RESULTS OF OPERATIONS U. S. Steel's results in the three months endedMarch 31, 2021 compared to the same period in 2020, across the reportable segments, benefited from improving business conditions despite continued challenges presented by the COVID-19 pandemic. Flat-Rolled results improved due to higher steel demand across most consumer and manufacturing industries, pushing both spot and contract prices higher. InMini Mill , with the acquisition ofBig River Steel onJanuary 15, 2021 , results were added for the first time in the first quarter of 2021. USSE results improved due to stronger performance of the manufacturing and construction sectors and higher selling prices though continued high levels of imports persist. In Tubular, net sales decreased as disruptions in the oil and gas industry continue to create significant reductions of drilling activity in theU.S and continued high levels of energy tubular imports persist.
Net sales by segment for the months ended
Three Months Ended March 31, (Dollars in millions, excluding intersegment % sales) 2021 2020 Change Flat-Rolled Products (Flat-Rolled)$ 2,272 $ 1,974 15 % Mini Mill (a) 450 - 100 % U. S. Steel Europe (USSE) 798 505 58 % Tubular Products (Tubular) 134 255 (47) % Total sales from reportable segments 3,654 2,734 34 % Other 10 14 (29) % Net sales$ 3,664 $ 2,748 33 %
(a)
-27- -------------------------------------------------------------------------------- Management's analysis of the percentage change in net sales for U. S. Steel's reportable business segments for the three months endedMarch 31, 2021 versus the three months endedMarch 31, 2020 is set forth in the following table: Steel Products (a) Net Volume Price Mix FX (b) Other (c) Change Flat-Rolled (6) % 17 % 3 % - % 1 % 15 % Mini Mill (d) n/a n/a n/a n/a n/a n/a USSE 30 % 19 % (3) % 12 % - % 58 % Tubular (51) % - % 3 % - % 1 % (47) % (a) Excludes intersegment sales (b) Foreign currency translation effects (c) Primarily of sales of raw materials and coke making by-products (d) Not applicable (n/a),Mini Mill segment added afterJanuary 15, 2021 with the purchase of the remaining equity interest inBig River Steel . Net sales for the three months endedMarch 31, 2021 compared to the same period in 2020 were$3,664 million and$2,748 million , respectively. •For the Flat-Rolled segment the increase in sales primarily resulted from higher realized prices ($177 per ton) across all products, partially offset by decreased shipments (177 thousand tons) notably for hot-rolled products. •For the USSE segment the increase in sales resulted from increased shipments (242 thousand tons) predominantly for hot-rolled products and higher average realized prices ($137 per net ton) across all products. •For the Tubular segment the decrease in sales primarily resulted from decreased shipments (98 thousand tons) across all products.
Selling, general and administrative expenses
Selling, general and administrative expenses were$96 million and$72 million in the three months endedMarch 31, 2021 and 2020. The increase in expenses in the three months endedMarch 31, 2021 versus the same period in 2020 primarily resulted from the addition ofBig River Steel with the purchase of its remaining equity interest and increased profit-based payments. Restructuring and other charges During the three months endedMarch 31, 2021 and 2020, the Company recorded restructuring and other charges of$6 million and$41 million , respectively. See Note 20 to the Condensed Consolidated Financial Statements for further details.
Strategic projects and technology investments
We are executing on our customer-centric strategy to transform U. S. Steel into a world-competitive, Best of BothSM, steelmaker by combining the best of the integrated steelmaking model with the best of the mini mill steelmaking model. Our strategy will deliver product and process innovation to create unmatched value for our customers while enhancing our earnings profile and delivering long-term cash flow through industry cycles. OnJanuary 15, 2021 , the Company completed a significant step in this transformation with the acquisition of the remaining equity interest inBig River Steel for approximately$625 million in cash net of$36 million and$62 million in cash and restricted cash received, respectively, and the assumption of liabilities of approximately$50 million . The results ofBig River Steel are reflected within the newMini Mill segment. The acquisition ofBig River Steel increased U. S. Steel's annual raw steel production capability by 3.3 million net tons to 26.2 million net tons.The Mini Mill segment has two electric arc furnaces (EAFs), two ladle metallurgical furnace stations (LMFs), a Ruhrstahl Heraeus degasser, two continuous slab casters, a pickle line tandem cold mill, batch annealing, a temper mill and a galvanizing line.Big River Steel commenced commercial production on the second EAF during the fourth quarter of 2020, doubling its raw steel production capacity.
