F-20


10. Short-Term Debt

榴莲视频K is the sole obligor on a short-term $10 million credit facility that expires on November 26, 2003. The facility bears interest on prevailing short-term market rates plus 1%. 榴莲视频K is obligated to pay a .25% commitment fee on undrawn amounts. At December 31, 2002, there were no borrowings against this facility. However, availability was reduced by $2 million to $8 million as a result of customs guarantees issued against the facility.

11. Long-Term Debt

 
  Interest
Rates — %

   
  December 31

(In millions)

  Maturity
  2002
  2001

Senior Notes   103/4   2008   $ 535   $ 535
Senior Quarterly Income Debt Securities   10   2031     49     49
Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes   43/4 — 67/8   2009-2033     471     471
Inventory Facility       2004        
Fairfield Caster Lease       2003 — 2012     80     84
All other obligations, including other capital leases       2003 — 2005     2     6
榴莲视频K loan   81/2   2003 — 2010     301     325
榴莲视频K credit facility       2004        
           
 
  Total             1,438     1,470
Less unamortized discount             4     4
Less amount due within one year             26     32
           
 
  Long-term debt due after one year           $ 1,408   $ 1,434

Senior Notes — $385 million and $150 million of Senior Notes (Notes) were issued on July 27, 2001, and September 11, 2001, respectively. Interest is payable semi-annually in February and August. Up to 35% of the aggregate principal amount of the Notes may be redeemed at any time prior to August 1, 2004, with the proceeds of public offerings of certain capital stock at a redemption price of 110.75% of the principal amount plus accrued interest.

Senior Quarterly Income Debt Securities (Quarterly Debt Securities) — On December 19, 2001, the Quarterly Debt Securities were issued in an exchange for certain preferred securities of Marathon. Interest is payable quarterly. The Quarterly Debt Securities will be redeemable at the option of U. S. Steel, in whole or in part, on or after December 31, 2006, at 100% of the principal amount redeemed together with accrued but unpaid interest to the redemption date.

Obligations relating to Industrial Development and Environmental Improvement Bonds and Notes — Under the Financial Matters Agreement (see Note 2), U. S. Steel assumed and will discharge all principal, interest and other duties of Marathon under these obligations, including any amounts due upon any defaults or accelerations of any of the obligations, other than defaults or accelerations caused by any action of Marathon. The agreement also provides that on or before the tenth anniversary of the Separation, U. S. Steel will provide for the discharge of Marathon from any remaining liability under any of these obligations.

Inventory Facility — On November 30, 2001, U. S. Steel entered into a revolving credit facility that provides for borrowings of up to $400 million and expires on December 31, 2004. The facility is secured by all domestic inventory and related assets, including receivables other than those sold under the Receivables Purchase Agreement (see Note 21). The amount outstanding under the facility will not exceed the permitted "borrowing base" calculated on percentages of the values of eligible inventory.

F-21



Interest on borrowings is calculated based on either LIBOR or J. P. Morgan Chase's prime rate using spreads determined by U. S. Steel's credit ratings. Although there were no amounts drawn against this facility at December 31, 2002, availability was reduced to $397 million due to a letter of credit issued against the facility.

Fairfield Caster Lease — U. S. Steel is the sublessee of a slab caster at the Fairfield Works facility in Alabama. The sublease is accounted for as a capital lease. Marathon is the primary obligor under the lease. Under the Financial Matters Agreement, U. S. Steel assumed and will discharge all obligations under this lease, which has a final maturity of 2012, subject to additional extensions.

榴莲视频K loan — 榴莲视频K has a loan with a group of financial institutions whose recourse is limited to 榴莲视频K. The loan is subject to annual repayments of $20 million beginning in November of 2003, with the balance due in 2010. Mandatory prepayments of the loan may be required based upon a cash flow formula or a change in control of U. S. Steel. A mandatory prepayment of $24 million was made in April of 2002, but no such mandatory prepayment will be required in 2003.

榴莲视频K credit facility — 榴莲视频K is the sole obligor on a $40 million credit facility that expires in December 2004. The facility bears interest on prevailing market rates plus .90%. 榴莲视频K is obligated to pay a .25% commitment fee on undrawn amounts.

Covenants — The Notes, Quarterly Debt Securities, 榴莲视频K loan, 榴莲视频K credit facility and the Inventory Facility may be declared immediately due and payable in the event of a change in control of U. S. Steel, as defined in the related agreements. In such event, U. S. Steel may also be required to either repurchase the leased Fairfield Caster for $91 million or provide a letter of credit to secure the remaining obligation. Additionally, the Notes contain various other restrictive covenants, the majority of which will not apply upon the attainment of an investment grade rating, including restrictions on the payment of dividends, limits on additional borrowings, including limiting the amount of borrowings secured by inventories and the accounts receivable securitization, limits on sale/leasebacks, limits on the use of funds from asset sales and sale of the stock of subsidiaries, and restrictions on our ability to make investments in joint ventures or make certain acquisitions. The Inventory Facility imposes additional restrictions including financial covenants that require U. S. Steel to meet interest expense coverage and leverage ratios, limitations on capital expenditures and restrictions on investments. If these covenants are breached, creditors would be able to declare their obligations immediately due and payable and foreclose on any collateral.

Liquidity — U. S. Steel management believes that U. S. Steel's liquidity will be adequate to satisfy its obligations for the foreseeable future, including obligations to complete currently authorized capital spending programs. Further requirements for U. S. Steel's business needs, including the funding of capital expenditures, debt service for outstanding financings, and any amounts that may ultimately be paid in connection with contingencies, are expected to be financed by a combination of internally generated funds (including asset sales), proceeds from the sale of stock, borrowings and other external financing sources. However, there is no assurance that our business will generate sufficient operating cash flow or that external financing sources will be available in an amount sufficient to enable us to service or refinance our indebtedness or to fund other liquidity needs. If there is a prolonged delay in the recovery of the manufacturing sector of the U. S. economy, U. S. Steel believes that it can maintain adequate liquidity through a combination of the deferral of nonessential capital spending, sales of non-strategic assets and other cash conservation measures.

Debt Maturities — Aggregate maturities of long-term debt are as follows (In millions):

Year ending December 31,


2003

  2004
  2005
  2006
  2007
  Later Years
  Total

$ 26   $ 25   $ 25   $ 26   $ 35   $ 1,301   $ 1,438

F-22


12. Pensions and Other Postretirement Benefits

U. S. Steel has noncontributory defined benefit pension plans covering substantially all domestic employees. Benefits under these plans are based upon years of service and final average pensionable earnings, or a minimum benefit based upon years of service, whichever is greater. In addition, pension benefits are also provided to most domestic salaried employees based upon a percent of total career pensionable earnings. U. S. Steel also participates in multiemployer plans, most of which are defined benefit plans associated with coal operations.

