-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DF0m9i1YaJ9wLBITWca4TuKlkJorT79NnB43JLGlv7iXHQ1Vk5qv9eFyCUvuyJq6 fbGk/8u11uTtFv2X/3Hb6w== 0000101778-02-000023.txt : 20021114 0000101778-02-000023.hdr.sgml : 20021114 20021114172411 ACCESSION NUMBER: 0000101778-02-000023 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARATHON OIL CORP CENTRAL INDEX KEY: 0000101778 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 250996816 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-05153 FILM NUMBER: 02826409 BUSINESS ADDRESS: STREET 1: P O BOX 3128 CITY: HOUSTON STATE: TX ZIP: 77253-3128 BUSINESS PHONE: 7136296600 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STATES STEEL CORP/DE DATE OF NAME CHANGE: 19860714 FORMER COMPANY: FORMER CONFORMED NAME: USX CORP DATE OF NAME CHANGE: 19920703 10-Q/A 1 f10q_30sep02.txt AMENDED 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A (Amendment No. 1) (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 1-5153 Marathon Oil Corporation (Exact name of registrant as specified in its charter) Delaware 25-0996816 (State of Incorporation) (I.R.S. Employer Identification No.) 5555 San Felipe Road, Houston, TX 77056-2723 (Address of principal executive offices) Tel. No. (713) 629-6600 ================================================================================ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes [X] No _____ There were 309,863,692 shares of Marathon Oil Corporation Common Stock outstanding as of October 31, 2002. ================================================================================ MARATHON OIL CORPORATION FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2002 -------------------------------- INDEX Page ----- ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statement of Income........................... 3 Consolidated Balance Sheet................................. 5 Consolidated Statement of Cash Flows....................... 7 Selected Notes to Consolidated Financial Statements...................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 22 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................... 38 Item 4. Controls and Procedures..................................... 44 Supplemental Statistics..................................... 45 PART II - OTHER INFORMATION Item 1. Legal Proceedings........................................... 48 Item 6. Exhibits and Reports on Form 8-K............................ 49 Part I - Financial Information MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF INCOME (Unaudited) ------------------------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- REVENUES AND OTHER INCOME: Revenues................................................................ $8,435 $8,514 $22,931 $26,260 Dividend and investee income............................................ 39 34 104 106 Net gains (losses) on disposal of assets................................ 33 (208) 44 (180) Gain (loss) on ownership change in Marathon Ashland Petroleum LLC................................................. 5 1 9 (5) Other income............................................................ 6 7 15 83 ------ ------ ------ ------ Total revenues and other income...................................... 8,518 8,348 23,103 26,264 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of revenues (excludes items shown below)........................... 6,444 6,058 17,192 18,499 Selling, general and administrative expenses............................ 218 175 588 506 Depreciation, depletion and amortization................................ 292 302 894 911 Taxes other than income taxes........................................... 1,176 1,216 3,387 3,541 Exploration expenses.................................................... 29 20 130 69 Inventory market valuation credit....................................... - - (72) - ------ ------ ------ ------ Total costs and expenses............................................. 8,159 7,771 22,119 23,526 ------ ------ ------ ------ INCOME FROM OPERATIONS.................................................... 359 577 984 2,738 Net interest and other financial costs.................................... 75 50 215 134 Minority interest in income of Marathon Ashland Petroleum LLC............................................................ 45 223 138 650 ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES............................................................. 239 304 631 1,954 Provision for income taxes................................................ 145 120 289 689 ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS 94 184 342 1,265 DISCONTINUED OPERATIONS: Loss from discontinued operations....................................... - (13) - (13) Costs associated with disposition of United States Steel.......................................................... - (1) - (13) ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES .............................................................. 94 170 342 1,239 Extraordinary loss from early extinguishment of debt, net of tax......................................................... (7) - (33) - Cumulative effect of changes in accounting principles, net of tax................................................... - - 13 (8) ------ ------ ------ ------ NET INCOME................................................................ $87 $170 $322 $1,231 ====== ====== ====== ======
Included in revenues and costs and expenses for the third quarter of 2002 and 2001 were $1,114 million and $1,152 million, respectively, representing consumer excise taxes on petroleum products and merchandise. Similar amounts for the nine months of 2002 and 2001 were $3,193 million and $3,322 million, respectively. The accompanying notes are an integral part of these consolidated financial statements. MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF INCOME (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions, except per share amounts) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------------------------------- MARATHON COMMON STOCK: Income from continuing operations applicable to Common Stock .................................................... $94 $184 $342 $1,265 Net income applicable to Common Stock.................................... 87 193 322 1,275 Per Share Data: - Income from continuing operations - basic......................... .30 .59 1.10 4.09 - Income from continuing operations - diluted....................... .30 .59 1.10 4.09 - Net income - basic................................................ .28 .63 1.04 4.13 - Net income - diluted.............................................. .28 .62 1.04 4.12 Weighted average shares, in thousands - Basic .......................................................... 309,874 309,309 309,751 309,056 - Diluted .......................................................... 309,970 309,923 309,952 309,452 STEEL STOCK: Net loss applicable to Steel Stock...................................... $- $(25) $- $(50) Per Share Data: - Net loss - basic.................................................. - (0.28) - (0.56) - Net loss - diluted................................................ - (0.28) - (0.57) Weighted average shares, in thousands - Basic and diluted................................................. - 89,193 - 89,003
See Note 4, for a description and computation of income per common share. The accompanying notes are an integral part of these consolidated financial statements. MARATHON OIL CORPORATION CONSOLIDATED BALANCE SHEET (Unaudited) ---------------------------------------- ASSETS
September 30 December 31 (Dollars in millions) 2002 2001 - --------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents............................................. $ 375 $ 657 Receivables, less allowance for doubtful accounts of $5 and $4................................................ 1,829 1,708 Receivables from United States Steel.................................. 14 64 Inventories........................................................... 2,075 1,851 Other current assets.................................................. 164 131 ------ ------ Total current assets............................................ 4,457 4,411 Investments and long-term receivables, less allowance for doubtful accounts of $10 and $4......................... 1,591 1,076 Receivables from United States Steel..................................... 546 551 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $10,816 and $10,384................................................... 10,192 9,552 Prepaid pensions......................................................... 213 207 Goodwill................................................................. 275 88 Intangibles.............................................................. 97 61 Other noncurrent assets.................................................. 170 183 ------ ------ Total assets.................................................... $17,541 $16,129 ====== ======
The accompanying notes are an integral part of these consolidated financial statements. MARATHON OIL CORPORATION CONSOLIDATED BALANCE SHEET (Continued)(Unaudited) ------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY
September 30 December 31 (Dollars in millions) 2002 2001 - -------------------------------------------------------------------------------------------------------------------- LIABILITIES Current liabilities: Accounts payable.............................................................. $2,587 $2,431 Payable to United States Steel................................................ 28 28 Payroll and benefits payable.................................................. 164 243 Accrued taxes................................................................. 375 171 Accrued interest.............................................................. 60 85 Obligations to repay preferred securities..................................... - 295 Long-term debt due within one year............................................ 161 215 ------ ------ Total current liabilities............................................... 3,375 3,468 Long-term debt................................................................... 4,579 3,432 Deferred income taxes............................................................ 1,429 1,297 Employee benefits................................................................ 743 677 Payable to United States Steel................................................... 5 8 Deferred credits and other liabilities........................................... 369 344 Minority interest in Marathon Ashland Petroleum LLC.............................. 2,028 1,963 STOCKHOLDERS' EQUITY Common stock: Common Stock issued - 312,165,978 shares at September 30, 2002 and December 31, 2001 (par value $1 per share, authorized 550,000,000 shares)................................. 312 312 Common Stock held in treasury - 2,298,289 shares at September 30, 2002 and 2,770,929 shares at December 31, 2001............................................................ (61) (74) Additional paid-in capital....................................................... 3,033 3,035 Retained earnings................................................................ 1,751 1,643 Accumulated other comprehensive income (loss).................................... (13) 34 Deferred compensation............................................................ (9) (10) ------ ------ Total stockholders' equity.............................................. 5,013 4,940 ------ ------ Total liabilities and stockholders' equity.............................. $17,541 $16,129 ====== ======
The accompanying notes are an integral part of these consolidated financial statements. MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------
Nine Months Ended September 30 (Dollars in millions) 2002 2001 - ---------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income.................................................................... $322 $1,231 Adjustments to reconcile to net cash provided from operating activities: Cumulative effect of changes in accounting principles...................... (13) 8 Extraordinary loss from early extinguishment of debt....................... 33 - Discontinued operations.................................................... - 26 Minority interest in income of Marathon Ashland Petroleum LLC............................................................. 138 650 Depreciation, depletion and amortization................................... 894 911 Inventory market valuation credits......................................... (72) - Exploratory dry well costs................................................. 70 12 Deferred income taxes...................................................... 28 (220) Net (gains) losses on disposal of assets................................... (44) 180 Changes in: Current receivables.................................................. (87) 132 Receivable from/payable to United States Steel....................... (2) - Inventories.......................................................... (142) (101) Current accounts payable and accrued expenses........................ 339 (296) All other - net............................................................ 6 162 ------ ------ Net cash provided from continuing operations......................... 1,470 2,695 Net cash provided from discontinued operations....................... - 197 ------ ------ Net cash provided from operating activities.......................... 1,470 2,892 ------ ------ INVESTING ACTIVITIES: Capital expenditures.......................................................... (1,023) (1,020) Acquisition of Equatorial Guinea interests.................................... (1,160) - Acquisition of Pennaco Energy, Inc............................................ - (506) Disposal of assets............................................................ 94 181 Receivable from United States Steel........................................... 54 - Restricted cash - withdrawals................................................ 39 66 - deposits................................................... (82) (52) Investees..................................................................... (98) (1) All other - net............................................................... (8) 4 ------ ------ Net cash used in continuing operations............................... (2,184) (1,328) Net cash used in discontinued operations............................. - (170) ------ ------ Net cash used in investing activities................................ (2,184) (1,498) ------ ------
The accompanying notes are an integral part of these consolidated financial statements. MARATHON OIL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)(Unaudited) -----------------------------------------------------------
Nine Months Ended September 30 (Dollars in millions) 2002 2001 - ----------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net.................. (200) (526) Other debt - borrowings............................................... 2,095 661 - repayments............................................... (868) (397) Repayment of preferred securities......................................... (295) - Common Stock - repurchased ............................................... - (1) Treasury Stock - reissued................................................. 2 11 Dividends paid - Marathon Common Stock................................ (217) (214) - Steel Stock.......................................... - (40) - Preferred stock...................................... - (6) Distributions to minority shareholder of Marathon Ashland Petroleum LLC........................................... (87) (450) ------ ------ Net cash provided from (used in) financing activities............ 430 (962) ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH................................... 2 (4) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... (282) 428 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................ 657 559 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $375 $987 ====== ======
The accompanying notes are an integral part of these consolidated financial statements. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- (Unaudited) 1. These consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods reported. All such adjustments are of a normal recurring nature unless disclosed otherwise. These financial statements, including selected notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications of prior year data have been made to conform to 2002 classifications. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2001 Annual Report on Form 10-K of Marathon Oil Corporation (Marathon). 2. Prior to December 31, 2001, Marathon, formerly named USX Corporation, had two outstanding classes of common stock: USX-Marathon Group common stock (Marathon Stock), which was intended to reflect the performance of Marathon's energy business, and USX-U. S. Steel Group common stock (Steel Stock), which was intended to reflect the performance of Marathon's steel business. On December 31, 2001, Marathon disposed of its steel business through a tax-free distribution of the common stock of its wholly owned subsidiary United States Steel Corporation (United States Steel) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis (the Separation). At December 31, 2001, the net debt and other financings of United States Steel was $54 million less than the net debt and other financings attributable to the Steel Stock, adjusted for a $900 million value transfer and certain one-time items related to the Separation. On February 6, 2002, United States Steel made a payment to Marathon of $54 million, plus applicable interest, to settle this difference. Marathon has accounted for the business of United States Steel as a discontinued operation. The income from discontinued operations for the periods ended September 30, 2001, represents the net income attributable to the Steel Stock, except for certain limitations on the amounts of corporate administrative expenses and interest expense (net of income tax effects) allocated to discontinued operations as required by accounting principles generally accepted in the United States. Because operating and investing activities are separately identifiable to each of Marathon and United States Steel, such amounts have been separately disclosed in the statement of cash flows. Financing activities were managed on a centralized, consolidated basis. Therefore they have been reflected on a consolidated basis in the statement of cash flows. 3. Effective January 1, 2001, Marathon adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended by SFAS Nos. 137 and 138. This statement requires recognition of all derivatives as either assets or liabilities at fair value. The transition adjustment related to adopting SFAS No. 133 on January 1, 2001, was recognized as a cumulative effect of a change in accounting principle. The unfavorable cumulative effect on net income, net of a tax benefit of $5 million, was $8 million. The unfavorable cumulative effect on other comprehensive income (loss) (OCI), net of a tax benefit of $4 million, was $8 million. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 3. (Continued) Since the issuance of SFAS No. 133, the Financial Accounting Standards Board (FASB) has issued several interpretations. As a result, Marathon has recognized in income beginning on January 1, 2002, the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom. As of January 1, 2002, Marathon recognized a favorable cumulative effect of a change in accounting principle of $13 million, net of tax of $7 million. The unfavorable pretax change in the fair value of the gas contracts during the first nine months of 2002 was $9 million. The recorded derivative assets will continue to be marked-to-market. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). This statement requires the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Marathon will adopt this statement effective January 1, 2003, as required. The adoption of this statement will result in a cumulative effect and be reported as a change in accounting principle relating primarily to the abandonment of oil and gas producing facilities. At this time, Marathon cannot reasonably estimate the effect of adoption on either its financial position or results of operations. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145). Extinguishment of debt will be accounted for in accordance with Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 145 has a dual effective date. The provisions relating to accounting for leases were applicable to transactions occurring after May 15, 2002. The provisions relating to the early extinguishment of debt will be adopted by Marathon on January 1, 2003. As a result, losses from the early extinguishment of debt in 2002, which are currently reported as extraordinary items, will be reported in income from continuing operations in comparative financial statements subsequent to the adoption of SFAS No. 145. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. 4. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock when applicable and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes exercise of stock options, provided the effect is not antidilutive. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