In addition to the investment in
The Company expects to invest approximately$550 million , of which approximately 50 percent has already been spent, to upgrade the Gary Works hot strip mill through a series of projects focused on expanding the line's competitive advantages. The Gary Works hot strip mill will further differentiate itself as a leader in heavy-gauge products in strategic markets. In the fourth quarter of 2020 the Company resumed certain capability upgrades after it had delayed upgrades as part of the Company's comprehensive response to impacts from COVID-19 in the first quarter of 2020. The Company will continue to evaluate the pace and timeline for completing the remaining investments in the Gary Works hot strip mill. -28- -------------------------------------------------------------------------------- InJanuary 2019 , U. S. Steel announced the construction of a new Dynamo line at USSE. The new line, a$130 million investment, has an annual capacity of approximately 100,000 metric tons. Construction on the Dynamo line began in mid-2019 but due to challenging market conditions, has been paused. Upon its completion, the new line will enable production of sophisticated silicon grades of non-grain oriented (NGO) electrical steels to support increased demand in vehicles and generators. InMay 2019 , U. S. Steel announced that it plans to construct a new endless casting and rolling facility at itsEdgar Thomson Plant inBraddock, Pennsylvania , and a cogeneration facility at its Clairton Plant inClairton, Pennsylvania , both part of the Company's Mon Valley Works, an expected investment of at least$1.5 billion . The Company purchased certain equipment for this project before delaying groundbreaking inMarch 2020 in response to COVID-19. As ofMarch 31, 2021 , the Company had capitalized approximately$200 million related to the project. The Company has determined not to pursue this project and is re-evaluating uses for the already purchased equipment.
Ongoing Impact of COVID-19
In 2020 the spread of the coronavirus pandemic across the globe significantly impacted global markets and nearly every industry, U. S. Steel included. We quickly recognized the uncertainty and potential severity the pandemic would cause, and implemented our crisis response plan. Overseen by our Board of Directors, and led by our executive team, we implemented a comprehensive and adaptive response to the pandemic focused on protecting lives and livelihoods, remaining nimble to execute our strategy and supporting our customers and communities, all in line with our S.T.E.E.L. Principles: Safety First; Trust and Respect; Environmental Stewardship; Excellence and Accountability; and Lawful and Ethical Conduct. Some of the measures we continue to practice include: •Issuing regular communications, including preventive tips, and a dedicated website for employees and their families; •Providing employees with protective equipment, masks, and sanitizing and cleaning supplies and enhanced cleaning frequency; •Limiting outside visitors to our facilities, restricting access for non-essential vendors, suppliers and contractors; •Actively managing physical distancing while at work; and •Permitting a majority of our employees in our administrative offices and headquarters to work from home.
Operating configuration adjustments
The Company also adjusted its operating configuration in response to changing market conditions including global overcapacity, unfair trade practices and increases in domestic demand as a result of tariffs on imports by indefinitely and temporarily idling and then re-starting production at certain of its facilities. U. S. Steel will continue to adjust its operating configuration in order to maximize its strategy of combining the Best of Both leading integrated and mini mill technology.
In
InDecember 2019 , the Company completed the indefinite idling of its East Chicago Tin (ECT) operations within its Flat-Rolled segment. ECT was indefinitely idled primarily due to increased tin import levels in theU.S. Additionally, U. S. Steel indefinitely idled its finishing facility inDearborn, Michigan (which operates an electrolytic galvanizing line), during the fourth quarter of 2019. The carrying value of these facilities was approximately$15 million as ofMarch 31, 2021 . In 2020, we took actions to adjust our footprint by temporarily idling certain operations for an indefinite period to better align production with customer demand and respond to the impacts from the COVID-19 pandemic. The operations that were initially idled in 2020 and remained idle as ofMarch 31, 2021 included: •Blast Furnace A at Granite City Works •Lone Star Tubular Operations •Lorain Tubular Operations •Wheeling Machine Products coupling production facility atHughes Springs, Texas
As of
-29-
--------------------------------------------------------------------------------
Earnings (loss) before interest and income taxes by segment is set forth in the following table:
-30- -------------------------------------------------------------------------------- Three months ended March 31, % (Dollars in millions) 2021 2020 Change Flat-Rolled $ 146$ (35) 517 % Mini Mill (a) 132 - n/a USSE 105 (14) 850 % Tubular (29) (48) 40 %
Total earnings (loss) from reportable segments 354 (97) 465 % Other 8 1 700 %
Segment earnings (loss) before interest and income
taxes 362 (96) 477 %
Items not allocated to segments:
Big River Steel - inventory step-up amortization (24) - Big River Steel - unrealized losses (9) - Big River Steel - acquisition costs (9) - Restructuring and other charges (6) (41) Gain on previously held investment inBig River Steel
111
Asset impairment charge - (263) Gain on previously held investment in UPI - 25
Total earnings (loss) before interest and income taxes $ 425
213 %
(a)
Segment results for Flat-Rolled
Three months ended March 31, % 2021 2020 Change
Earnings (loss) before interest and taxes ($ millions) $ 146 $ (35)
517 % Gross margin 15 % 7 % 8 % Raw steel production (mnt) 2,581 3,148 (18) % Capability utilization 62 % 74 % (12) % Steel shipments (mnt) 2,332 2,509 (7) % Average realized steel price per ton $ 888 $ 711 25 % The increase in Flat-Rolled results for the three months endedMarch 31, 2021 compared to the same period in 2020 was primarily due to: •increased average realized prices (approximately$345 million ), this change was partially offset by: •decreased shipments (approximately$15 million ) •decreased mining sales (approximately$30 million ) •higher raw material costs (approximately$20 million ) •higher energy costs (approximately$15 million ) •higher other costs, primarily variable compensation and LIFO inventory adjustments, (approximately$85 million ). Gross margin for the three months endedMarch 31, 2021 compared to the same period in 2020 increased primarily as a result of higher average realized prices. -31- --------------------------------------------------------------------------------
Segment results for
Three
Months Ended
2021 2020 Earnings before interest and taxes ($ millions) $ 132 $ - Gross margin 36 % - % Raw steel production (mnt) 510 - Capability utilization 75 % - % Steel shipments (mnt) 447 - Average realized steel price per ton $ 967 $ - (a)Mini Mill segment added afterJanuary 15, 2021 with the purchase of the remaining equity interest inBig River Steel . Segment results for USSE Three Months Ended March 31, % 2021 2020 Change
Earnings (loss) before interest and taxes ($ millions) $ 105 $ (14)
850 % Gross margin 17 % 4 % 13 % Raw steel production (mnt) 1,197 882 36 % Capability utilization 97 % 71 % 26 % Steel shipments (mnt) 1,043 801 30 % Average realized steel price per ($/ton) $ 748 $ 611 22 % Average realized steel price per (€/ton) € 620 € 554 12 % The increase in USSE results for the three months endedMarch 31, 2021 compared to the same period in 2020 was primarily due to: •Increased average realized prices (approximately$100 million ) •increased shipments (approximately$20 million ) •strengthening of the Euro versus theU.S. dollar (approximately$25 million ), these changes were partially offset by: •higher raw material costs (approximately$20 million ) •higher other costs (approximately$5 million ). Gross margin for the three months endedMarch 31, 2021 compared to the same periods in 2020 increased primarily as a result of higher sales volume and higher average realized prices.
