1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at July 31, 1999 follows:
USX-Marathon Group - 308,744,772 shares
USX-U. S. Steel Group - 88,369,055 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 1999
---------------------------
INDEX Page
----- ----
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 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 30
Financial Statistics 32
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 33
Marathon Group Balance Sheet 34
Marathon Group Statement of Cash Flows 35
Selected Notes to Financial Statements 36
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 45
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 59
Supplemental Statistics 61
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 30, 1999
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 62
U. S. Steel Group Balance Sheet 63
U. S. Steel Group Statement of Cash Flows 64
Selected Notes to Financial Statements 65
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 72
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 83
Supplemental Statistics 85
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 86
Item 4. Submission of Matters to a Vote of Security Holders 87
Item 5. Other Information 88
Item 6. Exhibits and Reports on Form 8-K 89
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES:
Sales $6,731 $7,182 $12,809 $14,082
Dividend and affiliate income 18 46 11 71
Gain (loss) on disposal of assets 9 30 (13) 44
Gain on ownership change in Marathon Ashland
Petroleum LLC - (2) - 246
Other income 8 4 13 17
------ ------ ------ ------
Total revenues 6,766 7,260 12,820 14,460
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 4,810 5,095 9,364 10,266
Selling, general and administrative expenses 37 67 89 152
Depreciation, depletion and amortization 301 281 609 628
Taxes other than income taxes 1,123 1,075 2,148 2,051
Exploration expenses 59 75 122 157
Inventory market valuation credits (66) (3) (415) (28)
------ ------ ------ ------
Total costs and expenses 6,264 6,590 11,917 13,226
------ ------ ------ ------
INCOME FROM OPERATIONS 502 670 903 1,234
Net interest and other financial costs 91 71 174 153
Minority interest in income of Marathon Ashland
Petroleum LLC 112 158 257 212
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS 299 441 472 869
Provision for estimated income taxes 110 143 173 301
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 189 298 299 568
Extraordinary loss on extinguishment of debt,
net of income tax - - 5 -
------ ------ ------ ------
NET INCOME 189 298 294 568
Dividends on preferred stock 3 3 5 5
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $186 $295 $289 $563
====== ====== ====== ======
<FN>
Selected notes to financial statements appear on pages 9-20.
5
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Net income $134 $162 $253 $345
- Per share - basic and diluted .43 .56 .82 1.19
Dividends paid per share .21 .21 .42 .42
Weighted average shares, in thousands
- Basic 309,054 289,591 309,041 289,220
- Diluted 309,462 290,263 309,332 289,879
APPLICABLE TO STEEL STOCK:
Income before extraordinary loss $52 $133 $41 $218
- Per share - basic .60 1.53 .47 2.51
- diluted .59 1.46 .47 2.41
Extraordinary loss, net of income tax - - 5 -
- Per share - basic and diluted - - .06 -
Net income $52 $133 $36 $218
- Per share - basic .60 1.53 .41 2.51
- diluted .59 1.46 .41 2.41
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 88,387 86,953 88,378 86,777
- Diluted 92,647 94,507 88,379 94,314
<FN>
Selected notes to financial statements appear on pages 9-20.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $99 $146
Receivables, less allowance for doubtful
accounts of $8 and $12 1,689 1,663
Inventories 2,607 2,008
Deferred income tax benefits 218 217
Other current assets 230 172
------ ------
Total current assets 4,843 4,206
Investments and long-term receivables,
less reserves of $3 and $10 1,175 1,249
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$16,632 and $16,238 12,723 12,929
Prepaid pensions 2,530 2,413
Other noncurrent assets 329 336
------ ------
Total assets $21,600 $21,133
====== ======
<FN>
Selected notes to financial statements appear on pages 9-20.
7
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $149 $145
Accounts payable 2,526 2,478
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Payroll and benefits payable 445 480
Accrued taxes 301 245
Accrued interest 103 97
Long-term debt due within one year 82 71
------ ------
Total current liabilities 3,606 3,619
Long-term debt, less unamortized discount 4,059 3,920
Long-term deferred income taxes 1,656 1,579
Employee benefits 2,858 2,868
Deferred credits and other liabilities 726 720
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 182 182
Minority interest in Marathon Ashland Petroleum LLC 1,744 1,590
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,767,787 shares
($138 liquidation preference) 3 3
Common stocks:
Marathon Stock issued - 308,722,152 shares and
308,458,835 shares 309 308
Steel Stock issued - 88,368,566 shares and
88,336,439 shares 88 88
Securities exchangeable solely into Marathon Stock
issued - 309,138 shares and 507,324 shares - 1
Additional paid-in capital 4,592 4,587
Deferred compensation (1) (1)
Retained earnings 1,582 1,467
Accumulated other comprehensive income (loss) (54) (48)
------ ------
Total stockholders' equity 6,519 6,405
------ ------
Total liabilities and stockholders' equity $21,600 $21,133
====== ======
<FN>
Selected notes to financial statements appear on pages 9-20.
8
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
Six Months Ended
June 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $294 $568
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 51 82
Depreciation, depletion and amortization 609 628
Exploratory dry well costs 62 97
Inventory market valuation credits (415) (28)
Pensions and other postretirement benefits (116) (101)
Deferred income taxes 98 180
Gain on ownership change in Marathon Ashland
Petroleum LLC - (246)
(Gain) loss on disposal of assets 13 (44)
Changes in:
Current receivables - sold 30 -
- operating turnover (301) 236
Inventories (221) (193)
Current accounts payable and accrued expenses 385 6
All other - net (33) (96)
------ ------
Net cash provided from operating activities 461 1,089
------ ------
INVESTING ACTIVITIES:
Capital expenditures (685) (686)
Disposal of assets 182 45
Restricted cash-withdrawals 39 202
- deposits (26) (390)
Affiliates -investments - net - (71)
- loans and advances (56) (58)
- repayments of loans and advances - 63
All other - net (3) 26
------ ------
Net cash used in investing activities (549) (869)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit
arrangements - net (51) (121)
Other debt - borrowings 459 842
- repayments (195) (100)
Common stock - issued 8 75
- repurchased - (195)
Dividends paid (179) (170)
------ ------
Net cash provided from financing activities 42 331
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (47) 551
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 146 54
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $99 $605
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(178) $(144)
Income taxes paid (12) (150)
<FN>
Selected notes to financial statements appear on pages 9-20.
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 1999 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1998.
2. On March 31, 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 will exchange the RTI shares
for the notes at maturity. The notes are exchangeable for shares of RTI
common stock on a variable basis up to one share per note depending on the
market price of RTI common stock at maturity. Ownership of any shares not
required for satisfaction of the indexed debt will revert 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 gain
(loss) on disposal of assets. This transaction represents a noncash
investing and financing activity of $56 million, which was the carrying
value of the indexed debt at March 31, 1999.
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 $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.
3. Total comprehensive income for the second quarter of 1999 and 1998 was
$185 million and $294 million, respectively, and $288 million and
$565 million for the six months of 1999 and 1998, respectively.
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. The Marathon Group's operations consists 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
- --------------------------------------------------------------------------------
SECOND QUARTER 1999
Revenues:
Customer $689 $4,637 $113 $5,439 $1,292 $6,731
Intersegment (a) 34 4 6 44 - 44
Intergroup (a) 4 - 4 8 11 19
Equity in earnings (losses) of
unconsolidated affiliates 3 4 5 12 (10) 2
Other 13 10 6 29 11 40
----- ----- ----- ----- ----- -----
Total revenues $743 $4,655 $134 $5,532 $1,304 $6,836
===== ===== ===== ===== ===== =====
Segment income (loss) $124 $228 $19 $371 $(9) $362
===== ===== ===== ===== ===== =====
SECOND QUARTER 1998
Revenues:
Customer $499 $4,928 $66 $5,493$1,689 $7,182
Intersegment (a) 41 1 2 44 - 44
Intergroup (a) 2 - 1 3 - 3
Equity in earnings of
unconsolidated affiliates 2 3 1 6 28 34
Other 20 11 3 34 16 50
----- ----- ----- ----- ----- -----
Total revenues $564 $4,943 $73 $5,580 $1,733 $7,313
===== ===== ===== ===== ==== =====
Segment income $73 $397 $3 $473 $154 $627
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
Revenues:
Customer $1,261 $8,816 $195 $10,272 $2,537 $12,809
Intersegment (a) 68 9 15 92 - 92
Intergroup (a) 7 - 8 15 12 27
Equity in earnings (losses) of
unconsolidated affiliates 4 7 13 24 (33) (9)
Other 19 16 9 44 21 65
----- ----- ----- ----- ----- -----
Total revenues $1,359 $8,848 $240 $10,447 $2,537 $12,984
===== ===== ===== ===== ===== =====
Segment income (loss) $160 $273 $34 $467 $(68) $399
===== ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1998
Revenues:
Customer $1,017 $9,520 $162 $10,699 $3,358 $14,057
Intersegment (a) 84 2 4 90 - 90
Intergroup (a) 6 - 4 10 - 10
Equity in earnings of
unconsolidated affiliates 1 6 6 13 43 56
Other 21 24 5 50 28 78
----- ----- ----- ----- ----- -----
Total revenues $1,129 $9,552 $181 $10,862 $3,429 $14,291
===== ===== ===== ===== ==== =====
Segment income $197 $525 $17 $739 $260 $999
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
The following schedules reconcile segment revenues and income (loss) to
amounts reported in the Marathon and U. S. Steel Groups' financial
statements:
Marathon GroupU. S. Steel Group
Second Quarter Second Quarter
Ended Ended
June 30 June 30
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $5,532 $5,580 $1,304 $1,733
Items not allocated to segments:
Loss on ownership change in MAP - (2) - -
Other (7) - - -
Elimination of intersegment revenues (44) (44) - -
Administrative revenues - (4) - -
------ ------ ----- -----
Total Group revenues $5,481 $5,530 $1,304 $1,733
====== ====== ====== ======
Income:
Income (loss) for reportable segments $371 $473 $(9) $154
Items not allocated to segments:
Loss on ownership change in MAP - (2) - -
Administrative expenses (31) (21) (8) (5)
Pension credits - - 140 93
Costs related to former business activities - - (20) (25)
Inventory market valuation adjustments 66 3 - -
Other (a) (7) - - -
------ ------ ------ ------
Total Group income from operations $399 $453 $103 $217
====== ====== ====== ======
<FN>
(a)Represents for the Marathon Group in 1999, estimated loss on sale of
Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie).