4. (Continued)- COMPUTATION OF INCOME PER COMMON SHARE Third Quarter Ended September 30 2002 2001 (Dollars in millions, except per share data) Basic Diluted Basic Diluted - ---------------------------------------------------------------------------------------------------------------------------- Common Stock - ------------- Income from continuing operations applicable to Common Stock...................................................... $94 $94 $184 $184 Expenses included in income from continuing operations applicable to Steel Stock................................... - - 10 10 Costs associated with disposition of United States Steel................................................... - - (1) (1) Extraordinary loss...................................................... (7) (7) - - ------- ------- ------- ------- Net income applicable to Common Stock................................... $87 $87 $193 $193 ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding............................. 309,874 309,874 309,309 309,309 Effect of dilutive securities - stock options........................... - 96 - 614 ------- ------- ------- ------- Average common shares including dilutive effect....................... 309,874 309,970 309,309 309,923 ======= ======= ======= ======= Per share: Income from continuing operations....................................... $.30 $.30 $.59 $.59 ======= ======= ======= ======= Extraordinary loss...................................................... $(.02) $(.02) - - ======= ======= ======= ======= Net income.............................................................. $.28 $.28 $.63 $.62 ======= ======= ======= ======= Steel Stock - ----------------- Loss from discontinued operations......................................... - - $(13) $(13) Expenses included in loss from continuing operations applicable to Steel Stock..................................... - - (10) (10) Preferred stock dividends................................................. - - (2) (2) ------ ------ ------ ------ Net loss applicable to Steel Stock........................................ - - $(25) $(25) ====== ====== ====== ====== Average common shares including dilutive effect (thousands).................................................... - - 89,193 89,193 ====== ====== ====== ====== Per share: Loss from discontinued operations..................................... - - $(.15) $(.15) ====== ====== ====== ====== Net loss.............................................................. - - $(.28) $(.28) ====== ====== ====== ======
MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
4. (Continued)- COMPUTATION OF INCOME PER COMMON SHARE Nine Month Ended September 30 2002 2001 (Dollars in millions, except per share data) Basic Diluted Basic Diluted - --------------------------------------------------------------------------------------------------------------------------- Common Stock - ------------- Income from continuing operations applicable to Common Stock...................................................... $342 $342 $1,265 $1,265 Expenses included in income from continuing operations applicable to Steel Stock................................... - - 31 31 Costs associated with disposition of United States Steel................................................... - - (13) (13) Extraordinary loss...................................................... (33) (33) - - Cumulative effect of changes in accounting principles.................................................. 13 13 (8) (8) ------- ------- ------- ------- Net income applicable to Common Stock................................... $322 $322 $1,275 $1,275 ======= ======= ======= ======= Shares of common stock outstanding (thousands): Average number of common shares outstanding............................. 309,751 309,751 309,056 309,056 Effect of dilutive securities - stock options........................... - 201 - 396 ------- ------- ------- ------- Average common shares including dilutive effect....................... 309,751 309,952 309,056 309,452 ======= ======= ======= ======= Per share: Income from continuing operations....................................... $1.10 $1.10 $4.09 $4.09 ======= ======= ======= ======= Extraordinary loss...................................................... $(.10) $(.10) - - ======= ======= ======= ======= Cumulative effect of changes in accounting principles.................................................. $.04 $.04 $(.03) $(.03) ======= ======= ======= ======= Net income.............................................................. $1.04 $1.04 $4.13 $4.12 ======= ======= ======= ======= Steel Stock - ----------------- Loss from discontinued operations......................................... - - $(13) $(13) Expenses included in loss from continuing operations applicable to Steel Stock..................................... - - (31) (31) Preferred stock dividends................................................. - - (6) (6) ------ ------ ------ ------ Net loss applicable to Steel Stock........................................ - - $(50) $(50) ====== ====== ====== ====== Average common shares including dilutive effect (thousands).................................................... - - 89,003 89,003 ====== ====== ====== ====== Per share: Loss from discontinued operations..................................... - - $(.15) $(.15) ====== ====== ====== ====== Net loss.............................................................. - - $(.56) $(.57) ====== ====== ====== ======
MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
5. Marathon's operations consist of three operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest, upper Great Plains and southeastern United States through Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB) - markets and transports, primarily in the United States and Europe, its own and third-party natural gas, crude oil and related products such as liquefied natural gas and methanol. The results of segment operations are as follows: Total (In millions) E&P RM&T OERB Segments - -------------------------------------------------------------------------------------------------------------------------- THIRD QUARTER 2002 - ------------------- Revenues and other income: Customer................................................................ $713 $7,199 $523 $8,435 Intersegment (a)........................................................ 210 41 18 269 Equity in earnings of unconsolidated investees.......................... 10 12 15 37 Other................................................................... 2 15 - 17 ------ ------ ------ ------ Total revenues and other income......................................... $935 $7,267 $556 $8,758 ====== ====== ====== ====== Segment income............................................................ $250 $108 $29 $387 ====== ====== ====== ====== THIRD QUARTER 2001 - ------------------ Revenues and other income: Customer................................................................ $867 $7,213 $434 $8,514 Intersegment (a)........................................................ 150 1 17 168 United States Steel (a)................................................. 3 - 1 4 Equity in earnings of unconsolidated investees.......................... 15 14 1 30 Other................................................................... - 19 5 24 ------ ------ ------ ------ Total revenues and other income......................................... $1,035 $7,247 $458 $8,740 ====== ====== ====== ====== Segment income............................................................ $256 $575 $6 $837 ====== ====== ====== ======
(a) Management believes intersegment transactions and transactions with United States Steel were conducted under terms comparable to those with unrelated parties. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
5. (Continued) Total (In millions) E&P RM&T OERB Segments - ---------------------------------------------------------------------------------------------------------------- Nine Months 2002 - ------------------- Revenues and other income: Customer..................................................... $2,253 $19,221 $1,457 $22,931 Intersegment (a)............................................. 526 100 55 681 Equity in earnings of unconsolidated investees............... 34 35 32 101 Other........................................................ 1 38 (1) 38 ------ ------ ------ ------ Total revenues and other income.............................. $2,814 $19,394 $1,543 $23,751 ====== ====== ====== ====== Segment income................................................. $677 $268 $74 $1,019 ====== ====== ====== ====== Nine Months 2001 - ------------------ Revenues and other income: Customer..................................................... $3,136 $21,490 $1,634 $26,260 Intersegment (a)............................................. 509 14 62 585 United States Steel (a)...................................... 18 - 6 24 Equity in earnings of unconsolidated investees............... 52 29 11 92 Other.......................................................... 16 52 11 79 ------ ------ ------ ------ Total revenues and other income.............................. $3,731 $21,585 $1,724 $27,040 ====== ====== ====== ====== Segment income................................................. $1,299 $1,693 $40 $3,032 ====== ====== ====== ======
(a) Management believes intersegment transactions and transactions with United States Steel were conducted under terms comparable to those with unrelated parties. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
5. (Continued) - The following schedule reconciles segment revenues and income to amounts reported in the financial statements: Third Quarter Ended September 30 (In millions) 2002 2001 - ------------------------------------------------------------------------------------------------------ Revenues and other income: Segment revenues and other income........................................... $8,758 $8,740 Items not allocated to segments: Gain on ownership change in MAP........................................... 5 1 Gain on asset disposition ................................................ 24 - Loss related to sale of certain Canadian assets........................... - (221) Elimination of intersegment revenues........................................ (269) (168) Elimination of sales to United States Steel................................. - (4) ------ ------ Total revenues and other income.......................................... $8,518 $8,348 ====== ====== Income: Segment income.............................................................. $387 $837 Items not allocated to segments: Administrative expenses................................................... (42) (40) Gain on ownership change in MAP........................................... 5 1 Gain on asset disposition ................................................ 24 - Contract settlement....................................................... (15) - Loss related to sale of certain Canadian assets........................... - (221) ------ ------ Total income from operations............................................. $359 $577 ====== ====== Nine Months Ended September 30 (In millions) 2002 2001 - ------------------------------------------------------------------------------------------------------ Revenues and other income: Segment revenues and other income........................................... $23,751 $27,040 Items not allocated to segments: Gain (loss) on ownership change in MAP.................................... 9 (5) Gain on lease resolution with U.S. Government............................. - 59 Gain on asset disposition ................................................ 24 - Loss related to sale of certain Canadian assets........................... - (221) Elimination of intersegment revenues........................................ (681) (585) Elimination of sales to United States Steel................................. - (24) ----- ----- Total revenues and other income.......................................... $23,103 $26,264 ====== ======
MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
5. (Continued) Nine Months Ended September 30 (In millions) 2002 2001 - ------------------------------------------------------------------------------------------------------ Income: Segment income................................................................. $1,019 $3,032 Items not allocated to segments: Administrative expenses...................................................... (125) (127) Gain (loss) on ownership change in MAP....................................... 9 (5) Gain on lease resolution with U.S. Government................................ - 59 Gain on asset disposition ................................................... 24 - Contract settlement.......................................................... (15) - Inventory market valuation credit............................................ 72 - Loss related to sale of certain Canadian assets.............................. - (221) ------ ------ Total income from operations................................................ $984 $2,738 ====== ======
6. During 2002, in two separate transactions, Marathon acquired interests in the Alba Field offshore Equatorial Guinea, West Africa, and certain other related assets. On January 3, 2002, Marathon acquired certain interests from CMS Energy Corporation for $1,005 million. Marathon acquired three entities that own a combined 52.4% working interest in the Alba Production Sharing Contract and a net 43.2% interest in an onshore liquefied petroleum gas processing plant through an equity method investee. Additionally, Marathon acquired a 45% net interest in an onshore methanol production plant through an equity method investee. Results of operations for the nine months of 2002 include the results of the interests acquired from CMS Energy from January 3, 2002. On June 20, 2002, Marathon acquired 100% of the outstanding stock of Globex Energy, Inc. (Globex) for $155 million. Globex owned an additional 10.9% working interest in the Alba Production Sharing Contract and an additional net 9.0% interest in the onshore liquefied petroleum gas processing plant. Globex also held oil and gas interests offshore Australia. The allocations of purchase price are preliminary. The allocations to intangible assets are not expected to be significant. The goodwill arising from the preliminary allocations was $179 million, which was assigned to the E&P segment. Significant factors that resulted in the recognition of goodwill include: the ability to acquire an established business with an assembled workforce and a proven track record and a strategic acquisition in a core geographic area. Additionally, the purchase price allocated to the equity method investments is $224 million higher than the underlying net assets of the investees. This excess will be amortized over the expected useful life of the underlying assets except for $35 million of goodwill relating to the equity investments. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 6. (Continued) The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisitions: (In millions) -------------------------------------------------------------------------- Receivables..................................................... $ 22 Inventories..................................................... 10 Investments and long-term receivables........................... 463 Property, plant and equipment................................... 661 Goodwill (none deductible for income tax purposes).............. 179 Other assets.................................................... 3 ------ Total assets acquired........................................ $1,338 ------ Current liabilities............................................. $ (31) Deferred income taxes........................................... (147) ------ Total liabilities assumed................................... $ (178) ------ Net assets acquired......................................... $1,160 ====== In the first quarter 2001, Marathon acquired Pennaco Energy, Inc.(Pennaco), a natural gas producer. Marathon acquired 87% of the outstanding stock of Pennaco through a tender offer completed on February 7, 2001 at $19 a share. On March 26, 2001, Pennaco was merged with a wholly owned subsidiary of Marathon. Under the terms of the merger, each share not held by Marathon was converted into the right to receive $19 in cash. The total cash purchase price of Pennaco was $506 million. The acquisition was accounted for under the purchase method of accounting. The goodwill totaled $70 million. Goodwill amortization ceased upon adoption of SFAS No. 142 on January 1, 2002. Results of operations for the nine months of 2001 include the results of Pennaco from February 7, 2001. The following unaudited pro forma data for Marathon includes the results of operations of the above acquisitions giving effect to them as if they had been consummated at the beginning of the periods presented. The pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations. Included in the amounts for the nine months ended September 30, 2002 are approximately $3 million (net of tax of $2 million) or $0.01 per share of nonrecurring legal and employee benefit costs incurred by Globex related to the acquisition. Nine Months Ended September 30 (In millions, except per share amounts) 2002 2001 --------------------------------------------------------------------------- Revenues and other income............................... $23,114 $26,345 Income from continuing operations....................... 338 1,259 Net income.............................................. 318 1,225 Per share amounts applicable to Common Stock - Income from continuing operations - basic............ 1.09 4.08 - Income from continuing operations - diluted.......... 1.09 4.07 - Net income - basic................................... 1.03 4.11 - Net income - diluted................................. 1.03 4.10 MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
