a portion of the indebtedness and other obligations of USX will be repaid or retired and United States Steel will incur indebtedness and other obligations and agree to repay a portion of the indebtedness and other obligations of USX, such that the amount of indebtedness and other obligations for which United States Steel is responsible is $900 million less than the net amounts attributed to the U. S. Steel Group immediately prior to the Separation (the "Value Transfer"). In addition to the Plan of Reorganization, USX and United States Steel will enter into certain related agreements, including a Financial Matters Agreement and a Tax Sharing Agreement (collectively, together with the Plan of Reorganization, the "Separation Agreement"), establishing certain arrangements between USX and United States Steel deemed necessary by USX and United States Steel in order to address various business, legal and regulatory issues resulting from the Separation. The Separation and the related transactions, including the Value Transfer, are collectively referred to as the "Transactions".
We have been requested to render to the Board our opinion with respect to the fairness, from a financial point of view, of the financial effects, taken as a whole, of the Transactions to the holders of the Marathon Group Shares and to the holders of the U. S. Steel Group Shares. We have not been requested to opine as to, and our opinion does not in any manner address, USX's underlying business decision to proceed with or effect the proposed Transactions.
In arriving at our opinion, we reviewed, among other things, (1) historical financial statements of USX, including the separate financial statements for the Marathon Group and the U. S. Steel Group, and certain other historical financial and operating data of USX, including the Marathon Group and the U. S. Steel Group, (2) certain publicly available information with respect to USX, including the Marathon Group and the U. S. Steel Group, (3) certain projected financial data with respect to USX, including the Marathon Group and the U. S. Steel Group, without giving effect to the Separation, and with respect to United States Steel and MOC,
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giving effect to the Separation, in each case as prepared by the management of USX, including the management of the Marathon Group and the management of the U. S. Steel Group (collectively, "Management"), (4) reported prices and trading activity for the Marathon Group Shares and the U. S. Steel Group Shares, (5) drafts of the Plan of Reorganization, the Financial Matters Agreement and the Tax Sharing Agreement, (6) the preliminary proxy materials filed by USX with the Securities and Exchange Commission in connection with the Separation, (7) the letter dated July 2, 2001 from USX to the Internal Revenue Service requesting a private letter ruling that the Separation will qualify as a tax- free distribution under Section 355 of the Internal Revenue Code and (8) the terms of the Marathon Group Shares and the U. S. Steel Group Shares as set forth in USX's certificate of incorporation as currently in effect. In addition, we have held discussions with Management with respect to, among other things, (1) the operations and financial condition of USX, including the Marathon Group and the U. S. Steel Group, and the plans of Management with respect to the business and affairs of USX, including the Marathon Group and the U. S. Steel Group, prior to the Separation and of United States Steel and MOC after the Separation, (2) certain projected financial data with respect to USX, including the Marathon Group and the U. S. Steel Group, without giving effect to the Separation, and with respect to United States Steel and MOC, giving effect to the Separation, in each case as prepared by Management, (3) the benefits and detriments to USX of continued ownership of both the Marathon Group and the U. S. Steel Group, (4) the expected impact of the Transactions on the operations and the financial and strategic flexibility of United States Steel and MOC after the Separation, (5) certain terms of the proposed Plan of Reorganization and (6) the effect of the Separation Agreement on the business, results of operations and financial condition of each of United States Steel and MOC. In addition, we undertook such other studies, analyses and investigations as we deemed appropriate for purposes of rendering our opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy and completeness of all of the financial and other information used by us without assuming any responsibility for independent verification of such information and have further relied upon the assurances of Management that they are not aware of any facts that would make such information inaccurate or misleading. With respect to the projected financial data of USX, including the Marathon Group and the U. S. Steel Group, and of United States Steel and MOC after the Separation prepared by Management, upon the advice of Management and with your consent we have assumed that such projections have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of Management as to the expected future prospects and financial performance of USX, including the Marathon Group and the U. S. Steel Group, and of United States Steel and MOC after the Separation, and we have relied on such projections in rendering our opinion. With respect to the estimates prepared by Management of the value of certain benefits and detriments of the Separation to each of United States Steel and MOC, with your consent, we have relied on such estimates and assumed that they were reasonably prepared and reflected the best currently available judgments of Management as to such benefits and detriments.
In arriving at our opinion, we have not conducted a physical inspection of the properties and facilities of USX, including the properties and facilities constituting the Marathon Group or the U. S. Steel Group, and have not made or obtained any evaluations or appraisals of the assets or liabilities of USX, including the assets or liabilities allocated or attributed to the Marathon Group or the U. S. Steel Group. We have not been requested to opine as to, and our opinion does not in any manner address, the solvency of United States Steel or MOC (including the impact of any contingent liabilities of United States Steel or MOC) after giving effect to the Transactions, which is the subject of a written opinion, dated as of the date of this opinion, of American Appraisal Associates, Inc. You also have advised us, and we have assumed, that the Transactions will be consummated in accordance with the terms of the Plan of Reorganization, without waiver, amendment or modification of any material term, condition or agreement set forth therein. We have also assumed that the Plan of Reorganization, the Financial Matters Agreement and the Tax Sharing Agreement, when executed, will conform to the drafts reviewed by us in all respects material to our analyses. In addition, you have not authorized us to solicit, and we have not solicited, any indications of interest from any third party with respect to a business combination or other extraordinary transaction involving USX or any of its assets or subsidiaries, including the assets or subsidiaries constituting the Marathon Group or the U. S. Steel Group. Similarly, we
B-1-2
have not been engaged by you to participate, nor have we participated in, the negotiation of any terms of the Separation Agreement or the Transactions. Our opinion does not address whether the financial effects of the Transactions to the holders of Marathon Group Shares or U. S. Steel Group Shares are the most favorable that could have been obtained by either group of such holders.
We have not been asked to, and we do not, express an opinion as to the prices at which the common stock of United States Steel or MOC will actually trade following the Separation, and we can provide no assurance that the trading price of (A) a share of common stock of MOC following the Separation will be equal to or in excess of the trading price of a Marathon Group Share prior to the Separation or (B) a share of common stock of United States Steel following the Separation will be equal to or in excess of the trading price of a U. S. Steel Group Share prior to the Separation.
Our opinion necessarily is based upon market, economic and other conditions as they exist on, and can be evaluated as of, the date of this letter. Furthermore, we wish to advise you that certain elements of the Transactions are not susceptible to precise quantification and that, in connection with the preparation of this opinion, we have made judgments and estimates that we consider reasonable and appropriate under the circumstances.
We have acted as financial advisor to the Board in connection with the Transactions and will receive a fee for our services. A significant portion of our fee is contingent on consummation of the Separation. We have performed in the past and may perform in the future other investment banking financial advisory services for USX, MOC, United States Steel and their respective affiliates, including in connection with the offering by the U. S. Steel Group of its 7 year, 10.75% senior unsecured notes, for which we have received and will receive customary compensation.
In the ordinary course of our business, we actively trade in the debt and equity securities of USX for our own account and for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board and is rendered to the Board in connection with its consideration of the Transactions. This opinion is not intended to be and does not constitute a recommendation to any holder of Marathon Group Shares or U. S. Steel Group Shares as to whether such stockholder should consent to the Transactions.
Based upon and subject to the foregoing, we are of the opinion as of the date hereof that the financial effects, taken as a whole, of the Transactions are fair, from a financial point of view, to the holders of the Marathon Group Shares and to the holders of the U. S. Steel Group Shares.
Very truly yours,
Credit Suisse First Boston Corporation
B-1-3
ANNEX B-2
[Letterhead of Salomon Smith Barney]
July 31, 2001
Board of Directors
USX Corporation
600 Grant Street
Pittsburgh, Pennsylvania 15219-4776
Members of the Board:
We understand that the Board of Directors (the "Board") of USX Corporation ("USX") is considering the separation of its U. S. Steel Group and its Marathon Group into two independent companies (the "Separation"). The Separation will be accomplished through a merger of USX with a newly formed subsidiary of USX pursuant to the Agreement and Plan of Reorganization, to be dated as of the date hereof (the "Plan of Reorganization"), by and between USX and United States Steel LLC, a wholly owned subsidiary of USX that will be converted into a Delaware corporation named United States Steel Corporation ("United States Steel") in accordance with the Plan of Reorganization. As a result of the Separation, United States Steel will become an independent, publicly held company, wholly owned by the holders of the then outstanding shares of USX-U. S. Steel Group Common Stock ("U. S. Steel Group Shares"), which are currently traded under ticker symbol "X" and U. S. Steel Group Shares will cease to exist. Pursuant to the Plan of Reorganization, USX will change its name to Marathon Oil Corporation ("MOC") and will be wholly owned by the holders of the then outstanding shares of USX-Marathon Group Common Stock (which are currently traded under ticker symbol "MRO") ("Marathon Group Shares"). As a result of the Separation, the business of the U. S. Steel Group of USX (the "U. S. Steel Group") will be owned and operated by United States Steel and the business of the Marathon Group of USX (the "Marathon Group") will be owned and operated by MOC.
Immediately prior to and as a condition of the consummation of the Separation, a portion of the indebtedness and other obligations of USX will be repaid or retired and United States Steel will incur indebtedness and other obligations and agree to repay a portion of the indebtedness and other obligations of USX, such that the amount of indebtedness and other obligations for which United States Steel is responsible is $900 million less than the net amounts attributed to the U. S. Steel Group immediately prior to the Separation (the "Value Transfer"). In addition to the Plan of Reorganization, USX and United States Steel will enter into certain related agreements, including a Financial Matters Agreement and a Tax Sharing Agreement (collectively, together with the Plan of Reorganization, the "Separation Agreement"), establishing certain arrangements between USX and United States Steel deemed necessary by USX and United States Steel in order to address various business, legal and regulatory issues resulting from the Separation. The Separation and the related transactions, including the Value Transfer, are collectively referred to as the "Transactions".
We have been requested to render to the Board our opinion with respect to the fairness, from a financial point of view, of the financial effects, taken as a whole, of the Transactions to the holders of the Marathon Group Shares and to the holders of the U. S. Steel Group Shares. We have not been requested to opine as to, and our opinion does not in any manner address, USX's underlying business decision to proceed with or effect the proposed Transactions.
In arriving at our opinion, we reviewed, among other things, (1) historical financial statements of USX, including the separate financial statements for the Marathon Group and the U. S. Steel Group, and certain other historical financial and operating data of USX, including the Marathon Group and the U. S. Steel Group, (2) certain publicly available information with respect to USX, including the Marathon Group and the U. S. Steel Group, (3) certain projected financial data with respect to USX, including the Marathon Group and the U. S.
B-2-1
Steel Group, without giving effect to the Separation, and with respect to
United States Steel and MOC, giving effect to the Separation, in each case as
prepared by the management of USX, including the management of the Marathon
Group and the management of the U. S. Steel Group (collectively, "Management"),
(4) reported prices and trading activity for the Marathon Group Shares and the
U. S. Steel Group Shares, (5) drafts of the Plan of Reorganization, the
Financial Matters Agreement and the Tax Sharing Agreement, (6) the preliminary
proxy materials filed by USX with the Securities and Exchange Commission in
connection with the Separation, (7) the letter dated July 2, 2001 from USX to
the Internal Revenue Service requesting a private letter ruling that the
Separation will qualify as a tax-free distribution under Section 355 of the
Internal Revenue Code and (8) the terms of the Marathon Group Shares and the U.
S. Steel Group Shares as set forth in USX's certificate of incorporation as
currently in effect. In addition, we have held discussions with Management with
respect to, among other things, (1) the operations and financial condition of
USX, including the Marathon Group and the U. S. Steel Group, and the plans of
Management with respect to the business and affairs of USX, including the
Marathon Group and the U. S. Steel Group, prior to the Separation and of United
States Steel and MOC after the Separation, (2) certain projected financial data
with respect to USX, including the Marathon Group and the U. S. Steel Group,
without giving effect to the Separation, and with respect to United States
Steel and MOC, giving effect to the Separation, in each case as prepared by
Management, (3) the benefits and detriments to USX of continued ownership of
both the Marathon Group and the U. S. Steel Group, (4) the expected impact of
the Transactions on the operations and the financial and strategic flexibility
of United States Steel and MOC after the Separation, (5) certain terms of the
proposed Plan of Reorganization and (6) the effect of the Separation Agreement
on the business, results of operations and financial condition of each of
United States Steel and MOC. In addition, we undertook such other studies,
analyses and investigations as we deemed appropriate for purposes of rendering
our opinion.
In arriving at our opinion, we have assumed and relied upon the accuracy and completeness of all of the financial and other information used by us without assuming any responsibility for independent verification of such information and have further relied upon the assurances of Management that they are not aware of any facts that would make such information inaccurate or misleading. With respect to the projected financial data of USX, including the Marathon Group and the U. S. Steel Group, and of United States Steel and MOC after the Separation prepared by Management, upon the advice of Management and with your consent we have assumed that such projections have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of Management as to the expected future prospects and financial performance of USX, including the Marathon Group and the U. S. Steel Group, and of United States Steel and MOC after the Separation, and we have relied on such projections in rendering our opinion. With respect to the estimates prepared by Management of the value of certain benefits and detriments of the Separation to each of United States Steel and MOC, with your consent, we have relied on such estimates and assumed that they were reasonably prepared and reflected the best currently available judgments of Management as to such benefits and detriments.
In arriving at our opinion, we have not conducted a physical inspection of the properties and facilities of USX, including the properties and facilities constituting the Marathon Group or the U. S. Steel Group, and have not made or obtained any evaluations or appraisals of the assets or liabilities of USX, including the assets or liabilities allocated or attributed to the Marathon Group or the U. S. Steel Group. We have not been requested to opine as to, and our opinion does not in any manner address, the solvency of United States Steel or MOC (including the impact of any contingent liabilities of United States Steel or MOC) after giving effect to the Transactions, which is the subject of a written opinion, dated as of the date of this opinion, of American Appraisal Associates, Inc. You also have advised us, and we have assumed, that the Transactions will be consummated in accordance with the terms of the Plan of Reorganization, without waiver, amendment or modification of any material term, condition or agreement set forth therein. We have also assumed that the Plan of Reorganization, the Financial Matters Agreement and the Tax Sharing Agreement, when executed, will conform to the drafts reviewed by us in all respects material to our analyses. In addition, you have not authorized us to solicit, and we have not solicited, any indications of interest from any third party with respect to a business combination or other extraordinary transaction involving USX or any of its assets or subsidiaries, including the assets or subsidiaries constituting the Marathon Group or the U. S. Steel Group. Similarly, we
B-2-2
have not been engaged by you to participate, nor have we participated in, the negotiation of any terms of the Separation Agreement or the Transactions. Our opinion does not address whether the financial effects of the Transactions to the holders of Marathon Group Shares or U. S. Steel Group Shares are the most favorable that could have been obtained by either group of such holders.
We have not been asked to, and we do not, express an opinion as to the prices at which the common stock of United States Steel or MOC will actually trade following the Separation, and we can provide no assurance that the trading price of (A) a share of common stock of MOC following the Separation will be equal to or in excess of the trading price of a Marathon Group Share prior to the Separation or (B) a share of common stock of United States Steel following the Separation will be equal to or in excess of the trading price of a U. S. Steel Group Share prior to the Separation.
Our opinion necessarily is based upon market, economic and other conditions as they exist on, and can be evaluated as of, the date of this letter. Furthermore, we wish to advise you that certain elements of the Transactions are not susceptible to precise quantification and that, in connection with the preparation of this opinion, we have made judgments and estimates that we consider reasonable and appropriate under the circumstances.
We have acted as financial advisor to the Board in connection with the Transactions and will receive a fee for our services. A significant portion of our fee is contingent on consummation of the Separation. We have performed in the past and may perform in the future other investment banking financial advisory services for USX, MOC, United States Steel and their respective affiliates, including in connection with the offering by the U. S. Steel Group of its 7 year, 10.75% senior unsecured notes, for which we have received and will receive customary compensation.
In the ordinary course of our business, we actively trade in the debt and equity securities of USX for our own account and for the accounts of our customers and, accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board and is rendered to the Board in connection with its consideration of the Transactions. This opinion is not intended to be and does not constitute a recommendation to any holder of Marathon Group Shares or U. S. Steel Group Shares as to whether such stockholder should consent to the Transactions.
Based upon and subject to the foregoing, we are of the opinion as of the date hereof that the financial effects, taken as a whole, of the Transactions are fair, from a financial point of view, to the holders of the Marathon Group Shares and to the holders of the U. S. Steel Group Shares.
Very truly yours,
SALOMON SMITH BARNEY INC.
B-2-3
ANNEX C
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
FOR UNITED STATES STEEL CORPORATION
The following unaudited pro forma condensed combined balance sheet as of June 30, 2001 gives effect to the $900 million Value Transfer, new financing arrangements, the assignment of certain USX corporate assets and liabilities and the payment of Separation Costs as if such transactions had been consummated as of June 30, 2001. The following unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2001, and the year ended December 31, 2000, give effect to changes in net interest and other financial costs as a result of the Value Transfer and new financing arrangements, as if such transactions had been consummated at the beginning of the periods presented.
No pro forma adjustments were made for changes in the future level of corporate administrative costs to be incurred by United States Steel Corporation as compared with the historical level of such costs allocated to United States Steel. These costs are expected to continue at approximately the same level as previously allocated, except for insurance costs which are estimated to be higher by $9 million annually.
No pro forma adjustments have been made in the unaudited pro forma condensed combined statements of operations for nonrecurring charges associated with the Separation. Such adjustments are reflected in the unaudited pro forma condensed combined balance sheet.
Following the Separation, United States Steel Corporation will account for its assets and liabilities based on the historical values at which they were carried by USX immediately prior to the Separation.
The pro forma adjustments included herein are based on available information and certain assumptions that management believes are reasonable and are described in the accompanying notes. The unaudited pro forma condensed combined financial statements do not necessarily represent United States Steel Corporation's financial position or results of operations had the transactions occurred at such dates or project United States Steel Corporation's financial position or results of operations for any future date or period. A number of factors may affect United States Steel Corporation's results. See "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" on page 26. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma condensed combined financial statements have been made. The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical combined financial statements of United States Steel, including the notes thereto, included in Annex D.
UNITED STATES STEEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 2001
Dollars in millions
United United States
States Steel
Steel Separation Value Corporation
Historical Adjustments Transfer Pro Forma
---------- ----------- -------- -------------
ASSETS
Cash and cash equivalents... $ 254 $(189)(A) $ $ 65
Other current assets........ 2,422 2,422
Property, plant and
equipment--net............. 3,098 20 (B) 3,118
Prepaid pensions............ 2,711 2,711
Other assets................ 469 31 (A) 505
5 (B)
------ ----- ----- ------
Total assets................ $8,954 $(133) $ $8,821
====== ===== ===== ======
LIABILITIES AND EQUITY
Current liabilities other
than debt.................. $1,313 $ (43)(A) $ $1,268
(2)(B)
Notes payable and long-term
debt due within one year... 347 (329)(A) 18
Long-term debt.............. 2,085 588 (A) (900)(C) 1,773
Other long-term
liabilities................ 3,100 (2)(A) 3,082
(16)(B)
Preferred securities of
subsidiaries............... 249 (249)(A) --
Equity...................... 1,860 (123)(A) 900 (C) 2,680
43 (B)
------ ----- ----- ------
Total liabilities and
equity..................... $8,954 $(133) $ -- $8,821
====== ===== ===== ======
|
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
UNITED STATES STEEL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(A) Reflects the effects of the following:
(1) Reversal of the attribution to United States Steel of the financial activities of USX, including invested cash, deferred financing costs, accrued interest payable, debt, and preferred securities of subsidiaries.
(2) Recognition of existing USX debt for which United States Steel Corporation will be responsible under the Financial Matters Agreement.
(3) New financing arrangements of United States Steel Corporation, the proceeds of which will be used to pay Marathon Oil Corporation in connection with the Separation and to pay United States Steel Corporation's portion of the Separation Costs.
For a more detailed description, see "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
The decrease in cash and cash equivalents of $189 million reflects the reversal of the portion of USX invested cash historically attributed to United States Steel which will be included in the accounts of Marathon Oil Corporation.
The increase in other assets of $31 million primarily reflects estimated deferred financing costs to be incurred related to the new financing arrangements.
The decrease in current liabilities other than debt of $43 million primarily reflects the reversal of the portion of USX's accrued interest payable historically attributed to United States Steel which will be included in the accounts of Marathon Oil Corporation.
The net increase in debt of $259 million (the sum of a decrease in notes payable and long-term debt due within one year of $329 million and an increase in long-term debt of $588 million) primarily reflects the refinancing of other obligations not classified as debt (Preferred securities of subsidiaries and 6.50% Preferred Stock), net of invested cash, and Separation Costs. The following table reconciles the amount of debt attributed to United States Steel to the pro forma balance of United States Steel Corporation debt.
Dollars
in millions
-----------
Debt attributed to United States Steel................. $2,432
Other obligations, net of invested cash, attributed to
United States Steel which will be refinanced as debt:
Preferred securities of subsidiaries................. 249
6.50% Preferred Stock................................ 121
Invested cash........................................ (189)
Other financial activities........................... 35
Excess of redemption value over carrying value of
Trust Preferred..................................... 14
Separation Costs..................................... 29
----
Net refinancing of other obligations................... 259
------
Debt before the Value Transfer......................... 2,691
Value Transfer......................................... (900)
------
Pro forma balance of United States Steel Corporation
debt.................................................. $1,791
======
|
The net decrease in other long-term liabilities of $2 million reflects expected tax benefits related to Separation Costs.
The net decrease in equity of $123 million consists of the following:
Dollars in millions
-------------------
6.50% Preferred Stock, which will be repaid by
Marathon Oil Corporation........................... $121
Excess of redemption value of the Trust Preferred
over carrying value................................ 14
Other adjustments, net.............................. (12)
----
Net decrease in equity.............................. $123
====
|
The following illustrates the pro forma balance of United States Steel Corporation's debt at June 30, 2001:
Dollars
in millions
-----------
USX debt that will be the responsibility of United
States Steel Corporation:
USSK Loan Facility.................................. $ 325
Industrial revenue bonds (for which Marathon Oil
Corporation remains obligated)..................... 479
Fairfield caster sublease........................... 84
Capital lease obligations and other................. 6
New financing arrangements:
To pay Marathon Oil Corporation..................... $868
To pay Separation Costs............................. 29
-----
Total new financing arrangements.................. 897
------
Total debt............................................ 1,791
Less notes payable and long-term debt within one
year............................................... 18
------
Total long-term debt.................................. $1,773
======
|
The new financing arrangements include the July 27 and September 11, 2001 sale of an aggregate of $535 million of Senior Notes at an annual interest rate of 10.75%. The Senior Notes were issued at a discount that resulted in proceeds of $530 million. At least $300 million of these financing requirements will be funded through the preliminary tax settlement with Marathon Oil Corporation which will occur immediately prior to the Separation. For more information regarding this tax settlement, see "RELATIONSHIP BETWEEN UNITED STATES STEEL CORPORATION AND MARATHON OIL CORPORATION AFTER THE SEPARATION--Tax Sharing Agreement" on page 118. The remaining $67 million of new financing arrangements may include a combination of additional senior notes, lease financings, new preferred or other security offerings, including an exchange of existing securities for new securities, and amounts drawn under new credit facilities, including a secured accounts receivable facility and a secured inventory facility.
(B) Reflects the assignment of certain USX corporate assets and liabilities to United States Steel Corporation. For a more detailed description, see "THE SEPARATION--Assignment of Other USX Corporate Assets and Certain Liabilities in the Separation" on page 53. The effects can be summarized as follows:
Dollars in millions
---------------------------------------------------
Property,
Plant and Other Current Other
Equipment Assets Liabilities Liabilities Total
--------- ------- ----------- ----------- -------
Property, plant and
equipment.............. $ 20 $ -- $ -- $ -- $ 20
Assets and liabilities
associated with
employee benefits...... -- 5 2 66 73
Income tax assets and
liabilities, including
tax effect of above
adjustments............ -- -- -- (50) (50)
----- ------- ------- ------- -------
Increase in equity...... $ 20 $ 5 $ 2 $ 16 $ 43
===== ======= ======= ======= =======
|
(C) Reflects adjustments related to the $900 million Value Transfer. In connection with the Separation, a portion of USX indebtedness and other obligations will be repaid or retired and United States Steel Corporation will incur indebtedness and other obligations and agree to repay a portion of the indebtedness and other obligations of USX, such that the amount of indebtedness and other obligations for which United States Steel Corporation is responsible is $900 million less than the net amounts attributed to United States Steel immediately prior to the Separation. For a more detailed description of the Value Transfer, see "THE SEPARATION-- Financing Arrangements Relating to the Separation" on page 47.
UNITED STATES STEEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2001
Dollars in millions (except per share amounts)
United States
United States Steel
Steel Separation Corporation
Historical Adjustments Pro forma
------------- ----------- -------------
Revenues and other income.............. $3,301 $ $3,301
Costs and expenses:
Cost of revenues (excludes items
shown below)........................ 3,148 3,148
Selling, general and administrative
expenses ........................... 3 3
Depreciation, depletion and
amortization........................ 152 152
Taxes other than income taxes........ 126 126
------ ---- ------
Total costs and expenses........... 3,429 3,429
------ ---- ------
Income (loss) from operations.......... (128) (128)
Net interest and other financial costs
...................................... 36 (18)(A) 18
------ ---- ------
Income (loss) before income taxes...... (164) 18 (146)
Provision (credit) for income taxes.... (143) 6 (B) (137)
------ ---- ------
Net income (loss)...................... (21) 12 (9)
Dividends on preferred stock........... 4 (4)(C) --
------ ---- ------
Net income (loss) applicable to common
stock................................. $ (25) $ 16 $ (9)
====== ==== ======
Net income (loss) per common share: (D)
Basic and diluted.................... $ (.10)
|
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
UNITED STATES STEEL CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
Dollars in millions (except per share amounts)
United States
United Steel
States Steel Separation Corporation
Historical Adjustments Pro forma
------------- ----------- -------------
Revenues and other income.............. $6,132 $ $6,132
Costs and expenses:
Cost of revenues (excludes items
shown below)........................ 5,656 5,656
Selling, general and administrative
expenses (credits).................. (223) (223)
Depreciation, depletion and
amortization........................ 360 360
Taxes other than income taxes........ 235 235
------ ---- ------
Total costs and expenses........... 6,028 6,028
------ ---- ------
Income from operations................. 104 104
Net interest and other financial
costs................................. 105 (68)(A) 37
------ ---- ------
Income (loss) before income taxes...... (1) 68 67
Provision for income taxes............. 20 24 (B) 44
------ ---- ------
Net income (loss)...................... (21) 44 23
Dividends on preferred stock........... 8 (8)(C) --
------ ---- ------
Net income (loss) applicable to common
stock................................. $ (29) $ 52 $ 23
====== ==== ======
Net income (loss) per common share: (D)
Basic and diluted.................... $ 0.26
|
See Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
UNITED STATES STEEL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(A) Reflects a decrease in net interest and other financial costs as a result of a decrease in the amount of indebtedness of United States Steel Corporation following the Separation, as compared to the amount of USX debt attributed to United States Steel. The decrease primarily reflects the $900 million Value Transfer. Pro forma interest costs have been calculated based on pro forma average levels of debt for the six months ended June 30, 2001, and for the year ended December 31, 2000. Pro forma debt reflects new financing arrangements, the proceeds of which will be used to pay Marathon Oil Corporation in connection with the Separation and to pay United States Steel Corporation's portion of the Separation Costs.
The assumed interest rate for new financing arrangements was 10% based upon expected market conditions and the expected credit rating of United States Steel Corporation. The pro forma average interest rate for the six months ended June 30, 2001 for existing USX debt and other obligations for which United States Steel Corporation will be responsible was approximately 6 3/4%. The weighted average interest rate for the six months ended June 30, 2001 for all United States Steel Corporation pro forma debt and other obligations was approximately 8 1/4%. A 1/8 percentage point change in the assumed interest rate for new financing arrangements would have changed annual interest costs by approximately $1 million.
(B) Reflects the income tax effects of adjustment (A).
(C) Reflects the elimination of preferred stock dividends on the 6.50% Preferred Stock, which will be repaid by Marathon Oil Corporation.
(D) Weighted average shares of common stock outstanding (basic and diluted) for United States Steel Corporation, on a pro forma basis, were 88,906,000 for the six months ended June 30, 2001, and 88,613,000 for the year ended December 31, 2000.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
FOR MARATHON OIL CORPORATION
The following unaudited pro forma condensed balance sheet as of June 30, 2001 gives effect to the discontinuance of the businesses of United States Steel Corporation, the $900 million Value Transfer, the assignment of certain USX corporate assets and liabilities to United States Steel Corporation, the payment of Separation Costs and the distribution of New U. S. Steel Shares to the holders of U. S. Steel Group Shares as if such transactions had been consummated as of June 30, 2001. The following unaudited pro forma condensed statements of operations for the six months ended June 30, 2001 and the year ended December 31, 2000 give effect to the discontinuance of the businesses of United States Steel Corporation and interest changes as a result of the Value Transfer and the repayment of the 6.5% Preferred Stock as if such transactions had been consummated at the beginning of the periods presented. The unaudited pro forma condensed statements of operations of Marathon Oil Corporation for the years ended December 31, 1999 and 1998 give effect to the discontinuance of the businesses of United States Steel Corporation but do not give effect to any adjustments associated with the Separation.
No pro forma adjustments were made for changes in the future level of corporate administrative costs to be incurred by Marathon Oil Corporation as compared with the historical level of such costs allocated to Marathon. These costs are expected to continue at approximately the same level as previously allocated, except for insurance costs which are estimated to be higher by $2 million annually.
No pro forma adjustments have been made in the unaudited pro forma condensed statements of operations for nonrecurring charges including the Separation Costs and the loss on the Separation. Such adjustments are reflected in the unaudited pro forma condensed balance sheet.
The pro forma adjustments included herein are based on available information and certain assumptions that management believes are reasonable and are described in the accompanying notes. The unaudited pro forma condensed financial statements do not necessarily represent Marathon Oil Corporation's financial position or results of operations had the transactions occurred at such dates or project Marathon Oil Corporation's financial position or results of operations for any future date or period. A number of factors may affect Marathon Oil Corporation's results. See "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS" on page 26. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma condensed financial statements have been made. The unaudited pro forma condensed financial statements should be read in conjunction with the historical financial statements of USX Corporation, including the notes thereto, included in Annex E.
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
June 30, 2001
Dollars in millions
Marathon
Oil
Corporation
Pro Forma Marathon
Discontinued Before Oil
USX Operations Separation Separation Value Corporation
Historical Adjustments Adjustments Adjustments Transfer Pro Forma
---------- ------------ ----------- ----------- -------- -----------
ASSETS
Cash and cash
equivalents............ $ 723 $ (254) (A) $ 469 $ 189 (C) $ $ 658
Other current assets.... 6,465 (2,422) (A) 4,366 20 (C) 4,386
323 (B)
Net investment in
discontinued
operations............. 1,860 (A) 1,860 (123) (C) 900 (F) --
43 (D)
(2,680) (E)
Property, plant and
equipment--net......... 12,977 (3,098) (A) 9,879 (20) (D) 9,859
Prepaid pensions........ 2,928 (2,711) (A) 217 217
Other assets............ 1,421 (469) (A) 1,073 551 (C) 1,542
121 (B) (82) (D)
------- ------- ------- ------- ---- -------
Total assets............ $24,514 $(6,650) $17,864 $(2,102) $900 $16,662
======= ======= ======= ======= ==== =======
LIABILITIES AND EQUITY
Current liabilities
other than debt........ $ 4,655 $(1,313) (A) $ 3,665 $ 25 (C) $ $ 3,692
323 (B) 2 (D)
Notes payable and long-
term debt due within
one year............... 686 (347) (A) 339 344 (C) 683
Long-term debt.......... 3,673 (2,085) (A) 1,588 367 (C) 900 (F) 2,855
Other long-term
liabilities............ 5,363 (3,100) (A) 2,384 (4) (C) 2,319
121 (B) (61) (D)
Preferred securities of
subsidiaries........... 433 (249) (A) 184 66 (C) 250
Minority interest in
Marathon Ashland
Petroleum LLC.......... 2,010 2,010 2,010
Equity.................. 7,694 7,694 (150) (C) 4,853
(11) (C)
(1,797) (E)
(883) (E)
------- ------- ------- ------- ---- -------
Total liabilities and
equity................. $24,514 $(6,650) $17,864 $(2,102) $900 $16,662
======= ======= ======= ======= ==== =======
|
See Notes to Unaudited Pro Forma Condensed Balance Sheet
MARATHON OIL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(A) Reflects the reclassification of all assets and liabilities of the businesses of United States Steel Corporation to discontinued operations. The measurement date for discontinued operations purposes will be on or about the Separation Effective Time.
(B) Reflects the establishment of payables to United States Steel previously eliminated in consolidation, primarily related to income taxes under USX's tax allocation policy.
(C) Reflects the effects of the following:
(1) Recognition of the financial activities of USX formerly attributed to United States Steel, including invested cash, deferred financing costs, accrued interest payable, debt, and preferred securities of subsidiaries.
(2) Reversal of existing USX debt for which United States Steel Corporation will be responsible under the Financial Matters Agreement.
(3) Establishment of receivables from United States Steel Corporation under the Financial Matters Agreement for obligations relating to industrial revenue bonds and a sublease of the Fairfield caster.
(4) Payment from United States Steel Corporation, the proceeds of which will be used to redeem the Trust Preferred, to repay the 6.5% Preferred Stock, to repay the Receivables Facility and to fund a portion of the Separation Costs.
(5) New financing arrangements of Marathon Oil Corporation, the proceeds of which will be used to fund the remaining portion of the Separation Costs.
For a more detailed description, see "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
The increase in cash of $189 million reflects the recognition of the portion of USX invested cash historically attributed to United States Steel which will be included in the accounts of Marathon Oil Corporation.
The increase in other current assets of $20 million reflects the principal and accrued interest on industrial revenue bonds and the Fairfield caster lease for which Marathon Oil Corporation remains obligated but United States Steel Corporation assumes responsibility for repayment.
The increase in other assets of $551 million primarily reflects receivables from United States Steel Corporation of $470 million related to industrial revenue bonds for which Marathon Oil Corporation remains obligated but United States Steel Corporation assumes responsibility for repayment and $78 million related to a sublease of the Fairfield caster to United States Steel Corporation.
The increase in current liabilities other than debt of $25 million primarily reflects the recognition of the portion of USX's accrued interest payable historically attributed to United States Steel which will be included in the accounts of Marathon Oil Corporation.
The net increase in debt of $711 million (the sum of an increase in notes payable and long-term debt due within one year of $344 million and an increase in long-term debt of $367 million) primarily reflects the refinancing of other obligations (Preferred securities of subsidiaries and 6.50% Preferred Stock), net of invested cash, by United States Steel Corporation, the refinancing of other obligations and Separation Costs by Marathon Oil Corporation, and certain obligations assumed by United States Steel Corporation but reflected as both an asset and liability by Marathon Oil Corporation. The following table reconciles the amount of total USX debt to the pro forma balance of Marathon Oil Corporation debt.
Dollars
in millions
-----------
Total USX debt......................................... $4,359
Less debt attributed to discontinued operations........ 2,432
------
Debt of Marathon Oil Corporation before separation
adjustments........................................... 1,927
Other obligations, net of invested cash, which will be
refinanced by United States Steel Corporation:
Preferred securities of subsidiaries................. (249)
6.50% Preferred Stock................................ (121)
Invested cash........................................ 189
Other financial activities........................... (35)
Excess of redemption value over carrying value of
Trust Preferred..................................... (14)
Other obligations which will be refinanced by Marathon
Oil Corporation:
Separation Costs..................................... 60
Redemption of the Trust Preferred.................... 197
Repayment of the 6.50% Preferred Stock............... 121
Obligations assumed by United States Steel Corporation,
reflected as both an asset and liability by Marathon
Oil Corporation:
Industrial revenue bonds............................. 479
Fairfield caster lease............................... 84
----
Net refinancing of other obligations and obligations
assumed by United States Steel Corporation............ 711
------
Debt before the Value Transfer......................... 2,638
Value Transfer......................................... 900
------
Pro forma balance of Marathon Oil Corporation debt..... $3,538
======
|
The decrease in other long-term liabilities of $4 million reflects expected tax benefits related to the Separation Costs.
The increase in preferred securities of subsidiaries of $66 million reflects the recognition of the portion of such obligations historically attributed to United States Steel which will be included in the accounts of Marathon Oil Corporation.
The decrease in equity of $150 million consists of the following:
Dollars
in millions
-----------
Repayment of 6.50% Preferred Stock............................. $121
Adjustments related to Separation Costs........................ 29
----
Net decrease in equity......................................... $150
====
|
The extraordinary loss of $11 million on the redemption of the Trust Preferred, net of the income tax benefit, included in pro forma equity is calculated below:
Dollars
in millions
-----------
Redemption cost (3,937,163 shares redeemed at $50 per
share)..................................................... $ 197
Carrying value.............................................. (183)
Writeoff of deferred financing costs........................ 4
-----
Extraordinary loss before income tax benefit................ 18
Income tax benefit.......................................... (7)
-----
Extraordinary loss, net of income tax benefit............... $ 11
=====
|
The extraordinary loss is reflected on the unaudited pro forma condensed balance sheet but not in the unaudited pro forma condensed statements of operations.
The decrease in net investment in discontinued operations of $123 million
reflects the offsetting impact of these adjustments on United States Steel
Corporation. For a detailed description, see "UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS FOR UNITED STATES STEEL CORPORATION" on pages
C-1 to C-8.
The pro forma sources and uses of funds received from United States Steel Corporation and from new financing arrangements were as follows:
Dollars
in millions
-----------
Payment from United States Steel Corporation................... $868
====
Repayment of the Receivables Facility.......................... $350
Redemption of the Trust Preferred.............................. 197
Repayment of the 6.50% Preferred Stock......................... 121
Repayment of other debt obligations............................ 140
Payment of Separation Costs.................................... 60
----
Total........................................................ $868
====
|
The payment from United States Steel Corporation will be reduced by the
amount paid by Marathon to United States Steel in the preliminary tax
settlement. This amount is expected to be at least $300 million. For more
information regarding this tax settlement, see "RELATIONSHIP BETWEEN UNITED
STATES STEEL CORPORATION AND MARATHON OIL CORPORATION AFTER THE
SEPARATION--Tax Sharing Agreement" on page 118.
The decrease in other long-term liabilities of $4 million reflects expected tax benefits related to the Separation Costs.
(D) Reflects the assignment of certain USX corporate assets and liabilities to United States Steel Corporation. For a more detailed description, see "THE SEPARATION--Assignment of Other USX Corporate Assets and Certain Liabilities in the Separation" on page 53. The effects can be summarized as follows:
Dollars in millions
---------------------------------------------------
Property,
Plant and Other Current Other
Equipment Assets Liabilities Liabilities Total
--------- ------- ----------- ----------- -------
Property, plant and
equipment.............. $(20) $ -- $ -- $ -- $ (20)
Assets and liabilities
associated with
employee benefits...... -- (5) (2) (66) (73)
Reclassification of
intercompany balances.. -- (77) -- 77 --
Income tax assets and
liabilities, including
the tax effect of above
adjustments............ -- -- -- 50 50
---- ------- ------- ------- -------
Net effect on net
investment in
discontinued
operations............. $(20) $ (82) $ (2) $ 61 $ (43)
==== ======= ======= ======= =======
|
(E) Reflects the removal of the net investment in discontinued operations. Also reflects the distribution of New U. S. Steel Shares to the holders of U. S. Steel Group Shares as a dividend. Because the net investment in discontinued operations exceeded the fair value, as measured by the aggregate market value of the U. S. Steel Group Shares at June 30, 2001, a nonrecurring non-cash charge would have been recognized as follows:
Dollars
in millions
-----------
Market value of the U. S. Steel Group Shares (89,156,721
shares of stock issued and outstanding at $20.15 per
share)...................................................... $1,797
Less net investment in discontinued operations............... 2,680
------
Loss on separation........................................... $ (883)
======
|
(F) Reflects adjustments related to the $900 million Value Transfer. In connection with the Separation, a portion of USX indebtedness will be repaid or retired and United States Steel Corporation will incur indebtedness and agree to repay a portion of the indebtedness and other obligations of USX, such that the amount of indebtedness and other obligations for which United States Steel Corporation is responsible is $900 million less than the net amounts attributed to United States Steel immediately prior to the Separation. For a more detailed description of the Value Transfer, see "THE SEPARATION--Financing Arrangements Relating to the Separation" on page 47.
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2001
Dollars in millions (except per share amounts)
Marathon Oil
Corporation
Pro Forma
Discontinued Before Marathon Oil
USX Operations Separation Separation Corporation
Historical Adjustments Adjustments Adjustments Pro Forma
---------- ------------ ------------ ----------- ------------
Revenues and other income........................ $21,188 $(3,301)(A) $17,911 $ $17,911
24 (B)
Costs and expenses:
Cost of revenues (excludes items shown below).. 15,560 (3,148)(A) 12,436 12,436
24 (B)
Selling, general and administrative expenses... 329 (3)(A) 340 340
14 (C)
Depreciation, depletion and amortization....... 761 (152)(A) 609 609
Taxes other than income taxes.................. 2,450 (126)(A) 2,324 2,324
Exploration expenses........................... 49 -- 49 49
------- ------- ------- ------- -------
Total costs and expenses..................... 19,149 (3,391) 15,758 15,758
------- ------- ------- ------- -------
Income from operations........................... 2,039 114 2,153 2,153
Net interest and other financial costs........... 109 (36)(A) 83 40 (F) 123
10 (D)
Minority interest in Marathon Ashland
Petroleum LLC................................... 427 -- 427 427
------- ------- ------- ------- -------
Income before income taxes....................... 1,503 140 1,643 (40) 1,605
Provision for income taxes....................... 434 143 (A) 569 (15)(G) 554
(8)(E)
------- ------- ------- ------- -------
Income from continuing operations................ 1,069 5 1,074 (25) 1,049
Discontinued operations:
Results of operations, net of tax............... -- (5)(A) (5) 5 (H) --
------- ------- ------- ------- -------
Income before cumulative effect of change in
accounting principle............................ 1,069 -- 1,069 (20) 1,049
Cumulative effect of change in accounting
principle....................................... (8) -- (8) (8)
------- ------- ------- ------- -------
Net income....................................... $ 1,061 $ -- $ 1,061 $ (20) $ 1,041
======= ======= ======= ======= =======
Applicable to Marathon Stock: (I)
Income before cumulative effect of change in
accounting principle............................ $ 1,090
Per share--basic............................... 3.53
--diluted........................................ 3.52
Cumulative effect of change in accounting
principle....................................... $ (8)
Per share--basic............................... (0.03)
--diluted........................................ (0.02)
Net income....................................... $ 1,082
Per share--basic and diluted................... 3.50
Applicable to Steel Stock: (I)
Income (loss) before cumulative effect of change
in accounting principle......................... $ (25)
Per share--basic and diluted................... (0.28)
Cumulative effect of change in accounting
principle....................................... $ --
Per share--basic and diluted................... --
Net income (loss)................................ $ (25)
Per share--basic and diluted................... (0.28)
Applicable to Marathon Oil Corporation Stock: (I)
Income before cumulative effect of change in
accounting principle............................ $ 1,049
Per share--basic............................... 3.40
--diluted........................................ 3.39
Cumulative effect of change in accounting
principle....................................... $ (8)
Per share--basic............................... (0.03)
--diluted........................................ (0.02)
Net income....................................... $ 1,041
Per share--basic and diluted................... 3.37
|
See Notes to Unaudited Pro Forma Condensed Statement of Operations.
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
Dollars in millions (except per share amounts)
Marathon Oil
Corporation
Pro Forma
Discontinued Before Marathon Oil
USX Operations Separation Separation Corporation
Historical Adjustments Adjustments Adjustments Pro Forma
---------- ------------ ------------ ----------- ------------
Revenues and other
income................. $39,914 $(6,132)(A) $33,859 $ $33,859
77 (B)
Costs and expenses:
Cost of revenues
(excludes items shown
below)............... 31,056 (5,656)(A) 25,477 25,477
77 (B)
Selling, general and
administrative
expenses............. 402 223 (A) 643 643
18 (C)
Depreciation,
depletion and
amortization......... 1,605 (360)(A) 1,245 1,245
Taxes other than
income taxes......... 4,861 (235)(A) 4,626 4,626
Exploration expenses.. 238 -- 238 238
------- ------- ------- ---- -------
Total costs and
expenses........... 38,162 (5,933) 32,229 32,229
------- ------- ------- ---- -------
Income from operations.. 1,752 (122) 1,630 1,630
Net interest and other
financial costs........ 341 (105)(A) 236 89 (F) 325
Minority interest in
Marathon Ashland
Petroleum LLC.......... 498 -- 498 498
------- ------- ------- ---- -------
Income before income
taxes.................. 913 (17) 896 (89) 807
Provision for income
taxes.................. 502 (20)(A) 476 (33)(G) 443
(6)(E)
------- ------- ------- ---- -------
Income from continuing
operations............. 411 9 420 (56) 364
Discontinued operations:
Results of operations,
net of tax............ -- (9)(A) (9) 9 (H) --
------- ------- ------- ---- -------
$
Net income.............. $ 411 -- $ 411 $(47) $ 364
======= ======= ======= ==== =======
Applicable to Marathon
Stock: (I)
Per share--basic and
diluted
Net income............ $ 1.39
Applicable to Steel
Stock: (I)
Per share--basic and
diluted
Net income (loss)..... $ (0.33)
Applicable to Marathon
Oil Corporation Stock:
(I)
Per share--basic and
diluted
Net income............ $ 1.17
|
See Notes to Unaudited Pro Forma Condensed Statement of Operations
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
Dollars in millions
Marathon
Oil Corporation
Pro Forma
Discontinued Before
USX Operations Separation
Historical Adjustments Adjustments
---------- ------------ ---------------
Revenues and other income........... $29,119 $(5,470)(A) $23,707
58 (B)
Costs and expenses:
Cost of revenues (excludes items
shown below)..................... 21,679 (5,084)(A) 16,653
58 (B)
Selling, general and
administrative expenses.......... 203 283 (A) 498
12 (C)
Depreciation, depletion and
amortization..................... 1,254 (304)(A) 950
Taxes other than income taxes..... 4,433 (215)(A) 4,218
Exploration expenses.............. 238 238
Inventory market valuation
credits.......................... (551) (551)
------- ------- -------
Total costs and expenses........ 27,256 (5,250) 22,006
------- ------- -------
Income from operations.............. 1,863 (162) 1,701
Net interest and other financial
costs.............................. 362 (74)(A) 288
Minority interest in Marathon
Ashland Petroleum LLC.............. 447 447
------- ------- -------
Income before income taxes.......... 1,054 (88) 966
Provision for income taxes.......... 349 (25)(A) 320
(4)(E)
------- ------- -------
Income from continuing operations... 705 (59) 646
Discontinued operations:
Results of operations, net of tax.. 59 (A) 59
Extraordinary losses................ 7 7
------- ------- -------
Net income.......................... $ 698 $ -- $ 698
======= ======= =======
|
See Notes to Unaudited Pro Forma Condensed Statement of Operations
MARATHON OIL CORPORATION
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
Dollars in millions
Marathon
Oil Corporation
Pro Forma
Discontinued Before
USX Operations Separation
Historical Adjustments Adjustments
---------- ------------ ---------------
Revenues and other income........... $28,077 $(6,477)(A) $21,623
23 (B)
Costs and expenses:
Cost of revenues (excludes items
shown below)..................... 20,211 (5,604)(A) 14,630
23 (B)
Selling, general and
administrative expenses.......... 304 201 (A) 514
9 (C)
Depreciation, depletion and
amortization..................... 1,224 (283)(A) 941
Taxes other than income taxes..... 4,241 (212)(A) 4,029
Exploration expenses.............. 313 313
Inventory market valuation
charges.......................... 267 267
------- ------- -------
Total costs and expenses........ 26,560 (5,866) 20,694
------- ------- -------
Income from operations.............. 1,517 (588) 929
Net interest and other financial
costs.............................. 279 (42)(A) 237
Minority interest in Marathon
Ashland Petroleum LLC.............. 249 249
------- ------- -------
Income before income taxes.......... 989 (546) 443
Provision for income taxes.......... 315 (173)(A) 139
(3)(E)
------- ------- -------
Income from continuing operations... 674 (370) 304
Discontinued operations:
Results of operations, net of
tax.............................. 370 (A) 370
------- ------- -------
Net income.......................... $ 674 $ -- $ 674
======= ======= =======
|
See Notes to Unaudited Pro Forma Condensed Statement of Operations
MARATHON OIL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED
STATEMENT OF OPERATIONS
(A) Reflects the reclassification of all revenues and expenses of the businesses of United States Steel to discontinued operations. The measurement date for discontinued operations purposes will be on or about the Separation Effective Time.
(B) Reflects the establishment of revenues and the related cost of revenues for intercompany sales previously eliminated in consolidation.
(C) Reflects the reversal of general corporate overhead expenses allocated to United States Steel that are not permitted to be reflected in discontinued operations.
(D) Reflects the reversal of a portion of the interest expense allocated to United States Steel that is not permitted to be reflected in discontinued operations. The only period in which allocated interest exceeded the permitted amount was the six months ended June 30, 2001.
(E) Reflects the income tax effects of adjustments (C) and (D).
(F) Reflects an increase in net interest and other financial costs as a result of an increase in the amount of indebtedness of Marathon Oil Corporation following the Separation, as compared to the amount of USX debt attributed to Marathon. The increase primarily reflects the $900 million Value Transfer and the repayment of the 6.50% Preferred Stock. Pro forma interest costs have been calculated based on pro forma average levels of debt for the six months ended June 30, 2001, and for the year ended December 31, 2000. Pro forma debt reflects the redemption of the Trust Preferred Securities and 6.50% Preferred Stock, repayment of the Receivables Facility, and payments from United States Steel Corporation for debt attributed to United States Steel prior to the Separation that will remain with Marathon Oil Corporation. In 2001, pro forma debt also includes the effects of additional drawings on existing lines of credit to fund Marathon's portion of the Separation Costs and to fund a portion of the repayment of the Receivables Facility. For the majority of the year 2000, the amount of debt that would have remained with Marathon Oil Corporation was less than the net debt levels of USX attributed to Marathon, adjusted for the $900 million Value Transfer. As a result, pro forma debt for 2000 reflects additional drawings on existing lines of credit to fund the redemption of the Trust Preferred Securities and 6.5% Preferred Stock, to repay the Receivables Facility, and to pay Marathon's share of the Separation Costs.
The assumed interest rate for new financings was 6% in 2001 and 7% in 2000, which was based on the average borrowing rates on available lines of credit. A 1/8 percentage point change in the assumed financing rate would have changed annualized interest costs in 2000 by approximately $1 million.
(G) Reflects the income tax effects of adjustments (F).
(H) Reflects the elimination of discontinued operations as a result of the Separation. Also includes amounts related to corporate administrative costs and interest costs allocated to United States Steel but not classified as discontinued operations.
(I) Weighted average shares of common stock outstanding were 308,928,000
(basic) and 309,338,000 (diluted) for both Marathon Group and, on a pro
forma basis, Marathon Oil Corporation for the six month period ended June
30, 2001. Weighted average shares of common stock outstanding were
311,531,000 (basic) and 311,761,000 (diluted) for both Marathon Group and,
on a pro forma basis, Marathon Oil Corporation for year ended December 31,
2000. Weighted average shares of common stock outstanding (basic and
diluted) for the U. S. Steel Group were 88,906,000 for the six months ended
June 30, 2001, and 88,613,000 for the year ended December 31, 2000.
Preferred stock dividends of $4 million and $8 million reduced net income
applicable to U. S. Steel Group Shares for the six months ended June 30,
2001, and for the year ended December 31, 2000, respectively.
ANNEX D
Index For Annex D
Historical Financial Information for United States Steel
Page
----
Report of Independent Accountants......................................... D-2
Audited Combined Financial Statements:
Combined Statement of Operations--Years Ended December 31, 2000, 1999
and 1998............................................................... D-3
Combined Balance Sheet--at December 31, 2000 and 1999................... D-4
Combined Statement of Cash Flows--Years Ended December 31, 2000, 1999
and 1998............................................................... D-5
Notes to Combined Financial Statements.................................. D-6
Unaudited Combined Financial Information:
Selected Quarterly Financial Data....................................... D-32
Supplementary Information on Mineral Reserves........................... D-32
Principal Unconsolidated Investees...................................... D-35
Unaudited Interim Combined Financial Information:
Combined Statement of Operations--Second Quarter and Six Months Ended
June 30, 2001 and 2000................................................. D-36
Combined Balance Sheet--at June 30, 2001 and December 31, 2000.......... D-37
Combined Statement of Cash Flows--Six Months Ended June 30, 2001 and
2000................................................................... D-38
Selected Notes to Combined Financial Statements......................... D-39
|
Report of Independent Accountants
To the Stockholders of USX Corporation
In our opinion, the accompanying combined balance sheets and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of United States Steel 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 Corporation'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
Pittsburgh, Pennsylvania
February 7, 2001
UNITED STATES STEEL
COMBINED STATEMENT OF OPERATIONS
2000 1999 1998
------ ------ ------
(Dollars in
millions)
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) available to USX's net investment.... $ (29) $ 35 $ 355
====== ====== ======
|
The accompanying notes are an integral part of these combined financial statements.
UNITED STATES STEEL
COMBINED BALANCE SHEET
December 31
----------------------
2000 1999
---------- ----------
(Dollars in millions)
ASSETS
Current assets:
Cash and cash equivalents............................ $ 219 $ 22
Receivables, less allowance for doubtful accounts of
$57 and $10......................................... 625 486
Receivables subject to a security interest (Note
11)................................................. 350 350
Receivables from related parties (Note 13)........... 366 99
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 (Note 16).................................. 439 475
Long-term receivables from related parties (Note 13)... 97 97
Property, plant and equipment--net (Note 21)........... 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..................................... 755 751
Accounts payable to related parties (Note 13)........ 5 6
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
Mandatorily redeemable convertible preferred securities
of a subsidiary trust holding solely junior
subordinated convertible debentures of USX (Note 18).. 183 183
EQUITY (Note 19)
Preferred stock........................................ 2 3
USX's net investment................................... 1,950 2,073
Deferred compensation.................................. (3) --
Accumulated other comprehensive income (loss).......... (30) (20)
---------- ----------
Total equity....................................... 1,919 2,056
---------- ----------
Total liabilities and equity....................... $ 8,711 $ 7,525
========== ==========
|
The accompanying notes are an integral part of these combined financial statements.
UNITED STATES STEEL
COMBINED STATEMENT OF CASH FLOWS
2000 1999 1998
------ ----- -----
(Dollars in
millions)
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 attributed 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 combined financial statements.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying combined financial statements represent a carve-out financial statement presentation of the businesses comprising United States Steel, and are not intended to be a complete presentation of the financial position, the results of operations and cash flows of United States Steel on a stand-alone basis. These combined financial statements are presented as if United States Steel existed as an entity separate from the remaining businesses of USX Corporation (USX) during the periods presented. The allocations and estimates included in these combined financial statements are determined using the methodologies described in Note 4.
United States Steel through its Domestic Steel segment, is engaged in the production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; real estate development; engineering and consulting services and, through its U.S. Steel Kosice segment, primarily located in the Slovak Republic, in the production and sale of steel mill products and coke for the central European market. Most businesses within the Domestic Steel segment are divisions of USX. Certain business activities are conducted through joint ventures and partially owned companies, such as USS-POSCO Industries, PRO-TEC Coating Company, Clairton 1314B Partnership, Republic Technologies International LLC and Rannila Kosice s.r.o.
