þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 25-0996816 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
2
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in millions, except per share data) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Revenues and other income: |
||||||||||||||||
Sales and other operating revenues (including
consumer excise taxes) |
$ | 15,962 | $ | 12,009 | $ | 28,862 | $ | 21,796 | ||||||||
Revenues from matching buy/sell transactions |
1,806 | 3,565 | 5,012 | 6,374 | ||||||||||||
Sales to related parties |
411 | 368 | 723 | 651 | ||||||||||||
Income from equity method investments |
97 | 45 | 189 | 84 | ||||||||||||
Net gains on disposal of assets |
5 | 23 | 16 | 34 | ||||||||||||
Other income |
9 | 14 | 27 | 40 | ||||||||||||
Total revenues and other income |
18,290 | 16,024 | 34,829 | 28,979 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of revenues (excludes items below) |
11,628 | 9,255 | 21,387 | 16,936 | ||||||||||||
Purchases related to matching buy/sell
transactions |
1,750 | 3,442 | 4,983 | 6,274 | ||||||||||||
Purchases from related parties |
47 | 63 | 98 | 119 | ||||||||||||
Consumer excise taxes |
1,277 | 1,210 | 2,442 | 2,294 | ||||||||||||
Depreciation, depletion and amortization |
369 | 321 | 769 | 631 | ||||||||||||
Selling, general and administrative expenses |
308 | 268 | 595 | 527 | ||||||||||||
Other taxes |
91 | 78 | 188 | 157 | ||||||||||||
Exploration expenses |
66 | 36 | 137 | 66 | ||||||||||||
Total costs and expenses |
15,536 | 14,673 | 30,599 | 27,004 | ||||||||||||
Income from operations |
2,754 | 1,351 | 4,230 | 1,975 | ||||||||||||
Net interest and other financing costs (income) |
(9 | ) | 35 | 14 | 68 | |||||||||||
Minority interests in income (loss) of: |
||||||||||||||||
Marathon Petroleum Company LLC |
| 314 | | 384 | ||||||||||||
Equatorial Guinea LNG Holdings Limited |
(2 | ) | | (5 | ) | (1 | ) | |||||||||
Income from continuing operations before
income taxes |
2,765 | 1,002 | 4,221 | 1,524 | ||||||||||||
Provision for income taxes |
1,281 | 334 | 1,966 | 533 | ||||||||||||
Income from continuing operations |
1,484 | 668 | 2,255 | 991 | ||||||||||||
Discontinued operations |
264 | 5 | 277 | 6 | ||||||||||||
Net income |
$ | 1,748 | $ | 673 | $ | 2,532 | $ | 997 | ||||||||
Per Share Data |
||||||||||||||||
Basic: |
||||||||||||||||
Income from continuing operations |
$ | 4.11 | $ | 1.93 | $ | 6.21 | $ | 2.86 | ||||||||
Discontinued operations |
$ | 0.73 | $ | 0.01 | $ | 0.76 | $ | 0.02 | ||||||||
Net income |
$ | 4.84 | $ | 1.94 | $ | 6.97 | $ | 2.88 | ||||||||
Diluted: |
||||||||||||||||
Income from continuing operations |
$ | 4.07 | $ | 1.91 | $ | 6.16 | $ | 2.84 | ||||||||
Discontinued operations |
$ | 0.73 | $ | 0.01 | $ | 0.75 | $ | 0.02 | ||||||||
Net income |
$ | 4.80 | $ | 1.92 | $ | 6.91 | $ | 2.86 | ||||||||
Dividends paid |
$ | 0.40 | $ | 0.28 | $ | 0.73 | $ | 0.56 | ||||||||
3
June 30, | December 31, | |||||||
(Dollars in millions, except per share data) | 2006 | 2005 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,026 | $ | 2,617 | ||||
Receivables, less allowance for doubtful accounts of $3 and $3 |
4,210 | 3,476 | ||||||
Receivables from United States Steel |
21 | 20 | ||||||
Receivables from related parties |
58 | 38 | ||||||
Inventories |
3,817 | 3,041 | ||||||
Other current assets |
173 | 191 | ||||||
Total current assets |
11,305 | 9,383 | ||||||
Investments and long-term receivables, less allowance for
doubtful accounts of $9 and $10 |
1,882 | 1,864 | ||||||
Receivables from United States Steel |
510 | 532 | ||||||
Property, plant and equipment, less accumulated depreciation,
depletion and amortization of $12,902 and $12,384 |
15,110 | 15,011 | ||||||
Goodwill |
1,286 | 1,307 | ||||||
Intangible assets, less accumulated amortization of $65 and $58 |
192 | 200 | ||||||
Other noncurrent assets |
165 | 201 | ||||||
Total assets |
$ | 30,450 | $ | 28,498 | ||||
Liabilities |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 6,140 | $ | 5,353 | ||||
Consideration payable under Libya re-entry agreement |
212 | 732 | ||||||
Payables to related parties |
166 | 82 | ||||||
Payroll and benefits payable |
263 | 344 | ||||||
Accrued taxes |
1,012 | 782 | ||||||
Deferred income taxes |
438 | 450 | ||||||
Accrued interest |
89 | 96 | ||||||
Long-term debt due within one year |
456 | 315 | ||||||
Total current liabilities |
8,776 | 8,154 | ||||||
Long-term debt |
3,224 | 3,698 | ||||||
Deferred income taxes |
2,114 | 2,030 | ||||||
Employee benefits obligations |
1,263 | 1,321 | ||||||
Asset retirement obligations |
754 | 711 | ||||||
Payable to United States Steel |
5 | 6 | ||||||
Deferred credits and other liabilities |
346 | 438 | ||||||
Total liabilities |
16,482 | 16,358 | ||||||
Minority interests in Equatorial Guinea LNG Holdings Limited |
479 | 435 | ||||||
Commitments and contingencies |
||||||||
Stockholders Equity |
||||||||
Common stock
issued 367,677,611 and 366,925,852 shares (par value
$1 per share, 550,000,000 shares authorized) |
368 | 367 | ||||||
Common stock
held in treasury, at cost 7,600,887 and 179,977 shares |
(569 | ) | (8 | ) | ||||
Additional paid-in capital |
5,150 | 5,111 | ||||||
Retained earnings |
8,672 | 6,406 | ||||||
Accumulated other comprehensive loss |
(132 | ) | (151 | ) | ||||
Unearned compensation |
| (20 | ) | |||||
Total stockholders equity |
13,489 | 11,705 | ||||||
Total liabilities and stockholders equity |
$ | 30,450 | $ | 28,498 | ||||
4
Six Months Ended June 30, | ||||||||
(Dollars in millions) | 2006 | 2005 | ||||||
Increase (decrease) in cash and cash equivalents |
||||||||
Operating activities: |
||||||||
Net income |
$ | 2,532 | $ | 997 | ||||
Adjustments to reconcile to net cash provided from operating activities: |
||||||||
Income from discontinued operations |
(277 | ) | (6 | ) | ||||
Deferred income taxes |
134 | (33 | ) | |||||
Minority interests in income (loss) of subsidiaries |
(5 | ) | 383 | |||||
Depreciation, depletion and amortization |
769 | 631 | ||||||
Pension and other postretirement benefits, net |
(41 | ) | 33 | |||||
Exploratory dry well costs and unproved property impairments |
69 | 25 | ||||||
Net gains on disposal of assets |
(16 | ) | (34 | ) | ||||
Equity method investments, net |
(141 | ) | (25 | ) | ||||
Changes in the fair value of long-term U.K. natural gas contracts |
(61 | ) | 224 | |||||
Changes in: |
||||||||
Current receivables |
(833 | ) | (357 | ) | ||||
Inventories |
(777 | ) | (643 | ) | ||||
Current accounts payable and accrued expenses |
916 | 269 | ||||||
All other, net |
(39 | ) | 5 | |||||
Net cash provided from continuing operations |
2,230 | 1,469 | ||||||
Net cash provided from discontinued operations |
69 | 51 | ||||||
Net cash provided from operating activities |
2,299 | 1,520 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(1,308 | ) | (1,179 | ) | ||||
Acquisitions |
(543 | ) | (497 | ) | ||||
Disposal of assets |
49 | 63 | ||||||
Disposal of discontinued operations |
832 | | ||||||
Investments - loans and advances |
(2 | ) | (36 | ) | ||||
- repayments of loans and advances |
146 | 5 | ||||||
Investing activities of discontinued operations |
(45 | ) | (47 | ) | ||||
All other, net |
14 | (16 | ) | |||||
Net cash used in investing activities |
(857 | ) | (1,707 | ) | ||||
Financing activities: |
||||||||
Commercial paper issued |
| 590 | ||||||
Debt repayments |
(303 | ) | (4 | ) | ||||
Issuance of common stock |
19 | 61 | ||||||
Purchases of common stock |
(554 | ) | | |||||
Excess tax benefits from stock-based compensation arrangements |
14 | | ||||||
Dividends paid |
(265 | ) | (194 | ) | ||||
Distributions to minority shareholder of Marathon Petroleum Company LLC |
| (272 | ) | |||||
Contributions from minority shareholders
of Equatorial Guinea LNG Holdings Limited |
41 | 112 | ||||||
Net cash provided from (used in) financing activities |
(1,048 | ) | 293 | |||||
Effect of exchange rate changes on cash: |
||||||||
Continuing operations |
14 | (13 | ) | |||||
Discontinued operations |
1 | | ||||||
Net increase in cash and cash equivalents |
409 | 93 | ||||||
Cash and cash equivalents at beginning of period |
2,617 | 3,369 | ||||||
Cash and cash equivalents at end of period |
$ | 3,026 | $ | 3,462 | ||||
5
1. | Basis of Presentation | |
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 consolidated 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 2006 classifications. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the 2005 Annual Report on Form 10-K of Marathon Oil Corporation (Marathon or the Company). | ||
2. | New Accounting Standards | |
EITF Issue No. 04-13 | ||
In September 2005, the Financial Accounting Standards Board (FASB) ratified the consensus reached by the Emerging Issues Task Force (EITF) on Issue No. 04-13, Accounting for Purchases and Sales of Inventory with the Same Counterparty. The consensus establishes the circumstances under which two or more inventory purchase and sale transactions with the same counterparty should be recognized at fair value or viewed as a single exchange transaction subject to Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions. In general, two or more transactions with the same counterparty must be combined for purposes of applying APB Opinion No. 29 if they are entered into in contemplation of each other. The purchase and sale transactions may be pursuant to a single contractual arrangement or separate contractual arrangements and the inventory purchased or sold may be in the form of raw materials, work-in-process or finished goods. | ||
