1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at July 31, 2000 follows:
USX-Marathon Group - 312,065,978 shares
USX-U. S. Steel Group - 88,688,017 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 2000
---------------------------
INDEX Page
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PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 20
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 30
Financial Statistics 33
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 34
Marathon Group Balance Sheet 35
Marathon Group Statement of Cash Flows 36
Selected Notes to Financial Statements 37
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 46
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 56
Supplemental Statistics 59
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 2000
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 60
U. S. Steel Group Balance Sheet 61
U. S. Steel Group Statement of Cash Flows 62
Selected Notes to Financial Statements 63
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 69
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 77
Supplemental Statistics 80
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 81
Item 4. Submission of Matters to a Vote of Security Holders 83
Item 5. Other Information 84
Item 6. Exhibits and Reports on Form 8-K 85
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
REVENUES:
Sales $10,432 $6,731 $19,804 $12,809
Dividend and affiliate income 31 18 35 11
Net gains (losses) on disposal of assets 15 9 122 (13)
Gain on ownership change in Marathon Ashland
Petroleum LLC 4 - 8 -
Other income 6 8 13 13
------ ------ ------ ------
Total revenues 10,488 6,766 19,982 12,820
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 7,848 4,810 15,126 9,364
Selling, general and administrative expenses 67 37 138 89
Depreciation, depletion and amortization 318 301 639 609
Taxes other than income taxes 1,237 1,123 2,400 2,148
Exploration expenses 46 59 91 122
Inventory market valuation credits - (66) - (415)
------ ------ ------ ------
Total costs and expenses 9,516 6,264 18,394 11,917
------ ------ ------ ------
INCOME FROM OPERATIONS 972 502 1,588 903
Net interest and other financial costs 92 91 187 174
Minority interest in income of Marathon Ashland
Petroleum LLC 203 112 258 257
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 677 299 1,143 472
Provision for estimated income taxes 254 110 423 173
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 423 189 720 299
Extraordinary loss on extinguishment of debt,
net of income tax - - - 5
------ ------ ------ ------
NET INCOME 423 189 720 294
Dividends on preferred stock 2 3 4 5
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $421 $186 $716 $289
====== ====== ====== ======
<FN>
Selected notes to financial statements appear on pages 9-19.
5
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Net income $367 $134 $621 $253
- Per share - basic and diluted 1.18 .43 1.99 .82
Dividends paid per share .21 .21 .42 .42
Weighted average shares, in thousands
- Basic 312,233 309,054 312,180 309,041
- Diluted 312,431 309,462 312,359 309,332
APPLICABLE TO STEEL STOCK:
Income before extraordinary loss $54 $52 $95 $41
- Per share - basic .62 .60 1.08 .47
- diluted .62 .59 1.07 .47
Extraordinary loss, net of income tax - - - 5
- Per share - basic and diluted - - - .06
Net income $54 $52 $95 $36
- Per share - basic .62 .60 1.08 .41
- diluted .62 .59 1.07 .41
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 88,499 88,387 88,461 88,378
- Diluted 92,755 92,647 92,721 88,379
<FN>
Selected notes to financial statements appear on pages 9-19.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
June 30 December 31
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $167 $133
Receivables, less allowance for doubtful
accounts of $15 and $12 3,000 2,706
Inventories 2,892 2,627
Deferred income tax benefits 316 303
Other current assets 281 218
------ ------
Total current assets 6,656 5,987
Investments and long-term receivables,
less reserves of $3 and $3 1,339 1,237
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$17,163 and $16,799 12,746 12,809
Prepaid pensions 2,775 2,629
Other noncurrent assets 267 300
------ ------
Total assets $23,783 $22,962
====== ======
<FN>
Selected notes to financial statements appear on pages 9-19.
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $121 $-
Accounts payable 3,531 3,440
Payroll and benefits payable 491 468
Accrued taxes 408 283
Accrued interest 107 107
Long-term debt due within one year 43 61
------ ------
Total current liabilities 4,701 4,359
Long-term debt, less unamortized discount 3,830 4,222
Deferred income taxes 2,028 1,839
Employee benefits 2,802 2,809
Deferred credits and other liabilities 663 691
Preferred stock of subsidiary 250 250
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 183 183
Minority interest in Marathon Ashland Petroleum LLC 1,943 1,753
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,428,887 shares
and 2,715,287 ($121 and $136 liquidation preference,
respectively) 2 3
Common stocks:
Marathon Stock issued - 312,164,678 shares and
311,767,181 shares 312 312
Steel Stock issued - 88,688,017 shares and
88,397,714 shares 89 88
Securities exchangeable solely into Marathon Stock
issued - 282,839 shares and 288,621 shares - -
Additional paid-in capital 4,675 4,673
Deferred compensation (12) -
Retained earnings 2,348 1,807
Accumulated other comprehensive income (loss) (31) (27)
------ ------
Total stockholders' equity 7,383 6,856
------ ------
Total liabilities and stockholders' equity $23,783 $22,962
====== ======
<FN>
Selected notes to financial statements appear on pages 9-19.
8
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
Six Months Ended
June 30
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $720 $294
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss - 5
Minority interest in income of Marathon Ashland
Petroleum LLC 258 257
Depreciation, depletion and amortization 639 609
Exploratory dry well costs 32 62
Inventory market valuation credits - (415)
Pensions and other postretirement benefits (157) (116)
Deferred income taxes 162 98
Gain on ownership change in Marathon Ashland
Petroleum LLC (8) -
Net (gains) losses on disposal of assets (122) 13
Changes in:
Current receivables - sold - 30
- operating turnover (299) (301)
Inventories (265) (221)
Current accounts payable and accrued expenses 192 353
All other - net (44) (1)
------ ------
Net cash provided from operating activities 1,108 667
------ ------
INVESTING ACTIVITIES:
Capital expenditures (673) (685)
Disposal of assets 230 182
Restricted cash - withdrawals 161 39
- deposits (194) (26)
Affiliates - investments (67) -
- loans and advances - (56)
- returns and repayments 2 -
All other - net 23 (3)
------ ------
Net cash used in investing activities (518) (549)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit arrangements - net(253) (51)
Other debt - borrowings 273 459
- repayments (309) (195)
Common stock issued - 8
Preferred stock repurchased (12) -
Dividends paid (179) (179)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (73) (206)
------ ------
Net cash used in financing activities (553) (164)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3) (1)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 34 (47)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 133 146
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $167 $99
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(179) $(178)
Income taxes paid (141) (12)
<FN>
Selected notes to financial statements appear on pages 9-19.
9
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 2000 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1999.
EITF Topic No. D-88, issued in March 2000, requires companies to
disclose their accounting policy for costs incurred in connection with
planned major maintenance activities. For USX, such costs primarily are
associated with refinery turnarounds in the Marathon Group and blast
furnace relines in the U. S. Steel Group. Costs associated with refinery
turnarounds are expensed in the same annual period as incurred; however,
estimated annual turnaround costs are recognized in income throughout the
year on a pro rata basis. Costs associated with blast furnace relines are
separately capitalized in property, plant and equipment. Such costs are
amortized over their estimated useful life, which is generally the period
until the next scheduled reline.
2. In 1998, Marathon Oil Company (Marathon) and Ashland Inc. (Ashland)
combined the major elements of their refining, marketing and transportation
(RM&T) operations. Marathon transferred certain RM&T assets to Marathon
Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also, Marathon
acquired certain RM&T net assets from Ashland in exchange for a 38%
interest in MAP. In accordance with MAP closing agreements, Marathon and
Ashland made capital contributions to MAP for environmental improvements.
The closing agreements stipulate that ownership interests in MAP will not
be adjusted as a result of such contributions. Accordingly, Marathon
recognized a gain on ownership change of $4 million in each of the first
and second quarters of 2000.
3. In 1997, USX sold its stock in Delhi Gas Pipeline Corporation and
other subsidiaries of USX that comprised all of the Delhi Group. The net
proceeds of the sale of $195 million were used to redeem all shares of USX-
Delhi Group Common Stock (Delhi Stock) and were distributed to the holders
thereof on January 26, 1998. After the redemption, 50,000,000 shares of
Delhi Stock remain authorized but unissued.
4. The Marathon Group's operations consist of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through MAP; and 3) Other Energy Related Businesses (OERB). OERB is an
aggregation of two segments which fall below the quantitative reporting
thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation -
markets and transports its own and third-party natural gas and crude oil in
the United States; and 2) Power Generation - develops, constructs and
operates
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
independent electric power projects worldwide. The U. S. Steel Group
consists of one operating segment, U. S. Steel (USS). USS is engaged in
the production and sale of steel mill products, coke and taconite pellets.
USS also engages in the following related business activities: the
management of mineral resources, domestic coal mining, engineering and
consulting services, and real estate development and management. The
results of segment operations are as follows:
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
SECOND QUARTER 2000
Revenues:
Customer $1,060 $7,486 $305 $8,851 $1,581 $10,432
Intersegment (a) 119 49 13 181 - 181
Intergroup (a) 6 - 6 12 4 16
Equity in earnings (losses) of
unconsolidated affiliate (3) 6 4 7 14 21
Other 7 10 2 19 12 31
----- ----- ----- ----- ----- -----
Total revenues $1,189 $7,551 $330 $9,070 $1,611 $10,681
===== ===== ===== ===== ===== =====
Segment income $356 $529 $- $885 $68 $953
===== ===== ===== ===== ===== =====
SECOND QUARTER 1999
Revenues:
Customer $689 $4,637 $113 $5,439 $1,292 $6,731
Intersegment (a) 34 4 6 44 - 44
Intergroup (a) 4 - 4 8 11 19
Equity in earnings (losses) of
unconsolidated affiliates 3 4 5 12 (10) 2
Other 13 10 6 29 11 40
----- ----- ----- ----- ----- -----
Total revenues $743 $4,655 $134 $5,532 $1,304 $6,836
===== ===== ===== ===== ===== =====
Segment income $124 $228 $19 $371 $43 $414
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
Revenues:
Customer $2,051 $13,981 $655 $16,687 $3,117 $19,804
Intersegment (a) 188 69 32 289 - 289
Intergroup (a) 11 - 11 22 8 30
Equity in earnings (losses) of
unconsolidated affiliates (4) 10 8 14 7 21
Other 10 20 6 36 26 62
----- ----- ----- ----- ----- -----
Total revenues $2,256 $14,080 $712 $17,048 $3,158 $20,206
===== ===== ===== ===== ===== =====
Segment income $665 $669 $13 $1,347 $122 $1,469
===== ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1999
Revenues:
Customer $1,261 $8,816 $195 $10,272 $2,537 $12,809
Intersegment (a) 68 9 15 92 - 92
Intergroup (a) 7 - 8 15 12 27
Equity in earnings (losses) of
unconsolidated affiliates 4 7 13 24 (33) (9)
Other 19 16 9 44 21 65
----- ----- ----- ----- ----- -----
Total revenues $1,359 $8,848 $240 $10,447 $2,537 $12,984
===== ===== ===== ===== ===== =====
Segment income $160 $273 $34 $467 $40 $507
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
The following schedules reconcile segment revenues and income to amounts
reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon Group U. S. Steel Group
Second Quarter Second Quarter
Ended Ended
June 30 June 30
(In millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $9,070 $5,532 $1,611 $1,304
Items not allocated to segments:
Gain on ownership change in MAP 4 - - -
Other (a) - (7) - -
Elimination of intersegment revenues (181) (44) - -
------ ------ ----- -----
Total Group revenues $8,893 $5,481 $1,611 $1,304
====== ====== ====== ======
Income:
Income for reportable segments $885 $371 $68 $43
Items not allocated to segments:
Gain on ownership change in MAP 4 - - -
Administrative expenses (29) (31) (5) (8)
Net pension credits - - 67 88
Costs related to former business activities - - (18) (20)
Inventory market valuation adjustments - 66 - -
Other (a) - (7) - -
------ ------ ------ ------
Total Group income from operations $860 $399 $112 $103
====== ====== ====== ======
<FN>
(a) Represents for the Marathon Group in 1999, estimated loss on sale of
Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie).
Effective January 1, 2000, USX changed its methodology for allocating
the pension credit or cost associated with its principal U. S. Steel
pension plans for internal business performance reporting purposes. Since
future contributions to these plans are expected to be minimal due to their
overfunded position, no pension credit or cost is allocated to the U. S.
Steel operating segment. Prior years' segment income or loss has been
restated to conform with the current allocation methodology.
13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Marathon Group U. S. Steel Group
Six Months Six Months
Ended Ended
June 30 June 30
(In millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $17,048 $10,447 $3,158 $2,537
Items not allocated to segments:
Gain on ownership change in MAP 8 - - -
Other (a) 87 (23) - (22)
Elimination of intersegment revenues (289) (92) - -
------ ------ ----- -----
Total Group revenues $16,854 $10,332 $3,158 $2,515
====== ====== ====== ======
Income:
Income for reportable segments $1,347 $467 $122 $40
Items not allocated to segments:
Gain on ownership change in MAP 8 - - -
Administrative expenses (57) (57) (11) (13)
Net pension credits - - 132 140
Costs related to former business activities - - (40) (44)
Inventory market valuation adjustments - 415 - -
Other (a) 87 (23) - (22)
------ ------ ------ ------
Total Group income from operations $1,385 $802 $203 $101
====== ====== ====== ======
<FN>
(a) Represents for the Marathon Group in 2000, gain on disposition of
Angus/Stellaria and in 1999, loss on sale of Scurlock Permian LLC and
Carnegie. For the U. S. Steel Group in 1999, represents loss on investment
in RTI International Metals stock used to satisfy indexed debt obligations.
14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
------------------------
June 30 December 31
2000 1999
-------- -----------
Raw materials $922 $830
Semi-finished products 368 392
Finished products 1,440 1,239
Supplies and sundry items 162 166
------ ------
Total (at cost) 2,892 2,627
Less inventory market valuation reserve - -
------ ------
Net inventory carrying value $2,892 $2,627
====== ======
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to costs and expenses. For
additional information, see discussion of results of operations in the
Marathon Group Management's Discussion and Analysis of Financial Condition
and Results of Operations.
6. Total comprehensive income was $420 million for the second quarter of
2000, $185 million for the second quarter of 1999, $716 million for the six
months of 2000 and $288 for the six months of 1999.