        U. S. Steel also has defined benefit retiree health care and life insurance plans (other benefits) covering most domestic employees upon their retirement. Health care benefits are provided through comprehensive hospital, surgical and major medical benefit provisions or through health maintenance organizations, both subject to various cost sharing features. Life insurance benefits are provided to nonunion retiree beneficiaries primarily based on employees' annual base salary at retirement. For domestic union retirees, life insurance benefits are provided primarily based on fixed amounts negotiated in labor contracts with the appropriate unions.

 
  Pension Benefits
  Other Benefits
 
(In millions)

  2002
  2001
  2002
  2001
 

 
Change in benefit obligations                          
Benefit obligations at January 1   $ 7,358   $ 6,921   $ 2,555   $ 2,149  
Service cost     96     89     18     15  
Interest cost     485     496     172     161  
Plan amendments         4          
Actuarial losses     602     469     638     261  
Plan merger and acquisition(a)         106         152  
Settlements, curtailments and termination benefits(b)     (215 )   21          
Benefits paid     (688 )   (748 )   (212 )   (183 )
   
 
 
 
 
Benefit obligations at December 31   $ 7,638   $ 7,358   $ 3,171   $ 2,555  

 
Change in plan assets                          
Fair value of plan assets at January 1   $ 8,583   $ 9,312   $ 728   $ 842  
Actual return on plan assets     (434 )   (26 )   (21 )   21  
Acquisition     1     62          
Employer contributions             17     17  
Trustee distributions(c)     (18 )   (17 )        
Settlements paid from plan assets     (197 )            
Benefits paid from plan assets     (688 )   (748 )   (180 )   (152 )
   
 
 
 
 
Fair value of plan assets at December 31   $ 7,247   $ 8,583   $ 544   $ 728  

 
Funded status of plans at December 31   $ (391) (d) $ 1,225 (d) $ (2,627 ) $ (1,827 )
Unrecognized transition asset     (1 )   (1 )        
Unrecognized prior service cost     532     629     6     7  
Unrecognized actuarial losses     2,581     866     770     57  
Additional minimum liability(e)     (1,663 )   (32 )        
   
 
 
 
 
Prepaid (accrued) benefit cost   $ 1,058   $ 2,687   $ (1,851 ) $ (1,763 )

 
Prepaid (accrued) benefit cost is reflected in the balance
sheet as follows:
                         
  Pension asset   $ 1,654   $ 2,745   $   $  
  Payroll and benefits payable     (5 )   (20 )   (56 )   (27 )
  Employee benefits     (591 )   (38 )   (1,795 )   (1,736 )

 
(a)
Reflects merger of Transtar benefit plans and LTV's tin mill employee obligations into the main U. S. Steel insurance plan upon acquisition of these businesses. Amount also reflects the recognition of an obligation associated with retiree medical benefits for pre-1989 Lorain Works' retirees which had been assumed by

F-23


(b)
Reflects pension settlements in 2002 as a result of increased lump sum payouts during 2002 primarily due to the completion in June 2002 of the voluntary early retirement program for nonunion employees related to the Separation. Reflects an increase in obligations in 2001 due principally to a nonunion voluntary early retirement program offered in conjunction with the Separation and a shutdown of the majority of the Fairless Works.

(c)
Represents transfers of excess pension assets to fund retiree health care benefits accounts under Section 420 of the Internal Revenue Code.

(d)
Includes plans that have accumulated benefit obligations in excess of plan assets:

 
  2002
  2001
 
Aggregate accumulated benefit obligations   $ (5,075 ) $ (58 )
Aggregate projected benefit obligations (PBO)     (5,227 )   (69 )
Aggregate plan assets     4,479      
(e)
Additional minimum liability recorded was offset by the following:

 
  2002
  2001
 
Intangible asset   $ 414   $  
   
 
 
Accumulated other comprehensive income (losses):              
  Beginning of year   $ (20 ) $ (4 )
  Change during year (net of tax)     (742 )   (16 )
  Change during the year (equity investees)(1)     (14 )    
   
 
 
  Balance at end of year   $ (776 ) $ (20 )

 
(1)
Amount reflects U. S. Steel's portion of the additional minimum pension liability recorded by 榴莲视频-POSCO Industries, an equity investee.

 
  Pension Benefits
  Other Benefits
 
(In millions)

  2002
  2001
  2000
  2002
  2001
  2000
 

 
Components of net periodic benefit cost (credit)                                      
Service cost   $ 96   $ 89   $ 76   $ 18   $ 15   $ 12  
Interest cost     485     496     505     172     161     147  
Expected return on plans assets     (788 )   (837 )   (841 )   (54 )   (60 )   (24 )
Amortization — net transition gain         (1 )   (67 )            
                        — prior service costs     96     97     98     2     4     4  
                        — actuarial (gains) losses     8     2     (44 )       (3 )   (29 )
Multiemployer plans(a)                 12     12     9  
Settlement and termination losses(b)     100     34                  
   
 
 
 
 
 
 
Net periodic benefit cost (credit)   $ (3 ) $ (120 ) $ (273 ) $ 150   $ 129   $ 119  

 
(a)
Primarily consists of payments to a multiemployer health care benefit plan created by the Coal Industry Retiree Health Benefit Act of 1992 based on assigned beneficiaries receiving benefits. The present value of this unrecognized obligation is broadly estimated to be $76 million, including the effects of future medical inflation, and this amount could increase if additional costs are assigned.

(b)
Relates primarily to voluntary early retirement programs.

F-24


 
  Pension Benefits
  Other Benefits
 
 
  2002
  2001
  2002
  2001
 

 
Weighted-average actuarial assumptions at December 31:                  
Discount rate   6.25 % 7.00 % 6.25 % 7.00 %
Increase in compensation rate   4.00 % 4.00 % 4.00 % 4.00 %

For the year ended December 31:

 

 

 

 

 

 

 

 

 
Expected annual return on plan assets   8.80 % 8.90 % 8.00 % 8.00 %

 

        For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. This rate was assumed to decrease gradually to 4.75% for 2010 and remain at that level thereafter. The expected annual return on plan asset assumption, used in the determination of the net periodic benefit cost (credit), will be reduced to 8.2% for 2003.

        A one-percentage-point change in assumed health care cost trend rates would have the following effects:

(In millions)

  1-Percentage-
Point Increase

  1-Percentage-
Point Decrease

 

 
Effect on total of service and interest cost components   $ 24   $ (20 )
Effect on other postretirement benefit obligations     300     (253 )

 

        Selling, general and administrative expenses for 2002 included a pretax settlement loss of $10 million related to retirements of personnel covered under the non tax-qualified pension plan and the executive management supplemental pension program, and a pretax pension settlement loss of $90 million for the nonunion qualified plan.