Effective April 1, 2006, Marathon adopted the provisions of EITF Issue No. 04-13 prospectively. EITF Issue No. 04-13 changes the accounting for matching buy/sell arrangements that are entered into or modified on or after April 1, 2006 (except for those accounted for as derivative instruments, which are discussed below). In a typical matching buy/sell transaction, Marathon enters into a contract to sell a particular quantity and quality of crude oil or refined petroleum products at a specified location and date to a particular counterparty and simultaneously agrees to buy a particular quantity and quality of the same commodity at a specified location on the same or another specified date from the same counterparty. Prior to adoption of EITF Issue No. 04-13, Marathon recorded such matching buy/sell transactions in both revenues and cost of revenues as separate sale and purchase transactions. Upon adoption, these transactions are accounted for as exchanges of inventory. | ||
The scope of EITF Issue No. 04-13 excludes matching buy/sell arrangements that are accounted for as derivative instruments. A portion of Marathons matching buy/sell transactions are nontraditional derivative instruments, which are contracts involving the purchase or sale of commodities that either do not qualify or have not been designated as normal purchases or normal sales and therefore are required to be accounted for as derivative instruments. Although the accounting for nontraditional derivative instruments is outside the scope of EITF Issue No. 04-13, the conclusions reached in that consensus caused Marathon to reconsider the guidance in EITF Issue No. 03-11, Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not Held for Trading Purposes as Defined in Issue No. 02-3. As a result, effective for contracts entered into or modified on or after April 1, 2006, the income effects of matching buy/sell arrangements accounted for as nontraditional derivative instruments are recognized on a net basis as cost of revenues. Prior to this change, Marathon recorded these transactions in both revenues and cost of revenues as separate sale and purchase transactions. This change in accounting principle is being applied on a prospective basis because it is impracticable to apply the change on a retrospective basis. | ||
Transactions arising from all matching buy/sell arrangements entered into before April 1, 2006 will continue to be reported as separate sale and purchase transactions. | ||
The adoption of EITF Issue No. 04-13 and the change in the accounting for nontraditional derivative instruments had no effect on net income. The amounts of revenues and cost of revenues recognized in the second quarter of 2006 and subsequent periods will be less than the amounts that would have been recognized under previous accounting practices. |
6
SFAS No. 123 (Revised 2004) | ||
In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment, (SFAS No. 123(R)) as a revision of SFAS No. 123, Accounting for Stock-Based Compensation. This statement requires entities to measure the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. In addition, awards classified as liabilities are remeasured at fair value each reporting period. Marathon had previously adopted the fair value method under SFAS No. 123 for grants made, modified or settled on or after January 1, 2003. | ||
Marathon adopted SFAS No. 123(R) as of January 1, 2006, for all awards granted, modified or cancelled after adoption, and for the unvested portion of awards outstanding at January 1, 2006. At the date of adoption, SFAS No. 123(R) requires that an assumed forfeiture rate be applied to any unvested awards and that awards classified as liabilities be measured at fair value. Prior to adopting SFAS No. 123(R), Marathon recognized forfeitures as they occurred and applied the intrinsic value method to awards classified as liabilities. The adoption did not have a significant effect on Marathons consolidated results of operations, financial position or cash flows. | ||
SFAS No. 123(R) also requires a company to calculate the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to adopting the statement. In November 2005, the FASB issued FASB Staff Position No. 123R-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, to provide an alternative transition election (the short-cut method) to account for the tax effects of share-based payment awards to employees. Marathon elected the long-form method to determine its pool of excess tax benefits as of January 1, 2006. | ||
See Note 3 to the consolidated financial statements for the disclosures regarding share-based payments required by SFAS No. 123(R). | ||
SFAS No. 151 | ||
Effective January 1, 2006, Marathon adopted SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4. This statement requires that items such as idle facility expense, excessive spoilage, double freight and re-handling costs be recognized as a current-period charge. The adoption did not have a significant effect on Marathons consolidated results of operations, financial position or cash flows. | ||
SFAS No. 154 | ||
Effective January 1, 2006, Marathon adopted SFAS No. 154, Accounting Changes and Error Corrections A Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires companies to recognize (1) voluntary changes in accounting principle and (2) changes required by a new accounting pronouncement, when the pronouncement does not include specific transition provisions, retrospectively to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. | ||
3. | Stock-Based Compensation Arrangements | |
Description of the Plans | ||
The Marathon Oil Corporation 2003 Incentive Compensation Plan (the Plan) authorizes the Compensation Committee of the Board of Directors to grant stock options, stock appreciation rights, stock awards, cash awards and performance awards to employees. The Plan also allows Marathon to provide equity compensation to its non-employee directors. No more than 20,000,000 shares of common stock may be issued under the Plan, and no more than 8,500,000 of those shares may be used for awards other than stock options or stock appreciation rights. Shares subject to awards that are forfeited, terminated, settled in cash, exchanged for other awards, tendered to satisfy the purchase price of an award or withheld to satisfy tax obligations or that expire unexercised or otherwise lapse become available for future grants. Shares issued as a result of awards granted under the Plan are generally funded out of common stock held in treasury, except to the extent there are insufficient treasury shares, in which case new common shares are issued. | ||
The Plan replaced the 1990 Stock Plan, the Non-Officer Restricted Stock Plan, the Non-Employee Director Stock Plan, the deferred stock benefit provision of the Deferred Compensation Plan for Non-Employee Directors, the Senior Executive Officer Annual Incentive Compensation Plan and the Annual Incentive Compensation Plan (collectively, the Prior Plans). No new grants will be made from the Prior Plans. Any awards previously granted under the Prior Plans shall continue to vest and/or be exercisable in accordance with their original terms and conditions. |
7
Stock-Based Awards Under the Plan | ||
Stock options Marathon grants stock options under the Plan. Marathons stock options represent the right to purchase shares of common stock at the fair market value of the common stock on the date of grant. Through 2004, certain options were granted with a tandem stock appreciation right, which allows the recipient to instead elect 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 the shares. Most stock options granted under the Plan vest ratably over a three-year period and have a maximum term of ten years from the date they are granted. | ||
Stock appreciation rights (SARs) Prior to 2005, Marathon granted SARs under the Plan. Similar to stock options, stock appreciation rights represent the right to receive a payment equal to the excess of the fair market value of shares of common stock on the date the right is exercised over the grant price. Certain SARs were granted as stock-settled SARs and others were granted in tandem with stock options. In general, SARs that have been granted under the Plan vest ratably over a three-year period and have a maximum term of ten years from the date they are granted. | ||
