Exhibit 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On December 31, 2001, in a tax-free transaction, Marathon Oil
Corporation ("Marathon"), formerly USX Corporation, converted each share of its
USX-U. S. Steel Group class of common stock ("Steel Stock") into the right to
receive one share of United States Steel Corporation common stock
("Separation"). The net assets of United States Steel on December 31, 2001 were
approximately the same as the net assets attributable to Steel Stock at the time
of the Separation, except for a value transfer of $900 million in the form of
additional net debt and other financings retained by Marathon. During the last
six months of 2001, United States Steel completed a number of financings so
that, upon the Separation, the net debt and other financings of United States
Steel on a stand-alone basis were approximately equal to the net debt and other
financings attributable to the Steel Stock less the value transfer and the tax
settlement with Marathon. For further information on the Separation, see Notes 1
and 2 of the Financial Statements.
United States Steel's 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. The U. S. Steel Kosice ("USSK")
segment, primarily located in the Slovak Republic, produces and sells steel mill
products and coke mainly for the Central European market. Certain business
activities are conducted through joint ventures and partially owned companies,
such as USS-POSCO Industries LLC ("USS-POSCO"), PRO-TEC Coating Company
("PRO-TEC"), Clairton 1314B Partnership L.P., 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
Financial Statements and Notes to Financial Statements.
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 certain
employee-related obligations from LTV. See Note 5 to the Financial Statements.
On March 23, 2001, Transtar, Inc. ("Transtar") completed a
reorganization with its two voting shareholders, United States Steel and
Transtar Holdings, L.P. ("Holdings"), an affiliate of Blackstone Capital
Partners L.P. As a result of this transaction, United States Steel became sole
owner of Transtar and certain of its subsidiaries, including several rail and
barge operations. Holdings became owner of the other operating subsidiaries of
Transtar. See Note 5 to the 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" or similar words indicating
that future outcomes are not known with certainty and are 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 Supplementary Data - Disclosures About
Forward-Looking Information.
Critical Accounting Policies and Estimates
Management's discussion and analysis of its financial condition and
results of operations are based upon United States Steel's financial statements,
which have been prepared in accordance with accounting standards generally
accepted in the United States of America. The preparation of these financial
statements requires 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 amount of revenues and expenses
during the year. Management regularly evaluates these estimates, including those
related to the carrying value of property, plant and equipment, valuation
allowances for receivables, inventories and deferred income tax assets;
liabilities for deferred income taxes, potential tax deficiencies, environmental
obligations, potential litigation claims and settlements; and assets and
obligations related to employee benefits. Management estimates are based on
historical experience and various other assumptions that are believed to be
reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Accordingly, actual results may differ
materially from current expectations under different assumptions or conditions.
Management believes that the following critical accounting policies
affect the more significant judgments and estimates used in the preparation of
the financial statements.
Depreciation - United States Steel records depreciation primarily 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. Depreciation charges
for 2001, 2000 and 1999 were 85%, 94% and 99%, respectively, of straight-line
depreciation based on production levels for each of the years. For certain
equipment related to railroad operations, depreciation is recorded on the
straight-line method, utilizing a composite or grouped approach, based on
estimated lives of assets.
Asset Impairments - United States Steel evaluates the impairment of its
property, plant and equipment on an individual asset basis or by logical
groupings of assets. Asset impairments are recognized when the carrying value of
those productive assets exceed their aggregate projected undiscounted cash
flows. If future demand and market conditions are less favorable than those
projected by management, additional asset write-downs may be required.
Allowances for Doubtful Accounts - United States Steel maintains allowances for
doubtful accounts for estimated losses resulting from the inability of customers
to make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Inventories - United States Steel determines the cost of inventories primarily
under the last-in, first-out ("LIFO") method. Consequently, the overall carrying
value of inventories is significantly less than the replacement cost. United
States Steel writes down inventories for the difference between the carrying
value of the inventories and the estimated market value on a worldwide basis. If
actual market conditions are less favorable than those projected by management,
additional write-downs may be required.
Deferred Taxes - United States Steel records a valuation allowance to reduce
deferred tax assets to the amount that is more likely than not to be realized.
While United States Steel has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for the
valuation allowance, in the event that United States Steel were to determine
that it would be able to realize deferred tax assets in the future in excess of
the net recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made. Likewise, should United States
Steel determine that it would not be able to realize all or part of its deferred
tax assets in the future, an adjustment to the valuation allowance for deferred
tax assets would be charged to income in the period such determination was made.
United States Steel makes no provision for deferred U.S. income taxes
on the undistributed earnings of USSK and other consolidated foreign
subsidiaries because management intends to permanently reinvest such earnings in
foreign operations. If circumstances change and it is determined that earnings
will be remitted in the foreseeable future, a change would be required to record
the U.S. deferred tax liability for the amounts planned to be remitted.
Liabilities for Potential Tax Deficiencies - United States Steel records
liabilities for potential tax deficiencies. These liabilities are based on
management's judgment of the risk of loss should those items be challenged by
taxing authorities. In the event that United States Steel were to determine that
tax-related items would not be considered deficiencies or that items previously
not considered to be potential deficiencies could be considered as potential tax
deficiencies (as a result of an audit, tax ruling or other positions or
authority) an adjustment to the liability would be recorded through income in
the period such determination was made.
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. Remediation liabilities are accrued
based on estimates of known environmental exposures and are discounted in
certain instances. United States Steel regularly monitors the progress of
environmental remediation. Should studies indicate that the cost of remediation
is to be more than previously estimated, an additional accrual would be recorded
in the period in which such determination was made.
Accruals for Potential Litigation Claims and Settlements - United States Steel
records accruals for potential litigation claims and settlements when legal
counsel advises that an obligation is probable and reasonably estimable. Changes
in findings and negotiations as the cases progress cause changes in the recorded
accruals.
Pensions and Other Postretirement Benefits ("OPEB") - Net pension and OPEB
expense recorded for pension and other postretirement benefits are based on,
among other things, assumptions of the discount rate, estimated return on plan
assets, salary increases, the mortality of participants and the current level
and escalation of health care costs in the future. Changes in these and other
factors and differences between actual and assumed changes in the present value
of liabilities or assets of United States Steel's plans above certain thresholds
could cause net annual expense to increase or decrease materially from year to
year.
Management's Discussion and Analysis of Income
Due to the capital intensive nature of integrated steel production, the
principal drivers of United States Steel's financial results are price, volume
and mix. To the extent that these factors are affected by industry conditions
and the overall economic climate, revenues and income will reflect such
conditions.
Revenues and other income for each of the last three years are
summarized in the following table:
(Dollars in millions) 2001 2000 1999
--------------------------------------------------------------------------------------------
Revenues by product:
Sheet and semi-finished steel products............ $ 3,163 $ 3,288 $ 3,433
Tubular products.................................. 755 754 221
Plate and tin mill products....................... 1,273 977 919
Raw materials (coal, coke and iron ore) .......... 485 626 549
Other/(a)/........................................ 610 445 414
Income (loss) from investees......................... 64 (8) (89)
Net gains on disposal of assets...................... 22 46 21
Other income......................................... 3 4 2
-------- -------- --------
Total revenues and other income................. $ 6,375 $ 6,132 $ 5,470
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/(a)/ Includes revenue from the sale of steel production by-products,
real estate development, resource management, and engineering and
consulting services and beginning in 2001, transportation
services.