Segment results for Tubular
% Three Months Ended March 31, Change 2021 2020 Loss before interest and taxes ($ millions) $ (29) $ (48) 40 % Gross margin (11) % (12) % 1 % Raw steel production (mnt) (a) 93 - n/a Capability utilization (a) 42 % - % 42 % Steel shipments (mnt) 89 187 (52) % Average realized steel price per ton $ 1,372$ 1,283 7 %
(a) Tubular segment raw steel added in
-32- -------------------------------------------------------------------------------- The increase in Tubular results for the three months endedMarch 31, 2021 as compared to the same period in 2020 was primarily due to: •increased average realized prices (approximately$5 million ) •lower operating costs (approximately$10 million ) •lower other costs, primarily idled plant carrying costs, (approximately$25 million ). these changes were partially offset by: •decreased shipments (approximately$10 million ) •higher raw material costs (approximately$10 million ). Gross margin for the three months endedMarch 31, 2021 compared to the same period in 2020 increased primarily as a result of the positive cost improvements from the Tubular plant idlings, partially offset by increased raw material costs.
Items not allocated to segments
•We recordedBig River Steel - inventory step-up amortization charge of$24 million in the three months endedMarch 31, 2021 . See Note 5 to the Condensed Consolidated Financial Statements for further details. •We recordedBig River Steel - unrealized losses of$9 million in the three months endedMarch 31, 2021 for the post-acquisition mark-to-market impacts of hedging instruments acquired with the purchase of the remaining equity interest inBig River Steel . See Note 14 to the Condensed Consolidated Financial Statements for further details. •We recordedBig River Steel - acquisition costs of$9 million in the three months endedMarch 31, 2021 . •We recorded restructuring and other charges of$6 million in the three months endedMarch 31, 2021 . See Note 20 to the Condensed Consolidated Financial Statements for further details. •We recorded a gain on previously held equity investment inBig River Steel of$111 million in the three months endedMarch 31, 2021 . See Note 5 to the Condensed Consolidated Financial Statements for further details.
Net interest and other financial costs
Three Months Ended March 31, % (Dollars in millions) 2021 2020 Change Interest expense $ 92$ 50 (84) % Interest income (1) (4) (75) % Loss on debt extinguishment 255 - (100) % Other financial cost (gains) 18 (3) (700) % Net periodic benefit income (31) (8) 288 % Total net interest and other financial costs $ 333$ 35 (851) % Net interest and other financial costs increased in the three months endedMarch 31, 2021 as compared to the same period last year from increased interest expense due to a higher level of debt, debt retirement costs and higher other financial costs primarily from the absence of the prior year's favorableBig River Steel call and put option adjustments and foreign exchange losses, partially offset by an increase in net periodic benefit income (as discussed below). The net periodic benefit income components of pension and other benefit costs are reflected in the table above, and increased in the three months endedMarch 31, 2021 as compared to the same periods last year primarily due to better than expected asset performance and lower amortization of prior service costs. Income taxes The income tax provision (benefit) was$1 million in the three months endedMarch 31, 2021 compared to$(19) million in the three months endedMarch 31, 2020 . The Company regularly evaluates the need for a valuation allowance for its deferred income tax benefits by assessing whether it is more likely than not it will realize these benefits in future periods. In assessing the need for a valuation allowance, the Company considers all available evidence, both positive and negative, related to the likelihood of realization of its deferred income tax benefits, and based on the weight of that evidence, determines whether a valuation allowance is required. Net earnings attributable toUnited States Steel Corporation were$91 million in the three months endedMarch 31, 2021 , compared to a net loss of$391 million in the three months endedMarch 31, 2020 . The changes primarily reflect the factors discussed above. -33- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was$111 million for the three months endedMarch 31, 2021 compared to net cash used by operating activities of$142 million in the same period last year. The increase in cash from operations is primarily due to stronger financial results, partially offset by changes in working capital period over period. Changes in working capital can vary significantly depending on factors such as the timing of inventory production and purchases, which is affected by the length of our business cycles as well as our captive raw materials position, customer payments of accounts receivable and payments to vendors in the regular course of business.