Stock-based performance awards In 2003 and 2004, the Compensation Committee granted stock-based performance awards to certain officers of Marathon and its consolidated subsidiaries under the Plan. Since that time, stock-based performance awards are no longer issued; however cash-settled performance units have been granted to the officers. The stock-based performance awards represent shares of common stock that are subject to forfeiture provisions and restrictions on transfer. Those restrictions may be removed if certain pre-established performance measures are met. The stock-based performance awards granted under the Plan will generally vest at the end of a 36-month performance period to the extent that the performance targets are achieved and the recipient is employed by Marathon on that date. Additional shares could be granted at the end of this performance period should performance exceed the targets. Prior to vesting, the recipients have the right to vote and receive dividends on the target number of shares awarded. However, the shares are not transferable until after they vest. | ||
Restricted stock Marathon grants restricted stock and restricted stock units under the Plan. Beginning in 2005, the Compensation Committee granted time-based restricted stock to officers. The restricted stock awards to officers vest three years from the date of grant, contingent on the recipients continued employment. Marathon also grants restricted stock to certain non-officer employees and restricted stock units to certain international non-officer employees (together with the restricted stock granted to officers above, restricted stock awards) based on their performance within certain guidelines and for retention purposes. The restricted stock awards to non-officers generally vest in one-third increments over a three-year period, contingent on the recipients continued employment. Prior to vesting, all restricted stock recipients have the right to vote such stock and receive dividends thereon. The nonvested shares are not transferable and are held by the Companys transfer agent. | ||
Common stock units Marathon maintains an equity compensation program for its non-employee directors under the Plan. All non-employee directors other than the Chairman receive annual grants of common stock units under the Plan and they are required to hold those units until they leave the Board of Directors. When dividends are paid on Marathons common stock, directors receive dividend equivalents in the form of additional common stock units. Prior to January 1, 2006, non-employee directors had the opportunity to receive a matching grant of up to 1,000 shares of common stock if they purchased an equivalent number of shares within 60 days of joining the Board. | ||
Stock-Based Compensation Expense | ||
The fair values of stock options, stock options with tandem SARs and stock-settled SARs (stock option awards) are estimated on the date of grant using the Black-Scholes option pricing model. The model employs various assumptions, based on managements best estimates at the time of grant, which impact the fair value calculated and ultimately, the expense that is recognized over the life of the stock option award. Of the required assumptions, the expected life of the stock option award and the expected volatility of Marathons stock price have the most significant impact on the fair value calculation. Marathon has utilized historical data and analyzed current information which reasonably support these assumptions. | ||
The fair values of Marathons restricted stock awards and common stock units are determined based on the fair market value of the Companys common stock on the date of grant. Prior to adoption of SFAS No. 123(R) on January 1, 2006, the fair values of Marathons stock-based performance awards were determined in the same manner as restricted stock awards. Under SFAS No. 123(R), on a prospective basis, these awards are required to be valued utilizing an option pricing model. No stock-based performance awards have been granted since May 2004. | ||
Effective January 1, 2006, Marathons stock-based compensation expense is recognized based on managements best estimate of the awards that are expected to vest, using the straight-line attribution method for all service-based |
8
awards with a graded vesting feature. If actual forfeiture results are different than expected, adjustments to recognized compensation expense may be required in future periods. Unearned stock-based compensation is charged to stockholders equity when restricted stock awards and stock-based performance awards are granted. Compensation expense is recognized over the balance of the vesting period and is adjusted if conditions of the restricted stock award or stock-based performance award are not met. Options with tandem SARs are classified as a liability and are remeasured at fair value each reporting period until settlement. | ||
Prior to January 1, 2006, Marathon recorded stock-based compensation expense over the stated vesting period for stock option awards that are subject to specific vesting conditions and specify (1) that an employee vests in the award upon becoming retirement eligible or (2) that the employee will continue to vest in the award after retirement without providing any additional service. Under SFAS No. 123(R), from the January 1, 2006 date of adoption, such compensation cost is recognized immediately for awards granted to retirement-eligible employees or over the period from the grant date to the retirement eligibility date if retirement eligibility will be reached during the stated vesting period. Stock compensation expense for the first half of 2006 included $3 million for such option awards. | ||
During the quarters ended June 30, 2006 and 2005, total employee stock-based compensation expense was $27 million and $20 million. The total related income tax benefits were $10 million and $7 million. During the second quarter of 2006, cash received upon exercise of stock option awards was $11 million. Tax benefits realized for deductions during the second quarter of 2006 that were in excess of the stock-based compensation expense recorded for options exercised and other stock-based awards vested during the quarter totaled $4 million. | ||
During the six months ended June 30, 2006 and 2005, total employee stock-based compensation expense was $50 million and $63 million. The total related income tax benefits were $19 million and $22 million. In the first six months of 2006, cash received upon exercise of stock option awards was $19 million. Tax benefits realized for deductions during the six months ended June 30, 2006 that were in excess of the stock-based compensation expense recorded for options exercised and other stock-based awards vested during the first six months of 2006 totaled $14 million. Cash settlements of stock option awards totaled less than $1 million during the quarter and six months ended June 30, 2006. | ||
Stock Option Awards Granted | ||
During the six months ended June 30, 2006 and 2005, Marathon granted stock option awards to both officer and non-officer employees. The weighted average grant date fair values of these awards were based on the following Black-Scholes assumptions: |
Six Months Ended June 30, | ||||||||
2006 | 2005 | |||||||
Weighted average exercise price per share |
$ | 75.68 | $ | 50.28 | ||||
Expected annual dividends per share |
$ | 1.60 | $ | 1.32 | ||||
Expected life in years |
5.0 | 5.5 | ||||||
Expected volatility |
28 | % | 28 | % | ||||
Risk-free interest rate |
5.0 | % | 3.8 | % | ||||
Weighted average grant date fair value of stock option awards granted |
$ | 20.37 | $ | 12.30 |
Outstanding Stock-Based Awards | ||
The following is a summary of stock option award activity for the six months ended June 30, 2006: |
Weighted- | ||||||||
Number | Average | |||||||
of Shares | Exercise Price | |||||||
Outstanding at December 31, 2005 |
6,007,954 | $ | 36.51 | |||||
Granted |
1,601,800 | $ | 75.68 | |||||
Exercised |
(733,295 | ) | $ | 24.70 | ||||
Canceled |
(47,909 | ) | $ | 45.57 | ||||
Outstanding at June 30, 2006 (a) |
6,828,550 | $ | 46.12 | |||||
(a) | Of the stock option awards outstanding as of June 30, 2006, 6,004,739 and 823,811 were outstanding under the 2003 Incentive Compensation Plan and 1990 Stock Plan, including 841,502 stock options with tandem SARs. |
The intrinsic value of stock option awards exercised during the six months ended June 30, 2006 and 2005 was $34 million and $51 million. Of those amounts, $10 million in the six months ended June 30, 2006, and $27 million in the six months ended June 30, 2005, was related to stock options with tandem SARs. |
9
The following table presents information on stock option awards at June 30, 2006: |
Outstanding | Exercisable | |||||||||||||||||||
Weighted- | ||||||||||||||||||||
Number | Average | Weighted- | Number | Weighted- | ||||||||||||||||
Range of Exercise | of Shares | Remaining | Average | of Shares | Average | |||||||||||||||
Prices | Under Option | Contractual Life | Exercise Price | Under Option | Exercise Price | |||||||||||||||
$25.50 - 26.91 |
1,039,680 | 7 | $ | 25.52 | 1,033,014 | $ | 25.51 | |||||||||||||
$28.12 - 30.88 |
480,134 | 5 | $ | 28.37 | 475,134 | $ | 28.35 | |||||||||||||
$32.52 - 34.00 |
1,947,952 | 7 | $ | 33.49 | 1,295,408 | $ | 33.43 | |||||||||||||
$47.65 - 51.67 |
1,758,984 | 9 | $ | 50.22 | 548,196 | $ | 50.08 | |||||||||||||
$75.64 - 81.02 |
1,601,800 | 10 | $ | 75.68 | | | ||||||||||||||
Total |
6,828,550 | 8 | $ | 46.12 | 3,351,752 | $ | 32.99 | |||||||||||||