Total revenues and other income increased by $243 million in 2001 from
2000 primarily due to the inclusion of USSK revenues for the full year, the
inclusion of Transtar revenues following the reorganization and higher income
from investees relating to the gain on the Transtar reorganization, partially
offset by lower domestic shipment volumes (domestic steel shipments decreased
955,000 tons) and lower average domestic steel product prices (average prices
decreased $23 per ton). Total revenues and other income in 2000 increased by
$662 million from 1999 primarily due to the consolidation of 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 United States Steel's investment in
USS/Kobe Steel Company ("USS/Kobe").
Income (loss) from operations for United States Steel for the last
three years was (a):
(Dollars in millions) 2001 2000 1999
---------------------------------------------------------------------------------------------
Segment income (loss) for Domestic Steel.............. $ (461) $ 98 $ 115
Segment income for U. S. Steel Kosice................. 123 2 -
-------- -------- --------
Income (loss) from reportable segments.......... $ (338) $ 100 $ 115
Net pension credits................................... 146 266 193
Costs related to former businesses (b)................ (76) (86) (83)
Administrative expenses............................... (22) (25) (17)
-------- -------- --------
Total........................................... $ (290) $ 255 $ 208
Other items not allocated to segment income:
Gain on Transtar reorganization.................... 68 - -
Insurance recoveries related to USS-POSCO fire (c). 46 - -
Asset impairments - trade receivables............ (100) (8) -
- other receivables............ (46) - -
Impairment and other costs related to
investments in equity investees.................. - (36) (54)
Loss on investment used to satisfy indexed
debt obligations (d)............................. - - (22)
Costs related to Fairless shutdown................. (38) - -
Costs related to Separation........................ (25) - -
Asset impairments - intangible assets............ (20) - -
- coal......................... - (71) -
Environmental and legal contingencies.............. - (36) (17)
Voluntary early retirement program
pension settlement............................... - - 35
-------- -------- --------
Total income (loss) from operations............. $ (405) $ 104 $ 150
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(a) Certain amounts have been removed from segment income and appear
in items not allocated to segments for consistency with current-
year presentation method.
(b) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of
United States Steel.
(c) In excess of facility repair costs.
(d) For further details, see Note 6 to the Financial Statements.
Segment income (loss) for Domestic Steel
Domestic Steel operations recorded a segment loss of $461 million in
2001 versus segment income of $98 million in 2000, a decrease of $559 million.
The decrease in segment income was primarily due to lower prices, primarily for
sheet products, lower domestic shipment volumes which resulted in less efficient
operating rates and higher unit costs, lower income from coke and taconite
pellet operations, lower results from tin operations during the phase out of
operations at Fairless and higher than anticipated start-up and operating
expenses associated with the March acquisition of East Chicago Tin, and business
interruption effects at USS-POSCO following the cold mill fire in May, some of
which were offset by insurance recoveries already received in the second half of
2001. Offsetting these decreases were improved results from coal operations due
to improved operating and geological conditions as well as higher tubular prices
during the first half of 2001.
Segment income for Domestic Steel operations in 2000 decreased $17
million from 1999. The decrease in segment income for Domestic Steel was
primarily due to lower throughput, lower income from raw materials operations,
particularly coal operations, and lower sheet shipments resulting from high
levels of imports.
Segment income for U. S. Steel Kosice
USSK segment income for the full-year 2001 was $123 million compared to
$2 million in 2000 for the period following United States Steel's acquisition of
USSK on November 24, 2000. The increase is primarily due to United States
Steel's full year of ownership, changes in commercial strategy, strong customer
focused marketing and a favorable cost structure.
Items not allocated to segments:
Net periodic pension credits, which are primarily noncash, totaled $120
million in 2001, $273 million in 2000 and $234 million in 1999. The decrease of
$153 million in the net periodic pension credit from 2000 to 2001 was primarily
due to the $69 million effect of the transition asset being fully amortized in
2000 and an unfavorable change in the amortization of actuarial (gains)/losses.
The increase of $39 million from 1999 to 2000 was primarily due to a favorable
change in the amortization of actuarial (gains)/losses. Net periodic pension
credits in 2001 and 1999 include settlement and termination effects. For
additional information on pensions, see Note 12 to the Financial Statements.
Gain on Transtar reorganization represents United States Steel's share
of the gain in 2001. Because this was a transaction with a noncontrolling
shareholder, Transtar, Inc. recognized a gain by comparing the carrying value of
the businesses sold to their fair value. See Note 5 to Financial Statements.
Insurance recoveries related to USS-POSCO fire represent United States
Steel's share of insurance recoveries in excess of facility repair costs for the
cold-rolling mill fire at USS-POSCO in 2001.
Asset impairments - Trade Receivables were for charges related to
receivables exposure from financially distressed steel companies, primarily
Republic, in 2000 and 2001.
Asset impairments - Other Receivables were for charges related to
retiree medical cost reimbursements owed by Republic in 2001.
In 2000, impairment and other costs related to investments in equity
investees totaled $36 million to establish reserves against notes from Republic
and to represent United States Steel's share of Republic special charges which
resulted from the completion of a financial restructuring of Republic. In 1999,
impairment and other costs related to investments in equity investees totaled
$54 million related to the impairment of United States Steel's investment in
USS/Kobe, costs related to the formation of Republic and other non-recurring
equity investee charges.
Income from operations in 1999 also included a loss on investment used
to satisfy indexed debt obligations of $22 million from the termination of
ownership in RTI International Metals, Inc. ("RTI"). For further discussion, see
Note 6 to the Financial Statements.
Costs related to Fairless shutdown resulted from the permanent shutdown
of the cold rolling and tin mill facilities at Fairless Works in 2001.
Costs related to the Separation were for United States Steel's share of
professional fees and expenses and certain other costs directly attributable to
the Separation in 2001.
Asset impairments - Intangible Asset was for the impairment of an
intangible asset in 2001 related to the five-year agreement for LTV to supply
United States Steel with pickled hot bands entered into in conjunction with the
acquisition of LTV's tin mill products business.
Asset impairments - Coal was for asset impairments at coal mines in
Alabama and West Virginia in 2000 following a reassessment of long-term
prospects after adverse geological conditions were encountered.
Environmental and legal contingencies relate to certain environmental
and legal accruals in 2000 and 1999.
The voluntary early retirement program pension settlement in 1999
relates to a favorable pension settlement primarily related to salaried
employees.
Selling, general and administrative expenses increased by $315 million
in 2001 as compared to 2000. The increase was due to several factors, including
the $157 million decrease in the net periodic pension credit previously
discussed. Other contributing factors were the increase in costs in 2001 as a
result of the USSK acquisition and the reorganization of Transtar, Separation
costs and the impairment of retiree medical cost reimbursements owed by
Republic. The increase in selling, general and administrative expenses of $60
million from 1999 to 2000 was primarily due to a $42 million decrease in the
portion of the net periodic pension credit recorded in selling, general and
administrative expenses, as well as increased costs following the acquisition of
USSK.