        SFAS No. 87 "Employer's Accounting for Pensions" provides that if at any plan measurement date, the fair value of plan assets is less than the plan's accumulated benefit obligation (ABO), the sponsor must establish a minimum liability at least equal to the amount by which the ABO exceeds the fair value of the plan assets and any pension asset must be removed from the balance sheet. The sum of the liability and pension asset is offset by the recognition of an intangible asset and/or as a direct charge to stockholders' equity, net of tax effects. Such adjustments have no direct impact on earnings per share or cash. As of December 31, 2002, the fair value of plan assets for the U. S. Steel pension plan for union employees was $4,479 million. Based on asset values as of December 31, 2002, the ABO for this plan exceeded the fair value of plan assets by $543 million. Consequently, required minimum liability adjustments were recorded resulting in the recognition of an intangible asset of $414 million and a charge to equity (net of tax) of $748 million at December 31, 2002.

        U. S. Steel also contributes to several defined contribution plans for its salaried employees and a small number of wage employees. Company contributions to these plans, which for the most part are based on a percentage of the employees' salary depending on years of service, totaled $14 million in 2002, $13 million in 2001 and $11 million in 2000. Most union employees are eligible to participate in a defined contribution plan where there is no company match on savings. U. S. Steel also maintains a supplemental thrift plan to provide benefits which are otherwise limited by the Internal Revenue Service for qualified plans; company costs under these plans totaled less than $1 million in 2002, 2001 and 2000.

F-25



13. Income Taxes

Provisions (benefits) for income taxes were:

 
  2002
  2001
  2000
 
(In millions)

  Current
  Deferred
  Total
  Current
  Deferred
  Total
  Current
  Deferred
  Total
 

 
Federal   $ (12 ) $ (28 ) $ (40 ) $ (326 ) $ 38   $ (288 ) $ (357 ) $ 340   $ (17 )
State and local         (6 )   (6 )   (23 )   (13 )   (36 )   (12 )   49     37  
Foreign     3     (5 )   (2 )   3     (7 )   (4 )            
   
 
 
 
 
 
 
 
 
 
  Total   $ (9 ) $ (39 ) $ (48 ) $ (346 ) $ 18   $ (328 ) $ (369 ) $ 389   $ 20  

 

        A reconciliation of the federal statutory tax rate of 35% to total provisions (benefits) follows:

(In millions)

  2002
  2001
  2000
 

 
Statutory rate applied to income (loss) before income taxes   $ 4   $ (191 ) $  
Excess percentage depletion     (1 )   (1 )   (3 )
Effects of foreign operations, including foreign tax credits     (39 )   (38 )   (5 )
State and local income taxes after federal income tax effects     (4 )   (23 )   24  
Nontaxable gain from ownership change         (24 )    
Adjustments of prior years' federal income taxes     (8 )   (18 )   5  
Dispositions of investments         (33 )    
Other             (1 )
   
 
 
 
Total provisions (benefits)   $ (48 ) $ (328 ) $ 20  

 

        Deferred tax assets and liabilities resulted from the following:

(In millions)
December 31

  2002
  2001
 

 
Deferred tax assets:              
  Federal tax loss carryforwards (expiring in 2022)   $ 27   $  
  Minimum tax credit carryforwards (no expiration)     4     3  
  State tax loss carryforwards (expiring in 2004 through 2022)     14     2  
  Foreign tax loss carryforwards (no expiration)     23     20  
  Employee benefits     1,412     875  
  Receivables, payables and debt     57     99  
  Expected federal benefit for deducting state deferred income taxes     25     27  
  Contingencies and accrued liabilities     70     98  
  Other deductible assets     20     20  
  Valuation allowances:              
    Foreign     (23 )   (20 )
    State     (7 )   (9 )
   
 
 
      Total deferred tax assets(a)     1,622     1,115  
   
 
 
Deferred tax liabilities:              
  Property, plant and equipment     365     359  
  Pension asset     1,129     1,095  
  Inventory     45     34  
  Investments in subsidiaries and equity investees     56     67  
  Other liabilities     36     74  
   
 
 
    Total deferred tax liabilities     1,631     1,629  
   
 
 
      Net deferred tax liabilities   $ 9   $ 514  

 
(a)
U. S. Steel expects to generate sufficient future taxable income to realize the benefit of its deferred tax assets.

F-26


        The consolidated tax returns of Marathon for the years 1992 through 2001 are under various stages of audit and administrative review by the IRS. U. S. Steel believes it has made adequate provision for income taxes and interest which may become payable for years not yet settled.

        Pretax income in 2002, 2001 and 2000 included $106 million, $103 million and $8 million of income, respectively, attributable to foreign sources.

        Undistributed earnings of certain consolidated foreign subsidiaries at December 31, 2002, amounted to approximately $260 million. No provision for deferred income taxes has been made for these subsidiaries because U. S. Steel intends to permanently reinvest such earnings in foreign operations. If such earnings were not permanently reinvested, a U.S. deferred tax liability of approximately $70 million would have been required.

        The Slovak Income Tax Act provides an income tax credit which is available to 榴莲视频K if certain conditions are met. In order to claim the tax credit in any year, 60% of 榴莲视频K's sales must be export sales and 榴莲视频K must reinvest the tax credits claimed in qualifying capital expenditures during the five years following the year in which the tax credit is claimed. The provisions of the Slovak Income Tax Act permit 榴莲视频K to claim a tax credit of 100% of 榴莲视频K's tax liability for years 2000 through 2004 and 50% for the years 2005 through 2009. Management believes that 榴莲视频K has fulfilled all of the necessary conditions for claiming the tax credit for 2000 through 2002.

        U. S. Steel and Marathon entered into a Tax Sharing Agreement that reflects each party's rights and obligations relating to payments and refunds of income, sales, transfer and other taxes that are attributable to periods beginning prior to and including the Separation Date and taxes resulting from transactions effected in connection with the Separation.

        The Tax Sharing Agreement incorporates the general tax sharing principles of the former tax allocation policy. In general, U. S. Steel and Marathon will make payments between them such that, with respect to any consolidated, combined or unitary tax returns for any taxable period or portion thereof ending on or before the Separation Date, the amount of taxes to be paid by each of U. S. Steel and Marathon will be determined, subject to certain adjustments, as if the former groups each filed their own consolidated, combined or unitary tax return. The Tax Sharing Agreement also provides for payments between U. S. Steel and Marathon for certain tax adjustments which may be made after the Separation. Other provisions address, but are not limited to, the handling of tax audits, settlements and return filing in cases where both U. S. Steel and Marathon have an interest in the results of these activities.

        A preliminary settlement of $441 million for the calendar year 2001 income taxes, which would have been made in March 2002 under the former tax allocation policy, was made by Marathon to U. S. Steel immediately prior to the Separation in 2001 at a discounted amount to reflect the time value of money. A final settlement for the calendar year 2001 income taxes of $7 million was received in December 2002. The tax allocation policy provides that U. S. Steel receive the benefit of tax attributes (principally net operating losses and various tax credits) that arose out of its business and which were used on a consolidated tax return.