As of June 30, 2006, the aggregate intrinsic value of stock option awards outstanding was $254 million. The aggregate intrinsic value and weighted average remaining contractual life of stock option awards currently exercisable were $169 million and 7 years. As of June 30, 2006, the number of fully-vested stock option awards and stock option awards expected to vest was 6,388,997. The weighted average exercise price and weighted average remaining contractual life of these stock option awards were $45.16 and 8 years and the aggregate intrinsic value was $244 million. As of June 30, 2006, unrecognized compensation cost related to stock option awards was $40 million, which is expected to be recognized over a weighted average period of 2 years. | ||
The following is a summary of stock-based performance award and restricted stock award activity for the six months ended June 30, 2006: |
Stock-Based | Weighted | Weighted | ||||||||||||||
Performance | Average Grant | Restricted | Average Grant | |||||||||||||
Awards | Date Fair Value | Stock Awards | Date Fair Value | |||||||||||||
Unvested at December 31, 2005 |
448,600 | $ | 29.93 | 985,556 | $ | 47.94 | ||||||||||
Granted (a) |
67,848 | $ | 76.82 | 123,160 | $ | 77.31 | ||||||||||
Vested |
(273,448 | ) | $ | 38.30 | (178,176 | ) | $ | 39.49 | ||||||||
Forfeited |
(6,000 | ) | $ | 33.61 | (25,656 | ) | $ | 51.58 | ||||||||
Unvested at June 30, 2006 |
237,000 | $ | 33.61 | 904,884 | $ | 53.54 | ||||||||||
(a) | Additional shares were issued in 2006 because the performance targets were exceeded for the performance period related to the 2003 grant. |
During the six months ended June 30, 2006 and 2005, the weighted average grant date fair value of restricted stock awards was $77.31 and $47.25. The vesting date fair value of stock-based performance awards which vested during the six months ended June 30, 2006 and 2005 was $21 million and $5 million. The vesting date fair value of restricted stock awards which vested during the six months ended June 30, 2006 and 2005 was $14 million and $8 million. | ||
As of June 30, 2006, there was $33 million of unrecognized compensation cost related to restricted stock awards which is expected to be recognized over a weighted average period of 2 years. | ||
4. | Discontinued Operations | |
On June 2, 2006, Marathon sold its Russian oil exploration and production businesses in the Khanty-Mansiysk region of western Siberia. Under the terms of the agreement, Marathon received $787 million for these businesses, plus preliminary working capital and other closing adjustments of $56 million, for a total transaction value of $843 million. Proceeds net of transaction costs and cash held by the Russian businesses at the transaction date totaled $832 million. A gain on the sale of $243 million ($342 million before income taxes) is reported in discontinued operations for the quarter and six months ended June 30, 2006. Income taxes on this gain were reduced by the utilization of a capital loss carryforward as discussed in Note 8 to the consolidated financial statements. Exploration and Production segment goodwill of $21 million was allocated to the Russian assets and reduced the reported gain. The final adjustment to the purchase price is expected to be made before December 31, 2006 and could affect the reported gain. The activities of the Russian businesses have been reported as discontinued operations in the consolidated statements of income and the consolidated statements of cash flows for all periods presented. Revenues applicable to discontinued operations totaled $74 million and $77 million for the second quarters of 2006 and 2005, and $173 million and $130 million for the six months ended June 30, 2006 and 2005. Pretax income from discontinued operations totaled $24 million and $6 million for the second quarters of 2006 and 2005, and $45 million and $7 million for the six months ended June 30, 2006 and 2005. |
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5. | Computation of Income per Share | |
Basic income per share is based on the weighted average number of common shares outstanding. Diluted income per share assumes exercise of stock options, provided the effect is not antidilutive. |
Second Quarter Ended June 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
(Dollars in millions, except per share data) | Basic | Diluted | Basic | Diluted | ||||||||||||
Income from continuing operations |
$ | 1,484 | $ | 1,484 | $ | 668 | $ | 668 | ||||||||
Discontinued operations |
264 | 264 | 5 | 5 | ||||||||||||
Net income |
$ | 1,748 | $ | 1,748 | $ | 673 | $ | 673 | ||||||||
Shares of common stock outstanding (thousands): |
||||||||||||||||
Average number of common shares outstanding |
360,860 | 360,860 | 347,075 | 347,075 | ||||||||||||
Effect of dilutive securities |
| 3,300 | | 2,843 | ||||||||||||
Average common shares including dilutive effect |
360,860 | 364,160 | 347,075 | 349,918 | ||||||||||||
Per share: |
||||||||||||||||
Income from continuing operations |
$ | 4.11 | $ | 4.07 | $ | 1.93 | $ | 1.91 | ||||||||
Discontinued operations |
$ | 0.73 | $ | 0.73 | $ | 0.01 | $ | 0.01 | ||||||||
Net income |
$ | 4.84 | $ | 4.80 | $ | 1.94 | $ | 1.92 | ||||||||
Six Months Ended June 30, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
(Dollars in millions, except per share data) | Basic | Diluted | Basic | Diluted | ||||||||||||
Income from continuing operations |
$ | 2,255 | $ | 2,255 | $ | 991 | $ | 991 | ||||||||
Discontinued operations |
277 | 277 | 6 | 6 | ||||||||||||
Net income |
$ | 2,532 | $ | 2,532 | $ | 997 | $ | 997 | ||||||||
Shares of common stock outstanding (thousands): |
||||||||||||||||
Average number of common shares outstanding |
362,973 | 362,973 | 346,541 | 346,541 | ||||||||||||
Effect of dilutive securities |
| 3,325 | | 2,687 | ||||||||||||
Average common shares including dilutive effect |
362,973 | 366,298 | 346,541 | 349,228 | ||||||||||||
Per share: |
||||||||||||||||
Income from continuing operations |
$ | 6.21 | $ | 6.16 | $ | 2.86 | $ | 2.84 | ||||||||
Discontinued operations |
$ | 0.76 | $ | 0.75 | $ | 0.02 | $ | 0.02 | ||||||||
Net income |
$ | 6.97 | $ | 6.91 | $ | 2.88 | $ | 2.86 | ||||||||
The per share calculations above exclude 1.6 million stock options for the second quarter and six months ended June 30, 2006, and 1.9 million stock options for the second quarter and six months ended June 30, 2005, as they were antidilutive. |
6. | Segment Information |
Marathons operations consist of three reportable operating segments: |
1) | Exploration and Production (E&P) explores for, produces and markets 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, the upper Great Plains and southeastern United States; and | ||
3) | Integrated Gas (IG) markets and transports products manufactured from natural gas, such as liquefied natural gas (LNG) and methanol, on a worldwide basis, and is developing other projects to link stranded natural gas resources with key demand areas. |
Effective January 1, 2006, Marathon revised its measure of segment income to include the effects of minority interests and income taxes related to the segments to facilitate comparison of segment results with Marathons peers. Income taxes were allocated to the segments using estimated effective rates for each segment. In addition, the results of activities primarily associated with the marketing of the Companys equity natural gas production, |
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which had been presented as part of the Integrated Gas segment prior to 2006, are now included in the Exploration and Production segment as those activities are aligned with E&P operations. Segment information for all periods presented reflects these changes. |
As discussed in Note 4, the Russian businesses that were sold in June 2006 have been accounted for as discontinued operations. Segment information for all presented periods excludes the amounts for these Russian operations. |
Total | ||||||||||||||||
(Dollars in millions) | E&P | RM&T | IG | Segments | ||||||||||||
Second Quarter Ended June 30, 2006 |
||||||||||||||||
Revenues: |
||||||||||||||||
Customer |
$ | 2,325 | $ | 15,390 | $ | 70 | $ | 17,785 | ||||||||
Intersegment (a) |
187 | 2 | | 189 | ||||||||||||
Related parties |
3 | 408 | | 411 | ||||||||||||
Segment revenues |
2,515 | 15,800 | 70 | 18,385 | ||||||||||||
Elimination of intersegment revenues |
(187 | ) | (2 | ) | | (189 | ) | |||||||||
Loss on long-term U.K. natural gas contracts |
(17 | ) | | | (17 | ) | ||||||||||
Total revenues |
$ | 2,311 | $ | 15,798 | $ | 70 | $ | 18,179 | ||||||||
Segment income |
$ | 659 | $ | 917 | $ | 17 | $ | 1,593 | ||||||||
Income from equity method investments |
53 | 32 | 12 | 97 | ||||||||||||
Depreciation, depletion and amortization (b) |
221 | 137 | 2 | 360 | ||||||||||||
Minority interests in income (loss) of subsidiaries
(b) |
| | (2 | ) | (2 | ) | ||||||||||
Provision for income taxes (b) |
716 | 564 | (1 | ) | 1,279 | |||||||||||
Capital expenditures (c) |
463 | 200 | 70 | 733 | ||||||||||||
Total | ||||||||||||||||
(Dollars in millions) | E&P | RM&T | IG | Segments | ||||||||||||
Second Quarter Ended June 30, 2005 |
||||||||||||||||
Revenues: |
||||||||||||||||
Customer |
$ | 1,820 | $ | 13,877 | $ | 44 | $ | 15,741 | ||||||||
Intersegment (a) |
131 | 41 | | 172 | ||||||||||||
Related parties |
3 | 365 | | 368 | ||||||||||||
Segment revenues |