Net interest and other financial costs for each of the last three years
are summarized in the following table:
(Dollars in millions) 2001 2000 1999
-------------------------------------------------------------------------------------------
Net interest and other financial costs............... $ 141 $ 105 $ 74
Plus:
Favorable adjustment to
carrying value of Indexed Debt/(a)/............. - - 13
Favorable adjustment to
interest related to prior years' taxes.......... 67 - -
-------- -------- -------
Net interest and other financial costs
adjusted to exclude above item.................... $ 208 $ 105 $ 87
-------------------------------------------------------------------------------------------
/(a)/ In December 1996, USX issued $117 million of 6-3/4% Exchangeable
Notes Due February 1, 2000 ("Indexed Debt") indexed to the price
of RTI common stock. The carrying value of Indexed Debt was
adjusted quarterly to settlement value, based on changes in the
value of RTI common stock. Any resulting adjustment was credited
to income and included in interest and other financial costs. For
further discussion of Indexed Debt, see Note 6 to the Financial
Statements.
Adjusted net interest and other financial costs increased by $103
million in 2001 as compared with 2000. This increase was largely due to higher
average debt levels, which resulted from negative cash flow and 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.
The credit for income taxes in 2001 was $328 million primarily as a
result of higher losses from operations. The credit included a $33 million
deferred tax benefit associated with the Transtar reorganization. In addition,
as a result of Slovak Republic laws regarding tax credits and certain tax
planning strategies to permanently reinvest earnings in foreign operations,
virtually no income tax provision is recorded for USSK income. If circumstances
change and it is determined that earnings will be remitted in the foreseeable
future, a charge would be required to record the U.S. deferred tax liability for
the amounts planned to be remitted. The provision for income taxes in 2000
decreased $5 million 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. See also Note 14 to the
Financial Statements.
The extraordinary loss on extinguishment of debt of $7 million, net of
income tax benefit, in 1999 included a $5 million loss resulting from the
satisfaction of the indexed debt and a $2 million loss for United States Steel's
share of Republic's extraordinary loss related to the early extinguishment of
debt. See also Note 6 to the Financial Statements.
Management's Discussion and Analysis of Operations
The year 2001 turned out to be an extremely difficult one for the
domestic steel industry. Steel imports to the United States accounted for an
estimated 24%, 27% and 26% of the domestic steel market for 2001, 2000 and 1999,
respectively. In 2001, imports of steel pipe increased 9% and imports of hot
rolled sheets decreased 59%, compared to 2000.
Injurious levels of imports continued to disrupt an already weakened
market in which domestic steel consumption plummeted from an annualized rate of
119 million tons in the first half to 98 million tons in the fourth quarter. The
3% average growth in the domestic economy predicted by economists never
materialized - largely due to a worldwide economic recession in the second half
and the impact of the September 11 tragedies. Contributing to the decline in net
income was a decrease in average realized domestic prices of 5% compared to the
2000 average and higher unit costs due to depressed production levels at all of
our domestic plants.
Total shipments from the Domestic Steel segment were 9.8 million tons in
2001, 10.8 million tons in 2000 and 10.6 million tons in 1999, and comprised
approximately 9.9% of the domestic steel market in 2001. Domestic Steel
shipments in 2001 were affected by a weak domestic economy, which reduced demand
for sheet, plate and tubular products. Shipments in 1999 were reduced because of
weak tubular markets. High import levels impacted all three years. Exports
accounted for approximately 5% of our shipments from Domestic Steel in 2001, 5%
in 2000 and 3% in 1999.
USSK shipments were 3.7 million net tons in 2001 and 0.3 million net tons
in 2000 in the short period following the acquisition.
Domestic raw steel production was 10.1 million tons in 2001, compared with
11.4 million tons in 2000 and 12.0 million tons in 1999. Domestic raw steel
production averaged 79% of capability in 2001, compared with 89% of capability
in 2000 and 94% of capability in 1999. In 2001, domestic raw steel production
was negatively impacted by poor economic conditions and the high level of
imports. In 2000, domestic raw steel production was negatively impacted by a
planned reline at the 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.
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. United
States Steel's stated annual domestic raw steel production capability was 12.8
million tons in 2001, 2000 and 1999.
USSK raw steel production was 4.1 million tons in 2001, or 81% of USSK's
stated annual raw steel production capability of 5.0 million net tons.
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 U.S. Department of Commerce
("Commerce") has found margins in all of the cases. The International Trade
Commission ("ITC") had previously found material injury to the domestic industry
in the cases against Argentina and South Africa, and, on November 2, 2001, the
ITC found material injury to the domestic industry in the cases against the
remaining countries.
On December 19, 2001, culminating a process which began in June 2001
regarding investigations under Section 201 of the Trade Act of 1974, the ITC
commissioners communicated their remedy recommendations to the President of the
United States. Five of the six commissioners recommended that tariffs of 20% to
40% be imposed on imports of hot-rolled, cold-rolled and corrosion-resistant
products for four years, subject to reductions of the tariffs from year to year.
The three commissioners who had previously found that imports of tin mill
products were a cause of serious injury to the domestic industry recommended the
same tariff remedies be applied to that product that they recommended for hot-
rolled, cold-rolled and corrosion-resistant products. Two of the commissioners
recommended the same remedy for imports of slabs, while four of the
commissioners recommended subjecting slab imports to these tariffs only after
certain quantities of slabs enter the country without special tariffs. The
remaining commissioner recommended declining levels of quotas for a three-year
period. The President is now reviewing the recommendations and will determine
what remedies, if any, to impose. In response to the recommendations, United
States Steel commented that under current market conditions, 20% tariffs are
inadequate and urged the President to act quickly to adopt 40% tariffs on all
flat-rolled imports, including slabs. Management is unable to predict the
outcome of the Section 201 actions, or its effect on our results or stock price.
On September 28, 2001, United States Steel joined with seven other
producers to file trade cases against cold-rolled carbon steel flat products
from 20 countries (Argentina, Australia, Belgium, Brazil, China, France,
Germany, India, Japan, Korea, Netherlands, New Zealand, Russia, South Africa,
Spain, Sweden, Taiwan, Thailand, Turkey, and Venezuela). AD cases were filed
against all the countries and CVD cases were filed against Argentina, Brazil,
France, and Korea. On November 13, 2001, the ITC determined that there is a
reasonable indication that the U.S. industry is materially injured or threatened
with material injury by reason of the imports in question. These cases will be
the subject of continuing investigations at both Commerce and the ITC.
United States Steel believes that the remedies provided by AD and CVD cases
are insufficient to correct the widespread dumping and subsidy abuses that
currently characterize steel imports into our country and has, therefore, urged
the U.S. government to take actions such as those in President Bush's three-part
program to address the excessive imports of steel that have been depressing
markets in the United States. 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.
Management's Discussion and Analysis of Financial Condition, Cash Flows and
Liquidity
Current assets at year-end 2001 decreased $644 million from year-end 2000
primarily due to the settlement in 2001 of the $364 million income tax
receivable from Marathon established in 2000, decreased trade receivables
including receivables subject to a security interest, and a decrease in cash and
cash equivalents. The proceeds from the settlement of the income tax receivable
from Marathon were used to reduce debt attributed to United States Steel.
Investments and long-term receivables decreased $93 million from year-end
2000 primarily due to the reorganization of Transtar in March of 2001, which
converted an equity method investee into a consolidated subsidiary.
Net property, plant and equipment at year-end 2001 increased $345 million
from year-end 2000 primarily due to the Transtar reorganization and the
acquisition of East Chicago Tin, which were noncash transactions.
Current liabilities at year-end 2001 decreased $132 million from year-end
2000 primarily due to a decrease in accounts payable and long-term debt due
within one year, partially offset by an increase in accrued taxes and amounts
payable to Marathon in connection with the Separation.
