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 September 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 October 31, 2000 follows:
USX-Marathon Group - 310,455,772 shares
USX-U. S. Steel Group - 88,767,023 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 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 22
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 32
Financial Statistics 35
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 36
Marathon Group Balance Sheet 37
Marathon Group Statement of Cash Flows 38
Selected Notes to Financial Statements 39
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 49
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 60
Supplemental Statistics 63
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 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 64
U. S. Steel Group Balance Sheet 65
U. S. Steel Group Statement of Cash Flows 66
Selected Notes to Financial Statements 67
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 76
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 85
Supplemental Statistics 88
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 89
Item 5. Other Information 92
Item 6. Exhibits and Reports on Form 8-K 93
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
REVENUES:
Sales $10,621 $7,827 $30,425 $20,636
Dividend and affiliate income (loss) 46 (39) 81 (28)
Net gains (losses) on disposal of assets 7 5 129 (8)
Gain on ownership change in Marathon Ashland
Petroleum LLC 1 11 9 11
Other income 18 9 31 22
------ ------ ------ ------
Total revenues 10,693 7,813 30,675 20,633
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 8,198 5,896 23,324 15,260
Selling, general and administrative expenses 95 60 233 149
Depreciation, depletion and amortization 310 297 949 906
Taxes other than income taxes 1,250 1,121 3,650 3,269
Exploration expenses 51 40 142 162
Inventory market valuation credits - (136) - (551)
------ ------ ------ ------
Total costs and expenses 9,904 7,278 28,298 19,195
------ ------ ------ ------
INCOME FROM OPERATIONS 789 535 2,377 1,438
Net interest and other financial costs 80 92 267 266
Minority interest in income of Marathon Ashland
Petroleum LLC 115 148 373 405
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
LOSSES 594 295 1,737 767
Provision for estimated income taxes 454 94 877 267
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSSES 140 201 860 500
Extraordinary losses on extinguishment of debt,
net of income tax - 2 - 7
------ ------ ------ ------
NET INCOME 140 199 860 493
Dividends on preferred stock 2 2 6 7
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $138 $197 $854 $486
====== ====== ====== ======
<FN>
Selected notes to financial statements appear on pages 9-21.
5
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Net income $121 $230 $742 $483
- Per share - basic .38 .74 2.38 1.56
- diluted .38 .74 2.37 1.56
Dividends paid per share .23 .21 .65 .63
Weighted average shares, in thousands
- Basic 311,847 309,392 312,068 309,160
- Diluted 312,094 309,810 312,272 309,491
APPLICABLE TO STEEL STOCK:
Income (loss) before extraordinary losses $17 $(31) $112 $10
- Per share - basic and diluted .19 (.35) 1.27 .12
Extraordinary losses, net of income tax - 2 - 7
- Per share - basic and diluted - .02 - .08
Net income (loss) $17 $(33) $112 $3
- Per share - basic and diluted .19 (.37) 1.27 .04
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Basic 88,738 88,394 88,554 88,383
- Diluted 88,738 88,394 88,556 88,385
<FN>
Selected notes to financial statements appear on pages 9-21.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
September 30 December 31
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $171 $133
Receivables, less allowance for doubtful
accounts of $16 and $12 3,035 2,706
Inventories 2,886 2,627
Deferred income tax benefits 316 303
Other current assets 269 218
------ ------
Total current assets 6,677 5,987
Investments and long-term receivables,
less reserves of $3 and $3 1,355 1,237
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$17,242 and $16,799 12,718 12,809
Prepaid pensions 2,850 2,629
Other noncurrent assets 270 300
------ ------
Total assets $23,870 $22,962
====== ======
<FN>
Selected notes to financial statements appear on pages 9-21.
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30 December 31
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $65 $-
Accounts payable 3,515 3,440
Payroll and benefits payable 501 468
Accrued taxes 305 283
Accrued interest 64 107
Long-term debt due within one year 709 61
------ ------
Total current liabilities 5,159 4,359
Long-term debt, less unamortized discount 3,128 4,222
Deferred income taxes 2,366 1,839
Employee benefits 2,818 2,809
Deferred credits and other liabilities 652 691
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 1,922 1,753
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,421,987 shares
and 2,715,287 shares ($121 and $136 liquidation
preference, respectively) 2 3
Common stocks:
Marathon Stock issued - 312,165,978 shares and
311,767,181 shares 312 312
Steel Stock issued - 88,767,395 shares and
88,397,714 shares 89 88
Securities exchangeable solely into Marathon Stock
issued - 281,539 shares and 288,621 shares - -
Treasury common stock, at cost -
Marathon Stock 1,397,400 shares and -0- shares (37) -
Additional paid-in capital 4,675 4,673
Deferred compensation (8) -
Retained earnings 2,392 1,807
Accumulated other comprehensive income (loss) (33) (27)
------ ------
Total stockholders' equity 7,392 6,856
------ ------
Total liabilities and stockholders' equity $23,870 $22,962
====== ======
<FN>
Selected notes to financial statements appear on pages 9-21.
8
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
Nine Months Ended
September 30
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $860 $493
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary losses - 7
Minority interest in income of Marathon Ashland
Petroleum LLC 373 405
Depreciation, depletion and amortization 949 906
Exploratory dry well costs 52 74
Inventory market valuation credits - (551)
Pensions and other postretirement benefits (217) (156)
Deferred income taxes 522 161
Gain on ownership change in Marathon Ashland
Petroleum LLC (9) (11)
Net (gains) losses on disposal of assets (129) 8
Changes in:
Current receivables - sold - 30
- operating turnover (334) (816)
Inventories (259) (116)
Current accounts payable and accrued expenses (20) 742
All other - net (32) 126
------ ------
Net cash provided from operating activities 1,756 1,302
------ ------
INVESTING ACTIVITIES:
Capital expenditures (1,011) (1,048)
Disposal of assets 269 261
Restricted cash - withdrawals 219 54
- deposits (207) (39)
Affiliates - investments (80) (17)
- loans and advances (13) (104)
- returns and repayments 9 1
All other - net 20 (4)
------ ------
Net cash used in investing activities (794) (896)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit
arrangements - net (329) (126)
Other debt - borrowings 273 460
- repayments (328) (240)
Common stock - issued - 46
- repurchased (37) -
Preferred stock repurchased (12) -
Dividends paid (275) (266)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (212) (333)
------ ------
Net cash used in financing activities (920) (459)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 38 (53)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 133 146
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $171 $93
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(301) $(313)
Income taxes paid (381) (36)
<FN>
Selected notes to financial statements appear on pages 9-21.
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.
In March 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) issued EITF Topic No. D-88, which
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 August 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing assets of
USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone
Capital Partners II. The combined entity was named Republic Technologies
International, LLC (Republic). In addition, USX made a $15 million equity
investment in Republic. USX owned 50% of USS/Kobe and now owns 16% of
Republic. USX accounts for its investment in Republic under the equity
method of accounting. The seamless pipe business of USS/Kobe was excluded
from this transaction. That business, now known as Lorain Tubular Company
LLC, is a wholly owned subsidiary of USX.
Third quarter 2000 dividend and affiliate income (loss) includes $10
million in charges related to USX's share of impairment and restructuring
charges of Republic. In addition, third quarter 1999 dividend and
affiliate income (loss) includes $50 million in charges related to the
impairment of the carrying value of USX's investment in USS/Kobe and costs
related to the formation of Republic.
In the third quarter of 2000, Republic underwent a financial
restructuring to improve its liquidity position and to assist in making the
semi-annual interest payment on its senior secured notes. As part of this
restructuring, Republic received approximately $30 million in loans from
certain of its direct and indirect equity partners in exchange for notes of
Republic and warrants to purchase Class D common stock of Republic
Technologies International, Inc., Republic's majority owner. USX loaned
approximately $6 million to Republic as part of this transaction. USX also
agreed to certain deferred payment terms into 2002 on up to a maximum of
$30 million of obligations relating to an iron ore pellets supply
agreement.
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. 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 Marathon Ashland Petroleum LLC (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 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
- ------------------------------------------------------------------------------
THIRD QUARTER 2000
- ------------------
Revenues:
Customer $1,124 $7,595 $490 $9,209 $1,412 $10,621
Intersegment (a) 74 10 20 104 - 104
Intergroup (a) 9 - 10 19 5 24
Equity in earnings of
unconsolidated affiliates 28 5 4 37 6 43
Other 5 13 3 21 7 28
----- ----- ----- ----- ----- -----
Total revenues $1,240 $7,623 $527 $9,390 $1,430 $10,820
===== ===== ===== ===== ===== =====
Segment income $465 $299 $12 $776 $23 $799
===== ===== ===== ===== ===== =====
THIRD QUARTER 1999
- ------------------
Revenues:
Customer $820 $5,413 $219 $6,452 $1,376 $7,828
Intersegment (a) 61 16 9 86 - 86
Intergroup (a) 5 - 7 12 2 14
Equity in earnings (losses) of
unconsolidated affiliates (2) 6 5 9 (3) 6
Other 1 12 3 16 12 28
----- ----- ----- ----- ----- -----
Total revenues $885 $5,447 $243 $6,575 $1,387 $7,962
===== ===== ===== ===== ===== =====
Segment income $201 $236 $13 $450 $3 $453
===== ===== ===== ===== ===== =====
<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)
3. (Continued)
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
- ------------------------------------
Revenues:
Customer $3,175 $21,576 $1,145 $25,896 $4,529 $30,425
Intersegment (a) 262 79 52 393 - 393
Intergroup (a) 20 - 21 41 13 54
Equity in earnings of
unconsolidated affiliates 24 15 12 51 13 64
Other 15 33 9 57 33 90
----- ----- ----- ----- ----- -----
Total revenues $3,496 $21,703 $1,239 $26,438 $4,588 $31,026
===== ===== ===== ===== ===== =====
Segment income $1,130 $968 $25 $2,123 $145 $2,268
===== ===== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ------------------------------------
Revenues:
Customer $2,081 $14,229 $414 $16,724 $3,913 $20,637
Intersegment (a) 129 25 24 178 - 178
Intergroup (a) 12 - 15 27 14 41
Equity in earnings (losses) of
unconsolidated affiliates 2 13 18 33 (36) (3)
Other 20 28 12 60 33 93
----- ----- ----- ----- ----- -----
Total revenues $2,244 $14,295 $483 $17,022 $3,924 $20,946
===== ===== ===== ===== ===== =====
Segment income $361 $509 $47 $917 $43 $960
===== ===== ===== ===== ===== =====
<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)
3. (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
Third Quarter Third Quarter
Ended Ended
September 30 September 30
(In millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $9,390 $6,575 $1,430 $1,387
Items not allocated to segments:
Gain on ownership change in MAP 1 11 - -
Other (a) - (10) - (50)
Elimination of intersegment revenues (104) (86) - -
------ ------ ----- -----
Total Group revenues $9,287 $6,490 $1,430 $1,337
====== ====== ====== ======
Income:
Income for reportable segments $776 $450 $23 $3
Items not allocated to segments:
Gain on ownership change in MAP 1 11 - -
Administrative expenses (48) (26) (7) (4)
Net pension credits - - 67 46
Costs related to former business activities - - (23) (21)
Inventory market valuation adjustments - 136 - -
Other (a) - (10) - (50)
------ ------ ------ ------
Total Group income (loss) from operations $729 $561 $60 $(26)
====== ====== ====== ======
<FN>
(a) Represents in 1999 for the Marathon Group, mainly the loss on sale of
certain domestic production properties and for the U. S. Steel Group,
impairment of investment in USS/Kobe and costs related to the formation of
Republic.