1,954 | 14,283 | 44 | 16,281 | ||||||||||||
Elimination of intersegment revenues |
(131 | ) | (41 | ) | | (172 | ) | |||||||||
Loss on long-term U.K. natural gas contracts |
(167 | ) | | | (167 | ) | ||||||||||
Total revenues |
$ | 1,656 | $ | 14,242 | $ | 44 | $ | 15,942 | ||||||||
Segment income |
$ | 504 | $ | 316 | $ | | $ | 820 | ||||||||
Income from equity method investments |
17 | 16 | 12 | 45 | ||||||||||||
Depreciation, depletion and amortization (b) |
206 | 105 | 2 | 313 | ||||||||||||
Minority interests in income of subsidiaries (b) |
| 309 | | 309 | ||||||||||||
Provision for income taxes (b) |
272 | 198 | 4 | 474 | ||||||||||||
Capital expenditures (c) |
296 | 166 | 183 | 645 | ||||||||||||
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Total | ||||||||||||||||
(Dollars in millions) | E&P | RM&T | IG | Segments | ||||||||||||
Six Months Ended June 30, 2006 |
||||||||||||||||
Revenues: |
||||||||||||||||
Customer |
$ | 4,433 | $ | 29,280 | $ | 100 | $ | 33,813 | ||||||||
Intersegment (a) |
377 | 15 | | 392 | ||||||||||||
Related parties |
6 | 717 | | 723 | ||||||||||||
Segment revenues |
4,816 | 30,012 | 100 | 34,928 | ||||||||||||
Elimination of intersegment revenues |
(377 | ) | (15 | ) | | (392 | ) | |||||||||
Gain on long-term U.K. natural gas contracts |
61 | | | 61 | ||||||||||||
Total revenues |
$ | 4,500 | $ | 29,997 | $ | 100 | $ | 34,597 | ||||||||
Segment income |
$ | 1,124 | $ | 1,236 | $ | 25 | $ | 2,385 | ||||||||
Income from equity method investments |
106 | 58 | 25 | 189 | ||||||||||||
Depreciation, depletion and amortization (b) |
477 | 270 | 4 | 751 | ||||||||||||
Minority interests in income (loss) of subsidiaries
(b) |
| | (5 | ) | (5 | ) | ||||||||||
Provision for income taxes (b) |
1,196 | 768 | 4 | 1,968 | ||||||||||||
Capital expenditures (c) |
821 | 304 | 164 | 1,289 | ||||||||||||
Total | ||||||||||||||||
(Dollars in millions) | E&P | RM&T | IG | Segments | ||||||||||||
Six Months Ended June 30, 2005 |
||||||||||||||||
Revenues: |
||||||||||||||||
Customer |
$ | 3,339 | $ | 24,950 | $ | 105 | $ | 28,394 | ||||||||
Intersegment (a) |
275 | 83 | | 358 | ||||||||||||
Related parties |
5 | 646 | | 651 | ||||||||||||
Segment revenues |
3,619 | 25,679 | 105 | 29,403 | ||||||||||||
Elimination of intersegment revenues |
(275 | ) | (83 | ) | | (358 | ) | |||||||||
Loss on long-term U.K. natural gas contracts |
(224 | ) | | | (224 | ) | ||||||||||
Total revenues |
$ | 3,120 | $ | 25,596 | $ | 105 | $ | 28,821 | ||||||||
Segment income |
$ | 838 | $ | 390 | $ | 22 | $ | 1,250 | ||||||||
Income from equity method investments |
22 | 33 | 29 | 84 | ||||||||||||
Depreciation, depletion and amortization (b) |
403 | 209 | 4 | 616 | ||||||||||||
Minority interests in income (loss) of subsidiaries
(b) |
| 376 | (1 | ) | 375 | |||||||||||
Provision for income taxes (b) |
484 | 266 | (1 | ) | 749 | |||||||||||
Capital expenditures (c) |
566 | 302 | 308 | 1,176 | ||||||||||||
(a) | Management believes intersegment transactions were conducted under terms comparable to those with unrelated parties. | |
(b) | Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities and other unallocated items and are included in Items not allocated to segments, net of income taxes in the reconciliation below. | |
(c) | Differences between segment totals and Marathon totals represent amounts related to corporate administrative activities. |
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Segment income |
$ | 1,593 | $ | 820 | $ | 2,385 | $ | 1,250 | ||||||||
Items not allocated to segments, net of income taxes: |
||||||||||||||||
Gain (loss) on long-term U.K. natural gas
contracts |
(10 | ) | (97 | ) | 35 | (130 | ) | |||||||||
Corporate and other unallocated items |
(99 | ) | (70 | ) | (165 | ) | (144 | ) | ||||||||
Ohio tax legislation |
| 15 | | 15 | ||||||||||||
Discontinued operations |
264 | 5 | 277 | 6 | ||||||||||||
Net income |
$ | 1,748 | $ | 673 | $ | 2,532 | $ | 997 | ||||||||
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7. | Pensions and Other Postretirement Benefits | |
The following summarizes the components of net periodic benefit cost: |
Second Quarter Ended June 30, | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Service cost |
$ | 32 | $ | 26 | $ | 6 | $ | 4 | ||||||||
Interest cost |
31 | 30 | 11 | 9 | ||||||||||||
Expected return on plan assets |
(29 | ) | (23 | ) | | | ||||||||||
Amortization: |
||||||||||||||||
net transition gain |
| (1 | ) | | | |||||||||||
prior service costs (credits) |
1 | 1 | (3 | ) | (3 | ) | ||||||||||
actuarial loss |
11 | 15 | 2 | 3 | ||||||||||||
Multi-employer and other plans |
1 | 1 | 2 | 1 | ||||||||||||
Net periodic benefit cost |
$ | 47 | $ | 49 | $ | 18 | $ | 14 | ||||||||
Six Months Ended June 30, | ||||||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Service cost |
$ | 66 | $ | 57 | $ | 12 | $ | 9 | ||||||||
Interest cost |
63 | 58 | 21 | 19 | ||||||||||||
Expected return on plan assets |
(55 | ) | (46 | ) | | | ||||||||||
Amortization: |
||||||||||||||||
net transition gain |
| (2 | ) | | | |||||||||||
prior service costs (credits) |
2 | 2 | (6 | ) | (6 | ) | ||||||||||
actuarial loss |
24 | 30 | 4 | 5 | ||||||||||||
Multi-employer and other plans |
1 | 1 | 2 | 1 | ||||||||||||
Net periodic benefit cost |
$ | 101 | $ | 100 | $ | 33 | $ | 28 | ||||||||
During the six months ended June 30, 2006, Marathon made contributions of $156 million to its funded pension plans. Of this amount, $14 million related to foreign pension plans. On July 21, 2006, Marathon made a contribution of $111 million to its U.S. funded pension plans and currently estimates additional contributions of up to $130 million, over the remainder of 2006. However, this contribution estimate may be revised pending analysis of the Pension Protection Act of 2006, which is expected to be signed into law in the third quarter of 2006. Contributions made from the general assets of Marathon to cover current benefit payments related to unfunded pension and other postretirement benefit plans were $3 million and $15 million for the first six months of 2006. |
8. | Income Taxes | |
The provision for income taxes for interim periods is based on managements best estimate of the effective income tax rate expected to be applicable for the current year plus any adjustments arising from a change in the estimated amount of taxes related to prior periods. The following is an analysis of the effective income tax rates for continuing operations for the periods presented: |
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Statutory U.S. income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
Effects of foreign operations |
9.9 | (1.1 | ) | 10.4 | (0.6 | ) | ||||||||||
State and local income taxes after federal income tax effects |
2.0 | (0.4 | ) | 2.0 | 1.3 | |||||||||||
Other tax effects |
(0.6 | ) | (0.2 | ) | (0.8 | ) | (0.7 | ) | ||||||||
Effective income tax rate for continuing operations |
46.3 | % | 33.3 | % | 46.6 | % | 35.0 | % | ||||||||
Capital loss carryforwards were utilized in conjunction with the sale of Marathons Russian oil exploration and production businesses in June 2006, as discussed in Note 4 to the consolidated financial statements. The reversal of |
14
the valuation allowance related to these capital loss carryforwards reduced income taxes attributable to discontinued operations by $79 million. The sale of the Russian businesses fully utilized the Companys capital loss carryforward deferred tax asset. |
Marathon is continuously undergoing examination of its federal income tax returns by the Internal Revenue Service (IRS). Audits of the Companys 1998 through 2003 income tax returns have been agreed between Marathon and the IRS and sent to the Joint Committee on Taxation for approval. If accepted by the Joint Committee, the Company does not anticipate the conclusion of these audits would have a material impact on its consolidated results of operations or financial position. The Company anticipates that a refund of income taxes will be received by the end of 2006. This refund will include periods up to 2001; therefore, a portion of the refund in the form of tax sharing payments may be attributable to United States Steel. These payments will be handled in accordance with the tax sharing agreement between Marathon and United States Steel. See Note 3 to the consolidated financial statements, Information about United States Steel, in Marathons 2005 Annual Report on Form 10-K for additional discussion of this tax sharing agreement. Audits for tax years 2004 and 2005 are commencing in 2006. Marathon believes it has made adequate provision for federal income taxes and interest which may become payable for years not yet settled. |
9. | Comprehensive Income | |
The following sets forth Marathons comprehensive income for the periods indicated: |
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Net income |
$ | 1,748 | $ | 673 | $ | 2,532 | $ | 997 | ||||||||
Other comprehensive income (loss), net of taxes: |
||||||||||||||||
Minimum pension liability adjustments |
5 | 24 | 15 | 24 | ||||||||||||
Change in fair value of derivative instruments |
4 | (9 | ) | 4 | (15 | ) | ||||||||||
Total comprehensive income |
$ | 1,757 | $ | 688 | $ | 2,551 | $ | 1,006 | ||||||||