The accompanying combined financial statements include the historical operations of certain divisions of USX and certain subsidiaries of USX. In this context, no direct ownership existed among all the various units comprising United States Steel; accordingly, USX's net investment in United States Steel (USX's net investment) is shown in lieu of Common Stockholder's Equity in the combined financial statements. The combined financial statements included herein have been prepared from USX's historical accounting records.
2. Summary of Principal Accounting Policies
Principles applied in consolidation--Investments in entities over which United States Steel has significant influence are accounted for using the equity method of accounting and are carried at United States Steel'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 United States Steel'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.
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.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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--United States Steel uses commodity-based derivative instruments to manage its exposure to price risk. Management is authorized to use futures, forwards, swaps and options related to the purchase of natural gas, refined products and nonferrous metals used in steel operations. Recorded deferred gains or losses are reflected within other current and noncurrent assets or accounts payable and deferred credits and other liabilities, as appropriate.
Long-lived assets--Depreciation is generally computed using a modified straight-line method based upon estimated lives of assets and production levels. The modification factors for domestic steel producing assets range from a minimum of 85% at a production level below 81% of capability, to a maximum of 105% for a 100% production level. No modification is made at the 95% production level, considered the normal long-range level.
Depletion of mineral properties is based on rates which are expected to amortize cost over the estimated tonnage of minerals to be removed.
United States Steel evaluates impairment of its long-lived assets on an individual asset basis or by logical groupings of assets. Assets deemed to be impaired are written down to their fair value, including any related goodwill, using discounted future cash flows and, if available, comparable market values.
When long-lived assets depreciated on an individual basis are sold or otherwise disposed of, any gains or losses are reflected in income. Gains on disposal of long-lived assets are recognized when earned, which is generally at the time of closing. If a loss on disposal is expected, such losses are recognized when long-lived assets are reclassified as assets held for sale. Proceeds from disposal of long-lived assets depreciated on a group basis are credited to accumulated depreciation, depletion and amortization with no immediate effect on income.
Major maintenance activities--United States Steel incurs planned major maintenance costs primarily for blast furnace relines. Such costs are separately capitalized in property, plant and equipment and are amortized over their estimated useful life, which is generally the period until the next scheduled reline.
Environmental remediation--United States Steel 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--United States Steel 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--United States Steel 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.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
3. New Accounting Standards
In the fourth quarter of 2000, United States Steel 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 United States Steel, 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. United States Steel 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. United States Steel 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.
United States Steel 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 United States Steel 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
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
long-term debt (including convertible debt), related net interest and other financial costs, and preferred stock and related dividends are attributed to United States Steel based upon its cash flows for the periods presented and its initial capital structure. Most financing transactions are not specifically attributed to United States Steel but represent attributed amounts of USX's financial activities. See Note 10, for United States Steel's attributed portion of USX's financial activities. 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 USX-U. S. Steel Group Common Stock are or will be specifically attributed to and reflected in their entirety in the financial statements of United States Steel.
Corporate general and administrative costs--Corporate general and administrative costs are allocated to United States Steel 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 United States Steel 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 United States Steel 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 to United States Steel for financial statement purposes, based upon its financial income, taxable income, credits, preferences, and other directly related amounts.
For tax provision and settlement purposes, tax benefits resulting from attributes (principally net operating losses and various tax credits), which cannot be utilized by United States Steel 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 United States Steel if it generated the attributes. To the extent that United States Steel 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 United States Steel if it 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 United States Steel if it would have realized the tax benefits on a separate return basis. As a result, the allocated amounts of taxes payable or refundable are not necessarily comparable to those that would have resulted if United States Steel had filed its own separate tax returns.
5. Business Combination
On November 24, 2000, United States Steel acquired U. S. Steel Kosice s.r.o. (USSK), which is located in the Slovak Republic. USSK was formed in June 2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The cash purchase price was $69 million. Additional payments to VSZ 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.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Prior to this transaction, United States Steel and VSZ were equal partners in VSZ U. S. Steel s.r.o. (VSZUSS), a tin mill products manufacturer. The assets of USSK included VSZ's interest in VSZUSS. The acquisition of the remaining interest in VSZUSS was accounted for under the purchase method of accounting. Previously, United States Steel had accounted for its investment in VSZUSS under the equity method of accounting.
The following unaudited pro forma data for United States Steel 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, United States Steel made certain estimates and assumptions regarding revenue and costs in the preparation of the following unaudited pro forma data.
Year Ended
December 31
-------------
2000 1999
------ ------
(In millions)
Revenues and other income..................................... $7,094 $6,472
Income before extraordinary loss.............................. 57 36
Net income.................................................... 57 29
|
6. Extraordinary Losses
In 1999, United States Steel 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 United States Steel's obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee exchanged one RTI share for each note at maturity. All shares were required for satisfaction of the indexed debt; therefore, none reverted back to United States Steel.
As a result of the above transaction, United States Steel 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.
In 1999, Republic Technologies International, LLC, an equity investee of United States Steel, recorded an extraordinary loss related to the early extinguishment of debt. As a result, United States Steel recorded an extraordinary loss of $2 million, net of a $1 million income tax benefit, representing its share of the extraordinary loss.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
7. Other Items
2000 1999 1998
---- ---- ----
(In millions)
Net interest and other financial costs
Interest and other financial income:
Interest income.............................................. $ 3 $ 1 $ 5
Other........................................................ 7 -- --
---- ---- ----
Total...................................................... 10 1 5
---- ---- ----
Interest and other financial costs:
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......................... $105 $ 74 $ 42
==== ==== ====
|
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
United States Steel consists of two reportable operating segments: 1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the United States operations of United States Steel, while USSK includes the United States Steel 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 United States Steel business activities
. Allocated 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 page D-13)
Information on assets by segment is not provided as it is not reviewed by the chief operating decision maker.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following represents the operations of United States Steel:
Domestic
Steel USSK Total
-------- ---- ------
(In millions)
2000
Revenues and other income:
Customer.............................................. $5,981 $ 92 $6,073
Other subsidiaries of USX(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
Other subsidiaries of USX(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
Other subsidiaries of USX(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
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following schedules reconcile segment amounts to amounts reported in United States Steel's combined financial statements:
2000 1999 1998
------ ------ ------
(In millions)
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 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 income from operations..................... $ 104 $ 150 $ 579
====== ====== ======
Revenues by Product:
2000 1999 1998
------ ------ ------
(In millions)
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
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Geographic Area:
The information below summarizes the operations in different geographic areas.
Revenues and Other Income
----------------------------
Within Between
Geographic Geographic
Year Areas Areas Total Assets(a)
---- ---------- ---------- ------ ---------
(In millions)
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
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
9. Supplemental Cash Flow Information
2000 1999 1998
------- ------- --------
(In millions)
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 USX under the tax allocation
policy.......................................... 81 3 (29)
Consolidated USX debt:
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
======= ======= ========
Activity attributed to United States Steel....... $ 1,208 $ 147 $ 13
Activity attributed to other subsidiaries of
USX............................................. (1,200) (296) 329
------- ------- --------
Total...................................... $ 8 $ (149) $ 342
======= ======= ========
Noncash investing and financing activities:
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 --
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
10. Financial Activities Attributed to United States Steel
The following is the portion of USX financial activities attributed to United States Steel. These amounts exclude amounts specifically attributed to United States Steel.
United
States Consolidated
Steel USX
----------- -------------
December 31
-------------------------
2000 1999 2000 1999
------ ---- ------ ------
(In millions)
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
====== ==== ====== ======
|
United States Consolidated
Steel(a) USX
-------------- --------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
(In millions)
Net interest and other financial costs (Note
7)............................................. $59 $39 $29 $309 $334 $324
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
11. Long-Term Debt
United States Steel's portion of USX's consolidated long-term debt is as follows:
United
States Consolidated
Steel USX
----------- -------------
December 31
-------------------------
2000 1999 2000 1999
------ ---- ------ ------
(In millions)
Specifically attributed debt(a):
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
====== ==== ====== ======
USX debt attributed to United States Steel(b)........ $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 not specifically
attributed...................................... $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
|
12. Pensions and Other Postretirement Benefits
United States Steel 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. United States Steel also participates in multiemployer plans, most of which are defined benefit plans associated with coal operations.
United States Steel 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. For U.S. union retirees, benefits are provided for the most part based on fixed amounts negotiated in labor contracts with the appropriate unions.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Pension
Benefits Other Benefits
----------------- ------------------
2000 1999 2000 1999
------ ------- ------- -------
(In millions)
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)
====== ======= ======= =======
|
2000 1999
---- ----
Aggregate accumulated benefit
obligations.............................. $(40) $(29)
Aggregate projected benefit obligations... (49) (39)
Aggregate plan assets..................... -- --
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Pension Benefits Other Benefits
---------------------- --------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
(In millions)
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
===== ===== ===== ==== ==== ====
|
Pension Other
Benefits 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-
Point Increase Point Decrease
-------------- --------------
(In millions)
Effect on total of service and interest cost
components..................................... $ 16 $ (14)
Effect on other postretirement benefit
obligations.................................... 177 (151)
|
13. Transactions with Related Parties
Revenues and purchases--United States Steel revenues for sales to other subsidiaries of USX totaled $17 million in both 2000 and 1999 and $2 million in 1998. United States Steel purchases from other subsidiaries of USX totaled $60 million, $41 million and $21 million in 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, United States Steel receivables from related parties totaled $366 million and $99 million, respectively, related to transactions with other subsidiaries of USX. At December 31, 2000 and 1999, United States Steel accounts payable to related parties totaled $5 million and $6 million, respectively, related to transactions with other subsidiaries of USX. These transactions were conducted under terms comparable to those with unrelated parties.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Income taxes receivable from/payable to USX--At December 31, 2000 and 1999, amounts receivable or payable for income taxes were included in the balance sheet as follows:
December
31
---------
2000 1999
---- ----
(In
millions)
Current:
Receivables........................................................ $364 $ 97
Accounts payable................................................... 4 1
Noncurrent:
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 tax effects of certain issues for years that are
still under various stages of audit and administrative review. Such tax effects
are not settled 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.
14. Inventories
December
31
---------
2000 1999
---- ----
(In
millions)
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 United States Steel are determined in accordance with the USX 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
===== ==== ==== ==== ==== === === ==== ====
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
A reconciliation of federal statutory tax rate (35%) to total provisions follows:
2000 1999 1998
---- ---- ----
(In millions)
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:
December 31
--------------
2000 1999
------ ------
(In millions)
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
====== ======
|
The consolidated tax returns of USX for the years 1990 through 1997 are under various stages of audit and administrative review by the IRS. United States Steel 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.
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 United States Steel 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.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
16. Investments and Long-Term Receivables
December 31
-----------
2000 1999
----- -----
(In
millions)
Equity method investments.......................................... $ 325 $ 397
Other investments.................................................. 67 39
Receivables due after one year..................................... 5 11
Deposits of restricted cash........................................ 3 2
Other.............................................................. 39 26
----- -----
Total............................................................ $ 439 $ 475
===== =====
|
Summarized financial information of investees accounted for by the equity method of accounting follows:
2000 1999 1998
------ ------ ------
(In millions)
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
|
United States Steel 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, United States Steel accounts for its investment in VSZ under the cost method of accounting.
In 1999, United States Steel 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, United States Steel 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, United States Steel made a $15 million equity investment in Republic. United States Steel owned 50% of USS/Kobe and now owns 16% of Republic. United States Steel 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 United States Steel 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.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
United States Steel's 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's payables to these investees totaled $66 million and $60 million, respectively. United States Steel's 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, United States Steel's receivables from these investees were $177 million. Generally, these transactions were conducted under long-term, market-based contractual arrangements.
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
Leases Leases
------- ---------
(In millions)
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:
2000 1999 1998
---- ---- ----
(In millions)
Minimum rental................................................ $132 $124 $131
Contingent rental............................................. 17 18 19
Sublease rentals.............................................. (6) (6) (7)
---- ---- ----
Net rental expense.......................................... $143 $136 $143
==== ==== ====
|
United States Steel 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.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 USX- U.S. Steel Group Common Stock at a conversion price of $46.25 per share (equivalent to a conversion ratio of 1.081 shares 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.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
19. Equity
2000 1999 1998
------ ------ ------
(In millions,
except per share
data)
Preferred stock:
Balance at beginning of year......................... $ 3 $ 3 $ 3
Repurchased.......................................... (1) -- --
------ ------ ------
Balance at end of year............................... 2 3 3
------ ------ ------
USX's net investment:
Balance at beginning of year......................... 2,073 2,126 1,808
Net income (loss).................................... (21) 44 364
Repurchase of 6.50% preferred stock.................. (11) (2) (8)
Common stock issued.................................. 6 2 59
Dividends on preferred stock......................... (8) (9) (9)
Dividends on common stock (per share $1.00).......... (89) (88) (88)
------ ------ ------
Balance at end of year............................... 1,950 2,073 2,126
------ ------ ------
Deferred compensation:
Balance at beginning of year......................... -- (1) (1)
Changes during year, net of taxes.................... (3) 1 --
------ ------ ------
Balance at end of year............................... (3) -- (1)
------ ------ ------
Accumulated other comprehensive income (loss):
Minimum pension liability adjustments (Note 12):
Balance at beginning of year....................... (7) (27) (25)
Changes during year, net of taxes (b).............. 3 20 (2)
------ ------ ------
Balance at end of year............................. (4) (7) (27)
------ ------ ------
Foreign currency translation adjustment:
Balance at beginning of year....................... (13) (8) (3)
Changes during year, net of taxes (b).............. (13) (5) (5)
------ ------ ------
Balance at end of year............................. (26) (13) (8)
------ ------ ------
Total accumulated other comprehensive income
(loss)(a)........................................... (30) (20) (35)
------ ------ ------
Total equity........................................... $1,919 $2,056 $2,093
====== ====== ======
|
Minimum pension liability adjustment......................... $(1) $(11) $ 1 Foreign currency translation adjustments..................... (5) 3 2 |
20. Stock-Based Compensation Plans
The 1990 Stock Plan of USX, as amended and restated, authorizes the Compensation Committee of the board of directors of USX to grant restricted stock, stock options and stock appreciation rights of USX-U. S. Steel Group Common Stock to key management employees. Up to 0.8 percent of the outstanding 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, 2,108,128 shares were available for grants in 2001.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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 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:
2000 1999 1998
------- ------ ------
Number of shares granted................................. 305,725 18,272 17,742
Weighted-average grant-date fair value per share......... $ 23.00 $28.22 $37.28
|
Stock options represent the right to purchase shares of stock at the market value of the stock at date of grant. Certain options contain the right to receive cash and/or common stock equal to the excess of the fair market value of shares of common stock, as determined in accordance with the plan, over the option price of shares. Most stock options vest after one-year service period and all expire 10 years from the date they are granted.
The following is a summary of stock option activity:
Shares Price(a)
--------- --------
Balance December 31, 1997................................... 1,633,100 $34.35
Granted................................................... 611,515 37.28
Exercised................................................. (230,805) 32.00
Canceled.................................................. (21,240) 35.89
---------
Balance December 31, 1998................................... 1,992,570 35.50
Granted................................................... 656,400 28.22
Exercised................................................. (2,580) 24.92
Canceled.................................................. (20,005) 38.51
---------
Balance December 31, 1999................................... 2,626,385 33.67
Granted................................................... 915,470 23.00
Exercised................................................. (400) 24.30
Canceled.................................................. (62,955) 38.19
---------
Balance December 31, 2000................................... 3,478,500 30.78
=========
|
The weighted-average grant-date fair value per option was $6.63 in 2000, $6.95 in 1999 and $8.29 in 1998.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
The following table represents stock options at December 31, 2000:
Outstanding Exercisable
-------------------------------------- ------------------------
Weighted-
Average Weight- Weight-
Range of Number Remaining Average Number Average
Exercise of Shares Contractual Exercise of Shares Exercise
Prices Under Option Life Price Under Option Price
-------- ------------ ----------- -------- ------------ --------
$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
========= =========
|
Actual stock-based compensation expense was $1 million in 2000 and 1999 and there was no amount in 1998. Incremental compensation expense, as determined under a fair value model, was not material. Therefore, pro forma net income has 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 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, 4,872 shares of stock were issued and during 1999, 3,798 shares of
stock were issued. During 1998, no shares of common stock were issued.
21. Property, Plant and Equipment
December 31
-------------
2000 1999
------ ------
(In millions)
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, United States Steel 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.
22. Derivative Instruments
United States Steel 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. United States Steel is
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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
(Liabilities)(a) (Liabilities) (Loss) Values(b)
---------------- ------------- -------- ---------
(In millions)
December 31, 2000:
OTC commodity swaps--other
than trading(c)........... $-- $-- $-- $18
==== ==== ==== ===
December 31, 1999:
OTC commodity swaps--other
than trading.............. $ 3 $ 3 $ 3 $37
==== ==== ==== ===
|
23. 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 22, by individual balance sheet account. As described in Note 4, United States Steel's specifically attributed financial instruments and the portion of USX's financial instruments attributed to United States Steel are as follows:
December 31
-------------------------------
2000 1999
--------------- ---------------
Fair Carrying Fair Carrying
Value Amount Value Amount
------ -------- ------ --------
(In millions)
Financial assets:
Cash and cash equivalents.................... $ 219 $ 219 $ 22 $ 22
Receivables (including related parties'
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
====== ====== ====== ======
|
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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. United States Steel 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 United States Steel'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 24.
24. Contingencies and Commitments
United States Steel 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 United States Steel's combined financial statements.
Environmental matters--
United States Steel 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, United States Steel 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. United States Steel 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 of the liabilities of unconsolidated entities of United States Steel totaled $82 million at December 31, 2000, and $88 million at December 31, 1999. In the event that any defaults of guaranteed liabilities occur, United States Steel has access to its interest in the assets 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.
Commitments--
At December 31, 2000 and 1999, United States Steel'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
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
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.
United States Steel entered into a 15-year take-or-pay arrangement in 1993, which requires United States Steel 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 United States Steel elects to terminate the contract early, a maximum termination payment of $96 million, which declines over the duration of the agreement, may be required.
25. Events Occurring After the Opinion Date (Unaudited)
On March 1, 2001, USX completed the purchase of the tin mill products business of LTV Corporation (LTV), which is now operated as East Chicago Tin. In this noncash transaction, USX assumed approximately $66 million of certain employee related obligations from LTV. The acquisition was accounted for using the purchase method of accounting. Results of operations for the six months of 2001 include the operations of East Chicago Tin from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously announced reorganization with its two voting shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L. P. As a result of this transaction, United States Steel became the sole owner of Transtar and certain of its subsidiaries. Holdings became owner of the other subsidiaries of Transtar. United States Steel accounted for this change in its ownership interest using the purchase method of accounting. United States Steel recognized in the first quarter of 2001, a pretax gain of $70 million (included in income (loss) from investees) and a favorable deferred tax adjustment of $33 million related to this transaction. United States Steel previously accounted for its investment in Transtar under the equity method of accounting.
During the first quarter of 2001, USX reached an agreement with the IRS regarding its review of USX's consolidated tax returns for the years 1990 and 1991. In the first quarter of 2001, United States Steel recorded a favorable adjustment of $67 million to net interest and financial costs and an unfavorable adjustment of $15 million to provision for income taxes, both of which were related to prior years' taxes.
United States Steel has a 16% investment in Republic Technologies International LLC (Republic) which was accounted for under the equity method of accounting. During the first quarter of 2001, United States Steel discontinued applying the equity method since investments in and advances to Republic had been reduced to zero. Also, United States Steel has recognized certain debt obligations of $14 million previously assumed by Republic. On April 2, 2001, Republic filed a voluntary petition with the U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the first quarter of 2001, as a result of Republic's action, United States Steel recorded a pretax charge of $74 million for the potentially uncollectible receivables from Republic.
On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group.
This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation.
UNITED STATES STEEL
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX (Proposed Separation). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current USX- U. S. Steel Group Common Stock will become holders of United States Steel Corporation Common Stock. Holders of current USX-Marathon Group Common Stock will continue to hold their shares in USX which will be renamed Marathon Oil Corporation. The Proposed Separation does not contemplate a cash distribution to stockholders. The Proposed Separation is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the transaction, completion of necessary financing arrangements and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001.
On May 31, 2001 a major fire damaged the cold-rolling mill at USS-POSCO, which is fifty percent owned by United States Steel. Damage was predominantly limited to the cold-rolling mill area of the plant. USS-POSCO maintains insurance coverage against such losses, including coverage for business interruption. The mill is expected to resume production in the first quarter of 2002, although full-production may not be achieved until mid-2002. Until such time, the plant will continue customer shipments using cold-rolled coils from United States Steel and POSCO as substitute feedstock.
On August 14, 2001, United States Steel announced its intention to permanently close the cold rolling and tin mill operations at Fairless Works, with an annual finishing capability of 1.5 million tons, on or after November 12, 2001. Under its labor agreement, United States Steel is required to discuss the proposed shutdown with the United Steel Workers of America before making a final decision. United States Steel also announced that, subject to market conditions, it currently intends to continue operating the hot dip galvanizing line at Fairless Works. The anticipated financial impact of the shutdown, which is predominately noncash, will be recorded in the second half of 2001 and is estimated to be a pretax charge of $35 to $45 million.
UNITED STATES STEEL
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 1999
---------------------------- ----------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------ ------ ------ ------ ------ ------ ------
(In millions, except per share data)
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)
|
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)
United States Steel 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. United States Steel 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 our 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.
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)--(Continued)
Coal Reserves
United States Steel 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 United States Steel'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 Reserve Control Coal Characteristics As Received(4)
Probable ----------------- ------------------------------- BTU Per As Received(4)
Location Reserves(1)(5) Owned Leased Grade Volatility Pound % Sulfur
-------- -------------- -------- -------- ------------------- ----------- -------------- --------------
Assigned Reserves(2):
Oak Grove Mine, AL...... 52.1 52.1 -- Metallurgical Low >12,000 <1.0%
#50 Mine, WV............ 88.2 76.0 12.2 Metallurgical Low >12,000 <1.0%
----- -------- -------
Sub-total Assigned..... 140.3 128.1 12.2
Unassigned Reserves(3):
Alabama................. 123.4 123.4 -- Metallurgical Low to High >12,000 <1.0%
Alabama(5)(6)........... 47.6 47.6 -- Steam Low to High >12,000 0.7%-2.5%
Alabama................. 31.9 -- 31.9 Metallurgical Medium >12,000 <1.0%
Illinois(6)............. 374.8 374.8 -- Steam High 11,600 2.3%
Indiana, Pennsylvania,
Tennessee, West
Virginia(6)............ 68.6 68.6 -- Metallurgical/Steam Low to High 11,600-13,000 1.0%-3.0%
----- -------- -------
Sub-total Unassigned... 646.3 614.4 31.9
Total Proven and
Probable............... 786.6 742.5 44.1
===== ======== =======
|
(6) 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.
Iron Ore Reserves
United States Steel 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
SUPPLEMENTARY INFORMATION ON MINERAL RESERVES (UNAUDITED)--(Continued)
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 United States Steel to its one operating mine, and are of blast furnace pellet grade. United States Steel owns 219.2 million of these tons and leases the remaining 490.6 million tons. United States Steel does not own, or control by lease, any unassigned iron ore reserves.
Independent outside entities, including lessors, have reviewed United States Steel's estimates on approximately 75% of the stated iron ore reserves.
UNITED STATES STEEL
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
|
UNITED STATES STEEL
COMBINED STATEMENT OF OPERATIONS (Unaudited)
Second Quarter Six Months
Ended June 30 Ended June 30
---------------- --------------
2001 2000 2001 2000
------- ------- ------ ------
(In millions)
Revenues and other income:
Revenues................................... $ 1,733 $ 1,629 $3,243 $3,211
Income (loss) from investees............... (7) 14 40 7
Net gains on disposal of assets............ 10 13 16 28
Other income (loss)........................ 1 -- 2 (2)
------- ------- ------ ------
Total revenues and other income.......... 1,737 1,656 3,301 3,244
------- ------- ------ ------
Costs and expenses:
Cost of revenues (excludes items shown
below).................................... 1,599 1,462 3,148 2,890
Selling, general and administrative
expenses (credits)........................ 19 (57) 3 (120)
Depreciation, depletion and amortization... 79 78 152 153
Taxes other than income taxes.............. 67 61 126 118
------- ------- ------ ------
Total costs and expenses................. 1,764 1,544 3,429 3,041
------- ------- ------ ------
Income (loss) from operations................ (27) 112 (128) 203
Net interest and other financial costs....... 48 24 36 48
------- ------- ------ ------
Income (loss) before income taxes............ (75) 88 (164) 155
Provision (credit) for income taxes.......... (45) 32 (143) 56
------- ------- ------ ------
Net income (loss)............................ (30) 56 (21) 99
Dividends on preferred stock................. 2 2 4 4
------- ------- ------ ------
Net income (loss) available to USX's net
investment.................................. $ (32) $ 54 $ (25) $ 95
======= ======= ====== ======
|
Selected notes to combined financial statements appear on pages D-39 to D-44.
UNITED STATES STEEL
COMBINED BALANCE SHEET (Unaudited)
June
30 December 31
2001 2000
------ -----------
(In millions)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 254 $ 219
Receivables, less allowance for doubtful accounts of $128
and $57................................................. 649 625
Receivables subject to a security interest............... 350 350
Receivables from related parties......................... 323 366
Inventories.............................................. 916 946
Deferred income tax benefits............................. 171 201
Other current assets..................................... 13 10
------ ------
Total current assets................................... 2,676 2,717
Investments and long-term receivables, less reserves of $39
and $38................................................... 332 439
Long-term receivable from related parties.................. 43 97
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of $6,708 and
$6,531.................................................... 3,098 2,739
Prepaid pensions........................................... 2,711 2,672
Other noncurrent assets.................................... 94 47
------ ------
Total assets........................................... $8,954 $8,711
====== ======
LIABILITIES
Current liabilities:
Notes payable............................................ $ 123 $ 70
Accounts payable......................................... 778 755
Accounts payable to related parties...................... -- 5
Payroll and benefits payable............................. 242 202
Accrued taxes............................................ 242 173
Accrued interest......................................... 51 47
Long-term debt due within one year....................... 224 139
------ ------
Total current liabilities.............................. 1,660 1,391
Long-term debt, less unamortized discount.................. 2,085 2,236
Deferred income taxes...................................... 709 666
Employee benefits.......................................... 1,916 1,767
Deferred credits and other liabilities..................... 475 483
Preferred stock of subsidiary.............................. 66 66
Mandatorily redeemable convertible preferred securities of
a subsidiary trust holding solely junior subordinated
convertible debentures of USX............................. 183 183
EQUITY
Preferred stock............................................ 2 2
USX's net investment....................................... 1,902 1,950
Deferred compensation...................................... (10) (3)
Accumulated other comprehensive loss....................... (34) (30)
------ ------
Total equity........................................... 1,860 1,919
------ ------
Total liabilities and equity........................... $8,954 $8,711
====== ======
|
Selected notes to combined financial statements appear on pages D-39 to D-44.
UNITED STATES STEEL
COMBINED STATEMENT OF CASH FLOWS (Unaudited)
Six Months Ended
June 30
------------------
2001 2000
-------- --------
(In millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income (loss)......................................... $ (21) $ 99
Adjustments to reconcile to net cash provided from
operating activities:
Depreciation, depletion and amortization................ 152 153
Pensions and other postretirement benefits.............. (51) (163)
Deferred income taxes................................... 56 146
Net gains on disposal of assets......................... (16) (28)
Changes in:
Current receivables................................... 64 13
Inventories........................................... 57 (29)
Current accounts payable and accrued expenses......... 61 (90)
All other -- net........................................ (77) (2)
-------- --------
Net cash provided from operating activities........... 225 99
-------- --------
Investing activities:
Capital expenditures.................................... (141) (97)
Disposal of assets...................................... 9 16
Restricted cash--withdrawals............................ 3 3
--deposits........................................ (2) (1)
Investees -- investments................................ (1) (11)
All other -- net........................................ 10 3
-------- --------
Net cash used in investing activities................. (122) (87)
-------- --------
Financing activities:
Increase (decrease) in attributed portion of USX
consolidated debt...................................... (26) 37
Specifically attributed debt repayments................. (6) (6)
Preferred stock repurchased............................. -- (12)
Dividends paid.......................................... (35) (48)
-------- --------
Net cash used in financing activities................. (67) (29)
-------- --------
Effect of exchange rate changes on cash................... (1) --
-------- --------
Net increase (decrease) in cash and cash equivalents...... 35 (17)
Cash and cash equivalents at beginning of year............ 219 22
-------- --------
Cash and cash equivalents at end of period................ $ 254 $ 5
======== ========
Cash provided from (used in) operating activities
included:
Interest and other financial costs paid (net of amount
capitalized)........................................... $ (93) $ (41)
Income taxes refunded, including settlements with USX... 387 85
|
Selected notes to combined financial statements appear on pages D-39 to D-44.
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying combined financial statements represent a carve-out financial statement presentation of the businesses comprising United States Steel and are not intended to be a complete presentation of the financial position, the results of operations and cash flows of United States Steel on a stand-alone basis. These combined financial statements are presented as if United States Steel existed as an entity separate from the remaining businesses of USX Corporation (USX) during the periods presented.
The accompanying combined financial statements include the historical operations of certain divisions of USX and certain subsidiaries of USX. In this context, no direct ownership existed among all the various units comprising United States Steel; accordingly, USX's net investment in United States Steel (USX's net investment) is shown in lieu of Common Stockholder's Equity in the combined financial statements. The combined financial statements included herein have been prepared from USX's historical accounting records.
The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These combined financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.
2. Effective January 1, 2001, United States Steel adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Standard, as amended, requires recognition of all derivatives at fair value as either assets or liabilities. United States Steel uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management has authorized the use of futures, forwards, swaps and options to reduce the effects of fluctuations related to the purchase of natural gas and nonferrous metals and also certain business transactions denominated in foreign currencies. United States Steel has not elected to designate derivative instruments as qualifying for hedge accounting treatment. As a result, the changes in fair value of all derivatives are recognized immediately in earnings. A cumulative effect adjustment relating to the adoption of SFAS No. 133 was recognized in other comprehensive income. The cumulative effect adjustment relates only to deferred gains or losses existing as of the close of business on December 31, 2000, for hedge transactions under prior accounting rules. The effect of adoption of SFAS No. 133 was less than $1 million, net of tax.
In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141), No. 142 "Goodwill and Other Intangible Assets" (SFAS 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 141 requires all business combinations completed after June 30, 2001, be accounted for under the purchase method. This standard also establishes for all business combinations made after June 30, 2001, specific criteria for the recognition of intangible assets separately from goodwill. SFAS 141 also requires that the excess of fair value of acquired assets over cost (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. United States Steel will account for all future business combinations under SFAS 141.
SFAS 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for the intangible assets with finite lives will no longer be limited to forty years. United States Steel will adopt SFAS 142 effective January 1, 2002, as required. At that time,
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
amortization of existing goodwill will cease on the unamortized portion associated with previous acquisitions and certain investments accounted for under the equity method. This provision of SFAS 142 is not expected to have a material impact on the results of operations for United States Steel. Additionally, SFAS 142 requires that unamortized negative goodwill associated with investments accounted for under the equity method and acquired before July 1, 2001, be recognized in income as a cumulative effect of change in accounting principle. United States Steel expects to recognize a favorable cumulative effect of a change in accounting principle of approximately $20 million, net of tax, upon adoption. United States Steel continues to evaluate the financial effects of the provisions of SFAS 142 pertaining to intangible assets other than goodwill.
SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement cost to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. United States Steel will adopt the Statement effective January 1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, United States Steel cannot reasonably estimate the effect of the adoption of this Statement on either its financial position or results of operations.
3. The financial statement provision for income taxes and related tax payments or refunds have been reflected in United States Steel's 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 to United States Steel principally upon its financial income, taxable income, credits, preferences and other directly related amounts.
The provision for income taxes for United States Steel is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities.
4. On November 24, 2000, United States Steel acquired U. S. Steel Kosice,
s.r.o. (USSK), which is primarily 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 acquisition was accounted for
under the purchase method of accounting.
On March 1, 2001, United States Steel completed the purchase of the tin mill products business of LTV Corporation (LTV), which is now operated as East Chicago Tin. In this noncash transaction, United States Steel assumed approximately $66 million of certain employee related obligations from LTV. The acquisition was accounted for using the purchase method of accounting. Results of operations for the six months of 2001 include the operations of East Chicago Tin from the date of acquisition.
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously announced reorganization with its two voting shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As a result of this transaction, United States Steel became sole owner of Transtar and certain of its subsidiaries. Holdings became owner of the other subsidiaries of Transtar. United States Steel accounted for the change in its ownership interest in Transtar using the purchase method of accounting. United States Steel recognized in the six months of 2001 a pretax gain of $68 million (included in income (loss) from investees) and a favorable deferred tax adjustment of $33 million related to this transaction. United States Steel previously accounted for its investment in Transtar under the equity method of accounting.
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The following unaudited pro forma data for United States Steel includes the results of operations of the above acquisitions giving effect to them as if they had been consummated at the beginning of the periods presented. The six months 2001 pro forma results exclude the $68 million gain and $33 million tax benefit recorded as a result of the Transtar transaction. In addition, VSZ did not historically provide historical carve-out financial information for its steel activities prepared in accordance with generally accepted accounting principles in the United States. Therefore, United States Steel made certain estimates and assumptions regarding revenues and costs used in the preparation of the unaudited pro forma data relating to USSK for the six months of 2000.
The following pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
Six Months
Ended June 30
--------------
2001 2000
------ ------
(In millions)
Revenues and other income...................................... $3,279 $3,850
Net income (loss).............................................. (123) 137
|
5. United States Steel consists of two reportable operating segments: 1) Domestic Steel and 2) U. S. Steel Kosice (USSK). Domestic Steel includes the United States operations of United States Steel while USSK includes the United States Steel operations primarily located in the Slovak Republic. Domestic Steel is engaged in the domestic production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; real estate development; and engineering and consulting services. USSK is engaged in the production and sale of steel mill products and coke and primarily serves central European markets. The results of segment operations are as follows:
Domestic Total
Steel USSK Segments
-------- ---- --------
(In millions)
Second Quarter 2001
Revenues and other income:
Customer.............................................. $1,447 $284 $1,731
Intersegment(a)....................................... 2 -- 2
Other subsidiaries of USX(a).......................... 2 -- 2
Equity in earnings (losses) of unconsolidated
investees............................................ (8) 1 (7)
Other................................................. 11 -- 11
------ ---- ------
Total revenues and other income..................... $1,454 $285 $1,739
====== ==== ======
Segment income (loss)................................... $ (69) $ 41 $ (28)
====== ==== ======
Second Quarter 2000
Revenues and other income:
Customer.............................................. $1,625 $-- $1,625
Other subsidiaries of USX(a).......................... 4 -- 4
Equity in earnings of unconsolidated investees........ 14 -- 14
Other................................................. 13 -- 13
------ ---- ------
Total revenues and other income..................... $1,656 $-- $1,656
====== ==== ======
Segment income.......................................... $ 68 $-- $ 68
====== ==== ======
|
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Domestic Total
Steel USSK Segments
-------- ---- --------
(In millions)
Six Months 2001
Revenues and other income:
Customer............................................... $2,709 $530 $3,239
Intersegment(a)........................................ 3 -- 3
Other subsidiaries of USX(a)........................... 4 -- 4
Equity in earnings of unconsolidated investees......... 39 1 40
Other.................................................. 17 1 18
------ ---- ------
Total revenues and other income...................... $2,772 $532 $3,304
====== ==== ======
Segment income (loss).................................... $ (220) $ 82 $ (138)
====== ==== ======
Six Months 2000
Revenues and other income:
Customer............................................... $3,203 $-- $3,203
Other subsidiaries of USX(a)........................... 8 -- 8
Equity in earnings of unconsolidated investees......... 7 -- 7
Other.................................................. 26 -- 26
------ ---- ------
Total revenues and other income...................... $3,244 $-- $3,244
====== ==== ======
Segment income........................................... $ 122 $-- $ 122
====== ==== ======
|
The following schedule reconciles segment revenues and income to amounts reported in United States Steel's combined financial statements:
Second Quarter Ended Six Months
June 30 Ended June 30
---------------------- --------------
2001 2000 2001 2000
---------- ---------- ------ ------
(In millions)
Revenues and other income:
Revenues and other income of
reportable segments................. $ 1,739 $ 1,656 $3,304 $3,244
Elimination of intersegment
revenues............................ (2) -- (3) --
---------- ---------- ------ ------
Total revenues and other income.. $ 1,737 $ 1,656 $3,301 $3,244
========== ========== ====== ======
Income:
Income (loss) for reportable
segments............................ $ (28) $ 68 $ (138) $ 122
Items not allocated to segments:
Administrative expenses............ (8) (5) (15) (11)
Net pension credits................ 31 67 72 132
Costs related to former business
activities........................ (14) (18) (38) (40)
Costs related to Proposed
Separation........................ (8) -- (9) --
---------- ---------- ------ ------
Total income (loss) from
operations...................... $ (27) $ 112 $ (128) $ 203
========== ========== ====== ======
|
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. United States Steel's total comprehensive income (loss) was $(31) million for the second quarter of 2001, $54 million for the second quarter of 2000, $(24) million for the six months of 2001 and $98 million for the six months of 2000.
7. United States Steel has a 16% investment in Republic Technologies International LLC (Republic) which was accounted for under the equity method of accounting. During the first quarter of 2001, United States Steel discontinued applying the equity method since investments in and advances to Republic had been reduced to zero. Also, United States Steel has recognized certain debt obligations of $14 million previously assumed by Republic. On April 2, 2001, Republic filed a voluntary petition with the U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the first quarter of 2001, as a result of Republic's action, United States Steel recorded a pretax charge of $74 million for potentially uncollectible receivables from Republic.
8. Inventories are carried at the lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
June 30 December 31
2001 2000
------- -----------
(In millions)
Raw materials............................................... $170 $214
Semi-finished products...................................... 378 429
Finished products........................................... 259 210
Supplies and sundry items................................... 109 93
---- ----
Total..................................................... $916 $946
==== ====
|
9. At June 30, 2001, and December 31, 2000, estimated income tax receivables from USX included in receivables from related parties were $320 million and $364 million, respectively. In addition, long-term receivables from related parties at June 30, 2001, and December 31, 2000, were $43 million and $97 million, respectively, of income taxes receivable from USX. These amounts have been determined in accordance with the tax allocation policy discussed in Note 3.
10. Interest and other financial costs in the six months of 2001 included a favorable adjustment of $67 million and provision for income taxes included an unfavorable adjustment of $15 million, both of which are related to prior years' taxes.
11. United States Steel is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to United States Steel 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 United States Steel combined financial statements.
United States Steel is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At June 30, 2001, and December 31, 2000, accrued liabilities for remediation totaled $138 million and $137 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.
UNITED STATES STEEL
SELECTED NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
For a number of years, United States Steel has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the second quarter of 2001 and for the years 2000 and 1999, such capital expenditures totaled $6 million, $18 million and $32 million, respectively. United States Steel 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 by United States Steel of the liabilities of affiliated entities of United States Steel totaled $58 million at June 30, 2001. In the event that any defaults of guaranteed liabilities occur, United States Steel has access to its interest in the assets of the affiliates to reduce losses resulting from these guarantees. As of June 30, 2001, the largest guarantee for a single affiliate was $48 million.
United States Steel's contract commitments to acquire property, plant and equipment at June 30, 2001, totaled $109 million compared with $206 million at December 31, 2000.
12. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX (Proposed Separation). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current USX-U. S. Steel Group Common Stock will become holders of United States Steel Corporation Common Stock. Holders of current USX-Marathon Group Common Stock will continue to hold their shares in USX which will be renamed Marathon Oil Corporation. The Proposed Separation does not contemplate a cash distribution to stockholders. The Proposed Separation is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the transaction, completion of necessary financing arrangements and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001. Costs related to the Proposed Separation include professional fees and other expenses and are included in selling, general and administrative expenses (credits). These costs in the second quarter and six months of 2001 were $8 million and $9 million, respectively.
13. On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group.
This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation.
14. On August 14, 2001, United States Steel announced its intention to permanently close the cold rolling and tin mill operations at Fairless Works, with an annual finishing capability of 1.5 million tons, on or after November 12, 2001. Under its labor agreement, United States Steel is required to discuss the proposed shutdown with the United Steel Workers of America before making a final decision. United States Steel also announced that, subject to market conditions, it currently intends to continue operating the hot dip galvanizing line at Fairless Works. The anticipated financial impact of the shutdown, which is predominately noncash, will be recorded in the second half of 2001 and is estimated to be a pretax charge of $35 to $45 million.
ANNEX E
Index For Annex E
Historical Financial Information for USX Corporation
Page
-----
Management's Report...................................................... E-2
Report of Independent Accountants........................................ E-3
Audited Financial Statements:
Consolidated Statement of Operations--Years Ended December 31, 2000,
1999 and 1998......................................................... E-4
Consolidated Balance Sheet--at December 31, 2000 and 1999.............. E-6
Consolidated Statement of Cash Flows--Years Ended December 31, 2000,
1999, 1998............................................................ E-7
Consolidated Statement of Stockholders' Equity......................... E-8
Notes to Consolidated Financial Statements............................. E-10
Unaudited Financial Information:
Selected Quarterly Financial Data...................................... E-43
Principal Unconsolidated Investees..................................... E-44
Supplementary Information on Mineral Reserves Other than Oil and Gas... E-44
Supplementary Information on Oil and Gas Producing Activities.......... E-47
Management's Discussion and Analysis..................................... E-56
Unaudited Interim Financial Information:
Consolidated Statement of Operations--Second Quarter and Six Months
Ended June 30, 2001 and 2000.......................................... E-82
Consolidated Balance Sheet--at June 30, 2001 and December 31, 2000..... E-84
Statement of Cash Flows--Six Months Ended June 30, 2001 and 2000....... E-86
Selected Notes to Consolidated Financial Statements.................... E-87
Management's Discussion and Analysis..................................... E-102
|
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 |
USX CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of USX Corporation:
In our opinion, the accompanying consolidated financial statements appearing on pages E-4 through E-42 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
USX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
2000 1999 1998
------- ------- -------
(Dollars in millions)
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.
USX CORPORATION
INCOME PER COMMON SHARE
2000 1999 1998
----- ---- -----
(Dollars in
millions,
except per share
data)
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.
USX CORPORATION
CONSOLIDATED BALANCE SHEET
December 31
----------------------
2000 1999
---------- ----------
(Dollars in millions)
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 E-8 and E-9)
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.
USX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
2000 1999 1998
------- ------- -------
(Dollars in millions)
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.
USX CORPORATION
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)
Comprehensive
Stockholders' Equity Income
---------------------- ----------------
2000 1999 1998 2000 1999 1998
------ ------ ------ ---- ---- ----
(Dollars in millions)
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
====== ====== ======
2000 1999 1998
------ ------ ------
(a) Related income tax provision
(credit):
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.
USX CORPORATION
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.
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
. In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) issued EITF Consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent," which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which addresses the classification of costs incurred for shipping goods to customers.
. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. USX adopted certain recognition and reclassification provisions of SFAS 140, which were effective for fiscal years ending after December 15, 2000. The remaining provisions of SFAS 140 are effective after March 31, 2001.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which later was amended by SFAS Nos. 137 and 138. This Standard requires recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. USX may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards.
USX will adopt the Standard effective January 1, 2001. The transition adjustment resulting from the adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of tax, is expected to approximate $9 million. The unfavorable cumulative effect on other comprehensive income, net of tax, will approximate $7 million. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations.
3. Business Combinations
On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. (USSK), which is located in the Slovak Republic. USSK was formed in June 2000 to hold the steel operations and related assets of VSZ a.s. (VSZ), a diversified Slovak corporation. The cash purchase price was $69 million. Additional payments to VSZ of not less than $25 million and up to $75 million are contingent upon the future performance of USSK. Additionally, $325 million of debt was included with the acquisition. The acquisition was accounted for under the purchase method of accounting. The 2000 results of operations include the operations of USSK from the date of acquisition.
Prior to this transaction, USX and VSZ were equal partners in VSZ U. S. Steel s.r.o. (VSZUSS), a tin mill products manufacturer. The assets of USSK included VSZ's interest in VSZUSS. The acquisition of the remaining interest in VSZUSS was accounted for under the purchase method of accounting. Previously, USX had accounted for its investment in VSZUSS under the equity method of accounting.
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.
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Year Ended December 31
-----------------------
2000 1999
----------- -----------
(In millions, except
per share amounts)
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
|
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.
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
2000 1999 1998
---- ---- ----
(In millions)
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
==== ==== ====
|
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Foreign currency transactions
For 2000, 1999 and 1998, the aggregate foreign currency transaction gains (losses) included in determining net income were $37 million, $(12) million and $13 million, respectively.
Consumer excise taxes
Included in revenues and costs and expenses for 2000, 1999 and 1998 were $4,344 million, $3,973 million and $3,824 million, respectively, representing consumer excise taxes on petroleum products and merchandise.
7. Extraordinary Losses
In 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6 3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee exchanged one RTI share for each note at maturity. All shares were required for satisfaction of the indexed debt; therefore, none reverted back to USX.
As a result of the above transaction, USX recorded in 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in net gains (losses) on disposal of assets. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group.
In 1999, Republic Technologies International, LLC, an equity investee of USX, recorded an extraordinary loss related to the early extinguishment of debt. As a result, USX recorded an extraordinary loss of $2 million, net of a $1 million income tax benefit, representing its share of the extraordinary loss.
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.
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Group Operations:
Income Net
From Income Capital
Year Revenues Operations (Loss) Expenditures Assets
---- -------- ---------- ------ ------------ -------
(In millions)
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 Corporation..... 2000 $40,500 $1,752 $411 $1,669 $23,401
1999 29,068 1,863 698 1,665 22,931
1998 27,629 1,517 674 1,580 21,133
|
Revenues by Product:
2000 1999 1998
------- ------- -------
(In millions)
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
|
USX CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 E-20.)
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
E&P RM&T OERB Segments Steel USSK Segments Total
------ ------- ------ -------- -------- ---- ----------- -------
(In millions)
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
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following schedules reconcile segment amounts to amounts reported in the Groups' financial statements:
Marathon Group U. S. Steel Group
------------------------- ----------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------ ------ ------
(In millions)
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
======= ======= ======= ====== ====== ======
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
Year Geographic Areas Geographic Areas Total Assets(a)
---- ---------------- ---------------- ------- ---------------
(In millions)
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
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
(In millions)
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)
======= ======= ======= =======
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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:
2000 1999
---- ----
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)
==== ====
|
Pension Benefits Other Benefits
------------------------ --------------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ---- ---- ----
(In millions)
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
===== ===== ===== ==== ==== ====
|
Other
Pension Benefits 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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
Point Point
Increase Decrease
------------- -------------
(In millions)
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
Leases Leases
------- ---------
(In millions)
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:
2000 1999 1998
---- ---- ----
(In millions)
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes
Provisions (credits) for income taxes were:
2000 1999 1998
---------------------- ---------------------- ----------------------
Current Deferred Total Current Deferred Total Current Deferred Total
------- -------- ----- ------- -------- ----- ------- -------- -----
(In millions)
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:
2000 1999 1998
---- ---- ----
(In millions)
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
==== ==== ====
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred tax assets and liabilities resulted from the following:
December 31
--------------
2000 1999
------ ------
(In millions)
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
====== ======
|
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
December 31
-----------
2000 1999
---- ------
(In
millions)
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:
2000 1999 1998
------ ------ ------
(In millions)
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
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Long-Term Debt
December 31
Interest -------------
Rates -- % Maturity 2000 1999
--------------- ----------- ------ ------
(In millions)
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
====== ======
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
15. Inventories
December 31
-------------
2000 1999
------ ------
(In millions)
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Supplemental Cash Flow Information
2000 1999 1998
------- ------- --------
(In millions)
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 --
|
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 0.5 percent of the outstanding Marathon Stock and 0.8 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
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
========= =========
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-
Range of Number of Average Weighted- Number of Weighted-
Exercise Shares Under Remaining Average Shares Under Average
Prices Option Contractual Life Exercise Price Option Exercise 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
========= =========
|
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 1999 1998
---------------- --------------- ---------------
Basic Diluted Basic Diluted Basic Diluted
------- ------- ------- ------- ------- -------
COMPUTATION OF INCOME PER
SHARE
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
======= ======= ======= ======= ======= =======
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. Property, Plant and Equipment
December 31
---------------
2000 1999
------- -------
(In millions)
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth quantitative information by class of derivative instrument for derivative instruments categorized as trading or other than trading:
Recognized
Fair Value Carrying Trading Recorded Aggregate
Assets Amount Assets Gain or (Loss) Deferred Contract
(Liabilities)(a)(b) (Liabilities) for the Year Gain or (Loss) Values(c)
------------------- ------------- -------------- -------------- ---------
(In millions)
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
==== ==== ==== ==== ======
|
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
December 31
-------------------------------
2000 1999
--------------- ---------------
Fair Carrying Fair Carrying
Value Amount Value Amount
------ -------- ------ --------
(In millions)
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.
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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
USX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
In the first quarter 2001, Marathon Oil Company (Marathon) acquired Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into the right to receive $19 in cash. The total purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting.
USX CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
2000 1999
-------------------------------------------------- --------------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
(In millions, except per share data)
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
|
USX CORPORATION
PRINCIPAL UNCONSOLIDATED INVESTEES (UNAUDITED)
December 31, 2000
-----------------
Company Country Ownership Activity
------- ------------- --------- --------
Clairton 1314B Partnership, United States 10% Coke & Coke By-Products
L.P.........................
CLAM Petroleum B.V........... Netherlands 50% Oil & Gas Production
Double Eagle Steel Coating United States 50% Steel Processing
Company.....................
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 United States 24% Natural Gas Transmission
Company, LLC................
Minnesota Pipe Line Company.. United States 33%(a) Pipeline Facility
Nautilus Pipeline Company, United States 24% Natural Gas Transmission
LLC.........................
Odyssey Pipeline LLC......... United States 29% Pipeline Facility
Poseidon Oil Pipeline United States 28% Crude Oil Transportation
Company, LLC................
PRO-TEC Coating Company...... United States 50% Steel Processing
Republic Technologies United States 16% Steel Products
International, LLC..........
Transtar, Inc. .............. United States 46% Transportation
USS-POSCO Industries......... United States 50% Steel Processing
Worthington Specialty United States 50% Steel Processing
Processing..................
|
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 our 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.
USX CORPORATION
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 Reserve Control Coal Characteristics As Received(4)
Probable ----------------- ------------------------------- BTU Per As Received(4)
Location Reserves(1)(5) Owned Leased Grade Volatility Pound % Sulfur
-------- -------------- -------- -------- ------------------- ----------- -------------- --------------
Assigned Reserves(2):
Oak Grove Mine, AL...... 52.1 52.1 -- Metallurgical Low >12,000 <1.0%
#50 Mine, WV............ 88.2 76.0 12.2 Metallurgical Low >12,000 <1.0%
----- -------- -------
Sub-total Assigned..... 140.3 128.1 12.2
Unassigned Reserves(3):
Alabama................. 123.4 123.4 -- Metallurgical Low to High >12,000 <1.0%
Alabama(5)(6)........... 47.6 47.6 -- Steam Low to High >12,000 0.7%-2.5%
Alabama................. 31.9 -- 31.9 Metallurgical Medium >12,000 <1.0%
Illinois(6)............. 374.8 374.8 -- Steam High 11,600 2.3%
Indiana, Pennsylvania,
Tennessee, West
Virginia(6)............ 68.6 68.6 -- Metallurgical/Steam Low to High 11,600-13,000 1.0%-3.0%
----- -------- -------
Sub-total Unassigned... 646.3 614.4 31.9
Total Proven and
Probable............... 786.6 742.5 44.1
===== ======== =======
|
(6) 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.
USX CORPORATION
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.
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
Capitalized Costs and Accumulated Depreciation, Depletion and Amortization
December 31
---------------------------------------------------
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ------ ------------ --------- -------
(In millions)
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
====== ====== ====== ======= ==== =======
|
USX CORPORATION
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
States Europe Intl. Consolidated Investees Total
------- ------ ----- ------------ --------- -------
(In millions)
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
======= ===== ===== ======= ==== =======
|
USX CORPORATION
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
States Europe Intl. Consolidated Investees Total
------ ------ ----- ------------ --------- -------
(In millions)
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(d).......... (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)(e).... 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
====== ===== ===== ======= ==== =======
|
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Average Production Costs(a)
2000 1999 1998
----- ----- -----
(Dollars per BOE)
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
|
Average Sales Prices
Average Sales Prices Crude Oil and
(excluding results of Condensate Natural Gas Liquids Natural Gas
hedging) -------------------- -------------------- -----------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ----- ----- -----
(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 Investee(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
|
Average Sales Prices Crude Oil and
(including results of Condensate Natural Gas Liquids Natural Gas
hedging) -------------------- -------------------- -----------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------ ------ ------ ------ ------ ------ ----- ----- -----
(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 Investee(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
|
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Costs Incurred for Property Acquisition, Exploration and Development--Including Capital Expenditures
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ------ ------------ --------- ------
(In millions)
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
|
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
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
States Europe Intl. Consolidated Investees Total
------ ------ ----- ------------ --------- -----
(Millions of barrels)
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
|
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
United Other Equity
States Europe Intl. Consolidated Investees Total
------ ------ ----- ------------ --------- -----
(Billions of cubic feet)
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
|
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.
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
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.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
United Other Equity
States Europe Intl. Consolidated Investees Total
------- ------- ------- ------------ --------- -------
(In millions)
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
======= ======= ======= ======= ====== =======
|
USX CORPORATION
SUPPLEMENTARY INFORMATION ON OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)--(Continued)
Summary of Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
Consolidated Equity Investees Total
------------------------- ------------------- -------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ----- ----- ----- ------- ------- -------
(In millions)
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
======= ======= ======= ===== ===== ===== ======= ======= =======
|
USX CORPORATION
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, primarily on Group reportable segments and changes in Group financial statements, 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.
Management's Discussion and Analysis of Income
Revenues and Other Income for each of the last three years are summarized in the following table:
2000 1999 1998
------- ------- -------
(Dollars in millions)
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
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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:
2000 1999 1998
------- ------ ------
(Dollars in millions)
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
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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.
Net interest and other financial costs for each of the last three years are summarized in the following table:
2000 1999 1998
---- ---- ----
(Dollars in
millions)
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
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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.
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:
2000 1999 1998
------ ------ ------
(Dollars in
millions)
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
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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 three year period ended December 31, 2000 relating to the development of proved undeveloped reserves (including equity investees) was $316 million, $333 million, and $496 million, respectively. As of December 31, 2000, estimated future development costs relating to the development of proved undeveloped reserves for the years 2001 through 2003 are projected to be $337 million, $115 million, and $97 million, respectively.
Investments in investees of $100 million in 2000 mainly reflected Marathon Group development spending for the Sakhalin II project in Russia and U. S. Steel Group investment in stock of VSZ in which USX now holds a 25 percent interest.
The above statements with respect to capital expenditures are forward- looking statements reflecting management's best estimates based on information currently available. To the extent this information proves to be inaccurate, the timing and levels of future expenditures could differ materially from those included in the forward-looking statements. Factors that could cause future capital expenditures to differ materially include changes in industry supply and demand, general economic conditions, the availability of business opportunities and levels of cash flow from operations for each of the Groups. The timing of completion or cost of particular capital projects could be affected by unforeseen hazards such as weather conditions, explosions or fires.