        Additionally, pursuant to the Tax Sharing Agreement, U. S. Steel and Marathon have agreed through various representations and covenants to protect the tax-free status of the Separation. To the extent that a breach of a representation or covenant results in corporate tax being imposed, the breaching party, either U. S. Steel or Marathon, will be responsible for the payment of the corporate tax. See further discussion in Note 25.

F-27


14. Transactions with Related Parties

Revenues from related parties and receivables from related parties primarily reflect sales of steel products, raw materials, transportation services and fees for providing various management and other support services to equity and certain other investees. Generally, transactions are conducted under long-term market-based contractual arrangements. Total revenues generated by sales and service transactions with equity investees were $905 million, $815 million and $948 million in 2002, 2001 and 2000, respectively. Revenues from related parties and receivables from related parties also include amounts related to the sale of materials, primarily coke by-products, to Marathon. These sales were conducted under terms comparable to those with unrelated parties and amounted to $13 million, $7 million and $17 million in 2002, 2001 and 2000, respectively.

        Receivables from related parties at December 31, 2002 and 2001, also included $28 million due from Marathon for tax settlements in accordance with the Tax Sharing Agreement.

        Long-term receivables from related parties at December 31, 2002, reflect amounts due from Marathon related to contractual reimbursements for the retirement of participants in the non-qualified employee benefit plans. These amounts will be paid by Marathon as participants retire. At December 31, 2001, long-term receivables from related parties also included certain unreserved retiree medical cost reimbursements from Republic. These receivables were fully reserved and subsequently written off in 2002, as discussed in Note 15.

        Accounts payable to related parties reflect the purchase of semi-finished steel products and outside processing services from equity and certain other investees in 2002, and for the first quarter of 2001 and the year 2000 included the purchase of transportation services from Transtar. Purchases from these investees totaled $181 million, $261 million and $566 million in 2002, 2001 and 2000, respectively. U. S. Steel also purchased natural gas and gasoline from Marathon under terms comparable to those with unrelated parties. Total purchases from Marathon were $15 million, $30 million and $60 million in 2002, 2001 and 2000, respectively.

        Accounts payable to related parties at December 31, 2002, also included the net present value of the second and final $37.5 million installment of contingent consideration payable to VSZ in July 2003 related to the acquisition of 榴莲视频K. This payable was reflected as a long-term payable to related parties at December 31, 2001. Accounts payable to related parties at December 31, 2001, also included the net present value of the first $37.5 million installment of contingent consideration paid to VSZ in July 2002 related to the acquisition of 榴莲视频K, and $54 million due to Marathon that was paid in the first quarter of 2002 in accordance with the terms of the Separation.

        The related party activity above includes transactions and related balances with Republic through August 2002, when Republic's operating assets were sold through a bankruptcy proceeding to an unrelated party, and with VSZ through October 2002, when U. S. Steel sold its investment in VSZ. The contingent consideration payable to VSZ related to the acquisition of 榴莲视频K will remain classified as a related party balance until it is paid.

        Under an agreement with PRO-TEC Coating Company (PRO-TEC), U. S. Steel provides exclusive marketing, selling and customer service functions, including invoicing and receivables collection, for substantially all of the products produced by PRO-TEC. U. S. Steel, as PRO-TEC's exclusive sales agent, is responsible for credit risk related to those receivables. Accounts payable to related parties include $42 million and $37 million at December 31, 2002, and December 31, 2001, respectively, related to this agreement with PRO-TEC.

F-28



15. Investments and Long-Term Receivables

(In millions)
December 31

   
  2002
  2001

Equity method investments       $ 244   $ 233
Other investments         38     49
Receivables due after one year         4     2
Mortgages         19     17
Split dollar life insurance         28     23
Other         8     16
       
 
  Total       $ 341   $ 340

        Summarized financial information of PRO-TEC, which is accounted for by the equity method of accounting follows:

(In millions)

  2002
  2001
  2000

Income data — year:                  
  Revenues and other income   $ 615   $ 506   $ 538
  Operating income     93     60     76
  Net income     51     16     31

Balance sheet data — December 31:                  
  Current assets   $ 126   $ 103      
  Noncurrent assets     209     231      
  Current liabilities     52     52      
  Noncurrent liabilities     96     106      

        Summarized financial information of 榴莲视频-POSCO Industries, which is accounted for by the equity method of accounting follows:

(In millions)

  2002
  2001
  2000

Income data — year:                  
  Revenues and other income   $ 581   $ 412   $ 750
  Operating income (loss)     38     (4 )   10
  Net income (loss)     36     (13 )   1

Balance sheet data — December 31:                  
  Current assets   $ 178   $ 165      
  Noncurrent assets     301     306      
  Current liabilities     175     278      
  Noncurrent liabilities     104     9      

        Summarized financial information of other investees accounted for by the equity method of accounting follows:

(In millions)

  2002
  2001
  2000
 

 
Income data — year:                    
  Revenues and other income   $ 299   $ 1,326   $ 2,196  
  Operating income (loss)     (110 )   (153 )   26  
  Net loss     (115 )   (211 )   (198 )

 
Balance sheet data — December 31:                    
  Current assets   $ 63   $ 437        
  Noncurrent assets     200     1,067        
  Current liabilities     51     531        
  Noncurrent liabilities     27     1,225        

 

F-29


        U. S. Steel acquired a 25% interest in VSZ during 2000. VSZ did not provide financial statements prepared in accordance with accounting principles generally accepted in the United States (USGAAP). Although shares of VSZ are traded on the Bratislava Stock Exchange, those securities do not have a readily determinable fair value as defined under USGAAP. Accordingly, U. S. Steel accounted for its investment in VSZ under the cost method of accounting. In October 2002, U. S. Steel granted an option to purchase its shares of VSZ and the shares were subsequently sold. Cash proceeds of $31 million were received in consideration for the option and the sale of the shares, resulting in a pretax gain of $20 million, which is included in net gains on disposal of assets.

        U. S. Steel has a 16% investment in Republic which was accounted for under the equity method of accounting until the first quarter of 2001, when investments in and advances to Republic were reduced to zero. Republic filed a voluntary petition for bankruptcy in April 2001 to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Due to Republic's filing for bankruptcy, further deterioration of Republic's financial position and progression in the bankruptcy proceedings, U. S. Steel recorded pretax charges reflected as reductions in revenues of $100 million in 2001 to impair trade accounts receivable from Republic. Additional pretax charges of $42 million in 2001 and $14 million in 2002 were recorded to impair retiree medical claim reimbursements owed by Republic. These charges are reflected in selling, general and administrative expenses. The operating assets of Republic were sold in July 2002 through a bankruptcy court administered auction process. The remaining assets of Republic will be liquidated through Chapter 11 liquidation proceedings. U. S. Steel received no proceeds from the initial sale of assets and does not expect to receive any proceeds from the liquidation. As a result, U. S. Steel wrote off all receivables from Republic against the associated reserves in the fourth quarter of 2002.