10. | Inventories | |
Inventories are carried at the lower of cost or market. The cost of inventories of crude oil, refined products and merchandise is determined primarily under the last-in, first-out (LIFO) method. |
June 30, | December 31, | |||||||
(Dollars in millions) | 2006 | 2005 | ||||||
Liquid hydrocarbons and natural gas |
$ | 1,918 | $ | 1,093 | ||||
Refined products and merchandise |
1,725 | 1,763 | ||||||
Supplies and sundry items |
174 | 185 | ||||||
Total, at cost |
$ | 3,817 | $ | 3,041 | ||||
11. | Property, Plant and Equipment | |
Exploratory well costs capitalized greater than one year after completion of drilling as of June 30, 2006 were $99 million, including $40 million added to this category during the first quarter of 2006 for wells in Equatorial Guinea (Corona, Bococo and Gardenia), where Marathon is evaluating various development scenarios for the discoveries around the Alba Field, including plans that would integrate the resources into the Companys long-term LNG supply. | ||
12. | Long-term Debt | |
Effective May 4, 2006, Marathon entered into an amendment to its $1.5 billion five-year revolving credit agreement, expanding the size of the facility to $2.0 billion and extending the termination date from May 2009 to May 2011. Interest on this facility is based on defined short-term market rates. During the term of the agreement, Marathon is obligated to pay a variable facility fee on the total commitment, which at June 30, 2006 was 0.08 percent. At June 30, 2006, there were no borrowings against this facility. Concurrent with this amendment, the $500 million MPC revolving credit agreement was terminated. |
15
13. | Commitments and Contingencies | |
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 commitments are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to Marathons 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. | ||
Contract commitments At June 30, 2006 and December 31, 2005, Marathons contract commitments to acquire property, plant and equipment totaled $709 million and $668 million, respectively. During the first half of 2006, the significant changes to Marathons contract commitments were increases of approximately $90 million related to the potential expansion of the Garyville, Louisiana refinery, and other increases related to development in North America and Libya. Commitments related to the Equatorial Guinea LNG plant, the Neptune development in the Gulf of Mexico and the Alvheim project in Norway declined as construction progress continued on those projects. | ||
Guarantees In conjunction with the sale of its Russian businesses as discussed in Note 4 to the consolidated financial statements, Marathon guaranteed the purchaser with regard to unknown obligations and inaccuracies in representations, warranties, covenants and agreements by Marathon. These indemnifications are part of the normal course of selling assets. Under the agreement, the maximum potential amount of future payments associated with these guarantees is equivalent to the proceeds from the sale. | ||
14. | Stock Repurchase Program | |
On January 29, 2006, Marathons Board of Directors authorized the repurchase of up to $2 billion of common stock over a period of two years. Such purchases are to be made during this period as Marathons financial condition and market conditions warrant. Any purchases under the program may be in either open market transactions, including block purchases, or in privately negotiated transactions. The repurchase program does not include specific price targets and is subject to termination prior to completion. Marathon will use cash on hand, cash generated from operations or cash from available borrowings to acquire shares. During the first six months of 2006, Marathon acquired 7.3 million common shares at an acquisition cost of $554 million, which were recorded as common stock held in treasury in the consolidated balance sheet. | ||
15. | Supplemental Cash Flow Information |
Six Months Ended June 30, | ||||||||
(Dollars in millions) | 2006 | 2005 | ||||||
Noncash investing and financing activities: |
||||||||
Asset retirement costs capitalized |
$ | 20 | $ | 8 | ||||
Payments of debt assumed by United States Steel |
21 | 8 | ||||||
Disposal of assets: |
||||||||
Asset retirement obligations assumed by buyer |
9 | 3 | ||||||
Acquisition: |
||||||||
Debt and other liabilities assumed |
14 | 5,105 | ||||||
Common stock issued to seller |
| 955 | ||||||
Receivables transferred to seller |
| 913 | ||||||
Commercial paper and revolving credit arrangements, net: |
||||||||
Borrowings |
$ | 1,321 | $ | 590 | ||||
Repayments |
(1,321 | ) | | |||||
Net cash provided from operating activities included: |
||||||||
Interest paid (net of amounts capitalized) |
$ | 56 | $ | 88 | ||||
Income taxes paid to taxing authorities |
1,728 | 643 | ||||||
16
16. | MPC Receivables Purchase and Sale Facility | |
On July 1, 2005, MPC entered into a $200 million, three-year Receivables Purchase and Sale Agreement with certain purchasers. The program was structured to allow MPC to periodically sell a participating interest in pools of eligible accounts receivable. During the term of the agreement MPC was obligated to pay a facility fee of 0.12%. In the first quarter of 2006, the facility was terminated. No receivables were sold under the agreement during its term. | ||
17. | Accounting Standards Not Yet Adopted | |
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes An Interpretation of FASB Statement No. 109. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. Marathon is currently evaluating the provisions of FIN No. 48 to determine the impact on its consolidated financial statements. | ||
In June 2006, the FASB ratified the consensus reached by the EITF regarding Issue No. 06-03, How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). Included in the scope of this issue are any taxes assessed by a governmental authority that are imposed concurrent with or subsequent to a revenue-producing transaction between a seller and a customer. The EITF concluded that the presentation of such taxes on a gross basis (included in revenues and costs) or a net basis (excluded from revenues) is an accounting policy decision that should be disclosed pursuant to APB Opinion No. 22. In addition, the amounts of such taxes reported on a gross basis must be disclosed if those tax amounts are significant. The disclosure prescribed by this consensus is required in financial statements for interim and annual reporting periods beginning after December 15, 2006, but early application is permitted. | ||
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets An Amendment of FASB Statement No. 140. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. Adoption of SFAS No. 156 is required as of the beginning of an entitys first fiscal year that begins after September 15, 2006. Marathon does not expect adoption of this statement to have a significant effect on its consolidated results of operations, financial position or cash flows. | ||
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments An Amendment of FASB Statements No. 133 and 140. SFAS No. 155 simplifies the accounting for certain hybrid financial instruments, eliminates the interim FASB guidance which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and eliminates the restriction on the passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. Marathon is currently evaluating the provisions of this Statement to determine the impact on its consolidated financial statements. |
17
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21
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
E&P |
$ | 2,515 | $ | 1,954 | $ | 4,816 | $ | 3,619 | ||||||||
RM&T |
15,800 | 14,283 | 30,012 | 25,679 | ||||||||||||
IG |
70 | 44 | 100 | 105 | ||||||||||||
Segment revenues |
18,385 | 16,281 | 34,928 | 29,403 | ||||||||||||
Elimination of intersegment revenues |
(189 | ) | (172 | ) | (392 | ) | (358 | ) | ||||||||
Gain (loss) on long-term U.K. natural gas contracts |
(17 | ) | (167 | ) | 61 | (224 | ) | |||||||||
Total revenues |
$ | 18,179 | $ | 15,942 | $ | 34,597 | $ | 28,821 | ||||||||
Items included in both revenues and costs and
expenses: |
||||||||||||||||
Consumer excise taxes on petroleum products
and merchandise |
$ | 1,277 | $ | 1,210 | $ | 2,442 | $ | 2,294 | ||||||||
Matching crude oil and refined product
buy/sell transactions: |
||||||||||||||||
E&P |
5 | 34 | 16 | 70 | ||||||||||||
RM&T |
1,801 | 3,531 | 4,996 | 6,304 | ||||||||||||
Total buy/sell transactions included in revenues |
$ | 1,806 | $ | 3,565 | $ | 5,012 | $ | 6,374 | ||||||||
22
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Statutory U.S. income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||
Effects of foreign operations |
9.9 | (1.1 | ) | 10.4 | (0.6 | ) | ||||||||||
State and local income taxes after federal income tax effects |
2.0 | (0.4 | ) | 2.0 | 1.3 | |||||||||||
Other tax effects |
(0.6 | ) | (0.2 | ) | (0.8 | ) | (0.7 | ) | ||||||||
Effective income tax rate for continuing operations |
46.3 | % | 33.3 | % | 46.6 | % | 35.0 | % | ||||||||
23
Second Quarter Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(Dollars in millions) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