7. The method of calculating net income per share for the Marathon Stock
and Steel Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Restated
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts. The financial statements of the Marathon
Group and the U. S. Steel Group, taken together, include all accounts which
comprise the corresponding consolidated financial statements of USX.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
7. (Continued)
COMPUTATION OF INCOME PER SHARE
Second Quarter Ended
June 30
2000 1999
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
- --------------
Net income (millions) $367 $367 $134 $134
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 312,233 312,233 309,054 309,054
Effect of dilutive securities - stock options - 198 - 408
------ ------ ------ ------
Average common shares and dilutive effect 312,233 312,431 309,054 309,462
====== ====== ====== ======
Net income per share $1.18 $1.18 $.43 $.43
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (millions):
Net income $56 $56 $55 $55
Dividends on preferred stock 2 2 3 3
------ ------ ------ ------
Net income applicable to Steel Stock 54 54 52 52
Effect of dilutive convertible securities - 2 - 2
------ ------ ------ ------
Net income assuming conversions $54 $56 $52 $54
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,499 88,499 88,387 88,387
Effect of dilutive securities:
Trust preferred securities - 4,256 - 4,256
Stock options - - - 4
------ ------ ------ ------
Average common shares and dilutive effect 88,499 92,755 88,387 92,647
====== ====== ====== ======
Net income per share $.62 $.62 $.60 $.59
====== ====== ====== ======
16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
7. (Continued)
COMPUTATION OF INCOME PER SHARE
Six Months Ended
June 30
2000 1999
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
- --------------
Net income (millions) $621 $621 $253 $253
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 312,180 312,180 309,041 309,041
Effect of dilutive securities - stock options - 179 - 291
------ ------ ------ ------
Average common shares and dilutive effect 312,180 312,359 309,041 309,332
====== ====== ====== ======
Net income per share $1.99 $1.99 $.82 $.82
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (millions):
Income before extraordinary loss $99 $99 $46 $46
Dividends on preferred stock 4 4 5 5
Extraordinary loss - - 5 5
------ ------ ------ ------
Net income applicable to Steel Stock 95 95 36 36
Effect of dilutive convertible securities - 4 - -
------ ------ ------ ------
Net income assuming conversions $95 $99 $36 $36
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,461 88,461 88,378 88,378
Effect of dilutive securities:
Trust preferred securities - 4,256 - -
Stock options - 4 - 1
------ ------ ------ ------
Average common shares and dilutive effect 88,461 92,721 88,378 88,379
====== ====== ====== ======
Per share:
Income before extraordinary loss $1.08 $1.07 $.47 $.47
Extraordinary loss - - .06 .06
------ ------ ------ ------
Net income $1.08 $1.07 $.41 $.41
====== ====== ====== ======
17
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. In 1999, USX irrevocably deposited with a trustee the entire 5.5
million common shares it owned in RTI International Metals (RTI). The
deposit of the shares resulted in the satisfaction of USX's obligation
under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000.
Under the terms of the indenture, the trustee exchanged one RTI share for
each note at maturity; therefore, none reverted back to USX.
As a result of the above transaction, USX recorded in the first
quarter of 1999 an extraordinary loss of $5 million, net of a $3 million
income tax benefit, representing prepaid interest expense and the write-off
of unamortized debt issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value of the investment in
RTI and the carrying value of the indexed debt, which is included in net
gains (losses) on disposal of assets.
Additionally, a $13 million credit to adjust the indexed debt to
settlement value at March 31, 1999, is included in net interest and other
financial costs.
In December 1996, USX had issued the $117 million of notes indexed to
the common share price of RTI. At maturity, USX would have been required
to exchange the notes for shares of RTI common stock, or redeem the notes
for the equivalent amount of cash. Since USX's investment in RTI was
attributed to the U. S. Steel Group, the indexed debt was also attributed
to the U. S. Steel Group. USX had a 26% investment in RTI and accounted
for its investment using the equity method of accounting.
9. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
Matching crude oil and refined product
buy/sell transactions settled in cash $1,415 $698 $2,470 $1,570
Consumer excise taxes on petroleum
products and merchandise 1,108 1,003 2,147 1,916
10. The provision for estimated income taxes for the periods reported is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities.
11. In the second quarter of 1999, USX recognized a one-time pretax
settlement gain of $35 million, related mainly to pension costs of
employees who retired under the U. S. Steel Group 1998 voluntary early
retirement program. This noncash settlement gain is included in selling,
general and administrative expenses.
18
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
12. At June 30, 2000, USX had no borrowings against its $2,350 million
long-term revolving credit agreement.
At June 30, 2000, MAP had no borrowings against its $500 million
revolving credit agreements with banks and had no amounts outstanding
against its $190 million revolving credit agreement with Ashland.
USX has a short-term credit agreement totaling $125 million at June
30, 2000. Interest is based on the bank's prime rate or London Interbank
Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other
banks provide short-term lines of credit totaling $150 million which
require a .125% fee or maintenance of compensating balances of 3%. At June
30, 2000, there were no borrowings against these facilities. USX had other
outstanding short-term borrowings of $121 million.
In the event of a change in control of USX, debt obligations totaling
$3,089 million at June 30, 2000, may be declared immediately due and
payable.
13. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 2000, and December
31, 1999, accrued liabilities for remediation totaled $184 million and $170
million, respectively. It is not presently possible to estimate the
ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed. Receivables for recoverable costs from
certain states, under programs to assist companies in cleanup efforts
related to underground storage tanks at retail marketing outlets, were $55
million at June 30, 2000, and $52 million at December 31, 1999.
For a number of years, USX has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the six months of 2000 and for the years 1999 and
1998, such capital expenditures totaled $23 million, $78 million and $132
million, respectively. USX anticipates making additional such expenditures
in the future; however, the exact amounts and timing of such expenditures
are uncertain because of the continuing evolution of specific regulatory
requirements.
19
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. (Continued)
At June 30, 2000, and December 31, 1999, accrued liabilities for
platform abandonment and dismantlement totaled $157 million and $152
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$218 million at June 30, 2000. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of June 30, 2000, the largest guarantee for a single affiliate was $131
million.
At June 30, 2000, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $144 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and long-
term investments at June 30, 2000, totaled $709 million compared with $568
million at December 31, 1999.
20
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
----------------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
6.58 4.00 4.20 3.45 3.63 3.41 1.46
==== ==== ==== ==== ==== ==== ====
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
-------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
6.74 4.11 4.32 3.56 3.79 3.65 1.58
==== ==== ==== ==== ==== ==== ====
21
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company that is principally
engaged in the energy business through its Marathon Group and in the steel
business through its U. S. Steel Group. The following discussion should be read
in conjunction with the second quarter 2000 USX Consolidated Financial
Statements and Selected Notes to Financial Statements. For income per common
share amounts applicable to USX's two classes of common stock, USX-Marathon
Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock
("Steel Stock"), see Consolidated Statement of Operations - Income per Common
Share. For individual Group results, see Management's Discussion and Analysis of
Financial Condition and Results of Operations for the Marathon Group and the
U. S. Steel Group. For operating statistics, see Supplemental Statistics
following Management's Discussion and Analysis of Financial Condition and
Results of Operations for each of the respective Groups.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
the forward-looking statements. For additional risk factors affecting the
businesses of USX, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX 1999 Form 10-K.
22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the second quarter and the first six months of 2000 and 1999
are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
------ ------ ------ ------
Revenues
Marathon Group $8,893 $5,481 $16,854 $10,332
U. S. Steel Group 1,611 1,304 3,158 2,515
Eliminations (16) (19) (30) (27)
------ ------ ------- -------
Total USX Corporation revenues $10,488 $6,766 $19,982 $12,820
Less:
Excise taxes (a)(b) 1,108 1,003 2,147 1,916
Matching buy/sell transactions (a)(c) 1,415 698 2,470 1,570
------ ------ ------ ------
Revenues excluding above items $7,965 $5,065 $15,365 $9,334
====== ====== ====== ======
- ------
<FN>
(a) Included in both revenues and costs and expenses for the Marathon Group and
USX consolidated.
(b) Consumer excise taxes on petroleum products and merchandise.
(c) Matching crude oil and refined products buy/sell transactions settled in
cash.
Revenues (excluding excise taxes and matching buy/sell transactions)
increased by $2,900 million in the second quarter of 2000 as compared with the
second quarter of 1999, reflecting increases of $2,590 million for the Marathon
Group and $307 million for the U. S. Steel Group. For the first six months of
2000, revenues increased $6,031 million as compared with the same period of
1999, reflecting increases of $5,391 million for the Marathon Group and $643
million for the U. S. Steel Group.
For discussion of revenues by Group, see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group.
23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the second quarter and the first six months of
2000 and 1999 are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
------ ------ ------ ------
Reportable segments
Marathon Group
Exploration & production $356 $124 $665 $160
Refining, marketing & transportation 529 228 669 273
Other energy related businesses - 19 13 34
------ ------ ------ ------
Income for reportable segments-Marathon Group $885 $371 $1,347 $467
U. S. Steel Group
Income for reportable segment 68 43 122 40
----- ----- ----- -----
Income for reportable segments-USX Corporation 953 414 1,469 507
Items not allocated to segments:
Marathon Group (25) 28 38 335
U. S. Steel Group 44 60 81 61
----- ----- ----- -----
Total income from operations-USX Corporation $972 $502 $1,588 $903
===== ===== ===== =====
Income for reportable segments increased by $539 million in the second
quarter of 2000 as compared with the second quarter of 1999, reflecting
increases of $514 million for the Marathon Group reportable segments and $25
million for U. S. Steel Group reportable segment. Income for reportable segments
in the first six months of 2000 increased by $962 million compared with the
first six months of 1999, reflecting increases of $880 million for the Marathon
Group reportable segments and $82 million for the U. S. Steel Group reportable
segment.
For discussion of income from operations see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group.
24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the second quarter and first six
months of 2000 and 1999 are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
------ ------ ------ ------
Net interest and other financial costs $92 $91 $187 $174
Less:
Favorable adjustment to carrying value
of indexed debt(a) - - - (13)
------ ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $92 $91 $187 $187
===== ====== ====== ======
- ------
<FN>
(a) In December 1996, USX issued $117 million of 6-3/4% Exchangeable Notes Due
February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for
common stock of RTI International Metals, Inc. ("RTI") or for the
equivalent amount of cash, at USX's option. The carrying value of indexed
debt was adjusted quarterly to settlement value based on changes in the
value of RTI common stock. Any resulting adjustment was charged or
credited to income and included in interest and other financial costs. In
1999, USX satisfied its obligation by irrevocably depositing with a trustee
the RTI common stock. For further discussion, see Note 8 to the USX
Consolidated Financial Statements.
Provisions for estimated income taxes of $254 million and $423 million for
the second quarter and the first six months of 2000 were based on tax rates and
amounts that recognize management's best estimate of current and deferred tax
assets and liabilities.
Extraordinary loss on extinguishment of debt of $5 million (net of a $3
million income tax benefit) in the first six months of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt. For further
discussion, see Note 8 to the USX Consolidated Financial Statements.
Net income was $423 million for the second quarter of 2000, an increase of
$234 million compared to the second quarter of 1999 reflecting increases of $233
million for the Marathon Group and $1 million for the U. S. Steel Group. Net
income was $720 million for the first six months of 2000, an increase of $426
million compared with the first six months of 1999, reflecting increases of $368
million for the Marathon Group and $58 million for the U. S. Steel Group.
25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends to Stockholders
- -------------------------
On July 25, 2000, the USX Board of Directors (the "Board") declared
dividends of 23 cents per share on Marathon Stock, a 2 cents per share increase
over the previous quarter, and 25 cents per share on Steel Stock, payable
September 9, 2000, to stockholders of record at the close of business on August
16, 2000. The Board also declared a dividend of $0.8125 per share on USX's
6.50% Cumulative Convertible Preferred Stock, payable September 29, 2000, to
stockholders of record at the close of business on August 31, 2000.
On July 25, 2000, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3370 per share on its non-
voting Exchangeable Shares, payable September 9, 2000, to stockholders of record
at the close of business on August 16, 2000.
Cash Flows
- ----------
Cash and cash equivalents totaled $167 million at June 30, 2000, compared
with $99 million at June 30, 1999, an increase of $68 million reflecting an $83
million increase for the Marathon Group offset by a $15 million decrease for the
U. S. Steel Group.
Net cash provided from operating activities totaled $1,108 million in the
first six months of 2000, a $441 million increase from the first six months of
1999, reflecting a $466 million increase for the Marathon Group and a $25
million decrease for the U. S. Steel Group. The increase primarily reflects
higher net income. For details, see Management's Discussion and Analysis of
Financial Condition and Results of Operation for each Group.
Capital expenditures for property, plant and equipment in the first six
months of 2000 were $673 million compared with $685 million for the first six
months of 1999. For details by Group, see USX Corporation - Financial
Statistics, following Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Contract commitments to acquire property, plant and equipment and long-term
investments at June 30, 2000, totaled $709 million compared with $568 million at
December 31, 1999.
Cash from disposal of assets was $230 million in the first six months of
2000, compared with $182 million in the first six months of 1999. Proceeds in
2000 were mainly from the disposition of Marathon's 33.34 percent interest in
the Angus/Stellaria development in the Gulf of Mexico. Proceeds in 1999 were
mainly from the sale of Scurlock Permian LLC and domestic production properties.
26
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The net change in restricted cash was a net deposit of $33 million in the
first six months of 2000, compared with a net withdrawal of $13 million in the
first six months of 1999. Restricted cash in both periods primarily reflected
the net effects of cash deposited and withdrawn from domestic production
property dispositions and acquisitions.
Financial obligations (the net of commercial paper and revolving credit
agreements, debt borrowings and repayments on the Consolidated Statement of Cash
Flows) decreased $289 million in the first six months of 2000 compared with an
increase of $213 million in the first six months of 1999. The decrease in 2000
reflects net cash provided from operating activities and asset sales in excess
of cash used for capital expenditures and dividend payments.
Distributions to minority shareholder of MAP were $73 million in the first
six months of 2000, compared with $206 million in the first six months of 1999.
For further details, see Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Marathon Group.
Debt and Preferred Stock Ratings
- --------------------------------
On May 8, 2000, Standard & Poor's raised its rating for USX senior debt to
BBB. USX's preferred stock rating is BB+. On May 26, 2000, Moody's Investors
Service upgraded the senior debt ratings of USX to Baa1 and preferred stock to
baa3.
Liquidity
- ---------
At June 30, 2000, USX had no borrowings against its $2,350 million long-
term revolving credit agreement. At June 30, 2000, MAP had no borrowings against
its bank revolving credit agreements. MAP's $100 million revolving credit
facility that was scheduled to terminate in July 2000 was extended for an
additional year. MAP's $400 million revolving credit facility terminates in July
2003.
On July 25, 2000, the USX Board of Directors authorized the spending of up
to $450 million to repurchase shares of its USX-Marathon Group Common Stock,
such purchases to be made from time to time as the Corporation's financial
condition and market conditions warrant. Any purchases may be in either open
market transactions, including block purchases, or in privately negotiated
transactions. The repurchase program does not include specific price targets or
timetables, and is subject to termination prior to completion. During the
repurchase program, offerings of Marathon Stock under the Marathon Group
Dividend Reinvestment and Direct Stock Purchase Plan have been suspended for
first-time, non-employee purchasers.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of June 30, 2000, and to complete
currently authorized capital spending programs. Future requirements for USX's
business needs, including the funding of capital expenditures, debt maturities
for the balance of 2000 and years 2001 and 2002, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
13 to the USX Consolidated Financial Statements), are expected to be financed by
a combination of internally generated funds, proceeds from the sale of stock,
borrowings and other external financing sources.