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)
3. (Continued)
Marathon Group U. S. Steel Group
Nine Months Nine Months
Ended Ended
September 30 September 30
(In millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $26,438 $17,022 $4,588 $3,924
Items not allocated to segments:
Gain on ownership change in MAP 9 11 - -
Other (a) 87 (33) - (72)
Elimination of intersegment revenues (393) (178) - -
------ ------ ----- -----
Total Group revenues $26,141 $16,822 $4,588 $3,852
====== ====== ====== ======
Income:
Income for reportable segments $2,123 $917 $145 $43
Items not allocated to segments:
Gain on ownership change in MAP 9 11 - -
Administrative expenses (105) (83) (18) (17)
Net pension credits - - 199 186
Costs related to former business activities - - (63) (65)
Inventory market valuation adjustments - 551 - -
Other (a) 87 (33) - (72)
------ ------ ------ ------
Total Group income from operations $2,114 $1,363 $263 $75
====== ====== ====== ======
<FN>
(a) Represents for the Marathon Group in 2000, gain on disposition of
Angus/Stellaria and in 1999, mainly the loss on sale of Scurlock Permian
LLC, Carnegie Natural Gas Company and subsidiaries, and certain domestic
production properties. For the U. S. Steel Group in 1999, represents
impairment of investment in USS/Kobe and costs related to the formation of
Republic and loss on investment in RTI International Metals, Inc. stock
used to satisfy indexed debt obligations.
4. 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 $1 million in the third quarter of
2000 and $9 million in the nine months of 2000 and $11 million in the third
quarter and nine months of 1999.
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)
-------------------------
September 30 December 31
2000 1999
------------ -----------
Raw materials $976 $830
Semi-finished products 391 392
Finished products 1,354 1,239
Supplies and sundry items 165 166
------ ------
Total (at cost) 2,886 2,627
Less inventory market valuation reserve - -
------ ------
Net inventory carrying value $2,886 $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 $138 million for the third quarter of
2000, $208 million for the third quarter of 1999, $854 million for the nine
months of 2000 and $496 million for the nine months of 1999.
7. The method of calculating net income (loss) 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 (loss) 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 (loss) per share assumes exercise of stock options,
provided 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
Third Quarter Ended
September 30
2000 1999
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
- ---------------
Net income (millions) $121 $121 $230 $230
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 311,847 311,847 309,392 309,392
Effect of dilutive securities - stock options - 247 - 418
------ ------ ------ ------
Average common shares and dilutive effect 311,847 312,094 309,392 309,810
====== ====== ====== ======
Net income per share $.38 $.38 $.74 $.74
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (loss) (millions):
Income (loss) before extraordinary loss $19 $19 $(29) $(29)
Dividends on preferred stock 2 2 2 2
Extraordinary loss - - 2 2
------ ------ ------ ------
Net income (loss) applicable to Steel Stock $17 $17 $(33) $(33)
====== ====== ====== ======
Shares of common stock outstanding (thousands) -
Average number of common shares outstanding 88,738 88,738 88,394 88,394
====== ====== ====== ======
Per share:
Income (loss) before extraordinary loss $.19 $.19 $(.35) $(.35)
Extraordinary loss - - .02 .02
------ ------ ------ ------
Net income (loss) $.19 $.19 $(.37) $(.37)
====== ====== ====== ======
16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
7. (Continued)
COMPUTATION OF INCOME PER SHARE
Nine Months Ended
September 30
2000 1999
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
- --------------
Net income (millions) $742 $742 $483 $483
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 312,068 312,068 309,160 309,160
Effect of dilutive securities - stock options - 204 - 331
------ ------ ------ ------
Average common shares and dilutive effect 312,068 312,272 309,160 309,491
====== ====== ====== ======
Net income per share $2.38 $2.37 $1.56 $1.56
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (millions):
Income before extraordinary loss $118 $118 $17 $17
Dividends on preferred stock 6 6 7 7
Extraordinary loss - - 7 7
------ ------ ------ ------
Net income applicable to Steel Stock $112 $112 $3 $3
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,554 88,554 88,383 88,383
Effect of dilutive securities - stock options - 2 - 2
------ ------ ------ ------
Average common shares and dilutive effect 88,554 88,556 88,383 88,385
====== ====== ====== ======
Per share:
Income before extraordinary loss $1.27 $1.27 $.12 $.12
Extraordinary loss - - .08 .08
------ ------ ------ ------
Net income $1.27 $1.27 $.04 $.04
====== ====== ====== ======
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, Inc. (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.
Republic Technologies International, LLC, an equity method affiliate
of USX, recorded in the third quarter of 1999 an extraordinary loss related
to the early extinguishment of debt. As a result, USX recorded an
extraordinary loss of $2 million, net of a $1 million income tax benefit,
representing its share of the extraordinary loss.
9. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
(In millions)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
Matching crude oil and refined product
buy/sell transactions settled in cash $1,192 $901 $3,662 $2,471
Consumer excise taxes on petroleum
products and merchandise 1,121 1,007 3,268 2,923
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.
The third quarter and nine month 2000 income tax provisions include a
one-time, noncash adjustment to deferred tax expense of $235 million, which
is discussed further in Note 17.
18
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
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.
12. At September 30, 2000, USX had no borrowings against its
$2,350 million revolving credit facility.
At September 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
September 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 September 30, 2000, there were no borrowings against these
facilities. USX had other outstanding short-term borrowings of $65
million.
In December 1999, USX entered into a secured borrowing agreement for
$350 million, under which the U. S. Steel Group participated in a program
to sell an undivided interest in certain accounts receivable. At December
31, 1999, the receivables facility was considered long-term, since it could
be refinanced by USX's long-term revolving credit facility. In August
2000, the revolving credit facility became due within one year, resulting
in the receivables facility being reclassified to short-term debt.
In the event of a change in control of USX, debt obligations totaling
$3,077 million at September 30, 2000, may be declared immediately due and
payable.
13. In July 2000, the Board of Directors of USX Corporation authorized the
spending of up to $450 million to repurchase shares of USX-Marathon Group
Common Stock (Marathon Stock), such purchases to be made from time to time
as the Corporation's financial condition and market conditions warrant.
During the third quarter of 2000, 1.4 million shares of Marathon Stock were
repurchased for $37 million.
14. 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.
15. 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
19
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
15. (Continued)
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 September 30, 2000, and
December 31, 1999, accrued liabilities for remediation totaled $187 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 $57
million at September 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 nine months of 2000 and for the years 1999 and
1998, such capital expenditures totaled $38 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.
At September 30, 2000, and December 31, 1999, accrued liabilities for
platform abandonment and dismantlement totaled $161 million and $152
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$219 million at September 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 September 30, 2000, the largest guarantee for a single affiliate was
$131 million.
At September 30, 2000, USX's pro rata share of obligations of LOOP LLC
and various pipeline affiliates secured by throughput and deficiency
agreements totaled $120 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 September 30, 2000, totaled $719 million compared with
$568 million at December 31, 1999.
20
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
16. In the fourth quarter 2000, USX must adopt several recently issued
accounting pronouncements primarily related to the classification of items
in the statement of operations. In December 1999, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB
101) "Revenue Recognition in Financial Statements," which summarizes the
SEC staff's interpretations of generally accepted accounting principles
related to revenue recognition and classification. During the third
quarter 2000, the EITF issued EITF Consensus No. 99-19 "Reporting Revenue
Gross as a Principal versus Net as an Agent", which addresses whether
certain cost items should be reported as a reduction of revenue or as a
component of cost of sales, and EITF Consensus No. 00-10 "Accounting for
Shipping and Handling Fees and Costs," which addresses the classification
of costs incurred for shipping goods to customers. The adoption of these
new pronouncements will have no net effect on the financial position or
results of operations of USX, although they will require reclassifications
of certain amounts in the statement of operations.
17. On October 19, 2000, the Marathon Group of USX signed a definitive
agreement with Shell to transfer its 37.5 percent interest in Sakhalin
Energy Investment Company Ltd.(Sakhalin Energy). In exchange, the Marathon
Group will receive certain Shell interests in the UK Atlantic Margin area
and the U.S. Gulf of Mexico as well as reimbursement for all Sakhalin
project capital expenditures made by the Marathon Group in 2000. The
closing and transfer of operations are expected to take place in early
December 2000.
The increased likelihood of closing this transaction resulted in a one-
time, noncash deferred tax charge of $235 million in the third quarter of
2000. Balance sheet net deferred tax liabilities include deferred U.S. tax
benefits related to certain foreign subsidiaries. Until now, management
concluded it was likely that income from foreign sources, such as Sakhalin
Energy, would allow these benefits to be realized in the future. The
definitive agreement to transfer the Marathon Group's interest in Sakhalin
Energy affects the timing, amount and nature of expected future foreign
source income, decreasing the likelihood that these tax benefits will be
realized.
18. Definitive agreements have been executed regarding the following
transactions, which will be accounted for as business combinations. The
transactions are expected to close shortly after the receipt of any
required approvals and the clearance of all preclosing conditions.
On September 29, 2000, final documents were signed for the acquisition
by USX of the steel operations and related assets of VSZ a.s. (VSZ). The
transaction was approved by VSZ shareholders on October 12, 2000. The
transaction must be approved by the Slovak government's anti-monopoly
office. These operations are located in Kosice, Slovak Republic and will
be known as U. S. Steel Kosice s.r.o. (USSK). An initial cash payment to
VSZ of $60 million will be made at closing. An additional payment to VSZ
of not less than $25 million and up to $75 million is contingent upon the
future performance of USSK. Additionally, $325 million of debt will be
issued by USSK to VSZ's lenders prior to closing. The acquisition will be
accounted for under the purchase method of accounting.
21
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
18. (Continued)
Prior to this transaction, USX and VSZ were joint partners in VSZ U. S.
Steel s. r.o. (VSZUSS), a tin mill products manufacturer. The assets of
USSK will include VSZ's interest in VSZUSS. The acquisition of the
remaining interest in VSZUSS will be accounted for under the purchase
method of accounting. Previously, USX had accounted for its investment in
VSZUSS under the equity method of accounting.
In October 2000, Transtar, Inc. (Transtar) announced that it had
entered into a Reorganization and Exchange Agreement with its two voting
shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of
Blackstone Capital Partners L.P. As a result of this transaction, USX will
become sole owner of Transtar and certain of its subsidiaries. Holdings
will become owner of the other subsidiaries of Transtar. USX will account
for the change in its ownership interest in Transtar under the purchase
method of accounting. Previously, USX had accounted for its investment in
Transtar under the equity method of accounting.
Also in October 2000, USX agreed to purchase the tin mill products
business of LTV Corporation (LTV). Terms of this noncash transaction call
for USX to assume certain employee-related obligations of LTV. The
acquisition will be accounted for under the purchase method of accounting.
Both the Transtar and the LTV transactions are subject to certain
government approvals and clearances. The LTV transaction is also subject
to certain third party consents and customary closing conditions.
22
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
----------------------------------------------------------
Nine Months Ended
September 30 Year Ended December 31
- --------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
6.60 4.30 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
-------------------------------------------------
Nine Months Ended
September 30 Year Ended December 31
- --------------------- -------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
6.77 4.43 4.32 3.56 3.79 3.65 1.58
==== ==== ==== ==== ==== ==== ====
23
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 third 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.
24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and the first nine months of 2000 and 1999
are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
------ ------ ------ ------
Revenues
Marathon Group $9,287 $6,490 $26,141 $16,822
U. S. Steel Group 1,430 1,337 4,588 3,852
Eliminations (24) (14) (54) (41)
------ ------ ------- -------
Total USX Corporation revenues $10,693 $7,813 $30,675 $20,633
Less:
Excise taxes (a)(b) 1,121 1,007 3,268 2,923
Matching buy/sell transactions (a)(c) 1,192 901 3,662 2,471
------ ------ ------ ------
Revenues excluding above items $8,380 $5,905 $23,745 $15,239
====== ====== ====== ======
- ------
<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 $2,475 million in the third quarter of 2000 as compared with the
third quarter of 1999, reflecting increases of $2,392 million for the Marathon
Group and $93 million for the U. S. Steel Group, before intergroup eliminations.