13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. (Continued)
Marathon GroupU. S. Steel Group
Six Months Six Months
Ended Ended
June 30 June 30
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $10,447 $10,862 $2,537 $3,429
Items not allocated to segments:
Gain on ownership change in MAP - 246 - -
Other (23) 24 (22) -
Elimination of intersegment revenues (92) (90) - -
Administrative revenues - (1) - -
------ ------ ----- -----
Total Group revenues $10,332 $11,041 $2,515 $3,429
====== ====== ====== ======
Income:
Income (loss) for reportable segments $467 $739 $(68) $260
Items not allocated to segments:
Gain on ownership change in MAP - 246 - -
Administrative expenses (57) (59) (13) (14)
Pension credits - - 248 186
Costs related to former business activities - - (44) (53)
Inventory market valuation adjustments 415 28 - -
Other (a) (23) (99) (22) -
------ ------ ------ ------
Total Group income from operations $802 $855 $101 $379
====== ====== ====== ======
<FN>
(a) Represents for the Marathon Group in 1999, loss on sale of Scurlock
and Carnegie, and in 1998, international exploration and production
property impairments, MAP transition charges and gas contract settlement.
For the U. S. Steel Group in 1999, represents loss on investment in RTI
stock used to satisfy indexed debt obligations.
5. In the second quarter of 1999, MAP sold Scurlock Permian LLC
(Scurlock), its crude oil gathering business, to Plains Marketing, L.P for
$136 million. During the first six months of 1999, MAP recorded a pretax
loss of $16 million related to the sale. Scurlock had been reported as
part of the Marathon Group's refining, marketing and transportation
operating segment.
On June 1, 1999, the Marathon Group announced that it had signed a
definitive agreement to sell Carnegie to Equitable Resources, Inc. The
transaction is expected to close later this year. Carnegie is engaged in
natural gas production, transmission, distribution, sales and storage
activities in Pennsylvania and West Virginia. At June 30, 1999, the net
assets held for sale have been included in other current assets in the
consolidated balance sheet. During the second quarter of 1999, USX
recorded an estimated pretax loss of $7 million related to the sale.
Carnegie has been reported as part of the Marathon Group's other energy
related businesses operating segment.
14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
6. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
Consumer excise taxes on petroleum
products and merchandise $1,003 $958 $1,916 $1,834
Matching crude oil and refined product
buy/sell transactions settled in cash 698 994 1,570 1,982
7. Income from operations includes net periodic pension credits of $83
million and $48 million in the second quarter of 1999 and 1998,
respectively, ($128 million and $98 million in the first six months of 1999
and 1998, respectively.) These pension credits are primarily noncash and
for the most part are included in selling, general and administrative
expenses.
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.
8. 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.
9. The method of calculating net income per share for the Marathon Stock
and Steel Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Restated
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts. The financial statements of the Marathon
Group and the U. S. Steel Group, taken together, include all accounts which
comprise the corresponding consolidated financial statements of USX.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. (Continued)
COMPUTATION OF INCOME PER SHARE
Second Quarter Ended
June 30
1999 1998
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
Net income (millions) $134 $134 $162 $162
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,054 309,054 289,591 289,591
Effect of dilutive stock options - 408 - 672
------ ------ ------ ------
Average common shares and dilutive effect 309,054 309,462 289,591 290,263
====== ====== ====== ======
Net income per share $.43 $.43 $.56 $.56
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Net income $55 $55 $136 $136
Dividends on preferred stock 3 3 3 -
------ ------ ------ ------
Net income applicable to Steel Stock 52 52 133 136
Effect of dilutive convertible securities - 2 - 2
------ ------ ------ ------
Net income assuming conversions $52 $54 $133 $138
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,387 88,387 86,953 86,953
Effect of dilutive securities:
Trust preferred securities - 4,256 - 4,256
Preferred stock - - - 3,211
Stock options - 4 - 87
------ ------ ------ ------
Average common shares and dilutive effect 88,387 92,647 86,953 94,507
====== ====== ====== ======
Net income per share $.60 $.59 $1.53 $1.46
====== ====== ====== ======
16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. (Continued)
COMPUTATION OF INCOME PER SHARE
Six Months Ended
June 30
1999 1998
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
Net income (millions) $253 $253 $345 $345
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,041 309,041 289,220 289,220
Effect of dilutive stock options - 291 - 659
------ ------ ------ ------
Average common shares and dilutive effect 309,041 309,332 289,220 289,879
====== ====== ====== ======
Net income per share $.82 $.82 $1.19 $1.19
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Income before extraordinary loss $46 $46 $223 $223
Dividends on preferred stock 5 5 5 -
Extraordinary loss 5 5 - -
------ ------ ------ ------
Net income applicable to Steel Stock 36 36 218 223
Effect of dilutive convertible securities - - - 4
------ ------ ------ ------
Net income assuming conversions $36 $36 $218 $227
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,378 88,378 86,777 86,777
Effect of dilutive securities:
Trust preferred securities - - - 4,256
Preferred stock - - - 3,211
Stock options - 1 - 70
------ ------ ------ ------
Average common shares and dilutive effect 88,378 88,379 86,777 94,314
====== ====== ====== ======
Per share:
Income before extraordinary loss $.47 $.47 $2.51 $2.41
Extraordinary loss .06 .06 - -
------ ------ ------ ------
Net income $.41 $.41 $2.51 $2.41
====== ====== ====== ======
17
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
10. During 1997, Marathon Oil Company (Marathon) and Ashland Inc.
(Ashland) agreed to combine the major elements of their refining, marketing
and transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to MAP, a new consolidated subsidiary.
Also on January 1, 1998, Marathon acquired certain RM&T net assets from
Ashland in exchange for a 38% interest in MAP. The acquisition was
accounted for under the purchase method of accounting. The purchase price
was determined to be $1.9 billion, based upon an external valuation. The
change in Marathon's ownership interest in MAP resulted in a gain of $246
million, which is included in the first six months 1998 revenues.
Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited (Tarragon), a Canadian oil and gas exploration and production
company. Results for 1999 include the operations of Marathon Canada
Limited, formerly known as Tarragon.
11. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
------------------------
June 30 December 31
1999 1998
------- -----------
Raw materials $840 $916
Semi-finished products 368 282
Finished products 1,370 1,205
Supplies and sundry items 165 156
------ ------
Total (at cost) 2,743 2,559
Less inventory market valuation reserve 136 551
------ ------
Net inventory carrying value $2,607 $2,008
====== ======
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's Management's Discussion and Analysis of Financial
Condition and Results of Operations.
12. 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.
18
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. At June 30, 1999, USX had $400 million in borrowings against its
$2,350 million long-term revolving credit agreement.
At June 30, 1999, MAP had no borrowings against its $500 million
revolving credit agreements with banks or its $190 million revolving credit
agreement with Ashland.
USX has a short-term credit agreement totaling $125 million at June
30, 1999. Interest is based on the bank's prime rate or London Interbank
Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other
banks provide short-term lines of credit totaling $150 million which
require a .125% fee or maintenance of compensating balances of 3%. At June
30, 1999, there were no borrowings against these facilities. USX had other
outstanding short-term borrowings of $149 million.
In the event of a change in control of USX, debt obligations totaling
$3,571 million at June 30, 1999, may be declared immediately due and
payable.
14. In the first quarter of 1999, USX issued $300 million in aggregate
principal amount of 6.65% Notes due 2006.
On March 31, 1999, USX extinguished $117 million of indexed debt,
representing 6-3/4% Exchangeable Notes due February 1, 2000. See Note 2
for further discussion.
15. USX has an agreement (the program) to sell an undivided interest in
certain accounts receivable of the U. S. Steel Group. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At June 30, 1999,
the amount sold under the program that had not been collected was $350
million, which will be forwarded to the buyers at the end of the agreement,
or in the event of earlier contract termination. If USX does not have a
sufficient quantity of eligible accounts receivable to reinvest in for the
buyers, the size of the program will be reduced accordingly. The buyers
have rights to a pool of receivables that must be maintained at a level of
at least 115% of the program's size. In the event of a change in control
of USX, as defined in the agreement, USX may be required to forward
payments collected on sold accounts receivable to the buyers.
16. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
19
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
16. (Continued)
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 1999, and December
31, 1998, accrued liabilities for remediation totaled $160 million and $145
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 $47
million at June 30, 1999, and $41 million at December 31, 1998.
For a number of years, USX has made substantial capital expenditures
to bring existing facilities into compliance with various laws relating to
the environment. In the six months of 1999 and for the years 1998 and
1997, such capital expenditures totaled $42 million, $173 million and $134
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 June 30, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $142 million and $141
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$218 million at June 30, 1999. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of June 30, 1999, the largest guarantee for a single affiliate was $131
million.
At June 30, 1999, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $163 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and
long-term investments at June 30, 1999, totaled $983 million compared
with $812 million at December 31, 1998.
20
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
17. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced
that they had entered into a letter of intent with Blackstone Capital
Partners II (Blackstone) to combine the steelmaking and bar producing
assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by
Blackstone, Republic Technologies International, Inc., Republic Engineered
Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In
addition, on August 6, 1999, USX agreed to a $15 million equity
investment in Republic when the combination is consummated. USX
currently owns 50% of USS/Kobe and will own approximately 15% of
Republic. The seamless pipe business of USS/Kobe is excluded from this
transaction and will continue to operate as a joint venture between USX
and Kobe Steel.
The transaction was subject to numerous conditions, including financing.