27
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are based on currently available information. To the extent
that this information proves to be inaccurate, future availability of financing
may be adversely affected. Factors that could affect the availability of
financing include the performance of each Group (as measured by various factors
including cash provided from operating activities), the state of worldwide debt
and equity markets, investor perceptions and expectations of past and future
performance, the overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of USX's outstanding debt and credit ratings by
rating agencies.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group are subject to similar environmental laws and regulations. However, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities, marketing areas,
production processes and the specific products and services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
40 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of June 30, 2000. In addition, there are 17 sites
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability. There are also 138 additional sites,
excluding retail gasoline stations, where remediation is being sought under
other environmental statutes, both federal and state, or where private parties
are seeking remediation through discussions or litigation. Of these sites, 16
were associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation. At many of these
sites, USX is one of a number of parties involved and the total cost of
remediation, as well as USX's share thereof, is frequently dependent upon the
outcome of investigations and remedial studies. USX accrues for environmental
remediation activities when the responsibility to remediate is probable and the
amount of associated costs is reasonably determinable. As environmental
remediation matters proceed toward ultimate resolution or as additional
remediation obligations arise, charges in excess of those previously accrued may
be required.
28
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
MAP has responded to information requests from the U.S. Environmental
Protection Agency ("EPA")regarding New Source Review ("NSR") compliance at its
Garyville and Texas City refineries. In addition, the scope of the EPA's 1998
multi-media inspections of the Detroit and Robinson refineries included NSR
compliance. MAP has not been notified of the results of either the information
requests or inspections as regards NSR compliance.
NSR requires new major stationary sources and major modifications at
existing major stationary sources to obtain permits, perform air quality
analysis and install stringent air pollution control equipment at affected
facilities. The current initiative appears to target many items that the
industry has historically considered routine repair, replacement and maintenance
or other activity exempted from the NSR requirements.
On July 25, 2000, the EPA issued a press release announcing a settlement in
principle with two refiners concerning NSR and other environmental issues. MAP
has initiated discussions with the EPA on similar issues.
In October 1998, the National Enforcement Investigations Center and Region
V of the EPA conducted a multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a multi-media inspection of
MAP's Robinson refinery. These inspections covered compliance with the Clean
Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (Permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. Although MAP has
been advised as to certain compliance issues regarding MAP's Detroit refinery,
complete findings on the results of the inspections have not been issued. Thus
far, MAP has been served with two Notices of Violation ("NOV")and three Findings
of Violation in connection with the multi-media inspections at its Detroit
refinery. The Detroit notices allege violations of the Michigan State Air
Pollution Regulation, the EPA New Source Performance Standards and National
Emission Standards for Hazardous Air Pollutant for benzene. On March 6, 2000,
MAP received its first NOV arising out of the multi-media inspection of the
Robinson Refinery conducted in November 1998. The NOV is for alleged Resource
Conservation and Recovery Act (hazardous waste) violations. MAP can contest the
factual and legal basis for the allegations prior to the EPA taking enforcement
action. At this time, it is not known when complete findings on the results of
these multi-media inspections will be issued.
29
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In 1996, USX was notified by the Indiana Department of Environmental
Management ("IDEM") acting as lead trustee, that IDEM and the U.S. Department
of the Interior had concluded a preliminary investigation of potential injuries
to natural resources related to releases of hazardous substances and oil into
the Grand Calumet River, Indiana Harbor Canal and Indiana Harbor near Gary
Works. USX was identified as a PRP along with 15 other companies owning property
along the river, harbor canal and harbor. The public trustees have completed a
preassessment screen pursuant to federal regulations and are performing a
Natural Resource Damage Assessment. USX is cooperating with eight other PRPs in
a joint defense group which is currently engaged in settlement discussions with
the public trustees and the EPA.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment (see Note 13 to the
USX Consolidated Financial Statements for a discussion of certain of these
matters). The ultimate resolution of these contingencies could, individually or
in the aggregate, be material to the USX Consolidated Financial Statements.
However, management believes that USX will remain a viable and competitive
enterprise even though it is possible that these contingencies could be resolved
unfavorably. See discussion of Liquidity herein.
Outlook
- -------
See Outlook in Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group and the U. S. Steel Group.
30
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on income before income
taxes of hypothetical 10% and 25% changes in commodity prices for open
derivative commodity instruments are provided in the following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- -------------------------------------------------------------------------------
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil
Trading $- $-
Other than trading (f)(g) $29.0 $74.5 (d)
Natural gas
Other than trading (f)(g) 2.2 5.7 (d)
Refined products
Other than trading (f)(g) .2 .8 (d)
U. S. Steel Group
Natural gas
Other than trading $- $-
Zinc
Other than trading .5 1.2 (e)
Tin
Other than trading .3 .7 (e)
<FN>
(a) Gains and losses on derivative commodity instruments used for other
than trading activities are generally offset by price changes in the
underlying commodity. Effects of these offsets are not reflected in
the sensitivity analyses. Amounts reflect the estimated incremental
decrease in income before income taxes of hypothetical 10% and 25%
changes in closing commodity prices for each open contract position at
June 30, 2000. Management evaluates the portfolios of derivative
commodity instruments on an ongoing basis and adjusts strategies to
reflect anticipated market conditions, changes in risk profiles and
overall business objectives. Changes to the portfolios subsequent to
June 30, 2000, may cause future income before income tax effects to
differ from those presented in the table.
31
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
(b) The number of net open contracts varied throughout second quarter
2000, from a low of 13,821 contracts at June 10, to a high of 24,360
contracts at May 4, and averaged 18,694 for the quarter. The derivative
commodity instruments used and hedging positions taken also varied
throughout second quarter 2000, and will continue to vary in the future.
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) Price increase.
(e) Price decrease.
(f) 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 income before income taxes when applied to the
derivative commodity instruments used to hedge that commodity.
(g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
Interest Rate Risk
- ------------------
USX is subject to the effects of interest rate fluctuations on certain of
its non-derivative financial instruments. A sensitivity analysis of the
projected incremental effect of a hypothetical 10% decrease in June 30, 2000
interest rates on the fair value of USX's non-derivative financial instruments
is provided in the following table:
(Dollars in millions)
- --------------------------------------------------------------------------------
As of June 30, 2000
Incremental
Increase in
Non-Derivative Carrying Fair Fair
Financial Instruments(a) Value Value Value(b)
- -----------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $204 $257 $ -
- -----------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $3,770 $3,868 $158
Preferred stock of
subsidiary 250 233 21
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 183 132 12
----- ----- -----
Total liabilities $4,203 $4,233 $191
- -----------------------------------------------------------------------------
<FN>
(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) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at June 30, 2000,
on the fair value of USX's non-derivative financial instruments. For
financial liabilities, this assumes a 10% decrease in the weighted average
yield to maturity of USX's long-term debt at June 30, 2000.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or current
borrowing rates for financings with similar terms and maturities.
32
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Foreign Currency Exchange Rate Risk
- -----------------------------------
USX is subject to the risk of price fluctuations related to anticipated
revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies other than U.S.
dollars. USX has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to manage
exposure to certain currency price fluctuations. At June 30, 2000, USX had open
Canadian dollar forward purchase contracts with a total carrying value of
approximately $41 million. A 10% increase in the Canadian dollar to U.S. dollar
forward rate would result in a charge to income of approximately $4 million.
Equity Price Risk
- -----------------
As of June 30, 2000, USX had no material exposure to equity price risk.
Safe Harbor
- -----------
USX's Quantitative and Qualitative Disclosures About Market Risk include
forward-looking statements with respect to management's opinion about risks
associated with USX's use of derivative instruments. These statements are based
on certain assumptions with respect to market prices and industry supply and
demand for crude oil, natural gas, refined products, steel products and certain
raw materials. To the extent that these assumptions prove to be inaccurate,
future outcomes with respect to USX's derivative usage may differ materially
from those discussed in the forward-looking statements.
33
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
-------------- --------------
(Dollars in millions) 2000 1999 2000 1999
- ------------------------------------------------------------------------------
REVENUES
Marathon Group $8,893 $5,481 $16,854 $10,332
U. S. Steel Group 1,611 1,304 3,158 2,515
Eliminations (16) (19) (30) (27)
------- ------- ------- -------
Total $10,488 $6,766 $19,982 $12,820
INCOME FROM OPERATIONS
Marathon Group $860 $399 $1,385 $802
U. S. Steel Group 112 103 203 101
------ ------ ------ ------
Total $972 $502 $1,588 $903
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group $239 $336 $576 $532
U. S. Steel Group 52 74 97 153
------ ------ ------ ------
Total $291 $410 $673 $685
INVESTMENTS (RETURNS) & OTHER AFFILIATE ACTIVITY - NET
Marathon Group $34 $37 $54 $56
U. S. Steel Group - - 11 -
------ ------ ------ ------
Total $34 $37 $65 $56
34
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
REVENUES:
Sales $8,863 $5,447 $16,709 $10,287
Dividend and affiliate income 17 28 28 44
Net gains (losses) on disposal of assets 2 (1) 94 (11)
Gain on ownership change in Marathon Ashland
Petroleum LLC 4 - 8 -
Other income 7 7 15 12
------ ------ ------ ------
Total revenues 8,893 5,481 16,854 10,332
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 6,447 3,669 12,352 7,074
Selling, general and administrative expenses 124 132 258 254
Depreciation, depletion and amortization 240 222 486 459
Taxes other than income taxes 1,176 1,066 2,282 2,036
Exploration expenses 46 59 91 122
Inventory market valuation credits - (66) - (415)
------ ------ ------ ------
Total costs and expenses 8,033 5,082 15,469 9,530
------ ------ ------ ------
INCOME FROM OPERATIONS 860 399 1,385 802
Net interest and other financial costs 68 71 139 146
Minority interest in income of Marathon Ashland
Petroleum LLC 203 112 258 257
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 589 216 988 399
Provision for estimated income taxes 222 82 367 146
------ ------ ------ ------
NET INCOME $367 $134 $621 $253
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share - basic and diluted $1.18 $.43 $1.99 $.82
Dividends paid per share .21 .21 .42 .42
Weighted average shares, in thousands
- Basic 312,233 309,054 312,180 309,041
- Diluted 312,431 309,462 312,359 309,332
<FN>
Selected notes to financial statements appear on pages 37-45.
35
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
June 30 December 31
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $162 $111
Receivables, less allowance for doubtful
accounts of $2 and $2 2,167 1,876
Inventories 2,120 1,884
Deferred income tax benefits 29 23
Other current assets 278 218
------ ------
Total current assets 4,756 4,112
Investments and long-term receivables 851 762
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,816 and $10,567 10,302 10,293
Prepaid pensions 232 225
Other noncurrent assets 280 313
------ ------
Total assets $16,421 $15,705
====== ======
LIABILITIES
Current liabilities:
Notes payable $103 $-
Accounts payable 2,843 2,685
Payroll and benefits payable 156 146
Income taxes payable 73 97
Accrued taxes 269 107
Accrued interest 91 92
Long-term debt due within one year 31 48
------ ------
Total current liabilities 3,566 3,175
Long-term debt, less unamortized discount 2,911 3,320
Deferred income taxes 1,530 1,495
Employee benefits 590 564
Deferred credits and other liabilities 408 414
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,943 1,753
COMMON STOCKHOLDERS' EQUITY 5,289 4,800
------ ------
Total liabilities and common stockholders' equity $16,421 $15,705
====== ======
<FN>
Selected notes to financial statements appear on pages 37-45.
36
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $621 $253
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC 258 257
Depreciation, depletion and amortization 486 459
Exploratory dry well costs 32 62
Inventory market valuation credits - (415)
Pensions and other postretirement benefits 6 27
Deferred income taxes 16 49
Gain on ownership change in Marathon
Ashland Petroleum LLC (8) -
Net (gains) losses on disposal of assets (94) 11
Changes in:
Current receivables (290) (265)
Inventories (236) (151)
Current accounts payable and accrued expenses 260 301
All other - net (42) (45)
------ ------
Net cash provided from operating activities 1,009 543
------ ------
INVESTING ACTIVITIES:
Capital expenditures (576) (532)
Disposal of assets 214 178
Restricted cash - withdrawals 158 39
- deposits (193) (20)
Affiliates - investments (56) -
- loans and advances - (56)
- returns and repayments 2 -
All other - net 20 -
------ ------
Net cash used in investing activities (431) (391)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in Marathon Group's portion of USX
consolidated debt (322) 119
Specifically attributed debt - borrowings 273 140
- repayments (271) (140)
Marathon Stock issued - 8
Dividends paid (131) (130)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (73) (206)
------ ------
Net cash used in financing activities (524) (209)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3) (1)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 51 (58)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 111 137
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $162 $79
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(138) $(136)
Income taxes paid, including settlements with the
U. S. Steel Group (226) (7)
<FN>
Selected notes to financial statements appear on pages 37-45.
37
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 2000 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1999.
EITF Topic No. D-88, issued in March 2000, requires companies to
disclose their accounting policy for costs incurred in connection with
planned major maintenance activities. For the Marathon Group, such costs
primarily are associated with refinery turnarounds, which are expensed in
the same annual period as incurred; however, estimated annual turnaround
costs are recognized in income throughout the year on a pro rata basis.
2. The financial statements of the Marathon Group include the financial
position, results of operations and cash flows for the businesses of
Marathon Oil Company (Marathon) and certain other subsidiaries of USX, and
a portion of the corporate assets and liabilities and related transactions
which are not separately identified with ongoing operating units of USX.
These financial statements are prepared using the amounts included in the
USX consolidated financial statements. Corporate amounts reflected in
these financial statements are determined based upon methods which
management believes to be reasonable. The accounting policies applicable
to the preparation of the financial statements of the Marathon Group may be
modified or rescinded in the sole discretion of the Board of Directors of
USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the Marathon Group and the U. S.
Steel Group separately report the assets, liabilities (including contingent
liabilities) and stockholders' equity of USX attributed to each such Group,
such attribution of assets, liabilities (including contingent liabilities)
and stockholders' equity between the Marathon Group and the U. S. Steel
Group for the purpose of preparing their respective financial statements
does not affect legal title to such assets and responsibility for such
liabilities. Holders of USX-Marathon Group Common Stock (Marathon Stock)
and USX-U. S. Steel Group Common Stock (Steel Stock) are holders of common
stock of USX and continue to be subject to all the risks associated with an
investment in USX and all of its businesses and liabilities. Financial
impacts arising from one Group that affect the overall cost of USX's
capital could affect the results of operations and financial condition of
the other Group. In addition, net losses of either Group, as well as
dividends or distributions on any class of USX Common Stock or series of
Preferred Stock and repurchases of any class of USX Common Stock or series
of Preferred Stock at prices in excess of par or stated value, will reduce
the funds of USX legally available for payment of dividends on both classes
of Common Stock. Accordingly, the USX consolidated financial information
should be read in connection with the Marathon Group financial information.
38
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the Marathon Group
and the U. S. Steel Group financial statements in accordance with USX's tax
allocation policy for such groups. In general, such policy provides that
the consolidated tax provision and related tax payments or refunds are
allocated between the Marathon Group and the U. S. Steel Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for estimated income taxes for the Marathon Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the Marathon and U. S. Steel Groups
and USX consolidated are allocated to each group based on the relationship
of the individual group provisions to the combined interim provisions.
3. The method of calculating net income per common share for the Marathon
Stock and Steel Stock reflects the Board's intent that the separately
reported earnings and surplus of the Marathon Group and the U. S. Steel
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is based on the weighted average number of
common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 7 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
4. In 1998, Marathon and Ashland Inc. (Ashland) combined the major
elements of their refining, marketing and transportation (RM&T) operations.