Proceeds from disposal of assets were $560 million in 2000, compared with $366 million in 1999 and $86 million in 1998. Proceeds in 2000 primarily reflected Marathon's Sakhalin exchange, sales of interest in the Angus/Stellaria development in the Gulf of Mexico, the sale of non-core Speedway SuperAmerica stores and other domestic production properties. Proceeds in 1999 primarily reflected the sales of Scurlock Permian LLC, over 150 non- strategic domestic and international production properties and Carnegie Natural Gas Company and affiliated subsidiaries, all of which were attributed to the Marathon Group.
The net change in restricted cash was a net withdrawal of $3 million in 2000, compared with a net deposit of $1 million in 1999 and a net withdrawal of $174 million in 1998. The $174 million net withdrawal in 1998 was primarily the result of redeeming all of the outstanding shares of USX--Delhi Group Common Stock with the $195 million of net proceeds from the sale of the Delhi Companies.
Repayments of loans and advances to investees were $10 million in 2000 compared with $1 million in 1999 and $71 million in 1998. In 1998, Sakhalin Energy Investment Company Ltd. repaid advances made by Marathon in connection with the Sakhalin II project.
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:
2000 1999 1998
---- ---- ----
(Dollars in
millions)
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
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In the event of a change in control of USX, debt and lease obligations totaling $3,818 million at year-end 2000 may be declared immediately due and payable or required to be collateralized. See Notes 10 and 14 to the USX Consolidated Financial Statements.
Marathon Stock repurchased was $105 million in 2000. In July 2000, the USX Board of Directors authorized spending up to $450 million to repurchase shares of Marathon Stock. This repurchase program will continue from time to time as the Corporation's financial condition and market conditions warrant.
Dividends paid increased $17 million in 2000 compared with 1999 and increased $12 million in 1999 compared with 1998. The increase in 2000 was due primarily to a two-cents-per-share increase in the quarterly Marathon Stock dividend effective with dividends paid in the third quarter 2000.
Benefit Plan Activity
In 2000, USX contributed $530 million to a VEBA, including a $500 million elective contribution, and $30 million to a non-union retiree life insurance trust. In 1999, USX contributed $20 million to a VEBA.
Debt and Preferred Stock Ratings
In May 2000, Standard & Poor's Corp. upgraded USX's and Marathon's senior debt to BBB, which continues the investment grade rating. At the same time, USX's subordinated debt was upgraded to BBB- and preferred stock was upgraded to BB+. Also in May 2000, Moody's Investors Services, Inc., upgraded USX's and Marathon's senior debt to the investment grade rating of Baa1, USX's subordinated debt to Baa2 and USX's preferred stock to baa3. Fitch IBCA Duff & Phelps currently rates USX's senior notes as investment grade at BBB and USX's subordinated debt as BBB-. In December 2000, Standard & Poor's Corp. advised that they had put USX on "Credit Watch Developing" status and Fitch IBCA, Duff & Phelps advised that they had put USX on "Rating Watch-Evolving" status. Both moves were in response to USX's announced structure study.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk for discussion of derivative instruments and associated market risk.
Liquidity
In December 2000, USX entered into a $1,354 million five- year revolving credit agreement, terminating in November 2005, and a $451 million 364-day facility, which together replaced the prior $2,350 million facility. At December 31, 2000, USX had $300 million of borrowings against its $1,354 million long-term revolving credit agreements and commercial paper borrowings of $77 million. Also, USX had a short-term line of credit totaling $150 million which was fully drawn at December 31, 2000. There were no borrowings against MAP or USSK revolving credit agreements at December 31, 2000.
USX had a total of $1,678 million available at December 31, 2000 under existing shelf registration statements filed with the Securities and Exchange Commission. These allow USX to offer and issue unsecured debt securities, common and preferred stock and warrants in one or more separate offerings on terms to be determined at the time of sale.
USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of December 31, 2000, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the years 2001, 2002 and 2003, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 26 to the USX Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings or other external financing sources. However, on November 30, 2000, USX announced that the USX Board of Directors had authorized management to retain financial, tax and legal advisors to perform an in-depth study of the corporation's targeted stock structure. Until the study is complete, USX management believes it will be more difficult to access traditional debt and equity markets. Although USX management believes that it will not be necessary to access financial markets during this time frame, nontraditional sources should be available to provide adequate liquidity, if necessary.
USX management's opinion concerning liquidity and USX's ability to avail itself in the future of the financing options mentioned in the above forward- looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that affect the availability of financing include the performance of each Group (as indicated by levels of cash provided from operating activities and other measures), the results of the announced structure study, the state of the debt and equity markets, investor perceptions of past performance and
expectations regarding future actions and performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, levels of USX's outstanding debt and credit ratings by rating agencies. For a summary of short-term and long-term debt, see Notes 13 and 14 to the USX Consolidated Financial Statements.
Management's Discussion and Analysis of Environmental Matters, Litigation and Contingencies
USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides.
In addition, USX expects to incur capital expenditures to meet environmental standards under the Slovak Republic's environmental laws for the U. S. Steel Group's USSK operation.
The following table summarizes USX's environmental expenditures for each of the last three years(a):
2000 1999 1998
---- ---- ----
(Dollars in
millions)
Capital
Marathon Group............................................. $ 73 $ 46 $ 83
U. S. Steel Group.......................................... 18 32 49
---- ---- ----
Total capital............................................ $ 91 $ 78 $132
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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
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USX's environmental capital expenditures accounted for 5%, 5% and 8% of total consolidated capital expenditures in 2000, 1999 and 1998, respectively.
USX's environmental compliance expenditures averaged 1% of total consolidated costs in each of 2000, 1999 and 1998. Remediation spending primarily reflected ongoing clean-up costs for soil and groundwater contamination associated with underground storage tanks and piping at retail gasoline stations, and remediation activities at former and present operating locations.
The Resource Conservation and Recovery Act ("RCRA") establishes standards for the management of solid and hazardous wastes. Besides affecting current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal operations, the recycling of wastes and the regulation of storage tanks.
A significant portion of USX's currently identified environmental remediation projects relate to the remediation of former and present operating locations. These projects include remediation of contaminated sediments in a river that receives discharges from the Gary Works and the closure of permitted hazardous and non-hazardous waste landfills.
USX has been notified that it is a potentially responsible party ("PRP") at 38 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of December 31, 2000. In addition, there are 23 sites where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 144 additional sites, excluding retail gasoline stations, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 15 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. See Note 26 to the USX Consolidated Financial Statements.
New Tier II Fuels regulations were proposed in late 1999. The gasoline rules, which were finalized by the U.S. Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel rule, which was finalized in January 2001, require substantially reduced sulfur levels. The combined capital cost to achieve compliance with the gasoline and diesel regulations could amount to approximately $700 million between 2003 and 2005. This is a forward-looking statement and can only be a broad-based estimate due to the ongoing evolution of regulatory requirements. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating considerations, and unforeseen hazards such as weather conditions.
In October 1998, the National Enforcement Investigations Center and Region V of the EPA conducted a multi-media inspection of MAP's Detroit refinery. Subsequently, in November 1998, Region V conducted a multi-media inspection of MAP's Robinson refinery. These inspections covered compliance with the Clean Air Act (New Source Performance Standards, Prevention of Significant Deterioration, and the National Emission Standards for Hazardous Air Pollutants for Benzene), the Clean Water Act (permit exceedances for the Waste Water Treatment Plant), reporting obligations under the Emergency Planning and Community Right to Know Act and the handling of process waste. MAP has been advised, in ongoing discussions with the EPA, as to certain compliance issues regarding MAP's Detroit and Robinson refineries. Thus far, MAP has been served with two Notices of Violation ("NOV") and three Findings of Violation in connection with the multi-media inspection at its Detroit refinery. The Detroit notices allege violations of the Michigan State Air Pollution Regulations, the EPA New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants for Benzene. On March 6, 2000, MAP received its first NOV arising out of the multi-media inspection of the Robinson refinery conducted in November 1998. The NOV is for alleged Resource Conservation and Recovery Act (hazardous waste) violations.
MAP has responded to information requests from the EPA regarding New Source Review ("NSR") compliance at its Garyville and Texas City refineries. In addition, the scope of the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries included NSR compliance. NSR requires new major stationary sources and major modifications at existing major stationary sources to obtain permits, perform air quality analysis and install stringent air pollution control equipment at affected facilities. The current EPA
initiative appears to target many items that the industry has historically considered routine repair, replacement and maintenance or other activity exempted from the NSR requirements. MAP is engaged in ongoing discussions with the EPA on these issues concerning all of MAP's refineries.
While MAP has not been notified of any formal findings or violations resulting from either the information requests or inspections regarding NSR compliance, MAP has been informed during discussions with the EPA of potential non-compliance concerns of the EPA based on these inspections and other information identified by the EPA. Recently, discussions with the EPA have included commitment to some specific control technologies and implementation schedules, but not penalties. In addition, MAP anticipates that some or all of the non-NSR related issues arising from the multi-media inspections may also be resolved as part of the current discussions with the EPA. A negotiated resolution with the EPA could result in increased environmental capital expenditures in future years, in addition to as yet, undetermined penalties.
During 1999 an EPA advisory panel on oxygenate use in gasoline issued recommendations to the EPA, calling for the improved protection of drinking water from methyl tertiary butyl ether ("MTBE") impacts, a substantial reduction in the use of MTBE, and action by Congress to remove the oxygenate requirements for reformulated gasoline under the Clean Air Act. The panel reviewed public health and environmental issues that have been raised by the use of MTBE in gasoline, and specifically by the discovery of MTBE in water supplies. State and federal environmental regulatory agencies could implement the majority of the recommendations, while some would require Congressional legislative action. California has acted to ban MTBE use by December 31, 2002 and has requested a waiver from the EPA of California state oxygenate requirements. In addition, a number of states have passed laws which limit or require the phase out of MTBE in gasoline, including states in MAP's marketing area such as Michigan and Minnesota. Many other states are considering bills which require similar limitations or the phase out of MTBE.
MAP has a non-material investment in MTBE units at its Robinson, Catlettsburg and Detroit refineries. Approximately seven percent of MAP's refinery gasoline production includes MTBE. Potential phase-outs or restrictions on the use of MTBE would not be expected to have a material impact on MAP and its operations, although it is not possible to reach any conclusions until further federal or state actions, if any, are taken.
In October 1996, USX was notified by the Indiana Department of Environmental Management ("IDEM") acting as lead trustee, that IDEM and the U. S. Department of the Interior had concluded a preliminary investigation of potential injuries to natural resources related to releases of hazardous substances from various municipal and industrial sources along the east branch of the Grand Calumet River and Indiana Harbor Canal. The public trustees completed a pre-assessment screen pursuant to federal regulations and have determined to perform an NRD Assessment. USX was identified as a PRP along with 15 other companies owning property along the river and harbor canal. USX and eight other PRPs have formed a joint defense group. The trustees notified the public of their plan for assessment and later adopted the plan. In 2000, the trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group is discussing settlement opportunities with the trustees and the EPA.
In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture between USX and Kobe Steel, Ltd. ("Kobe"), was the subject of a multi-media audit by the EPA that included an air, water and hazardous waste compliance review. USS/Kobe and the EPA entered into a tolling agreement pending issuance of the final audit and commenced settlement negotiations in July 1999. In August 1999, the steelmaking and bar producing operations of USS/Kobe were combined with companies controlled by Blackstone Capital Partners II to form Republic Technologies International, LLC ("Republic"). The tubular operations of USS/Kobe were transferred to a newly formed entity, Lorain Tubular Company, LLC ("Lorain Tubular"), which operated as a joint venture between USX and Kobe until December 31, 1999 when USX purchased all of Kobe's interest in Lorain Tubular. Republic and Lorain Tubular are continuing negotiations with the EPA. Most of the matters raised by the EPA relate to Republic's facilities; however, air discharges from Lorain Tubular's #3 seamless pipe mill have also been cited. Lorain Tubular will be responsible for matters relating to its facilities. The final report and citations from the EPA have not been issued.
In 1998, USX entered into a consent decree with the EPA which resolved alleged violations of the Clean Water Act National Pollution Discharge Elimination System ("NPDES") permit at Gary Works and provides for a sediment remediation project for a section of the Grand Calumet River that runs through Gary Works. Contemporaneously, USX entered into a consent decree with the public trustees which resolves potential liability for natural resource damages on the same section of the Grand Calumet River. In 1999, USX paid civil penalties of $2.9 million for the alleged water act violations and $0.5 million in natural resource damages assessment costs. In addition, USX will pay the public trustees $1 million at the end of the remediation project for future monitoring costs and USX is obligated to purchase and restore several parcels of property that have been or will be conveyed to the trustees. During the negotiations leading up to the settlement with EPA, capital improvements were made to upgrade plant systems to comply with the NPDES requirements. The sediment remediation project is an approved final interim measure under the corrective action program for Gary Works and is expected to cost approximately $36.4 million over the next five years. Estimated remediation and monitoring costs for this project have been accrued.
In February 1999, the U.S. Department of Justice and EPA issued a letter demanding a cash payment of approximately $4 million to resolve a Finding of Violation issued in 1997 alleging improper sampling of benzene waste streams at Gary Coke. On September 18, 2000, a Consent Decree was entered which required USX to pay a civil penalty of $587,000 and to replace PCB transformers as a Supplemental Environmental Program at a cost of approximately $2.2 million. Payment of the civil penalty was made on October 13, 2000.
New or expanded environmental requirements, which could increase USX's environmental costs, may arise in the future. USX intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, USX does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2001. USX expects environmental capital expenditures in 2001 to be approximately $120 million, or approximately 5% of total estimated consolidated capital expenditures. Predictions beyond 2001 can only be broad-based estimates which have varied, and will continue to vary, due to the ongoing evolution of specific regulatory requirements, the possible imposition of more stringent requirements and the availability of new technologies, among other matters. Based upon currently identified projects, USX anticipates that environmental capital expenditures in 2002 will total approximately $143 million; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements, and could increase if additional projects are identified or additional requirements are imposed.
USX is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.
Outlook
For Outlook, see Management's Discussion and Analysis for the Marathon Group and the U. S. Steel Group, herein.
Accounting Standards
In the fourth quarter of 2000, USX adopted the following accounting pronouncements primarily related to the classification of items in the financial statements. The adoption of these new pronouncements had no net
effect on the financial position or results of operations of USX, although they required reclassifications of certain amounts in the financial statements, including all prior periods presented.
. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," which summarizes the SEC staff's interpretations of generally accepted accounting principles related to revenue recognition and classification.
. In 2000, the Emerging Issues Task Force of the Financial Accounting Standards Board ("EITF") issued EITF consensus No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent," which addresses whether certain items should be reported as a reduction of revenue or as a component of both revenues and cost of revenues, and EITF Consensus No. 00-10 "Accounting for Shipping and Handling Fees and Costs," which addresses the classification of costs incurred for shipping goods to customers.
. In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. USX adopted certain recognition and reclassification provisions of SFAS 140, which were effective for fiscal years ending after December 15, 2000. The remaining provisions of SFAS 140 are effective after March 31, 2001.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which later was amended by SFAS Nos. 137 and 138. This Standard requires recognition of all derivatives as either assets or liabilities at fair value. Changes in fair value will be reflected in either current period net income or other comprehensive income, depending on the designation of the derivative instrument. USX may elect not to designate a derivative instrument as a hedge even if the strategy would be expected to qualify for hedge accounting treatment. The adoption of SFAS No. 133 will change the timing of recognition for derivative gains and losses as compared to previous accounting standards.
USX will adopt the Standard effective January 1, 2001. The transition adjustment resulting from adoption of SFAS No. 133 will be reported as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of tax, is expected to approximate $9 million. The unfavorable cumulative effect on other comprehensive income, net of tax, will approximate $7 million. The amounts reported as other comprehensive income will be reflected in net income when the anticipated physical transactions are consummated. It is not possible to estimate the effect that this Standard will have on future results of operations.
Management's Discussion and Analysis by Group
The Marathon Group
The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum LLC ("MAP"), owned 62 percent by Marathon; and other energy related businesses. The Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Notes to Financial Statements.
The Marathon Group's 2000 financial performance was primarily affected by the strong recovery in worldwide liquid hydrocarbon and natural gas prices and stronger refining margins. During 2000, Marathon focused on the acquisition of assets with a strong strategic fit, the disposal of non-core properties, and workforce reductions through a voluntary early retirement program.
Revenues and Other Income for each of the last three years are summarized in the following table:
2000 1999 1998
------- ------- -------
(Dollars in millions)
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
======= ======= =======
|
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.
Income from operations for each of the last three years is summarized in the following table:
2000 1999 1998
------ ------ -----
(Dollars in
millions)
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
====== ====== =====
|
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
========== ========== ==========
|
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.
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, 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 of Marathon Group
For a recent outlook pertaining to the Marathon Group, see "RECENT DEVELOPMENTS--Outlook of Marathon" on pages 29 through 31.
The outlook regarding the results of operations for Marathon'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 Marathon's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development.
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.
In the first quarter 2001, Marathon Oil Company (Marathon) acquired Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into
the right to receive $19 in cash. The total purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting.
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.
MAP is constructing a delayed coker unit at its Garyville, Louisiana refinery. This unit will allow for the use of heavier, lower cost crude and reduce the production of heavy fuel oil. To supply this new unit, MAP reached an agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy Mayan crude oil. This is a multi-year contract, which will begin upon completion of the delayed coker unit which is scheduled in the fall of 2001. In addition, a project to increase light product output is underway at MAP's Robinson, Illinois refinery and is expected to be completed in the second quarter of 2001.
MAP initiated a program for 2000 to dispose of approximately 270 non-core SSA retail outlets in the Midwest and Southeast. At the end of this program through December 31, 2000, 159 stores, which comprise about 7 percent of MAP's owned and operated SSA retail network, had been sold. MAP will continue to sell additional SSA stores as part of its ongoing store development process.
The above discussion includes forward-looking statements with respect to pipeline and refinery improvement projects. Some factors that could potentially cause actual results to differ materially from present expectations include the price of petroleum products, levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions, obtaining the necessary rights-of-way, outcome of pending litigation, and regulatory approval constraints. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements.
The U. S. Steel Group
The U. S. Steel Group is engaged in the production and sale of steel mill products, coke, and taconite pellets; the management of mineral resources; coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially owned companies, such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, and Republic Technologies International, LLC ("Republic"). On November 24, 2000, USX acquired U. S. Steel Kosice s.r.o. ("USSK"), which held the steel and related assets of VSZ a.s. ("VSZ"), headquartered in the Slovak Republic. Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements.
Revenues and Other Income for each of the last three years are summarized in the following table:
2000 1999 1998
------ ------ ------
(Dollars in
millions)
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
====== ====== ======
|
Total revenues and other income increased by $662 million in 2000 from 1999 primarily due to the consolidation of Lorain Tubular Company, LLC, ("Lorain Tubular") effective January 1, 2000, higher average realized prices, particularly tubular product prices, and lower losses from investees, which, in 1999, included a $47 million charge for the impairment of U. S. Steel's investment in USS/Kobe Steel Company. Total revenues and other income in 1999 decreased by $1,007 million from 1998 primarily due to lower average realized prices and lower income from investees.
Income from operations for the U. S. Steel Group for the last three years was:
2000 1999 1998
---- ---- -----
(Dollars in
millions)
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
==== ==== =====
|
Segment income for Domestic Steel
Domestic Steel operations recorded segment income of $23 million in 2000 versus segment income of $91 million in 1999, a decrease of $68 million. The 2000 segment income included $36 million for certain environmental and legal accruals, a $34 million charge to establish reserves against notes and receivables from financially distressed steel companies and a $10 million charge for USX's share of Republic special charges. Results in 1999 included $17 million in charges for certain environmental and legal accruals and $7 million in various non-recurring equity investee charges. Excluding these items, the decrease in segment income for Domestic Steel was primarily due to higher costs related to energy and inefficient operating levels due to lower throughput, lower income from raw materials operations, particularly coal operations and lower sheet shipments resulting from high levels of imports that continued in 2000.
Segment income for Domestic Steel operations in 1999 decreased $426 million from 1998. Results in 1998 included a net favorable $30 million for an insurance litigation settlement and charges of $10 million related to a voluntary workforce reduction plan. Excluding these items, the decrease in segment income for Domestic Steel was primarily due to lower average steel prices, lower income from raw materials operations, a less favorable product mix and lower income from investees.
Segment income for U. S. Steel Kosice
USSK segment income for the period following the November 24, 2000 acquisition was $2 million.
Items not allocated to segments: Net pension credits, which are primarily noncash, totaled $266 million in 2000, $228 million in 1999 and $186 million in 1998. Net pension credits in 1999 included $35 million for a one-time favorable pension settlement primarily related to the voluntary early retirement program for salaried employees. For additional information on pensions, see Note 12 to the U. S. Steel Group Financial Statements.
Asset impairments--Coal, were for asset impairments at U. S. Steel Mining's coal mines in Alabama and West Virginia in 2000 following a reassessment of long-term prospects after adverse geological conditions were encountered.
In 1999, an impairment of USX's investment in USS/Kobe and costs related to the formation of Republic totaled $47 million.
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--U. S. Steel Group
For a recent outlook pertaining to the U. S. Steel Group, see "RECENT DEVELOPMENTS--Outlook of United States Steel" on page 28.
Over the last few months, the Domestic Steel order book has strengthened and prices have stabilized. In the third quarter, we expect Domestic Steel volumes to be somewhat higher and realized prices to be at or modestly higher. On the cost side, there has been a declining trend in natural gas prices, and we have reduced our natural gas usage by approximately twenty five percent in the second quarter of 2001 compared to the same period last year. Continuation of this trend could provide a significant positive impact on our costs over the balance of the year.
On May 31, 2001 a major fire damaged the cold-rolling mill at USS-POSCO, which is fifty percent owned by United States Steel. Damage was predominantly limited to the cold-rolling mill area of the plant. USS-POSCO maintains insurance coverage against such losses, including coverage for business interruption. The mill is expected to resume production in the first quarter of 2002. Until such time, the plant will continue customer shipments using cold- rolled coils from United States Steel and POSCO as substitute feedstock.
For USSK, United States Steel expects third quarter shipments to be slightly lower than the second quarter and third quarter average realized prices to be flat compared to the second quarter.
High natural gas prices adversely affected our results in 2000 and are expected to persist for some time. The blast furnace idled at Gary Works in July 2000 for a planned 10-day outage remained down until late February 2001 due to business conditions. The U. S. Steel Group has continued its cost reduction efforts, and has recently requested from its current suppliers an immediate, temporary eight percent price reduction from existing levels to help weather this difficult period.
Several domestic competitors recently have filed for Chapter 11 bankruptcy protection. This provides them with certain competitive advantages and further demonstrates the very difficult economic circumstances faced by the domestic industry.
U. S. Steel Group's income from operations includes net pension credits, which are primarily noncash, associated with all of U. S. Steel's pension plans. Net pension credits were $266 million in 2000. At the end of
2000, U. S. Steel's main pension plans' transition asset was fully amortized, decreasing the pension credit by $69 million annually in future years for this component. In addition, for the year 2001, low marketplace returns on trust assets in the year 2000 and pending business combinations in the current year are expected to further reduce net pension credits to approximately $160 million. The above includes forward-looking statements concerning net pension credits which can vary depending upon the market performance of plan assets, changes in actuarial assumptions regarding such factors as the selection of a discount rate and rate of return on plan assets, changes in the amortization levels of transition amounts or prior period service costs, plan amendments affecting benefit payout levels, business combinations and profile changes in the beneficiary populations being valued. Changes in any of these factors could cause net pension credits to change. To the extent net pension credits decline in the future, income from operations would be adversely affected.
The U. S. Steel Group includes a 16 percent equity method investment in
Republic (through an ownership interest in Republic Technologies International
Holdings, LLC ("Republic Holdings"), which is the sole owner of Republic). In
the third quarter of 2000, Republic announced that it had completed a financial
restructuring to improve its liquidity position. Republic raised approximately
$30 million in loans from certain of its direct and indirect equity partners in
exchange for notes of Republic and warrants to purchase Class D common stock of
Republic Technologies International, Inc., Republic's majority owner. The U. S.
Steel Group's portion was approximately $6 million and the U. S. Steel Group
also agreed to certain deferred payment terms into the year 2002, up to a
maximum of $30 million, with regard to Republic's obligations relating to iron
ore pellets supplied to Republic. In its Form 10-Q for the period ended
September 30, 2000, which was filed with the SEC on October 31, 2000, Republic
Holdings stated that "Notwithstanding these efforts, [Republic Holdings] may
need to obtain additional financing to meet its cash flow requirements,
including financing from the sale of additional debt or equity securities."
Republic Holdings also stated "As a result of the factors mentioned above,
[Republic Holdings] is highly leveraged and could be considered a risky
investment."
At December 31, 2000, the U. S. Steel Group's financial exposure to Republic totaled approximately $131 million, consisting of amounts owed by Republic to the U. S. Steel Group and debt obligations assumed by Republic.
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.
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.
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.
Incremental Decrease
in
Pretax Income
Assuming a
Hypothetical Price
Change of(a)
------------------------
2000 1999
--------- -----------
Derivative Commodity Instruments 10% 25% 10% 25%
-------------------------------- ---- ---- ----- -----
(Dollars in millions)
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)
|
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 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.
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:
As of December 31,
-----------------------------------------
2000 1999
Incremental Incremental
Increase in Increase in
Non-Derivative Financial Fair Fair Fair Fair
Instruments(a) Value(b) Value(c) Value(b) Value(c)
------------------------ -------- ----------- -------- -----------
(Dollars in millions)
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
====== ==== ====== ====
|
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.
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.
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Second Quarter Six Months
Ended June 30 Ended June 30
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
(In millions)
Revenues and other income:
Revenues.................................. $10,844 $10,293 $20,960 $19,600
Dividend and investee income.............. 32 31 112 35
Net gains on disposal of assets........... 24 15 44 122
Gain (loss) on ownership change in
Marathon Ashland Petroleum LLC........... (7) 4 (6) 8
Other income.............................. 10 7 78 14
------- ------- ------- -------
Total revenues and other income......... 10,903 10,350 21,188 19,779
------- ------- ------- -------
Costs and expenses:
Cost of revenues (excludes items shown
below)................................... 7,791 7,710 15,560 14,923
Selling, general and administrative
expenses................................. 204 67 329 138
Depreciation, depletion and amortization.. 385 318 761 639
Taxes other than income taxes............. 1,269 1,237 2,450 2,400
Exploration expenses...................... 26 46 49 91
------- ------- ------- -------
Total costs and expenses................ 9,675 9,378 19,149 18,191
------- ------- ------- -------
Income from operations...................... 1,228 972 2,039 1,588
Net interest and other financial costs...... 86 92 109 187
Minority interest in income of Marathon
Ashland Petroleum LLC...................... 320 203 427 258
------- ------- ------- -------
Income before income taxes and cumulative
effect of change in accounting principle... 822 677 1,503 1,143
Provision for income taxes.................. 270 254 434 423
------- ------- ------- -------
Income before cumulative effect of change in
accounting principle....................... 552 423 1,069 720
Cumulative effect of change in accounting
principle.................................. -- -- (8) --
------- ------- ------- -------
Net income.................................. 552 423 1,061 720
Dividends on preferred stock................ 2 2 4 4
------- ------- ------- -------
Net income applicable to common stocks...... $ 550 $ 421 $ 1,057 $ 716
======= ======= ======= =======
|
Selected notes to financial statements appear on pages E-87 to E-100.
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
INCOME PER COMMON SHARE
(Unaudited)
Six Months
Second Quarter Ended
Ended June 30 June 30
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
(Dollars in millions, except
per share amounts)
Applicable to Marathon Stock:
Income before cumulative effect of change
in accounting principle................... $ 582 $ 367 $ 1,090 $ 621
--Per share--basic....................... 1.88 1.18 3.53 1.99
--diluted.................................... 1.88 1.18 3.52 1.99
Cumulative effect of change in accounting
principle................................. -- -- (8) --
--Per share--basic....................... -- -- (.03) --
--diluted.................................... -- -- (.02) --
Net income................................. $ 582 $ 367 $ 1,082 $ 621
--Per share--basic and diluted........... 1.88 1.18 3.50 1.99
Dividends paid per share................... .23 .21 .46 .42
Weighted average shares, in thousands......
--Basic.................................. 309,101 312,233 308,928 312,180
--Diluted................................ 309,627 312,431 309,338 312,359
Applicable to Steel Stock:
Net income (loss).......................... $ (32) $ 54 $ (25) $ 95
--Per share--basic....................... (.36) .62 (.28) 1.08
--diluted.................................... (.36) .62 (.28) 1.07
Dividends paid per share................... .10 .25 .35 .50
Weighted average shares, in thousands......
--Basic.................................. 89,005 88,499 88,906 88,461
--Diluted................................ 89,005 92,755 88,906 92,721
|
Selected notes to financial statements appear on pages E-87 to E-100.
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
June 30 December 31
2001 2000
------- -----------
(In millions)
ASSETS
Current assets:
Cash and cash equivalents................................ $ 723 $ 559
Receivables, less allowance for doubtful accounts of $131
and $60................................................. 2,836 2,888
Receivables subject to a security interest............... 350 350
Inventories.............................................. 2,926 2,813
Deferred income tax benefits............................. 234 261
Assets held for sale..................................... -- 330
Other current assets..................................... 119 131
------- -------
Total current assets................................... 7,188 7,332
Investments and long-term receivables, less reserves of $39
and $38................................................... 1,041 801
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of $16,810 and
$16,222................................................... 12,977 12,114
Prepaid pensions........................................... 2,928 2,879
Other noncurrent assets.................................... 380 275
------- -------
Total assets........................................... $24,514 $23,401
======= =======
|
Selected notes to financial statements appear on pages E-87 to E-100.
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET--(Continued)
(Unaudited)
June 30 December 31
2001 2000
------- -----------
(In millions)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current liabilities:
Notes payable........................................... $ 250 $ 150
Accounts payable........................................ 3,547 3,774
Payroll and benefits payable............................ 418 432
Accrued taxes........................................... 576 281
Accrued interest........................................ 114 108
Long-term debt due within one year...................... 436 287
------- -------
Total current liabilities............................. 5,341 5,032
Long-term debt, less unamortized discount................. 3,673 4,173
Deferred income taxes..................................... 2,070 2,020
Employee benefits......................................... 2,578 2,415
Deferred credits and other liabilities.................... 715 724
Preferred stock of subsidiary............................. 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX............... 183 183
Minority interest in Marathon Ashland Petroleum LLC....... 2,010 1,840
STOCKHOLDERS' EQUITY
Preferred stock--
6.50% Cumulative Convertible issued--2,404,487 shares
and 2,413,487 shares ($120 and $121 liquidation
preference, respectively).............................. 2 2
Common stocks:
Marathon Stock issued--312,165,978 shares and
312,165,978 shares..................................... 312 312
Steel Stock issued--89,156,721 shares and 88,767,395
shares................................................. 89 89
Securities exchangeable solely into Marathon Stock
issued--264,441 shares and 281,148 shares.............. -- --
Treasury common stock, at cost--Marathon Stock--3,256,789
shares and 3,899,714 shares.............................. (87) (104)
Additional paid-in capital................................ 4,686 4,676
Deferred compensation..................................... (30) (8)
Retained earnings......................................... 2,731 1,847
Accumulated other comprehensive loss...................... (9) (50)
------- -------
Total stockholders' equity............................ 7,694 6,764
------- -------
Total liabilities and stockholders' equity............ $24,514 $23,401
======= =======
|
Selected notes to financial statements appear on pages E-87 to E-100.
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30
--------------
2001 2000
------- -----
(In millions)
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income.................................................... $ 1,061 $ 720
Adjustments to reconcile to net cash provided from operating
activities:
Cumulative effect of change in accounting principle......... 8 --
Minority interest in income of Marathon Ashland Petroleum
LLC........................................................ 427 258
Depreciation, depletion and amortization.................... 761 639
Exploratory dry well costs.................................. 6 32
Pensions and other postretirement benefits.................. (42) (157)
Deferred income taxes....................................... (179) 162
Gain (loss) on ownership change in Marathon Ashland
Petroleum LLC.............................................. 6 (8)
Net gains on disposal of assets............................. (44) (122)
Changes in:
Current receivables....................................... 150 (320)
Inventories............................................... (83) (265)
Current accounts payable and accrued expenses............. (99) 213
All other--net.............................................. 51 (44)
------- -----
Net cash provided from operating activities............... 2,023 1,108
------- -----
Investing activities:
Capital expenditures.......................................... (769) (673)
Acquisition of Pennaco Energy, Inc............................ (506) --
Disposal of assets............................................ 115 230
Restricted cash--withdrawals.................................. 26 161
--deposits............................................ (15) (194)
Investees--investments (2) (67)
--loans and advances...................................... (5) --
--returns and payments.................................... 10 2
All other--net (19) 23
------- -----
Net cash used in investing activities.................... (1,165) (518)
------- -----
Financing activities:
Commercial paper and revolving credit arrangements--net....... (277) (253)
Other debt--borrowings........................................ 139 273
--repayments............................................ (132) (309)
Common stock repurchased...................................... (1) --
Treasury stock reissued....................................... 3 --
Preferred stock repurchased................................... -- (12)
Dividends paid................................................ (177) (179)
Distributions to minority shareholder of Marathon Ashland
Petroleum LLC................................................ (244) (73)
------- -----
Net cash used in financing activities.................... (689) (553)
------- -----
Effect of exchange rate changes on cash....................... (5) (3)
------- -----
Net increase in cash and cash equivalents..................... 164 34
Cash and cash equivalents at beginning of year................ 559 133
------- -----
Cash and cash equivalents at end of period.................... $ 723 $ 167
======= =====
Cash provided from operating activities included:
Interest and other financial costs paid (net of amount
capitalized)............................................... $ (178) $(179)
Income taxes paid........................................... (218) (141)
|
Selected notes to financial statements appear on pages E-87 to E-100.
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The information furnished in these financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2001 classifications. Additional information is contained in the USX Annual Report on Form 10-K for the year ended December 31, 2000.
2. Effective January 1, 2001, USX adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This Standard, as amended, requires recognition of all derivatives at fair value as either assets or liabilities. Changes in the fair value of all derivatives are recognized immediately in earnings, unless the derivative qualifies as a hedge of future cash flows or certain foreign currency exposures. For derivatives qualifying as hedges of future cash flows or certain foreign currency exposures, the effective portion of any changes in fair value is recognized in a component of stockholders' equity called other comprehensive income (OCI) and then reclassified to earnings when the underlying anticipated transaction is consummated. Any ineffective portion of such hedges is recognized in earnings as it occurs. For derivatives designated as hedges of the fair value of recognized assets, liabilities or firm commitments, changes in the fair value of the hedged item are recognized immediately in earnings. Since changes in fair value of the related derivative are also recognized immediately in earnings, the net effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value.
USX uses commodity-based and foreign currency derivative instruments to manage its exposure to price risk. Management has authorized the use of futures, forwards, swaps and options to reduce the effects of fluctuations related to the purchase, production or sale of crude oil, natural gas, refined products and nonferrous metals and also certain business transactions denominated in foreign currencies.
In order to apply hedge accounting under SFAS No. 133, USX is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective portion of the hedge. Generally, USX has not elected to designate derivative instruments as qualifying for hedge accounting treatment. As a result, the changes in fair value of most derivatives are recognized immediately in earnings, while the changes in the fair value of the underlying items generally are not recognized until the transaction is consummated. At the date of adoption, USX had one strategy that qualified as a hedge of the fair value of a firm commitment. This strategy continues to qualify for hedge accounting treatment. Additional strategies, which are hedges of future cash flows, were qualified as hedges on June 1, 2001.
A portion of the cumulative effect adjustment relating to the adoption of SFAS No. 133 was recognized in OCI. The cumulative effect adjustment relates only to deferred gains or losses existing as of the close of business on December 31, 2000, for hedge transactions under prior accounting rules. A reconciliation of the changes in OCI relating to derivative instruments is as follows:
Second Quarter Six Months
Ended Ended
Deferred gain (loss), net of tax (In millions) June 30, 2001 June 30, 2001
---------------------------------------------- -------------- -------------
Beginning balance................................ $34 $--
Cumulative effect adjustment..................... -- (8)
Reclassification of the cumulative effect
adjustment into earnings........................ (7) 35
Changes in fair value............................ 15 15
Reclassification to earnings..................... -- --
--- ---
Balance at June 30, 2001......................... $42 $42
=== ===
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USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Of the $42 million recorded in OCI as of June 30, 2001, $18 million, net of income taxes, is expected to be reclassified to earnings over the 12-month period ending June 30, 2002. The actual amounts that will be reclassified to earnings over the next twelve months will vary as a result of continual changes in fair value.
The ineffective portion of changes in the fair value of hedges of future cash flows recognized during the second quarter and six months of 2001 was a favorable $4 million before income taxes. This amount was included in revenues.
The futures contracts used in cash flow hedge strategies vary in duration with certain contracts extending into 2002.
USX employs one strategy qualifying as a hedge of the fair value of a firm commitment. There is no ineffectiveness associated with this hedge. The hedging instrument and the existing firm commitment contract are priced on the same underlying index. The over-the-counter swap agreement extends into 2008.
USX did not have any foreign currency contracts that qualified for hedge accounting. The changes in fair value of the forward currency contracts are recognized immediately in earnings. These forward currency contracts have various maturities extending into 2001.
In June 2001, the Financial Accounting Standards Board approved Statements of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141), No. 142 "Goodwill and Other Intangible Assets" (SFAS 142) and No. 143 "Accounting for Asset Retirement Obligations" (SFAS 143).
SFAS 141 requires all business combinations completed after June 30, 2001, be accounted for under the purchase method. This standard also establishes for all business combinations made after June 30, 2001, specific criteria for the recognition of intangible assets separately from goodwill. SFAS 141 also requires that the excess of fair value of acquired assets over cost (negative goodwill) be recognized immediately as an extraordinary gain, rather than deferred and amortized. USX will account for all future business combinations under SFAS 141.
SFAS 142 addresses the accounting for goodwill and other intangible assets after an acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and intangible assets with indefinite lives will no longer be amortized; 2) goodwill and intangible assets with indefinite lives must be tested for impairment at least annually; and 3) the amortization period for the intangible assets with finite lives will no longer be limited to forty years. USX will adopt SFAS 142 effective January 1, 2002, as required. At that time, amortization of existing goodwill will cease on the unamortized portion associated with previous acquisitions and certain investments accounted for under the equity method. This will have a favorable impact on the results of operations of approximately $5 million, net of tax, annually beginning in 2002. Additionally, SFAS 142 requires that unamortized negative goodwill associated with investments accounted for under the equity method and acquired before July 1, 2001, be recognized in income as a cumulative effect of change in accounting principle. USX expects to recognize a favorable cumulative effect of a change in accounting principle of approximately $35 million, net of tax, upon adoption. USX continues to evaluate the financial effects of the provisions of SFAS 142 pertaining to intangible assets other than goodwill.
SFAS 143 provides accounting requirements for retirement obligations associated with tangible long-lived assets, including: 1) the timing of liability recognition; 2) initial measurement of the liability; 3) allocation of asset retirement cost to expense; 4) subsequent measurement of the liability; and 5) financial statement disclosures. SFAS 143 requires that an asset retirement cost should be capitalized as part of the cost of the
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
related long-lived asset and subsequently allocated to expense using a systematic and rational method. USX will adopt the Statement effective January 1, 2003. The transition adjustment resulting from the adoption of SFAS 143 will be reported as a cumulative effect of a change in accounting principle. At this time, USX cannot reasonably estimate the effect of the adoption of this Statement on either its financial position or results of operations.
3. 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 Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB). OERB 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 primarily located in the Slovak Republic. Domestic Steel is engaged in the domestic production, sale and transportation of steel mill products, coke, taconite pellets and coal; the management of mineral resources; real estate development; and engineering and consulting services. USSK is engaged in the production and sale of steel mill products and coke and primarily serves central European markets.
The results of segment operations for USX are as follows:
Total
Marathon
E&P RM&T OERB Segments
------ ------ ---- --------
(In millions)
Second Quarter 2001
Revenues and other income:
Customer........................................ $1,140 $7,536 $437 $9,113
Intersegment(a)................................. 136 7 19 162
Intergroup(a)................................... 5 -- 3 8
Equity in earnings of unconsolidated investees.. 16 8 7 31
Other........................................... 9 17 5 31
------ ------ ---- ------
Total revenues and other income............... $1,306 $7,568 $471 $9,345
====== ====== ==== ======
Segment income.................................... $ 459 $ 842 $ 10 $1,311
====== ====== ==== ======
Second Quarter 2000
Revenues and other income:
Customer........................................ $ 957 $7,406 $305 $8,668
Intersegment(a)................................. 119 35 13 167
Intergroup(a)................................... 6 -- 6 12
Equity in earnings (losses) of unconsolidated
investees...................................... (3) 6 4 7
Other........................................... 7 10 2 19
------ ------ ---- ------
Total revenues and other income............... $1,086 $7,457 $330 $8,873
====== ====== ==== ======
Segment income.................................... $ 356 $ 529 $-- $ 885
====== ====== ==== ======
|
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Total Total
Domestic U. S. Steel Marathon
Steel USSK Segments Segments Total
-------- ---- ----------- -------- -------
(In millions)
Second Quarter 2001
Revenues and other income:
Customer.......................... $1,447 $284 $1,731 $9,113 $10,844
Intersegment(a)................... 2 -- 2 162 164
Intergroup(a)..................... 2 -- 2 8 10
Equity in earnings (losses) of
unconsolidated investees......... (8) 1 (7) 31 24
Other............................. 11 -- 11 31 42
------ ---- ------ ------ -------
Total revenues and other
income......................... $1,454 $285 $1,739 $9,345 $11,084
====== ==== ====== ====== =======
Segment income (loss)............... $ (69) $ 41 $ (28) $1,311 $ 1,283
====== ==== ====== ====== =======
Second Quarter 2000
Revenues and other income:
Customer.......................... $1,625 $-- $1,625 $8,668 $10,293
Intersegment(a)................... -- -- -- 167 167
Intergroup(a)..................... 4 -- 4 12 16
Equity in earnings of
unconsolidated investees......... 14 -- 14 7 21
Other............................. 13 -- 13 19 32
------ ---- ------ ------ -------
Total revenues and other
income......................... $1,656 $-- $1,656 $8,873 $10,529
====== ==== ====== ====== =======
Segment income...................... $ 68 $-- $ 68 $ 885 $ 953
====== ==== ====== ====== =======
|
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Total
Marathon
E&P RM&T OERB Segments
------ ------- ------ --------
(In millions)
Six Months 2001
Revenues and other income:
Customer..................................... $2,378 $14,278 $1,065 $17,721
Intersegment(a).............................. 270 13 44 327
Intergroup(a)................................ 15 -- 5 20
Equity in earnings of unconsolidated
investees................................... 36 14 11 61
Other........................................ 17 32 7 56
------ ------- ------ -------
Total revenues and other income............ $2,716 $14,337 $1,132 $18,185
====== ======= ====== =======
Segment income................................. $1,059 $ 1,118 $ 18 $ 2,195
====== ======= ====== =======
Six Months 2000
Revenues and other income:
Customer..................................... $1,909 $13,833 $ 655 $16,397
Intersegment(a).............................. 188 55 32 275
Intergroup(a)................................ 11 -- 11 22
Equity in earnings (losses) of unconsolidated
investees................................... (4) 10 8 14
Other........................................ 10 21 6 37
------ ------- ------ -------
Total revenues and other income............ $2,114 $13,919 $ 712 $16,745
====== ======= ====== =======
Segment income................................. $ 665 $ 669 $ 13 $ 1,347
====== ======= ====== =======
|
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Total Total
Domestic U. S. Steel Marathon
Steel USSK Segments Segments Total
-------- ---- ----------- -------- -------
(In millions)
Six Months 2001
Revenues and other income:
Customer.......................... $2,709 $530 $3,239 $17,721 $20,960
Intersegment(a)................... 3 -- 3 327 330
Intergroup(a)..................... 4 -- 4 20 24
Equity in earnings of
unconsolidated investees......... 39 1 40 61 101
Other............................. 17 1 18 56 74
------ ---- ------ ------- -------
Total revenues and other
income......................... $2,772 $532 $3,304 $18,185 $21,489
====== ==== ====== ======= =======
Segment income (loss)............... $ (220) $ 82 $ (138) $ 2,195 $ 2,057
====== ==== ====== ======= =======
Six Months 2000.....................
Revenues and other income:
Customer.......................... $3,203 $-- $3,203 $16,397 $19,600
Intersegment(a)................... -- -- -- 275 275
Intergroup(a)..................... 8 -- 8 22 30
Equity in earnings of
unconsolidated investees......... 7 -- 7 14 21
Other............................. 26 -- 26 37 63
------ ---- ------ ------- -------
Total revenues and other
income......................... $3,244 $-- $3,244 $16,745 $19,989
====== ==== ====== ======= =======
Segment income...................... $ 122 $-- $ 122 $ 1,347 $ 1,469
====== ==== ====== ======= =======
|
The following schedules reconcile segment revenues and income to amounts reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon U. S. Steel
Group Second Group Second
Quarter Ended Quarter Ended
June 30 June 30
-------------- --------------
2001 2000 2001 2000
------ ------ ------ ------
(In millions)
Revenues and other income:
Revenues and other income of reportable
segments.................................... $9,345 $8,873 $1,739 $1,656
Items not allocated to segments--
Gain (loss) on ownership change in MAP..... (7) 4 -- --
Elimination of intersegment revenues......... (162) (167) (2) --
------ ------ ------ ------
Total Group revenues and other income.... $9,176 $8,710 $1,737 $1,656
====== ====== ====== ======
Income:
Income (loss) for reportable segments........ $1,311 $ 885 $ (28) $ 68
Items not allocated to segments:
Gain (loss) on ownership change in MAP..... (7) 4 -- --
Administrative expenses.................... (34) (29) (8) (5)
Net pension credits........................ -- -- 31 67
Costs related to former business
activities................................ -- -- (14) (18)
Costs related to Proposed Separation....... (15) -- (8) --
------ ------ ------ ------
Total Group income (loss) from
operations.............................. $1,255 $ 860 $ (27) $ 112
====== ====== ====== ======
|
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
U. S. Steel
Marathon Group Group
Six Months Six Months
Ended June 30 Ended June 30
---------------- --------------
2001 2000 2001 2000
------- ------- ------ ------
(In millions)
Revenues and other income:
Revenues and other income of reportable
segments.................................. $18,185 $16,745 $3,304 $3,244
Items not allocated to segments:
Gain (loss) on ownership change in MAP... (6) 8 -- --
Other (a)................................ 59 87 -- --
Elimination of intersegment revenues....... (327) (275) (3) --
------- ------- ------ ------
Total Group revenues and other income.. $17,911 $16,565 $3,301 $3,244
======= ======= ====== ======
Income:
Income (loss) for reportable segments...... $ 2,195 $ 1,347 $ (138) $ 122
Items not allocated to segments:
Gain (loss) on ownership change in MAP... (6) 8 -- --
Administrative expenses.................. (65) (57) (15) (11)
Net pension credits...................... -- -- 72 132
Costs related to former business
activities.............................. -- -- (38) (40)
Costs related to Proposed Separation..... (16) -- (9) --
Other (a)................................ 59 87 -- --
------- ------- ------ ------
Total Group income (loss) from
operations............................ $ 2,167 $ 1,385 $ (128) $ 203
======= ======= ====== ======
|
4. On November 24, 2000, USX acquired U. S. Steel Kosice, s.r.o. (USSK), which is primarily 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 acquisition was accounted for under the purchase method of accounting.
In the first quarter 2001, Marathon Oil Company (Marathon) acquired Pennaco Energy, Inc. (Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into the right to receive $19 in cash. The total cash purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting. The excess of the purchase price over the preliminary fair value of net assets acquired (goodwill) was $64 million and was orginally to be amortized over 17 years. However, with the adoption of SFAS No. 142, effective January 1, 2002, USX will cease the amortization of goodwill and will test the unamortized balance for impairment on an annual basis. Results of operations for the six months of 2001 include the results of Pennaco from February 7, 2001.
On March 1, 2001, USX completed the purchase of the tin mill products business of LTV Corporation (LTV), which is now operated as East Chicago Tin. In this noncash transaction, USX assumed approximately $66 million of certain employee related obligations from LTV. The acquisition was accounted for using the purchase method of accounting. Results of operations for the six months of 2001 include the operations of East Chicago Tin from the date of acquisition.
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
On March 23, 2001, Transtar, Inc. (Transtar) completed its previously announced reorganization with its two voting shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of Blackstone Capital Partners L.P. As a result of this transaction, USX became sole owner of Transtar and certain of its subsidiaries. Holdings became owner of the other subsidiaries of Transtar. USX accounted for the change in its ownership interest in Transtar using the purchase method of accounting. USX recognized in the six months of 2001 a pretax gain of $68 million (included in dividend and investee income) and a favorable deferred tax adjustment of $33 million related to this transaction. USX previously accounted for its investment in Transtar under the equity method of accounting.
The following unaudited pro forma data for USX includes the results of operations of the above acquisitions giving effect to them as if they had been consummated at the beginning of the periods presented. The six months 2001 pro forma results exclude the $68 million gain and $33 million tax benefit recorded as a result of the Transtar transaction. In addition, VSZ did not historically provide historical carve-out financial information for its steel activities prepared in accordance with generally accepted accounting principles in the United States. Therefore, USX made certain estimates and assumptions regarding revenues and costs used in the preparation of the unaudited pro forma data relating to USSK for the six months of 2000.
The following pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations.
Six Months
Ended June 30
----------------
2001 2000
------- -------
(In millions,
except per
share amounts)
Revenues and other income..................................... $21,174 $20,402
Income before cumulative effect of change in accounting
principle.................................................... 964 740
Net income.................................................... 956 740
Applicable to Marathon Stock:
Income before cumulative effect of change in accounting
principle.................................................... 1,087 603
--Per share--basic and diluted.............................. 3.52 1.93
Net income.................................................... 1,079 603
--Per share--basic and diluted.............................. 3.49 1.93
Applicable to Steel Stock:
Net income (loss)(a).......................................... (127) 133
--Per share--basic.......................................... (1.43) 1.51
--diluted............................................... (1.43) 1.48
|
5. 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 has allowed Marathon to expand its interests in the Permian Basin and 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 is accounted for under the equity method of accounting.
6. Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
June
30 December 31
2001 2000
------ -----------
(In millions)
Raw materials................................................ $ 933 $ 915
Semi-finished products....................................... 378 429
Finished products............................................ 1,411 1,279
Supplies and sundry items.................................... 204 190
------ ------
Total...................................................... $2,926 $2,813
====== ======
|
7. Total comprehensive income was $562 million for the second quarter of 2001, $420 million for the second quarter of 2000, $1,103 million for the six months of 2001 and $716 million for the six months of 2000.
8. The method of calculating net income (loss) per share for the Marathon Stock and 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 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
(loss) 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.
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Computation of Income Per Share
Second Quarter Ended June 30
-------------------------------------
2001 2000
------------------ -----------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
Marathon Group
Net income (millions).................... $ 582 $ 582 $ 367 $ 367
======== ======== ======== ========
Shares of common stock outstanding
(thousands):
Average number of common shares
outstanding........................... 309,101 309,101 312,233 312,233
Effect of dilutive securities--stock
options............................... -- 526 -- 198
-------- -------- -------- --------
Average common shares and dilutive
effect.............................. 309,101 309,627 312,233 312,431
======== ======== ======== ========
Net income per share..................... $ 1.88 $ 1.88 $ 1.18 $ 1.18
======== ======== ======== ========
U. S. Steel Group
Net income (loss) (millions):
Net income (loss)...................... $ (30) $ (30) $ 56 $ 56
Dividends on preferred stock........... 2 2 2 2
-------- -------- -------- --------
Net income (loss) applicable to Steel
Stock................................. (32) (32) 54 54
Effect of dilutive trust preferred
securities............................ -- -- -- 2
-------- -------- -------- --------
Net income (loss) assuming
conversions......................... $ (32) $ (32) $ 54 $ 56
======== ======== ======== ========
Shares of common stock outstanding
(thousands):
Average number of common shares
outstanding........................... 89,005 89,005 88,499 88,499
Effect of dilutive securities--trust
preferred securities.................. -- -- -- 4,256
-------- -------- -------- --------
Average common shares and dilutive
effect.............................. 89,005 89,005 88,499 92,755
======== ======== ======== ========
Net income (loss) per share.............. $ (.36) $ (.36) $ .62 $ .62
======== ======== ======== ========
|
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Computation of Income Per Share
Six Months Ended June 30
-------------------------------------
2001 2000
------------------ -----------------
Basic Diluted Basic Diluted
-------- -------- -------- --------
Marathon Group
Net income (millions):
Income before cumulative effect of
change in accounting principle........ $ 1,090 $ 1,090 $ 621 $ 621
Cumulative effect of change in
accounting principle.................. (8) (8) -- --
-------- -------- -------- --------
Net income............................. $ 1,082 $ 1,082 $ 621 $ 621
======== ======== ======== ========
Shares of common stock outstanding
(thousands):
Average number of common shares
outstanding........................... 308,928 308,928 312,180 312,180
Effect of dilutive securities--stock
options............................... -- 410 -- 179
-------- -------- -------- --------
Average common shares and dilutive
effect.............................. 308,928 309,338 312,180 312,359
======== ======== ======== ========
Per share:
Income before cumulative effect of
change in accounting principle........ $ 3.53 $ 3.52 $ 1.99 $ 1.99
Cumulative effect of change in
accounting principle.................. (.03) (.02) -- --
-------- -------- -------- --------
Net income............................. $ 3.50 $ 3.50 $ 1.99 $ 1.99
======== ======== ======== ========
U. S. Steel Group
Net income (loss) (millions):
Net income (loss)...................... $ (21) $ (21) $ 99 $ 99
Dividends on preferred stock........... 4 4 4 4
-------- -------- -------- --------
Net income (loss) applicable to Steel
Stock................................. (25) (25) 95 95
Effect of dilutive trust preferred
securities............................ -- -- -- 4
-------- -------- -------- --------
Net income (loss) assuming
conversions........................... $ (25) $ (25) $ 95 $ 99
======== ======== ======== ========
Shares of common stock outstanding
(thousands):
Average number of common shares
outstanding........................... 88,906 88,906 88,461 88,461
Effect of dilutive securities:
Trust preferred securities........... -- -- -- 4,256
Stock options........................ -- -- -- 4
-------- -------- -------- --------
Average common shares and dilutive
effect.............................. 88,906 88,906 88,461 92,721
======== ======== ======== ========
Net income (loss) per share.............. $ (.28) $ (.28) $ 1.08 $ 1.07
======== ======== ======== ========
|
9. Included in revenues and costs and expenses for the second quarter of 2001 and 2000 were $1,132 million and $1,108 million, respectively, representing excise taxes on petroleum products and merchandise. Similar amounts for the six months of 2001 and 2000 were $2,170 million and $2,147 million, respectively.
10. The provision for income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities.
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Interest and other financial costs in the six months of 2001 included a favorable adjustment of $76 million and provision for income taxes included an unfavorable adjustment of $20 million, both of which are related to certain prior years' taxes.
In the second quarter of 2001, the income tax provision included a foreign deferred tax benefit of $9 million related to a reduction in the statutory rate enacted in the Canadian province of Alberta.
11. At June 30, 2001, USX had no borrowings against its $1,354 million long- term revolving credit facility and no borrowings against its $451 million short-term revolving credit facility.
Certain banks provide USX with short-term lines of credit totaling $115 million which require a .125% fee or maintenance of compensating balances of 3%. At June 30, 2001, there were no borrowings against these facilities.
At June 30, 2001, MAP had no borrowings against its $500 million revolving credit agreements with banks and had no amounts outstanding against its $190 million revolving credit agreement with Ashland, which was amended and extended for one year to March 15, 2002.