For the first nine months of 2000, revenues increased $8,506 million as compared
with the same period of 1999, reflecting increases of $7,783 million for the
Marathon Group and $736 million for the U. S. Steel Group, before intergroup
eliminations.
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.
25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the third quarter and the first nine months of
2000 and 1999 are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
------ ------ ------ ------
Reportable segments
Marathon Group
Exploration & production $465 $201 $1,130 $361
Refining, marketing & transportation 299 236 968 509
Other energy related businesses 12 13 25 47
------ ------ ------ ------
Income for reportable segments-Marathon Group $776 $450 $2,123 $917
U. S. Steel Group
Income for reportable segment 23 3 145 43
----- ----- ----- -----
Income for reportable segments-USX Corporation 799 453 2,268 960
Items not allocated to segments:
Marathon Group (47) 111 (9) 446
U. S. Steel Group 37 (29) 118 32
----- ----- ----- -----
Total income from operations-USX Corporation $789 $535 $2,377 $1,438
Income for reportable segments increased by $346 million in the third
quarter of 2000 as compared with the third quarter of 1999, reflecting increases
of $326 million for the Marathon Group reportable segments and $20 million for
the U. S. Steel Group reportable segment. Income for reportable segments in the
first nine months of 2000 increased by $1,308 million compared with the first
nine months of 1999, reflecting increases of $1,206 million for the Marathon
Group reportable segments and $102 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.
26
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 third quarter and first nine
months of 2000 and 1999 are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
------ ------ ------ ------
Net interest and other financial costs $80 $92 $267 $266
Less:
Favorable adjustment to carrying value
of indexed debt(a) - - - (13)
------ ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $80 $92 $267 $279
===== ====== ====== ======
- ------
<FN>
(a) For further discussion, see the Exchangeable Notes discussion in Note 8 to
the USX Consolidated Financial Statements.
Provisions for estimated income taxes of $454 million and $877 million for
the third quarter and the first nine months of 2000, respectively, were based on
tax rates and amounts that recognize management's best estimate of current and
deferred tax assets and liabilities and included a $235 million one-time,
noncash deferred tax charge related to the exchange involving Marathon's
interest in Sakhalin Energy Investment Company Ltd. (see Note 17 to the USX
Consolidated Financial Statements).
Extraordinary loss on extinguishment of debt of $2 million (net of $1
million income tax benefit) in the third quarter of 1999 was USX's share of
Republic's extraordinary loss related to the early extinguishment of debt. The
$7 million for the first nine months of 1999 included this charge and a $5
million loss (net of a $3 million income tax benefit) resulting from the
satisfaction of the indexed debt. For further discussion, see Note 8 to the USX
Consolidated Financial Statements.
Net income was $140 million for the third quarter of 2000, a decrease of
$59 million compared to the third quarter of 1999 reflecting a decrease of $109
million for the Marathon Group and an increase of $50 million for the U. S.
Steel Group. Net income was $860 million for the first nine months of 2000, an
increase of $367 million compared with the first nine months of 1999, reflecting
increases of $259 million for the Marathon Group and $108 million for the U. S.
Steel Group.
27
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends to Stockholders
- -------------------------
On October 31, 2000, the USX Board of Directors (the "Board") declared
dividends of 23 cents per share on Marathon Stock and 25 cents per share on
Steel Stock, payable December 9, 2000, to stockholders of record at the close of
business on November 16, 2000. The Board also declared a dividend of $0.8125 per
share on USX's 6.50% Cumulative Convertible Preferred Stock, payable December
29, 2000, to stockholders of record at the close of business on December 1,
2000.
On October 31, 2000, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3512 per share on its non-
voting Exchangeable Shares, payable December 9, 2000, to stockholders of record
at the close of business on November 16, 2000.
Cash Flows
- ----------
Cash and cash equivalents totaled $171 million at September 30, 2000,
compared with $133 million at December 31, 1999, an increase of $38 million
reflecting a $54 million increase for the Marathon Group and a $16 million
decrease for the U. S. Steel Group.
Net cash provided from operating activities totaled $1,756 million in the
first nine months of 2000, a $454 million increase from the first nine months of
1999, reflecting a $607 million increase for the Marathon Group and a $153
million decrease for the U. S. Steel Group. The increase primarily reflects
higher net income partially offset by income tax payments. 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 nine
months of 2000 were $1,011 million compared with $1,048 million for the first
nine 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 September 30, 2000, totaled $719 million compared with $568
million at December 31, 1999.
Cash from disposal of assets was $269 million in the first nine months of
2000, compared with $261 million in the first nine 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.
28
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 withdrawal of $12 million in
the first nine months of 2000, compared with a net withdrawal of $15 million in
the first nine 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 $384 million in the first nine months of 2000 compared with an
increase of $94 million in the first nine 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, dividend payments, and distributions.
Common stock repurchased was $37 million in the first nine months of 2000.
Based on USX Board of Directors' authorization, in the third quarter of 2000,
1.4 million shares of Marathon Stock were repurchased. For further details, see
Liquidity discussion for USX Corporation and Subsidiary Companies.
Distributions to minority shareholder of MAP were $212 million in the first
nine months of 2000, compared with $333 million in the first nine months of
1999. For further details, see Management's Discussion and Analysis of
Financial Condition and Results of Operations for the Marathon Group.
Liquidity
- ---------
At September 30, 2000, USX had no borrowings against its $2,350 million
revolving credit agreement which is scheduled to terminate in August 2001. At
September 30, 2000, MAP had no borrowings against its bank revolving credit
agreements. MAP's $100 million revolving credit facility is scheduled to
terminate in July 2001. 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 Marathon Stock, such purchases to be
made from time to time as the Corporation's financial condition and market
conditions warrant. During the third quarter of 2000, 1.4 million shares ($37
million) of Marathon Stock were repurchased. 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. In addition,
offerings of Steel Stock under the U. S. Steel Group Dividend Reinvestment and
Direct Stock Purchase Plan have also 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 September 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
29
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
paid in connection with contingencies (which are discussed in Note 15 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.
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 September 30, 2000. In addition, there are 19
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 145 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, 15 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.
30
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
New Tier II Fuels regulations were proposed in late 1999 and the U.S.
Environmental Protection Agency ("EPA") has since finalized the rules for
gasoline; however, the rules for diesel fuel are not yet final. The gasoline
rules, which are finalized and the diesel fuel rules, which are not yet final
are expected to require reduced sulfur levels. It is anticipated that if final
diesel regulations are adopted, consistent with the published proposed
regulations, then the combined compliance cost for the gasoline and diesel
regulations could amount to $600 to $700 million between 2003 and 2005. This is
a forward-looking statement and can only be a broad-based estimate due to the
ongoing evolution of regulatory requirements. Some factors (among others) that
could potentially affect gasoline and diesel fuel compliance costs include
adoption of final diesel fuel regulations, obtaining the necessary construction
and environmental permits, operating considerations, and unforeseen hazards such
as weather conditions.
MAP has responded to information requests from the 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. 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 EPA 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. MAP is engaged in ongoing discussions with the EPA on these
issues concerning all of MAP's refineries.
While MAP has not been notified of any formal findings or violations
resulting from either the information requests or inspections regarding NSR
compliance; MAP has been informed during discussions with the EPA of potential
non-compliance concerns of the EPA based on these inspections and other
information identified by the EPA. Currently, discussions with the EPA have
been of a general and technical nature without any commitment to specific
control technologies, implementation schedules or possible penalties. It is
possible that a framework for resolution of these issues could be reached as
early as the fourth quarter of this year and that any resolution may include
other pending matters such as those arising from the EPA's 1998 multi-media
inspections.
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
31
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
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 EPA.
In February 1999, the United States Department of Justice and the EPA
issued a letter demanding a cash payment of approximately $4 million to resolve
a Finding of Violation issued in 1997 alleging improper sampling of benzene
waste streams at Gary Works. On September 18, 2000, a Consent Decree was
entered with the United States District Court which settled the alleged
violation of the benzene National Emissions Standards for Hazardous Air
Pollutants. U. S. Steel agreed to pay a civil penalty of $587,000 and to
complete a Supplemental Environmental Project removing transformers containing
polychlorinated biphenyl at a cost of approximately $2.2 million.
Payment of the civil penalty was made on October 13, 2000.
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 15 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.
32
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
Other than trading (f)(g) $19.8 $54.6 (d)
Natural gas
Other than trading (f)(g) 4.3 10.6 (d)
Refined products
Other than trading (f)(g) 11.1 29.6 (d)
U. S. Steel Group
Zinc
Other than trading .2 .4 (e)
Tin
Other than trading .1 .2 (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 September 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 September
30, 2000, will cause future income before income tax effects to differ
from those presented in the table.
(b) The number of net open contracts varied throughout third quarter
2000, from a low of 12,252 contracts at July 5, to a high of 34,126
contracts at September 27, and averaged 21,063 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout third 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.
33
USX CORPORATION AND SUBSIDIARY COMPANIES
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 September 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 September 30, 2000
Incremental
Increase in
Non-Derivative Carrying Fair Fair
Financial Instruments(a) Value Value Value(b)
- ------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $188 $241 $ -
- ------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $3,734 $3,885 $154
Preferred stock of
subsidiary 250 241 21
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 183 129 11
----- ----- -----
Total liabilities $4,167 $4,255 $186
- ------------------------------------------------------------------------------
<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 September 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 September 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.
34
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 September 30, 2000, USX had
open Canadian dollar forward purchase contracts with a total carrying value of
approximately $9 million. A 10% increase in the Canadian dollar to U.S. dollar
forward rate would result in a charge to income of approximately $1 million.
Equity Price Risk
- -----------------
As of September 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.
35
USX CORPORATION
Third Quarter Nine Months
Ended Ended
September 30 September 30
-------------- --------------
(Dollars in millions) 2000 1999 2000 1999
- ------------------------------------------------------------------------------
REVENUES
Marathon Group $9,287 $6,490 $26,141 $16,822
U. S. Steel Group 1,430 1,337 4,588 3,852
Eliminations (24) (14) (54) (41)
------ ------ ------ ------
Total $10,693 $7,813 $30,675 $20,633
INCOME FROM OPERATIONS
Marathon Group $729 $561 $2,114 $1,363
U. S. Steel Group 60 (26) 263 75
------ ------ ------ ------
Total $789 $535 $2,377 $1,438
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group $302 $295 $878 $827
U. S. Steel Group 36 68 133 221
------ ------ ------ ------
Total $338 $363 $1,011 $1,048
INVESTMENTS (RETURNS) & OTHER AFFILIATE ACTIVITY - NET
Marathon Group $4 $49 $58 $105
U. S. Steel Group 15 15 26 15
------ ------ ------ ------
Total $19 $64 $84 $120
36
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 2000 1999 2000 1999
- -------------------------------------------------------------------------------
REVENUES:
Sales $9,228 $6,464 $25,937 $16,751
Dividend and affiliate income 40 14 68 58
Net gains (losses) on disposal of assets 1 (6) 95 (17)
Gain on ownership change in Marathon Ashland
Petroleum LLC 1 11 9 11
Other income 17 7 32 19
------ ------ ------ ------
Total revenues 9,287 6,490 26,141 16,822
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 6,923 4,621 19,275 11,695
Selling, general and administrative expenses 151 121 409 375
Depreciation, depletion and amortization 241 219 727 678
Taxes other than income taxes 1,192 1,064 3,474 3,100
Exploration expenses 51 40 142 162
Inventory market valuation credits - (136) - (551)
------ ------ ------ ------
Total costs and expenses 8,558 5,929 24,027 15,459
------ ------ ------ ------
INCOME FROM OPERATIONS 729 561 2,114 1,363
Net interest and other financial costs 53 72 192 218
Minority interest in income of Marathon Ashland
Petroleum LLC 115 148 373 405
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 561 341 1,549 740
Provision for estimated income taxes 440 111 807 257
------ ------ ------ ------
NET INCOME $121 $230 $742 $483
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share - basic $.38 $.74 $2.38 $1.56
- diluted .38 .74 2.37 1.56
Dividends paid per share .23 .21 .65 .63
Weighted average shares, in thousands
- Basic 311,847 309,392 312,068 309,160
- Diluted 312,094 309,810 312,272 309,491
<FN>
Selected notes to financial statements appear on pages 39-48.