Total long-term debt and notes payable at December 31, 2001 was $1,434
million, $802 million lower than year-end 2000. The decrease in debt was
primarily due to the $900 million value transfer from Marathon and the receipt
of $819 million of favorable tax settlements with Marathon; partially offset by
negative operating cash flow of $144 million absent the Marathon tax
settlements, net cash used in investing activities of $239 million, debt
repayments of $370 million and dividends paid of $57 million.
Employee benefit liabilities at December 31, 2001 increased $241 million
from year-end 2000 of which $152 million reflected mergers of liabilities
associated with the Transtar reorganization, the acquisition of LTV tin mill
properties and medical expenses of former Lorain Works retirees paid by United
States Steel which are pending collection under Republic bankruptcy proceedings.
The remainder of the increase was primarily due to ongoing accruals in excess of
cash payments from company assets. Following the elective $500 million Voluntary
Employee Benefit Association ("VEBA") funding in the fourth quarter of 2000,
which decreased the employee benefits liability, most union retiree medical
claims are being paid from the VEBA instead of company assets.
Preferred stock of subsidiary and mandatorily redeemable convertible
preferred securities of a subsidiary trust holding solely junior subordinated
convertible debentures decreased $66 million and $183 million, respectively,
from year-end 2000 in connection with the Separation. These amounts were
previously attributed to United States Steel under the Marathon capital
structure.
Net cash provided from operating activities of $669 million increased in
2001 compared to 2000. The increase was primarily due to the receipt of
favorable intergroup tax settlements from Marathon totaling $819 million in the
2001 period compared to a favorable intergroup settlement of $91 million in the
2000 period and the absence of a $530 million elective contribution to a VEBA
and non-union retiree life insurance trust. The $819 million tax settlement is
reflected in net cash provided by operating activities primarily as favorable
working capital changes of $364 million related to the settlement of the income
tax receivable established in 2000 arising from tax attributes primarily
generated in the year 2000; increases in net income of $426 million for tax
benefits generated by United States Steel in 2001; and net increases in all
other items net of $15 million for state tax benefits generated in 2000. The
last two items were included in the $441 million settlement with Marathon, which
occurred in 2001 as a result of the Separation. Absent these intergroup tax
settlements in 2001 and 2000 and the $530 million of elective contributions in
2000 to a VEBA and non-union retiree life insurance
trust, net cash used in operating activities decreased by $38 million. Cash
payments of employee benefit liabilities were lower because $152 million was
paid from assets held in trust for the plan in 2001 compared to $41 million in
2000 primarily as a result of approximately $112 million of funds from the VEBA
being used to pay retiree medical and life insurance benefits for union retirees
in 2001. In addition, working capital improved. These improvements were
partially offset by decreased net income.
Net cash used in operating activities in 2000 was $627 million and
reflected the $500 million elective contribution to a VEBA, a $30 million
elective contribution to a non-union retiree life insurance trust and an income
tax receivable from Marathon of $364 million. These unfavorable effects were
partially offset by a $91 million income tax settlement with Marathon received
in 2000 primarily for the year 1999 in accordance with the group tax allocation
policy. The $500 million VEBA contribution has provided United States Steel with
the flexibility to pay ongoing costs of providing USWA retiree health care and
life insurance benefits from the VEBA instead of from corporate cash flow.
Net cash used in operating activities was $80 million in 1999 including a
net payment of $320 million under a terminated accounts receivable program.
Excluding the non-recurring VEBA contributions and the accounts receivable
facility termination as well as the tax settlements with Marathon in both
years, net cash provided from operating activities decreased $430 million in
2000 due mainly to decreased profitability and an increase in working capital.
Capital expenditures of $287 million in 2001 included exercising a buyout
option of a lease for half of the Gary Works No. 2 Slab Caster; repairs to the
No. 3 blast furnace at the Mon Valley Works; work on the No. 2 stove at the No.
6 blast furnace at Gary Works; the completion of the replacement coke battery
thruwalls at Gary Works; the completion of an upgrade to the Mon Valley Works
cold reduction mill; systems development projects; and projects at USSK,
including the tin mill expansion and the vacuum degasser project.
Capital expenditures of $244 million in 2000 included exercising an early
buyout option of a lease for 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 the Gary Works hot strip mill; a blast furnace
stove replacement at Gary Works; and the continuation of an upgrade to the Mon
Valley Works cold reduction mill.
Capital expenditures of $287 million in 1999 included the completion of the
64" pickle line at Mon Valley Works; the replacement of one coiler at the Gary
Works hot strip mill; an upgrade to the Mon Valley Works 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 Works
pipemill to use rounds instead of square blooms.
Contract commitments for capital expenditures at year-end 2001 were $84
million, compared with $206 million at year-end 2000. USSK has a commitment to
the Slovak government to spend $700 million for a capital improvements program
at USSK, subject to certain conditions, over a period commencing with the
acquisition date and ending on December 31, 2010. As of December 31, 2001, USSK
had spent $66 million on this capital improvement program.
Capital expenditures for 2002 are expected to be approximately $300
million, including $105 million for USSK. This estimate anticipates entering
into operating leases for certain mobile and systems equipment, valued at
approximately $40 million, the acquisition of which would be included in capital
spending if the leases are not completed. Major expenditures include the
installation of a new quench and temper line at Lorain Tubular; continued
information systems development at Straightline; and projects at USSK, including
continued work on the new tin and continuous annealing lines and the completion
of the vacuum degasser. Over and above this capital spending, $37.5 million will
be paid to VSZ by USSK in both 2002 and 2003 to complete payment for the USSK
acquisition.
The preceding statement concerning expected 2002 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, business conditions, availability
of capital, whether or not assets are purchased or financed by operating leases,
and unforeseen hazards such as weather conditions, explosions or fires, which
could delay the timing of completion of particular capital projects.
Accordingly, actual results may differ materially from current expectations in
the forward-looking statement.
The acquisition of U. S. Steel Kosice s.r.o., consisted of cash payments of
$14 million in 2001 and net cash payments of $10 million in 2000, which
reflected $69 million of cash payments in 2000 less $59 million of cash acquired
in the transaction. Two additional payments of $37.5 million each are to be made
to VSZ in 2002 and 2003 related to the purchase. The first quarter 2001
acquisition of East Chicago Tin and reorganization of Transtar were noncash
transactions. See also Note 5 to the Financial Statements.
Investees - return of capital in 2001 of $13 million reflected a return of
capital on an investment in stock of VSZ in which United States Steel holds a
25% interest.
Net change in attributed portion of Marathon consolidated debt and other
financings was a decrease of $74 million in 2001 compared to an increase of
$1,208 million and $147 million in 2000 and 1999, respectively. The decrease in
2001 primarily reflected the net effects of cash provided from operating
activities less cash used for investing activities and dividend payments. 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 $40 million from year 2000 due to a decrease in
the quarterly dividend rate from $0.25 to $0.10 per share paid to USX-U. S.
Steel Group common stockholders, effective with the June 2001 payment. After the
Separation, United States Steel established an initial quarterly dividend rate
of $0.05 per share effective with the March 2002 payment.
Debt Ratings
As of December 31, 2001, Moody's Investor Services, Inc. assigned a
corporate credit rating of Ba3 to United States Steel with negative
implications. On January 17, 2002, Standard & Poor's Corp. placed the BB
corporate credit rating for United States Steel on credit watch with negative
implications. Additionally, Moody's and Standard & Poor's have assigned Ba3 and
BB, respectively, to United States Steel's senior unsecured debt.