At June 30, 2001, USSK had no borrowings against its $50 million short-term credit facility.
At June 30, 2001, in the event of a change in control of USX, debt obligations totaling $3,330 million and operating lease obligations of $101 million may be declared immediately due and payable. 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.
12. On February 16, 2001, USX borrowed $250 million under a six-month term loan facility agreement. The loan is unsecured and any borrowings bear interest at defined short-term market rates. At June 30, 2001, $250 million remained outstanding on this facility.
On March 30, 2001, USX borrowed $30 million under a five-year promissory note agreement. The amount borrowed is unsecured and requires quarterly principal payments and interest at a rate of 6.57%. At June 30, 2001, $29 million was outstanding under the agreement.
13. USX has a 16% investment in Republic Technologies International LLC (Republic) which was accounted for under the equity method of accounting. During the first quarter of 2001, USX discontinued applying the equity method since investments in and advances to Republic had been reduced to zero. Also, USX has recognized certain debt obligations of $14 million previously assumed by Republic. On April 2, 2001, Republic filed a voluntary petition with the U.S. Bankruptcy Court to reorganize its operations under Chapter 11 of the U.S. Bankruptcy Code. In the first quarter of 2001, as a result of Republic's action, USX recorded a pretax charge of $74 million for potentially uncollectible receivables from Republic.
14. In 1998, USX redeemed all shares of USX-Delhi Group Common Stock. After the redemption, 50,000,000 shares of this stock remain authorized but unissued.
15. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are 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
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
be resolved unfavorably. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 June 30, 2001, and December 31, 2000, accrued liabilities for remediation totaled $216 million and $212 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $60 million at June 30, 2001, and $57 million at December 31, 2000.
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 the six months of 2001 and for the years 2000 and 1999, such capital expenditures totaled $23 million, $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.
On May 11, 2001, MAP entered into a consent decree with the U.S. Environmental Protection Agency which commits it to complete certain agreed upon environmental capital projects over the next eight years primarily aimed at reducing air emissions at its seven refineries. The current estimated cost to complete these projects is approximately $270 million. In addition, MAP is required to complete certain agreed upon supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations, at a current estimated cost of $8 million. The consent decree is currently awaiting court approval.
At June 30, 2001, and December 31, 2000, accrued liabilities for platform abandonment and dismantlement totaled $178 million and $162 million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled $80 million at June 30, 2001. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of June 30, 2001, the largest guarantee for a single affiliate was $48 million.
At June 30, 2001, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $119 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and long-term investments at June 30, 2001, totaled $568 million compared with $663 million at December 31, 2000.
16. On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel business of USX (Proposed Separation). The Proposed Separation envisions a tax-free spin- off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current USX-U. S. Steel Group Common Stock will become holders of United States Steel Corporation Common Stock. Holders of current USX-Marathon Group Common Stock will become holders of Marathon Oil Corporation Common Stock. The Proposed Separation does not contemplate a cash distribution to stockholders. Each new company will carry
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
approximately the same assets and liabilities now associated with its existing businesses, except for a value transfer of approximately $900 million from Marathon Oil Corporation to United States Steel Corporation, intended to maintain United States Steel Corporation as a strong, independent company. The form of the value transfer will be a reattribution of USX corporate debt between the USX-Marathon Group and the USX-U. S. Steel Group. The Proposed Separation is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the transaction, completion of necessary financing arrangements and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001. Costs related to the Proposed Separation include professional fees and other expenses and are included in selling, general and administrative expenses. These costs in the second quarter and six months of 2001 were $23 million and $25 million, respectively.
17. On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, an Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group. The reorganization will not have any impact on the results of operations or financial position of USX Corporation, the Marathon Group or the U. S. Steel Group.
This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation.
18. On July 27, 2001, United States Steel LLC and United States Steel LLC's wholly owned subsidiary, United States Steel Financing Corp., issued $385 million of Senior Notes due August 1, 2008 (Notes), at an interest rate of 10.75 percent. The Notes were issued to meet, in part, the conditions of the Proposed Separation related to the completion of necessary financing arrangements. These notes are guaranteed by USX Corporation until completion of the Proposed Separation, at which time they will be solely the obligation of United States Steel Corporation. The notes may be redeemed if the Proposed Separation does not occur.
The Notes contain certain restrictive covenants that became effective on the date of issue. These convenants impose restrictions on certain activities of United States Steel. Most of these covenants apply only when the Notes are not rated investment grade.
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS--(Unaudited)
CONTINUING OPERATIONS
Six Months Ended
June 30 Year Ended December 31
------------------- ---------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ----- ---- ---- ---- ---- ----
11.18 6.58 3.79 4.20 3.45 3.63 3.41
====== ===== ==== ==== ==== ==== ====
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS--(Unaudited)
CONTINUING OPERATIONS
Six Months Ended
June 30 Year Ended December 31
------------------- ---------------------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
------ ----- ---- ---- ---- ---- ----
11.56 6.74 3.89 4.32 3.56 3.79 3.65
====== ===== ==== ==== ==== ==== ====
|
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
USX Corporation ("USX") is a diversified company that is principally engaged in the energy business through its Marathon Group and in the steel business through its U. S. Steel Group. The following discussion should be read in conjunction with the second quarter 2001 USX Consolidated Financial Statements and Selected Notes to Financial Statements. For income per common share amounts applicable to USX's two classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement of Operations--Income per Common Share. For individual Group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for each of the respective Groups.
On July 31, 2001, USX announced that its board of directors approved the definitive plan of reorganization to separate the energy and steel businesses of USX ("Proposed Separation"). The Proposed Separation envisions a tax-free spin-off of the steel business of USX into a freestanding, publicly traded company to be known as United States Steel Corporation. Holders of current Steel Stock would become holders of United States Steel Corporation Common Stock. Holders of current Marathon Stock would become holders of Marathon Oil Corporation Common Stock. The Proposed Separation does not contemplate a cash distribution to stockholders. Each new company will carry approximately the same assets and liabilities now associated with its existing business, except for a value transfer of approximately $900 million from Marathon Oil Corporation to United States Steel Corporation, intended to maintain United States Steel Corporation as a strong, independent company. The form of the value transfer will be a reattribution of USX corporate debt between the USX- Marathon Group and the USX-U. S. Steel Group. The Proposed Separation is subject to the approval of the holders of a majority of the outstanding shares of each class of current USX common stock, receipt of a favorable private letter ruling from the Internal Revenue Service ("IRS") on the tax-free nature of the transaction, completion of necessary financing arrangements, and receipt of necessary regulatory and third party consents. The transaction is expected to occur on or about December 31, 2001.
On July 2, 2001, a corporate reorganization was implemented to create a new holding company structure. USX became a holding company that owns all of the outstanding equity of Marathon Oil Company, a Ohio Corporation which, directly and indirectly, owns and operates the businesses of the USX-Marathon Group, and United States Steel LLC, a Delaware limited liability company which owns and operates the businesses of the USX-U. S. Steel Group. The reorganization will not have any impact on the results of operations or financial position of USX Corporation, the Marathon Group or the U. S. Steel Group. This reorganization in corporate form is independent of the Proposed Separation of the energy and steel businesses of USX Corporation.
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, which 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 Annual Report on Form 10-K for the year ended December 31, 2000 and subsequent filings.
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Results of Operations
Revenues and other income for the first six months of 2001 and 2000 are set forth in the following table:
Six Months
Ended June 30
----------------
2001 2000
------- -------
(Dollars in
millions)
Revenues and other income Marathon Group...................... $17,911 $16,565
U. S. Steel Group............................................ 3,301 3,244
Eliminations................................................. (24) (30)
------- -------
Total revenues and other income............................ $21,188 $19,779
Less:
Excise taxes(a).............................................. 2,170 2,147
Matching buy/sell transactions(a)............................ 2,130 2,295
------- -------
Revenues and other income excluding above items............ $16,888 $15,337
======= =======
--------
(a) Consumer excise taxes on petroleum products and merchandise and matching
crude oil and refined products buy/sell transactions settled in cash are
included in both revenues and costs and expenses for the Marathon Group
and USX consolidated.
Revenues and other income (excluding excise taxes and matching buy/sell
transactions) for the first six months of 2001 increased $1,551 million as
compared with the same period of 2000, reflecting increases of $1,488 million
for the Marathon Group and $57 million for the U. S. Steel Group.
For discussion of revenues and other income by Group, see Management's
Discussion and Analysis of Financial Condition and Results of Operations for
the Marathon Group and the U. S. Steel Group.
Income from operations for the the first six months of 2001 and 2000 are
set forth in the following table:
Six Months
Ended June 30
----------------
2001 2000
------- -------
(Dollars in
millions)
Reportable segments
Marathon Group
Exploration & production.................................... $ 1,059 $ 665
Refining, marketing & transportation........................ 1,118 669
Other energy related businesses............................. 18 13
------- -------
Income for reportable segments--Marathon Group............. $ 2,195 $ 1,347
U. S. Steel Group
Domestic Steel.............................................. $ (220) $ 122
U. S. Steel Kosice.......................................... 82 --
------- -------
Income (loss) for reportable segments--U. S. Steel Group... $ (138) $ 122
Income for reportable segments--USX Corporation............ 2,057 1,469
Items not allocated to segments:
Marathon Group.............................................. (28) 38
U. S. Steel Group........................................... 10 81
------- -------
Total income from operations--USX Corporation.............. $ 2,039 $ 1,588
|
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Income for reportable segments in the first six months of 2001 increased by $588 million compared with the first six months of 2000, reflecting an increase of $848 million for the Marathon Group reportable segments and a decrease of $260 million for the U. S. Steel Group reportable segments.
For discussion of income from operations by segment, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group.
Net interest and other financial costs for the first six months of 2001 included a favorable adjustment of $76 million related to prior years' taxes. Excluding this adjustment, net interest and other financial costs for the first six months of 2001 decreased $2 million compared to the same period in 2000.
The minority interest in income of MAP, which represents Ashland's 38 percent ownership interest, increased $169 million in the first six months of 2001 due to higher MAP income. For further discussion, see Management Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group.
Provisions for income taxes of $434 million for the first six months of 2001 was based on tax rates and amounts that recognize management's best estimate of current and deferred tax assets and liabilities. In the first six months of 2001, the provision included a $33 million tax benefit associated with the Transtar reorganization, a foreign deferred tax benefit of $9 million related to a reduction in the statutory rate enacted in the Canadian province of Alberta and an unfavorable adjustment of $20 million primarily related to the settlement of prior years' taxes.
Cumulative effect of change in accounting principle of $8 million, net of a tax benefit of $5 million, in the first six months of 2001 was an unfavorable transition adjustment related to adopting SFAS No. 133. For further discussion, see Note 2 to the USX Consolidated Financial Statements.
Net income was $1,061 million for the first six months of 2001, an increase of $341 million compared with the first six months of 2000, reflecting an increase of $461 million for the Marathon Group and a $120 million decrease for the U. S. Steel Group.
Dividends to Stockholders
On July 31, 2001, the USX Board of Directors (the "Board") declared dividends of 23 cents per share on Marathon Stock and 10 cents per share on Steel Stock, payable September 10, 2001, to stockholders of record at the close of business on August 16, 2001. The Board also declared a dividend of $0.8125 per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable September 28, 2001, to stockholders of record at the close of business on August 31, 2001.
On August 13, 2001, Marathon Oil Canada Limited, an indirect subsidiary of Marathon Oil Company, will redeem its non-voting Exchangeable Shares through an exchange for shares of Marathon Stock on a one-for-one basis.
Balance Sheet
Current assets at June 30, 2001 decreased $144 million from year-end 2000 primarily due to decreases in assets held for sale, accounts receivable and deferred income tax benefits, partially offset by increases in cash and cash equivalents and inventories. The decrease in assets held for sale resulted from the reclassification of the Yates field assets to investments and long-term receivables.
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Investments and long-term receivables increased $240 million from year-end 2000, primarily due to the reclassification of the Yates field assets from assets held for sale to an investment in MKM Partners L.P.
Net property, plant and equipment at June 30, 2001 increased $863 million from year-end 2000 primarily due to the acquisitions of Pennaco Energy, Inc. ("Pennaco") and East Chicago Tin and the consolidation of Transtar.
Current liabilities at June 30, 2001 increased $309 million compared to year-end 2000 primarily due to an increase in accrued taxes, debt due within one year and notes payable, partially offset by a decrease in accounts payable. The increase in accrued taxes was primarily related to the settlement of prior years' taxes.
Total long-term debt and notes payable was $4,359 million at June 30, 2001, $251 million lower than year-end 2000. Debt decreased due to increased cash available for debt reduction. As a result, revolving credit agreements and outstanding commercial paper were reduced, partially offset by increased borrowings from a six-month term loan facility agreement and a new five-year promissory note agreement. Most of the debt is a direct obligation of, or is guaranteed by, USX.
Employee benefits at June 30, 2001 increased $163 million compared to year- end 2000 primarily due to the addition of employees with the Transtar consolidation and the acquisition of the tin mill products business of LTV Corporation.
Minority interest in Marathon Ashland Petroleum LLC increased by $170 million from year-end 2000 due to Ashland's share of recorded MAP income exceeding cash distributions to Ashland.
Total stockholders' equity increased $930 million from year-end 2000 primarily due to increased net income, partially offset by dividends paid.
Cash Flows
Net cash provided from operating activities totaled $2,023 million in the first six months of 2001, a $915 million increase from the first six months of 2000, reflecting increases of $789 million for the Marathon Group and $126 million for the U. S. Steel Group. The increases primarily reflect higher net income and lower use of working capital. For details, see Management's Discussion and Analysis of Financial Condition and Results of Operation for each Group.
Capital expenditures for property, plant and equipment in the first six months of 2001 were $769 million compared with $673 million for the first six months of 2000. For further details, see Management's Discussion and Analysis of Financial Condition and Results of Operations for each of the respective Groups.
Contract commitments to acquire property, plant and equipment and long-term investments at June 30, 2001, totaled $568 million compared with $663 million at December 31, 2000. In addition, MAP has a commitment to spend approximately $270 million over the next eight years for future environmental projects.
The acquisition of Pennaco Energy, Inc. included cash payments of $506 million. For further discussion of Pennaco, see Note 4 to the USX Consolidated Financial Statements.
Cash from disposal of assets was $115 million in the first six months of 2001, compared with $230 million in the first six months of 2000. Proceeds in 2001 were for the disposition of various Canadian oil fields, SSA stores, and various domestic production properties. Proceeds in 2000 were mainly from the disposition of Marathon's 33.34 percent interest in the Angus/Stellaria development in the Gulf of Mexico.
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
The net change in restricted cash was a net withdrawal of $11 million in the first six months of 2001, compared with a net deposit of $33 million in the first six months of 2000. Restricted cash in both periods primarily reflected the net effects of cash deposited and withdrawn from domestic production property dispositions and acquisitions.
Financial obligations (the net of commercial paper and revolving credit agreements and other debt borrowings and repayments on the Consolidated Statement of Cash Flows) decreased $270 million in the first six months of 2001 compared with a decrease of $289 million in the first six months of 2000. The decrease in 2001 reflects net cash provided from operating activities and asset sales in excess of cash used for capital expenditures, acquisitions, dividend payments and minority interest distributions.
Distributions to minority shareholder of MAP were $244 million in the first six months of 2001, compared with $73 million in the first six months of 2000. For further details, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group.
Debt and Preferred Stock Ratings
Standard & Poor's Corp. rates USX's and Marathon's senior debt BBB, USX's subordinated debt BBB- and preferred stock BB+. Moody's Investor Services, Inc. rates USX's and Marathon's senior debt Baa1, USX's subordinated debt Baa2 and preferred stock Baa3. Fitch IBCA Duff & Phelps rates USX's senior notes BBB and USX's subordinated debt as BBB-. All senior debt of USX holds an investment grade rating. In connection with the Proposed Separation, Standard & Poor's reported that they had assigned a corporate credit rating of BBB+ for Marathon Oil Corporation with a stable outlook and a corporate credit rating of BB to United States Steel Corporation with a negative outlook, assuming the Proposed Separation is completed. Moody's has assigned a Ba1 senior implied rating to United States Steel Corporation with a stable outlook. Additionally, Standard & Poor's and Moody's have assigned BB and Ba2 ratings, respectively, to United States Steel LLC's $385 million senior unsecured note offering.
Liquidity
At June 30, 2001, USX had no borrowings against its $1,354 million long-term revolving credit agreement, no borrowings against its $451 million 364-day facility and no commercial paper borrowings. There were no borrowings against USX's short-term lines of credit totaling $115 million at June 30, 2001. At June 30, 2001, there were no borrowings against the USSK short-term credit facility. At June 30, 2001, MAP had no borrowings against its revolving credit agreements with banks and no amounts outstanding against its revolving credit agreement with Ashland, which was amended and extended for one year to March 15, 2002.
At June 30, 2001, USX had $250 million outstanding under a six-month term loan facility expiring August 16, 2001 and $29 million outstanding under a five-year promissory note agreement expiring in 2006.
On July 27, 2001, United States Steel LLC and United States Steel LLC's wholly owned subsidiary, United States Steel Financing Corp., issued $385 million of Senior Notes due August 1, 2008 ("Notes"), at an interest rate of 10.75 percent. The Notes were issued to meet, in part, the conditions of the Proposed Separation related to the completion of necessary financing arrangements. These Notes are guaranteed by USX Corporation until completion of the Proposed Separation, at which time they will be solely the obligation of United States Steel Corporation. The Notes allow their redemption if the Proposed Separation does not occur. In accordance with USX's policy of managing most financial activity on a centralized, consolidated basis, the proceeds from the issuance of these Notes will be attributed to and reflected in the financial statements of both
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
groups. The Notes contain covenants that impose significant restrictions on certain activities of United States Steel Corporation. For a description of these covenants see "Management's Discussion and Analysis of Financial Condition and Results of Operation for the U. S. Steel Group--Liquidity" on page 103.
Capital expenditures in the first six months of 2001 were $769 million and are expected to be approximately $2.1 billion for the full year, including expenditures by recently acquired businesses. Contract commitments for capital expenditures at June 30, 2001 totaled $568 million.
USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of June 30, 2001, to complete currently authorized capital spending programs and to complete the Proposed Separation. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the balance of 2001 and years 2002 and 2003, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 15 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 and other external financing sources. Until the Proposed Separation is implemented or abandoned, USX management believes that it will be more difficult to access traditional debt and equity markets.
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 could affect the availability of financing include the performance of each Group (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of USX's outstanding debt and credit ratings by rating agencies.
Environmental Matters, Contingencies and Commitments
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.
USX has been notified that it is a potentially responsible party ("PRP") at 33 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30, 2001. In addition, there are 20 sites where USX has received information requests or other indications that USX may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. There are also 145 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, 14 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for substantially 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
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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.
New Tier II gasoline rules, which were finalized by the U.S. Environmental Protection Agency ("EPA") in February 2000, and the diesel fuel rules, which were 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 and logistical considerations, and unforeseen hazards such as weather conditions.
In October 1996, EPA Region V issued a Finding of Violation against the Robinson refinery alleging that it does not qualify for an exemption under the National Emission Standards for Benzene Waste Operations pursuant to the CAA, because the refinery's Total Annual Benzene releases exceed the limitation of 10 megagrams per year, and as a result, the refinery is in violation of the emission control, record keeping, and reports requirements. The Marathon Group contends that it does qualify for the exemption. However, in February 1999, the U.S. Department of Justice ("DOJ") in Chicago, Illinois, filed a civil complaint in the U.S. District Court for the Southern District of Illinois alleging six counts of violations of the CAA with respect to the benzene releases. The case has been settled in concept with Marathon and MAP agreeing to pay a combined $1.6 million civil penalty and the performance of $125,000 in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. A negotiated consent decree was filed with the Court May 11, 2001 and approval by the Court is anticipated in the third quarter 2001.
In 1998, the EPA conducted multi-media inspections of MAP's Detroit and Robinson refineries covering compliance with the Clean Air Act, the Clean Water Act, reporting obligations under the Emergency Planning and Community Right to Know Act, and CERCLA and the handling of process waste. The EPA served a total of six Notices of Violation ("NOV") and Findings of Violation as a result of these inspections. On May 11, 2001, a consent decree was lodged with a federal court in Detroit, Michigan, where MAP settled with the EPA certain New Source Review ("NSR") and other air compliance issues as well as issues related to the EPA's 1998 multi-media inspections of the Detroit and Robinson refineries. MAP's settlement with the EPA includes all of MAP's refineries and commits MAP to specific control technologies and implementation schedules for approximately $270 million in environmental capital expenditures and improvements to MAP's refineries over approximately an eight year period that are consistent with MAP's current capital spending plans. It also commits MAP to payment of an aggregate civil penalty in the amount of $3.8 million and the performance of about $8 million in supplemental environmental projects as part of an enforcement action for alleged Clean Air Act violations. MAP believes that the settlement will provide MAP with increased permitting and operating flexibility while achieving significant emission reductions. Approval of the consent decree by the court is expected in the third quarter of 2001.
In 2000, the Kentucky Natural Resources and Environmental Cabinet sent Marathon Ashland Pipe Line LLC a NOV seeking a civil penalty associated with a pipeline spill earlier that year in Winchester, Kentucky. MAP has settled this NOV in concept for a $170,000 penalty and reimbursement of response costs up to $131,000. A final consent decree is expected in the third quarter 2001.
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 the releases of hazardous substances from
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
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. In 2000, the trustees concluded their assessment of sediment injuries, which includes a technical review of environmental conditions. The PRP joint defense group has proposed terms for the settlement of this claim which have been endorsed by representatives of the trustees and the EPA to be included in a consent decree that USX expects will resolve this claim. A reserve has been established for the USX share of this anticipated settlement.
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. On April 6, 2001, USX paid $.4 million for costs associated with this site. The only remaining outstanding claim is the natural resource damages claim filed by the Commonwealth of Pennsylvania.
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.
In November 2000, a NOV was issued by the Jefferson County Health Department ("JCHD") alleging violation of the Halogenated Solvent National Emission Standards for Hazardous Air Pollutants and the JCHD Volatile Organic Compound ("VOC") regulations at the sheet mill stretch leveler at Fairfield Works. U. S. Steel Group proposed a civil penalty of $100,000 and a VOC emission limit, which have been agreed to by JCHD. A consent order was executed and approved by the court in May 2001. The penalty was paid by U. S. Steel Group in June 2001.
USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment (see Note 15 to the USX Consolidated Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the USX 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. See discussion of Liquidity herein.
Outlook--U. S. Steel Group
For a recent outlook pertaining to the U. S. Steel Group, see "RECENT DEVELOPMENTS--Outlook of United States Steel" on page 28.
Outlook--Marathon Group
For a recent outlook pertaining to the Marathon Group, see "RECENT DEVELOPMENTS--Outlook of Marathon" on pages 29 through 31.
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk and Related Risks
Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for commodity-based derivative instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income
Taxes Assuming a
Hypothetical Price
Change of:
--------------------------
10% 25%
------------ -----------
(Dollars in millions)
Commodity-Based Derivative Instruments
Marathon Group(b)(c)
Crude oil(f)(g)................................ $ 8.0(d) $ 22.6(d)
Natural gas(f)(g).............................. 10.4(d) 25.3(d)
Refined products(f)(g)......................... 0.3(d) 1.8(d)
U. S. Steel Group
Natural Gas.................................... 0.9(e) 2.2(e)
Zinc........................................... 1.8(e) 4.6(e)
Tin............................................ 0.1(e) 0.3(e)
|
(a) With the adoption of SFAS No. 133, the definition of a derivative
instrument has been expanded to include certain fixed price physical
commodity contracts. Such instruments are included in the above table.
Amounts reflect the estimated incremental effects on pretax income of
hypothetical 10% and 25% changes in closing commodity prices at June 30,
2001. Management evaluates the portfolios of commodity-based derivative
instruments on an ongoing basis and adjusts strategies to reflect
anticipated market conditions, changes in risk profiles and overall
business objectives. Changes to the portfolios subsequent to June 30, 2001,
may cause future pretax income effects to differ from those presented in
the table.
(b) The number of net open contracts varied throughout second quarter 2001,
from a low of 19,657 contracts at June 30, to a high of 30,633 contracts at
May 30, and averaged 24,710 for the quarter. The type of derivative
instruments and number of positions entered into will vary which changes
the composition of the portfolio. Because of these variations, 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) Price increase.
(e) Price decrease.
(f) 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.
(g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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 June 30, 2001 interest rates on the fair value of USX's non-derivative financial instrument is provided in the following table:
As of June 30, 2001
Incremental
Increase in
Non-Derivative Fair Fair
Financial Instruments(a) Value Value(b)
--------------------------------------------------------------------------------
Financial assets:
Investments and long-term receivables...................... $ 272 $ --
--------------------------------------------------------------------------------
Financial liabilities:
Long-term debt(c)(d)....................................... $4,396 $146
Preferred stock of subsidiary.............................. 250 19
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust............................ 182 13
------ ----
Total liabilities............................................ $4,828 $178
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(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) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at June 30, 2001 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 June 30, 2001.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or current borrowing
rates for financings with similar terms and maturities.
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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 June 30, 2001, USX had open Euro forward sale contracts for Slovak Koruna with a total carrying value of approximately $20 million. A 10% increase in the June 30, 2001 Euro forward rates would result in a $2 million charge to income. The entire amount of these contracts is attributed to the U. S. Steel Group.
At June 30, 2001, USX had open Canadian dollar forward purchase contracts with a total carrying value of approximately $9 million. A 10% increase in the Canadian dollar to U.S. dollar forward rate would result in a charge to income of approximately $1 million. The entire amount of these contracts is attributed to the Marathon Group.
Equity Price Risk
As of June 30, 2001, USX was subject to equity price risk and liquidity risk
related to its investment in VSZ a.s., the former parent of U. S. Steel Kosice,
s.r.o., 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 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.
Annex F
UNITED STATES STEEL CORPORATION 2002 STOCK PLAN
1. Objectives. The United States Steel Corporation 2002 Stock Plan (the "Plan") is designed:
(a) to promote the long-term financial interests and growth of the Corporation and subsidiaries by attracting and retaining management personnel with the training, experience and ability to enable them to make a substantial contribution to the success of the Corporation's businesses;
(b) to motivate management personnel by means of growth-related incentives to achieve long-range growth goals; and
(c) to further the identity of interests of participants with those of the stockholders of the Corporation through opportunities for increased stock ownership in the Corporation.
2. Definitions.
(a) Board. The Board of Directors of United States Steel Corporation;
(b) Committee. The Compensation & Organization Committee of the Board of Directors of United States Steel Corporation, which will consist of not less than three directors of the Corporation who are appointed by the Board of Directors and who will satisfy the definition of "non-employee director" under Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any successor rule. In addition, in order to be a member of the Committee, a director must be an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder;
(c) Corporation. United States Steel Corporation (USS) and its (1) wholly- owned and partially-owned subsidiaries including limited liability companies ("Subsidiaries") and wholly-owned and partially-owned subsidiaries, direct and indirect, of Subsidiaries, and (2) joint ventures included within USS or any entity described in (1) above;
(d) Fair Market Value. Such value of a Share as reported for stock exchange transactions and determined in accordance with any applicable resolutions or regulations of the Committee in effect at the relevant time;
(e) Grant. A Grant made under the Plan to a Participant in the form of an Option, Restored Option, Stock Appreciation Right or Restricted Stock or any combination thereof;
(f) Participant. An employee of the Corporation to whom a Grant is made;
(g) Share. A share of Steel Stock, which may be authorized but unissued or issued and reacquired; and
(h) Steel Stock. United States Steel Corporation Common Stock, par value $1.00.
3. Eligibility. Employees of the Corporation eligible for a Grant under the Plan are all executive officers and others in responsible positions whose performance, in the judgment of the Committee, affects the Corporation's success.
4. Administration. The Plan shall be administered by the Committee in accordance with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 or any successor rule. The Committee shall determine the type or types of Grants to be made to each Participant and shall set forth in such Grant the terms, conditions and limitations applicable to it, including provisions relating to change in control of the Corporation. Grants may be made singly, in combination or in tandem. The Committee shall have full and exclusive power to interpret the Plan, to adopt rules, regulations and guidelines relating to the Plan, to
grant waivers of Plan restrictions, other than the restrictions described in Paragraph 10, and to make all of the determinations necessary for its administration.
5. Shares Subject to the Plan. Up to 10,000,000 Shares shall be available for Grants while the Plan is in effect. In addition, Shares related to Grants that are forfeited, terminated, cancelled, expire unexercised, settled in cash in lieu of stock or in such manner that all or some of the Shares covered by a Grant are not issued to a Participant shall immediately become available for Grants, and these Shares, as well as any unused portion of the percentage limit of Shares in any calendar year, shall be carried forward and available for Grants in succeeding calendar years. During any calendar year, no Participant shall be awarded Grants pursuant to Paragraphs 7, 8, 9 and 10 hereof with respect to more than 800,000 Shares of stock.
6. Delegation of Authority. The Committee may delegate to the Stock Option Officer and to other senior officers of the Corporation its duties under the Plan subject to such conditions and limitations as the Committee shall prescribe except that only the Committee may designate and make Grants to Participants who are subject to Section 16 of the Securities Exchange Act of 1934.
7. Option. A right to purchase a specified number of Shares at not less than 100% of Fair Market Value on the date of the Grant. All Options will be Non-Qualified Options. Full payment for Shares purchased shall be made at the time of the exercise of the Option, in whole or in part. Payment of the purchase price shall be made in cash or in such other form as the Committee may approve, including Shares valued at the Fair Market Value of the Shares on the date of exercising the Option. No Option shall have a term exceeding eight years from the date of grant or be exercisable prior to the expiration of one year from the date of grant, and, without prior stockholder approval, no Option shall be repriced either by lowering the exercise price of a previously granted Option or by cancelling and regranting the Option except as provided for in Paragraph 13.
8. Restored Option. An Option issued as a result of the exercise of an Option for which the purchase price is paid wholly in previously owned Shares of the stock of the underlying Option. Upon such an exercise, a Restored Option shall be granted with respect to Shares of the stock of the underlying Option, equal to the number of Shares actually used to exercise the underlying Option or portion thereof plus any Shares withheld for the payment of taxes. A Restored Option (1) shall have an Option price equal to the Fair Market Value of the stock of the underlying Option on the date of exercise, (2) shall have the same expiration date as the underlying Option and (3) shall not be exercisable prior to the expiration of one year from the date of grant. Grants and exercises of Restored Options shall be subject to such other restrictions as shall be determined by the Committee.
9. Stock Appreciation Right. A right to receive a payment in cash and/or Shares equal to the excess of the Fair Market Value of a Share on the date the Stock Appreciation Right (SAR) is exercised over the Fair Market Value of a Share at the date of the SAR Grant for a specified number of Shares; provided, that for any SAR exercised during the 10-business-day period beginning on the third business day following the release of USS's quarterly earnings, the Committee may, in its sole discretion, establish a uniform Fair Market Value of a Share for such period which shall not be more than the highest daily Fair Market Value and shall not be less than the lowest daily Fair Market Value during such 10-business-day period. No Stock Appreciation Right shall be exercisable prior to the expiration of one year from the date of grant. "Business day" shall mean all calendar days except Saturdays, Sundays and national holidays.
10. Restricted Stock. An award of Shares for no cash consideration, if permitted by applicable law, or for such other consideration as determined by the Committee. Each award shall be subject to: the condition that the Participant's continuous service with the Corporation continue for at least one year following the date of
such award; vesting restrictions based on achievement of business objectives, Corporation performance and other criteria; and provisions for forfeiture and non-transfer. Subject to such forfeiture and transfer restriction provisions as may be established by the Committee, any Participant receiving an award shall have all the rights of a stockholder of the Corporation with respect to Shares of Restricted Stock, including the right to vote the Shares and the right to receive any cash dividends thereon. During the period January 1, 2002 through December 31, 2006, no more than 1,200,000 Shares of Restricted Stock shall be granted.
Each award of Restricted Stock under this Plan shall remain unvested until the Committee vests the Shares based upon the specific performance measures outlined in the table below. The Committee has the authority to adopt, in accordance with regulations established under the Code, applicable target levels under these performance measures and the percentage of Restricted Stock to be vested for attaining these target levels. The Committee reserves the right to reduce the percentage of Restricted Shares to be vested for a Participant. Shares of Restricted Stock under this Plan will be vested only after the Committee certifies in writing that the applicable performance measures have been satisfied. No Shares of Restricted Stock shall be vested prior to the expiration of one year from the date of grant. In the case of a change in control of the Corporation, all restrictions shall terminate.
Income from operations as % of capital employed
Income from operations per ton shipped
Operating cash flow as % of capital employed
Safety performance
11. Assumptions and Conversions. Options and restored options to purchase USX-U. S. Steel Group Common Stock and stock appreciation rights with respect to USX-U. S. Steel Group Common Stock that were granted under the USX Corporation 1990 Stock Plan and that remain unexercised on December 31, 2001, shall, effective January 1, 2002, be assumed by the Corporation and shall be deemed to constitute Options and Restored Options to purchase, and Stock Appreciation Rights with respect to Shares, and shall be subject to the same terms and conditions as the options, restored options and stock appreciation rights being assumed. The Options and Restored Options will cover the same number of Shares and have the same exercise prices as the options and restored options to purchase shares of USX-U. S. Steel Group Common Stock that are being assumed, provided that the number of Shares and/or the exercise prices will be adjusted by the Committee, if necessary, so that (i) the aggregate intrinsic value of the Options and Restored Options on January 1, 2002 is not greater than the aggregate intrinsic value of the options and restored options being assumed immediately before January 1, 2002, and (ii) the ratio of the exercise price per share to the market value per share is not reduced. Any such adjustments will be based on the closing price per share of USX- U. S. Steel Group Common Stock on the last trading day before January 1, 2002 relative to the opening price per share of Shares on the next trading day. These assumptions shall not represent Grants under Paragraph 5 or 10 hereof. Also, Shares of Restricted Stock into which restricted shares of USX-U. S. Steel Group Common Stock awarded under the USX Corporation 1990 Stock Plan are converted on January 1, 2002 shall be subject to the same terms and conditions as the restricted shares being converted.
12. Transfer. No Grant may be assigned, pledged or transferred other than by will or by the laws of descent and distribution and during a Participant's lifetime shall be exercisable only by the Participant or his or her guardian or legal representative.
13. Adjustments. In the event of any change in the outstanding common stock of USS by reason of a stock split, stock dividend, stock combination or reclassification, recapitalization or merger, or similar event, the Committee may adjust appropriately the number of Shares available for or covered by Grants and Share prices related to outstanding Grants and make such other revisions to outstanding Grants as it deems are equitably required.
14. Tax Withholding. The Corporation shall have the right to deduct applicable taxes from any cash payment under this Plan which are required to be withheld and further to condition the obligation to deliver or the vesting of Shares under this Plan upon the Participant paying USS such amount as it may request to satisfy any liability for applicable withholding taxes. Participants may elect to have USS withhold Shares to satisfy all or part of their withholding liability in the manner and to the extent provided for by the Committee at the time of such election.
15. Amendments. The Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding Grants as are consistent with this Plan provided that, except for adjustments under Paragraph 13 hereof, no such action shall modify such Grant in a manner adverse to the Participant without the Participant's consent except as such modification is provided for or contemplated in the terms of the Grant.
The Board may amend, suspend or terminate the Plan except that no such action may be taken (other than as provided in Paragraph 13) which would, without stockholder approval, increase the aggregate number of Shares available for Grants under the Plan; decrease the price of Options, Restored Options or SARs; change the requirements relating to the Committee; or extend the term of the Plan.
16. Effective and Termination Dates. Subject to approval by the stockholders, the Plan shall be effective on January 1, 2002 and shall terminate on December 31, 2006, subject to earlier termination by the Board pursuant to Paragraph 15.
Annex G
UNITED STATES STEEL CORPORATION SENIOR EXECUTIVE OFFICER
ANNUAL INCENTIVE COMPENSATION PLAN
1. Purpose
The objectives of the Senior Executive Officer Annual Incentive Compensation Plan (the "Plan") are to advance the interests of the Corporation by providing Plan Participants with annual incentive opportunities linked directly to specific results. It is intended that the Plan will:
(a) reinforce the Corporation's goal-setting and strategic planning process,
(b) recognize the efforts of senior executive officers in achieving objectives, and
(c) aid in attracting and retaining competent senior executive officers, thus ensuring the long-range success of the Corporation.
2. Definitions
The following definitions will apply:
Award--An award granted under the Senior Executive Officer Annual Incentive Compensation Plan.
Board--The Board of Directors of United States Steel Corporation.
Committee--The Compensation & Organization Committee of the Board of
Directors of United States Steel Corporation, which will consist of not
less than three directors of the Corporation who are appointed by the Board
of Directors and who will not be and will not have been an officer or an
employee of the Corporation. In addition, in order to be a member of the
Committee, a director must be an "outside director" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereunder.
Corporation--United States Steel Corporation, together with any 80% or more owned subsidiary companies.
Participant--A senior executive officer who is eligible to receive incentive compensation under the Plan.
3. Administration
The Committee will administer the Plan and will make all other determinations necessary under the Plan. Determinations made by the Committee will be final and binding upon Participants and their legal representatives and, in the case of deceased Participants, upon their executors, administrators, estates, beneficiaries, heirs and legatees. The terms and provisions of the Plan will be construed under and controlled by the law of the Commonwealth of Pennsylvania.
4. Participants
Participants in the Plan are employees who served the Corporation in one of the positions listed below for at least a portion of the year for which Awards are made:
Chairman Chief Financial Officer Chief Executive Officer Chief Legal Officer President Executive Vice Presidents Vice Chairmen Senior Vice Presidents Chief Operating Officer |
Awards made to individuals who die (in which case the Award will be made to the estate of the Participant) or retire during the year will be prorated based on the period of active employment. An employee who is a participant in any other cash incentive plan for a year or portion thereof may not participate in the Plan for the same year or portion thereof.
5. Determination of Awards
Each Award granted under the Plan will be based upon the performance of the Corporation. Performance will be evaluated using the specific performance measures outlined in the table below. The Committee has the authority to adopt, in accordance with regulations established under the Code, applicable target levels under these performance measures and the amounts to be awarded for attaining these target levels.
The Committee reserves the right to reduce the amount of an Award or eliminate an Award that would otherwise be payable to a Participant under the Plan. In no event will the amount of an Award payable to a Participant for a year exceed $3.0 million.
Applicable Performance Measures
Income From Operations
Steel Shipments
Worker Safety (Injury Frequency Rate)
Toxic Emissions Improvements
Work Force Diversity
Common Stock Performance
6. Payment of Awards
Awards can be paid under the Plan only after the Committee certifies in writing that the applicable performance measures have been satisfied.
The Compensation Committee may permit deferral of receipt of all or any portion of an Award granted under the Plan for such period and under such conditions as the Committee may determine, including the payment of interest at a reasonable rate.
No Award will be paid to a Participant who quits or is discharged prior to payment of an Award.
Unless receipt is deferred, an Award will be paid in cash as soon as practicable following the determination of Awards. Awards are subject to income and payroll tax withholding.
Awards will not be considered as part of the Participant's salary and will not be used in the calculation of any other pay, allowance or benefit except for provisions as stated under the Supplemental Pension Program.
7. Effective Date
Subject to approval by a majority of votes present in person or represented by proxy and entitled to vote on October 16, 2001, this Plan will have an effective date of January 1, 2002.
[USX CORPORATION LOGO]
ATTENDANCE CARD
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 16, 2001
You are cordially invited to attend the Special Meeting of Stockholders on October 16, 2001. The Meeting will be held at the Hotel du Pont, 11th and Market Streets, Wilmington, Delaware 19801, at 9:00 A.M., Eastern Time.
Use of this attendance card is for our mutual convenience. Your right to attend the Special Meeting without this attendance card is not affected, provided that you present proper identification.
Attached below is your Proxy Card for the Special Meeting.
Dan D. Sandman
Secretary
YOU MAY VOTE
(A) BY COMPLETING THE PROXY CARD ATTACHED BELOW AND RETURNING IT IN
THE ENCLOSED ENVELOPE, OR
(B) BY TOLL-FREE TELEPHONE CALL, OR
TO VOTE BY TELEPHONE OR INTERNET
USE THE CONTROL NUMBER IN THE BOX BELOW
VOTING IS AVAILABLE 24 HOURS A DAY, 7 DAYS A WEEK
YOUR CONTROL NUMBER
[ ]
BY TELEPHONE BY INTERNET
Toll-free 1-888-216-1303 https://www.proxyvotenow.com/usx
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Have your control number available when you call or visit the Internet site and follow the prompts. If you vote on the Internet, be certain to enter the complete address shown above.
The undersigned appoint(s) Thomas J. Usher, Clarence P. Cazalot, Jr. and Robert M. Hernandez, or any of them, proxies to vote as herein stated on behalf of the undersigned at the Special Meeting of Stockholders of USX Corporation on October 16, 2001, and at any meeting resulting from an adjournment or postponement thereof, upon each of the proposals set forth below, as set forth in the Proxy Statement for such Special Meeting, with respect to which the proxies are instructed to vote as follows:
PROPOSALS OF THE BOARD OF DIRECTORS
TO HOLDERS OF USX-U. S. STEEL GROUP COMMON STOCK (VOTING AS A SEPARATE CLASS
AND/OR VOTING WITH USX--MARATHON GROUP COMMON STOCK AS A SINGLE CLASS)
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE ITEMS BELOW.
1. Approval and adoption of the FOR [_] AGAINST [_] ABSTAIN [_]
Agreement and Plan of
Reorganization, dated as of
July 31, 2001, between USX
Corporation and United States
Steel LLC, providing for the
separation of the U. S. Steel
Group and the Marathon Group into
two independent companies, by way
of a merger of a wholly owned
subsidiary of USX Corporation
with and into USX Corporation
pursuant to which each share of
USX-U. S. Steel Group Common
Stock shall be converted into one
share of common stock of United
States Steel Corporation and
shares of USX-Marathon Group
Common Stock shall remain
outstanding as the sole
outstanding shares of common
stock of USX.
2. Approval of the United States FOR [_] AGAINST [_] ABSTAIN [_]
Steel Corporation 2002 Stock
Plan.
3. Approval of the United States FOR [_] AGAINST [_] ABSTAIN [_]
Steel Corporation Senior
Executive Officer Annual
Incentive Compensation Plan.
4.To adjourn the special meeting, if FOR [_] AGAINST [_] ABSTAIN [_]
necessary.
SIGNATURE(S) ________________________________
_________________________________
Dated: ____________________, 2001
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Please sign exactly as your name appears hereon, including representative capacity where applicable. If more than one named owner, all owners should sign.
THIS PROXY IS SOLICITED BY THE BOARD OF DIREC- TORS AND REPRESENTS YOUR HOLDINGS OF USX-U.S. STEEL GROUP COMMON STOCK. UNLESS OTHERWISE MARKED, PROXIES ARE TO VOTE "FOR" PROPOSALS 1, 2, 3 AND 4.
The undersigned appoint(s) Thomas J. Usher, Clarence P. Cazalot, Jr. and Robert M. Hernandez, or any of them, proxies to vote as herein stated on behalf of the undersigned at the Special Meeting of Stockholders of USX Corporation on October 16, 2001, and at any meeting resulting from an adjournment or postponement thereof, upon each of the proposals set forth below, as set forth in the Proxy Statement for such Special Meeting, with respect to which the proxies are instructed to vote as follows:
PROPOSALS OF THE BOARD OF DIRECTORS
TO HOLDERS OF USX-MARATHON GROUP COMMON STOCK (VOTING AS A SEPARATE CLASS
AND/OR VOTING WITH USX--U. S. STEEL GROUP COMMON STOCK AS A SINGLE CLASS)
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE ITEMS BELOW.
1. Approval and adoption of the FOR [_] AGAINST [_] ABSTAIN [_]
Agreement and Plan of
Reorganization, dated as of
July 31, 2001, between USX
Corporation and United States
Steel LLC, providing for the
separation of the U. S. Steel
Group and the Marathon Group into
two independent companies, by way
of a merger of a wholly owned
subsidiary of USX Corporation
with and into USX Corporation
pursuant to which each share of
USX-U. S. Steel Group Common
Stock shall be converted into one
share of common stock of United
States Steel Corporation and
shares of USX-Marathon Group
Common Stock shall remain
outstanding as the sole
outstanding shares of common
stock of USX.
2. Approval of the United States FOR [_] AGAINST [_] ABSTAIN [_]
Steel Corporation 2002 Stock
Plan.
3. Approval of the United States FOR [_] AGAINST [_] ABSTAIN [_]
Steel Corporation Senior
Executive Officer Annual
Incentive Compensation Plan.
4.To adjourn the special meeting, if FOR [_] AGAINST [_] ABSTAIN [_]
necessary.
SIGNATURE(S) ________________________________
_________________________________
Dated: ____________________, 2001
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Please sign exactly as your name appears hereon, including representative capacity where applicable. If more than one named owner, all owners should sign.
THIS PROXY IS SOLICITED BY THE BOARD OF DIREC- TORS AND REPRESENTS YOUR HOLDINGS OF USX-MARA- THON GROUP COMMON STOCK. UNLESS OTHERWISE MARKED, PROXIES ARE TO VOTE "FOR" PROPOSALS 1, 2, 3 AND 4.
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
Limited liability companies organized under the laws of the State of Delaware are empowered by Section 18-108 of the Delaware Limited Liability Company Act to indemnify any person, including officers and directors, from and against any and all claims or demands whatsoever. Section 145 of the Delaware General Corporation Law (the "DGCL") provides that a corporation has the power to indemnify its officers, directors, employees and agents (or persons serving in such positions in another entity at the request of the corporation) against the expenses, including attorneys' fees, judgments, fines or settlement amounts actually and reasonably incurred by them, in connection with the defense of any action by reason of being or having been directors or officers, if such person shall have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation (and, with respect to any criminal action, had no reasonable cause to believe the person's conduct was unlawful), except that, if such action shall be by or in the right of the corporation, no such indemnification shall be provided as to any claim, issue or matter as to which such person shall have been judged to have been liable to the corporation unless and to the extent that the Court of Chancery of the State of Delaware, or another court in which the suit was brought, shall determine upon application that, in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity.
Section 145 also provides that, to the extent a director or officer is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify such person against expenses actually and reasonably incurred in connection therewith.
Article XI of the Amended and Restated Limited Liability Company Operating Agreement (the "Restated Operating Agreement") of United States Steel LLC (the "Company") provides, and, upon the conversion of the Company into a corporation (the "Conversion"), Article V of the Bylaws of United States Steel Corporation (the "Corporation" and together with the Company, "United States Steel") will provide that United States Steel shall indemnify to the fullest extent permitted by law any person who is made or is threatened to be made a party or is involved in any action, suit, or proceeding whether civil, criminal, administrative or investigative by reason of the fact that he is or was a director, officer, employee or agent of the United States Steel or is or was serving at the request of the United States Steel as an officer, director, employee or agent of another corporation, partnership, joint venture, trust, enterprise, or nonprofit entity.
Policies of insurance are maintained by the Company, and will become policies of the Corporation immediately after the Conversion, under which directors and officers of United States Steel are insured, within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of actions, suits or proceedings, and certain liabilities which might be imposed as a result of such actions, suits or proceedings, to which they are parties by reason of being or having been such directors or officers.
The Restated Operating Agreement provides, and, after the Conversion, the
Restated Certificate of Incorporation of the Corporation will provide, that no
director shall be personally liable to United States Steel or its members, or,
upon the Conversion, its stockholders for monetary damages for any breach of
fiduciary duty by such director as a director, except (i) for breach of the
director's duty of loyalty to United States Steel or its members, or, upon the
Conversion, its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (which, prior to the Conversion, shall be
applied as if the Company were a corporation organized pursuant to the DGCL),
(iv) for any transaction from which the director derived an improper personal
benefit.
The Plan of Reorganization provides that Marathon Oil Corporation will indemnify, defend and hold harmless United States Steel and its directors, officers, employees, representatives, advisors, agents and affiliates from, against and in respect of any and all losses arising out of, relating to or resulting from, directly
II-1
or indirectly, (i) any and all liabilities relating to the business, assets or liabilities of the Marathon Group, except as otherwise provided in the Separation Documents; (ii) Marathon Oil Corporation's failure to observe its obligations under the Plan of Reorganization or any of the Separation Documents; and (iii) sixty-five percent of any and all Joint Liabilities (as defined in the Plan of Reorganization).
ITEM 21. Exhibits and Financial Statement Schedules
(a) Exhibits. See Exhibit Index.
(b) Financial Statement Schedules. Not applicable.
(c) Reports, Opinions or Appraisals. The opinions of Credit Suisse First Boston Corporation and of Salomon Smith Barney, Inc. are included as Annexes B-1 and B-2, respectively, to the proxy statement/prospectus included as part of this Registration Statement.
ITEM 22. Undertakings
(a)(1) The undersigned registrant hereby undertakes as follows: prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.
(2) The undersigned registrant hereby undertakes that every prospectus: (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(4) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of each of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(b) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the proxy statement/prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
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within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, United States Steel LLC has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Pittsburgh, state of Pennsylvania on September 7, 2001.
UNITED STATES STEEL LLC
By: /s / Gretchen R. Haggerty
Name: Gretchen R. Haggerty
Title: Vice President--Accounting & Finance
POWER OF ATTORNEY
Know all men by these presents that the undersigned does hereby make, constitute and appoint Robert M. Hernandez, Gretchen R. Haggerty and Larry G. Schultz, or any one of them, my true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, to sign, execute and file for me and on my behalf any amendments, including any post-effective amendment, and supplements to this registration statement and to file the same, with all exhibits thereto and any other documents in connection therewith, making such changes in this registration statement as the person(s) so acting deems appropriate, with the Securities and Exchange Commission, hereby ratifying and confirming all that said persons, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title
Date
/s/ Thomas J. Usher Chairman and Chief Executive Officer
September 7,
----------------------------- 2001
(Principal Executive Officer and Director)
Thomas J. Usher
/s/ Gretchen R. Haggerty Vice President--Accounting & Finance
September 7,
----------------------------- 2001
(Principal Financial Officer and Director)
Gretchen R. Haggerty
/s/ Paul C. Reinbolt Comptroller September 7,
----------------------------- (Controller) 2001
Paul C. Reinbolt
Director September ,
----------------------------- 2001
Charles G. Carson, III
Director September ,
----------------------------- 2001
John J. Connelly
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II-4
Director September ,
----------------------------- 2001
Roy G. Dorrance
/s/ Albert E. Ferrara, Jr. Director September 7,
----------------------------- 2001
Albert E. Ferrara, Jr.
/s/ James D. Garraux Director September 7,
----------------------------- 2001
James D. Garraux
/s/ Charles C. Gedeon Director September 7,
----------------------------- 2001
Charles C. Gedeon
/s/ Bruce A. Haines Director September 7,
----------------------------- 2001
Bruce A. Haines
Director September ,
----------------------------- 2001
Robert M. Hernandez
/s/ J. Paul Kadlic Director September 7,
----------------------------- 2001
J. Paul Kadlic
/s/ Kenneth L. Matheny Director September 7,
----------------------------- 2001
Kenneth L. Matheny
/s/ Dan D. Sandman Director September 7,
----------------------------- 2001
Dan D. Sandman
Director September ,
----------------------------- 2001
Terrance D. Straub
/s/ Stephan K. Todd Director September 7,
----------------------------- 2001
Stephan K. Todd
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II-5
EXHIBIT INDEX
The following exhibits are filed herewith or incorporated herein by reference.
Exhibit Number Description
-------------- -----------
2.1 Agreement and Plan of Reorganization, dated as of July 31,
2001, by and between USX Corporation (to be renamed Marathon
Oil Corporation) and United States Steel LLC (to be converted
into United States Steel Corporation) (included as Annex A to
the proxy statement/prospectus which is part of this
registration statement on Form S-4).
3.1 Amended and Restated Limited Liability Company Agreement of
United States Steel LLC.
3.2 Form of Certificate of Incorporation of United States Steel
Corporation.
3.3 Form of Restated Certificate of Incorporation of Marathon Oil
Corporation (formerly USX Corporation).
3.4 Form of By-laws of United States Steel Corporation.
*4.1 Form of Rights Agreement between United States Steel
Corporation and [ ], as Rights Agent.
*4.2 Form of Amended and Restated Rights Agreement between Marathon
Oil Corporation and Mellon Investor Services LLC (formerly
known as ChaseMellon Shareholder Services, L.L.C.), as Rights
Agent.
4.3 Indenture, dated as of July 27, 2001, among United States Steel
LLC and United States Steel Financing Corp., Issuers, USX
Corporation, Guarantor, and The Bank of New York, Trustee
(incorporated by reference to Exhibit 4.2 to USX Corporation's
Form 10-Q filed for the period ending June 30, 2001).
5 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
the validity of United States Steel Corporation common stock to
be issued in connection with the Separation.
8 Opinion of Miller & Chevalier, Chartered, regarding material
U.S. Federal income tax consequences of the Separation.
10.1 Form of Tax Sharing Agreement between USX Corporation (to be
renamed Marathon Oil Corporation) and United States Steel LLC
(to be converted into United States Steel Corporation).
10.2 Form of Transition Services Agreement between USX Corporation
(to be renamed Marathon Oil Corporation) and United States
Steel LLC (to be converted into United States Steel
Corporation).
10.3 Form of Financial Matters Agreement between USX Corporation (to
be renamed Marathon Oil Corporation) and United States Steel
LLC (to be converted into United States Steel Corporation).
10.4 Form of Insurance Assistance Agreement between USX Corporation
(to be renamed Marathon Oil Corporation) and United States
Steel LLC (to be converted into United States Steel
Corporation).
10.5 Form of License Agreement between USX Corporation (to be
renamed Marathon Oil Corporation) and United States Steel LLC
(to be converted into United States Steel Corporation).
10.6 Form of the United States Steel Corporation 2002 Stock Plan
(included as Annex F to the proxy statement/prospectus which is
part of this registration statement on Form S-4).
10.7 Form of United States Steel Corporation Senior Executive
Officer Annual Incentive Plan (included as Annex G to the proxy
statement/prospectus which is part of this registration
statement on Form S-4).
10.8 Form of United States Steel Corporation Annual Incentive
Compensation Plan.
10.9 Form of United States Steel Corporation Non-Officer Restricted
Stock Plan (effective January 1, 2002).
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II-6
Exhibit Number Description
-------------- -----------
*10.10 Completion and Retention Agreement, dated as of 2001,
among USX Corporation, United States Steel LLC and Thomas J.
Usher.
*10.11 Retention Agreement, dated as of 2001, among USX
Corporation, United States Steel LLC and Dan D. Sandman.
*10.12 Form of Change of Control Agreements between United States
Steel and Various Officers.
10.13 Fairfield Caster sublease between USX Holdco, Inc. (predecessor
to Marathon Oil Corporation) and United States Steel LLC (to be
converted into United States Steel Corporation).
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included
in opinion filed as Exhibit 5 to this registration statement on
Form S-4).
23.3 Consent of Miller & Chevalier, Chartered (included in opinion
filed as Exhibit 8 to this registration statement on Form S-4).
23.5 Consent of PricewaterhouseCoopers LLP.
24 Powers of Attorney (included on signature page).
99.1 Opinion of Credit Suisse First Boston Corporation (included as
Annex B-1 to the proxy statement/prospectus which is part of
this registration statement on Form S-4).
99.2 Opinion of Salomon Smith Barney Inc. (included as Annex B-2 to
the proxy statement/prospectus which is part of this
registration statement on Form S-4).
99.3 Consent of Credit Suisse First Boston Corporation.
99.4 Consent of Salomon Smith Barney Inc.
99.5 Form of proxy card for holders of USX- U. S. Steel Group Common
Stock (attached to the proxy statement/prospectus which is part
of this registration statement on Form S-4).