As of the date of issuance of the accompanying financial statements, it was
uncertain whether several of these conditions would be resolved and the
transaction would be completed. Due to these uncertainties, neither USX
nor USS/Kobe recognized any financial effects of the transaction in the
second quarter 1999. On August 6, 1999, Republic received financing
commitments sufficient to complete the transaction, which is scheduled to
be closed on August 13, 1999.
The estimated fair value of USX's investment in Republic, based upon
preliminary information supplied by Republic, is approximately $80 million
less than USX's carrying value of its investment in the steelmaking and bar
producing assets of USS/Kobe. Based on the resolution of the uncertainties
and the anticipated closing of the transaction, USX expects to recognize an
estimated impairment of $80 million in the third quarter of 1999.
21
USX CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
----------------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
3.89 5.48 3.36 3.92 3.62 1.49 2.01
==== ==== ==== ==== ==== ==== ====
USX CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
-------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
4.00 5.67 3.47 4.11 3.90 1.62 2.18
==== ==== ==== ==== ==== ==== ====
22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company that is principally
engaged in the energy business through its Marathon Group and in the steel
business through its U. S. Steel Group. The following discussion should be read
in conjunction with the second quarter and first six months of 1999 USX
Consolidated Financial Statements and selected notes. 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 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 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 1998 Form 10-K.
23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the second quarter and the first six months of 1999 and 1998
are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Revenues
Marathon Group $5,481 $5,530 $10,332 $11,041
U. S. Steel Group 1,304 1,733 2,515 3,429
Eliminations (19) (3) (27) (10)
------ ------ ------- -------
Total USX Corporation revenues $6,766 $7,260 $12,820 $14,460
Less:
Excise taxes (a)(b) 1,003 958 1,916 1,834
Matching buy/sell transactions (a)(c) 698 994 1,570 1,982
------ ------ ------ ------
Revenues excluding above items $5,065 $5,308 $9,334 $10,644
====== ====== ====== ======
- ------
<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)
decreased by $243 million in the second quarter of 1999 as compared with the
second quarter of 1998, reflecting a decrease of $429 million for the
U. S. Steel Group offset by an increase of $202 million for the Marathon Group.
For the first six months of 1999 revenues decreased $1,310 million as compared
with the same period of 1998, reflecting decreases of $379 million for the
Marathon Group and $914 million for the U. S. Steel Group.
For discussion of revenues by Group, see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group.
24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the second quarter and the first six months of
1999 and 1998 are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Reportable segments
Marathon Group
Exploration & production $124 $73 $160 $197
Refining, marketing & transportation 228 397 273 525
Other energy related businesses 19 3 34 17
---- ---- ---- ----
Income for reportable segments - Marathon Group $371 $473 $467 $739
U. S. Steel Group
Income for reportable segment (9) 154 (68) 260
--- ---- ---- ----
Income for reportable segments - USX Corporation 362 627 399 999
Items not allocated to segments:
Marathon Group 28 (20) 335 116
U. S. Steel Group 112 63 169 119
---- ---- ---- ----
Total income from operations - USX Corporation $502 $670 $903 $1,234
Income for reportable segments decreased by $265 million in the second
quarter of 1999 as compared with the second quarter of 1998, reflecting
decreases of $102 million for the Marathon Group reportable segments and $163
million for U. S. Steel Group reportable segment. Income for reportable segments
in the first six months of 1999 decreased by $600 million compared with the
first six months of 1998, reflecting decreases of $272 million for the Marathon
Group reportable segments and $328 million for 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.
25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the second quarter and first six
months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Net interest and other financial costs $91 $71 $174 $153
Less:
Favorable (unfavorable) adjustment to carrying
value of indexed debt (a) - - 13 (4)
----- ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $91 $71 $187 $149
===== ====== ====== ======
- ------
<FN>
(a) For discussion, see Note 2 to the USX Consolidated Financial Statements.
Adjusted net interest and other financial costs increased by $20 million in
the second quarter of 1999 and $38 million in the first six months of 1999 as
compared with the same periods of 1998, due primarily to increased costs
resulting from higher average debt levels and lower interest income.
Provisions for estimated income taxes of $110 million and $173 million for
the second quarter and the first six months of 1999 were based on tax rates and
amounts that recognize management's best estimate of current and deferred tax
assets and liabilities. The U. S. Steel Group's provision for estimated income
taxes for the second quarter and first six months of 1998 included a $9 million
favorable foreign tax adjustment as a result of a favorable resolution of
foreign tax litigation.
Extraordinary loss on extinguishment of debt of $5 million, net of a $3
million income tax benefit, in the first six months of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt in the first
quarter of 1999. For further discussion, see Note 2 to the USX Consolidated
Financial Statements.
Net income was $189 million for the second quarter of 1999, a decrease of
$109 million from the second quarter of 1998 reflecting decreases of $28 million
for the Marathon Group and $81 million for the U. S. Steel Group. Net income
was $294 million for the first six months of 1999, a decrease of $274 million as
compared with the first six months of 1998, reflecting decreases of $92 million
for the Marathon Group and $182 million for the U. S. Steel Group.
26
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Dividends to Stockholders
- -------------------------
On July 27, 1999, the USX Board of Directors (the "Board") declared
dividends of 21 cents per share on Marathon Stock and 25 cents per share on
Steel Stock, payable September 10, 1999, to stockholders of record at the close
of business on August 18, 1999. The Board also declared a dividend of $0.8125
per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable
September 30, 1999, to stockholders of record at the close of business on August
31, 1999.
On July 27, 1999, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3178 per share on its non-
voting Exchangeable Shares, payable September 10, 1999, to stockholders of
record at the close of business on August 18, 1999.
Cash Flows
- ----------
Cash and cash equivalents totaled $99 million at June 30, 1999, compared
with $605 million at June 30, 1998, a decrease of $506 million reflecting a $510
million decrease for the Marathon Group offset by a $4 million increase for the
U. S. Steel Group. The decrease for the Marathon Group was primarily the result
of a temporary change in excise tax payment patterns in 1998 that reversed
later in the year.
Net cash provided from operating activities totaled $461 million in the
first six months of 1999, a $628 million decrease from the first six months of
1998, reflecting a $510 million decrease for the Marathon Group and a $118
million decrease for the U. S. Steel Group. The decrease for the Marathon Group
mainly reflected lower profitability, unfavorable working capital changes and an
increase from the previous period in the amount distributed by MAP to Ashland.
Capital expenditures for property, plant and equipment in the first six
months of 1999 were $685 million compared with $686 million for the first six
months of 1998. For further details, see USX Corporation - Financial Statistics,
following Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Loans and advances to affiliates were $56 million in the first six months
of 1999 compared with $58 million in the first six months of 1998. Cash
outflows in both periods mainly reflected funding by the Marathon Group to
equity affiliates for capital projects, primarily the Sakhalin II project in
Russia.
Repayments of loans and advances from affiliates were $63 million in the
first six months of 1998 as a result of repayments by Sakhalin Energy Investment
Company, Ltd. of advances made by the Marathon Group in conjunction with the
Sakhalin II project in Russia.
Contract commitments to acquire property, plant and equipment and long-term
investments at June 30, 1999, totaled $983 million compared with $812 million at
December 31, 1998. The increase was primarily due to the pending acquisition
of certain Ultramar Diamond Shamrock refining, marketing and transportation.
USX's total long-term debt, preferred stock of subsidiary, USX obligated
preferred securities of a subsidary trust and notes payable, totaled $4,722
million at June 30, 1999, up $154 million from December 31, 1998 primarily due
to the issuance of the 6.65% Notes due 2006 and an increase in commercial paper
issuances partially offset by repayments on revolving credit agreements and the
settlement of the indexed debt.
27
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity
- ---------
At June 30, 1999, USX had $400 million of borrowings against its $2,350
million long-term revolving credit agreement and $149 million of borrowings
against other short-term lines. There were no borrowings against the MAP
revolving credit agreements at June 30, 1999.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of June 30, 1999, 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 1999 and years 2000 and 2001, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
16 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
41 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of June 30, 1999. 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 140 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, 17
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,
28
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
In October 1998, the National Enforcement Investigations Center and Region
V of the United States Environmental Protection Agency ("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. Thus far, MAP has been served with two Notices of Violation
("NOV") and two Findings of Violation in connection with the multi-media
inspection at its Detroit refinery, and a NOV as a result of the inspection at
its Robinson refinery. MAP can contest the factual and the 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 involving a variety of matters,
including laws and regulations relating to the environment (see Note 16 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.
Year 2000 Readiness Disclosure
- ------------------------------
See Year 2000 Readiness Disclosure in Management's Discussion and Analysis
of Financial Condition and Results of Operations for the Marathon Group and the
U. S. Steel Group.
29
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- -------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This new standard requires recognition of
all derivatives as either assets or liabilities at fair value. This new
standard may result in additional volatility in both current period earnings and
other comprehensive income as a result of recording recognized and unrecognized
gains and losses resulting from changes in the fair value of derivative
instruments. At adoption this new standard requires a comprehensive review of
all outstanding derivative instruments to determine whether or not their use
meets the hedge accounting criteria. Upon adoption, there may be derivative
instruments employed by USX that do not meet all of the designated hedge
criteria and they will be reflected in income on a mark-to-market basis. Based
upon the strategies currently used by USX and the level of activity related to
forward exchange contracts and commodity-based derivative instruments in recent
periods, USX does not anticipate the effect of adoption to have a material
impact on either financial position or results of operations. The effective
date of SFAS No. 133 was amended by SFAS No. 137. USX plans to adopt the
standard effective January 1, 2001, as required.
30
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Management Opinion Concerning Derivative Instruments
- --------------------------------------
USX utilizes derivative instruments principally in hedging activities,
whereby gains and losses are generally offset by price changes in the underlying
commodity. Recently, the Marathon Group's risk management policy was expanded to
include the use of derivative instruments for certain nonhedging and trading
activities. These instruments will be marked-to-market each period and the
related income or loss will be included in income from operations. Management
believes that use of derivative instruments along with risk assessment
procedures and internal controls does not expose USX to material risk. The use
of derivative instruments could materially affect USX's results of operations in
particular quarterly or annual periods. However, management believes that use
of derivative instruments will not have a material adverse effect on financial
position or liquidity.