37
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
September 30 December 31
(Dollars in millions) 2000 1999
- ------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $165 $111
Receivables, less allowance for doubtful
accounts of $2 and $2 2,212 1,876
Inventories 2,030 1,884
Deferred income tax benefits 32 23
Other current assets 259 218
------ ------
Total current assets 4,698 4,112
Investments and long-term receivables 857 762
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,837 and $10,567 10,305 10,293
Prepaid pensions 234 225
Other noncurrent assets 282 313
------ ------
Total assets $16,376 $15,705
====== ======
LIABILITIES
Current liabilities:
Notes payable $52 $-
Accounts payable 2,888 2,685
Payroll and benefits payable 185 146
Income taxes payable 129 97
Accrued taxes 130 107
Accrued interest 50 92
Long-term debt due within one year 287 48
------ ------
Total current liabilities 3,721 3,175
Long-term debt, less unamortized discount 2,445 3,320
Deferred income taxes 1,814 1,495
Employee benefits 603 564
Deferred credits and other liabilities 387 414
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,922 1,753
COMMON STOCKHOLDERS' EQUITY 5,300 4,800
------ ------
Total liabilities and common stockholders' equity $16,376 $15,705
====== ======
<FN>
Selected notes to financial statements appear on pages 39-48.
38
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Nine Months Ended
September 30
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $742 $483
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC 373 405
Depreciation, depletion and amortization 727 678
Exploratory dry well costs 52 74
Inventory market valuation credits - (551)
Pensions and other postretirement benefits 17 41
Deferred income taxes 314 89
Gain on ownership change in Marathon
Ashland Petroleum LLC (9) (11)
Net (gains) losses on disposal of assets (95) 17
Changes in:
Current receivables (334) (667)
Inventories (146) (95)
Current accounts payable and accrued expenses 149 630
All other - net (39) 51
------ ------
Net cash provided from operating activities 1,751 1,144
------ ------
INVESTING ACTIVITIES:
Capital expenditures (878) (827)
Disposal of assets 252 255
Restricted cash - withdrawals 216 39
- deposits (205) (25)
Affiliates - investments (62) (2)
- loans and advances (5) (104)
- returns and repayments 9 1
All other - net 16 (10)
------ ------
Net cash used in investing activities (657) (673)
------ ------
FINANCING ACTIVITIES:
Decrease in Marathon Group's portion of USX
consolidated debt (586) (41)
Specifically attributed debt - borrowings 273 141
- repayments (271) (141)
Marathon Stock - issued - 46
- repurchased (37) -
Dividends paid (203) (193)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (212) (333)
------ ------
Net cash used in financing activities (1,036) (521)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (4) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 54 (50)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 111 137
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $165 $87
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(233) $(250)
Income taxes paid, including settlements with the
U. S. Steel Group (466) (31)
<FN>
Selected notes to financial statements appear on pages 39-48.
39
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.
In March 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) issued EITF Topic No. D-88, which
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.
40
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 (loss) 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 exercise of stock options,
provided 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 $1 million in the third quarter of 2000 and $9
million in the nine months of 2000 and $11 million in the third quarter and
nine months of 1999.
41
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)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
Matching crude oil and refined product
buy/sell transactions settled in cash $1,192 $901 $3,662 $2,471
Consumer excise taxes on petroleum
products and merchandise 1,121 1,007 3,268 2,923
6. The Marathon Group's total comprehensive income was $121 million for
the third quarter of 2000, $233 million for the third quarter of 1999, $739
million for the nine months of 2000 and $488 million for the nine 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:
42
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
THIRD QUARTER 2000
- ------------------
Revenues:
Customer $1,124 $7,595 $490 $9,209
Intersegment (a) 74 10 20 104
Intergroup (a) 9 - 10 19
Equity in earnings of unconsolidated affiliates 28 5 4 37
Other 5 13 3 21
------ ------ ------ ------
Total revenues $1,240 $7,623 $527 $9,390
====== ====== ====== ======
Segment income $465 $299 $12 $776
====== ====== ====== ======
THIRD QUARTER 1999
- ------------------
Revenues:
Customer $820 $5,413 $219 $6,452
Intersegment (a) 61 16 9 86
Intergroup (a) 5 - 7 12
Equity in earnings (losses) of
unconsolidated affiliates (2) 6 5 9
Other 1 12 3 16
------ ------ ------ ------
Total revenues $885 $5,447 $243 $6,575
====== ====== ====== ======
Segment income $201 $236 $13 $450
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
43
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000
- ------------------------------------
Revenues:
Customer $3,175 $21,576 $1,145 $25,896
Intersegment (a) 262 79 52 393
Intergroup (a) 20 - 21 41
Equity in earnings of unconsolidated affiliates 24 15 12 51
Other 15 33 9 57
------ ------ ------ ------
Total revenues $3,496 $21,703 $1,239 $26,438
====== ====== ====== ======
Segment income $1,130 $968 $25 $2,123
====== ====== ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ------------------------------------
Revenues:
Customer $2,081 $14,229 $414 $16,724
Intersegment (a) 129 25 24 178
Intergroup (a) 12 - 15 27
Equity in earnings of
unconsolidated affiliates 2 13 18 33
Other 20 28 12 60
------ ------ ------ ------
Total revenues $2,244 $14,295 $483 $17,022
====== ====== ====== ======
Segment income $361 $509 $47 $917
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted under terms
comparable to those with unrelated parties.
44
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:
Third Quarter Ended
September 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $9,390 $6,575
Items not allocated to segments:
Gain on ownership change in MAP 1 11
Other (a) - (10)
Elimination of intersegment revenues (104) (86)
------ ------
Total Group revenues $9,287 $6,490
====== ======
Income:
Income for reportable segments $776 $450
Items not allocated to segments:
Gain on ownership change in MAP 1 11
Administrative expenses (48) (26)
Inventory market valuation adjustments - 136
Other (a) - (10)
------ ------
Total Group income from operations $729 $561
====== ======
<FN>
(a) Represents mainly in 1999, loss on sale of certain domestic production
properties.
45
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
Nine Months Ended
September 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $26,438 $17,022
Items not allocated to segments:
Gain on ownership change in MAP 9 11
Other (a) 87 (33)
Elimination of intersegment revenues (393) (178)
------ ------
Total Group revenues $26,141 $16,822
====== ======
Income:
Income for reportable segments $2,123 $917
Items not allocated to segments:
Gain on ownership change in MAP 9 11
Administrative expenses (105) (83)
Inventory market valuation adjustments - 551
Other (a) 87 (33)
------ ------
Total Group income from operations $2,114 $1,363
====== ======
<FN>
(a) Represents in 2000, gain on disposition of Angus/Stellaria. Represents in
1999, mainly the loss on sale of Scurlock Permian LLC, Carnegie Natural Gas
Company and subsidiaries, and certain domestic production properties.
46
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)
------------------------
September 30 December 31
2000 1999
------------ -----------
Crude oil and natural gas liquids $789 $729
Refined products and merchandise 1,136 1,046
Supplies and sundry items 105 109
------ ------
Total (at cost) 2,030 1,884
Less inventory market valuation reserve - -
------ ------
Net inventory carrying value $2,030 $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 September 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 September
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 September 30, 2000,
and December 31, 1999, accrued liabilities for remediation totaled $72
million and $69 million, respectively. It is not presently possible to
estimate the ultimate amount of
47
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 $57 million at September
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 nine months of 2000 and for the
years 1999 and 1998, such capital expenditures totaled $22 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 September 30, 2000, and December 31, 1999, accrued liabilities for
platform abandonment and dismantlement totaled $161 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
September 30, 2000.
At September 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 $120 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 September 30, 2000, totaled
$635 million compared with $485 million at December 31, 1999.
11. In the fourth quarter 2000, the Marathon Group must adopt several
recently issued accounting pronouncements primarily related to the
classification of items in the statement of operations. In December 1999,
the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements,"
which summarizes the SEC staff's interpretations of generally accepted
accounting principles related to revenue recognition and classification.
During the third quarter 2000, the EITF issued EITF Consensus No. 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent", which
addresses whether certain cost items should be reported as a reduction of
revenue or as a component of cost of sales, and EITF Consensus No. 00-10
"Accounting for Shipping and Handling Fees and Costs," which addresses the
classification of costs incurred for shipping goods to customers. The
adoption of these new pronouncements will have no net effect on the
financial position or results of operations of the Marathon Group, although
they will require reclassifications of certain amounts in the statement of
operations.
48
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. On October 19, 2000, the Marathon Group signed a definitive agreement
with Shell to transfer its 37.5 percent interest in Sakhalin Energy
Investment Company Ltd.(Sakhalin Energy). In exchange, the Marathon Group
will receive certain Shell interests in the UK Atlantic Margin area and the
U.S. Gulf of Mexico as well as reimbursement for all Sakhalin project
capital expenditures made by the Marathon Group in 2000. The closing and
transfer of operations are expected to take place in early December 2000.
The increased likelihood of closing this transaction resulted in a one-
time, noncash deferred tax charge of $235 million in the third quarter of
2000. Balance sheet net deferred tax liabilities include deferred U.S. tax
benefits related to certain foreign subsidiaries. Until now, management
concluded it was likely that income from foreign sources, such as Sakhalin
Energy, would allow these benefits to be realized in the future. The
definitive agreement to transfer the Marathon Group's interest in Sakhalin
Energy affects the timing, amount and nature of expected future foreign
source income, decreasing the likelihood that these tax benefits will be
realized.
49
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 63.
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.
50
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 2000 and 1999 are
summarized in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
----- ----- ----- -----
Exploration & production ("E&P") $1,240 $885 $3,496 $2,244
Refining, marketing & transportation ("RM&T") 7,623 5,447 21,703 14,295
Other energy related businesses (a) 527 243 1,239 483
------ ------ ------ ------
Revenues of reportable segments $9,390 $6,575 $26,438 $17,022
Revenues not allocated to segments:
Gain on ownership change in MAP 1 11 9 11
Other (b) - (10) 87 (33)
Elimination of intersegment revenues (104) (86) (393) (178)
------ ------ ------ ------
Total Group revenues $9,287 $6,490 $26,141 $16,822
====== ====== ====== ======
Items included in both revenues and costs and expenses, resulting in no effect
on income:
Consumer excise taxes on petroleum
products and merchandise $1,121 $1,007 $3,268 $2,923
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P $119 $176 $496 $451
RM&T 1,073 725 3,166 2,020
----- ----- ----- -----
Total buy/sell transactions $1,192 $901 $3,662 $2,471
- ---------
<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, a loss on the sale of certain domestic production properties and a
loss on sale of Scurlock Permian LLC ("Scurlock") and Carnegie Natural Gas
Company and affiliated subsidiaries ("Carnegie"), partially offset by a gain
on the sale of certain Egyptian properties.
E&P segment revenues increased by $355 million in the third quarter of 2000
from the comparable prior-year period. For the first nine months of 2000,
revenues increased by $1,252 million from the prior-year period. The increase
in both periods primarily reflected higher worldwide liquid hydrocarbon and
natural gas prices, partially offset by lower domestic liquid hydrocarbon
volumes.