99.6 Form of proxy card for holders of USX- Marathon Group Common
Stock (attached to the proxy statement/prospectus which is part
of this registration statement on Form S-4).
*99.7 Consents of those named to be directors of United States Steel
Corporation.
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II-7
Exhibit 3.1
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
UNITED STATES STEEL LLC
THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY OPERATING AGREEMENT
(this "Agreement") of United States Steel LLC (the "Company") dated as of this
2nd day of July, 2001, by USX HoldCo, Inc., as the sole member of the Company,
to be renamed USX Corporation (the "Member").
WHEREAS, the Member has formed the Company as a limited liability company under the laws of the State of Delaware and, in connection therewith, executed a Limited Liability Company Operating Agreement for the Company, dated as of May 25, 2001 (the "Original Agreement"); and
WHEREAS, the Member desires to amend and restate the Original Agreement in its entirety, as set forth herein.
NOW, THEREFORE, the Member hereby amends and restates the Original Agreement in its entirety, as follows:
First: The name of the limited liability company (which is hereinafter referred to as the "Company") is
UNITED STATES STEEL LLC
Second: Its registered office and place of business in the State of Delaware is located at 1013 Centre Road, City of Wilmington, County of New Castle. The registered agent in charge thereof upon whom process against the Company may be served is Corporation Service Company.
Third: The purposes of the Company are to engage in any lawful act or activity for which a limited liability company may be formed under the Delaware Limited Liability Company Act and any successor statute, as amended from time to time (the "Act"),
and without limiting the foregoing to engage in integrated steel operations and to develop, mine, produce, manufacture, construct, transport, buy, hold, sell and generally deal in products, materials, property, both tangible and intangible, and services of all kinds.
Fourth: The capital structure of the Company shall consist of one class of common interests (the "Common Interests"). All Common Interests shall be identical with each other in every respect.
Fifth: The existence of the Company is to be perpetual.
Sixth: The private property of the Member shall not be subject to the payment of the Company's debts to any extent whatever.
Seventh: Subject to such matters which are expressly reserved hereunder or under the Act to the Member for decision, the business and affairs of the Company shall be managed by a board of directors (the "Board"). The number of directors of the Company shall be fixed from time to time by resolution of the Board, but the number thereof shall not be less than three. Directors shall be elected by the Member, to serve in accordance with the terms hereof, until their respective successors are duly elected and qualified.
In the case of any increase in the number of directors of the Company, the additional director or directors shall be elected by the Board. In the case of any vacancy in the Board from death, resignation, disqualification or other cause, a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election of his successor, shall be elected by a majority of the Board then in office, though less than a quorum.
Directors of the Company may be removed only for cause.
Meetings of the Board shall be held at such times as may be fixed by resolution of the Board on at least two days written notice before the meeting, or by telegraphing or by telexing or by facsimile transmission of such notice at least one day before the meeting, to each director; but such notice may be waived by any director.
A majority of the total number of directors shall constitute a quorum for the transaction of business; but if at any meeting of the Board there be less than a quorum present, a majority of those present may adjourn the meeting from time to time. At any meeting of the Board all matters shall be decided by the affirmative vote of a majority of directors then present, provided that the affirmative vote of at least one-third of all the directors then in office shall be necessary for the passage of any resolution.
Meetings of the Board may be conducted in person or by conference telephone facilities and each director shall be entitled to participate in any meeting of the Board by telephone. Any action required or permitted to be taken at any meeting of the Board may be taken without a meeting if all directors consent thereto in writing or electronic transmission. The writing or writings or electronic transmission or transmissions effectuating such written consent must be filed with the minutes of proceedings of the Board.
No Director (acting in his capacity as such) shall have any authority to bind the Company to any third party with respect to any matter except pursuant to a resolution expressly authorizing such action which resolution is duly adopted by the Board by the affirmative vote required for such matter pursuant to this Agreement.
Each Director of the Company who is not a salaried officer or employee of the Company, or of a subsidiary of the Company, shall receive such allowances for serving as a director and such fees for attendance at meetings of the Board or any committee appointed by the Board as the Board may from time to time determine.
Eighth: The name and address of the Member is as follows:
Name Address
---- -------
USX HoldCo, Inc. 600 Grant Street
Suite 1500
Pittsburgh, PA 15219-4776
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Legal title to all property of the Company shall be held and vested and conveyed in the name of the Company and no real or other property of the Company shall be deemed to be owned by the Member individually.
Any action required to be taken at any annual or special meeting of the Member, or any action which may be taken at any annual or special meeting of the Member or otherwise, may not be taken without a meeting, prior notice and a vote, and the Member may not act by written consent. Meetings of the Member may be called at such times as may be fixed by resolution of the Board, on at least two days written notice before the meeting or by telegraphing or by telexing or by facsimile transmission of such notice at least one day before the meeting to the Member; but such notice may be waived by the Member.
Ninth: The Board shall cause to be maintained complete and accurate books of account of the Company's affairs at the Company's principal place of business. Such books shall be kept on such method of accounting as the Board shall select.
The Board from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulation, the accounts and books of the Company, or any of them, shall be open to the inspection of the Member, and the Member shall have no right to inspect any account or book or document of the Company, except as conferred by law or authorized by the Board, or by the Member.
Tenth: The Board may from time to time declare such dividends as they shall deem advisable and proper, and to such restrictions as may be imposed by law, and pay the same to the Member at such times as they shall fix.
The Board shall have power to issue bonds, debentures, or other obligations, either non-convertible or convertible into the Company's Common Interests, upon such terms, in such manner and under such conditions in conformity with law, as may be fixed by the Board prior to the issue of such bonds, debentures or other obligations.
Eleventh: No director shall be personally liable to the Company or its
members for monetary damages for any breach of fiduciary duty by such director
as a director, except (i) for breach of the director's duty of loyalty to the
Company or the members, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or knowing violation of law, (iii) pursuant to
Section 174 of the Delaware General Company Law, as if the Company were a
corporation organized pursuant to the Delaware General Corporation Law ("DGCL"),
(iv) for any transaction from which the director derived an improper personal
benefit.
The Company shall indemnify and hold harmless to the fullest extent permitted by law any person who was or is made or is threatened to be made a party or is involved in any action, suit, or proceeding whether civil, criminal, administrative or investigative legal representative, is or was a director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee or agent of a corporation, partnership, limited liability company, joint venture, trust, enterprise or non- profit entity, including service with respect to employee benefit plans, against all expenses, liability, and loss reasonably incurred or suffered by such person. The Company shall indemnify any person seeking indemnity in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board.
The Company shall pay the expenses reasonably incurred in defending any such proceeding in advance of its final disposition provided however the payment of expenses incurred by a director or officer in his capacity as a director or officer (except with regard to service to an employee benefit plan or nonprofit entity) in advance of the final disposition of the proceeding shall be made only upon the agreement by the director or officer to repay all amounts advanced if it should be determined that the director or officer is not entitled to be indemnified under this Article or otherwise, and provided, further, that the Company shall have no obligation to pay any expenses in advance pursuant to this Article
to any person who is or was an employee or agent of the Company (other than a director or an officer) or is or was serving at the request of the Company as an employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, with respect to any proceeding by or in the right of the Company to procure a judgment in its favor.
If a claim under this Article is not paid in full within ninety days after a written claim has been received by the Company, the claimant may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid in addition the expense of prosecuting such claim. In any such action the Company shall have the burden of proving that the claimant was not eligible for indemnification under applicable law.
The rights conferred on any person by this Article shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of this Agreement, vote of the Member or disinterested directors or otherwise.
No amendment to or repeal of this Article Eleventh shall apply to or have any effect on the liability or alleged liability of any director of the Company for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal.
Twelfth: The powers and authorities hereinbefore conferred upon the Board are in furtherance and not in limitation of those conferred by the laws of the State of Delaware.
Thirteenth: The Company reserves the right at any time and from time to time to amend, alter, change or repeal any provisions contained in this Agreement in the manner now or hereafter prescribed by law, and all rights preferences and privileges of whatsoever nature conferred upon members, directors or any other persons whomsoever by and pursuant to this Agreement in its present form or as hereafter amended are granted subject to the rights reserved in this Article.
Notwithstanding the foregoing, any amendment to this Agreement or any other
organizational document of the Company, which amendment would, if adopted by a
corporation subject to the DGCL, be required to be included in the certificate
of incorporation of such corporation, shall, pursuant to subsection (g) of
Section 251 of the DGCL, require, in addition to the approval of the members of
the Company, the approval of the stockholders of USX HoldCo, Inc., a Delaware
corporation ("USX HoldCo"), or any successor thereto by merger, by the same vote
as is required by the DGCL and/or this Agreement.
Fourteenth: Any act or transaction by or involving the Company, other than the election or removal of directors,
(A) that requires for its adoption under the Act, or this Agreement, the approval of the members of the Company; or
(B) which, if the Company were a Delaware corporation subject to the DGCL, would require the approval of the stockholders of the Company pursuant to the DGCL,
shall, pursuant to subsection (g) of Section 251 of the DGCL, require, in addition to the approval of the members of the Company, the approval of the stockholders of USX HoldCo, or any successor thereto by merger, by the same vote as is required by the DGCL and/or this Agreement.
Fifteenth: The Company may be converted into a corporation organized under the laws of the State of Delaware upon the authorization of the Board, pursuant to Section 18-216 of the Act. Neither the approval of the Member nor of the stockholders of the Member is required for such conversion.
Sixteenth: The Company shall be a disregarded entity for U.S. federal income tax purposes, and the Member and the Company shall timely make any and all necessary elections and filings for the Company to be treated as a disregarded entity for U.S. federal income tax purposes.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, this Amended and Restated Limited Liability Company Operating Agreement, having been duly adopted, has been executed on the 2nd day of July, 2001.
USX HOLDCO, INC.
By: /s/ R. M. Stanton
----------------------------
Name: R. M.. Stanton
Title: President
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Exhibit 3.2
FORM OF
CERTIFICATE OF INCORPORATION
OF
UNITED STATES STEEL CORPORATION
First: The name of the Corporation (which is hereinafter referred to as the "Corporation") is
UNITED STATES STEEL CORPORATION
Second: Its registered office and place of business in the State of Delaware is located at 2711 Centerville Road, Suite 400,Wilmington, DE. The registered agent in charge thereof upon whom process against the Corporation may be served is Corporation Service Company.
Third: The purposes of the Corporation are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and without limiting the foregoing to engage in integrated steel operations and to develop, mine, produce, manufacture, construct, transport, buy, hold, sell and generally deal in products, materials, property, both tangible and intangible, and services of all kinds.
Fourth: The total number of shares of capital stock which the Corporation shall have authority to issue is Two Hundred and Fourteen Million (214,000,000), of which Two Hundred Million (200,000,000) shares shall be Common Stock having a par value of one dollar ($1.00) per share and Fourteen Million (14,000,000) shares shall be shares of Preferred Stock, without par value (hereinafter called "Preferred Stock").
A statement of the designations of the Preferred Stock or of any series thereof, and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, or of the authority of the Board of Directors to fix by resolution or resolutions such designations and other terms not fixed by the Certificate of Incorporation, is as follows:
1. The Preferred Stock may be issued in one or more series, from time to time, with each such series to have such designation, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation, subject to the
limitations prescribed by law and in accordance with the provisions hereof, the Board of Directors being hereby expressly vested with authority to adopt any such resolution or resolutions. The authority of the Board of Directors with respect to each such series shall include, but not limited to, the determination or fixing of the following:
(i) The distinctive designation and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then outstanding) from time to time by like action of the Board of Directors;
(ii) The dividend rate of such series, the conditions and times upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock or series thereof, or any other series of the same class, and whether dividends shall be cumulative or non-cumulative;
(iii) The conditions upon which the shares of such series shall be subject to redemption by the Corporation and the times, prices and other terms and provisions upon which the shares of the series may be redeemed;
(iv) Whether or not the shares of the series shall be subject to the operation of a retirement or sinking fund to be applied to the purchase or redemption of such shares and, if such retirement or sinking fund be established, the annual amount thereof and the terms and provisions relative to the operation thereof;
(v) Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes, with or without par value, or of any other series of the same class, and, if provision is made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange;
(vi) Whether or not the shares of the series shall have voting rights, in addition to the voting rights provided by law, and, if so, subject to the limitation hereinafter set forth, the terms of such voting rights;
(vii) The rights of the shares of the series in the event of voluntary or involuntary liquidation, dissolution, or upon the distribution of assets of the Corporation; and
(viii) Any other powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the shares of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of this Certificate of Incorporation.
2. The holders of shares of the Preferred Stock of each series shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends at the rates fixed by the Board of Directors for such series, and no more, before any dividends, other than dividends payable in Common Stock, shall be declared and paid, or set apart for payment, on the Common Stock with respect to the same dividend period.
3. Whenever, at any time, dividends on the then outstanding Preferred Stock as may be required with respect to any series outstanding shall have been paid or declared and set apart for payment on the then outstanding Preferred Stock, and after complying with respect to any retirement or sinking fund or funds for any series of Preferred Stock, the Board of Directors may, subject to the provisions of the resolution or resolutions creating any series of Preferred Stock, declare and pay dividends on the Common Stock, and the holders of shares of the Preferred Stock shall not be entitled to share therein.
4. The holders of shares of the Preferred Stock of each series shall be entitled upon liquidation or dissolution or upon the distribution of the assets of the Corporation to such preferences as provided in the resolution or resolutions creating such series of Preferred Stock, and no more, before any distribution of the assets of the Corporation shall be made to the holders of shares of the Common Stock.
5. Except as otherwise provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock or by the General Corporation Law of Delaware, the holders of shares of the Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive power to vote. The holders of shares of the Preferred Stock issued and outstanding shall, in no event, be entitled to more than one vote for each share of Preferred Stock held by them unless otherwise required by law.
Fifth: The existence of the Corporation is to be perpetual.
Sixth: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever.
Seventh: The number of directors of the Corporation shall be fixed from time to time by, or in the manner provided in, its by-laws and may be increased or decreased as therein provided; but the number thereof shall not be less than three.
The directors of the Corporation shall be divided into three classes:
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the whole number of the Board of Directors. In the
election of directors at the 2002 annual meeting of the stockholders, the Class
I directors shall be elected to hold office for a term to expire at the first
annual meeting of the stockholders thereafter; the Class II directors shall be
elected to hold office for a term to expire at the second annual meeting of the
stockholders thereafter; and the Class IIII directors shall be elected to hold
office for a term to expire at the third annual meeting of the stockholders
thereafter, and in the case of each class, until their respective successors are
duly elected and qualified. At each annual election held after the 2002 annual
meeting of the stockholders the directors elected to succeed those whose terms
expire shall be identified as being of the same class as the directors they
succeed and shall be elected to hold office for a term to expire at the third
annual meeting of the stockholders after their election, and until their
respective successors are duly elected and qualified. If the number of
directors is changed, any increase or decrease in directors shall be apportioned
among the classes so as to maintain all classes as equal in number as possible,
and any additional director elected to any class shall hold office for a term
which shall coincide with the terms of the other directors in such class and
until his successor is duly elected and qualified.
In the case of any increase in the number of directors of the Corporation, the additional director or directors shall be elected by the Board of Directors.
In the case of any vacancy in the Board of Directors from death, resignation, disqualification or other cause, a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election of his successor, shall be elected by a majority of the Board of Directors then in office, though less than a quorum.
Directors of the Corporation may be removed only for cause.
Eighth: The Board of Directors shall have power to adopt, amend and repeal the by-laws at any regular or special meeting of the Board of Directors, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of meeting; or, without any such notice, by a vote of two-thirds of the directors then in office.
Stockholders may adopt, amend and repeal the by-laws at any regular or special meeting of the stockholders by an affirmative vote of two-thirds of the shares outstanding and entitled to vote thereon, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of the meeting.
Any action required to be taken at any annual or special meeting of the stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders or otherwise, may not be taken without a meeting, prior notice and a vote, and stockholders may not act by written consent.
Ninth: The Board of Directors from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by the Board of Directors, or by the stockholders.
Tenth: The directors may from time to time declare such dividends as they shall deem advisable and proper, subject to the provisions of Article Fourth and to such restrictions as may be imposed by law, and pay the same to the stockholders at such times as they shall fix.
The Board of Directors shall have power to issue bonds, debentures, or other obligations, either non-convertible or convertible into the Corporation's stock, subject to the provisions of Article Fourth and upon such terms, in such manner and under such conditions in conformity with law, as may be fixed by the Board of Directors prior to the issue of such bonds, debentures or other obligations.
Eleventh: No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article Eleventh shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
Twelfth: The powers and authorities hereinbefore conferred upon the Board of Directors are in furtherance and not in limitation of those conferred by the laws of the State of Delaware.
Thirteenth: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article.
Exhibit 3.3
FORM OF
RESTATED
CERTIFICATE OF INCORPORATION
OF
USX CORPORATION
First: The name of the Corporation (which is hereinafter referred to as the "Corporation") is
MARATHON OIL CORPORATION
Second: Its registered office and place of business in the State of Delaware is located at 2711 Centerville Road, Suite 400,Wilmington, DE. The registered agent in charge thereof upon whom process against the Corporation may be served is Corporation Service Company.
Third: The purposes of the Corporation are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware, and without limiting the foregoing to engage in integrated steel operations and to develop, mine, produce, manufacture, construct, transport, buy, hold, sell and generally deal in products, materials, property, both tangible and intangible, and services of all kinds.
Fourth: The total number of shares of capital stock which the Corporation shall have authority to issue is Five Hundred and Seventy Six Million (576,000,000), of which Five Hundred and Fifty Million (550,000,000) shares shall be Common Stock having a par value of one dollar ($1.00) per share and Twenty Six Million (26,000,000) shares shall be shares of Preferred Stock, without par value (hereinafter called "Preferred Stock") and
A statement of the designations of the Preferred Stock or of any series thereof, and the powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, or of the authority of the Board of Directors to fix by resolution or resolutions such designations and other terms not fixed by the Certificate of Incorporation, is as follows:
1. The Preferred Stock may be issued in one or more series, from time to time, with each such series to have such designation, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation, subject to the limitations prescribed by law and in accordance with the provisions hereof, the Board of
Directors being hereby expressly vested with authority to adopt any such resolution or resolutions. The authority of the Board of Directors with respect to each such series shall include, but not limited to, the determination or fixing of the following:
(i) The distinctive designation and number of shares comprising such series, which number may (except where otherwise provided by the Board of Directors in creating such series) be increased or decreased (but not below the number of shares then outstanding) from time to time by like action of the Board of Directors;
(ii) The dividend rate of such series, the conditions and times upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock or series thereof, or any other series of the same class, and whether dividends shall be cumulative or non-cumulative;
(iii) The conditions upon which the shares of such series shall be subject to redemption by the Corporation and the times, prices and other terms and provisions upon which the shares of the series may be redeemed;
(iv) Whether or not the shares of the series shall be subject to the operation of a retirement or sinking fund to be applied to the purchase or redemption of such shares and, if such retirement or sinking fund be established, the annual amount thereof and the terms and provisions relative to the operation thereof;
(v) Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes, with or without par value, or of any other series of the same class, and, if provision is made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange;
(vi) Whether or not the shares of the series shall have voting rights, in addition to the voting rights provided by law, and, if so, subject to the limitation hereinafter set forth, the terms of such voting rights;
(vii) The rights of the shares of the series in the event of voluntary or involuntary liquidation, dissolution, or upon the distribution of assets of the Corporation;
(viii) Any other powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or
restrictions thereof, of the shares of such series, as the Board of Directors may deem advisable and as shall not be inconsistent with the provisions of this Certificate of Incorporation.
2. The holders of shares of the Preferred Stock of each series shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends, dividends at the rates fixed by the Board of Directors for such series, and no more, before any dividends, other than dividends payable in Common Stock, shall be declared and paid, or set apart for payment, on the Common Stock with respect to the same dividend period.
3. Whenever, at any time, dividends on the then outstanding Preferred Stock as may be required with respect to any series outstanding shall have been paid or declared and set apart for payment on the then outstanding Preferred Stock, and after complying with respect to any retirement or sinking fund or funds for any series of Preferred Stock, the Board of Directors may, subject to the provisions of the resolution or resolutions creating any series of Preferred Stock, declare and pay dividends on the Common Stock, and the holders of shares of the Preferred Stock shall not be entitled to share therein.
4. The holders of shares of the Preferred Stock of each series shall be entitled upon liquidation or dissolution or upon the distribution of the assets of the Corporation to such preferences as provided in the resolution or resolutions creating such series of Preferred Stock, and no more, before any distribution of the assets of the Corporation shall be made to the holders of shares of the Common Stock.
5. Except as otherwise provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock or by the General Corporation Law of Delaware, the holders of shares of the Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive power to vote. The holders of shares of the Preferred Stock issued and outstanding shall, in no event, be entitled to more than one vote for each share of Preferred Stock held by them unless otherwise required by law.
Terms of the Preferred Stocks are as follows:
Series A Junior Preferred Stock
Section 1. Designation and Amount. This resolution shall provide for a single series of preferred stock, the designation of which shall be "Series A Junior Preferred Stock", without par value, and the number of shares constituting such series shall be Eight Million (8,000,000).
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Junior Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Preferred Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds
legally available for the purpose, quarterly dividends payable in cash on
the first day of March, June, September and December in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first
issuance of a share or fraction of a share of Series A Junior Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the
greater of (a) $5.00 or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind)
of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), to be or being
declared on the Common Stock, par value $1.00 per share, of the Corporation
(the "Common Stock") with respect to the same dividend period. If the
Quarterly Dividend Payment Date is a Saturday, Sunday or legal holiday then
such Quarterly Dividend Payment Date shall be the first immediately
preceding calendar day which is not a Saturday, Sunday or legal holiday. In
the event the Corporation shall at any time after October 10, 1989 (the
"Rights Declaration Date") (i) declare any dividend on Common Stock payable
in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or
(iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount to which holders of shares of Series A
Junior Preferred Stock were entitled immediately prior to such event under
clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A Junior Preferred Stock as provided in paragraph (A) above immediately prior to the time it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall be declared on the Common Stock with respect to a particular dividend period, a dividend of $5.00 per share on the Series A Junior Preferred Stock shall nevertheless be payable on such Quarterly Dividend Payment Date with respect to such quarterly period.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Preferred
Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share- by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Dividends in arrears may be declared and paid at any time, without reference to any Quarterly Dividend Payment Date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors.
(D) Except as hereinafter provided, no dividends shall be declared or paid or set apart for payment on the shares of Series A Junior Preferred Stock for any period if the Corporation shall be in default in the payment of any dividends (including cumulative dividends, if applicable) on any shares of Preferred Stock ranking, as to dividends, prior to the Series A Junior Preferred Stock, unless the same shall be contemporaneously declared and paid.
(E) Dividends payable on the Series A Junior Preferred Stock for the initial dividend period and for any period less than a full quarterly period, shall be computed on the basis of a 360-day year of 30-day months.
Section 3. Voting Rights. The holders of shares of Series A Junior Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation. The holders of Series A Junior Preferred Stock shall be entitled to notice of all meetings of the stockholders of the Corporation.
(B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.
(C) If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in preference dividends on the Preferred Stock shall exist, the number of directors constituting the Board of Directors of the Corporation shall be increased by two, and the holders of the Preferred Stock of all series (whether or not the holders of such series of Preferred Stock would be entitled to vote for the election of directors if such default in preference dividends did not exist), shall have the right at such meeting, voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two directors of the Corporation to fill such newly created directorships. Each director elected by the holders of shares of Preferred Stock (herein called a "Preferred Director"), shall continue to serve as such director for the full term for which he shall have been elected, notwithstanding that prior to the end of such term a default in preference dividends shall cease to exist. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of Preferred Stock, called for the purpose. So long as a default in any preference dividends on the Preferred Stock shall exist (i) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (ii)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (ii) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Preferred Stock, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever the term of office of the Preferred Directors shall end and no default in preference dividends shall exist, the number of directors constituting the Board of Directors of the Corporation shall be reduced by two. For the purposes of this paragraph (C), a "default in preference dividends" on the Preferred Stock shall be deemed to have occurred whenever the amount of accrued and unpaid dividends upon any series of the Preferred Stock shall be equivalent to six full quarterly dividends or more, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Preferred Stock of each and every series then outstanding shall have been paid through the last Quarterly Dividend Payment Date.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Preferred Stock as provided in Section 2 are
in arrears, thereafter and until all accrued and unpaid dividends and
distributions,
whether or not declared, on shares of Series A Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions on (other than a dividend in Common Stock or in any other stock of the Corporation ranking junior to the Series A Junior Preferred Stock as to dividends and upon liquidation, dissolution or winding up and other than as provided in subparagraph (ii) of this section), or redeem or purchase or otherwise acquire for consideration (except by conversion into or exchange for stock of the Corporation ranking junior to the Series A Junior Preferred Stock as to dividends and upon dissolution, liquidation or winding up), any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Preferred Stock;
(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, except dividends paid ratably on the Series A Junior Preferred Stock and all stock ranking on a parity with the Series A Junior Preferred Stock as to dividends on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Junior Preferred Stock;
(iv) purchase or otherwise acquire for consideration any shares of Series A Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the Series A Junior Preferred Stock shall be entitled to receive the greater of (a) $100 per share, plus accrued dividends to the date of distribution, whether or not earned or declared, or (b) an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock (the "Series A Liquidation Preference"). In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event pursuant to clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
(B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or
any other property, then in any such case the shares of Series A Junior Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.
Section 8. Optional Redemption.
(A) The Corporation shall have the option to redeem the whole or any
part of the Series A Junior Preferred Stock at any time on at least 30 days
notice in accordance with the provisions of paragraph (B) of this Section 8
at a redemption price equal to, subject to the provision for adjustment
hereinafter set forth, 100 times the "current per share market price" of
the Common Stock on the date of the mailing of the notice of redemption,
together with unpaid accumulated dividends to the date of such redemption.
In the event the Corporation shall at any time after October 10, 1989 (i)
declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such
case the amount to which holders of shares of Series A Junior Preferred
Stock were otherwise entitled immediately prior to such event under the
preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately
prior to such event. The "current per share market price" on any date shall
be deemed to be the average of the closing price per share of such Common
Stock for the 10 consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date. The closing price for each day
shall be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices regular
way, in either cases as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading
on the New York Stock Exchange or, if the Common Stock is not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to
securities listed or admitted to trading
on the principal national securities exchange on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use or, if on any such date the Common Stock is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by the Corporation. If on such date no such market maker is making a market in the Common Stock, the fair value of the Common Stock on such date as determined in good faith by the Board of Directors of the Corporation shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Stock is listed or admitted to trading is open for the transaction of business or, if the Common Stock is not listed or admitted to trading on any national securities exchange, a Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in the State of New York are not authorized or obligated by law or executive order to close.
(B) Whenever shares of Series A Junior Preferred Stock are to be redeemed, the Corporation shall mail a notice ("Notice of Redemption") by first-class mail, postage prepaid, to each holder of record of shares of Series A Junior Preferred Stock to be redeemed and to the transfer agent for the Series A Junior Preferred Stock. The Notice of Redemption shall be addressed to the holder at the address of the holder appearing on the stock transfer books of the Corporation maintained by the transfer agent for the Series A Junior Preferred Stock. The Notice of Redemption shall include a statement of (i) the redemption date, (ii) the redemption price, (iii) the number of shares of Series A Junior Preferred Stock to be redeemed, (iv) the place or places where shares of the Series A Junior Preferred Stock are to be surrendered for payment of the redemption price, (v) that the dividends on the shares to be redeemed will cease to accrue on such redemption date, and (vi) the provision under which redemption is made. No defect in the Notice of Redemption or in the mailing thereof shall affect the validity of the redemption proceedings, except as required by law. From the date on which a Notice of Redemption shall have been given as aforesaid and the Corporation shall have deposited with the transfer agent for the Series A Junior Preferred Stock a sum sufficient to redeem the shares of Series A Junior Preferred Stock as to which Notice of Redemption has been given, with irrevocable instructions and authority to pay the redemption price to the holders thereof, or if no such deposit is made, then upon such date fixed for redemption (unless the Corporation shall default in making payment of the redemption price), all rights of the holders thereof as stockholders of the Corporation by reason of the ownership of such shares (except their right to receive the redemption price thereof, but without
interest), shall terminate including, but not limited to, their right to receive dividends, and such shares shall no longer be deemed outstanding. The Corporation shall be entitled to receive, from time to time, from the transfer agent for Series A Junior Preferred Stock the interest, if any, on such monies deposited with it and the holders of any shares so redeemed shall have no claim to any such interest. In case the holder of any shares so called for redemption shall not claim the redemption price for his shares within one year after the date of redemption, the transfer agent for the Series A Junior Preferred Stock shall, upon demand, pay over to the Corporation such amount remaining on deposit and the transfer agent for the Series A Junior Preferred Stock shall thereupon be relieved of all responsibility to the holders of such shares and such holder of the shares of the Series A Junior Preferred Stock so called for redemption shall look only to the Corporation for the payment thereof.
(C) In the event that fewer than all the outstanding shares of the Series A Junior Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable.
(D) If the Corporation shall be in default in the payment of any dividends (including cumulative dividends, if applicable) on any shares of Preferred Stock ranking, as to dividends, prior to the Series A Junior Preferred Stock, then no shares of the Series A Junior Preferred Stock shall be redeemed and the Corporation shall not purchase or otherwise acquire any shares of the Series A Junior Preferred Stock.
Section 9. Ranking.
(A) The Series A Junior Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up, unless the terms of any such series shall provide otherwise.
(B) For purposes of this resolution, any stock of any class or classes of the Corporation shall be deemed to rank:
(i) prior to the shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, dissolution or winding up, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in
preference or priority to the holders of shares of the Series A Junior Preferred Stock. Each holder of any share of the Series A Junior Preferred Stock, by his acceptance thereof, expressly covenants and agrees that the rights of the holders of any shares of any other series of Preferred Stock of the Corporation to receive dividends or amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be and hereby are expressly prior to his rights unless in the case of any particular series of Preferred Stock the certificate or other instrument creating or evidencing the same expressly provides that the rights of the holders of such series shall not be prior to the shares of the Series A Junior Preferred Stock; and
(ii) on a parity with shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of the Series A Junior Preferred Stock, if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of the Series A Junior Preferred Stock; and
(iii) junior to shares of the Series A Junior Preferred Stock, either as to dividends or upon liquidation, if such class or classes shall be Common Stock or if the holders of shares of the Series A Junior Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, as the case may be, in preference or priority to the holders of shares of such class or classes.
Section 10. Amendment. Except as otherwise set forth in this Certificate of Designation, Preferences and Rights with respect to the Series A Junior Preferred Stock, holders of Series A Junior Preferred Stock shall not have any special powers and their consent shall not be required for taking any corporate action, provided, however, that:
(A) Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66?% of all of the shares of the Series A Junior Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of the Series A Junior Preferred Stock shall vote together as a separate class, shall be necessary for authorizing, effecting
or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designation, Preferences and Rights or any similar document relating to any series of Preferred Stock) so as to affect adversely the powers, preferences, or rights, of this Series A Junior Preferred Stock. The increase of the authorized amount of the Preferred Stock, or the creation, authorization or issuance of any shares of any other class of stock of the Corporation ranking prior to or on a parity with the shares of the Series A Junior Preferred Stock as to dividends or upon liquidation, or the reclassification of any authorized or outstanding stock of the Corporation into any such prior or parity shares, or the creation, authorization or issuance of any obligation or security convertible into or evidencing the right to purchase any such prior or parity shares shall not be deemed to affect adversely the powers, preferences or rights of the Series A Junior Preferred Stock.
Section 11. Fractional Shares. Series A Junior Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Preferred Stock.
Fifth: The existence of the Corporation is to be perpetual.
Sixth: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever.
Seventh: The number of directors of the Corporation shall be fixed from time to time by, or in the manner provided in, its by-laws and may be increased or decreased as therein provided; but the number thereof shall not be less than three.
The directors of the Corporation shall be divided into three classes:
Class I, Class II and Class III. Each class shall consist, as nearly as may be
possible, of one-third of the whole number of the Board of Directors. In the
election of directors at the 2002 annual meeting of the stockholders, the Class
I directors shall be elected to hold office for a term to expire at the first
annual meeting of the stockholders thereafter; the Class II directors shall be
elected to hold office for a term to expire at the second annual meeting of the
stockholders thereafter; and the Class IIII directors shall be elected to hold
office for a term to expire at the third annual meeting of the stockholders
thereafter, and in the case of each class, until their respective successors are
duly elected and qualified. At each annual election held after the 2002 annual
meeting of the stockholders the directors elected to succeed those whose terms
expire shall be identified as being of the same class as the directors they
succeed and shall be elected to hold office for a term to expire at the third
annual meeting of the stockholders after their election, and until their
respective successors are duly elected and qualified. If the number of
directors is changed, any increase or decrease in directors shall be apportioned
among the classes so as to maintain all
classes as equal in number as possible, and any additional director elected to any class shall hold office for a term which shall coincide with the terms of the other directors in such class and until his successor is duly elected and qualified.
In the case of any increase in the number of directors of the Corporation, the additional director or directors shall be elected by the Board of Directors.
In the case of any vacancy in the Board of Directors from death, resignation, disqualification or other cause, a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election of his successor, shall be elected by a majority of the Board of Directors then in office, though less than a quorum.
Directors of the Corporation may be removed only for cause.
Eighth: The Board of Directors shall have power to adopt, amend and repeal the by-laws at any regular or special meeting of the Board of Directors, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of meeting; or, without any such notice, by a vote of two-thirds of the directors then in office.
Stockholders may adopt, amend and repeal the by-laws at any regular or special meeting of the stockholders by an affirmative vote of two-thirds of the shares outstanding and entitled to vote thereon, provided that notice of intention to adopt, amend or repeal the by-laws in whole or in part shall have been included in the notice of the meeting.
Any action required to be taken at any annual or special meeting of the stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders or otherwise, may not be taken without a meeting, prior notice and a vote, and stockholders may not act by written consent.
Ninth: The Board of Directors from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the Corporation, except as conferred by law or authorized by the Board of Directors, or by the stockholders.
Tenth: The directors may from time to time declare such dividends as they shall deem advisable and proper, subject to the provisions of Article Fourth and to such restrictions as may be imposed by law, and pay the same to the stockholders at such times as they shall fix.
The Board of Directors shall have power to issue bonds, debentures, or other obligations, either non-convertible or convertible into the Corporation's stock, subject to the provisions of Article Fourth and upon such terms, in such manner and under such conditions in conformity
with law, as may be fixed by the Board of Directors prior to the issue of such bonds, debentures or other obligations.
Eleventh: No director shall be personally liable to the Corporation or its
stockholders for monetary damages for any breach of fiduciary duty by such
director as a director, except (i) for breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit. No amendment to or repeal of this Article Eleventh shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
Twelfth: The powers and authorities hereinbefore conferred upon the Board of Directors are in furtherance and not in limitation of those conferred by the laws of the State of Delaware.
Thirteenth: The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law, and all rights preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article.
Exhibit 3.4
FORM OF
BY-LAWS
of
UNITED STATES STEEL CORPORATION
(hereinafter called the "Corporation")
December 31, 2001
ARTICLE I.
Stockholders.
Section 1. Time and Place of Meetings of Stockholders. Unless the time and place of the annual meeting of stockholders for the purpose of electing directors and transacting such other business as may be brought before the meeting are changed by the Board of Directors, as may be done from time to time, provided that all legal requirements for such change and notice to stockholders are observed, such annual meeting of stockholders of the Corporation shall be held on the last Tuesday in April in each year, if not a legal holiday, and if a legal holiday, then on the next succeeding Tuesday which is not a legal holiday.
Special meetings of the stockholders may be called by the Board of Directors to be held at such time and place and for such purpose or purposes as are specified in such call.
Neither the annual meeting nor any special meeting of stockholders need be held within the State of Delaware.
Any action required to be taken at any annual or special meeting of the stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders or otherwise, may not be taken without a meeting, prior notice and a vote, and stockholders may not act by written consent.
Section 2. Notice of Meetings of Stockholders. It shall be the duty of the Secretary to cause notice of each annual or special meeting to be mailed to all stockholders of record as of the record date as fixed by the Board of Directors for the determination of stockholders entitled to vote at such meeting. Such notice shall indicate briefly the action to be taken at such meeting and shall be mailed to the stockholders at the addresses of such stockholders as shown on the books of the Corporation at least 10 days but not more than 60 days preceding the meeting.
Section 3. Nomination of Directors. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nomination for election to the Board of Directors of the Corporation at a meeting of stockholders may be made by the Board of Directors or by any stockholder of record of the Corporation entitled to vote generally for the election of directors at such meeting who complies with the notice procedures set forth in this Section 3. Such nominations, other
than those made by or on behalf of the Board of Directors, shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary, and received not less than 45 days nor more than 75 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. Such notice shall set forth (a) as to each proposed nominee (i) the name, age, business address and, if known, residence address of each such nominee, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by each such nominee, and (iv) any other information concerning the nominee that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to be named as a nominee and to serve as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporation's books, of such stockholder and (ii) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by such stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation.
The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded.
Section 4. Notice of Business at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of record. For business to be properly brought before an annual meeting by a stockholder, if such business relates to the election of directors of the Corporation, the procedures in Article I, Section 3 must be complied with. If such business relates to any other matter, the stockholder must have given timely notice thereof in writing to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 45 days nor more than 75 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed by more than 30 days after the anniversary of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of (i) the 90th day prior to such annual meeting or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (c) the number of shares of each class of the capital stock of the Corporation which are beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 4 and in Section 3 of this Article I and except that any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or any successor provision) promulgated under the Securities Exchange Act of 1934, as amended, and is to be included in the Corporation's proxy statement for an annual meeting of stockholders shall be deemed to comply with the requirements of this Section 4.
The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 4, and if he should so determine, the chairman shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted.
Section 5. Quorum. At each meeting of the stockholders the holders of one-third of the voting power of the outstanding shares of stock entitled to vote generally at the meeting, present in person or represented by proxy, shall constitute a quorum, unless the representation of a larger number shall be required by law, and, in that case, the representation of the number so required shall constitute a quorum.
Except as otherwise required by law, a majority of the voting power of the shares of stock entitled to vote generally at a meeting and present in person or by proxy, whether or not constituting a quorum, may adjourn, from time to time, without notice other than by announcement at the meeting. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.
Section 6. Organization. The Chairman of the Board, or in his absence the Vice Chairman of the Board designated by the Chairman of the Board, or the President in the order named, shall call meetings of the stockholders to order, and shall act as chairman of such meeting; provided, however, that the Board of Directors may appoint any person to act as chairman of any meeting in the absence of the Chairman of the Board.
The Secretary of the Corporation shall act as secretary at all meetings of the stockholders; but in the absence of the Secretary at any meeting of the stockholders the presiding officer may appoint any person to act as secretary of the meeting.
Section 7. Voting. At each meeting of the stockholders, every stockholder shall be entitled to vote in person, or by proxy appointed by instrument in writing, subscribed by such stockholder or by his duly authorized attorney, or, to the extent permitted by law, appointed by an electronic transmission, and delivered to the inspectors at the meeting; and he shall have the number of votes for each share of capital stock standing registered in his name at the date fixed by the Board of Directors pursuant to Section 4 of Article IV of these By-Laws as may be determined in accordance with the Corporation's Certificate of Incorporation, or as may be provided by law. The votes for directors, and, upon demand of any stockholder, or where required by law, the votes upon any question before the meeting, shall be by ballot.
At least ten days before each meeting of the stockholders, a full, true and complete list, in alphabetical order, of all of the stockholders entitled to vote at such meeting, showing the address of each stockholder, and indicating the class and number of shares held by each, shall be furnished and held open for inspection in such manner, as is required by law. Only the persons in whose names shares of stock stand on the books of the Corporation at the date fixed by the Board of Directors pursuant to Section 4
of Article IV of these By-Laws, as evidenced in the manner provided by law, shall be entitled to vote in person or by proxy on the shares so standing in their names.
Prior to any meeting, but subsequent to the date fixed by the Board of Directors pursuant to Section 4 of Article IV of these By-Laws, any proxy may submit his powers of attorney to the Secretary, or to the Treasurer, for examination. The certificate of the Secretary, or of the Treasurer, as to the regularity of such powers of attorney, and as to the class and number of shares held by the persons who severally and respectively executed such powers of attorney, shall be received as prima facie evidence of the class and number of shares represented by the holder of such powers of attorney for the purpose of establishing the presence of a quorum at such meeting and of organizing the same, and for all other purposes.
Section 8. Inspectors. At each meeting of the stockholders, the polls shall be opened and closed, the proxies and ballots shall be received and be taken in charge, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes, shall be decided by one or more inspectors. Such inspector or inspectors shall be appointed by the Board of Directors before the meeting. If for any reason any of the inspectors previously appointed shall fail to attend or refuse or be unable to serve, inspectors in place of any so failing to attend or refusing or unable to serve, shall be appointed in like manner.
ARTICLE II.
Board of Directors.
Section 1. Number, Classes and Terms of Office. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.
The number of directors shall be fixed from time to time by resolution of the Board of Directors, but the number thereof shall not be less than three.
The directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the whole number of the Board of Directors. In the election of directors at the 1984 annual meeting of the stockholders, the Class I directors shall be elected to hold office for a term to expire at the first annual meeting of the stockholders thereafter; the Class II directors shall be elected to hold office for a term to expire at the second annual meeting of the stockholders thereafter; and the Class III directors shall be elected to hold office for a term to expire at the third annual meeting of the stockholders thereafter, and in the case of each class, until their respective successors are duly elected and qualified. At each annual election held after the 1984 annual meeting of the stockholders, the directors elected to succeed those whose terms expire shall be identified as being of the same class as the directors they succeed and shall be elected to hold office for a term to expire at the third annual meeting of the stockholders after their election, and until their respective successors are duly elected and qualified. If the number of directors is changed, any increase or decrease in directors shall be apportioned among the classes so as to maintain all classes as equal in number as possible, and any additional director elected to any class shall hold office for a term which shall coincide with the terms of the other directors in such class and until his successor is duly elected and qualified.
In the case of any increase in the number of directors of the Corporation, the additional director or directors shall be elected only by the Board of Directors.
Section 2. Vacancies. Except as otherwise provided by law, in the case of any vacancy in the Board of Directors through death, resignation, disqualification or other cause, a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant, and until the election of his successor, shall be elected only by a majority of the Board of Directors then in office, though less than a quorum.
Section 3. Removal. Directors of the Corporation may be removed only for cause.
Section 4. Place of Meetings, etc. The Board of Directors may hold its meetings, and may have an office and keep the books of the Corporation (except as otherwise may be provided for by law) in such place or places in the State of Delaware or outside of the State of Delaware, as the Board from time to time may determine.
Section 5. Regular Meetings. Regular meetings of the Board of Directors shall be held at such times as may be fixed by resolution of the Board of Directors. The Secretary shall give notice, as provided for special meetings, for each regular meeting.
Section 6. Special Meetings. Special meetings of the Board of Directors shall be held whenever called by direction of the Chairman or a Vice Chairman of the Board, or the President, or a majority of the directors then in office.
The Secretary shall give notice of each special meeting by mailing the same at least two days before the meeting, or by telegraphing or telexing or by facsimile transmission of the same at least one day before the meeting, to each director; but such notice may be waived by any director. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. At any meeting at which every director shall be present, even though without any notice, any business may be transacted.
Section 7. Quorum. A majority of the total number of directors shall constitute a quorum for the transaction of business; but if at any meeting of the Board there be less than a quorum present, a majority of those present may adjourn the meeting from time to time.
At any meeting of the Board of Directors all matters shall be decided by the affirmative vote of a majority of directors then present, provided, that the affirmative vote of at least one-third of all the directors then in office shall be necessary for the passage of any resolution.
Section 8. Order of Business. At meetings of the Board of Directors business shall be transacted in such order as, from time to time, the Board may determine by resolution.
At all meetings of the Board of Directors, the Chairman of the Board or in his absence the Vice Chairman of the Board designated by the Chairman of the Board, or the President, in the order named, shall preside.
Section 9. Compensation of Directors. Each director of the Corporation who is not a salaried officer or employee of the Corporation, or of a subsidiary of the Corporation, shall receive such allowances for serving as a director and such fees for attendance at meetings of the Board of Directors or any committee appointed by the Board as the Board may from time to time determine.
Section 10. Election of Officers. At the first regular meeting of the Board of Directors in each year (at which a quorum shall be present) held next after the annual meeting, the Board of Directors shall proceed to the election of the principal officers of the Corporation to be elected by the Board of Directors under the provisions of Article III of these By-Laws.
ARTICLE III.
Officers.
Section 1. Officers. The principal officers of the Corporation shall be a Chairman of the Board of Directors, one or more Vice Chairmen of the Board of Directors, a President, one or more Executive Directors, one or more Executive Vice Presidents, one or more Group Presidents, a Senior Vice President-Finance, a General Counsel, a Treasurer, a Secretary and a Comptroller, none of whom need be directors. All such principal officers shall be elected by the Board of Directors. Each principal officer who shall be a member of the Board of Directors shall be considered an Officer-Director.
The Board of Directors or any committee or officer designated by it may appoint such other officers as it or he shall deem necessary, who shall have such authority and shall perform such duties as from time to time may be assigned to them by or with the authority of the Board of Directors.
One person may hold two or more offices.
In its discretion, the Board of Directors may leave unfilled any office.
All officers, agents and employees shall be subject to removal at any time by the Board of Directors. All officers, agents and employees, other than officers elected by the Board of Directors, shall hold office at the discretion of the committee or of the officer appointing them.
Each of the salaried officers of the Corporation shall devote his entire time, skill and energy to the business of the Corporation, unless the contrary is expressly consented to by the Board of Directors.
Section 2. Powers and Duties of the Chairman of the Board. The Chairman of the Board of Directors shall be the chief executive officer of the Corporation and, subject to the Board of Directors, shall be in general charge of the affairs of the Corporation. He shall preside at all meetings of the stockholders and of the Board of Directors.
Section 3. Powers and Duties of the Vice Chairmen of the Board, the President and the Executive Directors. Subject to the Chairman of the Board of Directors and the Board itself, the Vice Chairmen of the Board, the President and the Executive Directors shall have such duties as may be assigned to them by the Chairman of the Board of Directors or the Board itself.
Section 4. Executive Vice Presidents, Group Presidents and Senior Vice President-Finance. Each Executive Vice President, each Group President and the Senior Vice President-Finance shall have such authority, and shall perform such duties, as may be assigned to him.
Section 5. The General Counsel. The General Counsel shall be the chief consulting officer of the Corporation in all legal matters and, subject to the Chairman of the Board of Directors and the Board itself, shall have general control of all matters of legal import concerning the Corporation.
Section 6. Powers and Duties of Treasurer. Subject to the officer designated by the Board of Directors, the Treasurer shall have custody of all the funds and securities of the Corporation which may have come into his hands; when necessary or proper he shall endorse, or cause to be endorsed, on behalf of the Corporation, for collection, checks, notes and other obligations, and shall cause the deposit of same to the credit of the Corporation in such bank or banks or depositary as the Board of Directors may designate or as the Board of Directors by resolution may authorize; he shall sign all receipts and vouchers for payments made to the Corporation other than routine receipts and vouchers, the signing of which he may delegate; he shall sign all checks made by the Corporation; provided, however, that the Board of Directors may authorize and prescribe by resolution the manner in which checks drawn on banks or depositaries shall be signed, including the use of facsimile signatures, and the manner in which officers, agents or employees shall be authorized to sign; he may sign with the President or a vice president all certificates of shares in the capital stock; whenever required by the Board of Directors, he shall render a statement of his cash account; he shall enter regularly, in books of the Corporation to be kept by him for the purpose, full and accurate account of all moneys received and paid by him on account of the Corporation; he shall, at all reasonable times, exhibit his books and accounts to any director of the Corporation upon application at his office during business hours; and he shall perform all acts incident to the position of treasurer.
He shall give a bond for the faithful discharge of his duties in such sum as the Board of Directors may require.
Section 7. Powers and Duties of Secretary. The Secretary shall keep the minutes of all meetings of the Board and the minutes of all meetings of the stockholders, and also (unless otherwise directed by the Board of Directors) the minutes of all committees, in books provided for that purpose; he shall attend to the giving and serving of all notices of the Corporation; he may sign with an Officer-Director or any other duly authorized person, in the name of the Corporation, all contracts authorized by the Board of Directors, and affix the seal of the Corporation thereto; he shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct, all of which shall, at all reasonable times, be open to the examination of any director, upon application at the Secretary's office during business hours; and he shall in general perform all the duties incident to the office of secretary, subject to the control of the Chairman of the Board of Directors and the Board itself.
Section 8. Comptroller. Subject to the officer designated by the Board of Directors, the Comptroller shall be in charge of the accounts of the Corporation, and shall perform such duties as from time to time may be assigned to him.
Section 9. Voting upon Stocks. Unless otherwise ordered by the Board of Directors, any Officer-Director or any person or persons appointed in writing by any of them, shall have full power and
authority on behalf of the Corporation to attend and to act and to vote at any meetings of stockholders of any corporation in which the Corporation may hold stock, and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such stock, and which, as the owner thereof, the Corporation might have possessed and exercised if present. The Board of Directors, by resolution, from time to time, may confer like powers upon any other person or persons.
ARTICLE IV.
Capital Stock - Seal.
Section 1. Certificates of Shares. The certificates for shares of each class of the capital stock of the Corporation shall be in such form, not inconsistent with the Certificate of Incorporation, as shall be prepared or be approved by the Board of Directors. No certificate shall be valid unless it is signed by the Chairman or a Vice Chairman of the Board of Directors or the President or a Vice President, and either the Treasurer or an assistant treasurer, or the Secretary or an assistant secretary, but where such certificate is signed by a registrar other than the Corporation or its employee the signatures of any such officer and, where authorized by resolution of the Board of Directors, any transfer agent may be facsimiles. In case any officer or transfer agent of the Corporation who has signed, or whose facsimile signature has been placed upon, any such certificate shall have ceased to such be such officer or transfer agent of the Corporation before such certificate is issued, such certificate may be issued by the Corporation with the same effect as though the person or persons were such officer or transfer agent of the Corporation at the date of issue.
All certificates for each class of capital stock of the Corporation shall be consecutively numbered. The name of the person owning the shares represented thereby, with the class and number of such shares and the date of issue, shall be entered on the Corporation's books.
All certificates surrendered to the Corporation shall be cancelled, and no new certificate shall be issued until the former certificate for the same class and number of shares of the same class shall have been surrendered and cancelled, except in accordance with procedures established by the Board of Directors or where required by law.
Section 2. Transfer of Shares. Shares in the capital stock of the Corporation shall be transferred only on the books of the Corporation by the holder thereof in person, or by his attorney, upon surrender and cancellation of certificates for a like class and number of shares.
Section 3. Regulations. The Board of Directors shall have power and authority to make all such rules and regulations as respectively they may deem expedient, concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation.
The Board of Directors may appoint one or more transfer agents or assistant transfer agents and one or more registrars of transfers, and may require all stock certificates to bear the signature of a transfer agent or assistant transfer agent and a registrar of transfers. The Board of Directors may at any time terminate the appointment of any transfer agent or any assistant transfer agent or any registrar of transfers.
Section 4. Fixing Date for Determination of Stockholders' Rights. The Board of Directors is authorized from time to time to fix in advance a date, not exceeding 60 days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall to into effect, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any
adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid.
Section 5. Dividends. The Board of Directors may from time to time declare such dividends as they shall deem advisable and proper, subject to such restrictions as may be imposed by law and the Corporation's Certificate of Incorporation.
Section 6. Facsimile Signatures. In addition to the provisions for the use of facsimile signatures elsewhere specifically authorized in these By-Laws, facsimile signatures of any officer or officers of this Corporation may be used whenever and as authorized by the Board of Directors.
Section 7. Corporate Seal. The Board of Directors shall provide a suitable seal, containing the name of the Corporation, which seal shall be in charge of the Secretary. If and when so directed by the Board of Directors, duplicates of the seal may be kept and be used by the Treasurer or by any assistant secretary or assistant treasurer.
ARTICLE V.
Indemnification.
Section 1. Right to Indemnification. The Corporation shall indemnify and hold harmless to the fullest extent permitted by law any person who was or is made or is threatened to be made a party or is involved in any action, suit, or proceeding whether civil, criminal, administrative or investigative ("proceeding") by reason of the fact that he, or a person for whom he is the legal representative, is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or non-profit entity, including service with respect to employee benefit plans, against all expenses, liability, and loss reasonably incurred or suffered by such person. The Corporation shall indemnify any person seeking indemnity in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Corporation.
Section 2. Prepayment of Expenses. The Corporation shall pay the expenses reasonably incurred in defending any such proceeding in advance of its final disposition; provided however the payment of expenses incurred by a director of officer in his capacity as a director or officer (except with regard to service to an employee benefit plan or nonprofit entity) in advance of the final disposition of the proceeding shall be made only upon the agreement by the director or officer to repay all amounts advanced if it should be determined that the director or officer is not entitled to be indemnified under this Article or otherwise, and provided, further, that the Corporation shall have no obligation to pay any expenses in advance pursuant to this Section 2 to any person who is or was an employee or agent of the Corporation (other than a director or an officer) or is or was serving at the request of the Corporation as an employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, with respect to any proceeding by or in the right of the Corporation to procure a judgment in its favor.
Section 3. Claims. If a claim under this Article is not paid in full within ninety days after a written claim has been received by the Corporation, the claimant may file suit to recover the unpaid
amount of such claim and, if successful in whole or in part, shall be entitled to be paid in addition the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the claimant was not eligible for indemnification under applicable law.
Section 4. Non-Exclusivity of Rights. The rights conferred on any person by this Article shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Law, agreement, vote of stockholders or disinterested directors or otherwise.
ARTICLE VI.
Amendments.
Section 1. The Board of Directors shall have the power to adopt, amend and repeal the By-Laws at any regular or special meeting of the Board, provided that notice of intention to adopt, amend or repeal the By-laws in whole or in part shall have been included in the notice of meeting; or, without any such notice, by a vote of two-thirds of the directors then in office.
Stockholders may adopt, amend and repeal the By-Laws at any regular or special meeting of the stockholders by an affirmative vote of holders of outstanding shares of the capital stock of the Corporation having two-thirds of the votes entitled to be cast thereon, provided that notice of intention to adopt, amend or repeal the By-Laws in whole or in part shall have been included in the notice of the meeting.
EXHIBIT 5
[LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP]
[ , 2001]
United States Steel LLC
600 Grant Street
Pittsburgh, PA 15219-4776
Ladies and Gentlemen:
We have acted as special counsel to USX Corporation ("USX"), a Delaware corporation, in connection with the transactions contemplated by the Agreement and Plan of Reorganization, dated as of July 31, 2001 (the "Plan of Reorganization"), by and between USX and United States Steel LLC (the "Company"), a Delaware limited liability company and a wholly owned subsidiary of USX. Pursuant to the Plan of Reorganization, the Company will be converted (the "Conversion") into a Delaware corporation named United States Steel Corporation ("United States Steel"), and USX Merger Corporation, a Delaware corporation and a wholly owned subsidiary of USX, will be merged with and into USX (the "Separation Merger"). In the Separation Merger, each share of USX-U. S. Steel Group Common Stock, par value $1.00 per share (the "U. S. Steel Group Shares"), issued and outstanding or held in the treasury of USX or by any subsidiary of USX immediately prior to the effective time of the Separation Merger shall be converted into one share of common stock, par value $1.00 per share, of United States Steel (the "Common Stock"). The shares of Common Stock to be issued in the Separation Merger are hereinafter collectively referred to as the "Shares".