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of June 30, 1999 are provided in the following
table(a):
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) (d) $21.8 $56.9
Natural gas (price decrease) (d) 9.6 24.8
Refined products (price increase) (d) .1 .2
U. S. Steel Group
Natural gas (price decrease) (d) $2.5 $6.3
Zinc (price decrease) (d) 3.0 7.6
Tin (price decrease) (d) .4 .7
Nickel (price decrease) (d) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments 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 effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at June 30, 1999. Marathon Group and U. S. Steel Group management
evaluate their portfolios of derivative commodity instruments on an
ongoing basis and add or revise strategies to reflect anticipated market
conditions and changes in risk profiles. Changes to the portfolios
subsequent to June 30, 1999, would cause future pretax income effects to
differ from those presented in the table.
31
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
(b) The number of net open contracts varied throughout second quarter
1999, from a low of 2,476 contracts at June 30, 1999, to a high of 34,199
contracts at April 16, 1999, and averaged 25,914 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout second quarter 1999, 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) 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 pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
Interest Rate Risk
- ------------------
As of June 30, 1999, the discussion of USX's interest rate risk has not
changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of June 30, 1999, the discussion of USX's foreign currency exchange rate
risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Equity Price Risk
- -----------------
USX was subject to equity price risk resulting from its issuance in
December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000
("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a
trustee the entire 5.5 million shares it owned in RTI. The deposit of shares
resulted in the satisfaction of USX's obligation under the indexed debt. Under
the terms of the indenture, the trustee will exchange the RTI shares for the
notes at maturity. USX is no longer exposed to any negative risks associated
with changes in the value of RTI common stock. For further discussion, see Note
2 to the USX Consolidated Financial Statements.
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.
32
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
-------------- --------------
(Dollars in millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------
REVENUES
Marathon Group $5,481 $5,530 $10,332 $11,041
U. S. Steel Group 1,304 1,733 2,515 3,429
Eliminations (19) (3) (27) (10)
------- ------- ------- -------
Total $6,766 $7,260 $12,820 $14,460
INCOME FROM OPERATIONS
Marathon Group $399 $453 $802 $855
U. S. Steel Group 103 217 101 379
------ ------ ------ ------
Total $502 $670 $903 $1,234
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group $336 $331 $532 $550
U. S. Steel Group 74 79 153 136
------ ------ ------ ------
Total $410 $410 $685 $686
INVESTMENTS (RETURNS) & OTHER AFFILIATE ACTIVITY - NET
Marathon Group $37 $(22) $56 $3
U. S. Steel Group - - - 63
------ ------ ------ ------
Total $37 $(22) $56 $66
33
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES:
Sales $5,447 $5,496 $10,287 $10,733
Dividend and affiliate income 28 18 44 28
Gain (loss) on disposal of assets (1) 13 (11) 16
Gain on ownership change in Marathon Ashland
Petroleum LLC - (2) - 246
Other income 7 5 12 18
------ ------ ------ ------
Total revenues 5,481 5,530 10,332 11,041
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 3,669 3,662 7,074 7,385
Selling, general and administrative expenses 132 120 254 251
Depreciation, depletion and amortization 222 209 459 479
Taxes other than income taxes 1,066 1,014 2,036 1,942
Exploration expenses 59 75 122 157
Inventory market valuation credits (66) (3) (415) (28)
------ ------ ------ ------
Total costs and expenses 5,082 5,077 9,530 10,186
------ ------ ------ ------
INCOME FROM OPERATIONS 399 453 802 855
Net interest and other financial costs 71 49 146 103
Minority interest in income of Marathon Ashland
Petroleum LLC 112 158 257 212
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 216 246 399 540
Provision for estimated income taxes 82 84 146 195
------ ------ ------ ------
NET INCOME $134 $162 $253 $345
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share
- Basic and diluted $.43 $.56 $.82 $1.19
Dividends paid per share .21 .21 .42 .42
Weighted average shares, in thousands
- Basic 309,054 289,591 309,041 289,220
- Diluted 309,462 290,263 309,332 289,879
<FN>
Selected notes to financial statements appear on pages 36-44.
34
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $79 $137
Receivables, less allowance for doubtful
accounts of $3 and $3 1,296 1,277
Inventories 1,839 1,310
Deferred income tax benefits 81 80
Other current assets 230 172
------ ------
Total current assets 3,525 2,976
Investments and long-term receivables 652 603
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,557 and $10,299 10,224 10,429
Prepaid pensions 203 241
Other noncurrent assets 301 295
------ ------
Total assets $14,905 $14,544
====== ======
LIABILITIES
Current liabilities:
Notes payable $132 $132
Accounts payable 1,940 1,980
Payroll and benefits payable 130 150
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Accrued taxes 173 99
Accrued interest 92 87
Long-term debt due within one year 67 59
------ ------
Total current liabilities 2,534 2,610
Long-term debt, less unamortized discount 3,568 3,456
Long-term deferred income taxes 1,482 1,450
Employee benefits 542 553
Deferred credits and other liabilities 411 389
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,744 1,590
COMMON STOCKHOLDERS' EQUITY 4,440 4,312
------ ------
Total liabilities and common
stockholders' equity $14,905 $14,544
====== ======
<FN>
Selected notes to financial statements appear on pages 36-44.
35
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $253 $345
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 51 82
Depreciation, depletion and amortization 459 479
Exploratory dry well costs 62 97
Inventory market valuation credits (415) (28)
Pensions and other postretirement benefits 27 6
Deferred income taxes 49 91
Gain on ownership change in Marathon
Ashland Petroleum LLC - (246)
(Gain) loss on disposal of assets 11 (16)
Changes in:
Current receivables (265) 161
Inventories (151) (160)
Current accounts payable and accrued expenses 333 105
All other - net (77) (69)
------ ------
Net cash provided from operating activities 337 847
------ ------
INVESTING ACTIVITIES:
Capital expenditures (532) (550)
Disposal of assets 178 30
Restricted cash -withdrawals 39 4
- deposits (20) (387)
Affiliates - investments - net - (8)
- loans and advances (56) (58)
- repayments of loans and advances - 63
All other - net - 13
------ ------
Net cash used in investing activities (391) (893)
------ ------
FINANCING ACTIVITIES:
Increase in Marathon Group's portion of USX
consolidated debt 119 292
Specifically attributed debt- borrowings 140 379
- repayments (140) -
Marathon Stock issued 8 50
Dividends paid (130) (122)
------ ------
Net cash provided from (used in)
financing activities (3) 599
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) -
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58) 553
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137 36
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $79 $589
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(136) $(105)
Income taxes paid, including settlements with the
U. S. Steel Group (7) (136)
<FN>
Selected notes to financial statements appear on pages 36-44.
36
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 1999 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1998.
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.
37
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 Marathon Group's total comprehensive income for the second quarter
of 1999 and 1998 was $134 million and $160 million, respectively, and $255
million and $344 million for the six months of 1999 and 1998, respectively.
4. In the second quarter of 1999, Marathon Ashland Petroleum LLC (MAP)
sold Scurlock Permian LLC (Scurlock), its crude oil gathering business, to
Plains Marketing, L.P for $136 million. During the first six months of
1999, MAP recorded a pretax loss of $16 million related to the sale.
Scurlock had been reported as part of the Marathon Group's refining,
marketing and transportation operating segment.
On June 1, 1999, the Marathon Group announced that it had signed a
definitive agreement to sell Carnegie Natural Gas Company and affiliated
subsidiaries (Carnegie) to Equitable Resources, Inc. The transaction is
expected to close later this year. Carnegie is engaged in natural gas
production, transmission, distribution, sales and storage activities in
Pennsylvania and West Virginia. At June 30, 1999, the net assets held for
sale have been included in other current assets in the balance sheet.
During the second quarter of 1999, the Marathon Group recorded an estimated
pretax loss of $7 million related to the sale. Carnegie has been reported
as part of the Marathon Group's other energy related businesses operating
segment.
5. The Marathon Group's operations consists 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:
38
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
SECOND QUARTER 1999
Revenues:
Customer $689 $4,637 $113 $5,439
Intersegment (a) 34 4 6 44
Intergroup (a) 4 - 4 8
Equity in earnings of
unconsolidated affiliates 3 4 5 12
Other 13 10 6 29
------ ------ ------ ------
Total revenues $743 $4,655 $134 $5,532
====== ====== ====== ======
Segment income $124 $228 $19 $371
====== ====== ====== ======
SECOND QUARTER 1998
Revenues:
Customer $499 $4,928 $66 $5,493
Intersegment (a) 41 1 2 44
Intergroup (a) 2 - 1 3
Equity in earnings of
unconsolidated affiliates 2 3 1 6
Other 20 11 3 34
------ ------ ------ ------
Total revenues $564 $4,943 $73 $5,580
====== ====== ====== ======
Segment income $73 $397 $3 $473
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
39
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999
Revenues:
Customer $1,261 $8,816 $195 $10,272
Intersegment (a) 68 9 15 92
Intergroup (a) 7 - 8 15
Equity in earnings of
unconsolidated affiliates 4 7 13 24
Other 19 16 9 44
------ ------ ------ ------
Total revenues $1,359 $8,848 $240 $10,447
====== ====== ====== ======
Segment income $160 $273 $34 $467
====== ====== ====== ======
SIX MONTHS ENDED JUNE 30, 1998
Revenues:
Customer $1,017 $9,520 $162 $10,699
Intersegment (a) 84 2 4 90
Intergroup (a) 6 - 4 10
Equity in earnings of
unconsolidated affiliates 1 6 6 13
Other 21 24 5 50
------ ------ ------ ------
Total revenues $1,129 $9,552 $181 $10,862
====== ====== ====== ======
Segment income $197 $525 $17 $739
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
40
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The following schedules reconcile segment revenues and income to amounts
reported in the Marathon Group financial statements:
Second Quarter Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $5,532 $5,580
Items not allocated to segments:
Loss on ownership change in MAP - (2)
Other (7) -
Elimination of intersegment revenues (44) (44)
Administrative revenues - (4)
------ ------
Total Group revenues $5,481 $5,530
====== ======
Income:
Income for reportable segments $371 $473
Items not allocated to segments:
Loss on ownership change in MAP - (2)
Administrative expenses (31) (21)
Inventory market valuation adjustments 66 3
Other (a) (7) -
------ ------
Total Group income from operations $399 $453
====== ======
<FN>
(a)Represents estimated loss on sale of Carnegie.