Marathon transferred certain RM&T assets to Marathon Ashland Petroleum LLC
(MAP), a new consolidated subsidiary. Also, Marathon acquired certain RM&T
net assets from Ashland in exchange for a 38% interest in MAP. In
accordance with MAP closing agreements, Marathon and Ashland made capital
contributions to MAP for environmental improvements. The closing
agreements stipulate that ownership interests in MAP will not be adjusted
as a result of such contributions. Accordingly, Marathon recognized a gain
on ownership change of $4 million in each of the first and second quarters
of 2000.
39
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
Matching crude oil and refined product
buy/sell transactions settled in cash $1,415 $698 $2,470 $1,570
Consumer excise taxes on petroleum
products and merchandise 1,108 1,003 2,147 1,916
6. The Marathon Group's total comprehensive income was $366 million for
the second quarter of 2000, $134 million for the second quarter of 1999,
$618 million for the six months of 2000 and $255 million for the six months
of 1999.
7. The Marathon Group's operations consist of three reportable operating
segments: 1) Exploration and Production (E&P) - explores for and produces
crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and
Transportation (RM&T) - refines, markets and transports crude oil and
petroleum products, primarily in the Midwest and southeastern United States
through MAP; and 3) Other Energy Related Businesses (OERB). OERB is an
aggregation of two segments which fall below the quantitative reporting
thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation -
markets and transports its own and third-party natural gas and crude oil in
the United States; and 2) Power Generation - develops, constructs and
operates independent electric power projects worldwide. The results of
segment operations are as follows:
40
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
SECOND QUARTER 2000
Revenues:
Customer $1,060 $7,486 $305 $8,851
Intersegment (a) 119 49 13 181
Intergroup (a) 6 - 6 12
Equity in earnings (losses) of
unconsolidated affiliates (3) 6 4 7
Other 7 10 2 19
------ ------ ------ ------
Total revenues $1,189 $7,551 $330 $9,070
====== ====== ====== ======
Segment income $356 $529 $- $885
====== ====== ====== ======
SECOND QUARTER 1999
Revenues:
Customer $689 $4,637 $113 $5,439
Intersegment (a) 34 4 6 44
Intergroup (a) 4 - 4 8
Equity in earnings of
unconsolidated affiliates 3 4 5 12
Other 13 10 6 29
------ ------ ------ ------
Total revenues $743 $4,655 $134 $5,532
====== ====== ====== ======
Segment income $124 $228 $19 $371
====== ====== ====== ======
<FN>
(a)Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
41
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
- ------------------------------
Revenues:
Customer $2,051 $13,981 $655 $16,687
Intersegment (a) 188 69 32 289
Intergroup (a) 11 - 11 22
Equity in earnings (losses) of
unconsolidated affiliates (4) 10 8 14
Other 10 20 6 36
------ ------ ------ ------
Total revenues $2,256 $14,080 $712 $17,048
====== ====== ====== ======
Segment income $665 $669 $13 $1,347
====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1999
- ------------------------------
Revenues:
Customer $1,261 $8,816 $195 $10,272
Intersegment (a) 68 9 15 92
Intergroup (a) 7 - 8 15
Equity in earnings of
unconsolidated affiliates 4 7 13 24
Other 19 16 9 44
------ ------ ------ ------
Total revenues $1,359 $8,848 $240 $10,447
====== ====== ====== ======
Segment income $160 $273 $34 $467
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
42
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
The following schedules reconcile segment revenues and income to amounts
reported in the Marathon Group financial statements:
Second Quarter Ended
June 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $9,070 $5,532
Items not allocated to segments:
Gain on ownership change in MAP 4 -
Other (a) - (7)
Elimination of intersegment revenues (181) (44)
------ ------
Total Group revenues $8,893 $5,481
====== ======
Income:
Income for reportable segments $885 $371
Items not allocated to segments:
Gain on ownership change in MAP 4 -
Administrative expenses (29) (31)
Inventory market valuation adjustments - 66
Other (a) - (7)
------ ------
Total Group income from operations $860 $399
====== ======
<FN>
(a)Represents in 1999, estimated loss on sale of Carnegie Natural Gas Company
and subsidiaries (Carnegie).
43
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Six Months Ended
June 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $17,048 $10,447
Items not allocated to segments:
Gain on ownership change in MAP 8 -
Other (a) 87 (23)
Elimination of intersegment revenues (289) (92)
------ ------
Total Group revenues $16,854 $10,332
====== ======
Income:
Income for reportable segments $1,347 $467
Items not allocated to segments:
Gain on ownership change in MAP 8 -
Administrative expenses (57) (57)
Inventory market valuation adjustments - 415
Other (a) 87 (23)
------ ------
Total Group income from operations $1,385 $802
====== ======
<FN>
(a) Represents in 2000, gain on disposition of Angus/Stellaria and in 1999, loss
on sale of Scurlock Permian LLC and Carnegie.
44
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
(In millions)
------------------------
June 30 December 31
2000 1999
----------- -----------
Crude oil and natural gas liquids $794 $729
Refined products and merchandise 1,222 1,046
Supplies and sundry items 104 109
------ ------
Total (at cost) 2,120 1,884
Less inventory market valuation reserve - -
------ ------
Net inventory carrying value $2,120 $1,884
====== ======
The inventory market valuation reserve reflects the extent that the
recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. The reserve is decreased to reflect
increases in market prices and inventory turnover and increased to reflect
decreases in market prices. Changes in the inventory market valuation
reserve result in noncash charges or credits to costs and expenses. For
additional information, see discussion of results of operations in the
Marathon Group Management's Discussion and Analysis of Financial Condition
and Results of Operations.
9. At June 30, 2000, and December 31, 1999, income taxes payable
represents an estimated income tax payable to the U. S. Steel Group. In
addition, included in deferred credits and other liabilities at June 30,
2000, and December 31, 1999, is $97 million income taxes payable to the
U. S. Steel Group. These amounts have been determined in accordance with
the tax allocation policy discussed in Note 2.
10. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At June 30, 2000, and
December 31, 1999, accrued liabilities for remediation totaled $73 million
and $69 million, respectively. It is not presently possible to estimate
the ultimate amount of
45
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. (Continued)
all remediation costs that might be incurred or the penalties that may
be imposed. Receivables for recoverable costs from certain states, under
programs to assist companies in cleanup efforts related to underground
storage tanks at retail marketing outlets, were $55 million at June 30,
2000, and $52 million at December 31, 1999.
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first six months of 2000 and for the
years 1999 and 1998, such capital expenditures totaled $9 million, $46
million and $83 million, respectively. The Marathon Group anticipates
making additional such expenditures in the future; however, the exact
amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At June 30, 2000, and December 31, 1999, accrued liabilities for
platform abandonment and dismantlement totaled $157 million and $152
million, respectively.
Guarantees by USX and its consolidated subsidiaries of the liabilities
of an affiliated entity of the Marathon Group totaled $131 million at June
30, 2000.
At June 30, 2000, the Marathon Group's pro rata share of obligations
of LOOP LLC and various pipeline affiliates secured by throughput and
deficiency agreements totaled $144 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at June 30, 2000, totaled $617
million compared with $485 million at December 31, 1999.
46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products primarily through Marathon
Ashland Petroleum ("MAP"), owned 62 percent by Marathon; and other energy
related businesses. The Management's Discussion and Analysis should be read in
conjunction with the Marathon Group's Financial Statements and Selected Notes to
Financial Statements. The discussion of Results of Operations should be read in
conjunction with the Supplemental Statistics provided on page 59.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "anticipates", "believes", "estimates", "expects", "targets", "scheduled" or
similar words indicating that future outcomes are uncertain. In accordance with
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, these statements are accompanied by cautionary language identifying
important factors, though not necessarily all such factors, that could cause
future outcomes to differ materially from those set forth in forward-looking
statements. For additional risk factors affecting the businesses of the
Marathon Group, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX Annual Report on Form 10-K for the year ended December 31,
1999.
47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the second quarter and first six months of 2000 and 1999 are
summarized in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
----- ----- ----- -----
Exploration & production ("E&P") $1,189 $743 $2,256 $1,359
Refining, marketing & transportation ("RM&T") 7,551 4,655 14,080 8,848
Other energy related businesses (a) 330 134 712 240
------ ------ ------ ------
Revenues of reportable segments $9,070 $5,532 $17,048 $10,447
Revenues not allocated to segments:
Gain on ownership change in MAP 4 - 8 -
Other (b) - (7) 87 (23)
Elimination of intersegment revenues (181) (44) (289) (92)
------ ------ ------ ------
Total Group revenues $8,893 $5,481 $16,854 $10,332
====== ====== ====== ======
Items included in both revenues and costs and expenses, resulting in no effect
on income:
Consumer excise taxes on petroleum
products and merchandise $1,108 $1,003 $2,147 $1,916
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P $222 $161 $377 $275
RM&T 1,193 537 2,093 1,295
----- ----- ----- -----
Total buy/sell transactions $1,415 $698 $2,470 $1,570
- ---------
<FN>
(a)Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(b)Represents in 2000, a gain on the disposition of Angus/Stellaria and in
1999, an estimated loss on sale of Scurlock and Carnegie.
E&P segment revenues increased by $446 million in the second quarter of
2000 from the comparable prior-year period. For the first six months of 2000,
revenues increased by $897 million from the prior-year period. The increase in
both periods primarily reflected higher worldwide liquid hydrocarbon and natural
gas prices.
RM&T segment revenues increased by $2,896 million in the second quarter of
2000 from the comparable prior-year period. For the first six months of 2000,
revenues increased by $5,232 million from the prior-year period. The increase
in both periods primarily reflected higher refined product prices and increased
refined product sales volumes.
48
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Other energy related businesses segment revenues increased by $196 million
in the second quarter of 2000 from the comparable prior-year period. For the
first six months of 2000, revenues increased by $472 million from the prior-year
period. The increase in both periods primarily reflected higher natural gas and
crude oil purchase and resale activity accompanied by higher crude oil and
natural gas prices.
Income from operations for the second quarter and first six months of 2000
and 1999 is summarized in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
----- ----- ----- -----
E&P
Domestic $277 $93 $478 $131
International 79 31 187 29
------ ------ ------ ------
Income for E&P reportable segment 356 124 665 160
RM&T 529 228 669 273
Other energy related businesses - 19 13 34
------ ------ ------ ------
Income for reportable segments $885 $371 $1,347 $467
Items not allocated to segments:
Administrative expenses (a) $(29) $(31) $(57) $(57)
IMV reserve adjustment (b) - 66 - 415
Estimated loss on sale of assets (c) - (7) - (23)
Gain on disposition of Angus/Stellaria (d) - - 87 -
Gain on ownership change in MAP (e) 4 - 8 -
------ ------ ------ ------
Total Group income from operations $860 $399 $1,385 $802
====== ====== ====== ======
- --------
<FN>
(a) Includes the portion of the Marathon Group's administrative costs not
charged to the operating segments and the portion of USX corporate general
and administrative costs allocated to the Marathon Group.
(b) The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. For additional discussion of the IMV, see
Note 8 to the Marathon Group Financial Statements.
(c) Resulted from the sale of Scurlock Permian LLC and Carnegie Natural Gas
Company and affiliated subsidiaries.
(d) Resulted from the disposition of Marathon's 33.34 percent interest in the
Angus/Stellaria development located in the Gulf of Mexico.
(e) For additional discussion of the gain on ownership change in MAP, see Note 4
to the Marathon Group Financial Statements.
49
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income for reportable segments in the second quarter of 2000 increased by
$514 million from last year's second quarter, due primarily to higher worldwide
liquid hydrocarbon and natural gas prices and higher refined product margins.
Income for reportable segments in the first six months of 2000 increased by $880
million from the first six months of 1999, due primarily to the factors
discussed previously.
Worldwide E&P segment income in the second quarter of 2000 increased by
$232 million from last year's second quarter. Results in the first six months
of 2000 increased by $505 million from the same period in 1999.
Domestic E&P income in the second quarter of 2000 increased by $184 million
from last year's second quarter. Results in the first six months of 2000
increased by $347 million from the same period in 1999. These increases were
mainly due to higher liquid hydrocarbon and natural gas prices and lower
exploration expense, partially offset by derivative losses from other than
trading activities and lower liquid hydrocarbon and natural gas volumes due to
natural field declines and asset sales.
International E&P income in the second quarter of 2000 increased by $48
million from last year's second quarter. This increase was mainly due to higher
liquid hydrocarbon and natural gas prices, partially offset by a decrease in
natural gas volumes due to the depletion of Heimdal reserves in Norway,
decreased production in Ireland and the sale of certain Egyptian properties.
Results in the first six months of 2000 increased by $158 million from the same
period in 1999. In addition to the factors discussed previously, the increase
was also due to lower dry well expense.
RM&T segment income in the second quarter of 2000 increased by $301 million
from last year's second quarter. Results in the first six months of 2000
increased by $396 million from the same period in 1999. These increases were
mainly due to higher refined product margins and increased refined product sales
volumes.
Other energy related businesses segment income in the second quarter of
2000 decreased by $19 million from last year's second quarter. Results in the
first six months of 2000 decreased by $21 million from the same period in 1999.
These decreases were primarily a result of derivative losses from other than
trading activities and lower equity earnings as a result of decreased pipeline
throughput. Also, the 1999 results included a reversal of abandonment accruals
of $10 million.
Item not allocated to reportable segments: IMV reserve adjustment - When
United States Steel Corporation acquired Marathon Oil Company in March 1982,
crude oil and refined product prices were at historically high levels. In
applying the purchase method of accounting, the Marathon Group's crude oil and
refined product inventories were revalued by reference to current prices at the
time of acquisition, and this became the new LIFO cost basis of the inventories.
Generally accepted accounting principles require that inventories be carried at
lower of cost or market. Accordingly, the Marathon Group has established an IMV
reserve to reduce the cost basis of its inventories to net realizable value.
Quarterly adjustments to the IMV reserve, if necessary, result in noncash
charges or credits to income from operations.
These adjustments affect the comparability of financial results from period
to period as well as comparisons with other energy companies, many of which do
not have such adjustments. Therefore, the Marathon Group reports separately the
effects of the IMV reserve adjustments on financial results. In management's
opinion, the effects of such adjustments should be considered separately when
evaluating operating performance.
50
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs in the first six months of 2000
decreased by $7 million from the comparable 1999 period, mainly due to decreased
costs resulting from lower average debt levels and higher interest income,
partially offset by lower capitalized interest on E&P projects.
The minority interest in income of MAP, which represents Ashland's 38
percent ownership interest, increased by $1 million in the first six months of
2000 from the comparable 1999 period. The 1999 results included a favorable IMV
reserve adjustment as discussed previously.
The provision for estimated income taxes in the first six months of 2000
increased by $221 million from the comparable 1999 period due to an increase in
income before taxes.
Net income for the second quarter and first six months increased by $233
million and $368 million, respectively, in 2000 from 1999, primarily reflecting
the factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $1,009 million in the first
six months of 2000, compared with $543 million in the first six months of 1999.
The $466 million increase mainly reflected the favorable effects of improved net
income (excluding noncash items), partially offset by an income tax settlement
with the Steel Group in accordance with the group tax allocation policy.
Capital expenditures in the first six months of 2000 totaled $576 million,
compared with $532 million in the comparable 1999 period. For additional
information regarding capital expenditures, refer to the Supplemental Statistics
on page 59.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at June 30, 2000 totaled $617 million compared with $485
million at December 31, 1999.