This opinion is being furnished by us in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act").
In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-4 (the "Registration Statement"), as filed with the Securities and Exchange Commission (the
"Commission") under the Act on [ ], 2001, relating to the registration under the Act of the issuance of the Shares in the Separation Merger; (ii) the Plan of Reorganization; (iii) the Certificate of Formation and the Amended and Restated Limited Liability Company Operating Agreement of the Company, each as currently in effect, (iv) the form of Certificate of Incorporation (the "Steel Charter") and By-Laws of United States Steel filed as exhibits to the Registration Statement; (v) the form of certificate of conversion to be filed with the Secretary of State of the State of Delaware with respect to the Conversion (the "Certificate of Conversion"); (vi) the form of certificate of merger to be filed with the Secretary of State of the State of Delaware with respect to the Separation Merger (the "Certificate of Merger"); and (vii) certain resolutions adopted by the Board of Directors of the Company relating to the Conversion, the issuance of the Shares in the Separation Merger and certain related matters. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such copies. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the power, corporate or other, to enter into and perform all obligations thereunder. In rendering the opinions set forth below, we have assumed the due filing with the Secretary of State of the State of Delaware of (i) the Certificate of Conversion; (ii) the Certificate of Merger; and (iii) the Steel Charter, in each case, in the form examined by us. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others.
Members of this firm are admitted to the bar of the State of Delaware, and we do not express any opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that the issuance of the Shares in the Separation Merger has been duly authorized and, when: (i) the Registration Statement becomes effective under the Act; (ii) the Conversion of the Company becomes effective pursuant to the Plan of Reorganization; (iii) the Separation Merger becomes effective pursuant to the Plan of Reorganization; and (iv) certificates representing the Shares are delivered in exchange for U. S. Steel Group Shares in accordance with the Plan of Reorganization, such Shares will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission.
Very truly yours,
Exhibit 8
[September 6, 2001]
Board of Directors
USX Corporation
600 Grant Street
Pittsburgh, PA 15219
Re: Separation of USX Corporation
Ladies and Gentlemen:
We have acted as special tax counsel to USX Corporation, a Delaware corporation ("USX"), in connection with the proposed distribution of the shares of a newly formed United States Steel Corporation ("United States Steel") to the USX - U.S. Steel Group shareholders pursuant to the terms of the Agreement and Plan of Reorganization entered into by USX and United States Steel dated as of July 31, 2001. On USX's behalf, we have submitted a request for a private letter ruling (the "Ruling Request") to the Internal Revenue Service (the "IRS") regarding the Federal income tax consequences of the Separation. You have asked for our opinion regarding the material United States Federal income tax consequences of the Separation.
For purposes of rendering our opinion set forth below, we have examined and
relied upon: (i) the Revised Preliminary Proxy Statement/Prospectus (File No. 1-
5153) (the "Proxy") as filed with the Securities and Exchange Commission (the
"SEC") on September 6, 2001, (ii) the Agreement and Plan of Reorganization
between USX and United States Steel LLC dated as of July 31, 2001 (the
"Separation Agreement"), (iii) the Holding Company Reorganization Agreement
among USX, USX Holdco, Inc., and United States Steel LLC dated July 1, 2001; and
(iv) the Ruling Request regarding the Separation submitted to the IRS on July 2,
2001 and supplemental submissions to date. Capitalized terms used herein and not
otherwise defined herein have the meanings assigned to them in the Proxy.
We have assumed with your consent that (i) the Separation will be completed in the manner contemplated by the Proxy and in accordance with the provisions of the Separation Agreement; (ii) no material amendments will be made to the documents set forth above, except that further supplemental submissions may be required by the IRS with respect to the Ruling Request; (iii) the IRS will issue a private letter ruling that in form and substance does not materially differ from the Ruling Request; and (iv) the representations made by USX in the
Board of Directors
September 6, 2001
Ruling Request and supplemental submissions to date are true, correct and complete and will not later become inaccurate.
In our opinion, the private letter ruling, if issued, will provide, in part, that for U.S. federal income tax purposes:
(i) No gain or loss will be recognized by (and no amount will be
included in the income of) a holder of U.S. Steel Group Shares as a result
of the Separation;
(ii) The basis of New U.S. Steel Shares in the hands of a holder of U.
S. Steel Group Shares will equal the basis of the holder's U.S. Steel
Group Shares immediately before the Separation;
(iii) The holding period of the New U.S. Steel Shares in the hands of a
holder of U.S. Steel Group Shares will include the holding period of the
U.S. Steel Group Shares that are exchanged in the Separation;
(iv) Holders of Marathon Group Shares will have no tax consequences
resulting from the Separation with respect to the Marathon Shares; and
(v) No gain or loss will be recognized by USX on the distribution of New
U.S. Steel Shares to the holders of U.S. Steel Group Shares.
The IRS private letter ruling, if issued, will be based on the facts presented and representations made by USX in the ruling request. Generally, an IRS private letter ruling will not be revoked or modified retroactively unless there has been an omission or misstatement of a material fact or a breach of a material representation. It is our understanding that USX intends to present all relevant facts and is not aware of any facts or circumstances that would cause those representations to be incorrect or incomplete in a material respect. It is our further understanding that Marathon Oil Corporation and United States Steel Corporation will agree in the Tax Sharing Agreement not to take actions, or to fail to take actions, that are inconsistent with the representations upon which the IRS private letter ruling is based. If, however, those facts or representations are found to be incorrect or incomplete in a material respect or if the facts at the time of the Separation are materially different from the facts upon which the IRS private letter ruling was based, in our opinion USX could not rely on the IRS private letter ruling and the Separation might not qualify as a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code").
If the IRS private letter ruling were determined to be inapplicable and the Separation were found to be a taxable distribution of New U.S. Steel Shares or Marathon Shares, the tax consequences to the USX stockholders would depend on which shares were deemed to be distributed for federal income tax purposes. The stockholders deemed to receive the distribution, either the holders of U.S. Steel Group Shares or the holders of Marathon Group Shares, as the case may be, would be treated as receiving a taxable distribution in an amount equal to the fair market value of the shares deemed to be received. The difference between the amount of the distribution and the stockholder's basis in the shares deemed to be exchanged would be treated as a capital gain or loss to such stockholder. The tax consequences to stockholders who hold both
Board of Directors
September 6, 2001
U.S. Steel Group Shares and Marathon Group Shares, however, may differ from those described above. Such stockholders may have dividend, return of capital, or capital gain/loss treatment and such stockholders are urged to consult their tax advisors. If the IRS private letter ruling were determined to be inapplicable and the Separation were found to be a taxable distribution of New U.S. Steel Shares or Marathon Shares, a corporate-level tax would be payable by USX. Such tax would be based on the excess, if any, of the fair market value of the shares deemed to be distributed over USX's tax basis for such shares. It is our understanding that the amount of USX's tax liability would be materially greater if the Separation were deemed to be a distribution of Marathon Shares. The party which would bear the burden of the corporate tax would be determined under the Tax Sharing Agreement.
Even if the Separation otherwise qualifies for tax-free treatment under
Section 355 of the Code, in our opinion the Separation may become taxable to USX
pursuant to Section 355(e) of the Code if 50% or more of either the Marathon
Shares or New U.S. Steel Shares are acquired, directly or indirectly, as part of
a plan or series of related transactions that include the Separation. For this
purpose, acquisitions (including acquisitions which are neither planned nor
accepted or recommended by the management of the company whose stock is
acquired) of Marathon Shares or New U.S. Steel Shares within the two years
before or after the Separation are presumed to be part of such a plan. Marathon
Oil Corporation or United States Steel Corporation may be able to rebut that
presumption, however, by establishing that the Separation and any preceding or
subsequent acquisition were not part of a plan or series of related
transactions. If an acquisition occurs pursuant to a plan or series of related
transactions that includes the Separation, USX would have to pay a corporate tax
based on the excess of the fair market value of the shares deemed to be
distributed, either New U.S. Steel Shares or Marathon Shares, over USX's tax
basis for such shares. It is our understanding that the amount of such tax would
be materially greater if the Separation were deemed to be a distribution of
Marathon Shares. The party who would bear the burden of the corporate tax would
be determined under the Tax Sharing Agreement. Even if Section 355(e) were to
apply to cause the Separation to be taxable to USX, it would remain tax-free to
the USX stockholders.
Our opinion is based on the Code, Treasury Department regulations promulgated thereunder, administrative positions of the IRS, and judicial decisions, all as in effect on the date hereof and all of which are subject to change, either prospectively or retroactively. Any change in the applicable laws or the facts and circumstances surrounding the Separation or any inaccuracy in any of the statements, representations, or assumptions that we relied upon to render this opinion may affect the continuing validity of our opinion set forth herein. We assume no responsibility to inform you of any such change or inaccuracy that may occur or come to our attention.
Our opinion is not binding on the IRS or a court and there can be no assurance that positions contrary to those stated in our opinion may not be taken by the IRS or that a court would agree with our opinion if litigated. Our opinion is limited to the Federal income tax matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other tax consequences of the transactions described in the Proxy. We do not
Board of Directors
September 6, 2001
express any opinion concerning any laws other than the Federal income tax laws of the United States. Notwithstanding any other statement in this letter, our opinion does not purport to cover all income tax consequences to USX and its stockholders and may not apply to stockholders who acquired their Marathon Group Shares or U.S. Steel Group Shares in connection with a grant of such shares as compensation, who are not citizens or residents of the United States, or who are otherwise subject to special treatment under the Code.
We understand that this letter will be filed with the SEC as an exhibit to the Registration Statement on Form S-4 of United States Steel, and we hereby consent to such use. We further hereby consent to the use of our name in the Proxy in connection with references to this letter. In giving this consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the SEC promulgated thereunder.
Sincerely,
MILLER & CHEVALIER, CHARTERED
By: ____________________________
Dennis P. Bedell
FORM AS OF AUGUST 13, 2001
EXHIBIT 10.1
TAX SHARING AGREEMENT
dated as of ____, 2001
between
USX Corporation
(to be renamed "Marathon Oil Corporation")
and
United States Steel LLC
(to be renamed "United States Steel Corporation")
EXHIBIT 10.1
This TAX SHARING AGREEMENT is entered into as of _____, 2001, by and among USX Corporation ("USX") (to be renamed Marathon Oil Corporation), a Delaware corporation (together with its successors, "Marathon") and United States Steel LLC (to be converted into a corporation named United States Steel Corporation), a Delaware limited liability company (together with its successors, "United States Steel").
RECITALS
WHEREAS, pursuant to the tax laws of various jurisdictions, the affiliated group of which USX is the common parent files certain tax returns on a consolidated, combined, unitary, or other group basis;
WHEREAS, the Board of Directors of USX has determined that it is in the best interests of USX and its stockholders to effect a reorganization and distribute all of the outstanding shares of United States Steel Corporation to the holders of the USX-U. S. Steel Group common stock in complete redemption of such stock (the "Distribution");
WHEREAS, in this Agreement, the parties have set forth certain representations and covenants that support the treatment of the Distribution as a transaction described in Section 355 of the Internal Revenue Code of 1986, as amended;
WHEREAS, in this Agreement, the parties have set forth the rights and obligations of Marathon and its affiliates and United States Steel and its affiliates with respect to the handling and allocation of certain Federal, state, local, foreign, and other taxes incurred in taxable periods beginning prior to the Distribution, and various other tax matters of the USX Consolidated Group;
WHEREAS, the allocation of certain Federal, state, local, foreign, and other taxes incurred in taxable periods beginning prior to the Distribution set forth in this Agreement shall incorporate, to the greatest extent possible, the tax sharing principles detailed in the USX Tax Allocation and Settlement Policy effective as of 1991 and as amended and restated as of August 26, 1997.
NOW, THEREFORE, in consideration of the mutual promises, covenants, and conditions contained herein, and intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions.
As used herein, the following terms shall have the following meanings:
"Agreement" shall mean this Tax Sharing Agreement dated as of _______, 2001.
"Agreement and Plan of Reorganization" shall mean the Agreement and Plan of Reorganization dated as of _________, 2001, by and among USX and United States Steel LLC.
"Business Day" shall mean a day other than a Saturday, Sunday or legal holiday (which for purposes of this Agreement shall include any day on which banks located in New York City are authorized or required by law to close).
"Calendar Day" shall mean each day of the week, including Saturdays, Sundays and legal holidays; provided that, if any action is required to be taken on a Saturday, Sunday or legal holiday, then such action shall be required to be taken on the immediately preceding Business Day.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Combined State Tax" shall mean any State Tax, the return for which includes Tax Items of both the Marathon Stock Group and the United States Steel Stock Group.
"Consolidated Federal Tax" shall mean any Federal Tax, the return for which includes Tax Items of both the Marathon Stock Group and the United States Steel Stock Group.
"Delhi Stock Group" shall mean the USX-Delhi Group as presented for financial statement purposes under generally accepted accounting principles prior to the 1998 redemption of the USX - Delhi Group stock and shall include the financial position, results of operations and cash flows for the businesses of Delhi Gas Pipeline Corporation 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.
"Distribution" shall mean the distribution of the shares of United States Steel Corporation in complete redemption of all of the outstanding USX-U. S. Steel Group shares. The term "Distribution" shall have the same meaning herein as the term "Separation" has in the Agreement and Plan of Reorganization.
"Distribution Date" shall mean the day on which the Distribution is effected.
"Effective Realization (and the correlative terms, "Effectively Realized" and "Effectively Realizes") shall mean, with respect to any Tax Attribute, the utilization of such Tax Attribute on
a Tax Return of the USX Consolidated Group, the Marathon Tax Group, or the United States Steel Tax Group, including, but not limited to, the application of such Tax Attribute on an IRS Form 7004, on a final Tax Return (such as an IRS Form 1120), pursuant to a Final Determination for the relevant year, or pursuant to a Final Determination for a future or prior taxable period resulting in a carryback or carryforward to the relevant year.
"Federal Tax" shall mean any Tax imposed under Subtitle A of the Code.
"Final Determination" (and the correlative term, "Finally Determined") shall mean the final resolution of any Tax (or other tax-related matter) for a taxable period, including related interest or penalties, including (1) by the expiration of a statute of limitations or a period for the filing of claims for refunds, amending Tax Returns, appealing from adverse determinations or recovering any refund (including by offset), (2) by a decision, judgment, decree, or other order by a court of competent jurisdiction which has become final, (3) by a closing agreement or accepted offer in compromise under Sections 7121 or 7122 of the Code, or comparable agreements under the laws of other jurisdictions, (4) by execution of an IRS Form 870 or 870AD (or any successor IRS form) or by execution of a comparable form under the laws of other jurisdictions (notwithstanding that, with respect to a particular Tax Item for a particular taxable period, any such form may reserve -- whether by its terms or by operation of law -- the right of the taxpayer to file a claim for refund and/or the right of the Tax Authority to assert a further deficiency with respect to any such Tax Item for such period), or (5) by any allowance of a refund or credit, but only after the expiration of all periods during which such refund or credit may be recovered (including by way of offset).
"Group" shall mean either the United States Steel Stock Group or Marathon Stock Group, as the case may be.
"Holding Company Reorganization" shall mean the internal restructuring effectuated on July 2, 2001.
"Income Tax" shall mean any Tax based on, measured by, or computed by reference to gross income, gross receipts, net income, profits, or any other measure of income or profits.
"IRS" shall mean the United States Internal Revenue Service.
"Marathon Stock Group" shall mean the USX-Marathon Group as presented for financial statement purposes under generally accepted accounting principles prior to the Distribution and shall include the financial position, results of operations and cash flows for the businesses of Marathon Oil Company 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.
"Marathon Tax Group" shall mean the affiliated group of corporations as defined in section 1504 of the Code, or similar group of entities as defined under corresponding provisions of the laws of other jurisdictions, of which Marathon will be the common parent following the Distribution.
"Payroll Taxes" shall mean any Tax imposed on an employer in connection with the payment or provision of salaries or benefits and other remuneration to employees and directors, including income tax withholding, social security, unemployment taxes, and premiums for workers compensation.
"Penalties" shall mean any penalties, fines, additions to Taxes, or additional amounts imposed by any Tax Authority (domestic or foreign).
"Post-Distribution Period" shall mean any taxable period or portion thereof beginning after the Distribution Date.
"Pre-Distribution Period" shall mean any taxable period or portion thereof ending on or before, or which includes, the Distribution Date.
"Ruling" shall mean (a) the private letter ruling issued by the IRS in connection with the Distribution (and any related transactions) or (b) any similar ruling issued by any Tax Authority other than the IRS in connection with the Distribution (and any related transactions).
"Ruling Documents" shall mean the request for the Ruling submitted to the IRS or to any other Tax Authority, together with the appendices and exhibits thereto and any supplemental filings or other materials subsequently submitted to the IRS or other Tax Authority, in connection with the Distribution (and any related transactions).
"SAR" shall mean any stock appreciation right.
"Separate State Tax" shall mean any State Tax other than a Combined State Tax.
"State Tax" shall mean any Tax payable to a state or local taxing jurisdiction of the United States.
"Supplemental Ruling" shall mean (a) any private letter ruling (other than the Ruling) issued by the IRS in connection with the Distribution (and any related transactions) or (b) any similar ruling (other than the Ruling) issued by any Tax Authority other than the IRS in connection with the Distribution (and any related transactions).
"Supplemental Ruling Documents" shall mean any request for a Supplemental Ruling submitted to the IRS or any other Tax Authority, together with the appendices and exhibits thereto and any supplemental filings or other materials subsequently submitted to the IRS or other Tax Authority, in connection with the Distribution (and any related transactions).
"Tax" shall mean any tax, charge, fee, impost, levy or other assessment, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever and shall include
any transferee liability in respect of such Taxes.
"Tax Attribute" shall mean any net operating losses, minimum tax credits, business tax credits, nonconventional fuels tax credits, net capital losses, charitable contributions, foreign income tax deductions, foreign income tax credits, or any similar Tax Item.
"Tax Authority" shall mean a governmental authority or any subdivision, agency, commission, or authority thereof or any quasi-governmental or private body having jurisdiction over the assessment, determination, collection or imposition of any Tax (including, without limitation, the IRS).
"Tax Item" shall mean any item of income, gain, loss, deduction or credit, or other similar item that may have the effect of increasing or decreasing any Tax.
"Tax Proceeding" shall mean any audit or other examination by any Tax Authority, assessment of Taxes, or proceeding or appeal of such a proceeding relating to Taxes, whether administrative or judicial.
"Tax Return" shall mean any return, report, certificate, form, election, or similar statement or document (including, without limitation, estimated tax returns and reports, extension requests and forms, and information returns and reports), in each case as amended, required to be filed with any Tax Authority, Federal, state, or foreign, in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations, or administrative requirements relating to any Tax.
"Treasury Regulations" shall mean the final, temporary and proposed income tax regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
"Two-Year Period" shall mean the period that begins on the Distribution Date and that ends on the date that is two years after the Distribution Date.
"United States Steel Stock Group" shall mean the USX-U. S. Steel Group as presented for financial statement purposes under generally accepted accounting principles prior to the Distribution and shall 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 Stock Group and a portion of the corporate assets and liabilities and related transactions which are not separately identified with ongoing operating units of USX.
"United States Steel Tax Group" shall mean the affiliated group of corporations as defined in section 1504 of the Code, or similar group of entities as defined under corresponding provisions of the laws of other jurisdictions, of which United States Steel will be the common parent following the Distribution.
"USX Consolidated Group" shall mean the group of entities that make up the affiliated group of corporations as defined in section 1504 of the Code, or similar group of entities as
defined under corresponding provisions of the laws of other jurisdictions, of
which USX, or a predecessor of USX under Treasury Regulations Section 1.1502-
1(f)(4), is the common parent for all Pre-Distribution Periods.
"USX Headquarters Tax" shall mean any Tax (but not including Income Taxes) with respect to, or incurred by reason of, the corporate headquarters activities of USX or any member of the USX Consolidated Group that was allocated between the Marathon Stock Group and the United States Steel Stock Group for financial statement purposes prior to the Distribution.
"USX Shareholder" shall mean a holder of any class of USX stock on or before the Distribution Date, including shares of USX-U. S. Steel Group stock and shares of USX-Marathon Group stock.
SECTION 1.02. Terms Defined Elsewhere in this Agreement.
For the purposes of this Agreement, the following terms shall have the meanings set forth in the Sections indicated below:
Term Section ---- ------- Adjusted AMT Separate Return Liability. 4.02(b)(i)(B) Adjusted Separate Return Liability 4.02(a)(ii)(D) After-Tax Amount 10.02(b) AMT 4.02(b) AMT Separate Return Liability 4.02(b)(i) Arbitrator 11.01 Buy-out Payment 3.06(a) Combined Separate Return Liabilities 4.02(a)(ii)(B) Consolidated MTCs 4.02(b)(ii) Consolidated Return Benefit or Detriment 4.02(a)(ii)(B) Consolidated Tax Attribute 4.02(a)(ii)(C)(2) Demand 11.01 Dispute 11.01 Dispute Resolution 11.01 Indemnitee 7.05 Indemnitor 7.05 MOC 6.01 MTC 4.02(b) Party 11.01 Panel 11.01 Payment Period 10.03 Preempting Attributes 4.02(a)(iii)(A) Separate Return Basis 4.02(a)(i) Separate Return Liability 4.02(a)(i) Total USX Liability 4.02(a) Total USX AMT Liability 4.02(b) Transfer Taxes 4.04 True-Up Payment 5.03(b)(iii) |
SECTION 1.03. Other Definitional Provisions.
(a) The words "hereof," "herein," "hereunder," and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa.
ARTICLE II
GENERAL
SECTION 2.01. Sole Tax Sharing Agreement.
This Agreement shall constitute the entire agreement between United States Steel and Marathon and their respective affiliates (including direct or indirect corporate subsidiaries, controlled partnerships, and controlled limited liability companies) with respect to the subject matters herein. The USX Tax Allocation and Settlement Policy effective as of 1991 and as amended and restated as of August 26, 1997 (including any amendments thereto) shall be or shall have been terminated as of the Distribution Date. On and after the Distribution Date, United States Steel and Marathon and their respective affiliates (including direct or indirect corporate subsidiaries, controlled partnerships, and controlled limited liability companies) shall have no rights or liabilities (including, without limitation, any rights and liabilities that may have accrued prior to the Distribution Date) under such terminated agreements and arrangements, and this Agreement shall be the sole tax sharing or tax allocation agreement among such corporations.
SECTION 2.02. No Third Party Rights.
Nothing in this Agreement shall be interpreted to create any rights or
liabilities (i) among members of the Marathon Tax Group, (ii) among members of
the United States Steel Tax Group, (iii) between the Marathon Tax Group and any
USX Shareholder, Marathon shareholder or United States Steel shareholder, or
(iv) between the United States Steel Tax Group and any USX Shareholder, Marathon
shareholder or United States Steel shareholder.
SECTION 2.03. Good Faith.
All parties shall act in good faith with respect to all aspects of this Agreement.
ARTICLE III
ADMINISTRATIVE AND COMPLIANCE MATTERS
SECTION 3.01. Designation Of Agent.
(a) Except with respect to Tax Returns described in Sections 3.02(a)(iii) and 3.02(a)(iv) of this Agreement, United States Steel hereby irrevocably authorizes and designates, and agrees to cause each member of the United States Steel Tax Group to so authorize and designate, Marathon as its sole and exclusive agent and attorney-in-fact to take such action (including execution of documents) as Marathon, in its sole discretion, may deem appropriate in any and all matters relating to Taxes (including Tax Proceedings) for taxable years or portions thereof in which United States Steel and its affiliates were members of the USX Consolidated Group. In exercising its authority under this Section 3.01, Marathon shall act in good faith and in a reasonable manner consistent with the principles of this Agreement.
(b) Marathon may, in its sole and absolute discretion, delegate at any time all or a portion of its authority, rights, or obligations under this Agreement to any corporation(s) or any person(s) (including, without limitation, United States Steel). Such delegation may be revoked by Marathon in its sole and absolute discretion.
SECTION 3.02. USX Consolidated Group Tax Returns and Elections.
(a) Original Tax Returns.
(i) Marathon shall prepare and file the Consolidated Federal Tax Returns and Combined State Tax Returns of the USX Consolidated Group for all Pre-Distribution Periods with the assistance of the members of the United States Steel Tax Group; provided that, all such Tax Returns shall be (1) prepared in a manner that is consistent with the most recent prior Tax Return of the USX Consolidated Group that includes the relevant position or is supported by a written opinion of outside tax counsel or nationally recognized accounting firm indicating that the position is more likely than not to prevail if litigated, unless the parties otherwise agree in writing; (2) prepared in a manner that is consistent with Article 6 of this Agreement and any Ruling, Supplemental Ruling, Ruling Documents, or Supplemental Ruling Documents; and (3) filed on a timely basis (taking into account applicable extensions); and further provided that, Marathon shall prepare any Tax Return that includes Combined State Taxes on a separate return basis or combined return basis, as the case may be, consistent with the manner in which such return was filed for the immediately preceding period.
(A) Marathon shall consult with United States Steel, and United States Steel shall assist Marathon, in preparing the portions of any such Tax Returns relating directly to any Tax Items generated solely by, or allocated solely to, the United States Steel Stock Group. Notwithstanding the obligation to consult with United States Steel, but subject to United States Steel's rights pursuant to Section 3.02(a)(i)(C) of this Agreement and subject to Section 3.02(c) of this Agreement, Marathon shall have the exclusive right to determine how the Tax Returns
shall be prepared and filed, including, without limitation, the positions taken with respect to any Tax Item reported thereon, and how any elections shall be made thereon.
(B) Marathon shall provide drafts of all Tax Returns of the USX Consolidated Group to United States Steel, in the case of Federal income tax no later than 30 Calendar Days prior to the due date for filing such Tax Return (including all applicable extensions), and in the case of State Income Tax and all other Taxes no later than 15 Calendar Days prior to the due date for filing such Tax Returns (including all applicable extensions).
(C) If United States Steel requests that Marathon take a
position relating to any Tax Item generated solely by, or allocated solely to,
the United States Steel Stock Group (including a position with respect to the
combined or separate status of a State Tax Return) that is (1) consistent with
the most recent prior Tax Return of the USX Consolidated Group that includes the
relevant position and (2) otherwise meets the requirements of Section 3.02(a)(i)
of this Agreement, then Marathon shall reflect such position on the Tax Return.
If United States Steel requests that Marathon take a position relating to any
Tax Item generated solely by, or allocated solely to, the United States Steel
Stock Group that is (1) supported by a written opinion of outside tax counsel or
a nationally recognized accounting firm that the position is more likely than
not to prevail in litigation (but does not meet the consistency requirements of
the immediately preceding sentence) and (2) otherwise meets the requirements of
Section 3.02(a)(i) of this Agreement, then Marathon may decline to take such
position on the Tax Return; provided that, Marathon shall make to United States
Steel a Buy-out Payment pursuant to Section 3.06 of this Agreement.
(ii) Marathon and the members of the Marathon Tax Group shall be solely responsible for the preparation and filing of (A) their respective Separate State Tax Returns for all taxable years, and (B) Tax Returns for the Marathon Tax Group for taxable years that begin after the Distribution Date.
(iii) United States Steel and the members of the United States Steel Tax Group shall be solely responsible for the preparation and filing of (A) their respective Separate State Tax Returns for all taxable years, and (B) Tax Returns for the United States Steel Tax Group for taxable years that begin after the Distribution Date.
(iv) All foreign Tax Returns shall be filed by the legal entities which had responsibility for filing such Tax Returns, regardless of whether such entities are members of the United States Steel Tax Group or the Marathon Tax Group after the Distribution.
(v) Without limiting the generality of Sections 8.01 and 8.02 of this Agreement, Marathon shall provide United States Steel, and United States Steel shall provide Marathon, with any information relevant or required for the preparation of the Tax Returns described in this Section 3.02. No later than June 30, 2002, Marathon shall provide United States Steel with a list of all Consolidated Federal Tax Returns and Combined State Tax Returns that Marathon will file pursuant to Section 3.02(a) of this Agreement.
(b) Amended Tax Returns, Claims for Refunds, and Tentative Carryback Adjustments.
(i) Marathon shall prepare and file any amended Tax Return, claim for refund, or tentative carryback adjustment (including an IRS Form 1139 arising as a result of an election made pursuant to Section 3.02(c)(ii) of this Agreement involving a Tax Item of the United States Steel Tax Group arising in a Post-Distribution Period) affecting a Tax Item included, or to be included, on any Consolidated Federal Tax Return or Combined State Tax Return of the USX Consolidated Group; provided that, all such amended Tax Returns, claims for refund, or tentative carryback adjustment shall (A) be prepared in a manner that is consistent with Article 6 of this Agreement and any Ruling, Supplemental Ruling, Ruling Documents, or Supplemental Ruling Documents, (B) meet the requirements of Section 3.02(c) of this Agreement, and (C) be filed on a timely basis (taking into account applicable extensions).
(ii) Marathon shall provide to United States Steel for its review any amended Tax Return, claim for refund, or tentative carryback adjustment of the USX Consolidated Group no later than 30 Calendar Days prior to its filing. Within 25 Calendar Days of receiving from Marathon such amended Tax Return, claim for refund, or tentative carryback adjustment, United States Steel shall have the right to request that Marathon not take any position proposed to be taken on such amended Tax Return, claim for refund, or tentative carryback adjustment relating to any Tax Item generated by (in whole or in part), or allocated to (in whole or in part), the Marathon Stock Group, and Marathon shall not take such position on an amended Tax Return, claim for refund, or tentative carryback; provided that, United States Steel shall make to Marathon a Buy-out Payment pursuant to Section 3.06 of this Agreement.
(iii) United States Steel shall have the right to request that Marathon file an amended Tax Return, claim for refund, or tentative carryback adjustment relating to any Tax Item generated solely by, or allocated solely to, the United States Steel Stock Group; provided that, all such amended Tax Returns, claims for refund, or tentative carryback adjustments shall satisfy the requirements of Section 3.02(b)(i) of this Agreement. United States Steel shall submit such portion of the amended Tax Return, claim for refund, or tentative carryback adjustment to Marathon no later than 30 Calendar Days prior to the due date for filing such amended Tax Returns, claims for refund, or tentative carryback adjustments and Marathon shall either (A) file such amended Tax Return, claim for refund, or tentative carryback adjustment within 25 Calendar Days of receiving it from United States Steel or (B) exercise its buy-out right provided in the next sentence. Marathon may, in its sole and absolute discretion, decline to take any position proposed to be taken on such amended Tax Return, claim for refund, or tentative carryback adjustment relating to any Tax Item generated solely by, or allocated solely to, the United States Steel Stock Group; provided that, if such position otherwise satisfies the requirements of this Section 3.02(b)(iii), then Marathon shall make to United States Steel a Buy-out Payment pursuant to Section 3.06 of this Agreement.
(c) Elections.
(i) Consistency. Any election that affects the Tax Items of both the Marathon Stock Group and the United States Steel Stock Group shall be made consistent with the most recently filed original Tax Return, unless the parties otherwise agree or the party seeking to make
the inconsistent election makes a Buy-out Payment to the other party pursuant to
Section 3.06 (for purposes of applying section 3.06, any such election shall be
treated as a position with respect to all affected Tax Items).
(ii) Carryback of Post-Distribution Period United States Steel Losses and Credits. Subject to the standards for filing Tax Returns of the USX Consolidated Group set forth in Sections 3.02(a) and 3.02(b) of this Agreement, United States Steel may elect to carry back any Post-Distribution Period losses or credits of the United States Steel Tax Group that may be carried back to a Tax Return of the USX Consolidated Group under any pertinent section of the Treasury Regulations, and Marathon shall take any such election into account in preparing the relevant Tax Returns, including amended Tax Returns if necessary, of the USX Consolidated Group.
(iii) Marathon may, at its option, elect, and the United States Steel Tax Group shall join it in electing (if necessary), to ratably allocate Tax Items (other than extraordinary Tax Items) of the United States Steel Stock Group in accordance with the relevant provisions of Treasury Regulations Section 1.1502-76. If Marathon makes such an election, the members of the United States Steel Tax Group shall provide to Marathon such statements as are required under the Treasury Regulations and other appropriate assistance.
(iv) Marathon shall elect, and the United States Steel Tax Group shall join it in electing (if necessary), to reattribute any net operating loss or capital loss carryover of a member of the United States Steel Stock Group to USX in accordance with the relevant provisions of Treasury Regulations Section 1.1502-20(g). The members of the United States Steel Tax Group shall provide to Marathon such statements as are required under the Treasury Regulations and other appropriate assistance.
SECTION 3.03. USX Consolidated Group Tax Proceedings.
(a) Control Over Tax Proceedings.
Subject to the limitations set forth below in this Section 3.03, Marathon shall have the exclusive right to control, contest, and represent the interests of United States Steel and each member of the United States Steel Tax Group in any Tax Proceeding relating to any Tax Item included on a Consolidated Federal Tax Return or Combined State Tax Return for all Pre-Distribution Periods, including the right to resolve, settle, or agree to any deficiency, claim or adjustment proposed, asserted, or assessed, in connection with or as a result of any such Tax Proceeding, and including the right to execute waivers, choose the forum for contests, schedule conferences, and resolve or settle any Tax Item.
(b) United States Steel Participation Rights.
Marathon shall consult with United States Steel, and United States Steel shall have the right (i) to represent the interests of itself and each member of the United States Steel Tax Group, in any Tax Proceeding relating to any Tax Item generated solely by, or allocated solely to, the United States Steel Stock Group, and (ii) to contest, resolve, settle, or agree to any deficiency,
claim, or adjustment proposed, asserted, or assessed in connection with or as a result of such Tax Proceeding; provided that, the entering into of any such resolution, settlement, or agreement or any decision in connection with (including the entering into of) any judicial or administrative proceeding relating to Taxes shall be subject to the review and approval of Marathon which approval shall not be unreasonably withheld. Notwithstanding the preceding sentence, Marathon shall have the exclusive right to represent the interests of United States Steel and each member of the United States Steel Tax Group in any Tax Proceeding with respect to any Tax Items that are allocated to both the Marathon Stock Group and the United States Steel Stock Group; provided that, Marathon shall exercise this authority under this Section 3.03(b) without discriminating against United States Steel or any member of the United States Steel Tax Group unless Marathon makes to United States Steel a Buy-out Payment pursuant to Section 3.06 of this Agreement.
(c) Marathon Buy-Out Right.
Notwithstanding Section 3.03(b) of this Agreement, Marathon shall have the right to concede, resolve, or settle any Tax Proceeding relating to any Tax Item generated by (in whole or in part), or allocated to (in whole or in part), the United States Steel Stock Group without the consent of United States Steel or any member of the United States Steel Tax Group; provided that, Marathon shall make to United States Steel a Buy-out Payment pursuant to Section 3.06 of this Agreement.
(d) United States Steel Buy-Out Right.
Notwithstanding Section 3.03(a) of this Agreement, United States Steel
shall have the right to request that Marathon concede, resolve, or settle any
Tax Proceeding relating to any Tax Item generated by (in whole or in part), or
allocated to (in whole or in part), the Marathon Stock Group, and Marathon shall
be required to so concede, resolve, or settle such Tax Proceeding; provided
that, United States Steel shall make to Marathon a Buy-out Payment pursuant to
Section 3.06 of this Agreement.
(e) Alternative Method for Administrative Resolution of Tax Proceedings.
Notwithstanding Sections 3.03(a), 3.03(b), 3.03(c), and 3.03(d) of this Agreement, Marathon and United States Steel may mutually agree to resolve with the relevant Tax Authority any proposed adjustments to a Tax Return of the USX Consolidated Group in any manner mutually agreed to by Marathon and United States Steel (including settling any Tax Proceeding on a basis that benefits one Group to the detriment of the other), and may take any action consistent with this Agreement to facilitate such settlement (including payment from one Group to the other).
(f) Judicial Resolution of Tax Proceedings.
In the event that any proposed adjustments to Tax Items of the USX Consolidated Group are not resolved administratively and a judicial resolution is necessary, Marathon and United States Steel shall consult regarding the choice of litigation forum and may agree to choose any available forum, which, as of the date of this Agreement, are the United States Tax Court, the
United States Court of Federal Claims, the United States district court with jurisdiction over the relevant Federal Tax Return, or a state court with jurisdiction over the relevant State Tax Return. If Marathon and United States Steel agree that the jurisdiction of a refund forum should be obtained, United States Steel shall make any payments required pursuant to Section 5.02(d) of this Agreement. If Marathon and United States Steel are unable to reach agreement as to the choice of litigation forum for any Federal tax matter, the United States Tax Court shall be selected as the litigation forum.
SECTION 3.04. Notices from Tax Authorities.
(a) If any member of the Marathon Tax Group receives written notice of, or relating to, a Tax Proceeding from a Tax Authority that asserts, proposes or recommends a deficiency, claim, or adjustment that, if sustained, would result in the redetermination of a Tax Item of a member of the United States Steel Stock Group, Marathon shall promptly provide a copy of such notice to United States Steel (but in no event later than ten Calendar Days following the receipt of such notice). If any member of the United States Steel Tax Group receives written notice of, or relating to, a Tax Proceeding from a Tax Authority that asserts, proposes or recommends a deficiency, claim, or adjustment that, if sustained, would result in the redetermination of a Tax Item of a member of the Marathon Stock Group, United States Steel shall promptly provide a copy of such notice to Marathon (but in no event later than ten Calendar Days following the receipt of such notice).
(b) Without limiting the generality of Section 12.04(b) of this Agreement, the failure of Marathon or United States Steel to promptly notify the other of any matter relating to a particular Tax for a taxable period shall not relieve the other party of any liability and/or obligation which it may have under this Agreement with respect to such Tax for such taxable period except to the extent that such other party's rights hereunder are materially prejudiced by such failure. The remedy for such failure shall be determined pursuant to Section 12.05 of this Agreement.
SECTION 3.05. Supplemental Rulings.
(a) Marathon shall have the right to obtain a Supplemental Ruling in its sole and exclusive discretion. If Marathon decides to obtain a Supplemental Ruling, United States Steel shall cooperate with Marathon and take any and all actions reasonably requested by Marathon in connection with obtaining the Supplemental Ruling (including, without limitation, by making any representation or covenant or providing any materials or information requested by any Tax Authority; provided that, United States Steel shall not be required to make any representation or covenant that is inconsistent with facts or as to future matters or events over which it has no control). In connection with obtaining a Supplemental Ruling (i) Marathon shall cooperate with and keep United States Steel informed in a timely manner of all material actions taken or proposed to be taken by Marathon in connection therewith; (ii) Marathon shall (A) reasonably in advance of the submission of any Supplemental Ruling Documents, provide United States Steel with a draft copy thereof; (B) reasonably consider United States Steel's comments on such draft copy; and (C) provide United States Steel with a final copy of all Supplemental Ruling Documents; and (iii) Marathon shall provide United States Steel with notice reasonably in
advance of, and United States Steel shall have the right to attend, any formally scheduled meetings with any Tax Authority (subject to the approval of the Tax Authority) that relate to such Supplemental Ruling. Further, Marathon shall provide United States Steel with 30 Calendar Days to review such Supplemental Ruling under this Section 3.05(a) and shall not file such request prior to the expiration of 30 Calendar Days unless United States Steel agrees to such early filing in writing. Marathon shall bear all costs and expenses incurred in obtaining such Supplemental Ruling and shall reimburse United States Steel for all reasonable costs and expenses of outside third parties incurred by United States Steel in connection with obtaining a Supplemental Ruling requested by Marathon.
(b) United States Steel hereby agrees that Marathon shall have, subject to Section 3.05(a) of this Agreement, sole and exclusive control over the process of obtaining a Supplemental Ruling and that only Marathon shall apply for a Supplemental Ruling. United States Steel further agrees that it shall not seek any guidance from the IRS or any other Tax Authority concerning the Distribution, except as set forth in Section 3.05(c) of this Agreement.
(c) Marathon agrees that at the reasonable request of United States Steel, Marathon shall cooperate with United States Steel and use its reasonable efforts to seek to obtain, as expeditiously as possible, a Supplemental Ruling or other guidance from the IRS or any other Tax Authority for the purpose of confirming (i) the Ruling or any Supplemental Ruling issued previously and (ii) compliance on the part of United States Steel or any member of the United States Steel Tax Group with its obligations under this Agreement. United States Steel shall reimburse Marathon for all reasonable costs and expenses incurred by Marathon in connection with obtaining a Supplemental Ruling requested by United States Steel.
SECTION 3.06. Buy-out Payments.
(a) In General. Any payment made pursuant to this Section 3.06 (a "Buy-out Payment") shall be determined as follows.
(b) Buy-out Payments by Marathon.
(i) Amount of Buy-out Payment.
The amount of a Buy-out Payment shall be determined by the parties. If the parties are unable to agree on the amount of a Buy-out Payment within 30 Calendar Days from the time that the position which Marathon declines to take is proposed by United States Steel, and United States Steel does not withdraw its request and Marathon does not agree to take the position proposed (and the time available for taking such position has not expired), then the amount shall be determined pursuant to Dispute Resolution as provided in Section 11.01 of this Agreement in accordance with the following principles:
(A) The amount shall reflect the extent to which each party has acted in good faith with respect to the position proposed by United States Steel; and
(B) The amount shall reflect the total benefit that would have
been realized for all relevant taxable years by United States Steel had the
position proposed by it been taken, including changes to the Separate Return
Liability of United States Steel, payments from and to Marathon pursuant to
Section 5.03 of this Agreement, Federal Tax interest savings and costs which
would have been allocated to United States Steel, and the likelihood that any
such benefits projected to be realized in future years in fact would have been
received; and
(C) The amount shall reflect the relative likelihood that the position proposed by United States Steel would have prevailed in litigation; and
(D) The amount shall reflect the time when the benefits would have been realized by United States Steel giving due regard to whether the position would have been taken on an original return or at some other time.
Upon a determination that a party has not acted in good faith, the amount may be reduced (but not below zero ($0)) and/or costs may be awarded as appropriate.
(ii) When Buy-out Payments are to be Made.
Unless the parties otherwise agree, a Buy-out Payment shall be made within 30 Calendar Days of the time when United States Steel would have received the relevant benefit if Marathon had agreed to pursue the position proposed by United States Steel. If the amount of a Buy-out Payment is determined pursuant to Dispute Resolution, Marathon shall make such Buy-out Payment no later than 30 Calendar Days following the conclusion of such Dispute Resolution, and if such payment date occurs prior to, or subsequent to, the date on which United States Steel would have realized the benefit from the proposed position, then the amount of the Buy-out Payment shall reflect interest from the time such benefit would have been realized until the actual payment date.
(iii) Tax Item Deemed Transferred.
If Marathon makes a Buy-out Payment with respect to a Tax Item generated by, or allocated to, the United States Steel Stock Group, such Tax Item thereafter shall be treated as a Tax Item allocated to the Marathon Stock Group for all purposes of this Agreement in all relevant taxable periods.
(c) Buy-out Payments By United States Steel.
The provisions of Section 3.06(b) of this Agreement shall be applied with respect to any Buy-out Payment by United States Steel by substituting "United States Steel" for "Marathon" each place that it appears and by substituting "Marathon" for "United States Steel" each place that it appears.
ARTICLE IV
DETERMINATION OF EACH GROUP'S SHARE OF THE USX CONSOLIDATED GROUP'S TAX
LIABILITY AND TAX ATTRIBUTES
SECTION 4.01. General.
(a) While the provisions of this Article 4 are intended to reflect the principles of the USX Tax Allocation and Settlement Policy effective as of 1991 and as amended and restated as of August 26, 1997, that policy shall have been revoked in its entirety as provided in Section 2.01 of this Agreement and the provisions of this Article 4 shall control. The principles of this Article 4 shall be applied in all relevant years as if there were two Groups, the Marathon Stock Group and the United States Steel Stock Group, and all Tax Items of the Delhi Stock Group shall be allocated to the Marathon Stock Group and the United States Steel Stock Group as provided in Section 4.02(a)(i)(E) of this Agreement. The determination under this Article 4 of a Group's allocable share of the tax liability of the USX Consolidated Group shall be made for the year to which the adjustment relates rather than for the current year.
(b) The entire determination required under this Article 4 shall be made whenever it is necessary to determine each Group's share of any tax liability of the USX Consolidated Group for any Pre-Distribution Period.
(c) Given the uncertain effects of various Tax Items on the total liability of the USX Consolidated Group, it is understood that a certain amount of judgment will be necessary to apply this Article 4 and that both Marathon and United States Steel will act reasonably and in good faith when applying the principles of this Article 4.
SECTION 4.02. Determination of Each Group's Allocable Share of the Federal Tax Liability of the USX Consolidated Group and Resulting Tax Attributes.
If the USX Consolidated Group is a regular taxpayer in the relevant period,
each Group's share of the regular Federal income tax liability of the USX
Consolidated Group and resulting Tax Attributes shall be determined under
Section 4.02(a) of this Agreement; if the USX Consolidated Group is an
alternative minimum taxpayer in the relevant period, each Group's share of the
alternative minimum tax liability of the USX Consolidated Group and resulting
Tax Attributes shall be determined under Section 4.02(b) of this Agreement.
(a) Determination of Groups' Allocable Share if the USX Consolidated Group is a Regular Taxpayer in the Relevant Period.
Each Group's allocable share of the regular Federal income tax liability of the USX Consolidated Group ("Total USX Liability") shall be determined by calculating the Group's Separate Return Liability pursuant to Section 4.02(a)(i) and then adjusting for the effects of the Consolidated Federal Tax Return of the USX Consolidated Group pursuant to Section 4.02(a)(ii). Each Group's share of the resulting Tax Attributes shall be determined by application of Section 4.02(a)(iii).
(i) Groups' Separate Return Liability.
The Federal regular income tax liability of the United States Steel Stock Group and the Marathon Stock Group (the "Separate Return Liability") shall be determined as if each Group were filing its own separate consolidated return (the "Separate Return Basis"). Without limiting the generality of the foregoing statement, the following special rules shall apply:
(A) For purposes of determining the Separate Return Liability of each Group, the taxable income or loss of each Group shall be the income or loss of each Group for financial statement purposes adjusted as shown on an IRS Form Schedule M associated with such Group. Any item of income or expense that is allocated between the Groups for financial statement purposes shall be allocated in a manner consistent with such financial statements in order to compute taxable income or loss on a Separate Return Basis.
(B) Dividend Income. For purposes of determining the Separate Return Liability of each Group, the tax treatment of any dividend income received by a Group shall be consistent with the actual tax consequences in the Tax Returns of the USX Consolidated Group.
(C) Tax Elections. All tax elections, which must be made on a consolidated return basis, shall conform to those elected by the USX Consolidated Group.
(D) Income Taxes relating to Holding Company Reorganization and Distribution.
(1) In the event that the USX Consolidated Group recognizes gain or other income as a result of the Holding Company Reorganization or Distribution being taxable due to the breach of a covenant or representation in Article 6 of this Agreement by a member of the United States Steel Tax Group or an acquisition of United States Steel that violates Section 355(e) of the Code, the United States Steel Stock Group shall be allocated such gain or other income. No portion of such gain or other income shall be allocated to the Marathon Stock Group.
(2) In the event that the USX Consolidated Group recognizes gain or other income as a result of the Holding Company Reorganization or Distribution being taxable due to the breach of a covenant or representation in Article 6 of this Agreement by a member of the Marathon Tax Group or an acquisition of Marathon that violates Section 355(e) of the Code, the Marathon Stock Group shall be allocated such gain or other income. No portion of such gain or other income shall be allocated to the United States Steel Stock Group.
(3) In the event that the USX Consolidated Group recognizes gain or other income as a result of the Holding Company Reorganization or Distribution being taxable due to an acquisition that violates Section 355(e) of the Code, and both United States Steel and Marathon have been acquired in transactions that are presumed to violate Section 355(e) of the Code (e.g., transactions that involve acquisitions by a third party of 50
percent or more of the stock of the relevant corporation), then such gain or other income shall be allocated to the Group whose acquisition occurred first in time (based on closing date). In the event that the USX Consolidated Group recognizes gain or other income as a result of the Holding Company Reorganization or Distribution being taxable under any other provision of the Code due to the breach of a covenant or representation in Article 6 of this Agreement, and both United States Steel and Marathon have breached a covenant or representation in Article 6 of this Agreement, then such gain or other income shall be allocated to the Group whose action causing such breach occurred first in time. No portion of such gain or other income shall be allocated to the other Group. Notwithstanding the foregoing, if the Distribution is characterized as other than a distribution of the stock of United States Steel and both United States Steel and Marathon (I) have been acquired in transactions that are presumed to violate Section 355(e) of the Code (e.g., transactions that involve acquisitions by a third party of 50 percent or more of the stock of the relevant corporation) or (II) have breached a covenant or representation in Article 6 of this Agreement, then any gain or other income recognized as a result of the Holding Company Reorganization or Distribution being taxable under any provision of the Code shall be allocated to the Group with respect to which such gain or other income is recognized.
(4) In the event that the USX Consolidated Group recognizes gain or other income as a result of the Holding Company Reorganization or Distribution being taxable, and no covenant or representation in Article 6 of this Agreement has been breached and neither United States Steel nor Marathon has been acquired in a transaction that is presumed to violate Section 355(e) of the Code, then any gain or other income shall be allocated to the Group with respect to which such gain or other income is recognized.
(E) Taxes Relating to Sale of Delhi Stock Group. In the event that the tax liability of the USX Consolidated Group is adjusted as a result of an adjustment to the taxable gain or loss on the sale of the Delhi Stock Group or as the result of adjustments to Tax Items allocated to entities within the Delhi Stock Group, the United States Steel Stock Group's share of such tax liability shall be 39%. The Marathon Stock Group's share shall be the remaining portion.
(F) Excess Loss Accounts and Deferred Intercompany Gains. Any tax liability resulting from the existence of any excess loss accounts or deferred intercompany gains immediately before the Distribution shall be allocated to the Group to which it relates and shall not be treated as a Tax relating to the Distribution under Section 4.02(a)(i)(D) of this Agreement. For purposes of this Agreement, an excess loss account shall relate to the Group which immediately before the Distribution owned the stock to which such excess loss account was attributable, and a deferred intercompany gain shall relate to the Group which immediately before the Distribution owned the entity whose gain was deferred.
(G) Offsets to Refund Claims. Any tax liability that otherwise would be precluded by the relevant statute of limitations which is applied as an offset to a refund claim shall be allocated to the Group whose Tax Items are included on such refund claim. In the event that a refund claim is filed which includes Tax Items of both Groups, any such offsets shall be allocated first to the Group whose Tax Items generated such offset and then to the other Group.
Assumptions. For the year at issue, the USX Consolidated Group files a claim for refund totaling $10 million, of which $8 million is attributable to Tax Items generated by, or allocated to, the United States Steel Stock Group and $2 million is attributable to Tax Items generated by, or allocated to, the Marathon Stock Group. The Tax Authority has an offset in the amount of $1 million, which is attributable entirely to Tax Items generated by, or allocated to, the Marathon Stock Group. The USX Consolidated Group receives a $9 million refund.
Allocation. The offset is allocated to the Marathon Stock Group and reduces the portion of the refund allocated to Marathon to $1 million. Of the $9 million refund received by the USX Consolidated Group, $8 million is allocated to the United States Steel Stock Group and $1 million is allocated to the Marathon Stock Group.
Assumptions. For the year at issue, the USX Consolidated Group files a claim for refund totaling $10 million, of which $8 million is attributable to Tax Items generated by, or allocated to, the United States Steel Stock Group and $2 million is attributable to Tax Items generated by, or allocated to, the Marathon Stock Group. The Tax Authority has offsets totaling $4 million, which are attributable entirely to Tax Items generated by, or allocated to, the Marathon Stock Group. The USX Consolidated Group receives a $6 million refund.
Allocation. The offset is allocated first to the Marathon Stock Group and reduces the portion of the refund allocated to Marathon to $0. The offset is thereafter allocated to the United States Steel Stock Group, and reduces the refund allocated to the United States Steel Stock Group to $6 million.
(H) Carryback of Post-Distribution United States Steel Losses and Credits. Any carryback of losses or credits of the United States Steel Tax Group to the Tax Returns of the USX Consolidated Group pursuant to an election described in Section 3.02(c)(ii) of this Agreement shall, for all purposes of this Agreement, be treated as a Tax Attribute of the United States Steel Stock Group.
(ii) Adjustments To Group's Separate Return Liability For Regular Tax Effects Of Consolidated Group.
The Separate Return Liability of each Group determined pursuant to Section 4.02(a)(i) of this Agreement shall be adjusted for the regular tax effects of the USX Consolidated Group as follows:
(A) The Total USX Liability shall be determined for regular tax purposes, taking into account the effects of any carryforward or carryback of Tax Attributes from
prior or future years, including the effects of any carrybacks from a Tax Return for a Post-Distribution Period of the United States Steel Tax Group carried back pursuant to Section 4.02(a)(i)(H) of this Agreement.
(B) The Separate Return Liabilities of each Group determined pursuant to Section 4.02(a)(i) of this Agreement shall be combined (the "Combined Separate Return Liabilities"). The Combined Separate Return Liabilities shall be subtracted from the Total USX Liability to determine the aggregate net benefit or detriment of filing a Consolidated Federal Income Tax Return (the "Consolidated Return Benefit or Detriment").
(C) The Consolidated Return Benefit or Detriment shall be allocated to the Group whose Tax Attributes caused the benefit or detriment. Such allocation shall be consistent with the actual usage of the Tax Attributes on the Tax Returns of the USX Consolidated Group. Without limiting the generality of the foregoing statement, the following special rules shall apply:
(1) For these purposes, Tax Attributes shall be deemed to cause a benefit to the extent that such Tax Attributes are used on the Tax Returns of the USX Consolidated Group but are not used by a Group on a Separate Return Basis; Tax Attributes shall be deemed to cause a detriment to the extent that such Tax Attributes are used by a Group on a Separate Return Basis but are not used on the Tax Returns of the USX Consolidated Group (except where preemption by the other Group's Tax Attributes occurs as set forth in Section 4.02(a)(iii) of this Agreement). Thus, the effect of a statutory limitation on the use of a Group's Tax Attribute on a Tax Return of the USX Consolidated Group shall be disregarded even if the statutory limitation is attributable to Tax Items of the other Group.
Assumptions. The Marathon Stock Group generates a $100 foreign tax credit that is used for purposes of computing the Separate Return Liability of the Marathon Stock Group for such year. The United States Steel Stock Group generates $100 of interest expense that is used in its entirety to compute the Separate Return Liability of the United States Steel Stock Group for the year and decreases the amount of the USX Consolidated Group's foreign source income. As a result of such interest expense, only $50 of the Marathon Stock Group's foreign tax credits is used in such year.
Allocation. For purposes of allocating any net Consolidated Return Benefit or Detriment, the United States Steel Group's $100 of interest expense shall be treated as being used on the Tax Returns of the USX Consolidated Group and only $50 of the Marathon Stock Group's foreign tax credits shall be treated as being used on the Tax Returns of the USX Consolidated Group.
(2) To determine the utilization of each Group's share of a particular Tax Attribute when the amount of such Tax Attribute available exceeds the total
amount of such Tax Attribute capable of being utilized on the Tax Return of the USX Consolidated Group (the "Consolidated Tax Attribute"), each Group's portion of the Consolidated Tax Attribute shall be an amount which bears the same ratio to the Consolidated Tax Attribute utilized as the amount of each Group's available Tax Attribute bears to the sum of all of the Groups' available Tax Attributes; provided that, the amount allocated to a Group shall not exceed the amount utilized by such Group on a Separate Return Basis. Each Group's remaining carryforwards and carrybacks of such Tax Attributes shall be adjusted to reflect the utilization determined under this Section 4.02(a)(ii)(C)(2).