        U. S. Steel operates and sells coke and by-products through the Clairton 1314B Partnership, L.P. in which it is the sole general partner. U. S. Steel is responsible for purchasing, operations and product sales and accounts for its 27% interest in the partnership under the equity method of accounting. U. S. Steel's share of profits and losses was 1.75% for the years ended December 31, 2001 and 2000, and through April 16, 2002. U. S. Steel's share of profits and losses was 1.75%, except for its share of depreciation and amortization expense which was 45.75%, from April 17, to December 31, 2002. U. S. Steel's share of all profits and losses increased to 45.75% on January 1, 2003. The partnership at times had operating cash shortfalls in 2002 and in 2001 that were funded with loans from U. S. Steel. There were no outstanding loans with the partnership at December 31, 2002, and $3 million was outstanding at December 31, 2001. An unamortized deferred gain from the formation of the partnership of $150 million is included in deferred credits and other liabilities in the balance sheet. The gain will not be recognized in income as long as U. S. Steel has a commitment to fund cash shortfalls of the partnership. See further discussion in Note 25.

        Dividends and partnership distributions received from equity investees were $24 million in 2002, $17 million in 2001 and $10 million in 2000.

        For discussion of transactions and related receivables and payable balances between U. S. Steel and its investees, see Note 14.

16. Stockholder Rights Plan

On December 31, 2001, U. S. Steel adopted a Stockholder Rights Plan and declared a dividend distribution of one right for each share of common stock issued pursuant to the Plan of Reorganization in connection with the Separation. Each right becomes exercisable, at a price of $110, after any person or group has acquired, obtained the right to acquire or made a tender or exchange offer for 15% or more of the outstanding voting power represented by the outstanding Voting Stock, except pursuant to a qualifying all-cash tender offer for all outstanding shares of Voting Stock which results in the offeror owning shares of Voting Stock representing a majority of the voting power (other

F-30



than Voting Stock beneficially owned by the offeror immediately prior to the offer). If the rights become exercisable, each right will entitle the holder, other than the acquiring person or group, to purchase one one-hundredth of a share of Series A Junior Preferred Stock or, upon the acquisition by any person of 15% or more of the outstanding voting power represented by the outstanding Voting Stock (or, in certain circumstances, other property), common stock having a market value of twice the exercise price. After a person or group acquires 15% or more of the outstanding voting power, if U. S. Steel engages in a merger or other business combination where it is not the surviving corporation or where it is the surviving corporation and the Voting Stock is changed or exchanged, or if 50% or more of U. S. Steel's assets, earnings power or cash flow are sold or transferred, each right will entitle the holder to purchase common stock of the acquiring entity having a market value of twice the exercise price. The rights and the exercise price are subject to adjustment. The rights will expire on December 31, 2011, unless such date is extended or the rights are earlier redeemed by U. S. Steel before they become exercisable. Under certain circumstances, the Board of Directors has the option to exchange one share of the respective class of Voting Stock for each exercisable right.

17. Leases

Future minimum commitments for capital leases (including sale-leasebacks accounted for as financings) and for operating leases having remaining noncancelable lease terms in excess of one year are as follows:

(In millions)

  Capital
Leases

  Operating
Leases

 

 
2003   $ 13   $ 101  
2004     11     108  
2005     11     82  
2006     11     55  
2007     20     42  
Later years     54     190  
Sublease rentals         (79 )
   
 
 
  Total minimum lease payments     120   $ 499  
         
 
Less imputed interest costs     38        
   
       
  Present value of net minimum lease payments included in long-term debt (see Note 11)   $ 82        

 

        Operating lease rental expense:

(In millions)

  2002
  2001
  2000
 

 
Minimum rental   $ 109   $ 133   $ 132  
Contingent rental     12     18     17  
Sublease rentals     (18 )   (17 )   (6 )
   
 
 
 
  Net rental expense   $ 103   $ 134   $ 143  

 

        U. S. Steel leases a wide variety of facilities and equipment under operating leases, including land and building space, office equipment, production facilities and transportation equipment. Most long-term leases include renewal options and, in certain leases, purchase options. See discussion of residual value guarantees in Note 25.

F-31



18. Income Per Common Share

Net income per common share for 2002 is based on the weighted average number of common shares outstanding during the year. Diluted net income per common share in 2002 assumes the exercise of stock options, provided the effect is dilutive.

        Prior to December 31, 2001, the businesses comprising U. S. Steel were an operating unit of Marathon and did not have any public equity securities outstanding. In connection with the Separation, U. S. Steel was capitalized through the issuance of 89.2 million shares of common stock. Basic and diluted net income (loss) per share for 2001 and 2000 are calculated by dividing net income (loss) for the period by the number of outstanding common shares at December 31, 2001, the date of the Separation.

        Potential common stock related to employee options to purchase 5,024,873 shares of common stock have been excluded from the computation of diluted net income (loss) per share for 2002, and 3,520,000 shares have been excluded for 2001 and 2000 because their effect was antidilutive.

 
  2002

  2001

  2000

 

 
Computation of Income Per Share                    

Net income (loss) (in millions)

 

$

61

 

$

(218

)

$

(21

)
Weighted average shares outstanding (in thousands):                    
  Basic     97,426     89,223     89,223  
  Diluted     97,428     89,223     89,223  
Per share — basic and diluted   $ .62   $ (2.45 ) $ (.24 )

 

19. Stock-Based Compensation Plans

The 2002 Stock Plan, which became effective January 1, 2002, replaced the 1990 Stock Plan as a stock-based compensation plan for key management employees of U. S. Steel. The 2002 Stock Plan authorizes the Compensation and Organization Committee of the board of directors to grant restricted stock, stock options and stock appreciation rights to key management employees. Up to 10 million shares are available for grants during the five-year term of the plan. In addition, awarded shares that do not result in shares being issued are available for subsequent grant, and any ungranted shares from prior years' annual allocations are available for subsequent grants during the years the 2002 Stock Plan is in effect.

        Stock options represent the right to purchase shares of stock at the market value of the stock at date of grant. Certain options contain the right to receive cash and/or common stock equal to the excess of the fair market value of shares of common stock, as determined in accordance with the plan, over the option price of shares. Under the 2002 Stock Plan, no stock options may be exercised prior to one year or after eight years from the date of grant. Under the 1990 Stock Plan, stock options expired ten years from the date they were granted.

        In connection with the Separation, all options to purchase Steel Stock were converted into options to purchase U. S. Steel common stock with identical terms; the remaining vesting periods and term of the options were continued.