Our cash conversion cycle for the first quarter of 2021 improved by nine days as compared to the fourth quarter of 2020 as shown below: Cash Conversion Cycle
2021 2020 $ millions Days $ millions Days Accounts receivable, net (a)$1,619 32$994 38 + Inventories (b)$1,750 46$1,402 54 - Accounts Payable and Other Accrued Liabilities (c)$2,491 63$1,861 68 = Cash Conversion Cycle (d) 15 24 (a) Calculated as Average Accounts Receivable, net divided by totalNet Sales multiplied by the number of days in the period. (b) Calculated as Average Inventory divided by total Cost of Sales multiplied by the number of days in the period. (c) Calculated as Average Accounts Payable and Other Accrued Liabilities less bank checks outstanding and other current liabilities divided by total Cost of Sales multiplied by the number of days in the period. (d) Calculated as Accounts Receivable Days plus Inventory Days less Accounts Payable Days. The cash conversion cycle is a non-generally accepted accounting principles (non-GAAP) financial measure. We believe the cash conversion cycle is a useful measure in providing investors with information regarding our cash management performance and is a widely accepted measure of working capital management efficiency. The cash conversion cycle should not be considered in isolation or as an alternative to other GAAP metrics as an indicator of performance. The last-in, first-out (LIFO) inventory method is the predominant method of inventory costing inthe United States . At bothMarch 31, 2021 andMarch 31, 2020 , the LIFO method accounted for 51 percent and 65 percent of total inventory values, respectively. In theU.S. , management monitors inventory realizability by comparing the LIFO cost of inventory with the replacement cost of inventory. To the extent the replacement cost (i.e., market value) of inventory is lower than the LIFO cost of inventory, management will write the inventory down. As ofMarch 31, 2021 , andDecember 31, 2020 the replacement cost of the inventory was higher by approximately$878 million and$848 million , respectively. Additionally, based on the Company's latest internal forecasts and its inventory requirements, management does not believe there will be significant permanent LIFO liquidations that would impact earnings for the remainder of 2021. Capital expenditures for the three months endedMarch 31, 2021 , were$136 million , compared with$282 million in the same period in 2020. Flat-rolled capital expenditures were$74 million and included spending forMon Valley Endless Casting and Rolling,Gary Hot Strip Mill upgrades, Mining Equipment and various other infrastructure, environmental, and strategic projects.Mini Mill capital expenditures were$36 million and primarily included spending for Phase II expansion. USSE capital expenditures of$14 million consisted of spending for Degasser improvements, Dynamo Line and various other infrastructure, and environmental projects. Tubular capital expenditures were$12 million and included spending for the Fairfield Electric Arc Furnace (EAF) project and various other infrastructure, and environmental projects. U. S. Steel's contractual commitments to acquire property, plant and equipment atMarch 31, 2021 , totaled$588 million . Net cash used by financing activities was$573 million for the three months endedMarch 31, 2021 compared to net cash provided of$983 million in the same period last year. The decrease was primarily due to the net change in short-term and long-term debt and revolving credit facilities, partially offset by the issuance of common stock. -34- --------------------------------------------------------------------------------
The following table summarizes U. S. Steel's liquidity as of
(Dollars in millions)
Cash and cash equivalents $
753
Amount available under
Amount available under
Amount available under USSK credit facilities
362
Total estimated liquidity $
2,909
In the first quarter of 2021, we issued 48,300,000 shares of common stock for net proceeds of approximately$791 million and issued$750 million in aggregate principal amount of 6.875% Senior Notes due 2029 (2029 Senior Notes) for net proceeds of$739 million after transaction costs. With the common stock and 2029 Senior Notes issuance proceeds and cash on hand we fully redeemed our 12.000% Senior Secured Notes due 2025 in the aggregate principal amount of$1.056 billion plus premiums of$181 million , repaid in full our Export-Import Credit Agreement in the amount of$180 million and reduced the borrowing under our Credit Facility Agreement and USSK Facility Agreement by$500 million and$163 million , respectively. See Note 15 to the Condensed Consolidated Financial Statements for further details. With the acquisition ofBig River Steel onJanuary 15, 2021 we assumed additional indebtedness. Below is a summary of the most significant debt acquired as ofMarch 31, 2021 . See Note 15 to the Condensed Consolidated Financial Statements for further details. •6.625% Senior Secured Notes in the aggregate principal amount of$900 million that mature inJanuary 2029 ; •4.50% Arkansas Development Finance Authority Bonds in the aggregate principal amount of$487 million that have a final maturity inSeptember 2049 ; •4.75% Arkansas Development Finance Authority Bonds Tax Exempt Series 2020 (Green Bonds) in the aggregate principal amount of$265 million that have a final maturity inSeptember 2049 ; •Arkansas Teacher Retirement System Notes Payable in the amount of$106 million that mature in 2023; •ABL Credit Agreement with current borrowings of$30 million and maturity inAugust 2022 . As ofMarch 31, 