41
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Six Months Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $10,447 $10,862
Items not allocated to segments:
Gain on ownership in MAP - 246
Other (23) 24
Elimination of intersegment revenues (92) (90)
Administrative revenues - (1)
------ ------
Total Group revenues $10,332 $11,041
====== ======
Income:
Income for reportable segments $467 $739
Items not allocated to segments:
Gain on ownership in MAP - 246
Administrative expenses (57) (59)
Inventory market valuation adjustments 415 28
Other (a) (23) (99)
------ ------
Total Group income from operations $802 $855
====== ======
<FN>
(a)Represents in 1999, loss on sale of Scurlock and Carnegie, and in 1998,
international exploration and production property impairments, MAP
transition charges and gas contract settlement.
6. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
Consumer excise taxes on petroleum
products and merchandise $1,003 $958 $1,916 $1,834
Matching crude oil and refined product
buy/sell transactions settled in cash 698 994 1,570 1,982
PAGE> 42
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. The method of calculating net income per common share for the Marathon
Stock and Steel Stock reflects the Board's intent that the separately
reported earnings and surplus of the Marathon Group and the U. S. Steel
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is based on the weighted average number of
common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 9 of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
8. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
(In millions)
------------------------
June 30 December 31
1999 1998
----------- -----------
Crude oil and natural gas liquids $712 $731
Refined products and merchandise 1,153 1,023
Supplies and sundry items 110 107
------ ------
Total (at cost) 1,975 1,861
Less inventory market valuation reserve 136 551
------ ------
Net inventory carrying value $1,839 $1,310
====== ======
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's Management's Discussion and Analysis of Financial
Condition and Results of Operations.
9. At June 30, 1999, accounts payable includes an estimated income tax
payable to the U. S. Steel Group of $24 million, determined in accordance
with the tax allocation policy discussed in Note 2.
PAGE> 43
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
10. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the
major elements of their refining, marketing and transportation (RM&T)
operations. On January 1, 1998, Marathon transferred certain RM&T net
assets to MAP, a new consolidated subsidiary. Also on January 1, 1998,
Marathon acquired certain RM&T net assets from Ashland in exchange for a
38% interest in MAP. The acquisition was accounted for under the purchase
method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $246 million, which is
included in the first six months 1998 revenues.
Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas
Limited (Tarragon), a Canadian oil and gas exploration and production
company. Results for 1999 include the operations of Marathon Canada
Limited, formerly known as Tarragon.
11. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At June 30, 1999, and
December 31, 1998, accrued liabilities for remediation totaled $59 million
and $48 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 $47
million at June 30, 1999, and $41 million at December 31, 1998.
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the first six months of 1999 and for the
years 1998 and 1997, such capital expenditures totaled $29 million, $124
million and $81 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.
44
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
At June 30, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $142 million and $141
million, respectively.
Guarantees by USX and its consolidated subsidiaries of the liabilities
of an affiliated entity of the Marathon Group totaled $131 million at June
30, 1999, and December 31, 1998.
At June 30, 1999, the Marathon Group's pro rata share of obligations
of LOOP LLC and various pipeline affiliates secured by throughput and
deficiency agreements totaled $163 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at June 30, 1999, totaled $861
million compared with $624 million at December 31, 1998.
45
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% by Marathon; and other energy related
businesses. Net income and related per share amounts are net of Ashland Inc.'s
38% minority interest in MAP's income. The Management's Discussion and Analysis
should be read in conjunction with the Marathon Group's Financial Statements and
Notes to Financial Statements. The discussion of Results of Operations should
be read in conjunction with the Supplemental Statistics provided on page 61.
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,
1998.
46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the second quarter and first six months of 1999 and 1998 are
summarized in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
----- ----- ----- -----
Exploration & production ("E&P") $743 $564 $1,359 $1,129
Refining, marketing & transportation 4,655 4,943 8,848 9,552
Other energy related businesses 134 73 240 181
------ ------ ------ ------
Revenues of reportable segments $5,532 $5,580 $10,447 $10,862
Items not allocated to segments:
Gain on ownership change in MAP - (2) - 246
Other (a) (7) - (23) 24
Elimination of intersegment revenues (44) (44) (92) (90)
Administrative revenues - (4) - (1)
------ ------ ------ ------
Total Group revenues $5,481 $5,530 $10,332 $11,041
====== ====== ====== ======
Items included in both revenues and costs and expenses, resulting in no effect
on income:
Consumer excise taxes on petroleum
products and merchandise $1,003 $958 $1,916 $1,834
Matching crude oil and refined product
buy/sell transactions settled in cash 698 994 1,570 1,982
- ---------
<FN>
(a)Represents in 1999, loss on sale of Scurlock and Carnegie, and in 1998, a
gas contract settlement.
E&P revenues increased by $179 million in the second quarter of 1999 from
the comparable prior-year period. The increase primarily reflected increased
domestic liquid hydrocarbon prices and volumes. For the first six months of
1999, E&P revenues increased by $230 million from the prior-year period due to
higher domestic liquid hydrocarbon volumes and prices and international gas
volumes, partially offset by lower worldwide natural gas prices.
Refining, marketing and transportation revenues decreased by $288 million
in the second quarter of 1999 from the comparable prior-year period. The
decrease primarily reflected the loss of revenues from Scurlock Permian LLC,
partially offset by higher volumes of refined product sales, increased refined
product prices and higher merchandise sales. For the first six months of 1999,
refining, marketing and transportation revenues decreased by $704 million from
the prior-year period primarily due to the factors discussed previously, except
for refined product prices, which decreased. Merchandise sales increased by $52
million and $108 million from last year's second quarter and first six months,
respectively.
47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Other energy related businesses revenues increased by $61 million in the
second quarter of 1999 from the comparable prior-year period. For the first six
months of 1999, revenues increased by $59 million from the prior-year period.
The increase in both periods primarily reflected increased oil and gas resale
activity and higher equity earnings from increased pipeline throughput.
Income from operations for the second quarter and first six months of 1999
and 1998 are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
----- ----- ----- -----
E&P
Domestic $93 $41 $131 $115
International (a) 31 32 29 82
------ ------ ------ ------
Income for E&P reportable segment 124 73 160 197
Refining, marketing & transportation 228 397 273 525
Other energy related businesses (b) 19 3 34 17
------ ------ ------ ------
Income for reportable segments $371 $473 $467 $739
Items not allocated to segments:
Administrative expenses (c) $(31) $(21) $(57) $(59)
IMV reserve adjustment (d) 66 3 415 28
Estimated loss on sale of assets (e) (7) - (23) -
Gain on ownership change & trans. charges-MAP (f) - (2) - 223
E&P int'l impairment & dom. contract settlement (g)- - - (76)
------ ------ ------ ------
Total Group income from operations $399 $453 $802 $855
====== ====== ====== ======
- --------
<FN>
(a)Where applicable, second quarter and six months 1999 results include
Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was
acquired by Marathon on August 11, 1998.
(b)Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(c)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.
(d)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. See Note 8 to the Marathon Group Financial
Statements.
(e)For additional information regarding the loss on the sale of Scurlock
Permian LLC and the estimated loss on the sale of Carnegie Natural Gas
Company and affiliated subsidiaries, see Note 4 to the Marathon Group
Financial Statements.
(f)The gain on ownership change and one-time transition charges relate to the
formation of MAP. For additional discussion of the gain on ownership change
in MAP, see Note 10 to the Marathon Group Financial Statements.
(g)This represents a write-off of certain non-revenue producing international
investments and the gain from the resolution of contract disputes with a
purchaser of the Marathon Group's natural gas production from certain
domestic properties.
48
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income for reportable segments in the second quarter of 1999 declined by
$102 million from last year's second quarter, due primarily to lower refined
product margins, partially offset by higher domestic liquid hydrocarbon prices
and production and increased refined product sales volumes. Income for
reportable segments in the first six months of 1999 decreased by $272 million
from the first six months of 1998, due primarily to lower refined product
margins and lower natural gas prices, partially offset by increased domestic
liquid hydrocarbon production and higher domestic liquid hydrocarbon prices.
Worldwide E&P ("upstream") segment income in the second quarter of 1999
increased by $51 million from last year's second quarter. Results in the first
six months of 1999 decreased by $37 million from the same period in 1998.
Domestic E&P income in the second quarter of 1999 increased by $52 million
from last year's second quarter. This increase was mainly due to higher liquid
hydrocarbon prices. Results in the first six months of 1999 increased by $16
million from the same period in 1998. The increase was primarily due to lower
exploration expense, increased liquid hydrocarbon and natural gas production and
increased liquid hydrocarbon prices, partially offset by lower natural gas
prices.
International E&P income in the second quarter of 1999 decreased by $1
million from last year's second quarter. Results in the first six months of
1999 decreased by $53 million from the same period in 1998. This decrease was
mainly due to lower liquid hydrocarbon and natural gas production in Europe,
higher exploration expense and lower natural gas prices.
Refining, marketing and transportation ("downstream") segment income in the
second quarter of 1999 decreased by $169 million from last year's second
quarter. Results in the first six months 1999 decreased by $252 million from
the same period in 1998. The decreases in both periods were mainly due to lower
refined product margins, partially offset by recognized mark-to-market
derivative gains from nonhedging activities, increased refined product sales
volumes and increased merchandise sales at Speedway SuperAmerica LLC.
Other energy related businesses segment income in the second quarter of
1999 increased by $16 million from last year's second quarter. Results in the
first six months of 1999 increased by $17 million from the same period in 1998.