7. During the second quarter of 2002, Marathon acquired additional interests in coalbed methane assets in the Powder River Basin of northern Wyoming and southern Montana from XTO Energy, Inc. (XTO) in exchange for certain oil and gas properties in eastern Texas and northern Louisiana. Additionally, 100 million cubic feet per day (MMCFD) of long term gas transportation capacity was released to Marathon by the original owner of the Powder River Basin interests. On July 1, 2002, Marathon completed this transaction by selling its production interests in the San Juan Basin of New Mexico to XTO for $42 million. Marathon recognized a pretax gain of $24 million in the third quarter related to this transaction. 8. Inventories are carried at lower of cost or market. Cost of inventories of crude oil and refined products is determined primarily under the last-in, first-out (LIFO) method. (In millions) --------------------------- September 30 December 31 2002 2001 ------------ ----------- Crude oil and natural gas liquids.................... $634 $693 Refined products and merchandise..................... 1,331 1,143 Supplies and sundry items............................ 110 87 ------ ------ Total (at cost)................................... 2,075 1,923 Less inventory market valuation reserve........... - 72 ------ ------ Net inventory carrying value......................... $2,075 $1,851 ====== ======
When the cost basis of its inventory exceeds market value, Marathon establishes an inventory market valuation (IMV) reserve to adjust the cost basis of its inventories to current market value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. Decreases in market prices below the cost basis result in charges to income from operations. Once a reserve has been established, subsequent inventory turnover and increases in prices (up to the cost basis) result in credits to income from operations. Nine months ended September 30, 2002, results of operations include a credit to income from operations of $72 million. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited)
9. The following sets forth Marathon's comprehensive income for the periods shown: Third Quarter Nine Months Ended Ended September 30 September 30 (In millions) 2002 2001 2002 2001 ------------- ------ ------ ------ ------ Net income.............................................. $87 $170 $322 $1,231 Other comprehensive income (loss), net of tax Foreign currency translation adjustments........................................ 3 - - (2) Deferred gains (losses) on derivative instruments.......................... (8) 15 (47) 57 Minimum pension liability adjustments................ - - - 2 ------ ------ ------ ------ Total comprehensive income.............................. $82 $185 $275 $1,288 ====== ====== ====== ======
During the first nine months of 2002, $14 million of gains, net of tax, were reclassified into earnings as a result of the discontinuance of cash flow hedges. As a result of a revised production forecast, it is no longer probable the original forecasted transactions will occur. 10. The provision for income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. In July 2002, the United Kingdom enacted a supplementary 10 percent tax on profits from North Sea oil and gas production retroactively effective to April 17, 2002. In the third quarter 2002, Marathon recognized a one-time noncash deferred tax adjustment of $61 million related to prior periods. The provision for income taxes for the first nine months of 2002 decreased by $400 million compared to the prior period primarily due to a $1,323 million decrease in income before income taxes in 2002 compared to 2001. The effective tax rate for the first nine months of 2002 was 46% compared to 35% for the comparable period in 2001. Without the one-time non cash deferred tax adjustment of $61 million, the effective tax rate for the first nine months of 2002 would have been 36%. Interest and other financial costs in the nine months of 2001 included a favorable adjustment of $9 million related to certain prior years' taxes. 11. At September 30, 2002, Marathon had no borrowings against its $1,354 million long-term revolving credit facility and no borrowings against its $451 million short-term revolving credit facility. In April 2002, Marathon initiated a $1,350 million U.S. commercial paper program which is backed by the long-term revolving credit facility. $275 million of commercial paper was outstanding at September 30, 2002. Certain banks provide Marathon with uncommitted short-term lines of credit totaling $200 million. At September 30, 2002, there were no borrowings against these facilities. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 11. (Continued) At September 30, 2002, MAP had no borrowings against its $350 million short-term revolving credit agreements with banks and had no borrowings outstanding against its $190 million revolving credit agreement with Ashland, Inc., which was amended and extended for one year to March 15, 2003. MAP had an additional committed $100 million 364-day revolving credit facility which expired in July 2002. At September 30, 2002, in the event of a change in control of Marathon, debt obligations totaling $2,378 million and operating lease obligations of $100 million may be declared immediately due and payable. In such event, Marathon may also be required to either repurchase the leased Fairfield slab caster for $96 million or provide a letter of credit to secure the remaining obligation. 12. In the first nine months of 2002, Marathon issued notes of $1.45 billion as follows: $450 million due 2012, $550 million due 2032 and $450 million due 2007, bearing interest at 6.125%, 6.8% and 5.375%, respectively. Additionally, Marathon Global Funding Corporation, a 100%-owned consolidated finance subsidiary of Marathon, issued notes of $400 million due 2012, bearing interest at 6.0%. Marathon has fully and unconditionally guaranteed the securities of Marathon Global Funding. Marathon used the net proceeds to fund the purchase price and associated costs of the CMS Energy and Globex acquisitions, to refinance existing debt, to reduce outstanding commercial paper and for other general corporate purposes. The debt repurchased and retired early had average terms to maturity of between two and 21 years bearing interest at rates ranging from 8.125% to 9.375% per year, or a weighted average of 9.04% per year. The retirement of $144 million in the third quarter resulted in an extraordinary loss of $7 million (net of tax of $5 million) or $0.02 per share. During the nine months ended September 30, 2002, Marathon retired $337 million of long-term debt resulting in an extraordinary loss of $33 million (net of tax of $20 million) or $0.10 per share. 13. Marathon is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. Marathon is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At September 30, 2002 and December 31, 2001, accrued liabilities for remediation totaled $72 million and $77 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $58 million at September 30, 2002, and $60 million at December 31, 2001. MARATHON OIL CORPORATION SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 13. (Continued) For a number of years, Marathon has made substantial capital expenditures to ensure its existing facilities comply with various laws relating to the environment. In the nine months of 2002 and for the years 2001 and 2000, such capital expenditures totaled $69 million, $85 million and $73 million, respectively. At September 30, 2002 and December 31, 2001, accrued liabilities for platform abandonment and dismantlement totaled $217 million and $193 million, respectively. Marathon guaranteed certain obligations related to the business of United States Steel. As of September 30, 2002 and December 31, 2001, the exposure for all of these matters totaled $19 million and $28 million, respectively. United States Steel is the sole general partner of Clairton 1314B Partnership, L.P., which owns certain cokemaking facilities formerly owned by United States Steel. Marathon has guaranteed to the limited partners all obligations of United States Steel under the partnership documents. United States Steel may dissolve the partnership under certain circumstances, including if it is required to fund accumulated cash shortfalls of the partnership in excess of $150 million. In addition to the normal commitments of a general partner, United States Steel has indemnified the limited partners for certain income tax exposures. United States Steel has reported that it currently has no unpaid outstanding obligations to the limited partners. At September 30, 2002, and December 31, 2001, Marathon's pro rata share of obligations of LOOP LLC and various pipeline investees secured by throughput and deficiency agreements totaled $168 million. Under the agreements, Marathon is required to advance funds if the investees are unable to service debt. Any such advances are prepayments of future transportation charges. At September 30, 2002, and December 31, 2001, MAP had guaranteed the repayment of $75 million and $38 million, respectively of the outstanding balance of Centennial Pipeline LLC's Master Shelf and Revolving Note Agreements. At September 30, 2002, and December 31, 2001, Marathon's contract commitments to acquire property, plant and equipment and long-term investments totaled $664 million and $297 million, respectively. MARATHON OIL CORPORATION AND SUBSIDIARY COMPANIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Marathon Oil Corporation (Marathon), formerly USX Corporation, is engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of crude oil and petroleum products primarily through its 62 percent owned subsidiary, Marathon Ashland Petroleum LLC (MAP); and other energy related businesses. Management's Discussion and Analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements. The discussion of the Consolidated Statement of Income should be read in conjunction with the Supplemental Statistics provided on page 45. Prior to December 31, 2001, Marathon had two outstanding classes of common stock: USX-Marathon Group common stock (Marathon Stock), which was intended to reflect the performance of Marathon's energy business, and USX-U. S. Steel Group common stock (Steel Stock), which was intended to reflect the performance of Marathon's steel business. On December 31, 2001, Marathon disposed of its steel business by distributing the common stock of its wholly owned subsidiary United States Steel Corporation (United States Steel) to holders of Steel Stock in exchange for all outstanding shares of Steel Stock on a one-for-one basis (the Separation). Certain sections of Management's Discussion and Analysis include forward-looking statements concerning trends or events potentially affecting Marathon. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of Marathon, see the information preceding Part I in the Marathon 2001 Form 10-K and subsequent filings. New Accounting Standards - ------------------------ Since the issuance of Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), the FASB has issued several interpretations. As a result, Marathon has recognized in income beginning on January 1, 2002, the effect of changes in the fair value of two long-term natural gas sales contracts in the United Kingdom (U.K.). As of January 1, 2002, Marathon recognized a favorable cumulative effect of a change in accounting principle of $13 million, net of tax of $7 million. The unfavorable pretax change in the fair value of the gas contracts during the first nine months of 2002 was $9 million. The recorded derivative assets will continue to be marked-to-market. Marathon expects to experience some volatility in earnings as a result of these interpretations. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 "Accounting for Asset Retirement Obligations" (SFAS No. 143). This statement requires the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Marathon will adopt this statement effective January 1, 2003, as required. The adoption of this statement will result in a cumulative effect and be reported as a change in accounting principle relating primarily to the abandonment of oil and gas producing facilities. Marathon expects that the cumulative effect adjustment will be favorable and that the effect on future earnings will be unfavorable. However, Marathon cannot reasonably quantify the effect of adoption on either its financial position or results of operations at this time. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS No. 145). Extinguishment of debt will be accounted for in accordance with Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". SFAS No. 145 has a dual effective date. The provisions relating to accounting for leases were applicable to transactions occurring after May 15, 2002. The provisions relating to the early extinguishment of debt will be adopted by Marathon on January 1, 2003. As a result, losses from the early extinguishment of debt in 2002, which are currently reported as extraordinary items, will be reported in income from continuing operations in comparative financial statements subsequent to the adoption of SFAS No. 145. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 "Accounting for Exit or Disposal Activities" (SFAS No. 146). SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------
Results of Operations - --------------------- Revenues and other income for the third quarter and first nine months of 2002 and 2001 are summarized in the following table: Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------ Exploration & production $935 $1,035 $2,814 $3,731 Refining, marketing & transportation 7,267 7,247 19,394 21,585 Other energy related businesses 556 458 1,543 1,724 ------ ------ ------ ------ Segment revenues and other income 8,758 8,740 23,751 27,040 Revenues and other income not allocated to segments: Gain (loss) on ownership change in MAP 5 1 9 (5) Gain on lease resolution with the U.S. Government - - - 59 Gain on asset disposition 24 - 24 - Loss related to sale of certain Canadian assets - (221) - (221) Elimination of intersegment revenues (269) (168) (681) (585) Elimination of sales to United States Steel - (4) - (24) ----- ----- ------ ------ Total revenues and other income $8,518 $8,348 $23,103 $26,264 ====== ====== ====== ====== Items included in both revenues and costs and expenses, resulting in no effect on income: Consumer excise taxes on petroleum products and merchandise $1,114 $1,152 $3,193 $3,322 Matching crude oil, gas and refined product buy/sell transactions settled in cash: E&P 78 126 227 359 RM&T 1,189 1,024 3,078 2,921 ------ ------ ------ ------ Total buy/sell transactions $1,267 $1,150 $3,305 $3,280 ====== ====== ====== ======
E&P segment revenues decreased by $100 million in the third quarter of 2002 from the comparable prior-year period. This decrease primarily reflected lower worldwide liquid hydrocarbon and natural gas volumes and losses from derivative activities, partially offset by higher liquid hydrocarbon prices. For the first nine months of 2002, revenues decreased by $917 million from the prior-year period. This decrease primarily reflected lower worldwide natural gas and liquid hydrocarbon prices and lower domestic liquid hydrocarbon volumes, partially offset by higher international liquid hydrocarbon volumes. RM&T segment revenues in the third quarter of 2002 were flat with the comparable prior-year period. For the first nine months of 2002, revenues decreased by $2,191 million from the prior-year period. The decrease in the first nine months primarily reflected lower refined product prices. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------
OERB revenues increased by $98 million in the third quarter of 2002 from the comparable prior-year period. This increase in the third quarter primarily reflected increased natural gas and crude oil sales volumes. For the first nine months of 2002, revenues decreased by $181 million from the prior-year period. The decrease in the first nine months primarily reflected lower natural gas prices partially offset by higher natural gas and crude oil sales volumes. Income from operations for the third quarter and first nine months of 2002 and 2001 is summarized in the following table: Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------- E&P Domestic $187 $207 $458 $1,007 International 63 49 219 292 ---- ---- ---- ---- E&P segment income 250 256 677 1,299 RM&T 108 575 268 1,693 OERB 29 6 74 40 ---- ---- ---- ----- Segment income 387 837 1,019 3,032 Items not allocated to segments: Administrative expenses (42) (40) (125) (127) Inventory market valuation - - 72 - Gain (loss) on ownership change - MAP 5 1 9 (5) Contract settlement (15) - (15) - Gain on asset disposition 24 - 24 - Gain on lease resolution with U.S. Government - - - 59 Loss related to sale of Certain Canadian Assets - (221) - (221) ---- ---- ---- ----- Total income from operations $359 $577 $984 $2,738 ==== ====== ==== ======