Assumptions. In the year at issue, each of the Marathon Stock Group and United States Steel Stock Group has $100 of MTC available. The USX Consolidated Group is able to use $100 of MTC on its Consolidated Federal Tax Return for such year. On a Separate Return Basis, the Marathon Stock Group is able to use $100 of MTC, and the United States Steel Stock Group is able to use $50 of MTC.
Allocation. The amount of each Group's Tax Attributes utilized on the Consolidated Federal Tax Return of the USX Consolidated Group is determined as follows. The amount utilized by each Group is deemed to be an amount equal to the ratio of each Group's available Tax Attributes to the amount of such Tax Attributes utilized on USX's Consolidated Federal Tax Return. Since in this case each Group has $100 of MTC on a Separate Return Basis, each Group would be deemed to utilize 50% of the total utilized, or $50 of MTC.
Assumptions. In the year at issue, each of the Marathon Stock Group and United States Steel Stock Group has $100 of MTC available. The USX Consolidated Group is able to use $100 of MTC on its Consolidated Federal Tax Return for such year. On a Separate Return Basis, the Marathon Stock Group is able to use $100 of MTC, and the United States Steel Stock Group is able to use $40 of MTC.
Allocation. The amount of each Group's Tax Attributes utilized on the Consolidated Federal Tax Return of the USX Consolidated Group is determined as follows. The amount utilized by each Group is deemed to be an amount equal to the ratio of each Group's available Tax Attributes to the amount of such Tax Attributes utilized on USX's Consolidated Federal Tax Return limited by each Group's use of such Tax Attribute on a Separate Return Basis. Since the United States Steel Stock Group only utilized $40 of MTC on a Separate Return Basis, it shall be treated as having utilized $40 of MTC on the USX Consolidated Federal Tax Return and Marathon shall be treated as having utilized $60 of MTC. United States Steel shall have $60 of the remaining MTC carryforward or carryback, and Marathon shall have $40.
(D) Determination Of Adjusted Separate Return Liability and Benefit. Each Group's Separate Return Liability shall be adjusted to reflect the portion of the Consolidated Return Benefit or Detriment allocated to such Group under this Section 4.02(a)(ii) (the "Adjusted Separate Return Liability"). To the extent a Group's Adjusted Separate Return Liability for a taxable period is below zero, and the Adjusted Separate Return Liability of another Group is greater than the Total USX Liability for that same taxable period, then such other Group shall have realized a benefit to the extent of the difference between its Adjusted Separate Return Liability and the Total USX Liability and shall make a payment under Section 5.03(a)(ii) of this Agreement.
In the year at issue, Marathon has an Adjusted Separate Return Liability of $200, United States Steel has an Adjusted Separate Return Liability of ($100), and the Total USX Liability is $100. Marathon shall be treated as having realized a benefit of $100 (the difference between Marathon's Adjusted Separate Return Liability and the USX Total Liability), and a payment of $100 will be required from Marathon under Section 5.03(a)(ii) of this Agreement.
In the year at issue, Marathon has a Separate Return Liability of $200, United States Steel has a Separate Return Liability of $100. The Total USX Liability is $200 because of the use of $100 of United States Steel MTC's, which United States Steel could not use on a Separate Return Basis. The $100 of Consolidated Return Benefit shall be allocated to United States Steel, decreasing its Adjusted Separate Return Liability from $100 to $0. Marathon's Adjusted Separate Return Liability remains at $200, and no payment will be required from Marathon under Section 5.03(a)(ii) of this Agreement.
(iii) Allocation of Tax Attributes and Adjustments.
Tax Attributes in the relevant year shall be allocated to the Group that generated them. If and when possible, adjustments shall be made to reflect as closely as possible the Separate Return Liability of each Group where such adjustments may be made without affecting the Separate Return Liability of the other Group. Without limiting the generality of the foregoing, the following principles shall apply:
(A) Preemption Rule.
For any Pre-Distribution Period, to the extent that a Group's Tax Attributes could have been utilized on a Separate Return Basis but actually are not used on the Tax Return of the USX Consolidated Group due to preemption by the other Group's Tax Attributes which could not have been used on a Separate Return Basis but are used on the Tax Return of the USX Consolidated Group (the "Preempting Attributes"), then (1) for all purposes, including
specifically for purposes of applying the provisions of Articles 4 and 5 of this Agreement, the Preempting Attributes shall not be treated as utilized on the Tax Return of the USX Consolidated Group, and instead, (2) for purposes of applying this Article 4, there shall be, in all relevant years, a reallocation of Tax Attributes between the Groups in an amount equal to the Tax Attributes which have been preempted and which appropriately reflects each Group's Separate Return Liability.
Assumptions. In the year at issue, the Marathon Stock Group is able to use $100 of MTC on a Separate Return Basis. In the same year, the USX Consolidated Group utilizes $286 of net operating losses of the United States Steel Stock Group, which under the relevant ordering rules of the Code, preempt and displace in their entirety the $100 of MTC utilized by the Marathon Stock Group on a Separate Return Basis. The United States Steel Stock Group could not have used its net operating losses on a Separate Return Basis. There is no Consolidated Return Benefit or Detriment, because the utilization of the $286 of net operating losses of the United States Steel Stock Group exactly offsets the benefits of the utilization of the $100 of MTC of the Marathon Stock Group.
Allocation. For purposes of Articles 4 and 5 of this Agreement,
the Marathon Stock Group shall be treated as if its entire $100 of MTC were
utilized on the Consolidated Federal Tax Return of the USX Consolidated
Group (thus, Marathon shall not be required to make a payment pursuant to
Section 5.03(a)(ii) of this Agreement associated with the utilization of
the United States Steel net operating losses), and the MTC not so utilized
by the USX Consolidated Group but treated as having been utilized, shall be
reallocated to the United States Steel Stock Group for all purposes,
including, without limitation, for purposes of further application of this
Article 4.
(B) Displacement By Subsequent Attributes.
If in any Pre-Distribution Period ("Year 1") a Group ("Group A") realizes
the benefit from the utilization of the Tax Attributes of another Group ("Group
B") on the Tax Return of the USX Consolidated Group and makes a payment for such
realization under Section 5.03 of this Agreement, and in a subsequent year
("Year 2") Group A generates Tax Attributes which, on a Separate Return Basis,
could have been carried back and utilized in Year 1, but which are not so
carried back and utilized on the Tax Return of the USX Consolidated Group, then
(1) for all purposes, including specifically for purposes of applying the
provisions of Articles 4 and 5 of this Agreement, Group A shall be treated as if
it had not realized the benefit from the utilization of Group B's Tax Attributes
in Year 1 (thus requiring Group B to refund to Group A the Section 5.03 payment
previously received from Group A in Year 1), and (2) for purposes of applying
this Article 4, there shall be, in all relevant years, a reallocation of Tax
Attributes between the Groups to appropriately reflect each Group's Separate
Return Liability; provided that, if the displaced attribute cannot be utilized
on a Pre-Distribution Period Tax Return of the
USX Consolidated Group, then no reallocation of attributes shall be made under this Section 4.02(a)(iii)(B).
Assumptions. In 1998, the Marathon Stock Group generates $200 of net operating losses which it is unable to use on a Separate Return Basis; the United States Steel Group generates $100 of income, which on the Tax Return of the USX Consolidated Group is offset by $100 of the Marathon net operating losses. United States Steel makes a payment to Marathon for the use of the net operating losses under Section 5.03 of this Agreement. In 1999, the United States Steel Stock Group generates $100 of losses and the Marathon Stock Group has no income; on a Separate Return Basis, United States Steel would have been able to carry the losses back to 1998, but no such carryback is available on the Tax Returns of the USX Consolidated Group.
Allocation. For purposes of this Article 4 and Article 5 of this
Agreement, the United States Steel Stock Group shall not be treated as
having used the $100 of Marathon losses in 1998, Marathon shall refund the
Section 5.03 payment received from United States Steel in 1998, and the
$100 of 1999 United States Steel losses shall be reallocated to Marathon.
(b) Determination of Groups' Allocable Share if the USX Consolidated Group is an Alternative Minimum Taxpayer in the Relevant Period.
Each Group's allocable share of the alternative minimum tax ("AMT") liability of the USX Consolidated Group ("Total USX AMT Liability") shall be determined under Section 4.02(b)(i) of this Agreement, and each Group's allocable share of the resulting Tax Attributes (Minimum Tax Credits or "MTCs") shall be determined under Section 4.02(b)(ii). For these purposes, AMT refers to the tentative minimum tax liability computed under Code Section 55(b) and not the excess amount computed under Code Section 55(a).
(i) Each Group's Allocable Share Of the AMT Liability of the USX Consolidated Group.
Each Group's allocable share of the Total USX AMT Liability shall be determined by calculating each Group's AMT liability computed on a Separate Return basis ("AMT Separate Return Liability") and then adjusting for the effects of the Consolidated Federal Tax Return of the USX Consolidated Group as follows:
(A) Determination of AMT Separate Return Liability. Each Group's AMT Separate Return Liability shall be determined by applying the principles set forth in Section 4.02(a)(i) of this Agreement on an AMT basis.
(B) Adjustments To Group's AMT Separate Return Liability For AMT Effects Of Consolidated Group. Each Group's AMT Separate Return Liability shall be adjusted
for any AMT Consolidated Return Benefit Or Detriment by applying the principles in Section 4.02(a)(ii) of this Agreement on an AMT basis ("Adjusted AMT Separate Return Liability").
(C) Allocation Of Total USX AMT Liability. The amount of Total USX AMT Liability is allocated to each Group up to the lesser of the Total USX AMT Liability or such Group's positive Adjusted AMT Separate Return Liability.
(ii) Each Group's Allocable Share of the Resulting MTCs and Benefit.
MTCs of the USX Consolidated Group (the "Consolidated MTCs") shall, to the extent possible, be allocated to each of the Groups in an amount such that the total regular Tax Attributes (i.e., Tax Attributes used against regular tax, including MTCs) received by the Group equals the excess of such Group's allocable share of the Total USX AMT Liability over its Adjusted Separate Return Liability (as computed under Section 4.02(a) of this Agreement). To the extent that the allocation of regular Tax Attributes is less than the excess of such Group's allocable share of the Total USX AMT Liability over its Adjusted Separate Return Liability, then the other Group shall have realized a benefit to the extent of such difference and shall make a payment under Section 5.03(a)(ii) of this Agreement.
Assumptions. Marathon's Adjusted Separate Return Liability is $140, and its Adjusted AMT Separate Return Liability is $100; United States Steel's Adjusted Separate Return Liability is ($105), and its Adjusted AMT Separate Return Liability is ($20). The Total USX Liability is $35, and the Total USX AMT Liability is $80.
Section 4.02(b)(i) Allocations. Marathon's share of the Total USX AMT Liability is $80, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability. United States Steel's share is $0 since it has no positive Adjusted AMT Separate Return Liability.
Section 4.02(b)(ii) Allocations. The USX Consolidated Group will receive Consolidated MTCs of $45, which equals USX's $80 AMT liability minus $35 regular tax liability. There are no other regular Tax Attributes generated in the year. United States Steel's share of the resulting Consolidated MTCs equals $45 because its $0 allocable share of the Total USX AMT Liability exceeds its ($105) Adjusted Separate Return Liability. In contrast, Marathon's $80 allocable share of the Total USX AMT Liability is less than its $140 Adjusted Separate Return Liability, and it is not allocated any Consolidated MTCs. Since the $45 of regular Tax Attributes (in this case, Consolidated MTCs) received by United States Steel is less than the $105 difference between United States Steel's $0 allocable share of the Total USX AMT Liability and its ($105) Adjusted Separate Return Liability, Marathon has received a benefit to the extent of the difference, $60, requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement. In contrast, since Marathon's $80 allocable share of the Total USX
AMT Liability is less than its $140 Adjusted Separate Return Liability, United States Steel has not received a benefit requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement.
Assumptions. Marathon's Adjusted Separate Return Liability is $70, and its Adjusted AMT Separate Return Liability is $80; United States Steel's Adjusted Separate Return Liability is ($70), and its Adjusted AMT Separate Return Liability is $40. The Total USX Liability is $0, and the Total USX AMT Liability is $120.
Section 4.02(b)(i) Allocations. Marathon's share of the Total USX AMT Liability is $80, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability. United States Steel's share of the Total USX AMT Liability is $40, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability.
Section 4.02(b)(ii) Allocations. The USX Consolidated Group will receive total Consolidated MTCs of $120, which equals USX's $120 AMT liability minus $0 regular tax liability. There are no other regular Tax Attributes generated in the year. Marathon's share of the resulting Consolidated MTCs is $10, which equals the difference between its $80 allocable share of the Total USX AMT Liability and its $70 Adjusted Separate Return Liability. United States Steel's share of the resulting Consolidated MTCs is $110, which equals the difference between its $40 allocable share of the Total USX AMT Liability and its ($70) Adjusted Separate Return Liability. Since the $110 of regular Tax Attributes (in this case, Consolidated MTCs) received by United States Steel equals the difference between United States Steel's $40 allocable share of the Total USX AMT Liability and its ($70) Adjusted Separate Return Liability, Marathon did not receive a benefit requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement. Similarly, since the $10 of regular Tax Attributes (in this case, Consolidated MTCs) received by Marathon equals the difference between Marathon's $80 allocable share of the Total USX AMT Liability and its $70 Adjusted Separate Return Liability, United States Steel received no benefit requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement.
Assumptions. Marathon's Adjusted Separate Return Liability is $70, its AMT Separate Return Liability is $80, and its Adjusted AMT Separate Return Liability is $40 (i.e., there is an AMT Consolidated Return Benefit of $40 allocable to Marathon pursuant to the principles of Section 4.02(a)(ii) of this Agreement); United States Steel's Adjusted Separate Return Liability is ($70), and its Adjusted AMT Separate Return Liability is $20. The Total USX Liability is $0, and the Total USX AMT Liability is $60.
Section 4.02(b)(i) Allocations. Marathon's share of the Total USX AMT Liability is $40, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability. United States Steel's Total USX AMT Liability is $20, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability.
Section 4.02(b)(ii) Allocations. The USX Consolidated Group will receive total Consolidated MTCs of $60, which equals USX's $60 AMT liability minus $0 regular tax liability. There are no other regular Tax Attributes generated in the year. United States Steel's share of the resulting Consolidated MTCs is $60, because its $20 allocable share of the Total USX AMT Liability exceeds its ($70) Adjusted Separate Return Liability. Marathon's share of the resulting Consolidated MTCs is $0, because its $40 allocable share of the Total USX AMT Liability is less than its $70 Adjusted Separate Return Liability. Since the $60 of regular Tax Attributes (in this case, Consolidated MTCs) received by Steel is less than the $90 difference between United States Steel's $20 allocable share of the Total USX AMT Liability and its ($70) Adjusted Separate Return Liability, Marathon has received a benefit to the extent of the difference, $30, requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement. In contrast, since Marathon's $40 allocable share of the Total USX AMT Liability is less than its $70 Adjusted Separate Return Liability, Steel has not received a benefit requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement.
Assumptions. Marathon's Adjusted Separate Return Liability is $10, and its Adjusted AMT Separate Return Liability is $100; United States Steel's Adjusted Separate Return Liability is $10, and its Adjusted AMT Separate Return Liability is ($20). The Total USX Liability is $20, and the Total USX AMT Liability is $80.
Section 4.02(b)(i) Allocations. Marathon's share of the Total USX AMT Liability is $80, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability. United States Steel's share of the Total USX AMT Liability is $0, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability.
Section 4.02(b)(ii) Allocations. The USX Consolidated Group will receive total Consolidated MTCs of $60, which equals USX's $80 AMT liability minus $20 regular tax liability. In addition, there are no other regular Tax Attributes generated in the year. Marathon's share of the resulting Consolidated MTCs is $60, because its $80 allocable share of the Total USX AMT Liability exceeds its $10 Adjusted Separate Return Liability. United States Steel's share of the resulting Consolidated MTCs is $0, because its $0 allocable share of the Total USX AMT Liability is less than its $10 Adjusted Separate Return Liability. Since
the $60 of regular Tax Attributes (in this case, Consolidated MTCs) received by Marathon is less than the difference between Marathon's $80 allocable share of the Total USX AMT Liability and its $10 Adjusted Separate Return Liability, United States Steel receive a benefit in this amount requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement. In contrast, since United States Steel's $0 allocable share of the Total USX AMT Liability is less than its $10 Adjusted Separate Return Liability, Marathon has not received a benefit requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement.
Assumptions. Marathon's Adjusted Separate Return Liability is $50, and its Adjusted AMT Separate Return Liability is $100; United States Steel's Adjusted Separate Return Liability is ($100), and its Adjusted AMT Separate Return Liability is ($20). The Total USX Liability is ($50), and the Total USX AMT Liability is $80.
Section 4.02(b)(i) Allocations. Marathon's share of the Total USX AMT Liability is $80, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability. United States Steel's share of the Total USX AMT Liability is $0, which equals the lesser of the Total USX AMT Liability or its positive Adjusted AMT Separate Return Liability.
Section 4.02(b)(ii) Allocations. The USX Consolidated Group will receive total Consolidated MTCs of $80, which equals USX's $80 AMT liability minus $0 regular tax liability. In addition, there is $50 of regular tax net operating losses generated in the year, which under Section 4.02(a)(iii) are allocated to United States Steel. Marathon's share of the resulting Consolidated MTCs is $30, which equals its $80 allocable share of the Total USX AMT Liability less its $50 Adjusted Separate Return Liability. United States Steel's share of the resulting Consolidated MTCs is $50, so that the total regular Tax Attributes received by United States Steel (in this case, net operating losses plus Consolidated MTCs) equals the $100 difference between its $0 allocable share of the Total USX AMT Liability less its ($100) Adjusted Separate Return Liability. Since the $30 of regular Tax Attributes (in this case, Consolidated MTCs) received by Marathon equals the difference between Marathon's $80 allocable share of the Total USX AMT Liability and its $50 Adjusted Separate Return Liability, United States Steel has not received a benefit requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement. Similarly, since the $100 of regular Tax Attributes (in this case, Consolidated MTCs and net operating losses) received by United States Steel equals the difference between United States Steel's $0 allocable share of the Total USX AMT Liability and its ($100) Adjusted Separate Return Liability, Marathon has not received a benefit requiring a payment pursuant to Section 5.03(a)(ii) of this Agreement.
SECTION 4.03. Allocation of Combined State Income Tax Liability.
Any Combined State Income Tax Liability of the USX Consolidated Group shall be allocated in a manner consistent with the allocation provided in Section 4.02 of this Agreement for Consolidated Federal Income Tax Liability.
SECTION 4.04. Transfer Taxes Related To Holding Company Reorganization and Distribution.
In the event that the USX Consolidated Group owes any transfer, documentary, sales, use, stamp, or registration taxes and fees ("Transfer Taxes") as a result of the Holding Company Reorganization or the Distribution, the United States Steel Stock Group's share of such liability shall be 35 percent of any such Transfer Taxes. The Marathon Stock Group shall be liable for the remaining portion of any such Transfer Taxes.
SECTION 4.05. Other Taxes.
Any other Taxes not specifically allocated in this Article 4 shall be allocated to the Group to which such Tax relates, and any USX Headquarters Tax liability which is not specifically allocated under any other section of this Agreement shall be allocated in the same manner as such Tax was allocated between the Groups for financial statement purposes with respect to the relevant period.
SECTION 4.06. Deductions and Certain Taxes Related to Stock Options, SARs, and Restricted Stock.
In the event that an employee or director of the Marathon Tax Group recognizes taxable income with respect to a stock option, restricted stock or SAR of United States Steel, the resulting tax deduction shall be allocated to United States Steel to the extent permitted by law, and any Payroll Taxes with respect thereto shall be allocated to United States Steel. In the event that an employee or director of the United States Steel Tax Group recognizes taxable income with respect to a stock option, restricted stock or SAR of Marathon, the resulting tax deduction shall be allocated to Marathon to the extent permitted by law, and any Payroll Taxes with respect thereto shall be allocated to Marathon.
Article V
TAXES AND RELATED OBLIGATIONS
SECTION 5.01. Payment of Taxes to Tax Authorities.
(a) Marathon shall pay (or cause to be paid) all Federal and State Taxes (including estimated Taxes and any adjustments to Taxes subsequently determined), interest, and Penalties with respect to any Tax Return of the USX Consolidated Group for all Pre-Distribution Periods; Marathon shall pay (or cause to be paid) all Taxes, interest, and Penalties relating to Tax Returns that Marathon is responsible for preparing pursuant to Sections 3.02(a)(i) and 3.02(a)(ii) of this
Agreement; United States Steel shall pay (or cause to be paid) all Taxes, interest, and Penalties relating to Tax Returns that United States Steel is responsible for preparing pursuant to Section 3.02(a)(iii) of this Agreement; and each entity responsible for filing a foreign Tax Return pursuant to Section 3.02(a)(iv) of this Agreement shall pay all Taxes, interest, and Penalties with respect to such Tax Return.
(b) At any time, Marathon in its sole discretion may make a cash remittance to a Tax Authority with respect to Federal Taxes or Combined State Taxes to stop the running of interest in whole or in part. At any time, United States Steel may request that Marathon make a cash remittance to a Tax Authority to stop the running of interest in whole or in part with respect to a tax deficiency related to a Tax Item generated by, or allocated to, the United States Steel Stock Group, and Marathon shall comply with such remittance request; provided that, United States Steel makes a payment to Marathon pursuant to Section 5.02(d)(ii) of this Agreement.
(c) Pursuant to any agreement with United States Steel under Section 3.03(f) of this Agreement, Marathon shall make a cash remittance to a Tax Authority to obtain the jurisdiction of a United States district court, the United States Court of Federal Claims, or a state court in any Tax Proceeding relating to a Tax described in this Agreement.
(d) The parties may agree that, to the extent permitted by law, any payment to a Tax Authority with respect to a Tax of the USX Consolidated Group for a Pre-Distribution Period required to be paid by Marathon pursuant to Section 5.01 shall be allocated between the parties and that each party shall pay directly to the Tax Authority its share (as determined under this Agreement) of such Tax. Any payment by United States Steel pursuant to this Section 5.01(d) shall, to the extent of such payment, relieve Marathon's obligation to make a payment pursuant to Section 5.01 of this Agreement and satisfy United States Steel's payment obligation under Section 5.02 of this Agreement.
SECTION 5.02. Allocation of Tax Payments Between the Groups.
(a) United States Steel Estimated Tax Payments.
(i) No later than 20 Calendar Days prior to the due date (including all applicable and valid extensions), Marathon shall send to United States Steel a statement of any estimated tax liability owed to a Tax Authority by the USX Consolidated Group for any Pre-Distribution Period, including a statement of United States Steel's allocable share, as determined under the principles of Article 4 of this Agreement, of such estimated tax liability.
(ii) No later than two Business Days prior to the due date (including all applicable and valid extensions), United States Steel shall pay to Marathon, or Marathon shall pay to United States Steel, as appropriate, an amount equal to the difference, if any, between United States Steel's allocable share of the estimated tax liability and the aggregate amount of any installment payments previously made by the United States Steel Stock Group or the United States Steel Tax Group with respect to such taxable period.
(iii) No later than two Business Days following the due date (including all applicable and valid extensions), Marathon shall provide United States Steel with a copy of the electronic transmittal record or other proof that payment of the estimated tax liability was made to the Tax Authority.
(iv) United States Steel may invoke Dispute Resolution with respect to a disagreement over any payments required under Section 5.02(a)(ii) of this Agreement only after it has paid to Marathon any such amounts.
(b) United States Steel End-Of-Year Tentative Tax Payment.
(i) No later than 20 Calendar Days prior to the due date, Marathon shall send to United States Steel an IRS Form 7004 of the USX Consolidated Group and a statement of United States Steel's allocable share, as determined under the principles of Article 4 of this Agreement, of any tentative tax liability shown on such Form 7004. No later than 20 Calendar Days prior to the due date, Marathon shall send to United States Steel any tentative or estimated State Tax Returns for each tentative Combined State Tax liability of the USX Consolidated Group and a statement of United States Steel's allocable share of any tentative tax liability shown on such filing as determined under the principles of Article 4 of this Agreement.
(ii) No later than two Business Days prior to the due date, United States Steel shall pay to Marathon, or Marathon shall pay to United States Steel, as appropriate, an amount equal to the difference, if any, between United States Steel's allocable share of the tentative tax liability and the aggregate amount of the estimated installment payments previously made by the United States Steel Stock Group or the United States Steel Tax Group with respect to such taxable period.
(iii) United States Steel may invoke Dispute Resolution with respect to a disagreement over any payments required under Section 5.02(b)(ii) of this Agreement only after it has paid to Marathon any such amounts.
(c) United States Steel Final Tax Payment.
(i) No later than 20 Calendar Days prior to the due date (including all applicable and valid extensions), Marathon shall send to United States Steel a final Consolidated Federal Income Tax Return (an IRS Form 1120) of the USX Consolidated Group and a statement of United States Steel's allocable share, as determined under the principles of Article 4 of this Agreement, of any resulting tax liability. No later than 15 Calendar Days prior to the due date (including all applicable and valid extensions), Marathon shall send to United States Steel a final Combined State Tax Return for each Combined State Tax liability of the USX Consolidated Group and a statement of United States Steel's allocable share, as determined under the principles of Article 4 of this Agreement, of any resulting tax liability.
(ii) No later than two Business Days prior to the due date
(including all applicable and valid extensions) for any Tax Return described in
Section 5.02(c)(i), United States Steel shall pay to Marathon, or Marathon shall
pay to United States Steel, as appropriate,
an amount equal to the difference, if any, between the United States Steel's allocable share of the tax liability as determined by Marathon and the aggregate amount of the estimated installment payments previously made by the United States Steel Stock Group or the United States Steel Tax Group, including any end-of-year tentative tax payment or refund with respect to such taxable period pursuant to Section 5.02(b)(ii) of this Agreement.
(iii) United States Steel may invoke Dispute Resolution with respect to a disagreement over any payments required under Section 5.02(c)(ii) of this Agreement only after it has paid to Marathon any such amounts.
(d) Other Tax Payments.
(i) In the event that United States Steel requests pursuant to
Section 5.01(b) of this Agreement, that Marathon make a cash remittance to a Tax
Authority to stop the running of interest in whole or in part, United States
Steel shall pay to Marathon the full amount that United States Steel has
requested Marathon remit to such Tax Authority no later than two Business Days
prior to the date on which Marathon will make such remittance to such Tax
Authority. If United States Steel fails to make such payment to Marathon as
provided above, Marathon need not make the requested remittance to the Tax
Authority.
(ii) In the event that United States Steel and Marathon agree
pursuant to Section 3.03(f) of this Agreement to obtain the jurisdiction of a
United States district court, the United States Court of Federal Claims, or a
state court in any Tax Proceeding, and a payment is required pursuant to Section
5.01(c) of this Agreement, then no later than two Business Days prior to the
date on which Marathon shall make such remittance, United States Steel shall pay
to Marathon its appropriate share of the remittance. For purposes of this
Section 5.03(d)(ii), the parties shall use reasonable efforts to agree on the
amount of each party's appropriate share of such remittance; provided that, if
no agreement as to United States Steel's appropriate share is reached five
Business Days prior to the date on which Marathon will make such remittance to
the Tax Authority, Marathon shall determine United States Steel's appropriate
share based on the ratio of the tax liability relating to Tax Items generated
by, or allocated to, the United States Steel Stock Group that will be litigated
to the total tax liability of the USX Consolidated Group that will be litigated.
United States Steel may invoke Dispute Resolution with respect to a disagreement
over any payment required under this Section 5.02(d)(ii) only after it has paid
to Marathon any such amounts.
(e) Treatment of Adjustments to Taxes, Interest, and Penalties.
(i) Adjustments to Federal Taxes or Combined State Taxes.
(A) Payment Obligation.
If any adjustment is made in a Tax Return relating to Federal Taxes or Combined State Taxes of the USX Consolidated Group, after the filing thereof, then within 30 Calendar Days of the time of a Final Determination of such adjustment, United States Steel shall pay to Marathon, or Marathon shall pay to United States Steel, as the case may be and as appropriate, the
difference between (1) all payments made, net of all refunds or recoupments
received, by United States Steel in accordance with the principles of this
Section 5.02 for the taxable period covered by such Tax Return, and (2) the
amount of Tax that is allocable to United States Steel in accordance with the
principles of Article 4 of this Agreement for the taxable period covered by such
Tax Return taking such adjustment into account when redetermining the tax
allocation. In the event that Tax is owed to a Tax Authority following receipt
of a Final Determination, United States Steel may invoke Dispute Resolution with
respect to a disagreement over any payment required under this Section
5.02(e)(i)(A) only after it has paid to Marathon any such amounts.
(B) Refunds Received Prior to Final Determination.
In the event that an amended Tax Return, claim for refund, or tentative carryback adjustment (including, without limitation, any Consolidated Federal Tax Returns, Combined State Tax Returns, IRS Form 1139, or comparable form of any Tax Authority) is filed with respect to Tax Items of the United States Steel Stock Group or the United States Steel Tax Group pursuant to Section 3.02(b)(iii) of this Agreement and a refund is received prior to a Final Determination with respect to such amended Tax Return (such as in the case of a refund pursuant to an IRS Form 1139), Marathon shall pay such refund to United States Steel no later than two Business Days following receipt of such refund from the Tax Authority; except that, if (1) the amended Tax Return, claim for refund, or tentative carryback adjustment is not supported by a written opinion of outside tax counsel or a nationally recognized accounting firm indicating that the positions shown on such amended Tax Return, claim for refund, or tentative carryback adjustment should prevail if litigated, and (2) United States Steel does not have an investment grade credit rating at the time when such refund is received from the Tax Authority, then either (I) United States Steel shall provide some form of credit enhancement acceptable to Marathon in which case Marathon shall pay the refund to United States Steel no later than two Business Days after receipt of the credit enhancement agreed upon by the parties, or (II) Marathon shall place the refund received from the Tax Authority into an escrow account for the benefit of United States Steel, the principal and earnings of which will be applied towards any liability resulting from a disallowance of, in whole or in part, the amended Tax Return, claim for refund, or tentative carryback adjustment and the excess will be distributed to United States Steel at such time as a Final Determination of the amended Tax Return, claim for refund, or tentative carryback adjustment is received.
(C) Refunds Received By United States Steel.
In the event that United States Steel receives a refund from a Tax Authority relating to a Tax Return of the USX Consolidated Group, United States Steel shall notify Marathon of such refund no later than two Business Days following its receipt. No later than five Business Days following notification that such refund has been received by United States Steel, Marathon shall send to United States Steel a statement of the allocation of such refund between the parties. United States Steel shall pay Marathon's share of such refund to Marathon no later than two Business Days following receipt of such statement from Marathon. United States Steel may invoke Dispute Resolution with respect to a disagreement over any payment required under this Section 5.02(e)(i)(C) only after it has paid to Marathon any such amounts.
(ii) Interest Resulting from Adjustments to Taxes.
(A) Interest Owed To or Received From a Tax Authority.
If any interest is to be paid to a Tax Authority, or is received from a Tax Authority, as a result of an adjustment to the USX Total Liability shown on a Tax Return of the USX Consolidated Group for any Pre-Distribution Period, such interest shall be allocated between the United States Steel Stock Group and the Marathon Stock Group by applying the applicable statutory rate to each Group's incremental tax liability or refund. No later than five Business Days prior to the date on which Marathon will make a payment relating to such interest to the relevant Tax Authority, Marathon shall notify United States Steel of (1) such planned date, and (2) its appropriate share of such remittance.
In the year at issue, a deficiency of Tax of $100 is determined for the USX Consolidated Group attributable to a Tax Item of the United States Steel Stock Group. Taking into account any payments made by the United States Steel Stock Group that offset such deficiency and the timing of such payments, the United States Steel Stock Group shall be allocated liability for all interest payments due and owing as a result of the $100 deficiency.
(B) Overpayments and Underpayments.
To the extent that a Group's payments with respect to a Tax Return of the USX Consolidated Group exceed its allocable share of the adjusted Total USX Liability, and the other Group's payments with respect to such Tax Return are less than its allocable share of the adjusted Total USX Liability, the Group that has overpaid shall be compensated for the benefit derived from the use of such overpayment by the other Group. The interest rate utilized for purposes of calculating the amount of the compensatory payment shall be the average of the overpayment and underpayment rates published pursuant to Sections 6621(a)(1) (the overpayment rate) and 6621(a)(2) (the underpayment rate) of the Code for such period.
(C) United States Steel Interest Payment Obligation.
United States Steel shall pay to Marathon (1) United States Steel's Section 5.02(e)(ii)(A) allocable share of any interest owed to a Tax Authority no later than two Business Days prior to the date on which Marathon will make a payment of such interest to the relevant Tax Authority and (2) the amount of any interest that United States Steel owes Marathon under Section 5.02(e)(ii)(B) no later than 30 Calendar Days subsequent to a Final Determination of the tax liability to which such interest is attributable. United States Steel may invoke Dispute Resolution with respect to a disagreement over any payment required under this Section 5.02(e)(ii) only after it has paid to Marathon any such amounts.
(D) Marathon Interest Payment Obligation.
Marathon shall pay to United States Steel (1) United States Steel's Section 5.02(e)(ii)(A) allocable share of any interest received from a Tax Authority no later than two Business Days subsequent to the date on which such refund is received (provided that Marathon's obligation to pay such interest shall be subject to Section 5.02(e)(i)(B) of this Agreement) and (2) the amount of any interest that Marathon owes United States Steel under Section 5.02(e)(ii)(B) of this Agreement no later than 30 Calendar Days subsequent to a Final Determination of the tax liability to which such interest is attributable.
(iii) Penalties Owed to a Tax Authority.
(A) Penalties Associated With a Particular Tax Item.
In the event that a Penalty is successfully asserted by a Tax Authority
with respect to a Tax Return of the USX Consolidated Group and such Penalty is
associated with a Tax Item of a particular Group or a Tax Item allocated to a
particular Group under this Agreement, then such Group shall be allocated such
Penalty. No later than five Business Days prior to the date planned for payment
of a Penalty under this section, Marathon shall notify United States Steel of
(1) such planned date, and (2) its appropriate share of such payment.
(B) Penalties Not Associated With A Tax Item.
In the event that a Penalty is successfully asserted by a Tax Authority with respect to a Tax Return of the USX Consolidated Group and such Penalty is not associated with a specific Tax Item, then Marathon shall determine United States Steel's appropriate share based on the ratio of the adjustments as Finally Determined with respect to Tax Items generated by, or allocated to, the United States Steel Stock Group to the total of all such Finally Determined adjustments shown on such Tax Return which provides the basis for the Penalty. No later than five Business Days prior to the date planned for payment of a Penalty under this section, Marathon shall notify United States Steel of (1) such planned date, and (2) its appropriate share of such payment.
(C) Penalties for Failure to Take Required Action.
In the event that a Penalty is successfully asserted by a Tax Authority as a result of a failure to file a Tax Return or pay estimated Taxes by the USX Consolidated Group, the Group with responsibility for filing such Tax Return or paying such estimated Taxes under this Agreement shall be allocated the Penalty. In the event that a Penalty is successfully asserted by a Tax Authority as a result of a failure to file a Tax Return or pay estimated Taxes by the USX Consolidated Group prior to the Distribution, such Penalty shall be allocated 35 percent to United States Steel and 65 percent to Marathon.
(D) United States Steel Penalty Payment Obligation.
United States Steel shall pay Marathon the amount of any Penalty allocated to it under this Section 5.02(e)(iii) no later than two Business Days prior to the date on which Marathon will make a payment relating to such Penalty to the relevant Tax Authority. United States Steel may invoke Dispute Resolution with respect to a disagreement over any payment required under this Section 5.02(e)(iii) only after it has paid to Marathon any such amounts.
SECTION 5.03. Payment For Use of Group's Tax Attributes.
(a) Utilization of Tax Attributes.
(i) Pre-Distribution Estimated Benefit Payment.
Prior to the effective time of the Distribution, the Marathon Stock Group will have paid (through a debt allocation as provided under the then-existing tax allocation policy) to the United States Steel Stock Group the estimated amount, discounted as described below, of the payment, if any, that would have been made by Marathon to United States Steel under Section 5.03(a)(ii) with respect to Federal Income Taxes of the USX Consolidated Group for the 2001 tax year. The amount of such payment will have been determined under the following principles:
(A) The amount of such payment will have reflected the best estimate of the tentative liability for 2001 Federal Income Taxes for the USX Consolidated Group.
(B) The amount of the payment will have been discounted back from the date such payment would have otherwise been due absent this Section 5.03(a)(i) to the Distribution Date, using a short-term, after-tax interest rate of 4%.
Any subsequent payments between Marathon and United States Steel described in this Section 5.03 shall take into account the undiscounted amount of the payment made under this Section 5.03(a)(i).
(ii) Utilization of Tax Attributes in Pre-Distribution Periods.
Upon the Effective Realization by any member of the Marathon Stock Group of the benefit attributable to a Tax Attribute generated by, or allocated to, the United States Steel Stock Group or the United States Steel Tax Group, Marathon shall pay to United States Steel an amount equal to the benefit received by the Marathon Stock Group on the date of Effective Realization thereof taking into account the sum of any payment made by Marathon pursuant to Section 5.03(a)(i) and the discount used in computing the amount of such payment. Upon the Effective Realization by any member of the United States Steel Stock Group of the benefit attributable to a Tax Attribute generated by, or allocated to, the Marathon Stock Group, United States Steel shall pay to Marathon an amount equal to the benefit received by the United States Steel Stock Group on the date of Effective Realization thereof. For purposes of this Section 5.03(a)(ii), the amount of the benefit Effectively Realized is determined under Section 4.02(a)(ii)(D) or Section 4.02(b)(ii) of this Agreement, as the case may be.
(iii) Utilization of Tax Attributes in Post-Distribution Periods.
Upon the Effective Realization by any member of the Marathon Tax Group of the benefit attributable to a Tax Attribute generated by, or allocated to, the United States Steel Stock Group or the United States Steel Tax Group, Marathon shall pay to United States Steel, on the date of Effective Realization thereof, an amount equal to the benefit received by the Marathon Tax Group. Upon the Effective Realization by any member of the United States Steel Tax Group of the benefit attributable to a Tax Attribute generated by, or allocated to, the Marathon Stock Group, United States Steel shall pay to Marathon, on the date of Effective Realization thereof, an amount equal to the benefit received by the United Stated Steel Tax Group. For purposes of this Section 5.03(a)(iii), the amount of a benefit Effectively Realized by a Group equals the difference between (A) the tax liability of the Group taking into account utilization of the Tax Attribute generated by, or allocated to, the other Group and (B) the tax liability of the Group without utilizing the Tax Attribute of the other Group.
(b) True-Up Payments.
(i) To the extent that any member of the Marathon Stock Group or the Marathon Tax Group Effectively Realizes, or has Effectively Realized under a prior tax allocation policy or agreement, the benefit attributable to a Tax Attribute generated by, or allocated to, the United States Steel Stock Group or United States Steel Tax Group (including a benefit determined under a prior application of this Section 5.03(b)) and there is an adjustment affecting the utilization of such Tax Attribute subsequent to such Effective Realization, the amount of the benefit Effectively Realized shall be redetermined, and United States Steel shall pay Marathon for any decrease, or Marathon shall pay United States Steel for any increase as the case may be, in the amount of the benefit Effectively Realized by the Marathon Stock Group or the Marathon Tax Group.
(ii) To the extent that any member of the United States Steel Stock Group or United States Steel Tax Group Effectively Realizes, or has Effectively Realized under a prior tax allocation policy or agreement, the benefit attributable to a Tax Attribute generated by, or allocated to, the Marathon Stock Group or the Marathon Tax Group (including a benefit determined under a prior application of this Section 5.03(b)) and there is an adjustment affecting the utilization of such Tax Attribute subsequent to such Effective Realization, the amount of the benefit Effectively Realized shall be redetermined, and Marathon shall pay United States Steel for any decrease, or United States Steel shall pay Marathon for any increase as the case may be, in the amount of the benefit Effectively Realized by the United States Steel Stock Group or the United States Steel Tax Group.
(iii) The amount of the payment under Sections 5.03(b)(i) and 5.03(b)(ii) of this Agreement (a "True-Up Payment") shall be the difference between (A) the benefit Effectively Realized by the Group prior to the adjustment and (B) the adjusted benefit Effectively Realized by such Group as determined under Article 4 of this Agreement following the adjustment.
(c) Notwithstanding Sections 5.03(a) and 5.03(b) of this Agreement, Marathon shall not be obligated to pay United States Steel any amount Effectively Realized in a Post-Distribution Period relating to Tax Attributes generated by, or allocated to, the United States Steel Stock Group with respect to State Taxes.
SECTION 5.04. Failure to Meet Time Requirements.
Without limiting the generality of Section 12.04(b) of this Agreement, no failure or delay by any party in taking any action pursuant to this Article 5, including the provision of any Tax Return or the making of any payment, shall operate as a waiver of any right, power, or privilege hereunder. Without limiting the generality of Section 12.05 of this Agreement, the remedy for any such failure or delay shall be limited to the actual damages suffered as a result of such failure or delay, including interest as provided in Section 10.03 of this Agreement for any late payments.
ARTICLE VI
CERTAIN REPRESENTATIONS AND COVENANTS IN CONNECTION WITH THE SEPARATION
SECTION 6.01. Representations of Marathon Tax Group.
Marathon and each other member of the Marathon Tax Group represent to
United States Steel and each member of the United States Steel Tax Group that,
as of the date of this Agreement, there is no plan or intention to (i) liquidate
Marathon or its wholly-owned subsidiary, Marathon Oil Company ("MOC"), (ii) sell
or otherwise dispose of the assets of Marathon, MOC, or any other member of the
Marathon Tax Group subsequent to the Distribution, except in the ordinary course
of business, or to merge Marathon with another entity other than mergers
occurring in connection with an acquisition by Marathon in pursuance of the
business purpose discussed in the Ruling and Ruling Documents, (iii) take any
action inconsistent with the information and representations furnished by USX in
connection with the Ruling, (iv) purchase stock of Marathon other than in
accordance with the requirements of Revenue Procedure 96-30 and in conformity
with the representations furnished by Marathon in connection with the Ruling, or
(v) enter into any negotiations, agreements or arrangements with respect to
transactions or events (including, without limitation, stock issuances, pursuant
to the exercise of options or otherwise, option grants, capital contributions or
acquisitions, or a series of such transactions or events) that may cause the
Distribution to be treated under Section 355(e) of the Code as part of a plan
pursuant to which one or more persons acquire, directly or indirectly, stock of
Marathon or United States Steel representing a "50-percent or greater interest"
therein within the meaning of Section 355(d)(4) of the Code.
SECTION 6.02. Representations of United States Steel Tax Group.
United States Steel and each other member of the United States Steel Tax Group represent to Marathon and each member of the Marathon Tax Group that, as of the date of this Agreement, there is no plan or intention to (i) liquidate United States Steel, (ii) sell or otherwise dispose of the assets of United States Steel or any other member of the United States Steel Tax
Group subsequent to the Distribution, except in the ordinary course of business,
or to merge United States Steel with another entity other than mergers occurring
in connection with an acquisition by United States Steel in pursuance of the
business purpose discussed in the Ruling and Ruling Documents, (iii) take any
action inconsistent with the information and representations furnished by USX in
connection with the Ruling, (iv) purchase stock of United States Steel other
than in accordance with the requirements of Revenue Procedure 96-30 and in
conformity with the representations furnished by United States Steel in
connection with the Ruling, or (v) enter into any negotiations, agreements or
arrangements with respect to transactions or events (including, without
limitation, stock issuances, pursuant to the exercise of options or otherwise,
option grants, capital contributions or acquisitions, or a series of such
transactions or events) that may cause the Distribution to be treated under
Section 355(e) of the Code as part of a plan pursuant to which one or more
persons acquire, directly or indirectly, stock of Marathon or United States
Steel representing a "50-percent or greater interest" therein within the meaning
of Section 355(d)(4) of the Code.
SECTION 6.03. Representations of Marathon Tax Group and United States Steel Tax Group regarding USX Shareholders.
Marathon and each other member of the Marathon Tax Group and United States Steel and each other member of the United States Steel Tax Group represent that it is not aware of any plan or intention by any five percent USX Shareholder and, to its best knowledge, is not aware of any plan or intention on the part of any particular remaining USX Shareholder or USX securityholder to sell, exchange, transfer by gift, or otherwise dispose of any of their stock in, or securities of, Marathon or United States Steel after the Distribution other than the redemption of the 6.5% preferred stock of USX and the Quarterly Income Preferred Securities in connection with the Distribution.
SECTION 6.04. Marathon Tax Group Covenants.
Marathon and each other member of the Marathon Tax Group covenant to United States Steel and each member of the United States Steel Tax Group that (i) during the Two-Year Period, Marathon shall continue the active conduct of a trade or business, within the meaning of Section 355 of the Code and the regulations promulgated thereunder, that had been conducted throughout the five- year period prior to the Distribution, (ii) during the Two-Year Period, Marathon and MOC shall not liquidate, (iii) during the Two-Year Period, Marathon shall not sell, exchange, distribute, or otherwise dispose of the assets of Marathon, MOC or any other member of the Marathon Tax Group, except in the ordinary course of business, and shall not merge Marathon with another entity other than mergers occurring in connection with an acquisition by Marathon in pursuance of the business purpose discussed in the Ruling and Ruling Documents, (iv) no member of the Marathon Tax Group shall purchase stock of Marathon, other than in accordance with Revenue Procedure 96-30 and in conformity with the representations furnished by Marathon in connection with the Tax Ruling, and (v) on or after the Distribution Date, Marathon shall not enter into any transaction or make any change in equity structure (including without limitation, stock issuances, pursuant to the exercise of options or otherwise, option grants, capital contributions or acquisitions, or a series of such transactions or events) that may cause the Distribution to be treated under Section 355(e) of the Code as part of a plan
pursuant to which one or more persons acquire, directly or indirectly, stock of Marathon or United States Steel representing a "50-percent or greater interest" therein within the meaning of Section 355(d)(4) of the Code.
SECTION 6.05. United States Steel Tax Group Covenants.
United States Steel and each other member of the United States Steel Tax
Group covenant to Marathon and each member of the Marathon Tax Group that (i)
during the Two-Year Period, United States Steel shall continue the active
conduct of a trade or business, within the meaning of Section 355 of the Code
and the regulations promulgated thereunder, that had been conducted throughout
the five-year period prior to the Distribution, (ii) during the Two-Year Period,
United States Steel shall not liquidate, (iii) during the Two-Year Period,
United States Steel shall not sell, exchange, distribute, or otherwise dispose
of the assets of United States Steel or any other member of the United States
Steel Tax Group, except in the ordinary course of business, and shall not merge
United States Steel with another entity other than mergers occurring in
connection with an acquisition by United States Steel in pursuance of the
business purpose discussed in the Ruling and Ruling Documents, (iv) no member of
the United States Steel Tax Group shall purchase stock of United States Steel,
other than in accordance with Revenue Procedure 96-30 and in conformity with the
representations furnished by United States Steel in connection with the Tax
Ruling, and (v) on or after the Distribution Date, United States Steel shall not
enter into any transaction or make any change in equity structure (including
without limitation, stock issuances, pursuant to the exercise of options or
otherwise, option grants, capital contributions or acquisitions, or a series of
such transactions or events) that may cause the Distribution to be treated under
Section 355(e) of the Code as part of a plan pursuant to which one or more
persons acquire, directly or indirectly, stock of Marathon or United States
Steel representing a "50-percent or greater interest" therein within the meaning
of Section 355(d)(4) of the Code.
ARTICLE VII
INDEMNITIES
SECTION 7.01. Indemnification of Marathon Tax Group by United States Steel Tax Group.
United States Steel and each other member of the United States Steel Tax Group shall jointly and severally indemnify Marathon and each other member of the Marathon Tax Group against and hold them harmless from:
(a) liability for Taxes allocated to any member of the United States Steel Stock Group under Article 4 of this Agreement, including, but not limited to, Taxes relating to (i) the Distribution or the Holding Company Reorganization, and (ii) the sale of the Delhi Stock Group or adjustments to Tax Items allocated to entities within the Delhi Stock Group;
(b) liability for Taxes attributable to any member of the United States Steel Tax Group relating to any taxable period; and
(c) liability for any interest or Penalty allocated to United States Steel under Article 5 of this Agreement.
SECTION 7.02. Indemnification of United States Steel Tax Group by Marathon Tax Group.
Marathon and each other member of the Marathon Tax Group shall jointly and severally indemnify United States Steel and each other member of the United States Steel Tax Group against and hold them harmless from:
(a) liability for Taxes allocated to any member of the Marathon Stock Group under Article 4 of this Agreement, including, but not limited to, Taxes relating to (i) the Distribution or the Holding Company Reorganization, and (ii) the sale of the Delhi Stock Group or adjustments to Tax Items allocated to entities within the Delhi Stock Group;
(b) liability for Taxes attributable to any member of the Marathon Tax Group relating to any taxable period; and
(c) liability for any interest or Penalty allocated to Marathon under Article 5 of this Agreement.
SECTION 7.03. Mutual Indemnification for Failure to Pay.
Each member of the Marathon Tax Group shall jointly and severally indemnify each member of the United States Steel Tax Group, and their respective directors, officers and employees, and hold them harmless from and against any Tax or loss that is attributable to, or results from the failure of any member of the Marathon Tax Group to make any payment required to be made under this Agreement. Each member of the United States Steel Tax Group shall jointly and severally indemnify each member of the Marathon Tax Group and their respective directors, officers and employees, and hold them harmless from and against any Tax or loss that is attributable to, or results from, the failure of any member of the United States Steel Tax Group to make any payment required to be made under this Agreement.
SECTION 7.04. Mutual Indemnification for Inaccurate or Incomplete Information.
Each member of the Marathon Tax Group shall jointly and severally indemnify each member of the United States Steel Tax Group and their respective directors, officers and employees, and hold them harmless from and against any Tax or loss attributable to the negligence of any member of the Marathon Tax Group in supplying any member of the United States Steel Tax Group with inaccurate or incomplete information (including estimates), in connection with the preparation of any Tax Return or with respect to any Tax Proceeding. Each member of the United States Steel Tax Group shall jointly and severally indemnify each member of the Marathon Tax Group and their respective directors, officers and employees, and hold them harmless from and against any Tax or loss attributable to the negligence of any member of the United States Steel Tax Group in supplying any member of the Marathon Tax Group with
inaccurate or incomplete information (including estimates), in connection with the preparation of any Tax Return or with respect to any Tax Proceeding.
SECTION 7.05. Additional Indemnity Amounts.
Each party with indemnification obligations under Sections 7.01, 7.02, 7.03, or 7.04 of this Agreement (an "Indemnitor") shall also pay to each party that is indemnified by such Indemnitor under such provision (an "Indemnitee") all liabilities, losses, damages, assessments, settlements, judgments, costs or properly documented expenses (including, without limitation, expenses of investigation and attorneys' fees and expenses) arising out of or incident to the imposition, assessment or assertion of any liabilities or damage described in such provision, including, without limitation, those incurred in the contest in good faith in appropriate proceedings relating to the imposition, assessment or assertion of any such liability or damage.
SECTION 7.06. Notice of Claim.
The Indemnitee agrees to give prompt notice to the Indemnitor of the assertion of any claim, or the commencement of any suit, action or proceeding in respect of which indemnity may be sought under Sections 7.01, 7.02, 7.03, 7.04, and 7.05 of this Agreement.
SECTION 7.07. Discharge of Indemnity.
An Indemnitor shall discharge its indemnification obligations by paying all amounts specified in Sections 7.01, 7.02, 7.03, 7.04, or 7.05 of this Agreement within 30 Calendar Days of demand therefore. After a Final Determination of an obligation for which an Indemnitee is to be indemnified, the Indemnitee shall send a statement to the Indemnitor showing the amount, if any, due under such provisions. Calculation of the amounts specified in Sections 7.01 and 7.02 of this Agreement shall be in accordance with the principles of Article 4 of this Agreement. An Indemnitor may dispute in good faith the fact or the amount of any indemnification obligation under Sections 7.01, 7.02, 7.03, 7.04 or 7.05 of this Agreement pursuant to the Dispute Resolution mechanism provided in Section 11.01 of this Agreement.
ARTICLE VIII
COMMUNICATIONS AND COOPERATION
SECTION 8.01. Consult and Cooperate.
Marathon and United States Steel shall consult and cooperate fully (and shall cause their respective affiliates to cooperate fully) at such time and to the extent reasonably requested by a party to this Agreement in connection with all matters subject to this Agreement. The cooperation under this Section 8.01 shall include, without limitation:
(a) the provision on reasonable request of any information (including, without limitation, any books, records, documentation or other information) pertaining to Tax matters
relating to the Marathon Stock Group and the United States Steel Stock Group, any necessary explanations of information, and access to personnel, until the expiration of the applicable statute of limitation (giving effect to any extension, waiver, or mitigation thereof);
(b) the execution, acknowledgement and delivery of any instrument or document that may be necessary or helpful in connection with (A) any Tax Return, (B) any Tax Proceeding or other litigation, investigation or action, or (C) the carrying out of the parties' respective obligations under this Agreement;
(c) the use of the parties' reasonable efforts to obtain any documentation from a Tax Authority, another governmental authority or another third party that may be necessary or helpful in connection with the foregoing;
(d) the retention of Tax Records as set forth in Section 9.02 of this Agreement; and
(e) the assistance of the parties in the preparation of any Tax Returns described in Sections 3.02(a)(i) and 3.02(b) of this Agreement.
SECTION 8.02. Provide Information.
Marathon and United States Steel shall keep one another fully informed with respect to any material developments relating to the matters subject to this Agreement.
ARTICLE IX
TAX RECORDS
SECTION 9.01. Ownership of Tax Records.
Ownership of all books, records, documentation, or other information relating to any Tax Return or Tax Proceeding of the USX Consolidated Group shall be determined in accordance with Section 11.1 of the Agreement and Plan of Reorganization.
SECTION 9.02. General Tax Records Retention Policy.
(a) Marathon and United States Steel shall, and shall cause their respective affiliates to, retain and provide on reasonable demand books, records, documentation, or other information relating to any Tax Return or Tax Proceeding, until the later of (i) the expiration of the applicable statute of limitations (after giving effect to any extension, waiver, or mitigation thereof) and (ii) in the event that any claim is made under this Agreement or by any Tax Authority for which such information is relevant, the receipt of a Final Determination with respect to such claim.
(b) The following categories of documents shall be retained for the periods (in years) outlined below.
Functional Description of Records Retention Period (years)
--------------------------------- ------------------------
Federal Income Tax Returns, Audits, Tax Balance Sheets, and Permanent
Supporting Data and Schedules
Correspondence Files Relating to Federal Tax Settlements, Claims, 10
Legislation, Decisions, Accounting Instructions, etc.
Foreign Taxes Permanent
State Income and Franchise Taxes
Returns, Certificates, and Supporting Data and Schedules 25
Licenses 6
Audits and General Correspondence 25
State Sales, Use and Similar Taxes
Returns, Certificates, and Supporting Data and Schedules 7
Audits and General Correspondence 10
Ad Valorem Taxes
Tax Receipts and Payments 50
All Other Ad Valorem 15
Unemployment Compensation Company
Returns and Associated Supporting Data and Schedules 8
Audits, Claims, Charges, and General Correspondence 8
Federal Income and FICA Withholding Employees
Returns 15
Information Returns 6
Correspondence 6
State and City Withholding
Returns 6
Correspondence 6
Tax Review Files
Pension Programs 50
Acquisitions, Mergers, Liquidations, and Joint Ventures 50
Insurance, Incentive and Similar Plans 15
All Other, Including Leases, Service Contracts, Timber and 25
Mineral Rights, etc.