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        The following is a summary of stock option activity under the former 1990 Stock Plan for 2000 and 2001 and the 2002 Stock Plan for 2002:

 
  Shares

  Price(a)


Balance December 31, 1999   2,626,385   $ 33.67
  Granted   915,470     23.00
  Exercised   (400 )   24.30
  Canceled   (62,955 )   38.19
   
     
Balance December 31, 2000   3,478,500     30.78
  Granted   1,089,555     19.89
  Exercised      
  Canceled   (89,520 )   32.56
   
     
Balance December 31, 2001   4,478,535     28.09
  Granted   1,825,200     20.42
  Exercised      
  Canceled   (138,465 )   27.31
   
     
Balance December 31, 2002   6,165,270     25.84

(a)
Weighted-average exercise price.

        The following table represents outstanding stock options issued under the 2002 Stock Plan and 1990 Stock Plan at December 31, 2002:

 
  Outstanding
  Exercisable
Range of Exercise Prices

  Number
of Shares
Under Option

  Weighted-Average
Remaining
Contractual Life

  Weighted-
Average
Exercise Price

  Number
of Shares
Under Option

  Weighted
Average
Exercise Price


$19.89—28.22   4,404,230   7.5 years   $ 21.96   2,580,530   $ 23.06
  31.69—34.44   959,595   3.3     32.53   959,595     32.53
  37.28—44.19   801,445   4.1     39.12   801,445     39.12
   
           
     
  Total   6,165,270   6.4     25.84   4,341,570     28.12

        Restricted stock represents stock granted for such consideration, if any, as determined by the Compensation and Organization Committee, subject to forfeiture provisions and restrictions on transfer. Those restrictions may be removed as conditions such as performance, continuous service and other criteria are met. Restricted stock is issued at the market price per share at the date of grant and vests over service periods that range from one to five years.

        The following table presents information on restricted stock grants made under the 2002 Stock Plan for 2002 and the 1990 Stock Plan for 2001 and 2000:

 
  2002

  2001

  2000


Number of shares granted     221,960     54,372     305,725
Weighted-average grant-date fair value per share   $ 20.42   $ 19.89   $ 23.00

        U. S. Steel also has a restricted stock plan for certain salaried employees who are not officers of the Corporation. Participants in the plan are awarded restricted stock by the Salary and Benefits Committee based on their performance within certain guidelines. 50% of the awarded stock vests at the end of two years from the date of grant and the remaining 50% vests in four years from the date of grant. Prior to vesting, the employee has the right to vote such stock and receive dividends thereon. The nonvested shares are not transferable and are retained by the Corporation until they vest.

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        The following table presents information on restricted stock grants under the nonofficer plan:

 
  2002

  2001


Number of shares granted         390,119
Weighted-average grant-date fair value per share   $   $ 18.97

        U. S. Steel has a deferred compensation plan for non-employee directors of its Board of Directors. The plan permits participants to defer up to 100% of their annual retainers in the form of common stock units, and it requires non-employee directors to defer at least half of their annual retainers in the form of common stock units. Common stock units are book entry units equal in value to a share of stock. During 2002, 16,993 units were issued; during 2001, 5,235 units were issued; and during 2000, 4,872 units were issued.

        Total stock-based compensation expense was $5 million in 2002, $6 million in 2001 and $1 million in 2000.

20. Property, Plant and Equipment

 
   
  December 31
(In millions)

  Useful Lives

  2002

  2001


Land and depletable property     $ 184   $ 193
Buildings   35 years     591     572
Machinery and equipment   4-22 years     9,195     9,080
Leased assets   3-25 years     103     105
       
 
  Total         10,073     9,950
Less accumulated depreciation, depletion and amortization         7,095     6,866
       
 
  Net       $ 2,978   $ 3,084

        Amounts in accumulated depreciation, depletion and amortization for assets acquired under capital leases (including sale-leasebacks accounted for as financings) were $95 million and $88 million at December 31, 2002 and 2001, respectively.

        On August 14, 2001, U. S. Steel announced its intention to permanently close the pickling, cold rolling and tin mill operations at its Fairless Works. In 2001, a pretax charge of $38 million was recorded related to the shutdown of these operations, of which $18 million is included in depreciation, depletion and amortization, and $20 million is included in cost of revenues. An additional $1 million was recorded in 2002, which is included in cost of sales.

        During 2000, U. S. Steel recorded $71 million of impairments relating to coal assets located in West Virginia and Alabama. The impairment was recorded as a result of a reassessment of long-term prospects after adverse geological conditions were encountered. The charge is included in depreciation, depletion and amortization.

21. Sale of Accounts Receivable

On November 28, 2001, U. S. Steel entered into a five-year Receivables Purchase Agreement to sell a revolving interest in eligible trade receivables generated by U. S. Steel and certain of its subsidiaries through a commercial paper conduit program. Qualifying accounts receivables are sold, on a daily basis, without recourse, to U. S. Steel Receivables LLC (榴莲视频R), a consolidated wholly owned special purpose entity. 榴莲视频R then sells an undivided interest in these receivables to certain conduits. The conduits issue commercial paper to finance the purchase of their interest in the receivables. U. S. Steel

F-34



has agreed to continue servicing the sold receivables at market rates. Because U. S. Steel receives adequate compensation for these services, no servicing asset or liability has been recorded.

        Sales of accounts receivable are reflected as a reduction of receivables in the balance sheet and the proceeds received are included in cash flows from operating activities in the statement of cash flows. Under the facility, 榴莲视频R may sell interests in the receivables up to the lesser of a funding base, comprised of eligible receivables, or $400 million. Generally, the facility provides that as payments are collected from the sold accounts receivables, 榴莲视频R may elect to have the conduits reinvest the proceeds in new eligible accounts receivable.

        During 2002, 榴莲视频R sold to conduits and subsequently repurchased $320 million of revolving interest in accounts receivable. No sales occurred in 2001. As of December 31, 2002, $343 million was available to be sold under this facility. The net book value of U. S. Steel's retained interest in the receivables represents the best estimate of the fair market value due to the short-term nature of the receivables.

        榴莲视频R pays the conduits a discount based on the conduits' borrowing costs plus incremental fees. During 2002, U. S. Steel incurred costs of $3 million on the sale of its receivables, while such costs were less than $1 million in 2001. These costs are included in net interest and other financial costs in the statement of operations.

        The table below summarizes cash flows from and paid to 榴莲视频R:

(In millions)

  2002

  2001


Proceeds from:            
  Collections reinvested   $ 5,114   $ 415
  Securitizations        
  Servicing fee     6     1

        The table below summarizes the trade receivables for 榴莲视频R:

 
  December 31
(In millions)

  2002

  2001


Balance of accounts receivable, net, purchased by 榴莲视频R   $ 451   $ 393
Revolving interest sold to conduits        
   
 
Accounts receivable — net, included in the balance sheet of U. S. Steel   $ 451   $ 393

        While the term of the facility is five years, the facility also terminates on the occurrence and failure to cure certain events, including, among others, certain defaults with respect to the Inventory Facility and other debt obligations, any failure of 榴莲视频R to maintain certain ratios related to the collectability of the receivables, and failure to extend the commitments of the commercial paper conduits' liquidity providers which currently terminate on November 26, 2003.