In the third quarter of 2002 segment income decreased by $450 million from last year's third quarter. Segment income in the first nine months of 2002 decreased by $2,013 million from the first nine months of 2001. The decrease in the third quarter was due primarily to lower refined product margins and lower liquid hydrocarbon and natural gas volumes. The decrease in the first nine months was due to lower refined product margins, lower liquid hydrocarbon and natural gas prices and volumes. Worldwide E&P segment income decreased $6 million and $622 million in the third quarter and first nine months of 2002, respectively, compared with the same periods in 2001, primarily due to the factors discussed below. Domestic E&P income in the third quarter of 2002 decreased by $20 million from last year's third quarter. Results in the first nine months of 2002 decreased by $549 million from the same period in 2001. The decrease in the third quarter was primarily due to lower liquid hydrocarbon and natural gas volumes. The decrease in the first nine months was due primarily to lower liquid hydrocarbon and natural gas prices and volumes, higher exploratory dry well expense and decreased derivative gains. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- International E&P income in the third quarter of 2002 increased by $14 million from last year's third quarter. Results in the first nine months of 2002 decreased by $73 million from the same period in 2001. The increase in the third quarter is a result of the addition of production interests in Equatorial Guinea, higher liquid hydrocarbon prices and lower transportation costs. This increase was partially offset by a mark-to-market valuation loss of $21 million associated with long-term natural gas contracts in the U.K. The decrease in the first nine months was due primarily to lower natural gas and liquid hydrocarbon prices, higher dry well expense and higher derivative losses partially offset by the addition of production interests in Equatorial Guinea and lower transportation costs. The first nine months of 2002 income includes a $9 million loss related to changes in the fair value of natural gas sales contracts in the U.K. (See Note 3 to the Consolidated Financial Statements.) RM&T segment income in the third quarter of 2002 decreased by $467 million from last year's third quarter. Results in the first nine months of 2002 decreased by $1,425 million from the same period in 2001. The decrease in downstream segment income was primarily due to a significantly lower refining and wholesale marketing margin. The refining and wholesale marketing margin was lower in the third quarter 2002 compared to the prior year period as crude oil costs increased more than refined product prices. Continuing narrow price differentials between sweet and sour crude oil in the third quarter 2002 also negatively impacted the refining and wholesale marketing margin. The refining and wholesale marketing margin was severely compressed in the first nine months of 2002 as refined product prices decreased more than crude oil costs compared to the prior year period. OERB segment income in the third quarter of 2002 increased by $23 million from last year's third quarter. Results in the first nine months of 2002 increased by $34 million from the same period in 2001. The increase in the third quarter reflected a favorable effect of $14 million from increased margins in our gas marketing activities and mark-to-market valuation changes in derivatives used to support those activities, earnings of $5 million from Marathon's equity investment in the Equatorial Guinea methanol plant acquired in 2002, and the recognition of a $5 million property damage loss in the third quarter 2001 for an equity investment in an offshore pipeline. The increase for the nine months was primarily the net result of increased margins in our gas marketing activities and mark-to-market valuation changes in derivatives used to support those activities and the aforementioned property damage loss in 2001. Net interest and other financial costs for the third quarter and the first nine months of 2002 increased $25 million and $81 million, respectively, from the comparable 2001 period. These increases were due to higher average debt levels resulting from acquisitions and the Separation. Also, in the first nine months of 2001, interest and other financial costs included a favorable adjustment of $9 million related to prior year taxes. The minority interest in income of MAP, which represents Ashland's 38 percent ownership interest, decreased $178 million and $512 million in the third quarter and the first nine months of 2002, respectively, from the comparable 2001 periods, due to lower MAP income as discussed above for the RM&T segment. The provision for income taxes in the third quarter of 2002 increased by $25 million from the comparable 2001 period primarily due to the United Kingdom's enactment of a supplementary 10 percent tax on profits from North Sea oil and gas production retroactively effective to April 17, 2002 resulting in a one-time non cash deferred tax MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- adjustment of $61 million. This increase was partially offset by a $65 million decrease in 2002 quarterly income before income taxes compared to the same period in 2001. The effective tax rate for the third quarter of 2002 was 61% compared to 39% for the third quarter of 2001. Without the one-time non cash deferred tax adjustment of $61 million, the effective tax rate for the third quarter of 2002 would have been 35%. Discontinued operations in the third quarter and first nine months of 2001 related to the businesses of United States Steel. Extraordinary loss from early extinguishment of debt in the third quarter of 2002 was attributable to the $144 million of long-term debt retired, resulting in a pre-tax extraordinary loss of $12 million ($7 million net of taxes or $.02 per share). During the first nine months of 2002, Marathon retired $337 million of long-term debt resulting in a pretax extraordinary loss of $53 million ($33 million net of taxes or $.10 per share.) The cumulative effect of changes in accounting principles of $13 million, net of a tax provision of $7 million in the first nine months of 2002 represents the adoption of recently issued interpretations by the FASB of SFAS No. 133 in which Marathon must recognize in income the effect of changes in the fair value of two long term natural gas contracts in the United Kingdom. The $8 million loss, net of a tax benefit of $5 million, in the first nine months of 2001 was an unfavorable transition adjustment related to the adoption of SFAS No. 133. For further discussion, see Note 3 to the Consolidated Financial Statements. Net income for the third quarter and first nine months decreased by $83 million and $909 million, respectively, in 2002 from 2001, primarily reflecting the factors discussed above. Dividends to Stockholders - ------------------------- On October 30, 2002, the Marathon Board of Directors (the Board) declared dividends of 23 cents per share, payable December 10, 2002, to stockholders of record at the close of business on November 20, 2002. Cash Flows - ---------- Net cash provided from operating activities was $1,470 million in the first nine months of 2002, compared with $2,695 million (from continuing operations) in the first nine months of 2001. The $1,225 million decrease mainly reflects the effects of lower refined product margins and lower prices for liquid hydrocarbons and natural gas. Capital expenditures in the first nine months of 2002 totaled $1,023 million excluding the acquisitions of Equatorial Guinea interests, compared with $1,020 million in the first nine months of 2001. The $3 million increase mainly reflected increased spending in the first nine months of 2002 in the OERB segment offset by decreased spending in the RM&T segment. The increase in the OERB segment was attributable to the $32 million paid to acquire the right to deliver and sell liquefied natural gas at terminal facilities located at Elba Island, near Savannah, Georgia. Marathon can supply up to 58 billion cubic feet of natural gas per year, for a minimum of 17 years, at the Elba Island LNG regasification terminal. For information regarding capital expenditures by segment, refer to the Supplemental Statistics on page 45. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Acquisitions included cash payments of $1,160 million in the first nine months of 2002 for the two acquisitions of Equatorial Guinea interests and $506 million in the first nine months of 2001 for Pennaco Energy, Inc. (Pennaco). For further discussion of acquisitions, see Note 6 to the Consolidated Financial Statements. Cash from disposal of assets was $94 million in the first nine months of 2002, compared with $181 million in the first nine months of 2001. In 2002, proceeds totaling $42 million were from the disposition of certain oil and gas properties in the San Juan Basin of New Mexico to complete the exchange transaction described below. Other proceeds in 2002 were primarily the result of the disposition of certain Speedway SuperAmerica LLC (SSA) stores. Proceeds in 2001 were mainly from the sale of various Canadian oil fields, SSA stores, and various domestic producing properties. Net cash provided from financing activities was $430 million in the first nine months of 2002, compared with net cash used of $962 million in the first nine months 2001. The increase was due to the financing primarily associated with the two acquisitions of Equatorial Guinea interests of approximately $1.2 billion. This was partially offset by the early extinguishment of debt of $337 million and the $295 million repayment of preferred securities which became redeemable or were converted to a right to receive cash upon the Separation. In early January 2002, Marathon paid $185 million to retire the 6.75% Convertible Quarterly Income Preferred Securities and $110 million to retire the 6.50% Cumulative Convertible Preferred Stock. Additionally, distributions to minority shareholder of MAP were $87 million in the first nine months of 2002, compared to $450 million in the comparable 2001 period. Significant noncash activities in the first nine months of 2002 included an asset exchange whereby Marathon acquired additional interests in coalbed methane assets in the Powder River Basin of northern Wyoming and southern Montana in exchange for certain oil and gas properties in eastern Texas and northern Louisiana. Additionally, 100 million cubic feet per day (MMCFD) of long term gas transportation capacity was released to Marathon as part of this transaction. Derivative Instruments - ---------------------- See Quantitative and Qualitative Disclosure About Market Risk for discussion of derivative instruments and associated market risk. Debt Ratings - -------------------------------- Marathon's senior unsecured debt is currently rated investment grade by Standard and Poor's Corporation, Moody's Investor Services, Inc. and Fitch Ratings with ratings of BBB+, Baa1, and BBB+, respectively. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Liquidity - --------- Marathon's main sources of liquidity and capital resources are internally generated cash flow from operations, committed and uncommitted credit facilities, and access to both the debt and equity capital markets. Marathon's ability to access the debt capital market is supported by its investment grade credit ratings. Because of the liquidity and capital resource alternatives available to Marathon, including internally generated cash flow, Marathon's management believes that its short-term and long-term liquidity is adequate to fund operations, including its capital spending program, repayment of debt maturities for the years 2002, 2003, and 2004, and any amounts that may ultimately be paid in connection with contingencies. Marathon has a committed $1,354 million long-term revolving credit facility that terminates in November 2005 and a committed $451 million 364-day revolving credit facility that terminates in November 2002. At September 30, 2002, there were no borrowings against these facilities. Marathon expects to renew the 364-day facility at approximately the same size. In April 2002, Marathon initiated a $1,350 million U.S. commercial paper program which is backed by the long-term revolving credit facility. $275 million of commercial paper was outstanding at September 30, 2002. Additionally, at September 30, 2002, Marathon had other uncommitted short-term lines of credit totaling $200 million, of which no amounts were drawn. MAP currently has a committed $350 million short-term revolving credit facility which expires in July 2003. Additionally, MAP has a $190 million revolving credit agreement with Ashland which expires in March 2003. As of September 30, 2002, MAP did not have any borrowings against these facilities. In early September 2002, Marathon filed a new universal shelf registration statement with the Securities and Exchange Commission registering $2.7 billion aggregate amount of common stock, preferred stock and other equity securities, debt securities, trust preferred securities and/or other securities, including securities convertible into or exchangeable for other equity or debt securities. In the first nine months of 2002, Marathon issued notes of $1.45 billion as follows: $450 million due 2012, $550 million due 2032 and $450 million due 2007, bearing interest at 6.125%, 6.8% and 5.375%, respectively. Additionally, Marathon Global Funding Corporation, a 100%-owned consolidated finance subsidiary of Marathon, issued notes of $400 million due 2012, bearing interest at 6.0%. Marathon has fully and unconditionally guaranteed the securities of Marathon Global Funding. Marathon used the net proceeds to fund the purchase price and associated costs of the CMS Energy and Globex acquisitions, to refinance existing debt, to reduce outstanding commercial paper and for other general corporate purposes. The debt repurchased and retired early had average terms to maturity of between two and 21 years bearing interest at rates ranging from 8.125% to 9.375% per year, or a weighted average of 9.04% per year. The retirement of $144 million in the third quarter resulted in an extraordinary loss of $7 million (net of tax of $5 million) or $0.02 per share. During the nine months ended September 30, 2002, Marathon retired $337 million of long-term debt resulting in an extraordinary loss of $33 million (net of tax of $20 million) or $0.10 per share. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Marathon is not dependent on off-balance sheet arrangements to meet its liquidity and capital resource needs. Marathon has used and may use in the future off-balance sheet arrangements to fund specific projects. For additional details of off-balance sheet arrangements, see Liquidity and Capital Resources on page 38 of the Annual Report on Form 10-K. Contract commitments for property, plant and equipment acquisitions and long-term investments at September 30, 2002, totaled $664 million compared with $297 million at December 31, 2001. Marathon management's opinion concerning liquidity and Marathon's ability to avail itself in the future of the financing options mentioned in the above forward-looking statements are based on currently available information. To the extent that this information changes, future availability of financing may be adversely affected. Factors that affect the availability of financing include the performance of Marathon (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the global financial climate, and, in particular, with respect to borrowings, the levels of Marathon's outstanding debt and credit ratings by rating agencies. Obligations Associated with the Separation of United States Steel - ----------------------------------------------------------------- Marathon remains obligated (primarily or contingently) for certain debt and other financial arrangements for which United States Steel has assumed responsibility for repayment under the terms of the Separation. In the event of United States Steel's failure to satisfy these obligations, Marathon would become responsible for repayment. As of September 30, 2002, Marathon has identified the following obligations totaling $676 million which have been assumed by United States Steel: o $470 million of industrial revenue bonds related to environmental improvement projects for current and former United States Steel facilities, with maturities ranging from 2009 through 2033. Accrued interest payable on these bonds was $7 million at September 30, 2002. o $80 million of sale-leaseback financing under a lease for equipment at United States Steel's Fairfield Works, with a term extending to 2012, subject to extensions. Accrued interest payable on this financing was $2 million at September 30, 2002. o $97 million of operating lease obligations, of which $83 million was in turn assumed by purchasers of major equipment used in plants and operations divested by United States Steel. o A guarantee of United States Steel's $19 million contingent obligation to repay certain distributions from its 50%-owned joint venture PRO-TEC Coating Company. o A guarantee of all obligations of United States Steel as general partner of Clairton 1314B Partnership, L.P. to the limited partners. United States Steel has reported that it currently has no unpaid outstanding obligations to the limited partners. For further discussion of the Clairton 1314B guarantee, see Note 13 to the Consolidated Financial Statements. o $1 million under the tax sharing agreement as described below. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Of the total $676 million, obligations of $560 million and corresponding receivables from United States Steel were recorded on Marathon's consolidated balance sheet (current portion - $14 million; long-term portion - $546 million). The remaining $116 million was related to off-balance sheet arrangements and contingent liabilities of United States Steel. Each of Marathon and United States Steel, as members of the same consolidated tax reporting group during taxable periods ended on or prior to December 31, 2001, is jointly and severally liable for the federal income tax liability of the entire consolidated tax reporting group for those periods. Marathon and United States Steel have entered into a tax sharing agreement which allocates tax liabilities relating to taxable periods ended on or prior to December 31, 2001. To address the possibility that the taxing authorities may seek to collect a tax liability from one party where the tax sharing agreement allocates that liability to the other party, the agreement includes indemnification provisions. United States Steel reported in its Form 10-Q for the quarterly period ended September 30, 2002, that it has significant restrictive covenants related to its indebtedness including cross-default and cross-acceleration clauses on selected debt which could have an adverse effect on its financial position and liquidity. However, United States Steel management believes that its liquidity will be adequate to satisfy its obligations for the foreseeable future. If there is a prolonged delay in the recovery of the manufacturing sector of the U.S. economy, United States Steel believes that it can maintain adequate liquidity through a combination of deferral of nonessential capital spending, sale of non-strategic assets and other cash conservation measures. Environmental Matters - --------------------- Marathon has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of Marathon's products and services, operating results will be adversely affected. Marathon believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business or the marine transportation of crude oil and refined products. Marathon has been notified that it is a potentially responsible party (PRP) at 11 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) as of September 30, 2002. In addition, there are three sites where Marathon has received information requests or other indications that Marathon may be a PRP under CERCLA but where sufficient information is not presently available to confirm the existence of liability. At many of these sites, Marathon is one of a number of parties involved and the total cost of remediation, as well as Marathon's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. There are also 103 additional sites, excluding retail marketing outlets, related to Marathon where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- through discussions or litigation. Of these sites, 16 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. Marathon accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. (See Note 13 to the Consolidated Financial Statements.) New or expanded environmental requirements, which could increase Marathon's environmental costs, may arise in the future. Marathon intends to comply with all legal requirements regarding the environment, but since many of them are not fixed or presently determinable (even under existing legislation) and may be affected by future legislation, it is not possible to predict accurately the ultimate cost of compliance, including remediation costs which may be incurred and penalties which may be imposed. However, based on presently available information, and existing laws and regulations as currently implemented, Marathon does not anticipate that environmental compliance expenditures (including operating and maintenance and remediation) will materially increase in 2002. Marathon's environmental capital expenditures are expected to be approximately $122 million in 2002. Based upon currently identified projects, Marathon anticipates that environmental capital expenditures will be approximately $157 million in 2003; however, actual expenditures may vary as the number and scope of environmental projects are revised as a result of improved technology or changes in regulatory requirements and could increase if additional projects are identified or additional requirements are imposed. New Tier II gasoline rules, which were finalized by the EPA in February 2000, and the diesel fuel rules, which were finalized in January 2001, require substantially reduced sulfur levels for gasoline and diesel. The combined capital costs to achieve compliance with the gasoline and diesel regulations could amount to approximately $850 million, which includes costs that could be incurred as part of other refinery upgrade projects, between 2002 and 2006. This is a forward-looking statement. Some factors (among others) that could potentially affect gasoline and diesel fuel compliance costs include obtaining the necessary construction and environmental permits, operating and logistical considerations, further refinement of preliminary engineering studies and project scopes, and unforeseen hazards. During 2001 MAP entered into a New Source Review consent decree and settlement of alleged Clean Air Act and other violations with the EPA covering all of MAP's refineries. The settlement committed MAP to specific control technologies and implementation schedules for environmental expenditures and improvements to MAP's refineries over approximately an eight year period. The current estimated cost to complete these programs is approximately $300 million in expenditures over the next six years. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- MAP has used MTBE as an octane enhancer and oxygenate in reformulated gasoline to comply with applicable laws for many years. The maximum amount of MTBE in gasoline is limited to 15% by volume. Approximately 7% of MAP's 2001 gasoline production contained MTBE. MAP had three MTBE units at its refineries in Detroit, Robinson and Catlettsburg with a relatively immaterial combined book value. Because several states in MAP's marketing area have passed laws banning MTBE as a gasoline component in the future, MAP decided in the first quarter of 2002 to begin to phase out production of MTBE and to reduce the remaining estimated useful life of the MTBE units. MTBE production was discontinued in October 2002, by which time the MTBE units were fully depreciated. Other Contingencies - ------------------- Marathon is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathon. However, management believes that Marathon will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to Marathon. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity". MAP has instituted a number of process and facility modifications at its Catlettsburg refinery to correct the operating conditions that led to a product quality issue earlier this year. MAP has been working with some regional gasoline jobbers and dealers since August to remedy certain product quality issues in gasoline produced at this refinery. As a part of its response to the situation, MAP has inspected a large number of retail, terminal and transportation facilities, and is systematically cleaning facilities that may have been impacted. Credit Risk - ----------- Marathon is exposed to credit risk in the form of possible nonpayment by customers and trading partners. A significant portion of this risk is concentrated in energy related businesses. The creditworthiness of customers and trading partners is subject to continuing review. When deemed appropriate, Marathon requires prepayment or letters of credit to secure credit exposure. Additionally, netting agreements are utilized to reduce exposures to firms with both receivables and payables. Marathon has in the past and continues to conduct business with the so-called "energy merchant" firms. Many of these firms have seen their credit ratings deteriorate during 2002. As a result, Marathon has reduced its exposure to these entities. In some cases security has been requested and, in other cases, all business activity has been stopped. Marathon estimates its aggregate net exposure to energy merchant companies to be less than $20 million with no individual company exposure greater than $10 million. Marathon has significant exposures to United States Steel arising from the separation. Those exposures are discussed in "Obligations Associated with the Separation of United States Steel". MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Outlook - ------- The outlook regarding Marathon's E&P segment revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming regions. Any significant decline in prices could have a material adverse effect on Marathon's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. Marathon estimates its 2003 and 2004 production will average approximately 390,000 to 395,000 barrels of oil equivalent per day (BOEPD). This compares to estimated 2002 production of approximately 413,000 BOEPD. The 2003 production forecast is less than expected due to project delays in Norway, as well as slower response time for new production in the Powder River Basin. Production for 2004 is less than the previous forecast of 430,000 to 435,000 boepd, due primarily to delayed production response in the Powder River Basin, permitting delays for the onshore facility associated with the Corrib field off the west coast of Ireland, and uncertainty regarding the development of the Ozona deepwater discovery in the Gulf of Mexico. This production revision is expected to negatively impact 2003 and 2004 earnings by approximately $.03 and $.10 per share, respectively, based on Marathon's forecast assumptions. Marathon continues to project an increase in its proven reserve base to approximately 1.4 billion barrels of oil equivalent by the end of 2004. On October 23, 2002, Marathon announced the Camden Hills field in the ultra-deepwater of the Gulf of Mexico began producing natural gas in 7,209 feet of water. The development, located in Mississippi Canyon Block 348 approximately 150 miles southeast of New Orleans, is the deepest field in the recently completed Canyon Express gas gathering system that links the Camden Hills, Aconcagua and Kings Peak fields. Marathon holds a 50 percent interest in Camden Hills and serves as operator. In the fourth quarter of 2002, Marathon plans to commence drilling operations on three deepwater wells in the Gulf of Mexico. Marathon plans to drill or participate in four additional wells in the Gulf of Mexico in 2003 and 2004. Other major upstream activities, which are currently underway or under evaluation, include: o Norway, where Marathon has interests in nine licenses in the Norwegian sector of the North Sea; o Alaska, where Marathon had a natural gas discovery on the Ninilchik Unit on the Kenai Peninsula with additional drilling planned in 2002; o Angola, where Marathon participated in the drilling of the successful Plutao exploration well on Block 31 and is currently participating in the drilling of the Gindungo well on Block 32. Marathon plans to participate in three or four additional exploration wells in this area during 2003; o Eastern Canada, where Marathon recently completed drilling the Annapolis G-24 well and expects to drill one or two additional exploration wells and gather extensive 3D seismic over two additional blocks in the area during 2003; and MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- o Equatorial Guinea, where a government approved expansion plan is underway to boost gas production from 250 to approximately 800 MMCFD in order to increase condensate production from 17,000 to approximately 46,000 gross barrels per day (BPD) by the fourth quarter of 2003. The additional gas production will be reinjected into the reservoir. Marathon is also finalizing plans to increase liquid petroleum gas (LPG) production by late 2004 through the expansion of existing LPG facilities from approximately 2,700 to 16,000 BPD. Marathon has proposed plans for a major liquefied natural gas (LNG) re-gasification and power generation complex near Tijuana in the Mexican State of Baja California. The proposed complex would consist of a LNG marine terminal, an off-loading terminal, onshore LNG re-gasification facilities, water desalinization plant, wastewater treatment facilities and pipeline infrastructure necessary to transport the natural gas. Additionally, a 1,000 megawatt natural gas-fired power generation plant would be constructed on the site. Potential completion and start-up is projected for 2005. In the North Sea, the Symphony natural gas pipeline project, another key component of Marathon's integrated gas strategy, recently conducted an open season for prospective shippers on this pipeline that is designed to transport gas from the UK and Norwegian North Sea to southern England. Based upon input from prospective shippers, Marathon will continue discussions with interested parties in evaluating the best transportation alternatives to bring Norwegian gas to the U.K. utilizing Marathon's Brae infrastructure. On October 1, 2002, Marathon announced the signing of a letter of intent with Rosneft Oil Company to participate in Urals North American Marketing, a venture that would transport and market Urals crude to the North American market. The venture is subject to the signing of definitive agreements and obtaining necessary U.S. and Russian government approvals. Expected start-up would be in the third quarter of 2003. The above discussion includes forward-looking statements with respect to the timing and levels of Marathon's worldwide liquid hydrocarbon and natural gas production, the exploration drilling program, additional resources, and the planned construction of LNG and pipeline facilities. Some factors that could potentially affect worldwide liquid hydrocarbon and natural gas production and the exploration drilling program include acts of war or terrorist acts and the governmental or military response, pricing, supply and demand for petroleum products, amount of capital available for exploration and development, occurrence of acquisitions/dispositions of oil and gas properties, regulatory constraints, timing of commencing production from new wells, drilling rig availability and other geological, operating and economic considerations. The forward-looking information related to reserve additions is based on certain assumptions, including, among others, presently known physical data concerning size and character of reservoirs, economic recoverability, technology development, future drilling success, production experience, industry economic conditions, levels of cash flow from operations and operating conditions. Factors that could impact the transporting and marketing of Urals crude to the North American market include the inability or delay in obtaining necessary government and third-party approvals, unforeseen difficulty in the negotiation of definitive agreements among project participants, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects and environmental and permitting issues. Some factors that could affect the planned construction of the LNG re-gasification, power generation and related facilities, as well as the North Sea pipeline transportation and related facilities, include, but are not limited to, MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- unforeseen difficulty in the negotiation of definitive agreements among project participants, identification of additional participants to reach optimum levels of participation, inability or delay in obtaining necessary government and third-party approvals, arranging sufficient project financing, unanticipated changes in market demand or supply, competition with similar projects and environmental and permitting issues. Additionally, the LNG project could be impacted by the availability or construction of sufficient LNG vessels. The foregoing factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. Marathon's RM&T segment income is largely dependent upon the refining and wholesale marketing margin for refined products, the retail gross margin for gasoline and distillates, and the gross margin on retail merchandise sales. The refining and wholesale marketing margin reflects the difference between the wholesale selling prices of refined products and the cost of raw materials refined, purchased product costs and manufacturing expenses. Refining and wholesale marketing margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate, the seasonal pattern of certain product sales, crude oil costs, manufacturing costs, the available supply of crude oil and refined products, and logistical constraints. The retail gross margin for gasoline and distillates reflects the difference between the retail selling prices of these products and their wholesale cost, including secondary transportation. Retail gasoline and distillate margins have also been historically volatile, but tend to be countercyclical to the refining and wholesale marketing margin. Factors affecting the retail gasoline and distillate margin include seasonal demand fluctuations, the available wholesale supply, the level of economic activity in the marketing areas and weather situations that impact driving conditions. The gross margin on retail merchandise sales tends to be less volatile than the retail gasoline and distillate margin. Factors affecting the gross margin on retail merchandise sales include consumer demand for merchandise items and the level of economic activity in the marketing area. At its Catlettsburg, Kentucky refinery, MAP has initiated a multi-year integrated investment program to upgrade product yield realizations and reduce fixed and variable manufacturing expenses. This program involves the expansion, conversion and retirement of certain refinery processing units which, in addition to improving profitability, will reduce the refinery's total gasoline pool sulfur below 30 ppm, thereby eliminating the need for low sulfur gasoline compliance investments at the refinery. The project is expected to be completed in late 2003. A MAP subsidiary, Ohio River Pipe Line LLC (ORPL), is building a pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier pipeline company and the pipeline will be an interstate common carrier pipeline. The pipeline is currently known as Cardinal Products Pipe Line and is expected to initially move about 50,000 barrels per day of refined petroleum into the central Ohio region. As of June 2002, ORPL had secured all of the rights-of-way required to build the pipeline, and on August 2, 2002, the final permits required to build the pipeline were approved. Construction began in August 2002 and start-up of the pipeline is expected to follow in the first half of 2003. On October 30, 2002, MAP announced its 50 percent-owned Pilot Travel Centers LLC (PTC) has signed a definitive agreement to purchase 60 retail travel centers including fuel inventory, merchandise and supplies. The 60 locations are in 15 states, primarily in the Midwest, Southeast and the Southwest regions of the country. Subject to governmental approval, the transaction is expected to close in approximately 60 days. MARATHON OIL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The above discussion includes forward-looking statements with respect to the Catlettsburg refinery, the Cardinal Products Pipe Line system and the PTC definitive agreement. Some factors that could potentially cause the actual results from the Catlettsburg investment program to differ materially from current expectations include the price of petroleum products, levels of cash flows from operations, unforeseen hazards such as weather conditions, the completion of construction and regulatory approval constraints. Factors that could impact the Cardinal Products Pipe Line include completion of construction and resolution of pending litigation. Some factors that could affect the PTC acquisition include inability or delay in obtaining necessary government and third-party approvals, and satisfaction of customary closing conditions. These factors (among others) could cause actual results to differ materially from those set forth in the forward-looking statements. On August 6, 2002, Marathon announced it will begin expensing the fair value of employee stock options on January 1, 2003. Marathon will adopt Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123). Under this methodology, stock options will be valued by using an option-pricing model, which expenses stock option grants over the vesting period. Currently, Marathon accounts for stock options using the principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25). Based upon this change, and assuming the number of stock options granted in 2003 approximates the number of those granted in 2002, the estimated impact on Marathon's 2003 earnings would not be materially different than under APB No. 25. MARATHON OIL CORPORATION ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ------------------------------------ Management Opinion Concerning Derivative Instruments - ---------------------------------------------------- Management has authorized the use of futures, forwards, swaps and options to manage exposure to market fluctuations related to commodities, interest rates, and foreign currency. Marathon uses commodity-based derivatives to manage price risk related to the purchase, production or sale of crude oil, natural gas, and refined products. To a lesser extent, Marathon is exposed to the risk of price fluctuations on natural gas liquids and on petroleum feedstocks used as raw materials. The approach of Marathon`s E&P segment to the use of commodity derivative instruments is selective and opportunistic. When it is deemed to be advantageous, Marathon may lock-in market prices on portions of its future production. Marathon's RM&T segment uses commodity derivative instruments to mitigate the price risk associated with crude oil and other feedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. Marathon's other energy related businesses are exposed to market risk associated with the purchase and subsequent resale of natural gas. Marathon uses commodity derivative instruments to mitigate the price risk on purchased volumes and anticipated sales volumes. As market conditions change, Marathon evaluates its risk management program and could enter into strategies that assume market risk whereby cash settlement of commodity-based derivatives will be based on market prices. From time to time, Marathon uses financial derivative instruments to manage interest rate and foreign currency exposures. As Marathon enters into derivatives, assessments are made as to the qualification of each transaction for hedge accounting. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose Marathon to material risk. However, the use of derivative instruments could materially affect Marathon's results of operations in particular quarterly or annual periods. Management believes that use of these instruments will not have a material adverse effect on financial position or liquidity. Commodity Price Risk and Related Risks - -------------------------------------- Marathon's strategy has generally been to obtain competitive prices for its products and allow operating results to reflect market price movements dictated by supply and demand. As part of achieving Marathon's strategy, certain fixed-priced physical contracts are hedged using derivative instruments that assume market risk. Marathon will use a variety of derivative instruments, including option combinations, as part of the overall risk management program to manage commodity price risk within its different businesses. MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10 percent and 25 percent changes in commodity prices for open derivative commodity instruments are provided in the following table(a): Incremental Decrease in Income Before Income Taxes Assuming a Hypothetical Price Change of:(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments(b)(c) Crude oil(d)................................ $47.0(e) $146.8(e) Natural gas(d).............................. 28.3(e) 96.2(e) Refined products(d)......................... 3.7(e) 12.4(e) (a) Amounts adjusted to reflect Marathon's 62 percent ownership of MAP. Marathon remains at risk for possible changes in the market value of derivative instruments; however, such risk should be mitigated by price changes in the underlying hedged item. Effects of these offsets are not reflected in the sensitivity analysis. Amounts reflect hypothetical 10% and 25% changes in closing commodity prices for each open contract position at September 30, 2002. Marathon management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Marathon is also exposed to credit risk in the event of nonperformance by counterparties. The creditworthiness of counterparties is subject to continuing review, including the use of master netting agreements to the extent practical. Changes to the portfolio subsequent to September 30, 2002, would cause future pretax income effects to differ from those presented in the table. (b) Net open contracts for the combined E&P and OERB segments varied throughout third quarter 2002, from a low of 30,201 contracts at August 16, to a high of 38,164 contracts at September 19, and averaged 34,684 for the quarter. The number of net open contracts for the RM&T segment varied throughout third quarter 2002, from a low of 12 contracts at August 2, to a high of 11,916 contracts at September 24, and averaged 4,313 for the quarter. The net open contracts represent 100% of MAP's positions. The derivative commodity instruments used and hedging positions taken will vary and, because of these variations in the composition of the portfolio over time, the number of open contracts by itself cannot be used to predict future income effects. (c) Gains and losses on options are based on changes in intrinsic value only. (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. (e) Price increase. MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------- E&P Segment Marathon uses derivative instruments in its E&P segment to mitigate the price risk associated with equity production of crude oil and natural gas. As of September 30, 2002, Marathon has entered into zero-cost collar options on approximately 30% of its remaining forecasted 2002 worldwide equity liquids production. These collars have been structured so that on average Marathon will receive the following: o When prices are below $19.34, market price plus $4 per barrel; o $23.34 when prices are between $19.34 and $23.34; o Market price when prices are between $23.34 and $29.35; and o No participation in market price movements above $29.35. The above-mentioned strategy is being marked-to-market and is reflected in income for the period. As of September 30, 2002, Marathon has entered into zero-cost collar options and other derivative instruments on approximately 30% of its remaining forecasted 2002 worldwide equity natural gas production. In one of the more significant strategies, Marathon has placed derivatives on 177 MMCFD at an average of $4.33 per MCF for the balance of 2002 relating to the Powder River Basin area. A portion of the above-mentioned strategy is being marked-to-market and is reflected in income for the period due to loss of hedge effectiveness. The balance qualifies for hedge accounting. Marathon has also entered into a zero-cost collar on 200 MMCFD through December 2002, whereby Marathon will receive up to $4.48 per MCF but no less than $3.19 per MCF. This strategy is being marked-to-market and is reflected in income for the period. As of September 30, 2002, Marathon has entered into zero-cost collars on 145 MMCFD of natural gas for January through December 2003, whereby Marathon will receive up to an average $4.64 per MCF but no less than an average $3.64 per MCF. Of the 145 MMCFD, 133 MMCFD currently qualify for hedge accounting. Additionally, Marathon has also entered into zero-cost collars on 25,000 BPD of oil for January through December 2003, whereby Marathon will receive up to an average $28.54 per BBL but no less than an average $23.01 per BBL. 19,000 BPD qualify for hedge accounting. The remaining oil and gas volumes are being marked-to-market and included in income. Total net pretax derivative gains for the E&P segment were $9 million and $51 million for the first nine months of 2002 and 2001, respectively. Gains of $23 million from discontinued cash flow hedges for the first nine months of 2002 are included in the aforementioned amounts. These gains were reclassified from accumulated other comprehensive income (loss) as it is no longer probable that the original forecasted transactions will occur. RM&T Segment Marathon's RM&T operations generally use derivative commodity instruments to lock-in costs of certain crude oil and other feedstocks, to protect carrying values of inventories and to protect margins on fixed-price sales of refined products. Total net pretax derivative losses, net of the 38 percent minority interest in MAP, were $54 million for the first nine months 2002 compared with gains of $57 million for the first nine months 2001. RM&T's trading activity gains and losses were not significant for the first nine months 2002 and 2001. MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------- OERB Segment Marathon has sold forward a specified volume of natural gas. Marathon has used derivatives to convert the fixed price in this contract to market prices. The underlying physical contract matures in 2008. Marathon generally will use derivative instruments to assume market risk on these contracts. In addition, Marathon uses fixed-price physical contracts for portions of its purchase for resale volumes to manage exposure to fluctuations in natural gas prices. Total net pretax derivative losses were $1 million and $29 million for the first nine months of 2002 and 2001, respectively. Other Commodity Related Risks - ----------------------------- Marathon is subject to basis risk, caused by factors that affect the relationship between commodity futures prices reflected in derivative commodity instruments and the cash market price of the underlying commodity. Natural gas transaction prices are frequently based on industry reference prices that may vary from prices experienced in local markets. For example, New York Mercantile Exchange (NYMEX) contracts for natural gas are priced at Louisiana's Henry Hub, while the underlying quantities of natural gas may be produced and sold in the Western United States at prices that do not move in strict correlation with NYMEX prices. To the extent that commodity price changes in one region are not reflected in other regions, derivative commodity instruments may no longer provide the expected hedge, resulting in increased exposure to basis risk. These regional price differences could yield favorable or unfavorable results. OTC transactions are being used to manage exposure to a portion of basis risk. Marathon is subject to liquidity risk, caused by timing delays in liquidating contract positions due to a potential inability to identify a counterparty willing to accept an offsetting position. Due to the large number of active participants, liquidity risk exposure is relatively low for exchange-traded transactions. Interest Rate Risk - ------------------ Sensitivity analysis of the incremental effects on the change in fair value assuming a hypothetical 10 percent change in interest rates is provided in the following table: Incremental Fair Increase in (Dollars in millions) Value(d) Fair Value(a) - -------------------------------------------------------------------------------- Financial assets: Interest Rate Swap Agreements(b)................ $3 $3 Financial liabilities: Long-term debt(c)............................... $5,206 $194 (a) For long-term debt, this assumes a 10% decrease in the weighted average yield to maturity of Marathon's long-term debt at September 30, 2002. For interest rate swap agreements, this assumes a 10% decrease in the effective swap rate at September 30, 2002. (b) See below. (c) Includes amounts due within one year. (d) Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------- At September 30, 2002, Marathon's portfolio of long-term debt was substantially comprised of fixed-rate instruments. Therefore, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. This sensitivity is illustrated by the $194 million increase in the fair value of long-term debt assuming a hypothetical 10 percent decrease in interest rates. However, Marathon's sensitivity to interest rate declines and corresponding increases in the fair value of its debt portfolio would unfavorably affect Marathon's results and cash flows only to the extent that Marathon would elect to repurchase or otherwise retire all or a portion of its fixed-rate debt portfolio at prices above carrying value. Marathon has initiated a program to manage its exposure to interest rate movements by utilizing financial derivative instruments. The primary objective of this program is to reduce the Company's overall cost of borrowing by managing the fixed and floating interest rate mix of the debt portfolio. Beginning in the third quarter 2002, Marathon entered into several interest rate swap agreements, designated as fair value hedges, which effectively resulted in an exchange of existing obligations to pay fixed interest rates for obligations to pay floating rates. The following table summarizes our interest rate swap activity as of September 30 and November 14, 2002: As of September 30, 2002 - ------------------------ Fixed Rate Notional 09/30/02 to be Amount Swap Fair Value Floating Rate to be Paid Received ($Millions) Maturity ($Millions) - ------------------------------------------------------------------------- Six Month LIBOR +1.915% 5.375% $200 2007 $2.5 Cumulative as of November 14, 2002 - ---------------------------------- Fixed Rate Notional to be Amount Floating Rate to be Paid Received ($Millions) Swap Maturity - ----------------------------------------------------------------------------- Six Month LIBOR +1.935% 5.375% $450 2007 During the first nine months of 2002, Marathon entered into U.S. Treasury Rate lock agreements to hedge pending issuances of new debt. The U.S. Treasury Rate lock agreements, which were designated and effective as cash flow hedges, were settled for a net of $14 million concurrent with the issuance of the new debt. The $9 million, net of tax, unrecognized loss is being reclassified from accumulated other comprehensive income (loss) to net interest and other financial cost over the life of the new debt. Foreign Currency Exchange Rate Risk - ----------------------------------- As of September 30, 2002, the discussion of foreign currency exchange rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in Marathon's 2001 Form 10-K. MARATHON OIL CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------- Safe Harbor - ----------- Marathon's quantitative and qualitative disclosures about market risk include forward-looking statements with respect to management's opinion about risks associated with the use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for crude oil, natural gas, and refined products. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to Marathon's hedging programs may differ materially from those discussed in the forward-looking statements. MARATHON OIL CORPORATION ITEM 4. CONTROLS AND PROCEDURES ----------------------------- Item 4. Controls and Procedures - ------------------------------- Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of Marathon's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. No significant changes were made in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. MARATHON OIL CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) -----------------------------------
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS Exploration & Production United States.............................................. $187 $207 $458 $1,007 International.............................................. 63 49 219 292 ----- ----- ----- ----- E&P Segment Income..................................... 250 256 677 1,299 Refining, Marketing & Transportation(a)..................... 108 575 268 1,693 Other Energy Related Businesses(b).......................... 29 6 74 40 ----- ----- ----- ----- Segment Income......................................... $387 $837 $1,019 $3,032 Items Not Allocated To Segments: Administrative Expenses..................................... (42) (40) (125) (127) Inventory Market Valuation Credit........................... - - 72 - Gain on lease resolution with U.S. Government............... - - - 59 Gain (Loss) on Ownership Change - MAP....................... 5 1 9 (5) Contract settlement......................................... (15) - (15) - Gain on asset disposition................................... 24 - 24 - Loss related to sale of certain Canadian assets............. (221) (221) ------ ------ ------ ------ Income From Operations.................................. $359 $577 $984 $2,738 CAPITAL EXPENDITURES Exploration & Production.................................... $222 $219 $660 $593 Refining, Marketing & Transportation........................ 121 153 303 365 Other(c).................................................... 40 20 60 62 ----- ----- ----- ----- Total................................................... $383 $392 $1,023 $1,020 EXPLORATION EXPENSE United States............................................... $4 $9 $85 $34 International............................................... 25 11 45 35 ----- ----- ----- ----- Total................................................... $29 $20 $130 $69 OPERATING STATISTICS Net Liquid Hydrocarbon Production(d)(f) United States............................................. 113.8 124.1 118.3 124.9 U.S. Equity Investee (MKM)................................ 8.2 9.0 8.5 9.5 ------ ------ ------ ------ Total United States.................................... 122.0 133.1 126.8 134.4 Europe................................................... 38.6 52.3 50.7 47.0 Other International...................................... 6.3 10.4 5.0 12.7 West Africa.............................................. 22.5 13.5 23.5 17.3 International Equity Investee (CLAM)..................... - - - .1 Total International.................................... 67.4 76.2 79.2 77.1 ------ ------ ------ ------ Worldwide.............................................. 189.4 209.3 206.0 211.5 Net Natural Gas Production(e)(f)(g) United States............................................ 709.6 751.8 743.3 771.3 Europe................................................... 270.4 301.4 308.8 322.1 Other International...................................... 99.0 119.1 104.0 125.4 West Africa.............................................. 72.5 - 48.3 - International Equity Investee (CLAM)..................... 16.1 26.4 23.3 31.6 Total International................................... 458.0 446.9 484.4 479.1 ------ ------- ------- ------ Worldwide............................................. 1,167.6 1,198.7 1,227.7 1,250.4 Total production (MBOEPD)..................................... 384.0 409.1 410.6 419.9
MARATHON OIL CORPORATION SUPPLEMENTAL STATISTICS (Unaudited)