Cash from disposal of assets was $214 million in the first six months of
2000, compared with $178 million in the comparable 1999 period. Proceeds in
2000 were mainly from the disposition of Marathon's 33.34 percent interest in
the Angus/Stellaria development in the Gulf of Mexico. Proceeds in 1999 were
mainly from the sale of Scurlock Permian LLC and domestic production properties.
51
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The net change in restricted cash was a net deposit of $35 million in the
first six months of 2000, compared to a net withdrawal of $19 million in the
comparable 1999 period. Restricted cash in both periods primarily reflected the
net effects of cash deposited and withdrawn from domestic production property
dispositions and acquisitions.
Net investments in affiliates were $54 million in the first six months of
2000, compared with $56 million in the comparable 1999 period. Cash outflows in
both periods mainly reflected funding provided to equity affiliates for capital
projects, primarily the Sakhalin II project in Russia.
Financial obligations, which consist of the Marathon Group's portion of USX
debt and preferred stock of a subsidiary attributed to both groups, as well as
debt specifically attributed to the Marathon Group, decreased by $320 million in
the first six months of 2000. Financial obligations decreased primarily because
cash from operating activities and asset sales exceeded capital expenditures and
dividend payments. For further details, see Management's Discussion and
Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity.
Distributions to minority shareholder of MAP were $73 million in the first
six months of 2000, compared with $206 million in the comparable 1999 period.
The 1999 amount included a distribution of $103 million in the first quarter
1999, which related to fourth quarter 1998 MAP activity.
Derivative Instruments
- ----------------------
See Quantitative and Qualitative Disclosure About Market Risk for
discussion of derivative instruments and associated market risk for the Marathon
Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
52
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The Marathon Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. To the extent these expenditures, as with
all costs, are not ultimately reflected in the prices of the Marathon Group's
products and services, operating results will be adversely affected. The
Marathon Group believes that substantially all of its competitors are subject to
similar environmental laws and regulations. However, the specific impact on
each competitor may vary depending on a number of factors, including the age and
location of its operating facilities, marketing areas, production processes and
whether or not it is engaged in the petrochemical business, power business or
the marine transportation of crude oil and refined products.
USX has been notified that it is a potentially responsible party ("PRP") at
13 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30,
2000. In addition, there are 5 sites related to the Marathon Group where USX
has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability.
There are also 108 additional sites, excluding retail marketing outlets,
related to the Marathon Group where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation through discussions or litigation. Of these sites, 16 were
associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation.
At many of these sites, USX is one of a number of parties involved and the
total cost of remediation, as well as USX's share thereof, is frequently
dependent upon the outcome of investigations and remedial studies. The Marathon
Group accrues for environmental remediation activities when the responsibility
to remediate is probable and the amount of associated costs is reasonably
determinable. As environmental remediation matters proceed toward ultimate
resolution or as additional remediation obligations arise, charges in excess of
those previously accrued may be required.
53
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
MAP has responded to information requests from the U.S. Environmental
Protection Agency ("EPA") regarding New Source Review ("NSR") compliance at its
Garyville and Texas City refineries. In addition, the scope of the EPA's 1998
multi-media inspections of the Detroit and Robinson refineries included NSR
compliance. MAP has not been notified of the results of either the information
requests or inspections as regards NSR compliance.
NSR requires new major stationary sources and major modifications at
existing major stationary sources to obtain permits, perform air quality
analysis and install stringent air pollution control equipment at affected
facilities. The current initiative appears to target many items that the
industry has historically considered routine repair, replacement and maintenance
or other activity exempted from the NSR requirements.
On July 25, 2000, the EPA issued a press release announcing a settlement in
principle with two refiners concerning NSR and other environmental issues. MAP
has initiated discussions with the EPA on similar issues.
In October 1998, the National Enforcement Investigations Center and Region
V of the EPA conducted a multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a multi-media inspection of
MAP's Robinson refinery. These inspections covered compliance with the Clean
Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (Permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. Although MAP has
been advised as to certain compliance issues regarding MAP's Detroit refinery,
complete findings on the results of the inspections have not been issued. Thus
far, MAP has been served with two Notices of Violation ("NOV") and three
Findings of Violation in connection with the multi-media inspections at its
Detroit refinery. The Detroit notices allege violations of the Michigan State
Air Pollution Regulations, the EPA New Source Performance Standards and National
Emission Standards for Hazardous Air Pollutants for benzene. On March 6, 2000,
MAP received its first NOV arising out of the multi-media inspection of the
Robinson Refinery conducted in November 1998. The NOV is for alleged Resource
Conservation and Recovery Act (hazardous waste) violations. MAP can contest the
factual and legal basis for the allegations prior to the EPA taking enforcement
action. At this time, it is not known when complete findings on the results of
these multi-media inspections will be issued.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the Marathon Group
involving a variety of matters, including laws and regulations relating to the
environment. See Note 10 to the Marathon Group Financial Statements for a
discussion of certain of these matters. The ultimate resolution of these
contingencies could, individually or in the aggregate, be material to the
Marathon Group Financial Statements. However, management believes that USX will
remain a viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
Management's Discussion and Analysis of USX Consolidated Financial Condition,
Cash Flows and Liquidity.
54
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Outlook
- -------
The outlook regarding the Marathon Group's upstream revenues and income is
largely dependent upon future prices and volumes of liquid hydrocarbons and
natural gas. Prices have historically been volatile and have frequently been
affected by unpredictable changes in supply and demand resulting from
fluctuations in worldwide economic activity and political developments in the
world's major oil and gas producing and consuming areas. Any significant
decline in prices could have a material adverse effect on the Marathon Group's
results of operations. A prolonged decline in such prices could also adversely
affect the quantity of crude oil and natural gas reserves that can be
economically produced and the amount of capital available for exploration and
development.
On July 27, 2000, Marathon expounded upon existing goals to significantly
improve its E&P business performance. Specific actions include: $75 million
reduction in above field costs, $25 million savings in global procurement
expenses and $50 million reduction in exploration expense. Other actions
include possible disposition or exchange of noncore producing properties for
producing properties in Marathon's core producing areas. These goals are
expected to be achieved in 2001. This is a forward-looking statement. Some
factors that could potentially affect reaching these goals include the closing
of certain acquisitions, dispositions and exchanges, drilling rig availability,
weather conditions, and other geological, operating and economic considerations.
On June 1, 2000, Marathon announced it had signed a non-binding letter of
intent with Shell to trade its 37.5 percent interest in Sakhalin Energy
Investment Company Ltd. ("Sakhalin Energy"). In exchange, Marathon would
receive all of Shell's interest in the BP Amoco-operated Foinaven field in the
UK North Sea, associated infrastructure, and adjacent discoveries and prospects.
In addition, Marathon would receive a 3.5 percent overriding royalty in eight
Gulf of Mexico blocks including the Shell-operated Ursa field and Shell would
reimburse Marathon for all Sakhalin project expenditures made this year.
Ultimate completion of the transaction is subject to the resolution of a number
of significant contingencies between Shell and Marathon in addition to the
receipt of consents from third parties. Pending the favorable and timely
resolution of these contingencies, definitive agreements are expected to be
signed in late September, with transfer of operations expected to take place in
the fourth quarter of this year. This is a forward-looking statement. Some
factors that could potentially affect the timing and completion of the Sakhalin
transaction include negotiation of definitive agreements, third party consents
and satisfactory due diligence results. In accordance with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, USX has
included in Form 10-K for the year ended December 31, 1999, cautionary
statements identifying important factors, but not necessarily all factors, that
could cause actual results to differ materially from those set forth in the
forward-looking statement.
55
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net deferred tax liabilities reported by USX at December 31, 1999 included
deferred tax assets related to expected federal tax benefits for crediting
certain foreign deferred tax liabilities, net of a valuation allowance for
amounts not expected to be realized. USX's ability to realize these assets is
based upon certain assumptions concerning future operating conditions
(particularly as related to prevailing oil and gas commodity prices), income
generated from foreign sources and USX's tax profile in the years that such
credits may be claimed. The proposed disposition of Sakhalin Energy would have
a significant impact on the amount and timing of expected future income
generated from foreign sources. An additional impairment of these deferred tax
assets would be necessary when it becomes more likely than not that Marathon
will dispose of its interest in Sakhalin Energy. Any impairment of these
deferred tax assets would not have a material impact on the financial position
of USX or the Marathon Group, although the impact could be material to the
results of operations for the interim period in which the deferred tax expense
is recognized.
Downstream income of the Marathon Group is largely dependent upon refined
product margins, which reflect the difference between the selling prices of
refined products and the cost of raw materials refined and manufacturing costs.
Refined product margins have been historically volatile and vary due to numerous
factors such as supply and demand balance in the various marketing areas, the
regulatory climate, crude oil costs, manufacturing costs and the available
supply of crude oil and refined products.
On March 9, 2000, Marathon Ashland Petroleum LLC ("MAP") announced it
joined CMS Energy Corporation and TEPPCO Partners, L.P., in an agreement to form
a limited liability company with equal ownership to operate an interstate
refined petroleum products pipeline extending from the U.S. Gulf of Mexico to
the Midwest. The new company plans to build a 70-mile, 24-inch diameter
pipeline connecting TEPPCO's facility in Beaumont, Texas, with an existing 720-
mile, 26-inch diameter pipeline extending from Longville, Louisiana to Bourbon,
Illinois. The system will be called Centennial Pipeline and will pass through
seven states. It is expected to be completed in the fourth quarter of 2001.
This is a forward-looking statement. Some factors that could potentially affect
the timing of the Centennial Pipeline completion include (among others) securing
acceptable financing, obtaining the necessary construction and environmental
permits, unforeseen hazards such as weather conditions, acquisitions of rights-
of-way and regulatory approval constraints.
MAP's subsidiary, Ohio River Pipe Line LLC ("ORPL"), plans to build a
pipeline from Kenova, West Virginia to Columbus, Ohio. ORPL is a common carrier
pipeline company and the pipeline will be an interstate common carrier pipeline.
The pipeline is expected to initially move about 50,000 bpd of refined petroleum
into the central Ohio region. Construction is currently expected to begin in
the second half of 2001. However, the construction schedule is largely
dependent on obtaining the necessary rights-of-way, of which approximately 90
percent have been obtained to date, and final regulatory approvals. ORPL is
still negotiating with various landowners to obtain the remaining rights-of-way.
In addition, where appropriate, ORPL has brought condemnation actions to acquire
rights-of-way. These actions are at various stages of litigation and appeal.
56
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on income before income
taxes of hypothetical 10% and 25% changes in commodity prices for open
derivative commodity instruments as of June 30, 2000, are provided in the
following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- -------------------------------------------------------------------------------
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil
Trading $- $-
Other than trading (f)(g) $29.0 $74.5 (d)
Natural gas
Other than trading (f)(g) 2.2 5.7 (d)
Refined products
Other than trading (f)(g) .2 .8 (d)
<FN>
(a) Gains and losses on derivative commodity instruments used for other
than trading activities are generally offset by price changes in the
underlying commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated incremental decrease
in income before income taxes of hypothetical 10% and 25% changes in
closing commodity prices for each open contract position at June 30,
2000. Management evaluates the portfolios of derivative commodity
instruments on an ongoing basis and adjusts strategies to reflect
anticipated market conditions, changes in risk profiles and overall
business objectives. Changes to the portfolios subsequent to June 30,
2000, may cause future income before income tax effects to differ from
those presented in the table.
(b) The number of net open contracts varied throughout second quarter
2000, from a low of 13,821 contracts at June 10, to a high of 24,360
contracts at May 4, and averaged 18,694 for the quarter. The derivative
commodity instruments used and hedging positions taken also varied
throughout second quarter 2000, and will continue to vary in the future.
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) Price increase.
(e) Price decrease.
(f) 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 income before income taxes when
applied to the derivative commodity instruments used to hedge that
commodity.
(g) Adjusted to reflect Marathon's 62 percent ownership of MAP.
57
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
USX is subject to the effects of interest rate fluctuations on certain of
its non-derivative financial instruments. A sensitivity analysis of the
projected incremental effect of a hypothetical 10% decrease in June 30, 2000,
interest rates on the fair value of the Marathon Group's specifically attributed
non-derivative financial instruments and the Marathon Group's portion of USX's
non-derivative financial instruments attributed to both groups, is provided in
the following table:
(Dollars in millions)
- -------------------------------------------------------------------------------
As of June 30, 2000
Incremental
Increase in
Non-Derivative Carrying Fair Fair
Financial Instruments(a) Value Value Value(b)
- -------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $152 $205 $ -
- -------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $2,927 $3,011 $135
Preferred stock of
subsidiary 184 171 15
----- ----- -----
Total liabilities $3,111 $3,182 $150
- -------------------------------------------------------------------------------
<FN>
(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) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at June 30, 2000, on
the fair value of USX's non-derivative financial instruments. For financial
liabilities, this assumes a 10% decrease in the weighted average yield to
maturity of USX's long-term debt at June 30, 2000.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or current
borrowing rates for financings with similar terms and maturities.
58
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Foreign Currency Exchange Rate Risk
- -----------------------------------
USX is subject to the risk of price fluctuations related to anticipated
revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies other than U.S.
dollars. USX has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to manage
exposure to certain currency price fluctuations. At June 30, 2000, USX had open
Canadian dollar forward purchase contracts with a total carrying value of
approximately $41 million. A 10% increase in the Canadian dollar to U.S. dollar
forward rate would result in a charge to income of approximately $4 million.
The entire amount of these contracts is attributed to the Marathon Group.
Equity Price Risk
- -----------------
As of June 30, 2000, the Marathon Group had no material exposure to equity
price risk.
Safe Harbor
- -----------
The Marathon Group's Quantitative and Qualitative Disclosures About Market
Risk include forward-looking statements with respect to management's opinion
about risks associated with the Marathon Group's use of derivative instruments.
These statements are based on certain assumptions with respect to market prices
and industry supply and demand for crude oil, natural gas and refined products.
To the extent that these assumptions prove to be inaccurate, future outcomes
with respect to the Marathon Group's derivative usage may differ materially from
those discussed in the forward-looking statements.