Liquidity
In November 2001, United States Steel entered into a five-year Receivables
Purchase Agreement with financial institutions. United States Steel established
a wholly owned subsidiary, United States Steel Receivables LLC, which is a
special-purpose, bankruptcy-remote entity that acquires, on a daily basis,
eligible trade receivables generated by United States Steel and certain of its
subsidiaries. Fundings under the facility are limited to the lesser of eligible
receivables or $400 million. As of February 28, 2002, United States Steel had
$299 million of eligible receivables, of which $200 million were sold, primarily
to fund working capital needs to build inventory based on increased order rates.
In addition, United States Steel entered into a three-year revolving credit
facility expiring December 31, 2004, that provides for borrowings of up to $400
million secured by all domestic inventory and related assets ("Inventory
Facility"), including receivables other than those sold under the Receivables
Purchase Agreement. As of February 28, 2002, $249 million was available to
United States Steel under the Inventory Facility.
USSK has bank credit facilities aggregating $50 million. At December 31,
2001, there were no borrowings against these facilities. If USSK were to default
under the $325 million outstanding loan, lenders could refuse to allow
additional borrowing under the $40 million facility; however, outstanding loans
would not be called.
United States Steel currently has Senior Notes outstanding in the aggregate
principal amount of $535 million. The Senior Notes impose significant
restrictions on United States Steel such as the following: restrictions on
payments of dividends; limits on additional borrowings, including limiting the
amount of borrowings secured by inventories or accounts receivable; limits on
sale/leasebacks; limits on the use of funds from asset sales and sale of the
stock of subsidiaries; and restrictions on our ability to invest in joint
ventures or make certain acquisitions. The Inventory Facility imposes additional
restrictions on United States Steel including the following: effective September
30, 2002, United States Steel must meet an interest expense coverage ratio of at
least 2 to 1 through March 30, 2003 and 2.5 to 1 thereafter and a leverage ratio
of no more
than 6 to 1 through December 30, 2002, 5.5 to 1 through March 30, 2003, 5 to 1
through June 29, 2003, 4.5 to 1 through September 29, 2003, 4 to 1 through March
30, 2004 and 3.75 to 1 thereafter; limitations on capital expenditures; and
restrictions on investments. If these covenants are breached, or if we fail to
make payments under our material debt obligations or the Receivables Purchase
Agreement, creditors would be able to terminate their commitments to make
further loans, declare their outstanding obligations immediately due and payable
and foreclose on any collateral, and it may also cause termination events to
occur under the Receivables Purchase Agreement and a default under the Senior
Notes. Additional indebtedness that United States Steel may incur in the future
may also contain similar covenants, as well as other restrictive provisions.
Cross-acceleration clauses in the Receivables Purchase Agreement, the Inventory
Facility, the Senior Notes and any future additional indebtedness could have an
adverse effect upon our financial position and liquidity.
United States Steel has utilized surety bonds to provide financial
assurance for certain transactions and business activities. The total amount of
active surety bonds currently being used for financial assurance purposes is
approximately $255 million. Recent events have caused major changes in the
surety bond market including significant increases in surety bond premiums.
These factors, together with our non-investment grade credit rating, may cause
United States Steel to replace some surety bonds with other forms of financial
assurance, or provide some form of collateral to the surety bond providers in
order to keep bonds in place. The other forms of financial assurance or
collateral could include financial instruments that are supported by either the
Receivables Purchase Agreement or Inventory Facility. The use of these types of
financial instruments for financial assurance and collateral will have a
negative impact on liquidity.
United States Steel is contingently liable for debt and other obligations
of Marathon in the amount of $359 million as of December 31, 2001. Marathon 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,
the holders of the Marathon industrial revenue bonds assumed by United States
Steel and such other obligations may declare them immediately due and payable.
If that occurs, United States Steel may not be able to satisfy such obligations.
See Note 11 to the Financial Statements for further information on the
industrial revenue bonds. In addition, if Marathon loses its investment grade
ratings, certain of these obligations will be considered indebtedness under the
Senior Notes indenture and for covenant calculations under the Inventory
Facility. This occurrence could prevent United States Steel from incurring
additional indebtedness under the Senior Notes or may cause a default under the
Inventory Facility.
United States Steel is the sole general partner of and owns a 10 percent
equity interest in Clairton 1314B Partnership, L.P. As general partner, United
States Steel is responsible for operating and selling coke and byproducts from
the partnership's three coke batteries located at United States Steel's Clairton
Works. United States Steel's share of profits and losses is currently 1.75%,
which will increase to 45.75% when the limited partners achieve a specified
return, which is currently expected to occur this year. The partnership at times
had operating cash shortfalls after payment of distributions to the partners in
2001 that were funded with loans from United States Steel. As of December 31,
2001, the partnership owed United States Steel $3 million, which was repaid in
January 2002. United States Steel may dissolve the partnership under certain
circumstances including if it is required to make equity investments or loans in
excess of $150 million to fund such shortfalls.
The following table summarizes United States Steel's liquidity as of
December 31, 2001:
(Dollars in millions)
-------------------------------------------------------------------
Cash and cash equivalents............................... $ 147
Amount available under Receivables
Purchase Agreement..................................... 258
Amount available under Inventory Facility .............. 250
Amounts available under USSK credit facilities.......... 50
-------
Total estimated liquidity............................ $ 705
-------------------------------------------------------------------
The following table summarizes United States Steel's contractual
obligations and commercial commitments at December 31, 2001, and the effect such
obligations and commitments are expected to have on its liquidity and cash flow
in future periods.
(Dollars in millions)
--------------------------------------------------------------------------------------------------------------
Payments Due By Period
Less Than 1-3 4-5 Beyond
Contractual Obligations Total 1 Year Years Years 5 Years
--------------------------------------------------------------------------------------------------------------
Long-term debt............................... $ 1,380 $ 26 $ 40 $ 40 $ 1,274
Capital leases (a)........................... 134 14 24 22 74
Operating leases (a)......................... 417 74 112 73 158
Capital commitments (b) (f).................. 718 - - - 718
Commitments under lease agreements (b)....... 2 1 1 - -
Environmental commitments (b) (f)............ 138 16 - - 122
Usher Separation bonus (b)................... 3 - 3 - -
Additional consideration for
USSK purchase (c)........................... 75 38 37 - -
-------- -------- -------- -------- --------
Total contractual cash obligations..... $ 2,867 $ 169 $ 217 $ 135 $ 2,346
--------------------------------------------------------------------------------------------------------------
Standby letters of credit (d)................ $ 1 $ 1 $ - $ - $ -
Surety bonds (f)............................. 255 - - - 255
Clairton 1314B Partnership(e) (f)............ 150 - - - 150
Guarantees of indebtedness of
unconsolidated entities (b) (f)............. 32 - - - 32
Contingent liabilities:
- Marathon obligations (b).................. 359 - 16 191 152
- Take or pay arrangement (b)............... 105 17 34 34 20
-------- -------- -------- -------- --------
Total commercial commitments........... $ 902 $ 18 $ 50 $ 225 $ 609
--------------------------------------------------------------------------------------------------------------
(a) See Note 17 to the Financial Statements.
(b) See Note 26 to the Financial Statements.
(c) See Note 5 to the Financial Statements.
(d) Guaranteed by Marathon.
(e) See Note 16 to the Financial Statements.
(f) Timing of potential cash outflows is not determinable.
Contingent lease payments have been excluded from the above table.