General Tax Division Subject Files 10
Tax Exemption Certificates from Customers
Blanket Type 4 years after last usage
Single Sale Type (unit) 4 years after usage
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SECTION 9.03. Exceptions to Duty to Provide Records.
(a) Notwithstanding any other provision of this Agreement, no member of the Marathon Tax Group shall be required to provide any member of the United States Steel Tax Group access to or copies of (i) any tax information as to which any member of the Marathon Tax Group is entitled to assert the protection of any evidentiary privilege, including, but not limited to, the attorney-client privilege and the attorney work product doctrine, or (ii) any tax information as to which any member of the Marathon Tax Group is subject to an obligation to
maintain the confidentiality of such information. Marathon shall use reasonable efforts to separate any such information from any other information to which United States Steel is entitled to access or to which United States Steel is entitled to copy under this Agreement, to the extent consistent with preserving its rights under this Section 9.03(a).
(b) Notwithstanding any other provision of this Agreement, no member of the United States Steel Tax Group shall be required to provide any member of the Marathon Tax Group access to or copies of (i) any tax information as to which any member of the United States Steel Tax Group is entitled to assert the protection of any evidentiary privilege, including, but not limited to, the attorney-client privilege and the attorney work product doctrine, or (ii) any tax information as to which any member of the United States Steel Tax Group is subject to an obligation to maintain the confidentiality of such information. United States Steel shall use reasonable efforts to separate any such information from any other information to which Marathon is entitled to access or to which Marathon is entitled to copy under this Agreement, to the extent consistent with preserving its rights under this Section 9.03(b).
ARTICLE X
PAYMENTS
SECTION 10.01. Procedure for Making Payments.
All payments to be made under this Agreement shall be made in immediately available funds.
SECTION 10.02. Tax Consequences of Payments.
(a) For all tax purposes and notwithstanding any other provision of this Agreement, to the extent permitted by applicable law, the parties hereto shall treat any payment made pursuant to this Agreement (other than an interest payment) as a capital contribution or dividend distribution, as the case may be, immediately prior to the Distribution Date and, accordingly, as not includible in the taxable income of the recipient.
(b) If, as a result of a Final Determination, it is determined that the receipt or accrual of any payment made under this Agreement results in any increased tax liability or reduction of any Tax Attribute of the recipient of such payment, the payor shall pay to the recipient an amount (the "After-Tax Amount") equal to the sum of (i) any increase in the Taxes of the recipient as a result of receiving the payment from the payor (which shall itself be grossed up to take into account such payment, if applicable) and (ii) any interest or Penalty attributable to such increased tax liability or to the reduction of such Tax Attribute. The payor shall not be required to pay the After-Tax Amount to the extent (1) the payor does not receive a deduction for such payment, or (2) the recipient obtains a deduction corresponding to the payment.
SECTION 10.03. Interest.
Payments made pursuant to this Agreement that are not made within the period prescribed in this Agreement, or if no period is prescribed within 15 Calendar Days after demand for payment is made (the "Payment Period"), shall bear interest for the period from and including the date immediately following the last Business Day of the Payment Period through and including the date of payment at a rate equal to the rate for underpayments under Code Section 6621(a)(2), without regard to the large corporate underpayment rate provided in Code Section 6621(c). Such interest shall be calculated on the basis of the actual number of days for which due.
ARTICLE XI
DISPUTES
SECTION 11.01. Dispute Resolution.
In the event that Marathon, on the one hand, and United States Steel, on
the other hand, disagree as to the amount or calculation of any payment to be
made under this Agreement, or the interpretation or application of any provision
under this Agreement, the parties shall attempt in good faith to resolve such
dispute (the "Dispute"). The parties shall escalate the Dispute through the
executive chain of command, such that if the chief tax officers are unable to
resolve the Dispute within ten Calendar Days, the chief financial officers will
attempt to resolve the Dispute. If such Dispute is not resolved by the chief
financial officers within 30 Calendar Days following the commencement of the
Dispute, each of United States Steel and Marathon shall have the right to submit
such Dispute to arbitration in accordance with the procedures set forth in this
Section 11.01. Resolution of any and all such Disputes ("Dispute Resolution")
shall be exclusively governed by and settled in accordance with the provisions
of this Section 11.01; provided that nothing contained herein shall preclude
either party from seeking or obtaining injunctive relief or equitable or other
judicial relief to enforce this Section 11.01.
United States Steel or Marathon (each, a "Party") may commence proceedings hereunder by delivering a written notice (the "Demand") to the other Party providing a reasonable description of the Dispute to the other and expressly requesting resolution hereunder. In the event that a Dispute involves the amount of a payment under this Agreement, the Party with the payment obligation shall make such payment before commencing arbitration under this Section.
Following delivery of the Demand, Marathon and United States Steel shall jointly retain a tax attorney or certified public accountant that is a member of a nationally recognized law firm or nationally recognized accounting firm or a tax professor at an accredited law school (the "Arbitrator") to resolve the Dispute. In the event that the Parties are unable to agree on an Arbitrator, the Dispute shall be resolved by a panel consisting of three Arbitrators acting by majority vote (the "Panel"). Of the three Arbitrators comprising the Panel, one Arbitrator shall be selected by United States Steel, one Arbitrator shall be selected by Marathon, and one Arbitrator shall be jointly selected by the Arbitrators selected by United States Steel and Marathon. If either United States Steel or Marathon fails to select an Arbitrator within 15
Calendar Days after delivery of the Demand, or within 15 Calendar Days of appointment of both Arbitrators they are unable to agree upon a third, then upon application by either Party such Arbitrator or Arbitrators (meeting the requirements above) shall be appointed by the Court of Chancery of the State of Delaware. If an Arbitrator becomes unable to serve, his or her successors shall be selected or appointed in accordance with this Section. Marathon and United States Steel shall act in good faith in selecting the Arbitrator or Panel and shall use reasonable efforts to reach agreement on such Arbitrator or Panel. The Arbitrator or Panel shall act as an arbitrator to resolve all points of disagreement and its decision shall be final and binding upon all parties involved. Marathon and United States Steel shall each take, or cause to be taken, any action necessary to implement the decision of the Arbitrator or Panel. The fees and expenses relating to the Arbitrator or Panel shall be borne equally by Marathon and United States Steel unless the Arbitrator or Panel decides otherwise.
The Parties hereby agree to submit all Disputes to arbitration under the terms hereof, and the arbitration shall be final, conclusive and binding upon the parties, their successors and assigns. Unless otherwise agreed by the Arbitrator or Arbitrators, the arbitration shall be conducted in Pittsburgh, Pennsylvania, if the arbitration is commenced by Marathon, or in Houston, Texas, if the arbitration is commenced by United States Steel.
ARTICLE 12
MISCELLANEOUS
Section 12.01. Guarantee.
Marathon shall guarantee the obligations under this Agreement of each other member of the Marathon Tax Group. United States Steel shall guarantee the obligations under this Agreement of each other member of the United States Steel Tax Group.
Section 12.02. Authorization.
Each of Marathon and United States Steel hereby represents and warrants that (i) it has the power and authority to execute, deliver and perform this Agreement, (ii) this Agreement has been duly authorized by all necessary corporate action on the part of such party, (iii) this Agreement constitutes a legal, valid and binding obligation of such party, and (iv) the execution, delivery and performance of this Agreement by such party does not contravene or conflict with any provision of law or of such party's charter or bylaws or any agreement, instrument or order binding on such party.
Section 12.03. Notices.
All notices, requests and other communications to any party hereunder shall be in writing (including facsimile or similar writing) and shall be given to:
If to Marathon, to:
Marathon Oil Corporation
5555 San Felipe Road
Houston, Texas 77056-2723
Attn: Chief Tax Officer __________________ (facsimile)
If to United States Steel, to:
United States Steel Corporation
600 Grant Street
Pittsburgh, PA 15219
Attn: Chief Tax Officer __________________ (facsimile)
or any other address or facsimile number as such party may hereafter specify in writing for this purpose by written notice to the other parties to this Agreement. Each such notice, request or other communication under this section shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is given, (ii) on the day of transmission if sent via facsimile transmission to the facsimile number given above; provided that, telephonic confirmation of receipt is obtained promptly after completion of transmission, (iii) on the business day after delivery to an overnight courier service or the express mail service maintained by the United States Postal Service; provided that, receipt of delivery has been confirmed, or (iv) on the fifth day after mailing; provided that, receipt of delivery is confirmed, if mailed to the party to whom notice is to be given, by first class mail, registered or certified, postage prepaid, properly addressed and return-receipt requested.
SECTION 12.04. Amendments; No Waivers.
(a) Any provision of this Agreement may be amended, supplemented, or waived if, and only if, such amendment, supplement, or waiver is in writing and signed by the parties.
(b) Notwithstanding any other section of this Agreement, no failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement shall be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 12.05. Damages.
The remedy for any failure or delay in satisfying the obligations contained herein shall be limited to the actual damages suffered as a result of such failure or delay, including interest as provided in Section 10.03 of this Agreement for any late payments.
SECTION 12.06. Expenses.
(a) Except as otherwise provided in this Agreement, each party shall bear its own costs and expenses (including, without limitation, attorneys' fees and other professional fees and expenses).
(b) Without limiting the generality of Section 12.06(a), each party shall bear the costs and expenses in connection with the preparation for or conduct of any Tax Proceeding that is not an audit (i) with respect to Tax Items that are allocated to such party under this Agreement, and/or (ii) with respect to which such party has an indemnification obligation under Article 7 of this Agreement.
SECTION 12.07. Information for Shareholders.
United States Steel shall provide each USX Shareholder that receives United States Steel stock pursuant to the Distribution with the information necessary for such USX Shareholder to comply with the requirements of Section 355 of the Code and the Treasury Regulations thereunder with respect to any statements that such USX Shareholders must file with their Tax Returns demonstrating the applicability of Section 355 of the Code to the Distribution.
SECTION 12.08. Successors and Assigns.
The provisions of this Agreement shall be binding upon and shall inure to
the benefit of the parties to this Agreement and their respective successors
(whether by merger, acquisition of assets or otherwise, and, including, without
limitation, any successor succeeding to the Tax Attributes of a party under
Section 381 of the Code) and assigns, to the same extent as if such successor or
assign had been an original party to this Agreement; provided that, except as
set forth in this Agreement, no party may assign, delegate or otherwise transfer
any of its rights or obligations under this Agreement without the consent of
each of the other parties to this Agreement.
SECTION 12.09. Governing Law.
The application of this Agreement shall be construed in accordance with and governed by the laws of the State of Delaware (regardless of the laws that might otherwise govern under applicable principles of conflicts law) as to all matters, including, without limitation, matters of validity, construction, effect, performance, and remedies.
SECTION 12.10. Changes in Tax Law.
Any reference to a provision of the Code or a law of another jurisdiction shall include a reference to any applicable successor provision or law.
SECTION 12.11. Jurisdiction; Forum.
(a) By the execution and delivery of this Agreement, Marathon and United States Steel submit, and agree to cause their respective affiliates to submit, to the personal jurisdiction of any state or Federal court in the State of Delaware in any suit or proceeding arising out of or relating to this Agreement.
(b) The parties hereto agree that an appropriate and convenient, nonexclusive forum for any disputes between any of the parties hereto or their respective affiliates arising out of this Agreement shall be in any state or Federal court in the State of Delaware.
SECTION 12.12. Counterparts; Effectiveness; No Third Party Beneficiaries.
(a) This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective upon the consummation of the Distribution; provided that, at or before such time, each party to this Agreement shall have received a counterpart of this Agreement signed by the other party. The parties to this Agreement do not intend that any of its provisions will, or do, confer any rights, benefits, remedies, obligations or liabilities under this Agreement upon any person other than (i) the parties to this Agreement, (ii) other members of the Marathon Tax Group, and (iii) other members of the United States Steel Tax Group, together in each case with their respective successors and assigns.
(b) All rights and obligations arising under this Agreement shall survive until they are fully effectuated or performed. Notwithstanding anything in this Agreement to the contrary, this Agreement shall remain in effect and its provisions shall survive for the full period of all applicable statutes of limitation (giving effect to any extension, waiver or mitigation thereof).
SECTION 12.13. Severability.
If any one or more of the provisions of this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained in this Agreement shall not in any way be affected or impaired by such holding. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions so that the replacement provisions will be valid, legal and enforceable and will have an economic effect which comes as close as possible to that of the invalid, illegal or unenforceable provisions.
SECTION 12.14. Confidentiality.
Subject to any contrary requirement of law and the right of each party to enforce its rights hereunder in any legal action, each party agrees that it shall keep strictly confidential, and shall cause its employees and agents to keep strictly confidential, any information which it or any of its employees or agents may acquire pursuant to, or in the course of performing its obligations under, any provision of this Agreement.
SECTION 12.15. Interpretation.
The Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties, and shall not in any way affect the meaning or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties to this Agreement have caused this Tax Sharing Agreement to be duly executed by their respective authorized officers as of the date first above written.
USX CORPORATION
By: _______________________________
Name:
Title:
UNITED STATES STEEL LLC
By: _______________________________
Name:
Title:
Exhibit 10.2
TRANSITION SERVICES AGREEMENT
W I T N E S S E T H:
WHEREAS, effective upon the Separation Effective Time, each of USX and SteelCo will be responsible for its own needs in the area of Corporate Services, and USX corporate personnel may be assigned to, and may be employed by, either USX or SteelCo or their respective subsidiaries;
WHEREAS, in the event that USX or SteelCo is unable to initially service its own needs with respect to any Corporate Services, the other company will provide such Corporate Services to the other in accordance with the terms hereof, if able to do so;
continue providing Computer Services to USX headquarters or the other party hereto on the terms and subject to the conditions contained herein; and
WHEREAS, the parties further desire to address the status of certain Transition Employees that will provide temporary services to USX after the Separation Effective Date.
NOW, THEREFORE, in furtherance of the foregoing and in consideration of the mutual promises and undertakings contained herein and in any other document executed in connection with this Agreement, the parties agree as follows:
ARTICLE I
DEFINITIONS
(a) The words "hereof", "herein", "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
ARTICLE II
SERVICES TO BE PROVIDED
Corporate Services agrees to reimburse the supplying party for all Costs incurred in providing such Corporate Services. For purposes herein, "Costs" shall mean all direct, fixed and variable, costs without allocation of overhead. The party supplying Corporate Services shall provide such Corporate Services on terms which are similar in nature, volume and scope to those Corporate Services which were provided to the requesting party immediately prior to the Separation Effective Time, unless otherwise mutually agreed upon by the parties hereto.
ARTICLE III
EMPLOYEE MATTERS
its subsidiaries; USX Corporate Employees expected to perform services for SteelCo or its subsidiaries will be assigned to and employed by SteelCo or its subsidiaries.
ARTICLE IV
RELEASE
ARTICLE V
LICENSE
ARTICLE VI
TERM AND AMENDMENT
ARTICLE VII
BILLING AND PAYMENT
disputing if such charge is ultimately determined to be applicable, but no interest shall apply as to any disputed amounts ultimately determined in the receiving party's favor.
ARTICLE VIII
GENERAL PROVISIONS
if mailed (registered or certified, return receipt requested, properly addressed and postage prepaid).
If to SteelCo, to:
United States Steel LLC
600 Grant Street
Suite 6100
Pittsburgh, PA 15219-4776
Attention: General Counsel
Facsimile: 412-433-1131
If to USX, to:
Marathon Oil Corporation
5555 San Felipe Road
Houston, TX 77056-2723
Attention: General Counsel
Facsimile: 713-296-4375
Such names and addresses may be changed by notice given in accordance with this
Section 8.5. Copies of all notices, requests, permissions, waivers, referrals
and all other communications hereunder given prior to the Separation Effective
Time shall be given to:
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, NY 10036-6522
Attention: Roger S. Aaron, Esquire
Facsimile: (212) 735-2000
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written.
USX CORPORATION
By: __________________________
Name: _______________________
Title: ________________________
UNITED STATES STEEL LLC
By: __________________________
Name: _______________________
Title: ________________________
Exhibit 10.3
Form Of
Financial Matters Agreement
This Financial Matters Agreement is entered into as of this [ ] day of [ ], 2001 by and between USX Corporation, a Delaware corporation ("Parent") and United States Steel LLC, a Delaware limited liability company ("Steel").
WITNESSETH
WHEREAS, Steel is a wholly owned subsidiary of Parent; and
WHEREAS, Parent, Steel and another corporation named USX Corporation ("Old USX") were parties to a Holding Company Reorganization Agreement dated as of July 1, 2001 (the "Reorganization Agreement"); and
WHEREAS, the Reorganization Agreement was entered into to better align the assets and liabilities of Old USX with its two classes of common stock, namely USX--Marathon Group Common Stock and USX--U.S. Steel Group Common Stock; and
WHEREAS, in connection with the Reorganization Agreement, Parent assumed certain obligations of Old USX and Steel became liable for all other obligations of Old USX as was required by the terms of such obligations; and
WHEREAS, to induce General Electric Credit Corporation of Delaware ("GECC") and Southern Energy Clairton, L.L.C ("SECL") to enter into Amendment Number 1 to the Amended and Restated Limited Partnership Agreement entered into and effective as of June 1, 1997 by and among Steel, GECC and SECL, Parent delivered to GECC and SECL, a guarantee dated July 2, 2001 of Steel's obligations under the aforesaid Partnership Agreement and certain related instruments and agreements (the "1314B Guarantee"); and
WHEREAS, to induce certain counterparties not to declare a "credit event upon merger" under certain ISDA swap agreements, Parent executed and delivered to various counterparties guarantees of the obligations of Steel under the aforesaid ISDA swap agreements (the "Swap Guarantees"); and
WHEREAS, Parent and Steel are also parties to an Agreement and Plan of Reorganization dated as of July 31, 2001 (the "Separation Agreement"), pursuant to which, and subject to the terms and conditions set forth therein, all of the shares of USX--U.S. Steel Group common stock will be converted into shares of common stock of United States Steel Corporation; and
WHEREAS, Parent and Steel have identified certain obligations of Parent that are closely related to the business of Steel; and
WHEREAS, In light of these relationships and in furtherment of the purpose of the Reorganization Agreement and the Separation Agreement Parent and Steel have
agreed that Parent will assign these obligations to Steel and that Steel will assume and discharge these obligations; and
WHEREAS, Parent and Steel wish to establish how certain other debt obligations and financial matters shall be arranged.
NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein and intending to be legally bound hereby, the parties hereto agree as follows:
Article I Industrial Revenue Bonds
(a) For a term beginning on the date hereof and ending on the earlier of the tenth anniversary of the Separation Effective Time (as defined in the Separation Agreement) or December 31, 2040, Parent hereby assigns to Steel and Steel assumes all of Parent's rights and obligations with respect to the Industrial Revenue Bonds including, without limitation, the obligation to pay debt service on the Industrial Revenue Bonds. The term "debt service" is meant to include all sums due with respect to the Industrial Revenue Bonds including, without limitation, payments of principal, interest and premium, letter of credit fees and expenses (incurred by either Parent or Steel or both), trustee fees and expenses, issuer fees and expenses and remarketing fees and expenses.
(b) During the term of this Agreement, Steel shall provide all notices and take such other actions as may be necessary or appropriate in connection with ongoing obligations related to the Industrial Revenue Bonds.
Steel's obligations with respect to the Industrial Revenue Bonds shall include payment of amounts due upon any defaults or acceleration of any of the obligations with respect to the Industrial Revenue Bonds other than defaults caused by Parent.
from time to time direct conversion of the Variable Rate Bonds to different interest rate periods, and Parent shall undertake all reasonable efforts to effectuate each such conversion. Parent will not, without the prior written consent of Steel, convert any of the Variable Rate Bonds to a different interest rate. Notwithstanding anything in this Agreement to the contrary, Steel's ability to direct conversion of the Variable Rate Bonds to a different interest rate period and maintain a given interest rate period shall be subject to Parent's ability to maintain appropriate letters of credit respecting the Variable Rate Bonds. Parent shall undertake commercially reasonable efforts to obtain and maintain letters of credit and/or such other liquidity facilities (each, a "Liquidity Facility") as may be permitted by the applicable Bond Documents (hereinafter defined). If Parent's ability to obtain and maintain Liquidity Facilities is reduced so that Parent's business is adversely affected in a material way, Parent may, following timely written notice to Steel, decline to renew one or more Liquidity Facilities with respect to one or more issues of Variable Rate Bonds. Concurrently with said notice Parent shall supply an opinion of an independent third party regarding the availability of Liquidity Facilities to Parent. Steel may at any time provide substitute Liquidity Facilities applicable to one or more issues of the Variable Rate Bonds.
(a) If Steel notifies Parent in writing that Steel elects to redeem all or part of any of the Industrial Revenue Bonds and supplies adequate funds therefor, Parent shall reasonably assist Steel to effectuate such redemption(s) and Steel's obligations under this Agreement shall be reduced accordingly. Parent shall not, without the prior written consent of Steel, direct the redemption of any Industrial Revenue Bonds prior to maturity.
(b) If Steel elects to refinance all or part of any of the Industrial Revenue Bonds through a tax-exempt refunding or otherwise, Parent shall take all such reasonable action as may be necessary or appropriate to reasonably assist Steel in completing the transactions contemplated by each such refinancing, so long as after the completion of such transactions, Parent does not have any obligations with respect to any new debt issued as a result.
Article II Leases
respect to the Assumed Leases shall include payment of amounts due upon any defaults or acceleration of any of the obligations with respect to the Assumed Leases other than defaults caused by Parent.
Article III Obligations of Each Party
Parent. Steel further agrees to use commercially reasonable efforts to avoid causing the amount for which Parent may be liable under the 1314B Guarantee to be increased without the Parent's prior written consent (such consent not to be unreasonably withheld).
Article IV Mutual Obligations
(a) Each of Steel and Parent agrees to employ all commercially reasonable efforts to take all necessary action or refrain from acting so as to assure compliance, and to cooperate with the other party in its endeavors to comply, with all obligations under the various documents that were executed and delivered in connection with the Assumed Leases and the Parent Obligations including, without limitation, covenants respecting the financed facilities, in each case, necessary to avoid the occurrence of a default, acceleration, casualty loss or other termination under any of the Assumed Leases and the Parent Obligations.
(b) Each of Steel and Parent agrees to employ all commercially reasonable efforts to take all necessary action or refrain from acting so as to assure compliance, and to cooperate with the other party in its endeavors to comply, with Parent's obligations under the various documents that were executed and delivered in connection with the issuance of the Industrial Revenue Bonds (collectively, the "Bond Documents") including, without limitation, covenants respecting the financed facilities, in each case, necessary to avoid the occurrence of an Event of Default under the Bond Documents or cause the interest on the Industrial Revenue Bonds to be included in the gross income of the holders thereof except holders who are "substantial users" or "related persons" as defined in Section 147(a) of the Internal Revenue Code of 1986, as amended or its predecessor.
(a) This Agreement is a general unsecured obligation of each of Parent and Steel (i.e., it ranks equal to accounts payable and other general unsecured obligations of each party). This Agreement does not contain any financial covenants and Parent and Steel remain free to incur additional debt, grant mortgages or security interests in its property and sell or transfer assets without the consent of the other. Parent acknowledges that Steel has granted or anticipates granting security interests in its accounts receivable and inventory.
(b) This Agreement is a contract between the parties. It does not grant any rights to the holders of the Industrial Revenue Bonds or the other parties to the Assumed Leases or the Parent Obligations or the beneficiaries of the 1314B Guarantee and the Swap Guarantees. Among other things the parties may agree to amend or modify this Agreement as they mutually agree and nothing herein creates or is intended to create any obligation to redeem or repurchase any of these instruments.
(a) The following shall be "Events of Default" under this Agreement:
(i) (A) Steel shall fail to make any payment under any Bond Document or Assumed Lease when due and such failure causes a default under the applicable Bond Document or Assumed Lease;
(B) Parent shall fail to make any payment under any Parent Obligation when due and such failure causes a default under the applicable Parent Obligation;
(ii) Either party shall fail to comply with any other covenant
contained in this Agreement (including, without limitation, covenants to
comply with covenants under the Bond Documents, the Assumed Leases and the
Parent Obligations) and such failure shall continue for more than thirty
(30) days after such party becomes aware of it, provided that under the
Bond Documents, Assumed Leases and Parent Obligations such period shall be
extended to the extent (but only to the extent) it does not precipitate an
event of default under the applicable Bond Documents, Assumed Leases or
Parent Obligations;
(iii) Either party shall make a general assignment for the benefit of creditors, or files or has filed a petition in bankruptcy, or a petition or answer seeking a readjustment of its indebtedness under the United States Bankruptcy Code or any similar law or code, or consents to the appointment of a receiver or trustee of it or for a substantial part of its properties; or
(iv) Either party shall be adjudged bankrupt or insolvent, or a petition or proceedings for bankruptcy shall be filed against it, and such party shall admit the material allegations thereof, or an order, judgment, or decree shall be made approving such a petition, and such order, judgment or decree shall not be vacated or stayed within sixty (60) days of its entry, or a custodian, receiver or trustee shall be appointed for either party or a substantial part of its properties and remain in possession thereof for sixty (60) days.
(b) Upon the occurrence of an Event of Default pursuant to subparagraphs (iii) or (iv) of Section 4.3(a), all sums then or thereafter due hereunder (including, without limitation, the amounts that may become due under Section 1.4 hereof) shall become immediately due and payable. Upon the occurrence of any one or more of the other Events of Default, all sums then or hereafter due hereunder shall, at the non-defaulting party's option, immediately become due and payable. Overdue amounts shall bear interest at a rate of interest equal to that announced from time to time by J. P. Morgan Chase & Co. (or its successor) as its "prime rate" plus two percent per annum.
(a) Steel agrees to indemnify and hold harmless Parent as well as all shareholders, directors, officers, employees, subsidiaries and agents of Parent (collectively, "Indemnified Persons") against any and all direct or indirect liability (whether absolute, accrued or unaccrued, contingent, liquidated or unliquidated,
matured or unmatured or known or unknown), indebtedness, obligation, expense, claim, deficiency, guarantee or endorsement of or by any such Indemnified Person (including, without limitation, those arising under any law, regulation, ordinance, or award of any court, tribunal or arbitrator of any kind) together with all reasonable attorney's fees and other costs and expenses ("Liability") arising from, relating to or incurred in connection with the Industrial Revenue Bonds, the Assumed Leases, the 1314B Guarantee or the Swap Guarantees.
(b) Parent agrees to indemnify and hold harmless Steel as well as all Indemnified Persons of Steel against any and all Liability arising from, relating to or incurred in connection with the Parent Obligations.
Article V General Provisions
In witness whereof this Agreement is entered into as of the day first written above.
USX CORPORATION
By:_____________________________________
Vice President
UNITED STATES STEEL LLC
By:_____________________________________
Vice President
Schedule 1.1
Industrial Revenue Bond Obligations
1. Loan Agreement dated as of June 1, 1994 with The Industrial Development Board of the City of Fairfield (Alabama) in relation to $12,695,000 aggregate principal amount of The Industrial Development Board of the City of Fairfield (Alabama), Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series A 1994.
2. Loan Agreement dated as of June 1, 1994 with Allegheny County Industrial Development Authority in relation to $42,370,000 aggregate principal amount of the Allegheny County Industrial Development Authority, Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series A 1994.
3. Loan Agreement dated as of November 1, 1995 with Utah County, Utah in relation to $32,375,000 aggregate principal amount of Utah County, Utah, Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1995. /V/
4. Loan Agreement dated as of November 1, 1995 with Ohio Air Quality Development Authority in relation to $10,160,000 aggregate principal amount of Ohio Air Quality Development Authority, Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1995. /V/
5. Amended and Restated Agreement of Sale dated as of November 1, 1995 with The Industrial Development Board of the City of Fairfield (Alabama) in relation to $6,175,000 aggregate principal amount of The Industrial Development Board of the City of Fairfield (Alabama), Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1995. /V/
6. Loan Agreement dated as of November 1, 1995 with Bucks County (Pennsylvania) Industrial Development Authority in relation to $8,690,000 aggregate principal amount of Bucks County (Pennsylvania) Industrial Development Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1995. /V/
7. Loan Agreement dated as of October 1, 1996 with Allegheny County Industrial Development Authority in relation to $36,515,000 aggregate principal amount of Allegheny County Industrial Development Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1996.
/V/ Variable Rate Bonds
Schedule 1.1
8. Loan Agreement dated as of December 1, 1998 with Allegheny County Industrial Development Authority in relation to $28,800,000 aggregate principal amount of Allegheny County Industrial Development Authority Environmental Improvement Bonds (USX Corporation Project) Refunding Series of 1998. /V/
9. Loan Agreement dated as of December 1, 1998 with Allegheny County Industrial Development Authority in relation to $59,600,000 aggregate principal amount of Allegheny County Industrial Development Authority, Environmental Improvement Revenue Bonds (USX Corporation Project) Second Refunding Series of 1998.
10. Loan Agreement dated as of December 1, 1998 with Indiana Development Finance Authority in relation to $55,000.000 aggregate principal amount of Indiana Development Finance Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1998. /V/
11. Loan Agreement dated as of December 1, 1998 with Indiana Development Finance Authority in relation to $47,000,000 aggregate principal amount of Indiana Development Finance Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1998.
12. Loan Agreement dated as of March 1, 1998 with Allegheny County Industrial Development Authority in relation to $33,030,000 aggregate principal amount of Allegheny County Industrial Development Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1998.
13. Loan Agreement dated as of March 1, 1998 with Bucks County Industrial Development Authority in relation to $11,125,000 aggregate principal amount of Bucks County Industrial Development Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1998.
14. Bond Amortization Agreement dated as of March 1, 1998 with Gulf Coast Waste Disposal Authority in relation to $10,600,000 aggregate principal amount of Gulf Coast Waste Disposal Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1998.
15. Amended and Restated Agreement of Sale dated as of March 1, 1998 with The Industrial Development Board of the City of Fairfield (Alabama) in relation to $10,945,000 aggregate principal amount of The Industrial Development Board of the City of Fairfield (Alabama) Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1998.
16. Loan Agreement dated as of May 1, 1999 with Ohio Water Development Authority in relation to $21,800,000 aggregate principal amount of Ohio Water Development Authority Environmental Improvement Revenue Bonds (USX Corporation Project) Refunding Series of 1999.
/V/ Variable Rate Bonds
Schedule 1.1
17. Agreement dated December 1, 1984 between United States Steel Corporation and Ohio Water Development Authority in relation to $9,000,000 Ohio Water Development Authority Variable Rate Demand Environmental Improvement Revenue Bonds (United States Steel Corporation Project) Series 1984. /V/
/V/ Variable Rate Bonds
Schedule 1.1
Schedule 2.1
Assumed Leases
1) Participation Agreement dated as of May 11, 1982 among USX Corporation, as Lessee, General Electric Credit and Leasing Corporation, as Owner Participant, State Street Bank and Trust Company of Connecticut, as Owner Trustee, The CIT Group/Equipment Financing, Inc. as Loan Participant and The Bank of New York. as Indenture Trustee relating to Coke Battery "B" at Clairton Works.
2) Charter dated as of September 1, 1980 (the "Charter") between State Street Bank and Trust Company of Connecticut, N.A. as Owner Trustee and USX Corporation of the M/V Speer.
3) Lease Agreement dated as of December 1, 1988 between Meridian Trust Company, Owner Trustee, as Lessor and USX Corporation, as Lessee relating to the continuous slab caster at Fairfield Works.
4) Participation Agreement dated as of October 1, 1973 among The Hydro- Electric Power Commission of Ontario, USX Corporation, as Lessee, Whitkath Inc. as Owner, the Prudential Insurance Company of America, The Travelers Insurance Company, Connecticut General Life Insurance Company as Loan Participants and First National City Bank, and the Non-Recourse Lease Agreements each dated as of October 1, 1973 between USX Corporation as Lessee and Whitkath, Inc. as Lessor.
5) Lease Agreement dated as of November 18, 1985 (the "Lease") between USX Corporation, as lessee Mellon Financial Services Corporation #4 relating to an air separation facility at Fairfield Works.
Schedule 2.1
Schedule 3.1
Parent Obligations
Parent Obligations under which Steel is not contingently liable:
1) Securities issued under the Indenture dated as of July 1, 1991 between USX Corporation as issuer and Pittsburgh National Bank as trustee.
2) Securities issued under the Indenture dated as of March 15, 1993 between USX Corporation as issuer and PNC Bank, National Association as trustee.
3) Refunding Agreement dated as of December 1, 1998 with the Parish of St. John the Baptist in relation to $23,425,000 Parish of St. John the Baptist, State of Louisiana Environmental Improvement Bonds Refunding Series of 1998 (USX Corporation Project).
4) First Amended and Restated Loan Agreement dated August 1, 1987 with the Camp County Industrial Development Corporation in relation to $4,700,000 Camp County Industrial Development Corporation Floating/Fixed Rate Pollution Control Revenue Bonds, Series 1983 (Texas Oil & Gas Corp. Project)
Parent Obligations under which Steel is contingently liable:
1) $1,353,750,000 Five Year Credit Agreement and the $451,250,000 364-Day Credit Agreement both dated as of November 30, 2000 and among USX Corporation, the Co-Agents and other Lenders party thereto, Bank of America, N.A., as Syndication Agent, Citibank, N.A., The Bank of Nova Scotia and Commerzbank AG, as Documentation Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent.
2) The following Guarantees to LOOP, LLC:
(a) Guarantee dated August 1, 1986 (Series 1986),
(b) Guarantee dated June 7, 1990 (Series E),
(c) Guarantee dated July 2, 1991 (Series 1991),
(d) Guarantee dated October 1, 1992 (Series 1992),
(e) Series 1997 - Guarantee dated August 29, 1997 (Series 1997), and
(f) Guarantee dated November 9, 1994 (Credit Agreement).
Schedule 3.1
Participants, (b) State Street Bank and Trust Company, as Owner Trustee,
(c) Bank of America, N.A. as Collateral Agent, Liquidity Agent and
Administrator for the Note Lender, (d) Bayerische Landesbank Girozentrale
(Cayman Islands Branch) and The Dai-Ichi Kangyo Bank, Ltd. (New York
Branch), as Co-Agents, (e) Enterprise Funding corporation, as Note Lender,
(f) the Committed Lenders from time to time party thereto, (g) Phillips
Petroleum Company and USX as guarantors, and (g) Kenai Tankers LLC, Polar
Eagle Shipping Company, Ltd. and Arctic Sun Shipping Company, Ltd., as
charterers.
4) Loan Agreement between USX Capital LLC, a limited life company organized under the laws of the Turks and Caicos Islands, and USX Corporation dated March 3, 1994 (MIPS).
5) Promissory Note dated as of March 30, 2001 issued by USX to Dresdner Kleinwort Benson North America Leasing, Inc.
6) Guarantee Agreement between the European Investment Bank (the "Bank") and USX dated 25 July 1991.
7) 6.75% Convertible Junior Subordinated Debentures issued pursuant to the Multiple Series Indenture dated as of May 16, 1997 between USX Corporation, as Issuer, and The Bank of New York, as Trustee as supplemented by the First Supplemental Indenture dated as of May 16, 1997 and a Second Supplemental Indenture dated as of July 2, 2001 between USX Corporation, as Issuer, and The Bank of New York, as Trustee. Such debt supports the obligations incurred in connection with the 6.75% Convertible Quarterly Income Preferred Securities issued by USX Capital Trust I, a Delaware statutory business trust (QUIPS).
8) 6.50% Cumulative Convertible Preferred Stock of USX Corporation.
9) Guaranty made as of November 15, 1983 (together with all amendments and supplements thereto) from USX Corporation in favor of Tower Associates, a New York limited partnership (Marathon Tower).
Schedule 3.1
Exhibit 10.4
FROM OF
INSURANCE ASSISTANCE AGREEMENT
W I T N E S S E T H:
WHEREAS, prior to the time of the HoldCo Merger, the Marathon Group and the U.S. Steel Group maintained independent property and business interruption insurance policies. Other types of insurance, such as general liability, employer's liability, aircraft liability, automobile liability, workers' compensation and executive risk, were purchased and held by Old USX, for the benefit of Old USX and all of its Subsidiaries;
WHEREAS, following the HoldCo Merger, separate policies of insurance for certain general liability, employer's liability, automobile liability, workers' compensation, boiler and machinery, and aircraft seat accident were issued to cover (i)
USX, Marathon and its Subsidiaries, on the one hand, and (ii) SteelCo and it Subsidiaries, on the other hand. The remaining policies of insurance held by Old USX were maintained for the benefit of USX and its Subsidiaries; and
WHEREAS, the parties desire to enter into this Agreement to set forth the parties' understanding with respect to their respective responsibilities and rights with respect to various insurance policies and claims associated therewith, both prior to and after the Separation.
NOW, THEREFORE, in furtherance of the foregoing and in consideration of the mutual promises and undertakings contained herein and in any other document executed in connection with this Agreement, the parties agree as follows:
ARTICLE I
DEFINITIONS
(a) The words "hereof", "herein", "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
ARTICLE II
PRE-SEPARATION INSURANCE
(a) USX shall have all rights in and to all claims, and shall be solely liable for the payment of any retroactive reimbursements, uninsured retentions and deductibles relating to the Fronting Insurance arising out of or relating to events or conditions occurring prior to the effective time of the HoldCo Merger and associated exclusively with the business of the Marathon Group.
(b) SteelCo shall have all rights in and to all claims, and shall be solely liable for the payment of any retroactive reimbursements, uninsured retentions and deductibles, relating to the Fronting Insurance arising out of or relating to events or conditions occurring prior to the effective time of the HoldCo Merger and associated exclusively with the business of the U.S. Steel Group.
(c) USX shall be entitled to 65%, and SteelCo shall be entitled to 35%, of all rights in and to all claims, and shall be liable for the payment of any retroactive reimbursements, uninsured retentions and deductibles on this same percentage basis, relating to the Fronting Insurance arising out of or relating to events or conditions occurring prior to the effective time of the HoldCo Merger and not related exclusively to either Group, including however, without limitation, pre-HoldCo Merger claims associated with Old USX's corporate assets, directors, officers and employees.
(d) Policy limits under each of the Fronting Insurance associated with claims arising out of or relating to events or conditions occurring prior to the effective time of the HoldCo Merger shall be applied on a first-come, first-served basis. Neither party shall be liable to the other in the event policy limits under any of the Fronting Insurance has been exhausted. USX and SteelCo shall not take any action that would prejudice the access of the other to coverage under the Fronting Insurance.
(a) USX shall have all rights in and to all claims, and shall be solely liable for the payment of any uninsured retentions and deductibles, relating to the Joint Insurance Arrangements arising out of or relating to events or conditions occurring prior to the Separation Effective Time and associated exclusively with the business of the Marathon Group.
(b) SteelCo shall have all rights in and to all claims, and shall be solely liable for the payment of any uninsured retentions and deductibles, relating to the Joint Insurance Arrangements arising out of or relating to events or conditions occurring prior
to the Separation Effective Time and associated exclusively with the business of the U.S. Steel Group.
(c) USX shall be entitled to 65%, and SteelCo shall be entitled to 35%, of all rights in and to all claims, and shall be liable for the payment of any uninsured retentions and deductibles on this same percentage basis, relating to the Joint Insurance Arrangements arising out of or relating to events or conditions occurring prior to the Separation Effective Time and not related exclusively to either Group, including however, without limitation, pre- Separation claims associated with Old USX's or USX's corporate assets, directors, officers and employees.
(d) Policy limits under each of the Joint Insurance Arrangements associated with claims arising out of or relating to events or conditions occurring prior to the Separation Effective Time shall be applied on a first- come, first-served basis. Neither party shall be liable to the other in the event policy limits under any of the Joint Insurance Arrangements has been exhausted. USX and SteelCo shall not take any action that would prejudice the access of the other to coverage under the Joint Insurance Arrangements.
ARTICLE III
POST-SEPARATION INSURANCE
(a) At the option of USX or SteelCo, any such party may purchase extended reporting insurance for any or all of the Joint Insurance Arrangements to cover pre-Separation claims. In the event that both parties elect to purchase the same extended reporting insurance, the cost of such insurance associated to the pre-Separation periods will be split between USX and SteelCo on a 65% - 35% basis, respectively.
(b) Policy limits under each of the extended reporting insurance associated with pre-Separation periods shall be applied on a first-come, first- served basis. Neither party shall be liable to the other in the event policy limits under any extended reporting insurance has been exhausted. With respect to the purchase of extended reporting insurance, USX and SteelCo shall not take any action that would prejudice the access of the other to such coverage.
ARTICLE IV
TERM AND AMENDMENT
ARTICLE V
GENERAL PROVISIONS
If to SteelCo, to:
United States Steel LLC
600 Grant Street
Suite 6100
Pittsburgh, PA 15219-4776 Attention: General Counsel Facsimile: 412-433-1131
If to USX, to:
Marathon Oil Corporation
5555 San Felipe Road
Houston, TX 77056-2723
Attention: General Counsel
Facsimile: 713-296-4375
Such names and addresses may be changed by notice given in accordance with this
Section 5.6. Copies of all notices, requests, permissions, waivers, referrals
and all other communications hereunder given prior to the Separation Effective
Time shall be given to:
Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, NY 10036-6522 Attention: Roger S. Aaron, Esquire Facsimile: (212) 735-2000
any of the parties hereto without the prior written consent of the other party. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon SteelCo and USX and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written.
USX CORPORATION
By: ___________________________
Name: _________________________
Title: ________________________
UNITED STATES STEEL LLC
By: ___________________________
Name: _________________________
Title: ________________________
Exhibit 10.5
FORM OF
LICENSE AGREEMENT
W I T N E S S E T H:
NOW, THEREFORE, in furtherance of the foregoing and in consideration of the mutual promises and undertakings contained herein and in any other document executed in connection with this Agreement, the parties agree as follows:
ARTICLE I
DEFINITIONS
(a) The words "hereof", "herein", "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
ARTICLE II
LICENSE AND QUALITY CONTROL
ARTICLE III
INDEMNIFICATION
If the Indemnifying Party undertakes to defend against such Asserted Liability, the Indemnified Party shall cooperate fully with the Indemnifying Party and its counsel in the investigation, defense and settlement thereof, but the Indemnifying Party shall control the investigation, defense and settlement thereof. If the Indemnified Party,
desires to participate in any such defense, it may do so at its sole cost and expense. If the Indemnifying Party elects not to defend against such Asserted Liability, then the Indemnifying Party shall have the right to participate in any such defense at its sole cost and expense, but the Indemnified Party shall control the investigation, defense and settlement thereof at the sole cost and expense of the Indemnifying Party. The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), consent to any settlement unless such settlement (i) includes a complete release of the Indemnified Party and (ii) does not require the Indemnified Party to admit any liability or make or forego any payment or forego or take any action. The Indemnifying Party shall not be liable for any settlement of any Asserted Liability effected without its prior written consent (which consent shall not be unreasonably withheld).
(i) The Indemnifying Party agrees to indemnify any successors of the Indemnified Party to the same extent and in the same manner and on the same terms and conditions as the Indemnified Party is indemnified by the Indemnifying Party under this Article III.
(ii) The amount that an Indemnifying Party is required to pay to any Indemnified Party pursuant to this Article III shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered by or on behalf of such Indemnified Party in respect of the related Indemnifiable Loss. If an Indemnified Party shall have received the payment required by this Article III in respect of an Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Indemnifiable Loss, then such Indemnified Party shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received, up to the aggregate amount of any payments received
from such Indemnifying Party pursuant to this Article III in respect of such Indemnifiable Loss.
ARTICLE IV
TERM AND AMENDMENT
ARTICLE V
GENERAL PROVISIONS
if mailed (registered or certified, return receipt requested, properly addressed and postage prepaid):
If to SteelCo, to:
United States Steel LLC
600 Grant Street
Suite 6100
Pittsburgh, PA 15219-4776
Attention: General Counsel
Facsimile: 412-433-1131
If to USX, to:
Marathon Oil Corporation
5555 San Felipe Road
Houston, TX 77056-2723
Attention: General Counsel
Facsimile: 713-296-4375
Such names and addresses may be changed by notice given in accordance with this
Section 5.5. Copies of all notices, requests, permissions, waivers, referrals
and all other communications hereunder given prior to the Separation Effective
Time shall be given to:
Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, NY 10036-6522 Attention: Roger S. Aaron, Esquire Facsimile: (212) 735-2000
"Sections" or "Appendices" shall be deemed to be references to Articles or Sections hereof or Appendices hereto unless otherwise indicated.
Section 5.12 Remedies. The parties agree that money damages or other remedy at law would not be a sufficient or adequate remedy for any breach or violation of, or a default under, this Agreement by them and that in addition to all other remedies available to them, each of them shall be entitled to the fullest extent permitted by law to an injunction restraining such breach, violation or default or threatened breach, violation or default and to any other equitable relief, including specific performance, without bond or other security being required.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written.
USX CORPORATION
By: _________________________
Name: _______________________
Title: ______________________
UNITED STATES STEEL LLC
By: _________________________
Name: _______________________
Title: ______________________
Exhibit 10.8
FORM OF
UNITED STATES STEEL CORPORATION
ANNUAL INCENTIVE COMPENSATION PLAN
The objectives of the Plan are to advance the interests of the Corporation and its shareholders by providing officers and key employees incentive opportunities in order that the Corporation might attract, retain and motivate outstanding personnel by:
a) providing compensation opportunities which are competitive with those of other major corporations of comparable size and in similar businesses;
b) supporting the Corporation's goal-setting and strategic planning process; and
c) motivating officers and key employees to achieve annual business goals and contribute to team performance by allowing them to share in the risks and rewards of the business.
This Plan shall be administered by the Compensation and Organization Committee of the Board of Directors, which shall consist of not less than three directors of the Corporation who are appointed by the Board of Directors and who shall not be, and shall not have been, an officer or an employee of the Corporation. The Committee is authorized to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to delegate the granting of awards pursuant to guidelines established from time to time by the Committee, and to make all other determinations necessary for its administration.
Employees of the Corporation eligible to receive incentive compensation under the Plan are those in responsible positions whose performance may affect the Corporation's success. Participants shall include employees of United States Steel Corporation as well as employees of any subsidiary and/or joint ventures if such employee is specifically designated as a participant.
The Board of Directors, upon the recommendation of the Committee, shall determine the aggregate amount which may be awarded with respect to each year.
Within the limits of the Plan, annual incentive awards stated in dollars may be made to any or all eligible participants. Determinations as to participation and award level shall be made on the basis of the positions, responsibilities and accomplishments of the eligible employees; the performance of the respective individuals, divisions, departments and subsidiaries of the Corporation; the overall performance and best interests of the Corporation; the recommendations of the Chairman; and other pertinent factors; such factors to be given such weight as is deemed appropriate. The guidelines established by the Committee shall provide that no participant shall have an annual target award in excess of 150% of his annual base salary; any exceptions to this limit shall be specifically approved by the Committee. If a participant retires during the year with respect to which awards are made, the Committee may grant him an award, but it shall be prorated based on the number of months of active employment. If a participant dies during the year, the Committee may grant a prorated award to the employee's estate.
In its discretion, the Committee may permit participants in the Plan to defer the receipt of all or any part of any award granted under the Plan for such period and under such conditions as the Committee may determine, including the payment of interest on deferred awards if the Committee so determines. Unless receipt is deferred, all awards will be paid in cash as soon as practicable following the grant. No award will be considered as part of a participant's salary and no award shall be used in the calculation of any other pay, allowance or benefit except for benefits under the Supplemental Pension Program. No award will be paid to a person who quits or is discharged prior to payment of the award.
This Plan became effective as of January 1, 2002.
The Board of Directors may, from time to time, amend, suspend or terminate the Plan in whole or in part. If it is suspended or terminated, the Board of Directors may reinstate any or all of the provisions of the Plan.
The objective of the United States Steel Corporation Non-Officer
Restricted Stock Plan (the "Plan") is, through the issuance of restricted
stock ("Shares"), to advance the interests of United States Steel
Corporation, its subsidiaries, affiliates and joint ventures (the
"Corporation") (a) by promoting the retention of outstanding employees,
(b) by rewarding specific noteworthy achievements on the part of an
employee or a group of employees, (c) by motivating employees through
growth-related incentives to achieve long-term goals and (d) by aligning
the interests of employees with those of the stockholders.
The Plan shall be administered by the Salary & Benefits Committee for United States Steel Corporation (the "Administering Committee")
The Administering Committee shall establish its own guidelines for granting Shares and for general administration of grants made under the Plan. Such guidelines shall be subject to review by the Law, Tax and Accounting departments. The Committee shall have the power to cancel a grant made under the Plan when such cancellation is deemed appropriate.
The Compensation and Organization Committee of the United States Steel Corporation Board of Directors shall create and authorize pools for specific numbers and classes of Shares to be granted by the Administering Committee. Authorizations shall be made every two years, and no authorization shall exceed one percent of the total shares of either class of stock outstanding on December 31 of the preceding year. In addition, Shares related to grants that are forfeited or cancelled before vesting shall immediately become available for grants, and these Shares, as well as any unused portion of the percentage limit of Shares available from previous authorizations, shall be carried forward and available for grants in succeeding calendar years.
The United States Steel Corporation Board of Directors shall approve the initial Plan and all material amendments to the Plan.
Participation in this Plan shall be limited to exempt employees below the officer level, up to and including Salary Grade 48.
All grants shall be subject to such forfeiture and transfer restriction provisions as may be established by the Administering Committee. Grantees receiving an award shall have all the rights of a stockholder of the Corporation, including the right to vote the Shares and the right to receive any cash dividends paid thereon.
Shares granted under the Plan may be granted out of authorized and unissued shares, treasury shares or open-market purchases.
Shares granted to an employee shall vest as follows: 50 percent of the Shares received pursuant to a specific grant shall vest on the second anniversary of the grant; the remaining 50 percent shall vest on the fourth anniversary of the grant. Each grant shall be subject to the condition that the employee's continuous service with the Corporation continue through the date on which the Shares vest.
In the event of any change in the outstanding common stock of United States Steel Corporation by reason of a stock split, stock dividend, stock combination or reclassification, recapitalization or merger, or similar event, the Compensation and Organization Committee may appropriately adjust the number of Shares covered by a grant and make such other revisions to outstanding grants as it deems are equitably required.
The Corporation shall have the right to condition the obligation to deliver or the vesting of Shares under this Plan upon the employee paying United States Steel Corporation such amount as it may request to satisfy any liability for applicable withholding taxes. Employees may elect to have United States Steel Corporation withhold Shares to satisfy all or part of their withholding liability in the manner and to the extent provided for by the Administering Committee at the time of such election.
The Administering Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding grants as are consistent with the Plan, provided that, except for adjustments under Paragraph 7 hereof, no such action shall modify a grant in a manner adverse to the grantee without the grantee's prior consent, except as such modification is provided for or contemplated in the terms of the grant.
This Plan shall become effective on January 1, 2002.
EXHIBIT 10.13
SUBLEASE AND ASSIGNMENT
THIS SUBLEASE, effective as of July 2, 2001 (this "Sublease"), between USX HoldCo, Inc. a Delaware corporation ("USX") and United States Steel, LLC, a Delaware limited liability company ("USS").
W I T N E S S E T H:
WHEREAS, USX is the lessee under that certain Lease Agreement dated as of December 1, 1988 (the "Lease") between Meridian Trust Company as Owner Trustee and Lessor and USX regarding Continuous Slab Caster at USX Corporation's Fairfield Works in Fairfield, Alabama; and
WHEREAS, the parties intend that USS operate the Facility.
NOW, THEREFORE, the parties hereto, in consideration of the premises, the covenants herein set forth, and intending to be legally bound, agree as follows:
1. USX hereby subleases the Facility to USS on the same terms and conditions set forth in the Lease. USS shall have, with respect to USX, all the rights, duties and obligations of the Lessee under the Lease, and USX shall have, with respect to USS, all the rights, duties and obligations of Owner Trustee under the Lease.
2. USX hereby assigns its rights and interests under the Facilities Agreement and every other Operative Document to USS.
3. Notwithstanding the foregoing, this Sublease and Assignment does not release USX from any of its responsibilities under the Operative Documents.
4. This Sublease is expressly subject and subordinate to the Lease and Lessor's right thereunder.
5. Capitalized terms used in this Sublease that are not otherwise defined shall have the meanings given to them in the Lease.
WITNESS the due execution hereof as of the date first written.
USX Holdco, Inc. United States Steel, LLC
By: /s/ R M. Stanton By: /s/ R M. Stanton
------------------------- ---------------------------
Robert M. Stanton Robert M. Stanton
President President
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Exhibit 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-4 of United States Steel LLC of our reports dated February 7, 2001, relating to the combined financial statements of United States Steel and the consolidated financial statements of USX Corporation which appear in such Registration Statement. We also consent to the references to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP ------------------------------- PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania September 7, 2001 |
Exhibit 99.3
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON]
Board of Directors
USX Corporation
600 Grant Street
Pittsburgh, PA 15219
Members of the Board:
Reference is made to our opinion letter dated July 31, 2001 (our "Opinion") with respect to the separation of the U.S. Steel Group and the Marathon Group of USX Corporation ("USX") into two independent companies (the "Separation"). Our opinion is for the information of the Board of Directors of USX in connection with its consideration of such Separation and is not to be quoted or referred to, in whole or in part, in any registration statement, prospectus or proxy statement, or in any other document used in connection with the offering or sale of securities, nor for any other purpose, without our prior written consent.
In that regard, we hereby consent to the inclusion of our Opinion as Annex B-1 to the proxy statement/prospectus of USX included in the Registration Statement of United States Steel LLC on Form S-4 filed with the Securities and Exchange Commission on September 7, 2001 (the "Registration Statement"), relating to the Separation and references made to such Opinion in the Registration Statement under the captions (i) Summary--Opinions of Financial Advisors; (ii) Proposal One: The Separation--Background of the Separation; (iii) Proposal One: The Separation--Factors Considered by the Board of Directors in Approving the Separation and (iv) Proposal One: The Separation--Opinions of Financial Advisors. In giving such consent, we do not admit that we come within the category of persons whose consent is required under, nor do we admit that we are "experts" for purposes of, the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
CREDIT SUISSE FIRST BOSTON CORPORATION
/s/ Credit Suisse First Boston Corporation __________________________________________ September 7, 2001 |
Exhibit 99.4
[LETTERHEAD OF SALOMON SMITH BARNEY]
Board of Directors
USX Corporation
600 Grant Street
Pittsburgh, PA 15219
Members of the Board:
Reference is made to our opinion letter dated July 31, 2001 (our "Opinion") with respect to the separation of the U.S. Steel Group and the Marathon Group of USX Corporation ("USX") into two independent companies (the "Separation"). Our opinion is for the information of the Board of Directors of USX in connection with its consideration of such Separation and is not to be quoted or referred to, in whole or in part, in any registration statement, prospectus or proxy statement, or in any other document used in connection with the offering or sale of securities, nor for any other purpose, without our prior written consent.
In that regard, we hereby consent to the inclusion of our Opinion as Annex B-2 to the proxy statement/prospectus of USX included in the Registration Statement of United States Steel LLC on Form S-4 filed with the Securities and Exchange Commission on September 7, 2001 (the "Registration Statement"), relating to the Separation and references made to such Opinion in the Registration Statement under the captions (i) Summary--Opinions of Financial Advisors; (ii) Proposal One: The Separation--Background of the Separation; (iii) Proposal One: The Separation--Factors Considered by the Board of Directors in Approving the Separation and (iv) Proposal One: The Separation--Opinions of Financial Advisors. In giving such consent, we do not admit that we come within the category of persons whose consent is required under, nor do we admit that we are "experts" for purposes of, the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
SALOMON SMITH BARNEY INC.
/s/ SALOMON SMITH BARNEY INC. _____________________________ September 7, 2001 |