RM&T segment revenues increased by $2,176 million in the third quarter of
2000 from the comparable prior-year period. For the first nine months of 2000,
revenues increased by $7,408 million from the prior-year period. The increase
in both periods primarily reflected higher refined product prices and increased
refined product sales volumes.
51
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 $284 million
in the third quarter of 2000 from the comparable prior-year period. For the
first nine months of 2000, revenues increased by $756 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 third quarter and first nine months of 2000
and 1999 is summarized in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
----- ----- ----- -----
E&P
Domestic $305 $168 $783 $299
International 160 33 347 62
------ ------ ------ ------
Income for E&P reportable segment 465 201 1,130 361
RM&T 299 236 968 509
Other energy related businesses 12 13 25 47
------ ------ ------ ------
Income for reportable segments $776 $450 $2,123 $917
Items not allocated to segments:
Administrative expenses (a) $(48) $(26) $(105) $(83)
IMV reserve adjustment (b) - 136 - 551
Loss on disposal of assets (c) - (10) - (33)
Gain on disposition of Angus/Stellaria (d) - - 87 -
Gain on ownership change in MAP (e) 1 11 9 11
------ ------ ------ ------
Total Group income from operations $729 $561 $2,114 $1,363
====== ====== ====== ======
- --------
<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) For the third quarter of 1999, this represented a loss on the sale of
certain domestic production properties, partially offset by a gain on the
sale of certain Egyptian properties. For the first nine months of 1999,
this also included a loss from the sale of Scurlock and Carnegie.
(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.
52
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income for reportable segments in the third quarter of 2000 increased by
$326 million from last year's third quarter, due primarily to higher worldwide
liquid hydrocarbon and natural gas prices, higher refined product margins, and
increased liquid hydrocarbon volumes. Income for reportable segments in the
first nine months of 2000 increased by $1,206 million from the first nine months
of 1999, due primarily to higher worldwide liquid hydrocarbon and natural gas
prices and higher refined product margins.
Worldwide E&P segment income in the third quarter of 2000 increased by
$264 million from last year's third quarter. Results in the first nine months
of 2000 increased by $769 million from the same period in 1999.
Domestic E&P income in the third quarter of 2000 increased by $137 million
from last year's third quarter. Results in the first nine months of 2000
increased by $484 million from the same period in 1999. These increases were
mainly due to higher liquid hydrocarbon and natural gas prices, partially offset
by lower liquid hydrocarbon and natural gas volumes due to natural field
declines and asset sales and derivative losses from other than trading
activities.
International E&P income in the third quarter of 2000 increased by
$127 million from last year's third quarter. This increase was mainly due to
higher liquid hydrocarbon and natural gas prices and higher liquid hydrocarbon
liftings, primarily in Russia and Gabon. Results in the first nine months of
2000 increased by $285 million from the same period in 1999. In addition to the
factors discussed previously, the increase was also due to lower dry well
expense, offset by lower natural gas volumes.
RM&T segment income in the third quarter of 2000 increased by $63 million
from last year's third quarter. Results in the first nine months of 2000
increased by $459 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 first nine months of
2000 decreased by $22 million from the same period in 1999. This decrease was
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 second quarter reversal of abandonment accruals of $10
million.
Items not allocated to reportable segments:
Administrative expenses in the third quarter and first nine months of 2000
increased by $22 million from the same periods in 1999. The increase was
primarily due to higher accruals for employee benefit plans, and Voluntary Early
Retirement Program ("VERP") and reorganization costs recorded in the third
quarter of 2000.
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.
53
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF 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.
Net interest and other financial costs in the first nine months of 2000
decreased by $26 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, decreased by $32 million in the first nine 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 nine months of 2000
increased by $550 million from the comparable 1999 period due to an increase in
income before taxes and a $235 million one-time, noncash deferred tax charge.
For additional information, see Note 12 to the Marathon Group Financial
Statements.
Net income for the third quarter and first nine months decreased by
$109 million and increased by $259 million, respectively, in 2000 from 1999,
primarily reflecting the factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $1,751 million in the first
nine months of 2000, compared with $1,144 million in the first nine months of
1999. The $607 million increase mainly reflected the favorable effects of
improved net income (excluding noncash items), partially offset by increased
allocation for income tax payments and an income tax settlement with the Steel
Group in accordance with the group tax allocation policy.
Capital expenditures in the first nine months of 2000 totaled $878 million,
compared with $827 million in the comparable 1999 period. For additional
information regarding capital expenditures, refer to the Supplemental Statistics
on page 63.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at September 30, 2000, totaled $635 million compared with
$485 million at December 31, 1999.
Cash from disposal of assets was $252 million in the first nine months of
2000, compared with $255 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 and other domestic
production properties. Proceeds in 1999 were mainly from the sale of Scurlock
Permian LLC and domestic and international production properties.
54
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 withdrawal of $11 million in
the first nine months of 2000, compared to a net withdrawal of $14 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 $58 million in the first nine months of
2000, compared with $105 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 $584 million in
the first nine months of 2000. Financial obligations decreased primarily
because cash from operating activities and asset sales exceeded capital
expenditures and distribution and dividend payments. For further details, see
Management's Discussion and Analysis of USX Consolidated Financial Condition,
Cash Flows and Liquidity.
Common stock repurchased was $37 million in the first nine months of 2000.
As announced on July 25, 2000, the USX Board of Directors authorized the
spending of up to $450 million to repurchase shares of USX-Marathon Group Common
Stock ("Marathon Stock"). In the third quarter, 1.4 million shares of Marathon
Stock were repurchased. Share repurchases will continue to be made from time to
time as the Corporation's financial condition and market conditions warrant.
Dividends paid in the first nine months of 2000 increased by $10 million
from the comparable 1999 period, reflecting the two-cents-per-share increase in
the quarterly Marathon Stock dividend rate, declared in July 2000.
Distributions to minority shareholder of MAP were $212 million in the first
nine months of 2000, compared with $333 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.
55
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
September 30, 2000. In addition, there are 6 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 115 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, 15 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.
56
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
New Tier II Fuels regulations were proposed in late 1999 and the U.S.
Environmental Protection Agency ("EPA") has since finalized the rules for
gasoline; however, the rules for diesel fuel are not yet final. The gasoline
rules, which are finalized and the diesel fuel rules, which are not yet final
are expected to require reduced sulfur levels. It is anticipated that if final
diesel regulations are adopted, consistent with the published proposed
regulations, then the combined compliance cost for the gasoline and diesel
regulations could amount to approximately $700 million between 2003 and 2005.
This is a forward-looking statement and can only be a broad-based estimate due
to the ongoing evolution of regulatory requirements. Some factors (among
others) that could potentially affect gasoline and diesel fuel compliance costs
include adoption of final diesel fuel regulations, obtaining the necessary
construction and environmental permits, operating considerations, and unforeseen
hazards such as weather conditions.
MAP has responded to information requests from the 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. 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 EPA 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. MAP is engaged in ongoing discussions with the EPA on these
issues concerning all of MAP's refineries.
While MAP has not been notified of any formal findings or violations
resulting from either the information requests or inspections regarding NSR
compliance; MAP has been informed during discussions with the EPA of potential
non-compliance concerns of the EPA based on these inspections and other
information identified by the EPA. Currently, discussions with the EPA have
been of a general and technical nature without any commitment to specific
control technologies, implementation schedules or possible penalties. It is
possible that a framework for resolution of these issues could be reached as
early as the fourth quarter of this year and that any resolution may include
other pending matters such as those arising from the EPA's 1998 multi-media
inspections.
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
57
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
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.
Marathon's fourth quarter 2000 worldwide liquid hydrocarbon production is
expected to be approximately 215,000 barrels per day ("bpd") and worldwide
natural gas production is projected at approximately 1.3 billion cubic feet per
day ("bcfpd"). Based on these fourth quarter projections, average production
for the full year 2000 is expected to be approximately 208,000 bpd and 1.25
bcfpd.
Because of potential transactions involving the possible disposition or
exchange of producing properties, it is difficult to project 2001 production at
this time. A revised 2001 production forecast is expected to be available by
early first quarter 2001.
On October 19, 2000, Marathon signed a definitive agreement with Shell
Sakhalin Holdings B.V. ("Shell") to transfer its 37.5 percent interest in
Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"). In exchange,
Marathon will receive certain Shell interests in the UK Atlantic Margin area and
the U.S. Gulf of Mexico as well as reimbursement for all Sakhalin project
capital expenditures made by Marathon in 2000. The closing and transfer of
operations are expected to take place in early December.
58
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On August 17, 2000, Marathon announced a VERP for approximately 970
eligible employees, of which 460 employees elected to retire. Upon completion
of the VERP, it is anticipated that some involuntary terminations may be
necessary as the company reorganizes to improve its overall competitiveness.
Administrative activities at region production offices in Cody, Wyoming and
Tyler, Texas along with a research facility in Littleton, Colorado will be
combined with functions currently being carried out in Catlettsburg, Kentucky,
Oklahoma City, Oklahoma, and Midland and Houston, Texas. Through the third
quarter, Marathon accrued $8 million in VERP charges. This is consistent with
Marathon's goals to significantly improve its E&P business performance,
including a $75 million reduction in above field costs, a $25 million savings in
global procurement expenses and a $50 million reduction in exploration expense.
These goals are expected to be achieved fully in 2001.
In July 2000, first production was achieved from Marathon's 50 percent
owned Viosca Knoll Block 786 ("Petronius") development in the Gulf of Mexico.
Drilling and well completion activities will continue through next year with
gross peak production of 50,000 barrels of oil per day and 70 million cubic feet
of gas per day expected by mid-2001.
The above discussion includes forward-looking statements with respect to
the timing and levels of Marathon's worldwide liquid hydrocarbon and natural gas
production, including production rates from the Petronius field, timing and
completion of the Sakhalin transaction, and amount and timing of cost
reductions. Some factors that could potentially affect timing and levels of
production include pricing, supply and demand for petroleum products, regulatory
constraints, and geological and operating considerations. Some factors that
could potentially affect the timing and completion of the Sakhalin transaction
include third party consents. Some factors that could potentially affect
reaching efficiency goals include the closing of certain acquisitions,
dispositions and exchanges, drilling rig availability, weather conditions, and
other geological, operating and economic considerations. 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 statements.
59
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
MAP is pursuing the disposition of approximately 270 non-strategic Speedway
SuperAmerica retail locations in the Midwest and Southeast. These locations
comprise less than 12 percent of MAP's owned and operated Speedway SuperAmerica
retail network. Through the end of the third quarter, 25 stations had been
sold. Most of the remaining stations are expected to be disposed of in the
fourth quarter of 2000.
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.
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 92
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.
The above discussion includes forward-looking statements with respect to
the disposition of MAP retail stations and completion of MAP infrastructure
projects. Some factors that could potentially affect the MAP dispositions
include receipt of government approvals, regulatory constraints, consent of
third parties, and satisfaction of customary closing conditions. Some factors
that could potentially affect the completion of the MAP infrastructure projects
include securing acceptable financing, obtaining the necessary construction and
environmental permits, unforeseen hazards such as weather conditions,
acquisitions of rights-of-way, outcome of pending litigation, and regulatory
approval constraints. 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
statements.
60
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 September 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
Other than trading (e)(f) $19.8 $54.6 (d)
Natural gas
Other than trading (e)(f) 4.3 10.6 (d)
Refined products
Other than trading (e)(f) 11.1 29.6 (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 September 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 September
30, 2000, will cause future income before income tax effects to differ
from those presented in the table.
(b) The number of net open contracts varied throughout third quarter
2000, from a low of 12,252 contracts at July 5, to a high of 34,126
contracts at September 27, and averaged 21,063 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout third 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) 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.
(f) Adjusted to reflect Marathon's 62 percent ownership of MAP.