Contingent lease payments relate to operating lease agreements that include a
floating rental charge, which is associated to a variable component. Future
contingent lease payments are not determinable to any degree of certainty.
United States Steel's annual incurred contingent lease expense is disclosed in
Note 17 to the Financial Statements. Additionally, recorded liabilities related
to deferred income taxes, employee benefits and other liabilities that may have
an impact on liquidity and cash flow in future periods are excluded from the
above table.
United States Steel management believes that our liquidity will be adequate
to satisfy our obligations for the foreseeable future, including obligations 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 financings 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. However, there is no assurance that our business will
generate sufficient operating cash flow or that external financing sources will
be available in an amount sufficient to enable us to service or refinance our
indebtedness or to fund other liquidity needs. If there is a prolonged delay in
the recovery of the manufacturing sector of the U.S. economy, United States
Steel believes that it can maintain adequate liquidity through a combination of
deferral of nonessential capital spending, sales of non-strategic assets and
other cash conservation measures.
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), levels of inventories and accounts receivable, 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, the levels of United States Steel's outstanding debt
and credit ratings by rating agencies.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk for
discussion of derivative instruments and associated market risk for United
States Steel.
Management's Discussion and Analysis of 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, 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.
USSK is subject to the 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. USSK has also entered into an
agreement with the Slovak government to bring, over time, its facilities into
European Union environmental compliance.
In addition, United States Steel expects to incur capital and operating
expenditures to meet environmental standards under the Slovak Republic's
environmental laws for its USSK operation.
United States Steel's environmental expenditures for the last three
years were (a):
(Dollars in millions) 2001 2000 1999
-------------------------------------------------------------------------------------------
Domestic:
Capital........................................... $ 5 $ 18 $ 32
Compliance
Operating & maintenance........................ 184 194 199
Remediation (b) ............................... 26 18 22
-------- -------- -------
Total Domestic........................ $ 215 $ 230 $ 253
USSK:
Capital........................................... $ 10 $ - $ -
Compliance
Operating & maintenance........................ 6 - -
Remediation.................................... - - -
-------- -------- -------
Total USSK............................ $ 16 $ - $ -
Total United States Steel.......... $ 231 $ 230 $ 253
-------------------------------------------------------------------------------------------
(a) Based on previously established U. S. Department of Commerce survey
guidelines.
(b) These amounts include spending charged against remediation reserves,
net of recoveries where permissible, but do not include noncash
provisions recorded for environmental remediation.
United States Steel's environmental capital expenditures accounted for 5%,
7% and 11% of total capital expenditures in 2001, 2000 and 1999, respectively.
Compliance expenditures represented 3% of United States Steel's total costs
and expenses in 2001 and 4% of United States Steel's total costs and expenses in
2000 and 1999. Remediation spending during 1999 to 2001 was mainly related to
remediation activities at former and present operating locations. These projects
include remediation of contaminated sediments in a river that receives
discharges from the Gary Works and the closure of permitted hazardous and non-
hazardous waste landfills.
The Resource Conservation and Recovery Act ("RCRA") establishes standards
for the management of solid and hazardous wastes. Besides affecting current
waste disposal practices, RCRA also addresses the environmental effects of
certain past waste disposal operations, the recycling of wastes and the
regulation of storage tanks.
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 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 potentially responsible
party ("PRP") at 19 waste sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") as of December 31, 2001. In addition,
there are 13 sites related to United States Steel where it has received
information requests or other indications that it may be a PRP under CERCLA but
where sufficient information is not presently available to confirm the existence
of liability or make any judgment as to the amount thereof. There are also 34
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. See Note 26 to
the Financial Statements.
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 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. 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 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.
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 EPA, capital improvements were made to upgrade
plant systems to comply with the NPDES requirements. As of December 31, 2001,
the sediment
remediation project is an approved final interim measure under the corrective
action program for Gary Works and is expected to cost approximately $35.2
million over the next five years. Estimated remediation and monitoring costs for
this project have been accrued.
At the former Duluth, Minnesota Works, United States Steel spent a
total of approximately $11.4 million through 2001. The Duluth Works was listed
by the Minnesota Pollution Control Agency under the Minnesota Environmental
Response and Liability Act on its Permanent List of Priorities. The EPA has
consolidated and included the Duluth Works site with the other 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. Depending upon the method and extent of remediation at this site,
future costs are presently unkown and indeterminable.
In 1997, 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 United States
Steel and Kobe until December 31, 1999, when United States Steel purchased all
of Kobe's interest in Lorain Tubular. Republic and United States Steel are
continuing negotiations with the EPA. Most of the matters raised by the EPA
relate to Republic's facilities; however, air discharges from United States
Steel's #3 seamless pipe mill have also been cited. United States Steel will be
responsible for matters relating to its facilities. The final report and
citations from the EPA have not been issued.
In 1987, United States Steel and the Pennsylvania Department of
Environmental Resources ("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 United States Steel to pay a penalty of $50,000 and a monthly
payment of $2,500 for five years. In 1990, United States Steel and the PADER
reached agreement to amend the Consent Order. Under the amended Order, United
States Steel agreed to remediate the Peters Creek Lagoon (a former coke plant
waste disposal site); to pay a penalty of $300,000; and to pay a monthly penalty
of up to $1,500 each month until the former disposal site is closed. Remediation
costs have amounted to $9.9 million with another $1.1 million presently
projected to complete the project.
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 Township, 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 indicated that
further remediation of this site would be required. In October 1991, the PADER
placed the site on the Pennsylvania State Superfund list and began a Remedial
Investigation ("RI"), which was issued in 1997. United States Steel's share of
any final allocation formula for cleanup of the entire site was never
determined; however, based on presently available information, United States
Steel may have been responsible for as much as 70% of the waste material
deposited at the site. The Pennsylvania Department of Environmental Protection
("PADEP"), formerly PADER, issued its Final Feasibility Study Report for the
entire site in August 2001. The report identifies and evaluates feasible
remedial alternatives and selects three preferred alternatives. These
alternatives are estimated to cost from $17 million to $20 million. Consultants
for United States Steel have concluded that a less costly alternative should be
employed at the site, which is estimated to cost $5.5 million. Based on the
allocation of liability that has been recognized for past site cleanup
activities, the United States Steel share of costs for this remedy would be
approximately $3.7 million. United States Steel is in the process of negotiating
a consent decree with PADEP. United States Steel has submitted a conceptual
remediation plan, which PADEP has approved. United States Steel will be
submitting a remedial design plan based on the remediation plan. PADEP is also
seeking reimbursement for approximately $2 million in costs. United States Steel
could potentially be held responsible for an undetermined share of those costs.
In September 2001, United States Steel agreed to an Administrative
Order on Consent with the State of North Carolina for the assessment and cleanup
of a Greensboro, N.C. fertilizer manufacturing site. The site was owned by
Armour Agriculture Chemical Company (now named Viad) from 1912 to 1968. United
States Steel owned the site from 1968 to 1986 and sold the site to LaRoche
Industries in 1986. The agreed order allocated responsibility for assessment and
cleanup costs as follows: Viad - 48%, United States Steel - 26% and LaRoche -
26%; and LaRoche was appointed to be the lead party responsible for conducting
the cleanup. In March 2001, United States Steel was notified that LaRoche had
filed for protection under the bankruptcy law. On August 23, 2001, the
allocation of responsibility for this site assessment and cleanup and the cost
allocation was approved by the bankruptcy court in the LaRoche bankruptcy. The
estimated remediation costs are $4.4 million to $5.7 million. United States
Steel's estimated share of these costs is $1.6 million.
