Marathon Gains Independence, Debt from Steel Unit

In a long-anticipated announcement last Tuesday, USX Corp. said it will break up its energy and steel businesses to give the companies more flexibility to expand and pursue acquisitions. The planned spin-off would completely separate USX's two divisions, Pittsburgh-based U.S. Steel Group and Houston-based Marathon Group, and comes following a five-month review of the corporation's capital structure (see NGI, Sept. 18, 2000).

Like many U.S. steelmakers, the steel division has struggled in recent years, and in the first quarter, it reported a loss of $98 million, or $1.12 a share. However, the energy unit, Marathon Group, has watched its earnings soar in the past year, mostly because of higher commodity prices. The breakup comes following a review initiated by USX last November that was conducted by Credit Suisse First Boston and Salomon Smith Barney.

With the breakup, Moody's Investors Service said the proposed transaction puts pressure on Marathon "on a stand-alone basis to increase its size and growth prospects, which could entail acquisitions or other business combinations."

Under the tax-free spin off plan, stockholders with USX-Marathon Group common stock, the energy division, would become holders of Marathon Oil Co. stock, while those holding USX-U.S. Steel Group stock would become shareholders in a new company. No cash payments would be made as part of the conversion. CEO Thomas Usher made the announcement at the 100th annual shareholders' meeting last week in Columbus, OH.

"The board believes that a tax-free spin-off of our steel business is in the best interest of all of our shareholders," Usher said. The plan still must be approved by a majority of shareholders in both stock groups, and the vote is expected by the fourth quarter. Usher said no employees would be affected by the plan.

Last November, the USX board authorized management to retain financial, tax and legal advisers to begin a comprehensive review of the company. Usher said the breakup would allow each "new company" to focus attention and financial resources on its core business. Marathon and U.S. Steel would have independent access to financial markets and align the liability risks with each business. Marathon was acquired in 1982 by U.S. Steel Corp., which became USX in 1986.

Marathon put together a deal that is expected to fuel its U.S.-based assets after acquiring Pennaco Energy Inc. last year (see NGI, April 2). Denver-based Pennaco's core business is in coalbed methane production in the gas-rich Powder River Basin. Pennaco is one of the basin's top leaseholders.

With Marathon the current moneymaker, USX plans to transfer approximately $900 million of Marathon's value to U.S. Steel, reallocating the steel unit's debt so that all public debt outstanding would remain with Marathon. Transition expenses and other separation costs would be allocated between the new companies.

Usher becomes chairman and CEO of U.S. Steel and chairman of Marathon Oil Co. He also would remain chairman of the Marathon Ashland Petroleum LLC board of managers. Clarence P. Cazalot Jr. would become president and CEO of Marathon. The rest of the management team was expected to remain "substantially" in its current state.

Moody's confirmed its Baa1 senior debt ratings and its Prime-2 short-term rating for USX, noting that if the separation proceeds as expected, Marathon's senior unsecured debt would be rated "at least equal" to Baa1 and Prime-2 for short-term debt.

Noting Marathon's key assets, Moody's said that its "1.23 B proved boe reserves and 2001 production of 425,000-to-430,000 boe/d, as well as a 62% equity interest in Marathon Ashland Petroleum LLC, a leading refining and marketing company in the Midwest" positioned it for positive growth.

Marathon's rating as a "stand-alone business reflects the benefits of its integrated petroleum company profile; the scope and diversification of its upstream reserve base and production; and the sizable and relatively stable cash flow contributions from its refining and marketing operations, all of which will support its debt burden. Additional factors are its relatively small reserve base and short reserve life within the integrated oil peer group; and its above average finding and development costs."

While enthusiastic about the reorganization, Usher was more subdued in announcing dividends for the two business units. He said the USX board had declared dividends of 23 cents per share on Marathon Group common stock and 10 cents per share on U.S. Steel Group stock, a decrease of 15 cents per share.

"It is clear from a cash flow perspective that we have not earned the prior dividend for the past two years," Usher said. "The combination of the steel import crisis, depressed industry conditions and the uncertain domestic economy makes a dividend reduction prudent at this time."

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