59
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $277 $93 $478 $131
International 79 31 187 29
----- ----- ----- -----
Income For E&P Reportable Segment 356 124 665 160
Refining, Marketing & Transportation 529 228 669 273
Other Energy Related Businesses (a) - 19 13 34
----- ----- ----- -----
Income For Reportable Segments $885 $371 $1,347 $467
Items Not Allocated To Segments:
Administrative Expenses $(29) $(31) $(57) $(57)
Inventory Market Valuation Reserve Adjustment - 66 - 415
Estimated Loss on Sale of Assets - (7) - (23)
Gain on Disposition of Angus/Stellaria - - 87 -
Gain on Ownership Change In MAP 4 - 8 -
------ ------ ------ ------
Marathon Group Income From Operations $860 $399 $1,385 $802
CAPITAL EXPENDITURES
Exploration & Production $129 $261 $400 $410
Refining, Marketing & Transportation 106 73 166 119
Other (b) 4 2 10 3
----- ----- ----- -----
Total $239 $336 $576 $532
EXPLORATION EXPENSE
Domestic $20 $44 $51 $66
International 26 15 40 56
----- ----- ----- -----
Total $46 $59 $91 $122
INVESTMENTS IN EQUITY AFFILIATES - NET $34 $37 $54 $56
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (c):
United States 137.1 148.7 132.9 145.9
Europe 28.9 34.5 29.1 34.2
Other International 32.8 29.8 34.6 30.4
------ ------ ------ ------
Total Consolidated 198.8 213.0 196.6 210.5
Equity Affiliates (CLAM & Sakhalin Energy) 2.6 0.1 1.3 0.1
------ ------ ------ ------
Worldwide 201.4 213.1 197.9 210.6
Net Natural Gas Production (d):
United States 711.6 741.8 731.5 755.5
Europe (e) 331.8 346.9 346.6 373.1
Other International 154.6 171.0 144.8 180.2
------ ------ ------- -------
Total Consolidated 1198.0 1259.7 1222.9 1308.8
Equity Affiliate (CLAM) 25.9 35.6 31.4 35.6
------- ------- ------- -------
Worldwide 1223.9 1295.3 1254.3 1344.4
Average Equity Sales Prices (f) (g):
Liquid Hydrocarbons (per Bbl)
Domestic $23.88 $13.56 $24.00 $11.41
International 25.74 14.87 25.80 12.80
Natural Gas (per Mcf)
Domestic $2.95 $1.81 $2.55 $1.64
International 2.41 1.77 2.41 1.82
Crude Oil Refined (c) 965.0 939.0 908.2 893.8
Refined Products Sold (c) 1344.7 1259.3 1281.7 1190.5
Matching buy/sell volumes included in refined
products sold (c) 73.5 56.0 61.3 47.1
MAP Merchandise Sales $607 $525 $1,148 $984
- --------------
<FN>
(a) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(b) Includes other energy related businesses and corporate capital
expenditures.
(c) Thousands of barrels per day
(d) Millions of cubic feet per day
(e) Includes gas acquired for injection and subsequent resale of 11.9,
16.1, 12.9 and 24.5 mmcfd in the second quarter and six month year-to-
date 2000 and 1999, respectively.
(f) Prices exclude gains and losses from hedging activities.
(g) Prices exclude equity affiliates and purchase/resale gas.
60
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
REVENUES:
Sales $1,585 $1,303 $3,125 $2,549
Income (loss) from affiliates 14 (10) 7 (33)
Net gains (losses) on disposal of assets 13 10 28 (2)
Other income (loss) (1) 1 (2) 1
------ ------ ------ ------
Total revenues 1,611 1,304 3,158 2,515
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,417 1,160 2,804 2,317
Selling, general and administrative
expenses (credits) (57) (95) (120) (165)
Depreciation, depletion and amortization 78 79 153 150
Taxes other than income taxes 61 57 118 112
------ ------ ------ ------
Total costs and expenses 1,499 1,201 2,955 2,414
------ ------ ------ ------
INCOME FROM OPERATIONS 112 103 203 101
Net interest and other financial costs 24 20 48 28
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 88 83 155 73
Provision for estimated income taxes 32 28 56 27
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 56 55 99 46
Extraordinary loss on extinguishment of debt,
net of income tax - - - 5
------ ------ ------ ------
NET INCOME 56 55 99 41
Dividends on preferred stock 2 3 4 5
------ ------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $54 $52 $95 $36
====== ====== ====== ======
STEEL STOCK DATA:
Income before extraordinary loss $54 $52 $95 $41
- Per share - basic .62 .60 1.08 .47
- diluted .62 .59 1.07 .47
Extraordinary loss, net of income tax - - - 5
- Per share - basic and diluted - - - .06
Net income $54 $52 $95 $36
- Per share - basic .62 .60 1.08 .41
- diluted .62 .59 1.07 .41
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 88,499 88,387 88,461 88,378
- Diluted 92,755 92,647 92,721 88,379
<FN>
Selected notes to financial statements appear on pages 63-68.
61
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
June 30 December 31
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $5 $22
Receivables, less allowance for doubtful
accounts of $13 and $10 842 838
Income taxes receivable 73 97
Inventories 772 743
Deferred income tax benefits 287 281
Other current assets 3 -
------ ------
Total current assets 1,982 1,981
Investments and long-term receivables,
less reserves of $3 and $3 585 572
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,347 and $6,232 2,444 2,516
Prepaid pensions 2,543 2,404
Other noncurrent assets 52 52
------ ------
Total assets $7,606 $7,525
====== ======
LIABILITIES
Current liabilities:
Notes payable $18 $-
Accounts payable 691 757
Payroll and benefits payable 335 322
Accrued taxes 139 177
Accrued interest 16 15
Long-term debt due within one year 12 13
------ ------
Total current liabilities 1,211 1,284
Long-term debt, less unamortized discount 919 902
Deferred income taxes 498 348
Employee benefits 2,212 2,245
Deferred credits and other liabilities 423 441
Preferred stock of subsidiary 66 66
USX obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely junior
subordinated convertible debentures of USX 183 183
STOCKHOLDERS' EQUITY
Preferred stock 2 3
Common stockholders' equity 2,092 2,053
------ ------
Total stockholders' equity 2,094 2,056
------ ------
Total liabilities and stockholders' equity $7,606 $7,525
====== ======
<FN>
Selected notes to financial statements appear on pages 63-68.
62
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Six Months Ended
June 30
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $99 $41
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss - 5
Depreciation, depletion and amortization 153 150
Pensions and other postretirement benefits (163) (143)
Deferred income taxes 146 49
Net (gains) losses on disposal of assets (28) 2
Changes in:
Current receivables - sold - 30
- operating turnover 13 (60)
Inventories (29) (70)
Current accounts payable and accrued expenses (90) 76
All other - net (2) 44
------ ------
Net cash provided from operating activities 99 124
------ ------
INVESTING ACTIVITIES:
Capital expenditures (97) (153)
Disposal of assets 16 4
Restricted cash - withdrawals 3 -
- deposits (1) (6)
Affiliates - investments (11) -
All other - net 3 (3)
------ ------
Net cash used in investing activities (87) (158)
------ ------
FINANCING ACTIVITIES:
Increase in U. S. Steel Group's portion of USX
consolidated debt 37 105
Specifically attributed debt repayments (6) (11)
Preferred stock repurchased (12) -
Dividends paid (48) (49)
------ ------
Net cash provided from (used in) financing activities (29) 45
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17) 11
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22 9
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5 $20
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(41) $(42)
Income taxes (paid) refunded, including settlements
with the Marathon Group 85 (5)
<FN>
Selected notes to financial statements appear on pages 63-68.
63
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 2000 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1999.
EITF Topic No. D-88, issued in March 2000, requires companies to
disclose their accounting policy for costs incurred in connection with
planned major maintenance activities. For the U. S. Steel Group, such
costs primarily are associated with blast furnace relines, which are
separately capitalized in property, plant and equipment. Such costs are
amortized over their estimated useful life, which is generally the period
until the next scheduled reline.
2. The financial statements of the U. S. Steel Group include the
financial position, results of operations and cash flows for all businesses
of USX other than the businesses, assets and liabilities included in the
Marathon Group and a portion of the corporate assets and liabilities and
related transactions which are not separately identified with ongoing
operating units of USX. These financial statements are prepared using the
amounts included in the USX consolidated financial statements. Corporate
amounts reflected in these financial statements are determined based upon
methods which management believes to be reasonable. The accounting
policies applicable to the preparation of the financial statements of the
U. S. Steel Group may be modified or rescinded in the sole discretion of
the Board of Directors of USX (Board), although the Board has no present
intention to do so. The Board may also adopt additional policies depending
on the circumstances.
Although the financial statements of the U. S. Steel Group and the
Marathon Group separately report the assets, liabilities (including
contingent liabilities) and stockholders' equity of USX attributed to each
such Group, such attribution of assets, liabilities (including contingent
liabilities) and stockholders' equity between the U. S. Steel Group and the
Marathon Group for purposes of preparing their respective financial
statements does not affect legal title to such assets and responsibility
for such liabilities. Holders of USX-U. S. Steel Group Common Stock (Steel
Stock) and USX-Marathon Group Common Stock (Marathon Stock) are holders of
common stock of USX and continue to be subject to all the risks associated
with an investment in USX and all of its businesses and liabilities.
Financial impacts arising from one Group that affect the overall cost of
USX's capital could affect the results of operations and financial
condition of the other Group. In addition, net losses of either Group, as
well as dividends or distributions on any class of USX Common Stock or
series of Preferred Stock and repurchases of any class of USX Common Stock
or series of Preferred Stock at prices in excess of par or stated value,
will reduce the funds of USX legally available for payment of dividends on
both classes of Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the U. S. Steel Group
financial information.
64
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the U. S. Steel
Group and the Marathon Group financial statements in accordance with USX's
tax allocation policy for such groups. In general, such policy provides
that the consolidated tax provision and related tax payments or refunds are
allocated between the U. S. Steel Group and the Marathon Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for estimated income taxes for the U. S. Steel Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the U. S. Steel and Marathon Groups
and USX consolidated are allocated to each group based on the relationship
of the individual group provisions to the combined interim provisions.
3. The U. S. Steel Group's total comprehensive income was $54 million for
the second quarter of 2000, $51 million for the second quarter of 1999,
$98 million for the six months of 2000 and $33 million for the six months
of 1999.
4. The method of calculating net income per common share for the Steel
Stock and Marathon Stock reflects the Board's intent that the separately
reported earnings and surplus of the U. S. Steel Group and the Marathon
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 7, of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
5. In 1999, USX irrevocably deposited with a trustee the entire 5.5
million common shares it owned in RTI International Metals (RTI). The
deposit of the shares resulted in the satisfaction of USX's obligation
under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000.
Under the terms of the indenture, the trustee exchanged one RTI share for
each note at maturity; therefore, none reverted back to USX.
65
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
As a result of the above transaction, USX recorded in the first
quarter of 1999 an extraordinary loss of $5 million, net of a $3 million
income tax benefit, representing prepaid interest expense and the write-off
of unamortized debt issue costs, and a pretax charge of $22 million,
representing the difference between the carrying value of the investment in
RTI and the carrying value of the indexed debt, which is included in net
gains (losses) on disposal of assets.
Additionally, a $13 million credit to adjust the indexed debt to
settlement value at March 31, 1999, is included in net interest and other
financial costs.
In December 1996, USX had issued the $117 million of notes indexed to
the common share price of RTI. At maturity, USX would have been required
to exchange the notes for shares of RTI common stock, or redeem the notes
for the equivalent amount of cash. Since USX's investment in RTI was
attributed to the U. S. Steel Group, the indexed debt was also attributed
to the U. S. Steel Group. USX had a 26% investment in RTI and accounted
for its investment using the equity method of accounting.
6. The U. S. Steel Group consists of one operating segment, U. S. Steel.
U. S. Steel is engaged in the production and sale of steel mill products,
coke and taconite pellets. U. S. Steel also engages in the following
related business activities: the management of mineral resources, domestic
coal mining, engineering and consulting services, and real estate
development and management. The results of segment operations are as
follows:
Second Quarter Ended
June 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Customer $1,581 $1,292
Intergroup (a) 4 11
Equity in earnings (losses) of
unconsolidated affiliates 14 (10)
Other 12 11
------ ------
Total revenues $1,611 $1,304
====== ======
Segment income $68 $43
====== ======
<FN>
(a) Intergroup sales and transfers were conducted under terms comparable
to those with unrelated parties.
Effective January 1, 2000, USX changed its methodology for allocating
the pension credit or cost associated with its principal pension plans for
internal business performance reporting purposes. Since future
contributions to these plans are expected to be minimal due to their
overfunded position, no pension credit or cost is allocated to the U. S.
Steel operating segment. Prior years' segment income or loss has been
restated to conform with the current allocation methodology.
66
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
Six Months Ended
June 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Customer $3,117 $2,537
Intergroup (a) 8 12
Equity in earnings (losses) of
unconsolidated affiliates 7 (33)
Other 26 21
------ ------
Total revenues $3,158 $2,537
====== ======
Segment income $122 $40
====== ======
<FN>
(a) Intergroup sales and transfers were conducted under terms comparable
to those with unrelated parties.
The following schedules reconcile segment revenue and income to
amounts reported in the U. S. Steel Group's financial statements:
Second Quarter Ended
June 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues of reportable segment and Group revenues $1,611 $1,304
====== ======
Income for reportable segment $68 $43
Items not allocated to segment:
Administrative expenses (5) (8)
Net pension credits 67 88
Costs related to former business activities (18) (20)
------ ------
Total Group income from operations $112 $103
====== ======
67
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
Six Months Ended
June 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues of reportable segment $3,158 $2,537
Loss on investment in RTI stock used to satisfy
indexed debt obligations - (22)
------ ------
Total Group revenues $3,158 $2,515
====== ======
Income for reportable segment $122 $40
Items not allocated to segment:
Administrative expenses (11) (13)
Net pension credits 132 140
Costs related to former business activities (40) (44)
Loss on investment in RTI stock used to satisfy
indexed debt obligations - (22)
------ ------
Total Group income from operations $203 $101
====== ======
7. In the second quarter of 1999, the U. S. Steel Group recognized a one-
time pretax settlement gain of $35 million, related mainly to pension costs
of employees who retired under the U. S. Steel Group 1998 voluntary early
retirement program. This noncash settlement gain is included in selling,
general and administrative expenses.
8. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
-------------------------
June 30 December 31
2000 1999
----------- -----------
Raw materials $128 $101
Semi-finished products 368 392
Finished products 218 193
Supplies and sundry items 58 57
---- ----
Total $772 $743
==== ====
68
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. At June 30, 2000, and December 31, 1999, income taxes receivable
represents an estimated income tax receivable from the Marathon Group. In
addition, included in investments and long-term receivables at June 30,
2000, and December 31, 1999, is $97 million income taxes receivable from
the Marathon Group. These amounts have been determined in accordance with
the tax allocation policy discussed in Note 2.
10. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
U. S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 2000, and December
31, 1999, accrued liabilities for remediation totaled $111 million and $101
million, respectively. It is not presently possible to estimate the
ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In the six months of 2000 and
for the years 1999 and 1998, such capital expenditures totaled $14 million,
$32 million and $49 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the
U. S. Steel Group totaled $87 million at June 30, 2000. In the event that
any defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the affiliates to reduce U. S. Steel Group losses
resulting from these guarantees. As of June 30, 2000, the largest
guarantee for a single affiliate was $60 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at June 30, 2000, totaled $92 million compared with
$83 million at December 31, 1999.