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 2002. United States Steel's environmental capital
expenditures are expected to be approximately $28 million in 2002 primarily
related to projects at Gary Works and at USSK (approximately $8 million).
Predictions beyond 2002 can only be broad-based estimates, which have varied,
and will continue to vary, due to the ongoing evolution of specific regulatory
requirements, the possible imposition of more stringent requirements and the
availability of new technologies to remediate sites, among other matters. Based
upon currently identified projects, United States Steel anticipates that
environmental capital expenditures will be approximately $49 million in 2003
including $17 million for USSK; 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 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 Fleet
or Intercoastal Fleet, 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, United States Steel 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.
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,
certain of which are discussed in Note 26 to the Financial Statements. The
ultimate resolution of these contingencies could, individually or in the
aggregate, be material to the United States Steel 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.
Outlook for 2002
In November 2001, Domestic Steel's order rate began to increase and
this trend has continued into the first quarter. Sheet facilities are now fully
loaded and spot market price increases are being implemented. Plate and tubular
markets continue to reflect weak demand. In the first quarter 2002, domestic
shipments are expected to improve and average realized prices are expected to be
slightly lower, largely due to product mix, when compared to fourth quarter
2001. USSK first quarter 2002 shipments and average realized prices are expected
to be lower than fourth quarter 2001.
For full-year 2002, domestic shipments are expected to be approximately
11 million net tons and USSK shipments are expected to be approximately 3.8
million net tons.
For the longer term, domestic shipment levels and realized prices will
be influenced by the strength and timing of a recovery in the manufacturing
sector of the domestic economy, levels of imported steel following the outcome
of the President's Section 201 decision and production capability changes at
domestic facilities. Many factors will determine the strength and timing of such
recovery, and shipment levels and prices are also subject to many of the same
factors. For USSK, economic and political developments in Europe, including many
factors similar to those impacting Domestic Steel, will impact USSK's results of
operations.
United States Steel's income from operations includes net pension
credits, which are primarily noncash, associated with all of United States
Steel's pension plans. Net pension credits were $146 million in 2001. At the end
of 2000, United States Steel's main pension plan's transition asset was fully
amortized, decreasing the pension credit by $69 million in 2001 and in future
years for this component. In addition, for the year 2002, lower than expected
market returns in the year 2001 and the mergers of Transtar and LTV tin mill
liabilities will further reduce net pension credits to approximately $110
million, excluding settlements and any potential effects of consolidation or
rationalization activities. An unfavorable $8 million settlement charge is
expected in the first half of 2002 under the nonqualified pension plan relative
to salaried employees accepting retirement under last year's VERP. A settlement
effect is not currently expected under the qualified salaried pension plan in
2002 relative to the VERP program. 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 discount
rate and rate of return on plan assets, plan amendments affecting benefit payout
levels 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.
In its retiree medical estimates of escalation, United States Steel
projects an aggregate 8.0% initial trend rate in 2002 that gradually reduces
each year to an ultimate trend rate of 5% in the year 2008. This was increased
from a 7.5% initial trend rate assumed for 2001. The 8.0% rate reflects a
weighting of various escalation rates on different components of the plan,
with some rates as high as 15%, after taking into consideration the demographics
of the affected populations and the different utilization patterns of medicare
versus pre-medicare retirees. See Note 12 to the Financial Statements for the
effect of a 1% change in the assumed health care cost trend rates.
United States Steel owns a 16% investment in Republic, through United
States Steel'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 our
tubular facility in Lorain, Ohio. During the first quarter of 2001, United
States Steel discontinued applying the equity method of accounting since
investments in and advances to Republic had been reduced to zero. 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. During 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 and recognized
certain debt obligations of $14 million previously assumed by Republic. Due to
further financial deterioration of Republic during the balance of 2001, United
States Steel recorded a pretax charge of $68 million in the fourth quarter of
2001 related to a portion of the remaining Republic trade receivables and
retiree medical cost reimbursements owed by Republic. At December 31, 2001,
United States Steel's remaining financial exposure to Republic was approximately
$19 million.
On January 17, 2002, United States Steel announced that it had entered
into an Option Agreement with NKK Corporation ("NKK") of Japan. The agreement
grants United States Steel an option to purchase, either directly or through a
subsidiary, all of NKK's National Steel Corporation common stock and to
restructure a $100 million loan previously made to National Steel by an NKK
subsidiary. NKK's ownership of National Steel's common stock represents
approximately 53% of National's outstanding shares. The option expires on June
15, 2002.
If the option is exercised, NKK will receive warrants to purchase 4
million shares of United States Steel common stock in exchange for its National
Steel shares. The warrants will be exercisable through June 2007 at a price
equal to 150% of the average closing price for United States Steel's common
stock during a 60-day period prior to the issuance of the warrants. In
connection with any exercise of the option, the NKK subsidiary loan to National
Steel would be restructured into an unsecured, non-interest bearing $30 million
note, with a 20-year term, convertible into 1 million shares of United States
Steel common stock. The NKK convertible note will remain part of a restructured
National Steel. United States Steel will have the right to convert in the first
five years if the price of United States Steel common stock exceeds $30 per
share. In the next five-year period, both parties have the right to cause
conversion if the price exceeds $30 per share and in the final ten years, either
party has the right to cause conversion. In addition, United States Steel will,
if it exercises the option, offer to acquire the remaining shares of National
Steel in exchange for either warrants with no less value than those provided to
NKK or United States Steel common stock based upon an exchange ratio of 0.086
shares of United States Steel common stock for each share of National Steel
stock. The minority shareholder option to receive warrants will not be available
unless a sufficient number of those shareholders elect to receive warrants to
permit such warrants to be listed on the New York Stock Exchange.
Also, NKK and United States Steel have agreed to enter into discussions
for the purpose of developing a business alliance to support Japanese auto
manufacturers in North America.
Although United States Steel has the ability to exercise the option at
any time during its term, it is United States Steel's current intent not to
exercise the option or to consummate a merger with National Steel unless a
number of significant conditions are satisfied, including a substantial
restructuring of National Steel's debt and other obligations. Other significant
conditions include the resolution of key contingencies related to the
consolidation of the domestic steel industry, the financial viability of
National Steel and satisfactory general market conditions.
United States Steel has publicly stated that it is willing to
participate in consolidation of the domestic steel industry if it would be
beneficial to our customers, shareholders, creditors and employees. A number of
important conditions must occur to facilitate such consolidation including
implementation of President Bush's three-part program to address worldwide
overcapacity, relief from the burden of costs related to retiree obligations of
other domestic steel companies and a new progressive labor agreement. In
addition, United States Steel may make additional investments in Central Europe
to build USSK and to better serve our customers who are seeking worldwide supply
arrangements.
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
levels of imports following government action on Section 201 activities,
domestic and international economies, domestic production capacity and customer
demand. In the event these assumptions prove to be inaccurate, actual results
may differ significantly from those presently anticipated. The potential
exercise of the National Steel option by United States Steel, the negotiation
and possible consummation of any merger or acquisition agreement, and the
potential completion of any industry consolidation or acquisitions whether
domestic or international are all subject to numerous conditions, some of which
are described above. Many of these conditions depend upon actions of other
parties, such as the federal government, the United Steelworkers of America and
foreign governments. There is no assurance that the National Steel option will
be exercised, that any merger agreement will be negotiated and/or consummated,
or that any industry domestic or international consolidation in general will
occur, nor any specificity concerning the terms upon which any of these might
occur, other than the specific terms of the Option Agreement.