61
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 September 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 September 30, 2000
Incremental
Increase in
Non-Derivative Carrying Fair Fair
Financial Instruments(a) Value Value Value(b)
- -------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $129 $182 $ -
- ------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $2,717 $2,838 $124
Preferred stock of
subsidiary 184 177 15
----- ----- -----
Total liabilities $2,901 $3,015 $139
- ------------------------------------------------------------------------------
<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 September 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 September 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.
62
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 September 30, 2000, USX had
open Canadian dollar forward purchase contracts with a total carrying value of
approximately $9 million. A 10% increase in the Canadian dollar to U.S. dollar
forward rate would result in a charge to income of approximately $1 million.
The entire amount of these contracts is attributed to the Marathon Group.
Equity Price Risk
- -----------------
As of September 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.
63
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $305 $168 $783 $299
International 160 33 347 62
----- ----- ----- -----
Income For E&P Reportable Segment 465 201 1,130 361
Refining, Marketing & Transportation 299 236 968 509
Other Energy Related Businesses (a) 12 13 25 47
----- ----- ----- -----
Income For Reportable Segments $776 $450 $2,123 $917
Items Not Allocated To Segments:
Administrative Expenses $(48) $(26) $(105) $(83)
Inventory Market Valuation Reserve Adjustment - 136 - 551
Estimated Loss on Sale of Assets - (10) - (33)
Gain on Disposition of Angus/Stellaria - - 87 -
Gain on Ownership Change In MAP 1 11 9 11
------ ------ ------ ------
Marathon Group Income From Operations $729 $561 $2,114 $1,363
CAPITAL EXPENDITURES
Exploration & Production $153 $184 $553 $594
Refining, Marketing & Transportation 149 107 315 226
Other (b) - 4 10 7
----- ----- ----- -----
Total $302 $295 $878 $827
EXPLORATION EXPENSE
Domestic $33 $26 $84 $92
International 18 14 58 70
----- ----- ----- -----
Total $51 $40 $142 $162
INVESTMENTS IN EQUITY AFFILIATES - NET $4 $49 $58 $105
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (c):
United States 129.4 138.6 131.7 143.4
Europe 26.3 28.7 28.2 32.3
Other International 42.8 24.4 37.3 28.4
------ ------ ------ ------
Total Consolidated 198.5 191.7 197.2 204.1
Equity Affiliates (CLAM & Sakhalin Energy) 24.4 2.4 9.1 0.9
------ ------ ------ ------
Worldwide 222.9 194.1 206.3 205.0
Net Natural Gas Production (d):
United States 715.5 730.9 726.1 747.2
Europe (e) 306.2 291.1 333.1 345.5
Other International 144.8 149.1 144.8 169.7
------ ------ ------- -------
Total Consolidated 1166.5 1171.1 1204.0 1262.4
Equity Affiliate (CLAM) 21.4 25.1 28.0 32.0
------- ------- ------- -------
Worldwide 1187.9 1196.2 1232.0 1294.4
Average Equity Sales Prices (f) (g):
Liquid Hydrocarbons (per Bbl)
Domestic $26.58 $17.78 $24.85 $13.48
International 28.84 19.56 26.87 14.80
Natural Gas (per Mcf)
Domestic $3.61 $2.22 $2.90 $1.83
International 2.59 1.80 2.47 1.81
Crude Oil Refined (c) 928.4 940.4 915.0 909.5
Refined Products Sold (c) 1350.0 1301.4 1304.6 1227.9
Matching buy/sell volumes included in refined
products sold (c) 43.5 55.8 55.3 50.0
MAP Merchandise Sales $638 $561 $1,786 $1,545
- --------------
<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 9.3,
16.0, 11.7 and 20.8 mmcfd in the third quarter and nine 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.
64
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
REVENUES:
Sales $1,417 $1,377 $4,542 $3,926
Income (loss) from affiliates 6 (53) 13 (86)
Net gains on disposal of assets 6 11 34 9
Other income (loss) 1 2 (1) 3
------ ------ ------ ------
Total revenues 1,430 1,337 4,588 3,852
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,299 1,289 4,103 3,606
Selling, general and administrative
expenses (credits) (56) (61) (176) (226)
Depreciation, depletion and amortization 69 78 222 228
Taxes other than income taxes 58 57 176 169
------ ------ ------ ------
Total costs and expenses 1,370 1,363 4,325 3,777
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 60 (26) 263 75
Net interest and other financial costs 27 20 75 48
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSSES 33 (46) 188 27
Provision (credit) for estimated income taxes 14 (17) 70 10
------ ------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSSES 19 (29) 118 17
Extraordinary losses on extinguishment of debt,
net of income tax - 2 - 7
------ ------ ------ ------
NET INCOME (LOSS) 19 (31) 118 10
Dividends on preferred stock 2 2 6 7
------ ------ ------ ------
NET INCOME (LOSS) APPLICABLE TO STEEL STOCK $17 $(33) $112 $3
====== ====== ====== ======
STEEL STOCK DATA:
Income (loss) before extraordinary losses $17 $(31) $112 $10
- Per share - basic and diluted .19 (.35) 1.27 .12
Extraordinary losses, net of income tax - 2 - 7
- Per share - basic and diluted - .02 - .08
Net income (loss) $17 $(33) $112 $3
- Per share - basic and diluted .19 (.37) 1.27 .04
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Basic 88,738 88,394 88,554 88,383
- Diluted 88,738 88,394 88,556 88,385
<FN>
Selected notes to financial statements appear on pages 67-75.
65
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
September 30 December 31
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $6 $22
Receivables, less allowance for doubtful
accounts of $14 and $10 832 838
Income taxes receivable 129 97
Inventories 856 743
Deferred income tax benefits 284 281
Other current assets 10 -
------ ------
Total current assets 2,117 1,981
Investments and long-term receivables,
less reserves of $3 and $3 595 572
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,405 and $6,232 2,413 2,516
Prepaid pensions 2,616 2,404
Other noncurrent assets 52 52
------ ------
Total assets $7,793 $7,525
====== ======
LIABILITIES
Current liabilities:
Notes payable $13 $-
Accounts payable 627 757
Payroll and benefits payable 316 322
Accrued taxes 175 177
Accrued interest 14 15
Long-term debt due within one year 422 13
------ ------
Total current liabilities 1,567 1,284
Long-term debt, less unamortized discount 683 902
Deferred income taxes 552 348
Employee benefits 2,215 2,245
Deferred credits and other liabilities 435 441
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 2,090 2,053
------ ------
Total stockholders' equity 2,092 2,056
------ ------
Total liabilities and stockholders' equity $7,793 $7,525
====== ======
<FN>
Selected notes to financial statements appear on pages 67-75.
66
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Nine Months Ended
September 30
(Dollars in millions) 2000 1999
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $118 $10
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary losses - 7
Depreciation, depletion and amortization 222 228
Pensions and other postretirement benefits (234) (197)
Deferred income taxes 208 72
Net gains on disposal of assets (34) (9)
Changes in:
Current receivables - sold - 30
- operating turnover (33) (208)
Inventories (113) (21)
Current accounts payable and accrued expenses (138) 170
All other - net 9 76
------ ------
Net cash provided from operating activities 5 158
------ ------
INVESTING ACTIVITIES:
Capital expenditures (133) (221)
Disposal of assets 17 6
Restricted cash - withdrawals 3 15
- deposits (2) (14)
Affiliates - investments (18) (15)
- loans and advances (8) -
All other- net 4 6
------ ------
Net cash used in investing activities (137) (223)
------ ------
FINANCING ACTIVITIES:
Increase in U. S. Steel Group's portion of USX
consolidated debt 206 146
Specifically attributed debt repayments (6) (11)
Preferred stock repurchased (12) -
Dividends paid (72) (73)
------ ------
Net cash provided from financing activities 116 62
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (16) (3)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22 9
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6 $6
====== ======
Cash provided from (used in) operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(68) $(63)
Income taxes (paid) refunded, including settlements
with the Marathon Group 85 (5)
<FN>
Selected notes to financial statements appear on pages 67-75.
67
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.
In March 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) issued EITF Topic No. D-88, which
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.
68
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 (loss) was $17 million
for the third quarter of 2000, $(25) million for the third quarter of 1999,
$115 million for the nine months of 2000 and $8 million for the nine months
of 1999.
4. In 1999, USX irrevocably deposited with a trustee the entire 5.5
million common shares it owned in RTI International Metals, Inc. (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.
69
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
Republic Technologies International, LLC, an equity method affiliate
of USX, recorded in the third quarter of 1999 an extraordinary loss related
to the early extinguishment of debt. As a result, the U. S. Steel Group
recorded an extraordinary loss of $2 million, net of a $1 million income
tax benefit, representing its share of the extraordinary loss.
5. 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:
Third Quarter Ended
September 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Customer $1,412 $1,376
Intergroup (a) 5 2
Equity in earnings (losses) of unconsolidated affiliates 6 (3)
Other 7 12
------ ------
Total revenues $1,430 $1,387
====== ======
Segment income $23 $3
====== ======
<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.
70
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Nine Months Ended
September 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues:
Customer $4,529 $3,913
Intergroup (a) 13 14
Equity in earnings (losses) of unconsolidated affiliates 13 (36)
Other 33 33
------ ------
Total revenues $4,588 $3,924
====== ======
Segment income $145 $43
====== ======
<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:
Third Quarter Ended
September 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues of reportable segment $1,430 $1,387
Items not allocated to segment - impairment of USS/Kobe
investment and costs related to formation of Republic - (50)
------ ------
Total Group revenues $1,430 $1,337
====== ======
Income for reportable segment $23 $3
Items not allocated to segment:
Administrative expenses (7) (4)
Net pension credits 67 46
Costs related to former business activities (23) (21)
Impairment of USS/Kobe investment and costs related
to formation of Republic - (50)
------ ------
Total Group income (loss) from operations $60 $(26)
====== ======
71
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Nine Months Ended
September 30
(In millions) 2000 1999
- --------------------------------------------------------------------------------
Revenues of reportable segment $4,588 $3,924
Items not allocated to segment:
Impairment of USS/Kobe investment and costs related
to formation of Republic - (50)
Loss on investment in RTI stock used to satisfy
indexed debt obligations - (22)
------ ------
Total Group revenues $4,588 $3,852
====== ======
Income for reportable segment $145 $43
Items not allocated to segment:
Administrative expenses (18) (17)
Net pension credits 199 186
Costs related to former business activities (63) (65)
Impairment of USS/Kobe investment and costs related
to formation of Republic - (50)
Loss on investment in RTI stock used to satisfy
indexed debt obligations - (22)
------ ------
Total Group income from operations $263 $75
====== ======
6. 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.
7. 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)
-------------------------
September 30 December 31
2000 1999
------------ -----------
Raw materials $187 $101
Semi-finished products 391 392
Finished products 218 193
Supplies and sundry items 60 57
---- ----
Total $856 $743
==== ====
72
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. The method of calculating net income (loss) 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 (loss) 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 (loss) per share assumes exercise of stock options,
provided the effect is not antidilutive.
See Note 7, of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
9. At September 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 September
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. In August 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing assets of
USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone
Capital Partners II. The combined entity was named Republic Technologies
International, LLC (Republic). In addition, USX made a $15 million equity
investment in Republic. USX owned 50% of USS/Kobe and now owns 16% of
Republic. USX accounts for its investment in Republic under the equity
method of accounting. The seamless pipe business of USS/Kobe was excluded
from this transaction. That business, now known as Lorain Tubular Company
LLC, is a wholly owned subsidiary of USX.
Third quarter 2000 income (loss) from affiliates includes $10 million
in charges related to USX's share of impairment and restructuring charges
of Republic. In addition, third quarter 1999 income (loss) from affiliates
includes $50 million in charges related to the impairment of the carrying
value of USX's investment in USS/Kobe and costs related to the formation of
Republic.