2021 ,$161 million of the total cash and cash equivalents was held by foreign subsidiaries. Substantially all of the liquidity attributable to our foreign subsidiaries can be accessed without the imposition of income taxes as a result of the election effectiveDecember 31, 2013 to liquidate forU.S. income tax purposes a foreign subsidiary that holds most of our international operations. OnApril 12, 2021 ,United States Steel Corporation entered into a Notice and Acknowledgement with the Export Credit Agreement (ECA) lender, facility agent and ECA agent,KFW IPEX-BANK GMBH to acknowledge that the previously announced endless casting and rolling project at Mon Valley Works would no longer be pursued and the associated equipment for the project is now being evaluated for other uses. Use of the Export-Credit Agreement for further equipment purchases is also being evaluated. As ofMarch 31, 2021 ,$136 million was owed on the ECA. Certain of our credit facilities, including the Credit Facility Agreement, the Big River Steel ABL Facility, the USSK Credit Agreement and the Export Credit Agreement, contain standard terms and conditions including customary material adverse change clauses. If a material adverse change was to occur, our ability to fund future operating and capital requirements could be negatively impacted. We may from time to time seek to retire or repurchase our outstanding long-term debt through open market purchases, privately negotiated transactions, exchange transactions, redemptions or otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, and other factors and may be commenced or suspended at any time. The amounts involved may be material. See Note 15 to the Condensed Consolidated Financial Statements for further details regarding U. S. Steel's debt. We use surety bonds, trusts and letters of credit to provide financial assurance for certain transactions and business activities. The use of some forms of financial assurance and cash collateral have a negative impact on liquidity. U. S. Steel has committed$220 million of liquidity sources for financial assurance purposes as ofMarch 31, 2021 . Increases in certain of these commitments which use collateral are reflected within cash, cash equivalents and restricted cash on the Condensed Consolidated Statement of Cash Flows. InOctober 2020 , the Company entered into a supply chain finance agreement with a third party administrator with an initial term of one year which is guaranteed by theExport Import Bank of the United States (Ex-Im Guarantee), see our Annual Report on Form 10-K for the year-endedDecember 31, 2020 for further details. As ofMarch 31, 2021 , accounts payable and accrued expenses included$78 million of outstanding payment obligations which suppliers elected to sell to participating financial institutions. Access to supply chain financing could be curtailed in the future if the terms of the Ex-Im Guarantee are modified or if -35- --------------------------------------------------------------------------------
our credit ratings are downgraded. If access to supply chain financing is curtailed, working capital could be negatively impacted which may necessitate additional borrowing.
We finished the first quarter of 2021 with$753 million of cash and cash equivalents and$2,909 million of total liquidity. Available cash is left on deposit with financial institutions or invested in highly liquid securities with parties we believe to be creditworthy. U. S. Steel management believes that our liquidity will be adequate to fund our requirements based on our current assumptions with respect to our results of operations and financial condition. We expect that our estimated liquidity requirements will consist primarily of the remaining portion of our 2021 planned strategic and sustaining capital expenditures, additional debt repayment, working capital requirements, interest expense, and operating costs and employee benefits for our operations after taking into account recent footprint actions and cost reductions at our plants and headquarters. Our available liquidity atMarch 31, 2021 consists principally of our cash and cash equivalents and available borrowings under the Credit Facility Agreement, Big River Steel ABL Facility and the USSK Credit Facilities. Management continues to evaluate market conditions in our industry and our global liquidity position, and may consider additional actions to further strengthen our balance sheet and optimize liquidity, including but not limited to, repayment or refinancing of outstanding debt, the incurrence of additional debt or the issuance of additional debt or equity securities, drawing on available capacity under the Credit Facility Agreement, Big River Steel ABL Facility and/or the USSK Credit Facilities, or reducing outstanding borrowings under those facilities from time to time if deemed appropriate by management. Environmental Matters, Litigation and Contingencies Some of U. S. Steel's facilities were in operation before 1900. Although the Company believes that its environmental practices have either led the industry or at least been consistent with prevailing industry practices, hazardous materials have been and may continue to be released at current or former operating sites or delivered to sites operated by third parties. OurU.S. facilities are subject to environmental laws applicable in theU.S. , including the Clean Air Act (CAA), the Clean Water Act (CWA), the Resource Conservation and Recovery Act (RCRA) and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), as well as state and local laws and regulations.