Accounting Standards
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.
Changes in fair value will be reflected in current period net income or other
comprehensive income depending on the designation of the derivative instrument.
This Statement, as amended, requires recognition of all derivatives at fair
value as either assets or liabilities. Changes in fair value will be reflected
in current period net income or other comprehensive income depending on the
designation of the derivative instrument. 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 for hedge transactions as of December 31, 2000. The effect of adoption of
SFAS No. 133 was less than $1 million, net of tax.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141"), No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142") and No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"). The adoption of SFAS No. 141 and SFAS No. 142 on January 1, 2002, did not
have a material impact on the results of operations or financial position of
United States Steel.
SFAS No. 143 establishes a new accounting model for the recognition and
measurement of retirement obligations associated with tangible long-lived
assets. SFAS No. 143 requires that an asset retirement obligation 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
plans to adopt the Statement effective January 1, 2003. The transition
adjustment resulting from the adoption of SFAS No. 143 will be reported as a
cumulative effect of a change in accounting principle. At this time, United
States Steel has not completed its assessment of the effect of the adoption of
this Statement on either its financial position or results of operations.
In August 2001, the FASB approved SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This Statement
establishes a single accounting model for long-lived assets to be disposed of by
sale and provides additional implementation guidance for assets to be held and
used and assets to be disposed of other than by sale. United States Steel
adopted SFAS No. 144 effective January 1, 2002. There was no financial
statement implication related to the adoption of SFAS No. 144, and the guidance
will be applied on a prospective basis.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management Opinion Concerning Derivative Instruments
United States Steel 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 of natural gas, heating oil and nonferrous
metals and also certain business transactions denominated in foreign currencies.
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 United States Steel'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 the use of derivative instruments, along with
risk assessment procedures and internal controls, does not expose United States
Steel to material risk. The use of derivative instruments could materially
affect United States Steel's results of operations in particular quarterly or
annual periods. However, management believes that use of these instruments will
not have a material adverse effect on financial position or liquidity. For a
summary of accounting policies related to derivative instruments, see Note 3 to
the Financial Statements.
Commodity Price Risk and Related Risks
In the normal course of its business, United States Steel is exposed to
market risk or price fluctuations related to the purchase, production or sale of
steel products. To a lesser extent, United States Steel is exposed to price risk
related to the purchase, production or sale of coal and coke and the purchase of
natural gas, steel scrap, iron ore and pellets, and certain nonferrous metals
used as raw materials.
United States Steel'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, United
States Steel uses derivative commodity instruments (primarily over-the-counter
commodity swaps) to manage exposure to fluctuations in the purchase price of
natural gas, heating oil and certain nonferrous metals. The use of these
instruments has not been significant in relation to United States Steel's
overall business activity.
Sensitivity analyses of the incremental effects on pretax income of
hypothetical 10% and 25% decreases in commodity prices for open derivative
commodity instruments as of December 31, 2001, and December 31, 2000, are
provided in the following table.
(Dollars in millions)
-------------------------------------------------------------------------------------------------
Incremental Decrease in
Pretax Income Assuming a
Hypothetical Price
Decrease of/(a)/
2001 2000
Commodity-Based Derivative Instruments 10% 25% 10% 25%
-------------------------------------------------------------------------------------------------
Zinc.......................................... 3.5 8.9 1.5 3.8
Tin........................................... 0.2 0.6 0.2 0.6
-------------------------------------------------------------------------------------------------
/(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 effect on pretax income of hypothetical 10% and 25%
decreases in closing commodity prices for each open contract
position at December 31, 2001, and December 31, 2000. Management
evaluates the portfolio of derivative commodity instruments on
an ongoing basis and adjusts strategies to reflect anticipated
market conditions, changes in risk profiles and overall business
objectives. Changes to the portfolio subsequent to December 31,
2001, may cause future pretax income effects to differ from
those presented in the table.
United States Steel uses OTC commodity swaps to manage exposure to
market risk related to the purchase of natural gas, heating oil and certain
nonferrous metals. United States Steel recorded net pretax other than trading
activity losses of $13 million in 2001, gains of $2 million in 2000 and losses
of $3 million in 1999. 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
Financial Statements.
Interest Rate Risk
United States Steel 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 2001 and 2000 interest rates on the fair value of United
States Steel's non-derivative financial instruments is provided in the following
table:
(Dollars in millions)
--------------------------------------------------------------------------------------------------------------
As of December 31 2001 2000
Incremental Incremental
Increase in Increase in
Fair Fair Fair Fair
Non-Derivative Financial Instruments (a) Value (b) Value (c) Value (b) Value (c)
--------------------------------------------------------------------------------------------------------------
Financial assets:
Investments and long-term receivables (d)..... $ 42 $ - $ 137 $ -
Financial liabilities:
Long-term debt (e)(f)......................... $ 1,122 $ 79 $ 2,375 $ 80
Preferred stock of subsidiary (g)............. - - 63 5
USX obligated mandatorily
redeemable convertible preferred
securities of a subsidiary trust (g)....... - - 119 10
---------- ---------- ----------- -----------
Total liabilities....................... $ 1,122 $ 79 $ 2,557 $ 95
--------------------------------------------------------------------------------------------------------------
(a) Fair values of cash and cash equivalents, receivables, notes
payable, accounts payable and accrued interest, approximate carrying
value and are relatively insensitive to changes in interest rates
due to the short-term maturity of the instruments. Accordingly,
these instruments are excluded from the table.
(b) See Note 25 to the Financial Statements for carrying value of
instruments.
(c) Reflects, by class of financial instrument, the estimated
incremental effect of a hypothetical 10% decrease in interest rates
at December 31, 2001, and December 31, 2000, on the fair value of
United States Steel's non-derivative financial instruments. For
financial liabilities, this assumes a 10% decrease in the weighted
average yield to maturity of United States Steel's long-term debt at
December 31, 2001, and December 31, 2000.
(d) For additional information, see Note 16 to the Financial Statements.
(e) Includes amounts due within one year.
(f) Fair value was based on market prices where available, or current
borrowing rates for financings with similar terms and maturities.
For additional information, see Note 11 to the Financial Statements.
(g) See Note 18 to the Financial Statements.
At December 31, 2001, United States Steel'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 $79 million increase in the fair value of
long-term debt assuming a hypothetical 10% decrease in interest rates. However,
United States Steel's sensitivity to interest rate declines and corresponding
increases in the fair value of its debt portfolio would unfavorably affect
United States Steel's results and cash flows only to the extent that United
States Steel 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
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, in particular the Euro and Slovak Koruna.
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 December
31, 2001, United States Steel had no open forward currency contracts. In
November 2001, the month in which United States Steel had the most foreign
currency exchange maturities, total notional maturities were $19.4 million.
Equity Price Risk
United States Steel is subject to equity price risk and market
liquidity risk related to its investment in VSZ a.s., the former parent of U. S.
Steel Kosice, s.r.o. These risks are not readily quantifiable for several
reasons, including the absence of a readily determinable fair value as
determined under U.S. generally accepted accounting principles.
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 of and demand for steel products and certain
raw materials. To the extent that these assumptions prove to be inaccurate,
future outcomes with respect to United States Steel's hedging programs may
differ materially from those discussed in the forward-looking statements.