69
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is engaged in the
production, transportation and sale of steel mill products, coke, and taconite
pellets; the management of mineral resources; domestic coal mining; real estate
development; and engineering and consulting services. Certain business
activities are conducted through joint ventures and partially owned companies,
such as USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"),
Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, VSZ U. S. Steel, s.
r.o, and Republic Technologies International, LLC ("Republic"). Management's
Discussion and Analysis should be read in conjunction with the U. S. Steel
Group's Financial Statements and Selected Notes to Financial Statements. The
discussion of Results of Operations should be read in conjunction with the
Supplemental Statistics provided on page 80.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates," "believes," "estimates," "expects" or similar words
indicating that future outcomes are not known with certainty and subject to risk
factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements. For additional risk factors affecting
the businesses of the U. S. Steel Group, see Supplementary Data -- Disclosures
About Forward-Looking Information in USX
1999 Form 10-K.
Results of Operations
- ---------------------
Revenues for the second quarter and first six months of 2000 and 1999 are
set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Revenues of reportable segment $1,611 $1,304 $3,158 $2,537
Revenues not allocated to reportable segment - - - (22)
----- ----- ----- -----
Total Revenues $1,611 $1,304 $3,158 $2,515
Total reportable segment revenues increased by $307 million and $621
million in the second quarter and first six months of 2000, respectively,
compared with the same periods in 1999. The increases primarily reflected
higher average steel product prices (average prices increased $27/ton and
$15/ton in the second quarter and first six months of 2000, respectively),
higher shipment volumes (shipments increased 356,000 tons and 955,000 tons in
the second quarter and first six months of 2000, respectively) and better
results from equity affiliates.
70
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Income from operations for the U. S. Steel Group for the second quarter and
first six months of 2000 and 1999 is set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
- ------------------------------------------------------------------------------
Segment income for U. S. Steel operations (a) $68 $43 $122 $40
Items not allocated to segment:
Net pension credits 67 88 132 140
Administrative expenses (5) (8) (11) (13)
Costs related to former business activities (b) (18) (20) (40) (44)
Loss on investment in RTI stock used to satisfy
indexed debt obligations (c) - - - (22)
----- ----- ----- -----
Total Group income from operations $112 $103 $203 $101
===== ===== ===== =====
- -----
<FN>
(a) Includes income from the production and sale of steel products, coke
and taconite pellets; domestic coal mining; the management of mineral
resources; engineering and consulting services; and equity income from
joint ventures and partially owned companies, such as USS-POSCO
Industries, PRO-TEC Coating Company, Transtar Inc., Republic Technologies
International, LLC and VSZ U. S. Steel, s. r.o. Also includes results of
real estate development and leasing and financing activities.
(b) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the
U. S. Steel Group.
(c) For further details, see Note 5 to the U. S. Steel Group Financial
Statements.
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations increased $25 million and $82
million in the second quarter and first six months of 2000, respectively,
compared with the same periods in 1999. The increases in segment income were
primarily due to higher average steel prices, higher shipments and better
results from affiliates. The second quarter and first six months of 2000
included charges totaling $15 million for certain environmental and legal
contingencies and were unfavorably impacted by a two-week unplanned blast
furnace outage at Fairfield Works and increased natural gas prices. Segment
income for the first six months of 1999 included a $10 million charge for
environmental accruals. Segment income for 1999 was restated to conform with
the current pension allocation methodology; therefore, no pension credit or cost
is allocated to the U. S. Steel operations segment.
Item not allocated to segment
Net pension credits associated with all of U. S. Steel's pension plans are
not included in segment income for U. S. Steel operations. These net pension
credits, which are primarily noncash, totaled $67 million and $132 million in
the second quarter and first six months of 2000, respectively, compared to $88
million and $140 million in the same periods in 1999. Net pension credits in
the second quarter and first six months of 1999 included $35 million for a one-
time favorable settlement primarily related to the 1998 voluntary early
retirement program for salaried employees completed during the second quarter
1999.
71
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Future net pension credits can vary depending upon the market performance
of plan assets, changes in actuarial assumptions regarding such factors as a
selection of a discount rate and rate of return on assets, changes in the
amortization levels of transition amounts or prior period service costs, plan
amendments affecting benefit payout levels and profile changes in the
beneficiary populations being valued. To the extent net pension credits decline
in the future, income from operations would be adversely affected.
Net interest and other financial costs for the second quarter and first six
months of 2000 and 1999 are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 2000 1999 2000 1999
- ------------------------------------------------------------------------------
Net interest and other financial costs $24 $20 $48 $28
Less:
Favorable adjustment to carrying value
of indexed debt(a) - - - (13)
----- ----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $24 $20 $48 $41
===== ===== ===== =====
- -----
<FN>
(a) In December 1996, USX issued $117 million of 6-3/4% Exchangeable Notes Due
February 1, 2000 ("indexed debt"), mandatorily exchangeable at maturity for
common stock of RTI International Metals, Inc. ("RTI") or for the
equivalent amount of cash, at USX's option. The carrying value of indexed
debt was adjusted quarterly to settlement value based on changes in the
value of RTI common stock. Any resulting adjustment was charged or
credited to income and included in interest and other financial costs. In
1999, USX satisfied its obligation by irrevocably depositing with a trustee
the RTI common stock. For further discussion, see Note 5 to the U. S.
Steel Group Financial Statements.
Adjusted net interest and other financial costs increased by $4 million and
$7 million in the second quarter and first six months of 2000, respectively, as
compared with the same periods in 1999. This increase was primarily due to
higher debt levels and higher interest rates.
The provision for estimated income taxes in the second quarter and first
six months of 2000 increased compared to the same periods in 1999 due to an
increase in income before income taxes.
The extraordinary loss on extinguishment of debt of $5 million (net of $3
million income tax benefit) in the first six months of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt. For further
discussion, see Note 5 to the U. S. Steel Group Financial Statements.
Net income increased $1 million and $58 million in the second quarter and
first six months of 2000, respectively, compared to the same periods in 1999,
primarily reflecting the factors discussed above.
72
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Operating Statistics
- --------------------
Second quarter and first six months of 2000 steel shipments of 2.9 million
tons and 5.9 million tons, increased 14% and 19%, respectively, from the same
periods in 1999. Raw steel production in the second quarter of 2000 of 3.0
million tons was down slightly compared to the same period in 1999. Raw steel
production in the first six months of 2000 of 6.2 million tons, increased 6%
from the same period in 1999. Raw steel capability utilization in the second
quarter of 2000 averaged 95.4%, compared to 96.9% in the same period in 1999.
Raw steel capability utilization in the first six months of 2000 averaged 97.2%,
compared to 92.0% in the same period in 1999. Steel shipments, raw steel
production and raw steel capability utilization in the second quarter and first
six months of 2000 were negatively impacted by the blast furnace outage at
Fairfield Works.
Cash Flows
- ----------
Net cash provided from operating activities in the first six months of 2000
was $99 million, compared with $124 million in the same period in 1999. The
decrease of $25 million reflected unfavorable working capital changes, partially
offset by improved net income and an income tax settlement with the Marathon
Group in accordance with the group tax allocation policy.
Capital expenditures in the first six months of 2000 were $97 million,
compared with $153 million in the same period in 1999.
Contract commitments for capital expenditures at June 30, 2000, totaled
$92 million, compared with $83 million at December 31, 1999.
Financial obligations increased $19 million in the first six months of
2000. The increase in financial obligations resulted from capital expenditures
and dividend payments exceeding cash from operating activities. Financial
obligations consist of the U. S. Steel Group's portion of USX debt and preferred
stock of a subsidiary attributed to both groups, as well as debt and financing
agreements specifically attributed to the U. S. Steel Group.
Derivative Instruments
- ----------------------
See Quantitative and Qualitative Disclosures About Market Risk for
discussion of derivative instruments and associated market risk for U. S. Steel
Group.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
73
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Environmental Matters, Litigation and Contingencies
- ---------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely affected. The U. S. Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities, marketing
areas, production processes and the specific products and services it provides.
To the extent that competitors are not required to undertake equivalent costs in
their operations, the competitive position of the U. S. Steel Group could be
adversely affected.
USX has been notified that it is a potential responsible party ("PRP") at
27 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30,
2000. In addition, there are 12 sites related to the U. S. Steel Group where
USX has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability or make any judgment as to the amount
thereof. There are also 30 additional sites related to the U. S. Steel Group
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group accrues for environmental remediation activities
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. As environmental remediation matters proceed
toward ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required.
In 1997, USS/Kobe Steel Company ("USS/Kobe"), a joint venture between USX
and Kobe Steel, Ltd. ("Kobe"), was the subject of a multi-media audit by the
U.S. Environmental Protection Agency ("EPA") that included an air, water and
hazardous waste compliance review. USS/Kobe and the EPA entered into a tolling
agreement pending issuance of the final audit and commenced settlement
negotiations in July 1999. In August 1999, the steelmaking and bar producing
operations of USS/Kobe were combined with companies controlled by Blackstone
Capital Partners II to form Republic. The tubular operations of USS/Kobe were
transferred to a newly formed entity, Lorain Tubular Company, LLC ("Lorain
Tubular"), which operated as a joint venture between USX and Kobe until December
31, 1999 when USX purchased all of Kobe's interest in Lorain Tubular. Republic
and Lorain Tubular are continuing negotiations with the EPA. Most of the
matters raised by the EPA relate to Republic's facilities; however, air
discharges from Lorain Tubular's #3 seamless pipe mill have also been cited.
Lorain Tubular will be responsible for matters relating to its facilities. The
final report and citations from the EPA have not been issued.
74
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
In 1996, USX was notified by the Indiana Department of Environmental
Management ("IDEM"), acting as lead trustee, that IDEM and the U.S. Department
of the Interior had concluded a preliminary investigation of potential injuries
to natural resources related to releases of hazardous substances and oil into
the Grand Calumet River, Indiana Harbor Canal and Indiana Harbor near Gary
Works. USX was identified as a PRP along with 15 other companies owning
property along the river, harbor canal and harbor. The public trustees have
completed a preassessment screen pursuant to federal regulations and are
performing a Natural Resource Damage Assessment. USX is cooperating with eight
other PRP's in a joint defense group which is currently engaged in settlement
discussions with the public trustees and the EPA.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments relating to the U. S. Steel Group
involving a variety of matters, including laws and regulations relating to the
environment, certain of which are discussed in Note 11 to the U. S. Steel Group
Financial Statements. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group Financial
Statements. However, management believes that USX will remain a viable and
competitive enterprise even though it is possible that these contingencies could
be resolved unfavorably to the U. S. Steel Group.
Outlook
- -------
U. S. Steel's order book and prices are softening due to continued high
import volumes, which are approaching record 1998 levels, and increasing
evidence that the growth in the domestic economy is slowing. High natural gas
prices, which unfavorably affected the second quarter 2000, are expected to
persist for some time.
USX owns a 16 percent equity method investment in Republic (through USX's
ownership in Republic Technologies International Holdings, LLC ("Republic
Holdings"), which is the sole owner of Republic). In its Annual Report on Form
10-K for the year ended December 31, 1999, which was filed with the SEC on May
9, 2000, Republic Holdings stated that "[it] and its [p]redecessors have
historically incurred substantial losses...[Republic's] performance during the
third and fourth quarters of 1999 was below expectations, causing the
[c]ompany's liquidity position to be negatively affected. [Republic's]
liquidity position has also been negatively impacted by the implementation of
[Republic's] consolidation plan...." Republic Holdings' 10-K also discusses a
number of actions that Republic's management has taken to improve its liquidity
position. In the same report, Republic's independent accountants rendered an
unqualified opinion and stated that "[Republic] and [its] [p]redecessors'
recurring losses and negative cash flows from operations and ... [Republic's]
members' interest deficiency and limited available liquidity from existing
credit resources raise substantial doubt about its ability to continue as a
going concern."
On July 18, 2000, Republic announced that it had "reached a series of key
agreements and agreements in principle that will, upon completion, provide the
additional liquidity Republic needs to continue its plans to expand. Coincident
with this, Republic made its current bond interest payment of July 17, 2000."
Through one of the agreements, Republic raised approximately $30 million through
a rights offering to its current shareholders, including USX which invested
approximately $6 million under such agreement. USX also agreed to certain
deferred payment terms, up to a maximum of $30 million into the year 2002, with
regard to Republic's obligations to USX relating to iron ore pellets supplied
to Republic.
75
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
At June 30, 2000, USX's financial exposure to Republic totaled
approximately $100 million, excluding the $6 million July investment, consisting
of its equity investment in Republic (which includes an unsecured note
receivable), unsecured trade accounts receivable and contingent liabilities on
USX obligations assumed by Republic.
In March 2000, U. S. Steel announced it had reached a tentative agreement
to acquire ownership of the steel and related assets of VSZ a.s. ("VSZ") located
in the Slovak Republic. VSZ has an annual capacity of 4 million tons of raw
steel production. In May 2000, the shareholders of VSZ approved the general
terms of this agreement. Final approval of the transaction is expected to be
voted on by the shareholders in late August and closing of the transaction is
expected in the third quarter of 2000. The agreement guaranteeing U. S. Steel's
exclusivity as the strategic investor in VSZ has been extended.
The above discussion includes forward-looking statements concerning
shipments, pricing, and completion of the VSZ acquisition. These statements are
based on assumptions as to future product demand, prices and mix, production and
the prompt closing of the VSZ acquisition. Steel shipments and prices can be
affected by imports and actions of the U.S. Government and its agencies
pertaining to trade, domestic and international economies, domestic production
capacity, and customer demand. In the event these assumptions prove to be
inaccurate, actual results may differ significantly from those presently
anticipated. Some factors that could potentially affect the completion or
timing of the VSZ closing include, among others, final approval by the
shareholders of VSZ and satisfactory completion of all necessary agreements and
financing arrangements.
Steel imports to the United States accounted for an estimated 27%, 26% and
30% of the domestic steel market in the first five months of 2000, and for the
years 1999 and 1998, respectively. Steel imports of hot-rolled sheet and pipe
increased 76% and 44%, respectively, in the first five months of 2000, compared
to the same period in 1999.
On June 2, 1999, U. S. Steel joined with eight other producers, the USWA
and the Independent Steelworkers Union ("ISU") to file trade cases against
twelve countries (Argentina, Brazil, China, Indonesia, Japan, Russia, South
Africa, Slovakia, Taiwan, Thailand, Turkey, and Venezuela) concerning imports of
cold-rolled sheet products. Antidumping ("AD") cases were filed against all the
countries and countervailing duty ("CVD") cases were filed against Brazil,
Indonesia, Thailand, and Venezuela. On July 19, 1999, the ITC issued its
preliminary determination that the domestic industry was being injured or
threatened with injury as the result of imports from all of the countries. It
decided, however, to discontinue the investigations of subsidies on imports from
Indonesia, Thailand, and Venezuela. The Department of Commerce ("Commerce")
found AD and CVD margins against each of the countries in each of the remaining
cases, and also announced that it had entered into an agreement with Russia to
suspend the investigation. On March 3, 2000 and June 30, 2000, the
International Trade Commission ("ITC") determined that the imports in question
were not causing, or threatening to cause, material injury to the domestic
industry, terminating the cases. Appeals are pending at the U.S. Court of
International Trade ("CIT") in which various domestic producers are challenging
the decisions of the ITC.
76
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
On June 30, 1999, U. S. Steel joined with four other producers and the USWA
to file trade cases against five countries (the Czech Republic, Japan, Mexico,
Romania, and South Africa) concerning imports of large and small diameter
seamless carbon and alloy standard, line, and pressure pipe. In each of these
cases Commerce found that dumping had occurred, and on June 9, 2000 and July 13,
2000, the ITC determined that the domestic industry is being materially injured
or threatened with material injury by the dumping in question. Commerce issued
AD orders against Japan and South Africa effective June 26, 2000 and is expected
to issue orders against the remaining countries in early August.
USX intends to file additional AD and CVD petitions if unfairly traded
imports adversely impact, or threaten to adversely impact, the results of
the U. S. Steel Group.