The 1999 results included a reversal of abandonment accruals ($10 million)
resulting from revised cost estimates and higher equity earnings as a result of
increased pipeline throughput.
Items not allocated to segments
Administrative expenses in the second quarter of 1999 increased by $10
million from last year's second quarter. The increase was primarily due to
higher accruals for employee benefit plans.
IMV reserve adjustment - When U. S. 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 result in
noncash charges or credits to income from operations.
49
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
When Marathon acquired the crude oil and refined product inventories
associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group
established a new LIFO cost basis for those inventories. The acquisition cost
of these inventories lowered the overall average cost of the Marathon Group's
combined RM&T inventories. As a result, the price threshold at which an IMV
reserve will be recorded has also been lowered. This acquisition resulted in a
one-time reduction in the IMV reserve, yielding a net favorable IMV reserve
adjustment of $25 million in the first quarter of 1998.
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 six months of 1999
increased by $43 million from the comparable 1998 period, mainly due to
increased costs resulting from higher average debt levels and lower interest
income.
The provision for estimated income taxes in the first six months of 1999
decreased by $49 million from the comparable 1998 period due to a decline in
income before taxes.
Net income for the second quarter and first six months decreased by $28
million and $92 million, respectively, in 1999 from 1998, primarily reflecting
the factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $337 million in the first
six months of 1999, compared with $847 million in the first six months of 1998.
The $510 million decrease mainly reflected lower profitability, unfavorable
working capital changes and distributions by MAP to Ashland of $206 million in
the first six months of 1999 as compared to $130 million in the comparable 1998
period. The favorable working capital change reported in the first six months
of 1998 was due to a temporary change in excise tax payment patterns, which
reversed later in the year.
Capital expenditures in the first six months of 1999 totaled $532 million,
compared with $550 million in the comparable 1998 period. For additional
information regarding capital expenditures, refer to the Supplemental Statistics
on page 61.
Cash from disposal of assets was $178 million in the first six months 1999,
compared with $30 million in the comparable 1998 period. Proceeds in 1999 were
mainly from the sale of Scurlock Permian LLC and domestic production properties.
50
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 $19 million in
the first six months of 1999, compared to a net deposit of $383 million in the
comparable 1998 period. The 1999 amount primarily represents net cash withdrawn
for the purchase of domestic production properties. The 1998 amount primarily
represents the proceeds from a Cdn$550 million loan agreement Marathon entered
into to finance a portion of the Tarragon Oil and Gas Limited acquisition, which
were restricted to collateralize a loan and invested in short-term investments.
Loans and advances to affiliates were $56 million in the first six months
of 1999, compared with $58 million in the comparable 1998 period. Cash outflows
in both periods mainly reflected funding provided to equity affiliates for
capital projects, primarily the Sakhalin II project in Russia.
Repayments of loans and advances to affiliates were $63 million in the
first six months of 1998 as a result of repayments by Sakhalin Energy Investment
Company, Ltd. of advances made by Marathon in conjunction with the Sakhalin II
project in Russia.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at June 30, 1999 totaled $861 million compared with $624
million at December 31, 1998. The increase was primarily due to the pending
acquisition of certain Ultramar Diamond Shamrock refining, marketing and
transportation assets.
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, increased by $119 million in
the first six months of 1999. Financial obligations increased primarily because
capital expenditures and dividend payments exceeded cash from operating
activities and proceeds from asset sales. These obligations were partially
funded by a reduction in cash of $58 million.
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.
51
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
16 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of June 30,
1999. In addition, there are 7 sites related to the Marathon Group where USX
has received information requests or other indications that USX may be a PRP
under CERCLA but where sufficient information is not presently available to
confirm the existence of liability.
There are also 108 additional sites, excluding retail marketing outlets,
related to the Marathon Group where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation through discussions or litigation. Of these sites, 17 were
associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation.
At many 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.
52
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In October 1998, the National Enforcement Investigations Center and Region
V of the United States Environmental Protection Agency ("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, it is not known when complete findings on the results of the
inspections will be issued. Thus far, MAP has been served with two Notices of
Violation ("NOV") and two Findings of Violation in connection with the multi-
media inspection at its Detroit refinery, and a NOV as a result of the
inspection at its Robinson refinery. MAP can contest the factual and the 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 11 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
discussion of Liquidity in USX Consolidated Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Outlook
- -------
The outlook regarding the Marathon Group's upstream revenues and income is
largely dependent upon future prices and volumes of liquid hydrocarbons and
natural gas. Prices have historically been volatile and have frequently been
affected by unpredictable changes in supply and demand resulting from
fluctuations in worldwide economic activity and political developments in the
world's major oil and gas producing and consuming areas. Any significant
decline in prices could have a material adverse effect on the Marathon Group's
results of operations. A prolonged decline in such prices could also adversely
affect the quantity of crude oil and natural gas reserves that can be
economically produced and the amount of capital available for exploration and
development.
53
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Marathon's 1999 worldwide liquid hydrocarbon production is currently
estimated to average in the range of 215,000 to 220,000 barrels per day ("bpd").
Worldwide natural gas volumes for 1999 are expected to be approximately 1.35
billion cubic feet per day ("bcfpd"). These estimates reflect the anticipated
sale of Marathon fields in Egypt, as well as timing delays in both domestic and
international offshore developments. Marathon expects liquid hydrocarbon
production to increase approximately seven percent annually in 2000 and 2001.
Natural gas volumes in 2000 are expected to be flat with 1999 and up
approximately four percent in 2001. These projections are based on known
discoveries and do not include the impact of potential or future major
acquisitions, dispositions, or wildcat drilling.
On July 16, 1999, Marathon agreed to sell its interests in two fields in
Egypt. The transaction included a 50 percent interest in the Ashrafi oilfield
offshore in the southwest Gulf of Suez and a 25 percent interest in the El Qar'a
natural gas and condensate field in the Nile Delta. Marathon's second quarter
production was about 6,000 bpd from the two fields. The transaction is expected
to close in the third quarter of 1999 with an effective date of June 1, 1999.
The sale is subject to final approval by the Egyptian authorities, consents of
third parties and satisfaction of customary closing conditions.
On July 5, 1999, oil production commenced from the Piltun-Astokhskoye field
offshore Sakahlin Island in the Russian Far East Region. Marathon holds a 37.5%
interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), which
is the first enterprise to develop and produce oil and gas resources in Russia
under a production sharing agreement. Production, limited to the ice-free
season of the year, is expected to reach 90,000 gross barrels of oil per day by
the start of the second producing season in 2000.
On May 27, 1999, Marathon was awarded a 10 percent equity interest in
Blocks 31 and 32 offshore Angola. The blocks, which are located approximately
90 miles northwest of Luanda in water depths between 5,400 and 9,200 feet, are
adjacent to Blocks 15 and 17 where major discoveries by others have been made.
Marathon, bidding with others, was recently awarded three parcels offshore
Nova Scotia. Marathon and its partners submitted high gross bids of $118
million with Marathon's share being approximately $39 million. The high bids
represent exploration expenditures which will be made during the initial five
years of a nine-year license. Marathon has a 30, 33.75 and 37.5 percent
interest in Parcels 11, 18 and 10, respectively and will be operator of Parcel
11.
54
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The above discussion includes forward-looking statements with respect to
projected liquid hydrocarbon production levels and natural gas volumes for 1999,
2000 and 2001 and timing/levels of gross production for Sakhalin Energy. These
statements are based on a number of assumptions, including (among others)
prices, amount of capital available for exploration and development, worldwide
supply and demand for petroleum products, regulatory constraints, reserve
estimates, production decline rates of mature fields, timing of commencing
production from new wells, timing and results of future development drilling,
reserve replacement rates, and other geological, operating and economic
considerations. In addition, development of new production properties in
countries outside the United States may require protracted negotiations with
host governments and is frequently subject to political considerations, such as
tax regulations, which could adversely affect the
economics of projects. To the extent these assumptions prove inaccurate and/or
negotiations and other considerations are not satisfactorily resolved, actual
results could be materially different than present expectations.
Downstream income of the Marathon Group is largely dependent upon refining
crack spreads (the difference between light product prices and crude costs).
Refined product margins have been historically volatile and vary with the level
of economic activity in the various marketing areas, the regulatory climate and
the available supply of crude oil and refined products.
On May 24, 1999, MAP signed an agreement with Ultramar Diamond Shamrock
("UDS") to purchase 179 UDS owned-and-operated convenience stores, 5 product
terminals and an assignment of supply contracts for about 240 branded UDS jobber
stations in Michigan. Additionally, MAP will lease a sixth product terminal
from UDS. The transaction is expected to close later this year. This is a
forward-looking statement. Some factors that could potentially affect the
timing of the UDS closing include (among others) receipt of government
approvals, consents of third parties and satisfaction of customary closing
conditions.
On May 20, 1999, MAP reached an agreement with P.M.I. Comercio
Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos,
(PEMEX), to purchase approximately 90,000 bpd of heavy Maya crude oil. The
multi-year contract will begin upon completion of a 34,500 bpd delayed-coking
project planned for MAP's refinery in Garyville, Louisiana. This work is
anticipated to be completed in fourth quarter 2001. This is a forward-looking
statement. Some factors that could potentially affect the completion of the
delayed-coking project include (among others) levels of cash flow from
operations, obtaining the necessary construction and environmental permits,
unforeseen hazards such as weather conditions and regulatory constraints.
On August 3, 1999, Marathon announced a voluntary early retirement
incentive program. Eligibility is extended to approximately 500 employees in
specific organizations and groups, which does not include MAP and Information
Technology employees. Retirement effective dates under this program will be
November 1, 1999.
55
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Year 2000 Readiness Disclosure
- ------------------------------
The Marathon Group is executing Year 2000 action plans which include:
* prioritizing and focusing on those computerized and automated systems and
processes ("systems") critical to the Marathon Group's operations in terms of
material operational, safety, environmental and financial risk to the company.
* allocating and committing appropriate resources to fix the problem.