U. S. Steel has incurred and will continue to incur substantial capital,
operating, and maintenance and remediation expenditures as a result of
environmental laws and regulations, related to release of hazardous materials,
which in recent years have been mainly for process changes to meet CAA
obligations and similar obligations in
EU Environmental Requirements and Slovak Operations
Under the EU Emissions Trading System (
Phase IV commenced on1 January 2021 and will finish on31 December 2030 . The decision on USSE's free allocation for the first five years of the Phase IV period is expected by the end ofJune 2021 . In the fourth quarter of 2020 USSE started with purchases of EUA for Phase IV period. As ofMarch 31, 2021 , we have pre-purchased approximately 1.6 million EUA totaling €38 million (approximately$46 million ).The EU's Industrial Emissions Directive requires implementation of EU determined best available techniques (BAT) for Iron and Steel production, to reduce environmental impacts as well as compliance with BAT associated emission levels. Total capital expenditures for projects to comply with or go beyond BAT requirements were €138 million (approximately$162 million ) over the actual program period. These costs were partially offset by the EU funding received and may be mitigated over the next measurement periods if USSK complies with certain financial covenants, which are assessed annually. USSK complied with these covenants as ofMarch 31, 2021 . If we are unable to meet these covenants in the future, USSK might be required to provide additional collateral (e.g. bank guarantee) to secure 50 percent of the EU funding received.
For further discussion of laws applicable in
New and Emerging Environmental Regulations
Future compliance with CO2 emission requirements may include substantial costs for emission allowances, restriction of production and higher prices for coking coal, natural gas and electricity generated by carbon-based systems. Because we cannot predict what requirements ultimately will be imposed in theU.S. andEurope , it is difficult to estimate the likely impact on U. S. Steel, but it could be substantial. OnMarch 28, 2017 ,President Trump signed Executive Order 13783 instructing theUnited States Environmental Protection Agency (U.S. EPA ) to review the Clean Power Plan (CPP). As a result, inJune 2019 , theU.S. EPA published a final rule, the "Affordable Clean Energy (ACE) Rule" that replaced the CPP. Twenty-three states, the District of -36- --------------------------------------------------------------------------------Columbia , and seven municipalities are challenging the CPP repeal and ACE rule in theU.S. Court of Appeals for the D.C. Circuit . A coalition of 21 states has intervened in the litigation in support of theU.S. EPA . Various other public interest organizations, industry groups, and Members ofCongress are also participating in the litigation. OnJanuary 19, 2021 , the D.C. Circuit vacated and remanded the ACE toEPA , while the CPP remains stayed. It is unclear as to how the new Biden administration will proceed with the remand. Any impacts to our operations as a result of any future greenhouse gas regulations are not estimable at this time since the matter is unsettled. In any case, to the extent expenditures associated with any greenhouse gas regulation, as with all costs, are not ultimately reflected in the prices of U. S. Steel's products and services, operating results will be reduced. The PhaseIV EU ETS period spans 2021-2030 and began onJanuary 1, 2021 . The Phase IV period is divided into two sub periods (2021-2025 and 2026-2030). Revised rules for Phase IV are still being finalized and may differ between the periods. However, the legislation as currently drafted places more stringent requirements over reduction targets and the amount of the free allocation of CO2 emissions credits. Currently, the overall target is a 40 percent reduction of 1990 emissions by 2030. Ongoing political discussions indicate that an even more stringent target of 60 percent may be instituted. At this time, carbon neutrality of the EU industry is set to be achieved by 2050. Revised rules for free allocation of CO2 emissions credits are based on reduced benchmark values which have not yet been published and historical levels of production from 2014-2018. USSE submitted all required historical production data in 2019. The final EU decision on the free allocation amount for 2021-2025 is expected in the second quarter of 2021. Allocations to individual installations may be adjusted annually to reflect relevant increases and decreases in production. The threshold for adjustments was set at 15 percent and will be assessed on the basis of a rolling average of two years. The average production level of 2019 and 2020 will be assessed to determine the free allocation for 2021. Preliminary production data shows that USSE missed the 15 percent threshold in 2020; therefore, the free allocation for 2021 may be decreased. Lower production in 2019 and 2020 may have an impact on the future free allocation for 2026-2030, where historical production average for years 2019-2023 are assessed.United States - Air The CAA imposes stringent limits on air emissions with a federally mandated operating permit program and civil and criminal enforcement sanctions. The CAA requires, among other things, the regulation of hazardous air pollutants through the development and promulgation of National Emission Standards for Hazardous Air Pollutants (NESHAP) and Maximum Achievable Control Technology (MACT) Standards. TheU.S. EPA has developed various industry-specific MACT standards pursuant to this requirement. The CAA requires theU.S. EPA to promulgate regulations establishing emission standards for each category ofHazardous Air Pollutants. TheU.S. EPA also must conduct risk assessments on each source category that is already subject to MACT standards and determine if additional standards are needed to reduce residual risks. While our operations are subject to several different categories of NESHAP and MACT standards, the principal impact of these standards on U. S. Steel operations includes those that are specific to coke making, iron making, steel