22. Inventories

(In millions)

  December 31

  2002

  2001


Raw materials       $ 228   $ 184
Semi-finished products         472     408
Finished products         271     210
Supplies and sundry items         59     68
       
 
  Total       $ 1,030   $ 870

F-35


        At December 31, 2002 and 2001, the LIFO method accounted for 92% and 91%, respectively, of total inventory value. Current acquisition costs were estimated to exceed the above inventory values at December 31 by approximately $310 million in 2002 and $410 million in 2001. Cost of revenues were reduced and income (loss) from operations was improved by $24 million in 2001 and $3 million in 2000 as a result of liquidations of LIFO inventories. The effect of liquidations of LIFO inventories in 2002 was less than $1 million.

        Supplies and sundry items inventory in the table above includes $43 million and $45 million of land held for residential/commercial development by U. S. Steel's Real Estate segment as of December 31, 2002 and 2001, respectively.

23. Derivative Instruments

The following table sets forth quantitative information by class of derivative instrument at December 31, 2002 and 2001:

(In millions)

  Fair
Value
Assets
(Liabilities)(a)

  Carrying
Amount
Assets
(Liabilities)

 

 
Non-Hedge Designation:              
 
OTC commodity swaps(b):

 

 

 

 

 

 

 
    December 31, 2002   $ (2 ) $ (2 )
    December 31, 2001     (5 )   (5 )

 
(a)
The fair value amounts are based on exchange-traded index prices and dealer quotes.

(b)
The OTC swap arrangements vary in duration with certain contracts extending into 2004.

24. Fair Value of Financial Instruments

Fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement. The following table summarizes financial instruments, excluding derivative financial instruments disclosed in Note 23, by individual balance sheet account. U. S. Steel's financial instruments at December 31, 2002 and 2001, were:

 
   
  2002
  2001
(In millions)

  December 31
  Fair
Value

  Carrying
Amount

  Fair
Value

  Carrying
Amount


Financial assets:                            
  Cash and cash equivalents       $ 243   $ 243   $ 147   $ 147
  Receivables         805     805     671     671
  Receivables from related parties         129     129     159     159
  Investments and long-term receivables         45     44     42     41
       
 
 
 
    Total financial assets       $ 1,222   $ 1,221   $ 1,019   $ 1,018

Financial liabilities:                            
  Accounts payable       $ 677   $ 677   $ 551   $ 551
  Accounts payable to related parties         90     90     143     143
  Accrued interest         44     44     45     45
  Long-term debt (including amounts due within one year)         1,165     1,352     1,122     1,375
       
 
 
 
    Total financial liabilities       $ 1,976   $ 2,163   $ 1,861   $ 2,114

F-36


        Fair value of financial instruments classified as current assets or liabilities approximates carrying value due to the short-term maturity of the instruments. Fair value of investments and long-term receivables was based on discounted cash flows or other specific instrument analysis. The cost method investment in VSZ at December 31, 2001, was excluded from investments and long-term receivables because the fair value was not readily determinable. U. S. Steel is subject to market risk and liquidity risk related to its investments; however, these risks are not readily quantifiable. Fair value of long-term debt instruments was based on market prices where available or current borrowing rates available for financings with similar terms and maturities.

        Financial guarantees are U. S. Steel's only unrecognized financial instrument. For details relating to financial guarantees, see Note 25.

25. Contingencies and Commitments

U. S. Steel is the subject of, or party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that U. S. Steel will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably.

Property taxes — U. S. Steel is a party to several property tax disputes involving its Gary Works property in Indiana, including claims for refunds of approximately $65 million pertaining to tax years 1994-96 and 1999, and assessments of approximately $110 million in excess of amounts paid for the 2000 and 2001 tax years. In addition, interest may be imposed upon any final assessment. The disputes involve property values and tax rates and are in various stages of administrative appeals. U. S. Steel is vigorously defending against the assessments and pursuing its claims for refunds.

Environmental matters — U. S. Steel is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. Accrued liabilities for remediation totaled $135 million and $138 million at December 31, 2002 and 2001, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed.

        For a number of years, U. S. Steel has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In 2002 and 2001, such capital expenditures totaled $14 million and $15 million, respectively. U. S. Steel anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements.

        Throughout its history, U. S. Steel has sold numerous properties and businesses and has provided various indemnifications with respect to many of the assets that were sold. These indemnifications have been associated with the condition of the property, the approved use, certain representations and warranties, matters of title and environmental matters. While the vast majority of indemnifications have not covered environmental issues, there have been a few transactions in which U. S. Steel indemnified the buyer for non-compliance with past, current and future environmental laws related to existing conditions; however, most recent indemnifications are of a limited nature only applying to non-compliance with past and/or current laws. Some indemnifications only run for a specified period of time after the transactions close and others run indefinitely. The amount of potential liability associated with these transactions is not estimable due to the nature and extent of the unknown conditions related to the properties sold. Aside from approximately $14 million of liabilities already

F-37



recorded as a result of these indemnifications due to specific environmental remediation cases (included in the $135 million of accrued liabilities for remediation discussed above), there are no other known liabilities related to these indemnifications.

Guarantees — Guarantees of the liabilities of unconsolidated entities of U. S. Steel totaled $27 million at December 31, 2002, and $32 million at December 31, 2001. In the event that any defaults of guaranteed liabilities occur, U. S. Steel has access to its interest in the assets of the investees to reduce potential losses resulting from these guarantees. As of December 31, 2002, the largest guarantee for a single such entity was $18 million, which represents the maximum exposure to loss under a guarantee of debt service payments of an equity investee. No liability has been recorded for these guarantees as management believes the likelihood of occurrence is remote.

Contingencies related to Separation from Marathon — U. S. Steel was contingently liable for debt and other obligations of Marathon in the amount of approximately $168 million as of December 31, 2002, compared to $359 million at December 31, 2001. In the event of the bankruptcy of Marathon, these obligations for which U. S. Steel is contingently liable may be declared immediately due and payable. If such event occurs, U. S. Steel may not be able to satisfy such obligations. No liability has been recorded for these contingencies as management believes the likelihood of occurrence is remote.

        If the Separation is determined to be a taxable distribution of the stock of U. S. Steel, but there is no breach of a representation or covenant by either U. S. Steel or Marathon, U. S. Steel would be liable for any resulting taxes (Separation No-Fault Taxes) incurred by Marathon. U. S. Steel's indemnity obligation for Separation No-Fault Taxes survives until the expiration of the applicable statute of limitations. The maximum potential amount of U. S. Steel's indemnity obligation for Separation No-Fault Taxes at December 31, 2002, is estimated to be approximately $90 million. No liability has been recorded for this indemnity obligation as management believes that the likelihood of the Separation being determined to be a taxable distribution of the stock of U. S. Steel is remote.