Third Quarter Nine Months Ended Ended September 30 September 30 (Dollars in millions) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------ OPERATING STATISTICS Average Sales Prices (excluding derivative gains and losses) Liquid Hydrocarbons United States................................................ $23.77 $21.97 $21.31 $22.54 U.S. Equity Investee (MKM)................................... 27.35 25.01 23.98 25.07 Total United States ....................................... 24.01 22.18 21.49 22.72 Europe........................................................ 26.52 24.67 23.54 25.60 Other International........................................... 25.21 22.55 23.05 21.99 West Africa................................................... 25.89 24.20 23.39 25.95 International Equity Investees (CLAM)......................... 36.36 42.36 15.51 28.86 Total International......................................... 26.20 24.31 23.46 25.09 Worldwide................................................... $24.79 $22.95 $22.25 $23.58 Natural Gas(g) United States................................................. $2.75 $2.69 $2.69 $4.20 Europe........................................................ 2.56 2.38 2.61 2.69 Other International........................................... 3.05 2.82 3.01 4.72 West Africa................................................... .24 - .24 - International Equity Investees (CLAM)......................... 2.69 3.29 2.95 3.46 Total International......................................... 2.30 2.55 2.48 3.27 Worldwide................................................... $2.57 $2.64 $2.60 $3.85 Average Sales Prices (including derivative gains and losses) Liquid Hydrocarbons United States................................................ $23.54 $22.09 $20.71 $22.58 U.S. Equity Investee (MKM)................................... 27.35 25.01 23.98 25.07 Total United States ....................................... 23.80 22.29 20.93 22.75 Europe........................................................ 26.45 24.67 23.52 25.60 Other International........................................... 25.21 22.55 23.05 21.99 West Africa................................................... 25.89 24.20 23.39 25.95 International Equity Investees (CLAM)......................... 36.36 42.36 15.51 28.86 Total International......................................... 26.15 24.31 23.45 25.09 Worldwide................................................... $24.64 $23.03 $21.90 $23.60 Natural Gas(g) United States................................................ $2.83 $2.76 $2.87 $4.44 Europe........................................................ 1.72 2.38 2.51 2.69 Other International........................................... 3.05 2.82 3.01 4.72 West Africa................................................... .24 - .24 - International Equity Investees (CLAM)......................... 2.69 3.29 2.95 3.46 Total International......................................... 1.81 2.55 2.41 3.27 Worldwide................................................... $2.41 $2.68 $2.68 $3.99 MAP: Crude Oil Refined(d)............................................. 931.3 961.1 931.9 930.0 Consolidated Refined Products Sold(d)............................ 1,387.4 1,343.8 1,322.7 1,300.3 Matching buy/sell volumes included in refined products sold(d)............................................ 94.4 43.0 76.4 43.8 Refining and Wholesale Marketing Margin(h)(i).................... $.0389 $.1314 $.0364 $.1347 Number of SSA retail outlets(k).................................. 2,063 2,145 - - SSA Gasoline and Distillate Sales(j)(k).......................... 943 916 2,706 2,657 SSA Gasoline and Distillate Gross Margin(h)(k)................... $.1063 $.1331 $.1007 $.1230 SSA Merchandise Sales(k)......................................... $645 $607 $1,797 $1,669 SSA Merchandise Gross Margin(k).................................. $150 $137 $436 $387
MARATHON OIL CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- (a) Includes MAP at 100%. RM&T segment income includes Ashland's 38% interest in MAP of $45 million, $223 million, $110 million and $650 million in the third quarter and nine months of 2002 and 2001, respectively. (b) Includes domestic natural gas and crude oil marketing and transportation. (c) Includes other energy related businesses and corporate capital expenditures. (d) Thousands of barrels per day (e) Millions of cubic feet per day (f) Amounts reflect sales before royalties, if any, excluding Canada, Equatorial Guinea, Gabon and the United States where amounts are shown after royalties. (g) Includes gas acquired for injection and subsequent resale of 4.0, 6.8, 4.4, and 8.3 MMCFD in the third quarter and nine months of 2002 and 2001, respectively. (h) Per gallon (i) Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation. (j) Millions of gallons (k) Excludes travel centers contributed to Pilot Travel Centers LLC. Periods prior to September 1, 2001 have been restated. Part II - Other Information: - ---------------------------- Item 1. LEGAL PROCEEDINGS Cajun Express Arbitration In September, 2002, Marathon settled its pending arbitration with Transocean Sedco Forex Inc. arising from Marathon's cancellation of the Cajun Express rig contract on July 5, 2001. Transocean's July 19, 2001 demand for arbitration sought net lost revenue of an unspecified amount. The contract may have generated $90 million in gross revenues over the remainder of the 18 month period. The settlement terms included payment of a portion of the disputed claim resulting in a $9 million after-tax loss. Environmental Proceedings On December 3, 2001, Illinois EPA (IEPA) issued a Notice of Violation to MAP arising out of the sinking of a floating roof on a storage tank at a Martinsville, Illinois facility. A heavy rainfall caused the floating roof to sink. MAP believes it may have an Act of God/emergency defense. Based upon discussions with IEPA, MAP expects the matter to be referred to the Illinois Attorney General's office for enforcement proceedings. In March, 2002, MAP attended a meeting with the Illinois EPA concerning MAP's self reporting of possible emission exceedences and permitting issues related to some storage tanks at MAP's Robinson, Illinois facility. In late April, MAP submitted to IEPA a comprehensive settlement proposal which was rejected by IEPA. We have had subsequent discussions with IEPA and the Illinois Attorney General's office and anticipate additional meetings and discussions in the coming months. Part II - Other Information (Continued): - ---------------------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 Marathon Oil Corporation Deferred Compensation Plan for Non-Employee Directors, Amended and Restated as of January 1, 2002. 10.2 Second Amended and Restated Marathon Oil Corporation Non-Officer Restricted Stock Plan, effective as of January 2, 2002. 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges. 99.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) REPORTS ON FORM 8-K Form 8-K dated August 13, 2002 (filed August 13, 2002), reporting under Item 9. Regulation FD Disclosure, that Marathon Oil Corporation's President and Chief Executive Officer and Chief Financial Officer submitted to the SEC statements under oath regarding facts and circumstances relating to Exchange Act filings. Form 8-K dated November 14, 2002 (filed November 14, 2002), reporting under Item 9. Regulation FD Disclosure, that Marathon Oil Corporation updated its production forecast. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned chief accounting officer thereunto duly authorized. MARATHON OIL CORPORATION By /s/ A. G. Adkins A. G. Adkins Vice President - Accounting and Controller November 14, 2002 MARATHON OIL CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Clarence P. Cazalot, Jr., President & Chief Executive Officer, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Marathon Oil Corporation; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Clarence P. Cazalot, Jr. Clarence P. Cazalot, Jr. President & Chief Executive Officer MARATHON OIL CORPORATION CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John T. Mills, Chief Financial Officer, certify that: (1) I have reviewed this quarterly report on Form 10-Q of Marathon Oil Corporation; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ John T. Mills John T. Mills Chief Financial Officer EX-10 3 ex10-1_30sep02.txt EXHIBIT 10.1 EXHIBIT 10.1 MARATHON OIL CORPORATION DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (Amended and Restated as of January 1, 2002) 1. Purpose The Marathon Oil Corporation Deferred Compensation Plan for Non-Employee Directors is intended to enable the Corporation to attract and retain non-employee Directors and to enhance the long-term mutuality of interest between such Directors and shareholders of the Corporation. 2. Definitions The following definitions apply to this Plan and to the Deferral Election Forms: (a) Beneficiary or Beneficiaries means a person or persons or other entity designated on a Beneficiary Designation Form by a Participant as allowed in subsection 8(c) of this Plan to receive Deferred Benefit payments. If there is no valid designation by the Participant, or if the designated Beneficiary or Beneficiaries fail to survive the Participant or otherwise fail to take the Benefit, the Participant's Beneficiary is the Participant's surviving spouse or, if there is no surviving spouse, the Participant's estate. (b) Beneficiary Designation Form means a form acceptable to the Committee or its designee and used by a Participant according to this Plan to name his/her Beneficiary or Beneficiaries. (c) Board means the board of directors of Marathon Oil Corporation. (d) Committee means the Compensation and Organization Committee of the Board or such other committee of the Board as the Board may designate to administer the Plan. (e) Common Stock means the common stock of the Corporation. (f) Common Stock Unit means a book-entry unit equal in value to a share of Common Stock. (g) Corporation means Marathon Oil Corporation, or any successor thereto. (h) Deferral Election Form means a document designated by the Committee for the purpose of allowing a Participant to elect to make a deferral under section 4 of this Plan, including the portion that is the Distribution Election Form. (i) Deferral Year means a calendar year for which a Participant has a Deferred Benefit. (j) Deferred Benefit means either a Deferred Cash Benefit or a Deferred Stock Benefit under the Plan. (k) Deferred Cash Account means that bookkeeping record established for each Participant who elects a Deferred Cash Benefit under this Plan. A Deferred Cash Account is established only for purposes of measuring a Deferred Cash Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Cash Benefit. A Deferred Cash Account will be credited with that portion of the Participant's Retainer Fee deferred as a Deferred Cash Benefit according to a Deferral Election Form and according to section 6 of this Plan. A Deferred Cash Account will be credited periodically with amounts as provided under section 6(b) of this Plan. (l) Deferred Cash Benefit means the Deferred Benefit elected by a Participant under section 4 that results in payments governed by sections 6 and 8. (m) Deferred Stock Account means that bookkeeping record established for each Participant to reflect the status of his/her Deferred Stock Benefits under this Plan. A Deferred Stock Account is established only for purposes of measuring a Deferred Stock Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Stock Benefit. A Deferred Stock Account will be credited with that portion of the Participant's Retainer Fee deferred as a Deferred Stock Benefit according to section 3 of this Plan and any dividend equivalent payments according to section 7 of this Plan. A Deferred Stock Account will be credited periodically with amounts determined by the Committee under subsection 7(b) of this Plan. (n) Deferred Stock Benefit means the Deferred Benefit that is established in accordance with section 3 of this Plan and that results in distributions governed by sections 7 and 8. (o) Directors means those duly named members of the Board. (p) Distribution Election Form means that part of a Deferral Election Form used by a Participant according to this Plan to establish the post-Termination duration of deferral of a Deferred Benefit and the frequency of payments of any Deferred Cash Benefit. If a Deferred Benefit has no Distribution Election Form that is operative according to section 4, distribution of that Deferred Benefit is governed by section 8. (q) Election Date means the date established by this Plan as the date before which a Participant must submit a valid Deferral Election Form to the Committee. For each Deferral Year, the Election Date is December 31 of the preceding calendar year or, in the case of an individual who becomes a Participant during a Deferral Year, the date that he/she becomes a Participant. Despite the two preceding sentences, the Committee may set an earlier date as the Election Date for any Deferral Year. (r) Participant means a Director who is not simultaneously an employee of the Corporation. (s) Plan means the Marathon Oil Corporation Deferred Compensation Plan for Non-Employee Directors. (t) Retainer Fee means that portion of a Participant's compensation that is fixed and paid without regard to his/her attendance at meetings. (u) Terminate, Terminating, or Termination, with respect to a Participant, means cessation of his/her relationship with the Corporation as a Director whether by retirement, death, disability or severance for any other reason. 3. Minimum Stock-Based Compensation Each Person who becomes a Participant after October 29, 1996 shall receive at least 50 percent of his/her annual Retainer Fee in the form of Common Stock Units which are maintained as a Deferred Stock Benefit until termination within each Participant's Deferred Stock Account. 4. Deferral Election A deferral election is valid when a Deferral Election Form is completed, signed by the Participant, and received by the Committee or its designee. Deferral elections are governed by the provisions of this section. (a) A Participant may elect a Deferred Benefit for any Deferral Year if he/she is a Participant at the beginning of that Deferral Year or becomes a Participant during the Deferral Year. (b) Before each Deferral Year's Election Date, each Participant will be provided with a Deferral Election Form. Subject to Section 3, a Participant may elect on or before the Election Date to defer until after Termination the receipt of the remaining portion of his/her Retainer Fee for the Deferral Year in the form of a Deferred Cash Benefit. (c) A Participant may not elect to convert a Deferred Cash Benefit to a Deferred Stock Benefit or to convert a Deferred Stock Benefit to a Deferred Cash Benefit. (d) Each Distribution Election Form is part of the Deferral Election Form on which it appears or to which it states that it is related. The Committee may allow a Participant to file one Distribution Election Form for all of his/her Deferred Cash Benefits and one for all of his/her Deferred Stock Benefits. (e) If it does so before the last business day of the Deferral Year, the Committee may reject any Deferral Election Form or any Distribution Election Form or both, and the Committee is not required to state a reason for any rejection. The Committee may modify any Distribution Election Form at any time to the extent necessary to comply with any laws or regulations. However, the Committee's rejection of any Deferral Election Form or any Distribution Election Form or the Committee's modification of any Distribution Election Form must be based upon action taken without regard to any vote of the Participant whose Deferral Election Form or Distribution Election Form is under consideration, and the Committee's rejections must be made on a uniform basis with respect to similarly situated Participants. If the Committee rejects a Deferral Election Form, the Participant must be paid the amounts he/she would then have been entitled to receive if he/she had not submitted the rejected Deferral Election Form. (f) A Participant may not revoke a Deferral Election Form or a Distribution Election Form after the Deferral Year begins. Any revocation before the beginning of the Deferral Year is the same as a failure to submit a Deferral Election Form or a Distribution Election Form. Any writing signed by a Participant expressing an intention to revoke his/her Deferral Election Form or a related Distribution Election Form and delivered to the Committee or its designee before the close of business on the relevant Election Date is a revocation. 5. Effect of No Election A Participant who has not submitted a valid Deferral Election Form to the Committee or its designee on or before the relevant Election Date may not defer any part of the cash portion of his/her Retainer Fee for the Deferral Year under this Plan. In the case of a person who becomes a Participant after October 29, 1996 and who does not submit a valid Deferral Election Form on or before the relevant Election Date, fifty percent of such Participant's Retainer Fee will become a Deferred Stock Benefit pursuant to section 4 of this Plan. The Deferred Benefit of a Participant who submits a valid Deferral Election Form but fails to submit a valid Distribution Election Form for that Deferred Benefit before the relevant Election Date or who otherwise has no valid Distribution Election Form for that Deferred Benefit is governed by section 8. 6. Deferred Cash Benefits (a) Deferred Cash Benefits will be set up in a Deferred Cash Account for each Participant and credited with deemed investment returns as provided in section 6(b). Deferred Cash Benefits are credited to the applicable Participant's Deferred Cash Account as of the day they would have been paid but for the deferral. (b) A Participant may select one or more investment options approved by the Committee for his/her Deferred Cash Benefits. Amounts will be credited to Deferred Cash Accounts to reflect the deemed returns on such investment options at periods determined by the Committee. A participant may change the investment allocation of his/her Deferred Cash Account at anytime. 7. Deferred Stock Benefits (a) Deferred Stock Benefits will consist of Common Stock Units and will be set up in a Deferred Stock Account for each Participant. Each Common Stock Unit will increase or decrease in value by the same amount and with the same frequency as the fair market value of a share of Common Stock. Each Deferred Stock Account will be credited as of the date the annual retainer fee would otherwise have been payable with a quantity of Common Stock Units determined in accordance with this section based on the closing price of a share of Common Stock on the NYSE on the date of such credit to the Deferred Stock Account. (b) Each Deferred Stock Account will be credited on or about each Common Stock dividend payment date with additional Common Stock Units, including fractional units, in a quantity equal to the quotient of the dividends payable on the quantity of shares in such account divided by the closing price of a share of Common Stock on the NYSE on the date of that payment. (c) In the event of a reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure, the number and kind of common stock units credited to each Participant's account shall be adjusted accordingly. 