E&P |
||||||||||||||||
United States |
$ | 243 | $ | 258 | $ | 488 | $ | 435 | ||||||||
International |
416 | 246 | 636 | 403 | ||||||||||||
E&P segment |
659 | 504 | 1,124 | 838 | ||||||||||||
RM&T |
917 | 316 | 1,236 | 390 | ||||||||||||
IG |
17 | | 25 | 22 | ||||||||||||
Segment income |
1,593 | 820 | 2,385 | 1,250 | ||||||||||||
Items not allocated to segments, net of income taxes: |
||||||||||||||||
Gain (loss) on long-term U.K. natural gas contracts |
(10 | ) | (97 | ) | 35 | (130 | ) | |||||||||
Corporate and other unallocated items |
(99 | ) | (70 | ) | (165 | ) | (144 | ) | ||||||||
Ohio tax legislation |
| 15 | | 15 | ||||||||||||
Discontinued operations |
264 | 5 | 277 | 6 | ||||||||||||
Net income |
$ | 1,748 | $ | 673 | $ | 2,532 | $ | 997 | ||||||||
24
25
June 30, | December 31, | |||||||
(Dollars in millions) | 2006 | 2005 | ||||||
Long-term debt due within one year |
$ | 456 | $ | 315 | ||||
Long-term debt |
3,224 | 3,698 | ||||||
Total debt |
$ | 3,680 | $ | 4,013 | ||||
Cash |
$ | 3,026 | $ | 2,617 | ||||
Equity |
$ | 13,489 | $ | 11,705 | ||||
Calculation: |
||||||||
Total debt |
$ | 3,680 | $ | 4,013 | ||||
Minus cash |
3,026 | 2,617 | ||||||
Total debt minus cash |
654 | 1,396 | ||||||
Total debt |
3,680 | 4,013 | ||||||
Plus equity |
13,489 | 11,705 | ||||||
Minus cash |
3,026 | 2,617 | ||||||
Total debt plus equity minus cash |
$ | 14,143 | $ | 13,101 | ||||
Cash-adjusted debt-to-capital ratio |
5 | % | 11 | % | ||||
26
27
28
29
| to mitigate the price risk: |
o | between the time foreign and domestic crude oil and other feedstock purchases for refinery supply are priced and when they are actually refined into salable petroleum products, | ||
o | associated with anticipated natural gas purchases for refinery use, | ||
o | associated with freight on crude oil, feedstocks and refined product deliveries, and | ||
o | on fixed price contracts for ethanol purchases; |
| to protect the value of excess refined product, crude oil and liquefied petroleum gas inventories; | ||
| to protect margins associated with future fixed price sales of refined products to non-retail customers; | ||
| to protect against decreases in future crack spreads; | ||
| to take advantage of trading opportunities identified in the commodity markets. |
30
Incremental Decrease in IFO Assuming a | ||||||||
Hypothetical Price Change of (a): | ||||||||
(Dollars in millions) | 10% | 25% | ||||||
Commodity Derivative Instruments: (b)(c) |
||||||||
Crude oil (d) |
$ | 29 | (e) | $ | 65 | (e) | ||
Natural gas (d) |
76 | (e) | 190 | (e) | ||||
Refined products (d) |
42 | (e) | 115 | (e) | ||||
(a) | We remain 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 analyses. Amounts reflect hypothetical 10 percent and 25 percent changes in closing commodity prices, excluding basis swaps, for each open contract position at June 30, 2006. Included in the natural gas impacts shown above are $85 million and $211 million related to the long-term U.K. natural gas contracts for hypothetical price changes of 10 percent and 25 percent, respectively. We evaluate our portfolio of derivative commodity instruments on an ongoing basis and add or revise strategies in anticipation of changes in market conditions and in risk profiles. We are also exposed to credit risk in the event of nonperformance by counterparties. The creditworthiness of counterparties is reviewed continuously and master netting agreements are used when practical. Changes to the portfolio after June 30, 2006, would cause future IFO effects to differ from those presented in the table. | |
(b) | The number of net open contracts for the E&P segment varied throughout the second quarter of 2006, from a low of 316 contracts on June 27, 2006 to a high of 1,165 contracts on April 20, 2006, and averaged 794 for the quarter. The number of net open contracts for the RM&T segment varied throughout the second quarter of 2006, from a low of 8,802 contracts on April 2, 2006 to a high of 19,748 contracts on May 4, 2006, and averaged 14,700 for the quarter. 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) | The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. | |
(d) | The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in IFO when applied to the commodity derivative instruments used to hedge that commodity. | |
(e) | Price increase. |
31
Six Months Ended June 30, | ||||||||
(Dollars in millions) | 2006 | 2005 | ||||||
Strategy: |
||||||||
Mitigate price risk |
$ | (105 | ) | $ | (19 | ) | ||
Protect carrying values of excess inventories |
(78 | ) | (67 | ) | ||||
Protect margin on fixed price sales |
10 | 15 | ||||||
Protect crack spread values |
(5 | ) | (68 | ) | ||||
Subtotal, non-trading activities |
(178 | ) | (139 | ) | ||||
Trading activities |
(2 | ) | (34 | ) | ||||
Total net derivative losses |
$ | (180 | ) | $ | (173 | ) | ||
Incremental Increase in | ||||||||
(Dollars in millions) | Fair Value (b) | Fair Value (c ) | ||||||
Financial assets (liabilities) (a) |
||||||||
Interest rate swap agreements |
$ | (38 | ) | $ | 12 | |||
Long-term debt, including that due within one year (d) |
(3,806 | ) | (150 | ) |
(a) | Fair values of cash and cash equivalents, receivables, notes payable, accounts payable and accrued interest approximate carrying value and are relatively insensitive to changes in interest rates due to the short-term maturity of the instruments. Accordingly, these instruments are excluded from the table. | |
(b) | Fair value was based on market prices where available, or current borrowing rates for financings with similar terms and maturities. | |
(c) | Assumes a 10 percent decrease in the June 30, 2006 effective swap rate or a 10 percent decrease in the weighted average yield to maturity of our long-term debt at June 30, 2006, as appropriate. | |
(d) | See below for sensitivity analysis. |
32
33
Second Quarter | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
(Dollars in millions, except as noted) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
SEGMENT INCOME: |
||||||||||||||||
Exploration and Production |
||||||||||||||||
United States |
$ | 243 | $ | 258 | $ | 488 | $ | 435 | ||||||||
International |
416 | 246 | 636 | 403 | ||||||||||||
E&P Segment |
659 | 504 | 1,124 | 838 | ||||||||||||
Refining, Marketing and Transportation(a) |
917 | 316 | 1,236 | 390 | ||||||||||||
Integrated Gas |
17 | | 25 | 22 | ||||||||||||
Segment Income |
1,593 | 820 | 2,385 | 1,250 | ||||||||||||
Items not allocated to segments, net of
income taxes: |
||||||||||||||||
Long-term U.K. natural gas contracts |
(10 | ) | (97 | ) | 35 | (130 | ) | |||||||||
Corporate and other unallocated items |
(99 | ) | (70 | ) | (165 | ) | (144 | ) | ||||||||
Ohio tax legislation |
| 15 | | 15 | ||||||||||||
Discontinued operations |
264 | 5 | 277 | 6 | ||||||||||||
Net income |
$ | 1,748 | $ | 673 | $ | 2,532 | $ | 997 | ||||||||
CAPITAL EXPENDITURES: |
||||||||||||||||
Exploration and Production |
$ | 463 | $ | 296 | $ | 821 | $ | 566 | ||||||||
Refining, Marketing and Transportation(a) |
200 | 166 | 304 | 302 | ||||||||||||
Integrated Gas(b) |
70 | 183 | 164 | 308 | ||||||||||||
Discontinued Operations |
19 | 23 | 45 | 47 | ||||||||||||
Corporate |
2 | 2 | 19 | 3 | ||||||||||||
Total |
$ | 754 | $ | 670 | $ | 1,353 | $ | 1,226 | ||||||||
EXPLORATION EXPENSE: |
||||||||||||||||
United States |
$ | 41 | $ | 24 | $ | 69 | $ | 41 | ||||||||
International |
25 | 12 | 68 | 25 | ||||||||||||
Total |
$ | 66 | $ | 36 | $ | 137 | $ | 66 | ||||||||
E&P OPERATING STATISTICS |
||||||||||||||||
Net Liquid Hydrocarbon Sales (mbpd)(c) |
||||||||||||||||
United States |
79 | 85 | 79 | 79 | ||||||||||||
Europe |
47 | 49 | 38 | 40 | ||||||||||||
Africa |
133 | 61 | 103 | 48 | ||||||||||||
Total International |
180 | 110 | 141 | 88 | ||||||||||||
Worldwide Continuing Operations |
259 | 195 | 220 | 167 | ||||||||||||
Discontinued Operations |
20 | 24 | 25 | 24 | ||||||||||||
Worldwide |
279 | 219 | 245 | 191 | ||||||||||||
Net Natural Gas Sales (mmcfd)(c)(d) |
||||||||||||||||
United States |
523 | 579 | 542 | 575 | ||||||||||||
Europe |
226 | 205 | 286 | 288 | ||||||||||||
Africa |
52 | 108 | 70 | 96 | ||||||||||||
Total International |
278 | 313 | 356 | 384 | ||||||||||||
Worldwide |
801 | 892 | 898 | 959 | ||||||||||||
Total Worldwide Sales (mboepd) |
412 | 368 | 395 | 351 | ||||||||||||
Discontinued operations (mboepd) |
20 | 24 | 25 | 24 | ||||||||||||
Continuing operations (mboepd) |
392 | 344 | 370 | 327 | ||||||||||||
(a) | RM&T segment income for the second quarter and first six months of 2005 is net of $309 million and $376 million pretax minority interest in MPC. RM&T capital expenditures include MPC at 100 percent. | |
(b) | Includes Equatorial Guinea LNG Holdings at 100 percent. | |
(c) | Amounts reflect sales after royalties, except for Ireland where amounts are before royalties. | |
(d) | Includes natural gas acquired for injection and subsequent resale of 60 mmcfd and 22 mmcfd in the second quarters of 2006 and 2005, and 50 mmcfd and 21 mmcfd for the first six months of 2006 and 2005. Effective July 1, 2005, the methodology for allocating sales volumes between natural gas produced from the Brae complex and third-party natural gas production was modified, resulting in an increase in volumes representing natural gas acquired for injection and subsequent resale. |