Other contingencies — U. S. Steel is contingently liable to its Chairman and Chief Executive Officer for a $3 million retention bonus. The bonus is payable upon the earlier of his retirement from active employment or December 31, 2004, and is subject to certain performance measures.

        U. S. Steel has the option, under certain operating lease agreements covering various equipment, to renew the leases or to purchase the equipment during or at the end of the terms of the leases. If U. S. Steel does not exercise the purchase options by the end of the terms of the leases, U. S. Steel guarantees a residual value of the equipment as determined at the lease inception date of each agreement (approximately $51 million at December 31, 2002). No liability has been recorded for these guarantees as either management believes that the potential recovery of value from the equipment when sold is greater than the residual value guarantee, or the potential loss is not probable and/or estimable.

Transtar reorganization — The 2001 reorganization of Transtar was intended to be tax-free for federal income tax purposes, with U. S. Steel and Holdings agreeing through various representations and covenants to protect the reorganization's tax-free status. If the reorganization is determined to be taxable, but there is no breach of a representation or covenant by either U. S. Steel or Holdings, U. S. Steel is liable for 44% of any resulting Holdings taxes (Transtar No-Fault Taxes), and Holdings is responsible for 56% of any resulting U. S. Steel taxes. U. S. Steel's indemnity obligation for Transtar No-Fault Taxes survives until 30 days after the expiration of the applicable statute of limitations. The maximum potential amount of U. S. Steel's indemnity obligation for Transtar No-Fault Taxes at December 31, 2002, is estimated to be approximately $70 million. No liability has been recorded for this indemnity obligation as management believes that the likelihood of the reorganization being determined to be taxable is remote. U. S. Steel can recover all or a portion of any indemnified Transtar

F-38



No-Fault Taxes if Holdings receives a future tax benefit as a result of the Transtar reorganization being taxable.

Clairton 1314B partnership — See description of the partnership in Note 15. U. S. Steel has a commitment to fund operating cash shortfalls of the partnership of up to $150 million. Additionally, U. S. Steel, under certain circumstances, is required to indemnify the limited partners if the partnership product sales fail to qualify for the credit under Section 29 of the Internal Revenue Code. This indemnity will effectively survive until the expiration of the applicable statute of limitations. The maximum potential amount of this indemnity obligation at December 31, 2002, including interest and tax gross-up, is approximately $600 million. Furthermore, U. S. Steel under certain circumstances has indemnified the partnership for environmental obligations. See discussion of environmental matters above. The maximum potential amount of this indemnity obligation is not estimable. Management believes that the $150 million deferred gain related to the partnership, which is recorded in deferred credits and other liabilities, is more than sufficient to cover any probable exposure under these commitments and indemnifications.

Self-insurance — U. S. Steel is self-insured for certain liabilities including workers' compensation, auto liability and general liability, within specified deductible and retainage levels. Certain equipment that is leased by U. S. Steel is also self-insured within specified deductible and retainage levels. Liabilities are recorded for workers' compensation and personal injury obligations. Other costs resulting from self-insured losses are charged against income upon occurrence.

        U. S. Steel uses surety bonds, trusts and letters of credit to provide whole or partial financial assurance for certain obligations such as workers' compensation. The total amount of active surety bonds, trusts and letters of credit being used for financial assurance purposes is approximately $144 million as of December 31, 2002, which reflects our maximum exposure under these financial guarantees, but not our total exposure for the underlying obligations. Most of the trust arrangements and letters of credit are collateralized by restricted cash that is recorded in other noncurrent assets.

Commitments — At December 31, 2002 and 2001, U. S. Steel's domestic contract commitments to acquire property, plant and equipment totaled $24 million and $28 million, respectively.

        榴莲视频K has a commitment to the Slovak government for a capital improvements program of $700 million, subject to certain conditions, over a period commencing with the acquisition date of November 24, 2000, and ending on December 31, 2010. The remaining commitments under this capital improvements program as of December 31, 2002 and 2001, were $541 million and $634 million, respectively.

        U. S. Steel entered into a 15-year take-or-pay arrangement in 1993, which requires U. S. Steel to accept pulverized coal each month or pay a minimum monthly charge of approximately $1 million. Charges for deliveries of pulverized coal totaled $23 million in 2002, 2001 and 2000. If U. S. Steel elects to terminate the contract early, a maximum termination payment of $82 million as of December 31, 2002, which declines over the duration of the agreement, may be required.

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26. Subsequent Events

On January 9, 2003, U. S. Steel announced that it had signed an Asset Purchase Agreement with National Steel Corporation (National) to acquire substantially all of National's steelmaking and finishing assets for approximately $950 million, which includes the assumption of liabilities of approximately $200 million. The closing of the agreement with National was contingent on, among other things, the approval of the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, and the execution and ratification of a new labor agreement with the United Steelworkers of America (USWA) with respect to the steelworkers at the National facilities to be acquired.

        On January 30, 2003, National announced that it had signed an agreement with another party, under which National would sell substantially all of its assets, including its pellet-making facility, for $1,125 million, consisting of cash and the assumption of approximately $200 million of liabilities. The closing of the agreement between National and the other party is contingent on, among other things, the approval of the U.S. Bankruptcy Court and the execution and ratification of a new labor agreement with the USWA with respect to the steelworkers at the National facilities to be acquired. The U.S. Bankruptcy Court in Chicago established an auction period for National's assets that began on February 6, 2003, and will end on April 7, 2003.

        On February 10, 2003, U. S. Steel announced that it would immediately begin bargaining with the USWA to reach a new, progressive labor contract covering facilities now owned by bankrupt National as well as the USWA-represented plants of U. S. Steel. U. S. Steel remains interested in acquiring the assets of National if U. S. Steel is able to reach a new labor agreement with the USWA for the steelworkers at the National facilities and acquire the assets at a price that U. S. Steel views to be appropriate in light of conditions in the steel and financial markets at the time of the auction. Management cannot assure that U. S. Steel will participate in or prevail at the auction for National's assets.

        In February 2003, U. S. Steel sold 5 million shares of 7% Series B Mandatory Convertible Preferred Shares (liquidation preference $50 per share) (Series B Preferred) for net proceeds of $242 million. U. S. Steel also granted the underwriters an over-allotment option to purchase up to an additional 750,000 of Series B Preferred. The Series B Preferred have a dividend yield of 7%, a 20% conversion premium (for an equivalent conversion price of $15.66 common share) and will mandatorily convert into U. S. Steel common shares on June 15, 2006. The net proceeds of the offering will be used for general corporate purposes, including funding working capital, financing potential acquisitions, debt reduction and voluntary contributions to employee benefit plans. The number of common shares that could be issued upon conversion of the 5 million shares of Series B Preferred ranges from approximately 16.0 million shares to 19.2 million shares, based upon the timing of the conversion and the market price of U. S. Steel's common stock.

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