* developing detailed contingency plans for those systems critical to the
operations in terms of material operational, safety, environmental and
financial risk to the company.
* communicating with, and aggressively pursuing, critical third parties to
help ensure the Year 2000 readiness of their products and services through use
of mailings, telephone contacts, and the inclusion of Year 2000 readiness
language in purchase orders and contracts.
* performing rigorous Year 2000 tests of critical systems.
* participating in, and exchanging Year 2000 information with industry trade
associations, such as the American Petroleum Institute ("API").
* engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 inventory, assessment and
readiness.
State of Readiness
Information Technology (IT) systems are 96% ready as of June 30, 1999. IT
systems are expected to be 100% ready by September 30, 1999 with minor
exceptions. The exceptions identified currently are third party software
vendors whose upgrade schedules have been delayed until fourth quarter 1999. In
these cases, contingency plans are scheduled to be in place by September 30,
1999 for the affected software to ensure there will be no significant business
impact.
Inventorying of Non-Information Technology (Non-IT) systems and assessment
of these inventoried systems was 99% complete as of June 30, 1999. Of the
inventory assessed, few systems require remediation. Non-IT systems are
scheduled to be Year 2000 ready by the end of third quarter 1999.
The following chart provides the percent of completion for the (i)
inventory of systems and processes that may be affected by the Year 2000 ("Y2K
Inventory"), (ii) analysis performed to determine the Year 2000 date impact of
inventoried systems and processes ("Y2K Impact Assessment") and (iii) overall
Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness
of Overall Inventory"). The percent of completion for Y2K Readiness of Overall
Inventory includes all inventory systems not date impacted, those systems
already Year 2000 ready and those corrected and made Year 2000 ready through the
renovation/replacement, testing and implementation activities; however, the
implementation of certain Year 2000 ready IT systems has been deferred until the
fourth quarter of 1999 due to third party software vendor upgrade schedules.
56
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Percent Completed
Y2K
Y2K Readiness
As of June 30, 1999 Impact of
Y2K Assess- Overall
Inventory ment Inventory
------ ------ ------
Information Technology 100% 100% 96%
Non-Information Technology 99% 99% 97%
Third Parties
Third parties include suppliers, customers and vendors. Contacts have been
made with critical third parties to determine if they will be able to provide
their services to the Marathon Group after the Year 2000. Third party vendors'
responses have been graded in order to rate their Y2K readiness. Those with an
average or below average grade have been contacted directly by the appropriate
business units to discuss their Y2K readiness. Using a Year 2000 ready test
environment, testing is underway on third party software to validate that it is
Year 2000 ready. In addition, third party software that poses a risk to a
business unit is being included within the business unit's contingency plans.
The Costs to Address Year 2000 Issues
Total costs incurred as of June 30, 1999, were $25 million, including $11
million of incremental costs. The total estimated costs associated with Year
2000 readiness are expected to be $39 million, of which $20 million are
incremental costs. This reflects a decrease of $3 million from the previously
reported estimate.
The Risks of the Company's Year 2000 Issues
The most reasonably likely worst case Year 2000 scenario would be the
inability of critical third party suppliers, such as utility providers,
telecommunication companies, drilling equipment suppliers, platform suppliers,
crude oil suppliers and pipeline carriers, to continue providing their products
and services. This could pose the greatest material operational, safety,
environmental and/or financial risk to the company. These critical third party
suppliers have generally indicated that they are or expect to be Year 2000 ready
in a timely manner.
The lack of accurate and timely Year 2000 date impact information from
suppliers of automation and process control systems and processes is also a
concern. Without quality information from suppliers, specifically on embedded
chip technology, some Year 2000 problems could go undetected until after January
1, 2000. According to information received from suppliers of these systems,
oil and gas industry surveys and Marathon Group's own test results,
These embedded systems do not appear to pose significant problems or involve
the possibility of major failures that could affect vital operations.
An additional risk is the ability of some third party software vendors to
provide timely software upgrades to make their product Year 2000 ready.
Communication continues with these vendors to expedite the completion of
upgrades as much as possible. Contingency plans are being developed in case
timely upgrades are not available.
57
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In a report issued February 24, 1999 by the United States Senate Special
Committee on the Year 2000 Technology Problem, the committee expressed concern
that many of the countries from which the United States imports oil are
significantly behind the United States in their Year 2000 remediation efforts
and oil production and transportation could be at some risk. In 1998, 64% or
577,000 bpd of the crude oil processed by MAP's refineries was from foreign
sources and acquired primarily from various foreign national oil companies,
producing companies and traders. Of this total, approximately 330,000 bpd was
acquired from the Middle East. According to a report by the American Petroleum
Institute and a February 1999 report by the United States Department of Energy,
the four largest exporters of petroleum to the United States expect all critical
systems to be Year 2000 ready by the end of 1999. If any country is unable to
export oil, other countries may be able to increase production and exports.
According to the API report, in any event, import deliveries of oil would not
stop immediately as there is always crude oil en route to the United States. In
addition, the United States government has a Strategic Petroleum Reserve to act
as a buffer to protect against temporary interruptions in foreign oil supplies.
The Marathon Group could be adversely affected by a disruption in supply if
alternate sources of supply are not available.
In the initial review of assets to be acquired from UDS, Marathon
determined that certain facilities and systems may not be completely Y2K ready.
Once the transaction is closed, Marathon will undertake thorough Y2K inventory,
assessment and remediation (where necessary) of acquired facilities. Marathon
expects this work can be completed by December 31, 1999. If the closing is
delayed or if the required remediation is greater than expected, there is a risk
some of the acquired facilities may not be Y2K ready. The completion
percentages in the chart on page 56 do not include UDS IT or Non-IT systems.
Contingency Planning
Marathon Group business units are reviewing their written contingency plans
within their business units and with other business units with which they
interact. Overall, contingency planning is 66% completed, which is slightly
ahead of schedule. These plans are to be completed and tested, when practical,
by the end of third quarter 1999. A multiple occurrence emergency response
drill for Year 2000 was conducted during the last week of July 1999.
Planning is progressing with the year-end Marathon Group Year 2000
monitoring center. Marathon will also be participating in the API Year 2000
monitoring center currently in development. These centers will be used to track
and report the Y2K impact as each time zone rolls over to January 1, 2000. As
Marathon Group business units and API member companies report problems and
related solutions, the information will be shared with other business units so
they can proactively prepare to deal with a similar situation.
This discussion includes forward-looking statements of the Marathon Group's
efforts and management's expectations and costs relating to Year 2000 readiness.
The Marathon Group's ability to achieve Year 2000 readiness and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to install or modify proprietary hardware and software and
unanticipated problems identified in the ongoing Year 2000 readiness review.
Also, the Marathon Group's ability to mitigate Year 2000 risks could be
adversely impacted by the effectiveness of contingency plans.
58
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Accounting Standard
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This new standard requires recognition of
all derivatives as either assets or liabilities at fair value. This new
standard may result in additional volatility in both current period earnings and
other comprehensive income as a result of recording recognized and unrecognized
gains and losses resulting from changes in the fair value of derivative
instruments. At adoption this new standard requires a comprehensive review of
all outstanding derivative instruments to determine whether or not their use
meets the hedge accounting criteria. Upon adoption, there may be derivative
instruments employed by USX that do not meet all of the designated hedge
criteria and they will be reflected in income on a mark-to-market basis. Based
upon the strategies currently used by USX and the level of activity related to
forward exchange contracts and commodity-based derivative instruments in recent
periods, USX does not anticipate the effect of adoption to have a material
impact on either financial position or results of operations of the Marathon
Group. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX
plans to adopt the standard effective January 1, 2001, as required.
59
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Management Opinion Concerning Derivative Instruments
- --------------------------------------
USX utilizes derivative instruments principally in hedging activities, whereby
gains and losses are generally offset by price changes in the underlying
commodity. Recently, the Marathon Group's risk management policy was expanded
to include the use of derivative instruments for certain nonhedging and trading
activities. These instruments will be marked-to-market each period and the
related income or loss will be included in income from operations. Management
believes that use of derivative instruments along with risk assessment
procedures and internal controls does not expose the Marathon Group to material
risk. The use of derivative instruments could materially affect the Marathon
Group's results of operations in particular quarterly or annual periods.
However, management believes that use of derivative instruments will not have a
material adverse effect on financial position or liquidity.
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of June 30, 1999 are provided in the following
table(a):
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) (d) $21.8 $56.9
Natural gas (price decrease) (d) 9.6 24.8
Refined products (price increase) (d) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments 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 effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at June 30, 1999. Marathon Group management evaluates its portfolio of
derivative commodity instruments on an ongoing basis and adds or revises
strategies to reflect anticipated market conditions and changes in risk
profiles. Changes to the portfolio subsequent to June 30, 1999 would
cause future pretax income effects to differ from those presented in the
table.
(b) The number of net open contracts varied throughout second quarter
1999 from a low of 2,476 contracts at June 30, 1999, to a high of 34,199
contracts at April 16, 1999, and averaged 25,914 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout second quarter 1999, 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.
60
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
(d) The direction of the price change used in calculating the
sensitivity amount for each commodity reflects that which would result in
the largest incremental decrease in pretax income when applied to the
derivative commodity instruments used to hedge that commodity.
Interest Rate Risk
- ------------------
As of June 30, 1999, the discussion of the Marathon Group's interest rate
risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of June 30, 1999, the discussion of the Marathon Group's foreign
currency exchange rate risk has not changed materially from that presented in
Quantitative and Qualitative Disclosures About Market Risk included in USX's
1998 Form 10-K.
Equity Price Risk
- -----------------
As of June 30, 1999, 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.