making and iron ore processing. OnJuly 13, 2020 , theU.S. EPA published a Residual Risk andTechnology Review (RTR) rule for the Integrated Iron and Steel MACT category in theFederal Register . Based on the results of theU.S. EPA's risk review, the Agency determined that risks due to emissions of air toxics from the Integrated Iron and Steel category are acceptable and that the current regulations provided an ample margin of safety to protect public health. Under the technology review, theU.S. EPA determined that there are no developments in practices, processes or control technologies that necessitate revision of the standards. InSeptember 2020 , several petitions for review of the rule, including those filed by the Company, AISI,Clean Air Council and others, were filed with theUnited States Court of Appeals for the District of Columbia Circuit . The cases were consolidated and are being held in abeyance untilEPA reviews and responds to administrative petitions for review. For the Taconite Iron Ore Processing category, based on the results of the Agency's risk review,U.S. EPA promulgated a final rule onJuly 28, 2020 , in whichEPA determined that risks from emissions of air toxics from this source category are acceptable and that the existing standards provide an ample margin of safety. Furthermore, under the technology review, the Agency identified no cost-effective developments in controls, practices, or processes to achieve further emissions reductions. Based upon our analysis of the proposed taconite rule, the Company does not expect any material impact as a result of the rule. However, petitions for review of the rule were filed in theUnited States Court of Appeals for the District of Columbia Circuit , in which the Company and AISI intervened. Because theU.S. EPA has not completed its review of the Coke MACT regulations, any impacts related to theU.S. EPA's review of the coke standards cannot be estimated at this time. OnMarch 12, 2018 , theNew York State Department of Environmental Conservation (DEC), along with other petitioners, submitted a CAA Section 126(b) petition to theU.S. EPA . In the petition, the DEC asserts that stationary sources from the following nine states are interfering with attainment or maintenance of the 2008 and 2015 ozone National Ambient Air Quality Standards (NAAQS) inNew York :Illinois ,Indiana ,Kentucky ,Maryland ,Michigan ,Ohio ,Pennsylvania ,Virginia , andWest Virginia . DEC is requesting theU.S. EPA to require sources of nitrogen oxides in the nine states to reduce such emissions. In a final rule promulgated in theOctober 18, 2019 ,Federal Register ,EPA denied the petition. OnOctober 29, 2019 ,New York ,New Jersey , and theCity of New York petitioned theUnited States Court of Appeals for the District of Columbia Circuit for review ofU.S. EPA's denial of the petition. InJuly 2020 , the Court vacatedEPA 's determination and remanded it back toEPA to reconsider -37- -------------------------------------------------------------------------------- the 126(b) petition in a manner consistent with the Court's opinion. At this time, sinceEPA 's decision after its reconsideration is unknown, the impacts of any reconsideration are indeterminable and inestimable. The CAA also requires theU.S. EPA to develop and implement NAAQS for criteria pollutants, which include, among others, particulate matter (PM) - consisting of PM10 and PM2.5, lead, carbon monoxide, nitrogen dioxide, sulfur dioxide (SO2), and ozone. InOctober 2015 , theU.S. EPA lowered the NAAQS for ozone from 75 parts per billion (ppb) to 70 ppb. OnNovember 6, 2017 , theU.S. EPA designated most areas in which we operate as attainment with the 2015 standard. In a separate ruling, onJune 4, 2018 , theU.S. EPA designated other areas in which we operate as "marginal nonattainment" with the 2015 ozone standard. OnDecember 6, 2018 ,U.S. EPA published a final rule regarding implementation of the 2015 ozone standard. Because no state regulatory or permitting actions to bring the ozone nonattainment areas into attainment have yet to be proposed or developed for U. S. Steel facilities, the operational and financial impact of the ozone NAAQS cannot be reasonably estimated at this time. OnDecember 31, 2020 ,EPA published a final rule pursuant to its statutorily required review of NAAQS that retains the ozone NAAQS at 70 ppb. InJanuary 2021 ,New York , along with several states and non-governmental organizations filed petitions for judicial review of the action with theUnited States Court of Appeals for the District of Columbia Circuit . Several other states and industry trade groups intervened in support of U. S.EPA 's action. The case remains before the Court. OnDecember 14, 2012 , theU.S. EPA lowered the annual standard for PM2.5 from 15 micrograms per cubic meter (ug/m3) to 12 ug/m3, and retained the PM2.5 24-hour and PM10 NAAQS rules. InDecember 2014 , theU.S. EPA designated some areas in which U. S. Steel operates as nonattainment with the 2012 annual PM2.5 standard. OnApril 6, 2018 , theU.S. EPA published a notice thatPennsylvania ,California andIdaho failed to submit a SIP to demonstrate attainment with the 2012 fine particulate standard by the deadline established by the CAA. As a result of the notice,Pennsylvania , a state in which we operate, was required to submit a State Implementation Plan (SIP) to theU.S. EPA no later thanNovember 7, 2019 to avoid sanctions. OnApril 29, 2019 , the ACHD published a draft SIP for theAllegheny County nonattainment area which demonstrates that all ofAllegheny County will meet its reasonable further progress requirements and be in attainment with the 2012 PM2.5 annual and 24-hour NAAQS byDecember 31, 2021 with the existing controls that are in place. OnSeptember 12, 2019 , theAllegheny County Board of Health unanimously approved the draft SIP. The draft SIP was then sent to thePennsylvania Department of Environmental Protection (PADEP). PADEP submitted the SIP toU.S. EPA for approval onNovember 1, 2019 . To date,U.S. EPA has not taken action on PADEP's submittal. OnDecember 18, 2020 ,EPA published a final rule pursuant to its statutorily required review of NAAQS that retains the existing PM2.5 standards without revision. In