On September 1, 1999, Commerce and the ITC published public notices
announcing the initiation of the mandatory five-year "sunset" reviews of AD and
CVD orders issued as a result of the cold-rolled, corrosion-resistant, and cut-
to-length plate cases filed by the domestic industry in 1992 and earlier. Under
the "sunset" review procedure, an order must be revoked after five years unless
Commerce and the ITC determine that dumping or a countervailable subsidy is
likely to continue or recur and that material injury to the domestic industry is
likely to continue or recur. Of the 34 orders issued concerning the various
products imported from various countries, 26 are the subject of expedited review
at Commerce because there was no response, inadequate response, or waiver of
participation by the respondent parties. Therefore, at Commerce, only eight of
the orders (corrosion-resistant, cold-rolled, and cut-to-length plate from
Germany; corrosion-resistant and cut-to-length plate from Canada; corrosion-
resistant from Japan; cold-rolled from the Netherlands; and cut-to-length plate
from Romania) are the subject of a full review. On March 29, 2000, Commerce
issued its final determinations of margins in the expedited reviews and found
that if the CVD or AD orders were to be revoked, further dumping or
subsidization would occur. In all eight cases subject to full review, it issued
preliminary margins and a preliminary determination that, if the CVD or AD
orders were to be revoked, further dumping or subsidization would occur. The
ITC will conduct full reviews in all 34 of the cases, despite the fact that
responses by some of the respondent countries were inadequate. Hearings in
these cases are scheduled to be held at the ITC on September 12, 13, and 15,
2000.
On July 3, 2000, Commerce and the ITC published public notices announcing
the initiation of the mandatory five-year "sunset" reviews of AD orders issued
in 1995 against seamless pipe from Argentina, Brazil, Germany and Italy and oil
country tubular goods from Argentina, Italy, Japan, Mexico and South Korea. The
reviews will also encompass the 1995 CVD orders against the same two products
from Italy.
On October 28, 1999, Weirton Steel, along with the USWA and the ISU, filed
a trade case against tin- and chromium-coated steel sheet imports from Japan.
In December 1999, the ITC issued its preliminary determination that the domestic
industry is being injured as a result of the imports from Japan. On June 20,
2000 Commerce announced final AD margins. This case is subject to further
investigation by the ITC.
77
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on income before income
taxes of hypothetical 10% and 25% decreases in commodity prices for open
derivative commodity instruments as of June 30, 2000, are provided in the
following table(a):
Incremental Decrease in
Income Before Income Taxes
Assuming a Hypothetical
Price Change of:
(Dollars in millions) 10% 25%
- -------------------------------------------------------------------------------
Derivative Commodity Instruments
U. S. Steel Group
Natural gas
Other than trading $- $- (b)
Zinc
Other than trading .9 2.2 (b)
Tin
Other than trading .3 .7 (b)
<FN>
(a) Gains and losses on derivative commodity instruments used for other
than trading activities are generally offset by price changes in the
underlying commodity. Effects of these offsets are not reflected in the
sensitivity analyses. Amounts reflect the estimated incremental decrease
in income before income taxes of hypothetical 10% and 25% changes in
closing commodity prices for each open contract position at June 30,
2000. Management evaluates the portfolios of derivative commodity
instruments on an ongoing basis and adjusts strategies to reflect
anticipated market conditions, changes in risk profiles and overall
business objectives. Changes to the portfolios subsequent to June 30,
2000, may cause future income before income tax effects to differ from
those presented in the table.
(b) Price decrease.
78
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
USX is subject to the effects of interest rate fluctuations on certain of
its non-derivative financial instruments. A sensitivity analysis of the
projected incremental effect of a hypothetical 10% decrease in June 30, 2000,
interest rates on the fair value of the U.S. Steel Group's specifically
attributed non-derivative financial instruments and the U. S. Steel Group's
portion of USX's non-derivative financial instruments attributed to both groups,
is provided in the following table:
(Dollars in millions)
- --------------------------------------------------------------------------------
As of June 30, 2000
Incremental
Increase in
Non-Derivative Carrying Fair Fair
Financial Instruments(a) Value Value Value(b)
- -------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $52 $52 $-
- -------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $843 $857 $23
Preferred stock of
subsidiary 66 62 6
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 183 132 12
----- ----- -----
Total liabilities $1,092 $1,051 $41
- -------------------------------------------------------------------------------
<FN>
(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) Reflects, by class of financial instrument, the estimated incremental
effect of a hypothetical 10% decrease in interest rates at June 30, 2000, on
the fair value of USX's non-derivative financial instruments. For financial
liabilities, this assumes a 10% decrease in the weighted average yield to
maturity of USX's long-term debt at June 30, 2000.
(c) Includes amounts due within one year.
(d) Fair value was based on market prices where available, or current
borrowing rates for financings with similar terms and maturities.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of June 30, 2000, the U. S. Steel Group had no material exposure to
foreign currency exchange rate risk.
Equity Price Risk
- -----------------
As of June 30, 2000, the U. S. Steel Group had no material exposure to
equity price risk.
79
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Safe Harbor
- -----------
The U. S. Steel Group's Quantitative and Qualitative Disclosures About
Market Risk include forward-looking statements with respect to management's
opinion about risks associated with the U. S. Steel Group's use of derivative
instruments. These statements are based on certain assumptions with respect to
market prices and industry supply and demand for steel products and certain raw
materials. To the extent that these assumptions prove to be inaccurate, future
outcomes with respect to the U. S. Steel Group's hedging programs may differ
materially from those discussed in the forward-looking statements.
80
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 2000 1999 2000 1999
- -------------------------------------------------------------------------------
REVENUES $1,611 $1,304 $3,158 $2,515
INCOME (LOSS) FROM OPERATIONS
U. S. Steel operations (a) (b) (c) $68 $43 $122 $40
Items not allocated to segment:
Net Pension Credits (c) 67 88 132 140
Administrative Expenses (5) (8) (11) (13)
Cost related to former business activities (d) (18) (20) (40) (44)
Loss on settlement of indexed debt with
RTI International Metals, Inc. Stock - - - (22)
---- ---- ---- ----
Total U. S. Steel Group 112 103 203 101
CAPITAL EXPENDITURES $52 $74 $97 $153
OPERATING STATISTICS
Average steel price per ton $451 $424 $445 $430
Steel Shipments (e) 2,904 2,548 5,884 4,929
Raw Steel-Production (e) 3,034 3,091 6,186 5,840
Raw Steel-Capability Utilization (f) 95.4% 96.9% 97.2% 92.0%
Iron ore shipments (e) 4,656 4,823 6,685 6,186
- ----------
<FN>
(a) Results in the second quarter and first six months of 2000 included
charges totaling $15 million for environmental and legal contingencies.
Results in the first six months of 1999 included a $10 million charge for
environmental accruals.
(b) Includes the production and sale of steel products, coke and taconite
pellets; domestic coal mining; the management of mineral resources; engineering
and consulting services; and equity income from joint ventures and partially
owned companies, such as USS-POSCO Industries, PRO-TEC Coating Company, Transtar
Inc., Republic Technologies International, LLC and VSZ U. S. Steel, s. r.o.
Also includes results of real estate development and leasing and financing
activities.
(c) Effective January 1, 2000, USX changed its methodology for
allocating the pension credit or cost associated with its principal
pension plans for internal business performance reporting purposes.
Since future contributions to these plans are expected to be minimal due
to their overfunded position, no pension credit or cost is allocated to
current business activities. Accordingly, no pension credit or cost has
been allocated to the U. S. Steel operations segment. Prior years'
segment profit or loss has been restated to conform with the current
allocation methodology. Net pension credits for 1999 periods include $35
million for a pension settlement gain primarily related to the early
retirement program completed during the second quarter 1999.
(d) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(e) Thousands of net tons.
(f) Based on annual raw steel production capability of 12.8 million tons.
81
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Environmental Proceedings
MAP has responded to information requests from the U.S. Environmental
Protection Agency ("EPA") regarding New Source Review ("NSR") compliance at its
Garyville and Texas City refineries. In addition, the scope of the EPA's 1998
multi-media inspections of the Detroit and Robinson refineries included NSR
compliance. MAP has not been notified of the results of either the information
requests or inspections as regards NSR compliance.
NSR requires new major stationary sources and major modifications at
existing major stationary sources to obtain permits, perform air quality
analysis and install stringent air pollution control equipment at affected
facilities. The current initiative appears to target many items that the
industry has historically considered routine repair, replacement and maintenance
or other activity exempted from the NSR requirements.
On July 25, 2000, the EPA issued a press release announcing a settlement in
principle with two refiners concerning NSR and other environmental issues. MAP
has initiated discussions with the EPA on similar issues.
In October 1998, the National Enforcement Investigations Center and Region
V of the EPA conducted a multi-media inspection of MAP's Detroit refinery.
Subsequently, in November 1998, Region V conducted a multi-media inspection of
MAP's Robinson refinery. These inspections covered compliance with the Clean
Air Act (New Source Performance Standards, Prevention of Significant
Deterioration, and the National Emission Standards for Hazardous Air Pollutants
for Benzene), the Clean Water Act (Permit exceedances for the Waste Water
Treatment Plant), reporting obligations under the Emergency Planning and
Community Right to Know Act and the handling of process waste. Although MAP has
been advised as to certain compliance issues regarding MAP's Detroit refinery,
complete findings on the results of the inspections have not been issued. Thus
far, MAP has been served with two Notices of Violation ("NOV") and three
Findings of Violation in connection with the multi-media inspections at its
Detroit refinery. The Detroit notices allege violations of the Michigan State
Air Pollution Regulations, the EPA New Source Performance Standards and National
Emission Standards for Hazardous Air Pollutants for benzene. On March 6, 2000,
MAP received its first NOV arising out of the multi-media inspection of the
Robinson Refinery conducted in November 1998. The NOV is for alleged Resource
Conservation and Recovery Act (hazardous waste) violations. MAP can contest the
factual and legal basis for the allegations prior to the EPA taking enforcement
action. At this time, it is not known when complete findings on the results of
these multi-media inspections will be issued.
FTC Investigation
On June 27, 2000, the Federal Trade Commission ("FTC") issued a subpoena to
MAP as part of an investigation to determine whether firms engaged in the
production, transportation, distribution, marketing or sale of petroleum
products have engaged in any unfair methods of competition in the Midwest in
violation of Section 5 of the Federal Trade Commission Act. MAP is responding to
the subpoena and cooperating with the investigation. On June 29, 2000, MAP
received a demand for information from the Wisconsin Attorney General which is
substantially similar to the FTC subpoena. MAP is likewise responding to the
request and certain other informal requests for information.
82
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS (continued)
Marathon Group (continued)
Environmental Proceedings (continued)
The investigation was in response to a recent increase in gasoline prices,
particularly those in the Midwest. MAP believes that much of the increase
nationwide was related to the price of crude oil, which nearly tripled since
January 1999, and to the implementation of regulations which force refiners to
produce an ever-widening array of motor fuels for different markets. In addition
to these factors, the Midwest has been experiencing an imbalance of gasoline
supply and demand. The primary causes of this imbalance are new fuels required
June 1 for the Chicago, Milwaukee and St. Louis markets and a series of pipeline
and refinery disruptions. MAP believes that it properly responded to market
forces in its gasoline pricing practices.
Manteo
On July 18, 1997, the United States Court of Federal Claims, Case No. 92-
331C, entered a judgment in the amount of $78 million in favor of Marathon Oil
Company and against the United States of America. The U.S. government was
effectively ordered to return lease bonuses that Marathon paid in 1981 for
interest in five oil and gas leases offshore North Carolina. The lawsuit filed
in May 1992 alleged, inter alia, that the federal government breached the leases
through passage of legislation which imposed additional conditions and a
moratorium on the company's rights to explore, develop, and produce hydrocarbons
from the leases. The Department of Justice appealed the trial court's decision
to the U.S. Court of Appeals for the Federal Circuit which reversed the trial
court. During the fourth quarter of 1999, Marathon's request for Writ of
Certiorari to the U.S. Supreme Court was granted. On June 26, 2000, the United
States Supreme Court reversed and remanded the case to the U.S. Court of
Appeals for the Federal Circuit for further action.
83
Part II - Other Information (continued)
- ----------------------------
Item 1. LEGAL PROCEEDINGS (continued)
U. S. Steel Group
Environmental Proceedings
Gary Works
In 1996, USX was notified by the Indiana Department of Environmental
Management ("IDEM") acting as lead trustee, that IDEM and the U.S. Department of
the Interior had concluded a preliminary investigation of potential injuries to
natural resources related to releases of hazardous substances and oil into the
Grand Calumet River, Indiana Harbor Canal and Indiana Harbor near Gary Works.
USX was identified as a PRP along with 15 other companies owning property along
the river, harbor canal and harbor. The public trustees have completed a
preassessment screen pursuant to federal regulations and are performing a
Natural Resource Damage Assessment. USX is cooperating with eight other
PRPs in a joint defense group which is currently engaged in settlement
discussions with the public trustees and the EPA.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held April 25, 2000. In
connection with the meeting, proxies were solicited pursuant to the
Securities Exchange Act. The following are the voting results on
proposals considered and voted upon at the meeting, all of which were
described in the proxy statement.
1. All nominees for director listed in the proxy statement were elected.
2. PricewaterhouseCoopers LLP was elected as the independent accountants
for 2000. (For, 346,217,388; against, 964,867; abstained, 1,679,869).
84
Part II - Other Information (continued)
- ---------------------------
Item 5. OTHER INFORMATION (continued)
Marathon Group
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
INCOME DATA:
Revenues $8,893 $5,480 $16,854 $10,322
Income from operations 866 415 1,399 823
Net income 355 143 617 254
(In millions)
-----------------------
June 30 December 31
2000 1999
-------- -----------
BALANCE SHEET DATA:
Assets:
Current assets $6,939 $6,077
Noncurrent assets 11,557 11,489
------ ------
Total assets $18,496 $17,566
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $3,744 $3,320
Noncurrent liabilities 8,950 9,250
Preferred stock of subsidiary 10 10
Minority interest in consolidated subsidiary 1,943 1,753
Stockholder's equity 3,849 3,233
------- -------
Total liabilities and stockholder's equity $18,496 $17,566
======= =======
85
Part II - Other Information (continued)
- ---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K dated June 1, 2000, reporting under Item 5. Other Events, that
effective June 1, 2000, Marathon Sakhalin Limited, a subsidiary of Marathon Oil
Company, had signed a nonbinding letter of intent with Shell Sakhalin Holdings
B.V. to transfer Marathon's 37.5 percent interest in Sakhalin Energy Investment
Company Ltd. to Shell.
Form 8-K dated July 25, 2000, reporting under Item 5. Other Events, that
the Board of Directors declared a dividend of 25 cents per share on
USX-U. S. Steel Group Common Stock.
Form 8-K dated July 25, 2000, reporting under Item 5. Other Events, that
the Board of Directors declared a dividend of 23 cents per share on USX-Marathon
Group Common Stock, an increase of 2 cents per share. USX also announced the
Board of Directors authorized the spending of up to $450 million to repurchase
shares of its USX-Marathon Group Common Stock.
86
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Larry G. Schultz
-----------------------
Larry G. Schultz
Vice President -
Accounting
August 2, 2000