8. Distributions (a) According to a Participant's Distribution Election Form, but subject to section 4(d), a Deferred Cash Benefit must be distributed in cash. Subject to section 4(d), a Deferred Stock Benefit will be distributed in shares of Common Stock corresponding to, and equal to the number of, the Common Stock Units credited to the Participant's Deferred Stock Account. However, cash must be paid in lieu of fractional shares of the Common Stock otherwise distributable. (b) Deferred Cash Benefits will be paid in a lump sum unless the Participant's Distribution Election Form specifies payment of a Deferred Cash Benefit in installment payments over ten years. For a Deferred Cash Benefit payable in installments, investment returns under section 6(b) will continue to accrue on the unpaid balance of a Deferred Cash Account. Any lump-sum cash payment will be paid or installment payments will begin to be paid or delivery of Common Stock will be made in the month following the Participant's Termination, unless a later post-Termination distribution date is specified in a Participant's Distribution Election Form. (c) Deferred Benefits may not be assigned by a Participant or Beneficiary. A Participant may use a Beneficiary Designation Form to designate one or more Beneficiaries for all of his/her Deferred Benefits; such designations are revocable. Each Beneficiary will receive his/her portion of the Participant's Deferred Cash Account and Deferred Stock Account on February 15 of the year following the Participant's death unless the Beneficiary's request for a different distribution schedule is received before distributions begin and is approved at the Committee's sole discretion. The Committee may require that multiple Beneficiaries agree upon a single distribution method. (d) Upon the occurrence of a Change in Control resulting in a Participant's Termination, the Corporation shall pay such Participant, in the month following such Termination, cash in an aggregate amount equal to the value of such Participant's Deferred Cash Account and Deferred Stock Account on the date of the Change in Control, as determined using the closing price of the Common Stock on the New York Stock Exchange on such date or the highest per-share price actually paid in connection with such Change in Control. For purposes of this Plan, "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Corporation is then subject to such reporting requirement; provided, that, without limitation, such a change in control shall be deemed to have occurred if (i) any person (as defined in Sections 13(d) and 14(d) of the Exchange Act) (a "Person") is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation (not including in the amount of the securities beneficially owned by such person any such securities acquired directly from the Corporation or its affiliate representing twenty percent (20%) or more of the combined voting power of the Corporation's then outstanding voting securities; provided, however, that for purposes of this Agreement the term "Person" shall not include (A) the Corporation or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its subsidiaries, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, or (D) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation; and provided, further, however, that for purposes of this paragraph (i), there shall be excluded any Person who becomes such a beneficial owner in connection with an Excluded Transaction (as defined in paragraph (iii) below) : or (ii) the following individuals cease for any reason to constitute a majority of the number of Directors then serving: individuals who, on the date hereof, constitute the Board and any new Director (other than a Director whose initial assumption of office is in connection with an actual or threatened election contest including but not limited to a consent solicitation, relating to the election of Directors of the Corporation) whose appointment or election by the Board or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were Directors on the date hereof or whose appointment, election or nomination for election was previously so approved; or (iii) there is consummated a merger or consolidation of the Corporation or any direct or indirect subsidiary thereof with any other corporation, other than a merger or consolidation (an "Excluded Transaction")which would result in the holders of the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving corporation or any parent thereof) at least 50% of the combined voting power of the voting securities of the entity surviving the merger or consolidation (or the parent of such surviving entity) immediately after such merger or consolidation, or the shareholders of the Corporation approve a plan of complete liquidation of the Corporation, or there is consummated the sale or other disposition of all or substantially all of the Corporation's assets. Notwithstanding any other provision to the contrary, in no event shall the transfer of ownership interests in the Corporation in and of itself constitute a Change in Control under this Plan. 9. Corporation's Obligation (a) The Plan is unfunded. A Deferred Benefit is at all times solely a contractual obligation of the Corporation. A Participant and his/her Beneficiaries have no right, title or interest in the Deferred Benefits or any claim against them. Except according to section 9(b), the Corporation will not segregate any funds or assets for Deferred Benefits nor issue any notes or security for the payment of any Deferred Benefit. (b) The Corporation may establish a grantor trust and transfer to that trust shares of the Corporation's common stock or other assets. The governing trust agreement must require a separate account to be established for each electing Participant. The governing trust agreement must also require that all Corporation assets held in trust remain at all times subject to the Corporation's judgment creditors. 10. Control by Participant A Participant has no control over Deferred Benefits except according to his/her Deferral Election Form, Distribution Election Form, and Beneficiary Designation Form, and deemed investment allocation in section 6(b). 11. Claims Against Participant's Deferred Benefits A Deferred Cash Account and Deferred Stock Account relating to a Participant under this Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so is void. A Deferred Benefit is not subject to attachment or legal process for a Participant's debts or other obligations. Nothing contained in this Plan gives any Participant any interest, lien or claim against any specific asset of the Company. A Participant or his/her beneficiary has no rights other than as a general creditor. 12. Amendment or Termination This Plan may be altered, amended, suspended, or terminated at any time by the Committee. 13. Administration The Committee shall have the full and exclusive power and authority to administer this Plan and to take all actions that are specifically contemplated hereby or are necessary or appropriate in connection with the administration hereof. The Committee shall also have full and exclusive power to interpret this Plan and to adopt such rules, regulations and guidelines for carrying out this Plan as it may deem necessary or proper. The Committee may correct any defect or supply an omission or reconcile any inconsistency in this Plan in the manner and to the extent the Committee deems necessary or desirable to further the Plan purposes. Any decision of the Committee in the interpretation and administration of this Plan shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. 14. Notices Notices and elections under this Plan must be in writing. A notice or election is deemed delivered if it is delivered personally or if it is mailed by registered or certified mail to the person at his/her last known business address. 15. Waiver The waiver of a breach of any provision in this Plan does not operate as and may not be construed as a waiver of any later breach. 16. Construction This Plan is created, adopted, maintained and governed according to the laws of the state of Delaware. Headings and captions are only for convenience; they do not have substantive meaning. If a provision of this Plan is not valid or not enforceable, the validity or enforceability of any other provision is not affected. Use of one gender includes all, and the singular and plural include each other. 17. Effective Date The effective date of the Plan is January 1, 2002. EX-10 4 ex10-2_30sep02.txt EXHIBIT 10.2 EXHIBIT 10.2 THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 Second Amended and Restated Marathon Oil Corporation Non-Officer Restricted Stock Plan (As Approved October 30, 2002, but Effective as of January 2, 2002) 1. Purpose The objective of the Marathon Oil Corporation Non-Officer Restricted Stock Plan (the "Plan") is, through the issuance of restricted stock ("Shares"), to advance the interests of Marathon Oil Corporation, its subsidiaries, affiliates and joint ventures (the "Corporation") (a) by promoting the retention of outstanding employees, (b) by rewarding specific noteworthy achievements on the part of an employee or a group of employees, (c) by motivating employees through growth-related incentives to achieve long-term goals and (d) by aligning the interests of employees with those of the stockholders. 2. Administration The Compensation and Organization Committee of the Marathon Oil Corporation Board of Directors (the "Board") or such other committee of the Board as the Board may designate to oversee the Plan (the "Authorizing Committee") shall create and authorize pools of specific numbers of Shares to be granted under the Plan by the Granting Committee. Authorizations shall be made every two years, and no authorization shall exceed 1 percent of the total shares of common stock outstanding on December 31 of the preceding year. In addition, Shares related to grants that are forfeited or cancelled before vesting shall immediately become available for grants, and these Shares, as well as any unused portion of the percentage limit of Shares available from previous authorizations, shall be carried forward and available for grants in succeeding calendar years. Except as otherwise set forth herein, the Plan shall be administered by the Salary and Benefits Committee of the Corporation (the "Administering Committee"). The Administering Committee shall establish its own guidelines for general administration of the Plan. Such guidelines shall be subject to review by the Law, Tax and Accounting departments. The Administering Committee shall have the power to cancel a grant made under the Plan when such cancellation is deemed appropriate. The Administering Committee may delegate to the Stock Plan Officer (as designated under the Marathon Oil Corporation 1990 Stock Plan) its duties under this Plan pursuant to such conditions or limitations as the Administering Committee may establish. From and after May 28, 2002, the Authorizing Committee shall authorize a committee (the "Director Committee") consisting of the employee Director(s) of the Marathon Oil Corporation Board of Directors to grant awards of specific numbers of Shares to eligible employees. The term "Granting Committee" shall refer to the Administrative Committee prior to May 28, 2002, and shall refer to the Director Committee from and after May 28, 2002. 3. Eligibility for Participation Individuals who are employed by one of the following entities and are below Salary Grade 19 shall be eligible to receive grants under the Plan: Marathon Oil Corporation and its wholly-owned direct and indirect subsidiaries, Marathon Oil Company and its wholly-owned direct and indirect subsidiaries, Marathon Ashland Petroleum LLC and its wholly-owned direct and indirect subsidiaries, Speedway SuperAmerica LLC and its wholly-owned direct and indirect subsidiaries, or any foreign entity that is wholly-owned, directly or indirectly, by Marathon Oil Corporation. The Granting Committee shall select from among such eligible employees those to whom Shares shall be granted and shall determine the number of Shares to be granted to each such grantee. 4. Grants All grants shall be subject to such forfeiture and transfer restriction provisions as may be established by the Administering Committee. As a condition of acceptance of a grant, each employee must agree to forgo the opportunity to make an election under Section 83(b) of the Internal Revenue Code of 1986 to be taxed on the fair market value of the shares as of the date of the grant. Grantees receiving an award shall have all the rights of a stockholder of the Corporation, including the right to vote the Shares and the right to receive any cash dividends paid thereon. 5. Source of Shares Shares granted under the Plan may be granted out of authorized and unissued shares, treasury shares or open-market purchases. 6. Vesting Shares granted to an employee shall vest as follows: 50 percent of the Shares received pursuant to a specific grant shall vest on the second anniversary of the grant, the remaining 50 percent shall vest on the fourth anniversary of the grant. Each grant shall be subject to the condition that the employee's continuous service with the Corporation continues through the relevant anniversary date, unless terminated by reason of death. Notwithstanding anything herein to the contrary, if the grantee is eligible to participate in a change of control plan adopted by his or her employer, any provisions of such plan that relate to the vesting of restricted stock shall apply to the Shares. 7. Adjustments In the event of any change in the outstanding common stock of the Corporation by reason of a stock split, stock dividend, stock combination or reclassification, recapitalization or merger, or similar event, the Authorizing Committee may appropriately adjust the number of Shares covered by a grant and make such other revisions to outstanding grants as it deems are equitably required. 8. Tax Withholding At the time of delivery or vesting of cash or Shares under this Plan, the Corporation, its subsidiaries, affiliates, and joint ventures shall have the right to withhold from any payment of cash or Shares under this Plan or any other available source an appropriate amount of cash or number of Shares or a combination thereof for payment of taxes or other amounts required by law or to take such other action as may be necessary in the opinion of the Corporation to satisfy all obligations for withholding of such taxes. If Shares are used to satisfy withholding, such Shares shall be valued based on the fair market value when the tax withholding is required to be made from the eligible employee. 9. Amendments The Administering Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding grants as are consistent with the Plan, provided that, except for adjustments under Paragraph 7 hereof, no such action shall modify a grant in a manner adverse to the grantee without the grantee's prior consent, except as such modification is provided for or contemplated in the terms of the grant. Except for the authorization or issuance of additional shares of the Corporation's common stock, the Authorizing Committee shall approve all amendments to the Plan. 10. Awards to Employees on Non-U.S. Payrolls The Granting Committee shall have the power to grant awards under the Plan in the form of restricted stock units ("Units"), with each Unit representing the right to receive, at the discretion of the Authorizing Committee, either one share of the Corporation's common stock ("Common Stock"), or a cash payment equal to the fair market value of a share of Common Stock subject to certain conditions. Grantees receiving Units shall have the right to receive cash dividend equivalents equal in value to any cash dividends paid on the shares of Common Stock represented by the Units but shall have no voting rights with respect to such Units. Upon the vesting of Units under Paragraph 6 hereof, the vested Units shall be cancelled and each grantee shall be entitled to receive payment in one of the following forms at the discretion of the Granting Committee: (i) a number of shares of Common Stock equal to the number of vested Units, or (ii) a cash payment equal to the fair market value of the number of shares of Common Stock equal to the number of vested Units as determined on the date of vesting. Thereafter each grantee who receives payment in the form of shares of Common Stock shall have all the rights of a stockholder of the Corporation, including the right to vote such shares of Common Stock. Except as otherwise noted in this Paragraph 10, Units granted hereunder shall be subject to the provisions of Paragraphs 1 through 9 of the Plan; provided however, that the terms and conditions of such Units shall be subject to the rules and regulations of applicable U.S. and foreign laws (including, but not limited to tax withholding, resale restrictions, and transferability), and shall be administered at all times in accordance with such applicable laws. 11. Effective Date This amended and restated Plan is approved this 30th day of October, 2002, but is effective as of January 2, 2002, and supercedes the prior Plan document effective on that date. EX-12 5 ex12-1_30sep02.txt EXHIBIT 12.1 Exhibit 12.1 Marathon Oil Corporation Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends TOTAL ENTERPRISE BASIS--Unaudited Including Discontinued Operations (Dollars in Millions)
Nine Months Ended September 30 Year Ended December 31 -------------- -------------------------------------- 2002 2001 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ ------ ------ Portion of rentals representing interest...... $ 47 $ 39 $ 54 $ 52 $ 49 $ 53 $ 35 Capitalized interest, including discontinued operations................ 11 20 27 19 26 46 31 Other interest and fixed charges, including discontinued operations... 235 213 349 375 365 318 352 Pretax earnings which would be required to cover preferred stock dividend requirements of parent................. - 9 12 12 14 15 20 ------ ------ ------ ------ ------ ------ ------ Combined fixed charges and preferred stock dividends (A)............. $ 293 $ 281 $ 442 $ 458 $ 454 $ 432 $ 438 ====== ====== ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B). $1,061 $2,868 $3,213 $1,809 $1,866 $1,087 $1,067 ====== ====== ====== ====== ====== ====== ====== Ratio of (B) to (A)......... 3.62 10.19 7.26 3.95 4.11 2.51 2.43 ====== ====== ====== ====== ====== ====== ======
EX-12 6 ex12-2_30sep02.txt EXHIBIT 12.2 Exhibit 12.2 Marathon Oil Corporation Computation of Ratio of Earnings to Fixed Charges TOTAL ENTERPRISE BASIS - Unaudited Continuing Operations (Dollars in Millions)
Nine Months Ended September 30 Year Ended December 31 -------------- -------------------------------------- 2002 2001 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ ------ ------ Portion of rentals representing interest....... $ 47 $ 39 $ 54 $ 52 $ 49 $ 53 $ 35 Capitalized interest, including discontinued operations................. 11 20 27 19 26 46 31 Other interest and fixed charges, including discontinued operations.... 235 213 349 375 365 318 352 ------ ------ ------ ------ ------ ------ ------ Total fixed charges (A)..... $ 293 $ 272 $ 430 $ 446 $ 440 $ 417 $ 418 ====== ====== ====== ====== ====== ====== ====== Earnings-pretax income with applicable adjustments (B). $1,061 $2,868 $3,213 $1,809 $1,866 $1,087 $1,067 ====== ====== ====== ====== ====== ====== ====== Ratio of (B) to (A)......... 3.62 10.53 7.47 4.06 4.24 2.60 2.55 ====== ====== ====== ====== ====== ====== ======
EX-99 7 ex99-1_30sep02.txt EXHIBIT 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Marathon Oil Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Clarence P. Cazalot, Jr., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Clarence P. Cazalot, Jr. Clarence P. Cazalot, Jr. President & Chief Executive Officer November 14, 2002 EX-99 8 ex99-2_30sep02.txt EXHIBIT 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Marathon Oil Corporation (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John T. Mills, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John T. Mills John T. Mills Chief Financial Officer November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----