In the third quarter of 2000, Republic underwent a financial
restructuring to improve its liquidity position and to assist in making the
semi-annual interest payment on its senior secured notes. As part of this
restructuring, Republic received approximately $30 million in loans from
certain of its direct and indirect equity partners in exchange for notes of
Republic and warrants to purchase Class D common stock of Republic
Technologies International, Inc., Republic's majority owner. USX loaned
approximately $6 million to Republic as part of this transaction. USX also
agreed to certain deferred payment terms into 2002 on up to a maximum of
$30 million of obligations relating to an iron ore pellets supply
agreement.
73
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. 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 September 30, 2000, and
December 31, 1999, accrued liabilities for remediation totaled $115 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 nine months of 2000 and
for the years 1999 and 1998, such capital expenditures totaled $16 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 $88 million at September 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 September 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 September 30, 2000, totaled $84 million compared
with $83 million at December 31, 1999.
74
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. In the fourth quarter 2000, the U. S. Steel Group must adopt several
recently issued accounting pronouncements primarily related to the
classification of items in the statement of operations. In December 1999,
the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial Statements,"
which summarizes the SEC staff's interpretations of generally accepted
accounting principles related to revenue recognition and classification.
During the third quarter 2000, the EITF issued EITF Consensus No. 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent", which
addresses whether certain cost items should be reported as a reduction of
revenue or as a component of cost of sales, and EITF Consensus No. 00-10
"Accounting for Shipping and Handling Fees and Costs," which addresses the
classification of costs incurred for shipping goods to customers. The
adoption of these new pronouncements will have no net effect on the
financial position or results of operations of the U. S. Steel Group,
although they will require reclassifications of certain amounts in the
statement of operations.
13. Definitive agreements have been executed regarding the following
transactions, which will be accounted for as business combinations. The
transactions are expected to close shortly after the receipt of any
required approvals and the clearance of all preclosing conditions.
On September 29, 2000, final documents were signed for the acquisition
by USX of the steel operations and related assets of VSZ a.s. (VSZ). The
transaction was approved by VSZ shareholders on October 12, 2000. The
transaction must be approved by the Slovak government's anti-monopoly
office. These operations are located in Kosice, Slovak Republic and will
be known as U. S. Steel Kosice s.r.o. (USSK). An initial cash payment to
VSZ of $60 million will be made at closing. An additional payment to VSZ
of not less than $25 million and up to $75 million is contingent upon the
future performance of USSK. Additionally, $325 million of debt will be
issued by USSK to VSZ's lenders prior to closing. The acquisition will be
accounted for under the purchase method of accounting.
Prior to this transaction, USX and VSZ were joint partners in VSZ U.S.
Steel s. r.o. (VSZUSS), a tin mill products manufacturer. The assets of
USSK will include VSZ's interest in VSZUSS. The acquisition of the
remaining interest in VSZUSS will be accounted for under the purchase
method of accounting. Previously, USX had accounted for its investment in
VSZUSS under the equity method of accounting.
In October 2000, Transtar, Inc. (Transtar) announced that it had
entered into a Reorganization and Exchange Agreement with its two voting
shareholders, USX and Transtar Holdings, L.P. (Holdings), an affiliate of
Blackstone Capital Partners L.P. As a result of this transaction, USX will
become sole owner of Transtar and certain of its subsidiaries. Holdings
will become owner of the other subsidiaries of Transtar. USX will account
for the change in its ownership interest in Transtar under the purchase
method of accounting. Previously, USX had accounted for its investment in
Transtar under the equity method of accounting.
75
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
13. (Continued)
Also in October 2000, USX agreed to purchase the tin mill products
business of LTV Corporation (LTV). Terms of this noncash transaction call
for USX to assume certain employee-related obligations of LTV. The
acquisition will be accounted for under the purchase method of accounting.
Both the Transtar and the LTV transactions are subject to certain
government approvals and clearances. The LTV transaction is also subject
to certain third party consents and customary closing conditions.
76
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 management; 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 88.
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 third quarter and first nine months of 2000 and 1999 are
set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
Revenues of reportable segment $1,430 $1,387 $4,588 $3,924
Revenues not allocated to reportable segment - (50) - (72)
----- ----- ----- -----
Total Revenues $1,430 $1,337 $4,588 $3,852
Total reportable segment revenues increased by $43 million and $664 million
in the third quarter and first nine months of 2000, respectively, compared with
the same periods in 1999. The increase in the third quarter reflected higher
steel transaction prices and better results from equity affiliates, partially
offset by lower steel shipment volumes. For the first nine months, improvement
came primarily from higher tubular shipment volumes which had higher average
transaction prices.
77
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 third quarter and
first nine months of 2000 and 1999 is set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
- -------------------------------------------------------------------------------
Segment income for U. S. Steel operations (a) $23 $3 $145 $43
Items not allocated to segment:
Net pension credits 67 46 199 186
Administrative expenses (7) (4) (18) (17)
Costs related to former business activities (b) (23) (21) (63) (65)
Impairment of USX's investment in USS/Kobe and
costs related to formation of Republic (c) - (50) - (50)
Loss on investment in RTI stock used to satisfy
indexed debt obligations (d) - - - (22)
----- ----- ----- -----
Total Group income from operations $60 $(26) $263 $75
===== ===== ===== =====
- -----
<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 management, 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 10 to the U. S. Steel Group Financial
Statements.
(d) For further details, see Note 4 to the U. S. Steel Group Financial
Statements.
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations increased $20 million and
$102 million in the third quarter and first nine months of 2000, respectively,
compared with the same periods in 1999. The increases in segment income were
primarily due to those factors previously mentioned in the revenue discussion.
In addition, the third quarter and first nine months of 2000 were negatively
impacted by higher natural gas prices. Segment income in the third quarter and
first nine months of 2000 included a $10 million charge for USX's share of
restructuring and impairment charges at Republic. The first nine months of 2000
included charges totaling $15 million for certain environmental and legal
contingencies. The third quarter and first nine months of 2000 were unfavorably
impacted by a planned blast furnace outage at Gary Works and the first nine
months of 2000 were also negatively impacted by an unplanned blast furnace
outage at Fairfield Works. Segment income for the third quarter and first nine
months of 1999 included charges of $7 million and $17 million, respectively, for
certain environmental and legal 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.
78
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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 $199 million in
the third quarter and first nine months of 2000, respectively, compared to $46
million and $186 million in the same periods in 1999. Net pension credits in
the first nine 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.
Net interest and other financial costs for the third quarter and first nine
months of 2000 and 1999 are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
- -------------------------------------------------------------------------------
Net interest and other financial costs $27 $20 $75 $48
Less:
Favorable adjustment to carrying value
of indexed debt(a) - - - (13)
----- ----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $27 $20 $75 $61
===== ===== ===== =====
- -----
<FN>
(a) For further discussion, see the Exchangeable Notes discussion in Note 4 to
the U. S. Steel Group Financial Statements.
Adjusted net interest and other financial costs increased by $7 million and
$14 million in the third quarter and first nine months of 2000, respectively, as
compared with the same periods in 1999. These increases were primarily due to
higher debt levels.
The provision for estimated income taxes in the third quarter and first
nine 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 $2 million (net of
$1 million income tax benefit) in the third quarter of 1999 was USX's share of
Republic's extraordinary loss related to the early extinguishment of debt. The
$7 million for the first nine months included this charge and a $5 million loss
(net of $3 million income tax benefit) resulting from the satisfaction of the
indexed debt. For further discussion, see Note 4 to the U. S. Steel Group
Financial Statements.
Net income increased $50 million and $108 million in the third quarter and
first nine months of 2000, respectively, compared to the same periods in 1999,
primarily reflecting the factors discussed above.
79
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Operating Statistics
- --------------------
Third quarter 2000 steel shipments of 2.6 million tons decreased 10% from
the same period in 1999 and steel shipments of 8.4 million tons in the first
nine months of 2000 increased 9% from the same period in 1999. Raw steel
production in the third quarter of 2000 of 2.8 million tons was down 10%
compared to the same period in 1999. Raw steel production in the first nine
months of 2000 of 8.9 million tons was comparable to the same period in 1999.
Raw steel capability utilization in the third quarter of 2000 averaged 85.5%,
compared to 94.9% in the same period in 1999. Raw steel capability utilization
in the first nine months of 2000 averaged 93.3%, compared to 93.0% in the same
period in 1999. Steel shipments, raw steel production and raw steel capability
utilization in the third quarter and first nine months of 2000 were negatively
impacted by a planned blast furnace outage at Gary Works, with this blast
furnace expected to be idled for the remainder of the year because of business
conditions, and, for the first nine months, by the blast furnace outage at
Fairfield Works in the second quarter.
Cash Flows
- ----------
Net cash provided from operating activities in the first nine months of
2000 was $5 million, compared with $158 million in the same period in 1999. The
decrease of $153 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 nine months of 2000 were $133 million,
compared with $221 million in the same period in 1999. Capital expenditures are
expected to approximate $200 million for the year 2000.
Contract commitments for capital expenditures at September 30, 2000,
totaled $84 million, compared with $83 million at December 31, 1999. The
September 30, 2000 commitment includes approximately half of the $90 million
purchase price for the Gary No. 2 Slab Caster which is expected to be purchased
upon lease expirations in the second and third quarters of 2001. The commitment
for the remaining purchase price was made in October 2000.
The above discussion includes a forward-looking statement concerning
capital expenditures for the year 2000. This statement is based on assumptions
as to completion of capital projects and estimated spending levels. In the
event any of these assumptions prove to be inaccurate, actual results may differ
significantly from those presently anticipated.
Financial obligations increased $200 million in the first nine 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.
80
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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.
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
September 30, 2000. In addition, there are 13 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
81
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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.
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 EPA.
In February 1999, the United States Department of Justice and EPA issued a
letter demanding a cash payment of approximately $4 million to resolve a Finding
of Violation issued in 1997 alleging improper sampling of benzene waste streams
at Gary Works. On September 18, 2000, a Consent Decree was entered with the
United States District Court which settled the alleged violation of the benzene
National Emissions Standards for Hazardous Air Pollutants. U. S. Steel agreed
to pay a civil penalty of $587,000 and to complete a Supplemental Environmental
Project removing polychlorinated biphenyl transformers at a cost of
approximately $2.2 million. Payment of the civil penalty was made on
October 13, 2000.
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 have softened due to continued high
import volumes, which, through the first eight months of 2000, exceeded record-
year 1998 levels for the same period, a draw down of inventories by spot
purchasers and increasing evidence that the growth in the domestic economy is
slowing. These factors are expected to continue to dampen our business through
the fourth quarter with shipments for the fourth quarter of 2000 projected to be
somewhat below third quarter levels. High natural gas prices, which unfavorably
affected the first nine months of 2000, are expected to persist for some time.
Due to our reduced order book, the blast furnace idled at Gary Works in July for
a planned 10-day outage is now expected to remain down through year end. In
addition, one of five agglomerator lines at Minntac taconite mining operations
in Minnesota will be idled on November 3, 2000, and is expected to remain down
through year end.
82
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
U. S. Steel's income from operations includes net pension credits, which
are primarily noncash, associated with all of U. S. Steel's pension plans. Net
pension credits are expected to be approximately $265 million in 2000. At the
end of 2000, U. S. Steel's main pension plans' transition asset will be fully
amortized, decreasing the pension credit by $69 million annually in future years
for this component. In addition, for the year 2001, changes in plan assets
based on market performance, if unfavorable, and pending business combinations
are expected to further reduce net pension credits which are currently projected
to be in the range of $140 million to $165 million. The above includes forward-
looking statements concerning net pension credits which can vary depending upon
the market performance of plan assets, changes in actuarial assumptions
regarding such factors as the selection of a discount rate and rate of return on
plan 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. Changes in any of
these factors could cause net pension credits to change. To the extent net
pension credits decline in the future, income from operations would be adversely
affected.