34
Second Quarter | Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
E&P OPERATING STATISTICS (continued) |
||||||||||||||||
Average Realizations (e) |
||||||||||||||||
Liquid Hydrocarbons ($ per bbl) |
||||||||||||||||
United States |
$ | 59.80 | $ | 42.22 | $ | 54.52 | $ | 40.52 | ||||||||
Europe |
67.52 | 49.77 | 65.43 | 48.06 | ||||||||||||
Africa |
65.14 | 46.53 | 60.36 | 45.31 | ||||||||||||
Total International |
65.76 | 47.98 | 61.74 | 46.55 | ||||||||||||
Worldwide Continuing Operations |
63.95 | 45.45 | 59.14 | 43.71 | ||||||||||||
Discontinued Operations |
39.80 | 34.50 | 38.38 | 29.69 | ||||||||||||
Worldwide |
$ | 62.19 | $ | 44.23 | $ | 57.04 | $ | 41.94 | ||||||||
Natural Gas ($ per mcf) |
||||||||||||||||
United States |
$ | 5.35 | $ | 5.76 | $ | 6.02 | $ | 5.36 | ||||||||
Europe |
6.32 | 4.78 | 7.13 | 4.95 | ||||||||||||
Africa |
0.25 | 0.26 | 0.25 | 0.25 | ||||||||||||
Total International |
5.19 | 3.22 | 5.78 | 3.78 | ||||||||||||
Worldwide |
$ | 5.29 | $ | 4.87 | $ | 5.93 | $ | 4.73 | ||||||||
RM&T OPERATING STATISTICS |
||||||||||||||||
Refinery Runs (mbpd): |
||||||||||||||||
Crude oil refined |
1,038 | 1,012 | 968 | 967 | ||||||||||||
Other charge and blend stocks |
207 | 175 | 228 | 173 | ||||||||||||
Total |
1,245 | 1,187 | 1,196 | 1,140 | ||||||||||||
Refined Product Yields (mbpd): |
||||||||||||||||
Gasoline |
663 | 636 | 654 | 606 | ||||||||||||
Distillates |
321 | 327 | 306 | 310 | ||||||||||||
Propane |
24 | 23 | 22 | 21 | ||||||||||||
Feedstocks and special products |
125 | 98 | 116 | 107 | ||||||||||||
Heavy fuel oil |
25 | 20 | 24 | 26 | ||||||||||||
Asphalt |
102 | 97 | 89 | 85 | ||||||||||||
Total |
1,260 | 1,201 | 1,211 | 1,155 | ||||||||||||
Refined Products Sales Volumes
(mbpd)(f)(g) |
1,461 | 1,477 | 1,439 | 1,424 | ||||||||||||
Matching buy/sell volumes included in refined
product sales volumes (mbpd) (g) |
11 | 87 | 47 | 84 | ||||||||||||
Refining and Wholesale Marketing Gross
Margin ($/gallon)(h) |
$ | 0.2978 | $ | 0.1592 | $ | 0.2077 | $ | 0.1158 | ||||||||
Number of SSA Retail Outlets |
1,637 | 1,647 | ||||||||||||||
SSA Gasoline and Distillate Sales(i) |
816 | 822 | 1,592 | 1,567 | ||||||||||||
SSA Gasoline and Distillate Gross Margin
($/gallon) |
$ | 0.1019 | $ | 0.1211 | $ | 0.1037 | $ | 0.1138 | ||||||||
SSA Merchandise Sales |
$ | 690 | $ | 645 | $ | 1,300 | $ | 1,205 | ||||||||
SSA Merchandise Gross Margin |
$ | 171 | $ | 163 | $ | 319 | $ | 306 | ||||||||
(e) | Excludes all derivative gains and losses, including the effects of long-term U.K. natural gas contracts that are accounted for as derivatives. | |
(f) | Total average daily volumes of all refined product sales to wholesale, branded and retail (SSA) customers. | |
(g) | As a result of the change in accounting for matching buy/sell arrangements on April 1, 2006, the reported sales volumes will be lower than the volumes determined under the previous accounting practices. See Note 2 to the consolidated financial statements, New Accounting Standards. | |
(h) | Sales revenue less cost of refinery inputs, purchased products and manufacturing expenses, including depreciation. As a result of the change in accounting for matching buy/sell transactions on April 1, 2006, the resulting per gallon statistic will be higher than the statistic that would have been calculated from amounts determined under previous accounting practices. See Note 2 to the consolidated financial statements, New Accounting Standards. | |
(i) | Millions of gallons. |
35
(a) | (b) | (c) | (d) | |||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
Shares Purchased | Value of Shares that | |||||||||||||||
as Part of Publicly | May Yet Be | |||||||||||||||
Total Number of | Average Price Paid | Announced Plans | Purchased Under the | |||||||||||||
Period | Shares Purchased (a)(b) | per Share | or Programs (d) | Plans or Programs (d) | ||||||||||||
04/01/06 04/30/06 |
1,505,468 | $ | 79.80 | 1,498,100 | $ | 1,651,291,662 | ||||||||||
05/01/06 05/31/06 |
1,333,472 | $ | 77.98 | 1,332,400 | $ | 1,547,393,011 | ||||||||||
06/01/06 06/30/06 |
1,383,061 | (c) | $ | 74.60 | 1,361,100 | $ | 1,445,827,171 | |||||||||
Total |
4,222,001 | $ | 77.52 | 4,191,600 |
(a) | 9,552 shares of restricted stock were delivered by employees to Marathon, upon vesting, to satisfy tax withholding requirements. | |
(b) | Under the terms of the transaction whereby Marathon acquired the minority interest in MPC and other businesses from Ashland Inc., Marathon paid Ashland Inc. shareholders cash in lieu of issuing fractional shares of Marathons common stock to which such holders would otherwise be entitled. Marathon acquired 3 shares due to acquisition share exchanges and Ashland Inc. share transfers pending at the closing of the transaction. | |
(c) | 20,846 shares were repurchased in open-market transactions to satisfy the requirements for dividend reinvestment under the Marathon Oil Corporation Dividend Reinvestment and Direct Stock Purchase Plan (the Dividend Reinvestment Plan) by the administrator of the Dividend Reinvestment Plan. Stock needed to meet the requirements of the Dividend Reinvestment Plan are either purchased in the open market or issued directly by Marathon. | |
(d) | On January 29, 2006, our Board of Directors authorized the repurchase of up to $2 billion of common stock over a period of two years. On July 26, 2006 we announced that purchases under the program were being accelerated. We currently anticipate repurchasing $1.5 billion of our common stock by December 31, 2006, with the balance of the shares being repurchased in 2007. This program does not include specific price targets and may be changed based upon our financial condition or changes in market conditions and is subject to termination prior to completion. |
36
1. | Votes regarding the persons elected to serve as Class I directors for a term expiring in 2009 were as follows: |
NOMINEE | VOTES FOR | VOTES WITHHELD | ||||||
Clarence P. Cazalot, Jr. |
306,764,458 | 15,827,069 | ||||||
David A. Daberko |
303,433,496 | 19,158,031 | ||||||
William L. Davis |
310,566,832 | 12,024,695 |
Continuing as Class II directors for a term expiring in 2007 are Charles F. Bolden, Jr., Charles R. Lee, Dennis H. Reilley and Thomas J. Usher. Continuing as Class III directors for a term expiring in 2008 are Shirley Ann Jackson, Philip Lader, Seth E. Schofield and Douglas C. Yearley. | ||
2. | PricewaterhouseCoopers LLP was ratified as the independent auditors for 2006. The voting results were as follows: |
VOTES FOR | VOTES AGAINST | VOTES ABSTAINED | ||
315,237,067
|
4,911,915 | 2,416,550 |
3. | The Board of Directors proposal to amend the Restated Certificate of Incorporation to declassify the Board of Directors was approved. The voting results were as follows: |
VOTES FOR | VOTES AGAINST | VOTES ABSTAINED | ||
316,615,678 | 3,100,505 | 2,838,147 |
4. | The Board of Directors proposal to amend the Restated Certificate of Incorporation to revise the purpose clause, eliminate the Series A Junior Preferred Stock and make other technical changes was approved. The voting results were as follows: |
VOTES FOR | VOTES AGAINST | VOTES ABSTAINED | ||
318,561,637 | 1,089,662 | 2,903,498 |
5. | The stockholder proposal to elect directors by a majority vote was approved. The proposal requested that the Board of Directors initiate the appropriate process to amend the Companys governance documents (certificate of incorporation or bylaws) to provide that a director nominee shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders. The voting results were as follows: |
VOTES | VOTES | VOTES | BROKER | |||
FOR | AGAINST | ABSTAINED | NON-VOTES | |||
191,576,749 | 91,294,280 | 3,975,143 | 35,745,355 |
6. | The stockholder proposal for a simple majority vote of shareholders was approved. The proposal recommended that the Board of Directors take each step necessary for a simple majority vote to apply on each issue that can be subject to shareholder vote to the greatest extent possible. The voting results were as follows: |
VOTES | VOTES | VOTES | BROKER | |||
FOR | AGAINST | ABSTAINED | NON-VOTES | |||
236,460,419 | 47,119,626 | 3,265,194 | 35,746,288 |
37
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 | |
31.1 | Certification of President and Chief Executive Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934 | |
31.2 | Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934 | |
32.1 | Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | |
32.2 | Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
38
MARATHON OIL CORPORATION | ||||||
By: | Michael K. Stewart | |||||
Michael K. Stewart | ||||||
Vice President, Accounting and Controller |
39
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 | |
31.1
|
Certification of President and Chief Executive Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934 | |
31.2
|
Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13(a)-14 and 15(d)-14 under the Securities Exchange Act of 1934 | |
32.1
|
Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 | |
32.2
|
Certification of Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 |
40