early 2021, several states and non-governmental organizations filed petitions for judicial review of the action with theUnited States Court of Appeals for the District of Columbia Circuit . Several industry trade groups intervened in support of U. S.EPA 's action. The case remains before the Court. OnJanuary 26, 2021 , ACHD announced that for the first time in history all eight air quality monitors inAllegheny County met the federal air quality standards including particulate matter (PM2.5 and PM10). OnNovember 20, 2020 , ACHD proposed a reduction to the current allowable emissions from coke plant operations, including the hydrogen sulfide content of coke oven gas, that would be more stringent than the Federal Best Available Control Technology and Lowest Achievable Emission Rate requirements. In various meetings with ACHD, U. S. Steel has raised significant objections, in particular, that ACHD has not demonstrated that continuous compliance with the draft rule is economically and technologically feasible. While U. S. Steel continues to meet with ACHD regarding the draft rule, U. S. Steel believes that any rule promulgated by ACHD must comply with its statutory authority. If the draft rule or similar rule is adopted, the financial and operational impacts to U. S. Steel could be material. To assist in developing rules objectively and with adequate technical justification, theJune 27, 2019 , Settlement Agreement, establishes procedures that would be used when developing a new rule. Because U. S. Steel believes ACHD did not follow the procedures prescribed in theJune 27, 2019 Settlement Agreement (Agreement) with ACHD, U. S. Steel has invoked dispute resolution per the terms of the Agreement regarding ACHD's proposed coke rule. U. S. Steel and ACHD are currently negotiating resolution of the disputes. For further discussion of relevant environmental matters, including environmental remediation obligations, see "Item 1. Legal Proceedings - Environmental Proceedings." OFF-BALANCE SHEET ARRANGEMENTS U. S. Steel did not enter into any new material off-balance sheet arrangements during the first quarter of 2021.INTERNATIONAL TRADE U. S. Steel continues to face import competition, much of which is unfairly traded, supported by foreign governments, and fueled by massive global steel overcapacity, currently estimated to be over 625 million metric tons per year-over seven times the entireU.S. steel market and over thirty times totalU.S. steel imports. These imports, as well as the underlying policies/practices and overcapacity, impact the Company's operational and financial performance. U. S. Steel continues to lead efforts to address these challenges that threaten the Company, our workers, our stockholders, and our country's national and economic security.
As of the date of this filing, pursuant to a series of Presidential
Proclamations issued in accordance with Section 232 of the Trade Expansion Act
of 1962,
-38- --------------------------------------------------------------------------------Argentina ,Brazil , andSouth Korea , which are subject to restrictive quotas; (2)Canada andMexico , which are not subject to either tariffs or quotas but tariffs could be re-imposed on surging product groups after consultations; and (3)Australia , which is not subject to tariffs, quotas, or an anti-surge mechanism. TheU.S. Department of Commerce (DOC) is managing a process in whichU.S. companies may request and/or oppose one-year temporary product exclusions from the Section 232 tariffs and quotas. Over 248,000 temporary exclusions have been requested for steel products. InDecember 2020 , DOC announced 108 indefinite and not importer-specific "General Approved Exclusions" for products DOC determined not to be domestically available. Multiple legal challenges to the Section 232 action continue before the U.S. Court ofInternational Trade (CIT) and U.S. Court of Appeals for the Federal Circuit (CAFC). ThoughU.S. courts have rejected constitutional and statutory challenges to the initial steel Section 232 action and overall product exclusion process, the CIT struck down both the 2018-2019 temporary increase in Section 232 tariffs on imports fromTurkey (the government's appeal is pending before the CAFC) and theJanuary 2021 expansion of the Section 232 action to certain downstream steel products (pending appeal to the CAFC). Multiple countries have challenged the Section 232 action at theWorld Trade Organization (WTO), imposed retaliatory tariffs, and/or acted to safeguard their domestic steel industries from increased steel imports. In turn,the United States has challenged the retaliation at theWTO . Since its implementation inMarch 2018 , the Section 232 action has supported theU.S. steel industry's and U. S. Steel's investments in advanced steel capacity, technology, and skills, thereby strengtheningU.S. national and economic security. The Company continues to actively defend the Section 232 action. InFebruary 2019 , theEuropean Commission (EC) imposed a definitive tariff rate quota safeguard of 25 percent on certain steel imports that exceed established quotas. InFebruary 2021 , the EC initiated its ongoing review to determine whether to extend the safeguard beyondJune 2021 . Antidumping duties (AD) and countervailing duties (CVD or antisubsidy duties) apply in addition to the Section 232 tariffs and quotas and the EC's safeguard, and AD/CVD orders will continue beyond the Section 232 action and the EC's safeguard. Thus, U. S. Steel continues to actively defend and maintain the 55U.S. AD/CVD orders and 11European Union (EU) AD/CVD orders covering U. S. Steel products in multiple proceedings before the DOC,U.S. International Trade Commission , CIT, CAFC, the EC and European courts, and theWTO .
In
Additional tariffs of 7.5 to 25 percent continue to apply to certain
U. S. Steel will continue to execute a broad, global strategy to maximize opportunities and navigate challenges presented by imports, global steel overcapacity, and international trade law and policy developments.
NEW ACCOUNTING STANDARDS See Notes 2 and 3 to the Condensed Consolidated Financial Statements in Part I Item 1 of this Form 10-Q.
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