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 the third quarter of 2000,
Republic announced that it had completed a financial restructuring to improve
its liquidity position. Republic raised approximately $30 million in loans from
certain of its direct and indirect equity partners in exchange for notes of
Republic and warrants to purchase Class D common stock of Republic Technologies
International, Inc., Republic's majority owner. USX's portion was approximately
$6 million. USX also agreed to certain deferred payment terms into the year
2002, up to a maximum of $30 million, with regard to Republic's obligations
relating to iron ore pellets supplied to Republic. In its Form 10-Q for the
period ended September 30, 2000, which was filed with the SEC on October 31,
2000, Republic Holdings stated that "Notwithstanding these efforts, [Republic]
may need to obtain additional financing to meet its cash flow requirements,
including financing from the sale of additional debt or equity securities."
Republic Holdings also stated, "As a result of the factors mentioned above,
[Republic] is highly leveraged and could be considered a risky investment."
At September 30, 2000, USX's financial exposure to Republic totaled
approximately $107 million, consisting of its equity investment in Republic,
unsecured notes 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 operations and related assets of VSZ a.s.
("VSZ"). These operations are located in Kosice, Slovak Republic and will be
known as U. S. Steel Kosice s.r.o. ("USSK"). VSZ has an annual capacity of 4
million tons of raw steel production. An initial cash payment to VSZ of $60
million will be made at closing. Additional payments to VSZ of not less that
$25 million and up to $75 million are contingent upon the future performance of
USSK. Additionally, USSK will issue $325 million of debt to VSZ lenders and
will reimburse VSZ for paying $15 million in past taxes. Also, USSK has agreed
to spend $700 million in capital improvements over the next ten years. Final
transaction documents were signed on September 29 and shareholders gave their
final approval at a meeting held on October 12. The transaction is expected to
close in November 2000. USX owns approximately 25% of the shares of VSZ.
83
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
In early October 2000, U. S. Steel announced an agreement with LTV
Corporation ("LTV") to purchase LTV's tin mill products business, including its
Indiana Harbor, Indiana tin operations. Terms of this noncash transaction call
for U. S. Steel to assume certain employee-related obligations of LTV. U. S.
Steel intends to operate these facilities as an ongoing business and tin mill
employees at Indiana Harbor will become U. S. Steel employees. U. S. Steel and
LTV also entered into 5-year agreements for LTV to supply U. S. Steel with
pickled hot bands and for U. S. Steel to provide LTV with processing of cold
rolled steel. The purchase is expected to become effective around year end.
Transtar recently announced it has entered into a Reorganization and
Exchange Agreement with its two voting shareholders, Transtar Holdings, L.P.
(Holdings), an affiliate of Blackstone Capital Partners L.P., and USX
Corporation. As a result of this transaction, USX would become the sole owner
of Transtar and certain of its subsidiaries, namely, the Birmingham Southern
Railroad Company; the Elgin, Joliet and Eastern Railway Company; the Lake
Terminal Railroad Company; the McKeesport Connecting Railroad Company; the
Mobile River Terminal Company, Inc.; the Union Railroad Company; the Warrior &
Gulf Navigation Company; and Tracks Traffic and Management Services, Inc. and
their subsidiaries. Holdings would become the owner of the other subsidiaries.
The above discussion includes forward-looking statements concerning
shipments and prices and the completion of the VSZ, LTV and Transtar
transactions. Projected shipments and prices are based on assumptions as to
import levels, purchaser inventory levels and U.S. economic performance. One
factor among others that could affect the VSZ acquisition is final approval by
the anti-monopoly office of the Slovak Republic. The completion of the LTV
acquisition may be affected by factors such as receipt of government approvals,
consent of third parties, and satisfaction of customary closing conditions. The
completion of the Transtar reorganization and exchange could be affected by a
number of factors, such as approval by the Surface and Transportation Board,
antitrust clearances and satisfaction of customary closing conditions. In the
event any of these assumptions prove to be inaccurate, actual results may differ
significantly from those presently anticipated.
Steel imports to the United States accounted for an estimated 28%, 26% and
30% of the domestic steel market in the first eight months of 2000, and for the
years 1999 and 1998, respectively. Steel imports of hot-rolled sheet and pipe
increased 58% and 45%, respectively, in the first eight months of 2000, compared
to the same period in 1999.
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 the Department of Commerce ("Commerce") found that dumping had occurred,
and on June 9, 2000 and July 13, 2000, the International Trade Commission
("ITC") determined that the domestic industry is being materially injured or
threatened with material injury by the dumping in question. Commerce issued
antidumping ("AD") orders in all of the cases.
84
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
USX intends to file additional antidumping and countervailing duty
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
countervailing duty ("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 discontinued 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. In all
34 of the cases, Commerce issued determinations that, if the CVD or AD orders
were to be revoked, further dumping or subsidization would occur. On
November 2, 2000, the ITC determined that the orders should be continued in
place in all of the cases concerning corrosion-resistant steel and all of the
cases concerning cut-to-length plate, except cut-to-length plate from Canada.
It decided that all of the orders on cold-rolled product should be discontinued.
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 ("OCTG") from Argentina, Italy, Japan, Mexico and South
Korea. The reviews also encompass the 1995 CVD orders against the same two
products from Italy. Of the 11 orders, 8 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 three of
the orders (AD: OCTG from Mexico; and CVD: OCTG and seamless pipe from Italy)
are the subject of a full review. The ITC is conducting full reviews of all the
cases, despite the fact that responses by some of the respondent countries were
inadequate.
On October 28, 1999, Weirton Steel, along with the USWA and the Independent
Steelworkers Union ("ISU"), filed a trade case against tin- and chromium-coated
steel sheet imports from Japan. On June 20, 2000 Commerce announced final AD
margins and on August 2, 2000, the ITC determined that the domestic industry is
being materially injured or threatened with material injury by the dumping in
question. Commerce issued an AD order against Japan effective August 28, 2000.
85
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 September 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
Zinc
Other than trading $.2 $.4 (b)
Tin
Other than trading .1 .2 (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 September 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
September 30, 2000, will cause future income before income tax effects to
differ from those presented in the table.
(b) Price decrease.
86
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 September 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 September 30, 2000
Incremental
Increase in
Non-Derivative Carrying Fair Fair
Financial Instruments(a) Value Value Value(b)
- -------------------------------------------------------------------------------
Financial assets:
Investments and
long-term receivables $59 $59 $-
- ------------------------------------------------------------------------------
Financial liabilities:
Long-term debt (c)(d) $1,017 $1,047 $30
Preferred stock of
subsidiary 66 64 6
USX obligated mandatorily redeemable convertible
preferred securities of a subsidiary trust 183 129 11
----- ----- -----
Total liabilities $1,266 $1,240 $47
- ------------------------------------------------------------------------------
<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 September 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 September 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 September 30, 2000, the U. S. Steel Group had no material exposure to
foreign currency exchange rate risk.
Equity Price Risk
- -----------------
As of September 30, 2000, the U. S. Steel Group had no material exposure to
equity price risk.
87
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.
88
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 2000 1999 2000 1999
- --------------------------------------------------------------------------------
REVENUES $1,430 $1,337 $4,588 $3,852
INCOME (LOSS) FROM OPERATIONS
U. S. Steel operations (a) (b) (c) $23 $3 $145 $43
Items not allocated to segment:
Net Pension Credits (c) 67 46 199 186
Administrative Expenses (7) (4) (18) (17)
Cost related to former business activities (d) (23) (21) (63) (65)
Impairment of USX's investment in USS/Kobe
and costs related to the formation of
Republic (e) - (50) - (50)
Loss on settlement of indexed debt with
RTI International Metals, Inc. Stock - - - (22)
---- ---- ---- ----
Total U. S. Steel Group 60 (26) 263 75
CAPITAL EXPENDITURES $36 $68 $133 $221
OPERATING STATISTICS
Average steel price per ton $454 $405 $448 $421
Steel Shipments (f) 2,557 2,835 8,441 7,764
Raw Steel-Production (f) 2,752 3,061 8,938 8,901
Raw Steel-Capability Utilization (g) 85.5% 94.9% 93.3% 93.0%
Iron ore shipments (f) 4,770 4,706 11,455 10,892
- ----------
<FN>
(a) Results in the third quarter and first nine months of 2000 included
$10 million for USX's share of Republic's special charges. Results in
the first nine months of 2000 included charges totaling $15 million for
certain environmental and legal accruals. Results in the third quarter
and first nine months of 1999 included charges of $7 million and $17
million, respectively, for certain legal and 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 management, 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) For additional information on the impairment, see Note 10 to the U. S.
Steel Group Financial Statements.
(f) Thousands of net tons.
(g) Based on annual raw steel production capability of 12.8 million
tons.
89
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Environmental Proceedings
MAP has responded to information requests from the 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. 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 EPA 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. MAP is engaged in ongoing discussions with the EPA on these
issues.
While MAP has not been notified of any formal findings or violations
resulting from either the information requests or inspections regarding NSR
compliance; MAP has been informed during discussions with the EPA of potential
non-compliance concerns of the EPA based on these inspections and other
information identified by the EPA. Currently, discussions with the EPA have
been of a general and technical nature without any commitment to specific
control technologies, implementation schedules or possible penalties. It is
possible that a framework for resolution of these issues could be reached as
early as the fourth quarter of this year and that any resolution may include
other pending matters such as those arising from the EPA's 1998 multi-media
inspections.
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.
90
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS (continued)
Marathon Group (continued)
Environmental Proceedings (continued)
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 has responded to
the subpoena and is 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 has responded to the request and
certain other informal requests for information.
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.
91
Part II - Other Information (continued)
- ----------------------------
Item 1. LEGAL PROCEEDINGS (continued)
U. S. Steel Group
Environnmental 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 (8) other
PRPs in a joint defense group which is currently engaged in settlement
discussions with the public trustees and EPA.
In February 1999, the United States Department Of Justice and EPA issued a
letter demanding a cash payment of approximately $4 million to resolve a Finding
of Violation issued in 1997 alleging improper sampling of benzene waste streams
at Gary Works. On September 18, 2000, a Consent Decree was entered with the
United States District Court which settled the alleged violation of the benzene
National Emissions Standards for Hazardous Air Pollutants. U. S. Steel agreed
to pay a civil penalty of $587,000 and to complete a Supplemental Environmental
Project removing transformers containing polychlorinated biphenyl at a cost of
approximately $2.2 million. Payment of the civil penalty was made on
October 13, 2000.
92
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)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
INCOME DATA:
Revenues $9,288 $6,483 $26,142 $16,805
Income from operations 741 566 2,140 1,389
Net income 107 221 724 475
(In millions)
-----------------------
September 30 December 31
2000 1999
-------- -----------
BALANCE SHEET DATA:
Assets:
Current assets $7,031 $6,077
Noncurrent assets 11,568 11,489
------ ------
Total assets $18,599 $17,566
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $3,912 $3,320
Noncurrent liabilities 8,799 9,250
Preferred stock of subsidiary 10 10
Minority interest in consolidated subsidiary 1,922 1,753
Stockholder's equity 3,956 3,233
------- -------
Total liabilities and stockholder's equity $18,599 $17,566
======= =======
93
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 July 25, 2000, reporting under Item 5. Other Events,
that the Board of Directors declared a dividend of 25 cents per share on USX-US
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.
Form 8-K dated October 19, 2000, reporting under Item 5. Other Events
and Regulation FD Disclosure, that the Marathon Group Earnings Release reported
that Marathon has signed a definitive agreement with Shell to transfer its 37.5
percent interest in Sakhalin Energy Investment Company Ltd. The increased
likelihood of closing this transaction triggered a one-time, noncash deferred
tax charge of $235 million in the third quarter.
94
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
November 2, 2000