61
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 1999(a) 1998 1999(a) 1998
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $93 $41 $131 $115
International 31 32 29 82
----- ----- ----- -----
Income For E&P Reportable Segment 124 73 160 197
Refining, Marketing & Transportation 228 397 273 525
Other Energy Related Businesses(b) 19 3 34 17
----- ----- ----- -----
Income For Reportable Segments $371 $473 $467 739
Items Not Allocated To Segments:
Administrative Expenses $(31) $(21) $(57) $(59)
Inventory Market Val. Res. Adjustment 66 3 415 28
Estimated Loss on Sale of Assets (7) - (23) -
Gain on Ownership Change & Trans. Charges - MAP - (2) - 223
E&P Int'l Impairment & Dom. Contract Settlement - - - (76)
------ ------ ------ ------
Marathon Group Income From Operations $399 $453 $802 $855
CAPITAL EXPENDITURES
Exploration & Production $261 $256 $410 $423
Refining, Marketing & Transportation 73 69 119 119
Other (c) 2 6 3 8
----- ----- ----- -----
Total $336 $331 $532 $550
EXPLORATION EXPENSE
Domestic $44 $54 $66 $92
International (d) 15 21 56 65
----- ----- ----- -----
Total $59 $75 $122 $157
INVESTMENTS(RETURNS) & OTHER AFFILIATE
ACTIVITY-NET $37 $(22) $56 $3
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (e):
United States 148.7 137.9 145.9 131.9
Europe 34.6 45.6 34.3 43.0
Other International 29.8 13.8 30.4 9.8
------ ------ ------ ------
Worldwide 213.1 197.3 210.6 184.7
Net Natural Gas Production (f):
United States 741.8 723.2 755.5 735.6
Europe (g) 346.9 402.8 373.1 428.0
Other International 171.0 12.7 180.2 12.9
------ ------ ------- -------
Total Consolidated 1259.7 1138.7 1308.8 1176.5
Equity Affiliate 35.6 36.6 35.6 39.6
------- ------- ------- -------
Worldwide 1295.3 1175.3 1344.4 1216.1
Average Equity Sales Prices (h):
Liquid Hydrocarbons (per Bbl)
Domestic $13.56 $9.97 $11.41 $10.98
International 14.87 12.85 12.80 13.24
Natural Gas (per Mcf)
Domestic $1.81 $1.87 $1.64 $1.89
International 1.77 2.05 1.82 2.11
Crude Oil Refined (e) 939.0 923.2 893.8 914.3
Refined Products Sold (e) 1259.3 1178.9 1190.5 1160.8
Matching buy/sell volumes included in refined
products sold (e).................... 56.0 32.1 47.1 39.8
- --------------
<FN>
(a) Where applicable, second quarter and six months 1999 results include
Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was
acquired by Marathon on August 11, 1998.
(b) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(c) Includes other energy related businesses and corporate capital
expenditures.
(d) Six months ended June 30, 1998 includes $30 million for impairment
in first quarter 1998.
(e) Thousands of barrels per day
(f) Millions of cubic feet per day
(g) Includes gas acquired for injection and subsequent resale of 16.1,
17.8, 24.5 and 25.2 mmcfd in the second quarters and six months year-to-
date 1999 and 1998, respectively.
(h) Prices exclude gains and losses from hedging activities.
62
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES:
Sales $1,303 $1,689 $2,549 $3,359
Income (loss) from affiliates (10) 28 (33) 43
Gain (loss) on disposal of assets 10 17 (2) 28
Other income (loss) 1 (1) 1 (1)
------ ------ ------ ------
Total revenues 1,304 1,733 2,515 3,429
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,160 1,436 2,317 2,891
Selling, general and administrative
expenses (credits) (95) (53) (165) (99)
Depreciation, depletion and amortization 79 72 150 149
Taxes other than income taxes 57 61 112 109
------ ------ ------ ------
Total costs and expenses 1,201 1,516 2,414 3,050
------ ------ ------ ------
INCOME FROM OPERATIONS 103 217 101 379
Net interest and other financial costs 20 22 28 50
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 83 195 73 329
Provision for estimated income taxes 28 59 27 106
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 55 136 46 223
Extraordinary loss on extinguishment of debt,
net of income tax - - 5 -
------ ------ ------ ------
NET INCOME 55 136 41 223
Dividends on preferred stock 3 3 5 5
------ ------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $52 $133 $36 $218
====== ====== ====== ======
STEEL STOCK DATA:
Income before extraordinary loss $52 $133 $41 $218
- Per share - basic .60 1.53 .47 2.51
- diluted .59 1.46 .47 2.41
Extraordinary loss, net of income tax - - 5 -
- Per share - basic and diluted - - .06 -
Net income $52 $133 $36 $218
- Per share - basic .60 1.53 .41 2.51
- diluted .59 1.46 .41 2.41
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 88,387 86,953 88,378 86,777
- Diluted 92,647 94,507 88,379 94,314
<FN>
Selected notes to financial statements appear on pages 65-71.
63
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
June 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $20 $9
Receivables, less allowance for doubtful
accounts of $5 and $9 423 392
Inventories 768 698
Deferred income tax benefits 176 176
------ ------
Total current assets 1,387 1,275
Investments and long-term receivables,
less reserves of $3 and $10 620 743
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,075 and $5,939 2,499 2,500
Prepaid pensions 2,327 2,172
Other noncurrent assets 51 59
----- ------
Total assets $6,884 $6,749
====== ======
LIABILITIES
Current liabilities:
Notes payable $17 $13
Accounts payable 612 501
Payroll and benefits payable 315 330
Accrued taxes 132 150
Accrued interest 11 10
Long-term debt due within one year 15 12
------ ------
Total current liabilities 1,102 1,016
Long-term debt, less unamortized discount 491 464
Long-term deferred income taxes 174 129
Employee benefits 2,316 2,315
Deferred credits and other liabilities 474 484
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 182 182
STOCKHOLDERS' EQUITY
Preferred stock 3 3
Common stockholders' equity 2,076 2,090
------ ------
Total stockholders' equity 2,079 2,093
------ ------
Total liabilities and stockholders' equity $6,884 $6,749
====== ======
<FN>
Selected notes to financial statements appear on pages 65-71.
64
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Six Months Ended
June 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $41 $223
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Depreciation, depletion and amortization 150 149
Pensions and other postretirement benefits (143) (107)
Deferred income taxes 49 89
(Gain) loss on disposal of assets 2 (28)
Changes in:
Current receivables - sold 30 -
- operating turnover (60) 94
Inventories (70) (33)
Current accounts payable and accrued expenses 76 (116)
All other - net 44 (29)
------ ------
Net cash provided from operating activities 124 242
------ ------
INVESTING ACTIVITIES:
Capital expenditures (153) (136)
Disposal of assets 4 15
Restricted cash -withdrawals - 3
- deposits (6) (3)
Affiliates - investments - net - (63)
All other - net (3) 13
------ ------
Net cash used in investing activities (158) (171)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in U. S. Steel Group's portion of USX
consolidated debt 105 (47)
Specifically attributed debt repayments (11) (3)
Steel Stock issued - 25
Dividends paid (49) (48)
------ ------
Net cash provided from (used in)
financing activities 45 (73)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11 (2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9 18
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $20 $16
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(42) $(39)
Income taxes paid, including settlements with
the Marathon Group (5) (14)
<FN>
Selected notes to financial statements appear on pages 65-71.
65
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 1999 classifications. Additional information is contained in
the USX Annual Report on Form 10-K for the year ended December 31, 1998.
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.
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
66
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
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 for the second
quarter of 1999 and 1998 was $51 million and $134 million, respectively,
and $33 million and $221 million for the six months of 1999 and 1998,
respectively.
4. The U. S. Steel Group consists of one operating segment, U. S. Steel.
U. S. Steel is engaged in the production and sale of steel mill products,
coke and taconite pellets. U. S. Steel also engages in the following
related business activities: the management of mineral resources, domestic
coal mining, engineering and consulting services, and real estate
development and management. The results of segment operations are as
follows:
Second Quarter Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Customer $1,292 $1,689
Intergroup (a) 11 -
Equity in earnings (losses) of
unconsolidated affiliates (10) 28
Other 11 16
------ ------
Total revenues $1,304 $1,733
====== ======
Segment income (loss) $(9) $154
====== ======
<FN>
(a) Intergroup sales and transfers were conducted on an arm's-length basis.
67
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
Six Months Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Customer $2,537 $3,358
Intergroup (a) 12 -
Equity in earnings (losses) of
unconsolidated affiliates (33) 43
Other 21 28
------ ------
Total revenues $2,537 $3,429
====== ======
Segment income (loss) $(68) $260
====== ======
<FN>
(a) Intergroup sales and transfers were conducted on an arm's-length basis.
The following schedules reconcile segment revenue and income (loss) to
amounts reported in the U. S. Steel Group's financial statements:
Second Quarter Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues of reportable segment and Group revenues $1,304 $1,733
====== ======
Income (loss) for reportable segment $(9) $154
Items not allocated to segment:
Administrative expenses (8) (5)
Pension credits 140 93
Costs related to former business activities (20) (25)
------ ------
Total Group income from operations $103 $217
====== ======
68
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
Six Months Ended
June 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues of reportable segment $2,537 $3,429
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group revenues $2,515 $3,429
====== ======
Income (loss) for reportable segment $(68) $260
Items not allocated to segment:
Administrative expenses (13) (14)
Pension credits 248 186
Costs related to former business activities (44) (53)
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group income from operations $101 $379
====== ======
5. The method of calculating net income per common share for the Steel
Stock and Marathon Stock reflects the Board's intent that the separately
reported earnings and surplus of the U. S. Steel Group and the Marathon
Group, as determined consistent with the USX Restated Certificate of
Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income per share is calculated by adjusting net income for
dividend requirements of preferred stock and is based on the weighted
average number of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 9, of the Notes to USX Consolidated Financial Statements for
the computation of income per share.
6. On March 31, 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 will exchange the RTI shares
for the notes at maturity. The notes are exchangeable for shares of RTI
common stock on a variable basis up to one share per note depending on the
market price of RTI common stock at maturity. Ownership of any shares not
required for satisfaction of the indexed debt will revert 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
69
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
the difference between the carrying value of the investment in RTI and
the carrying value of the indexed debt, which is included in gain (loss) on
disposal of assets. This transaction represents a noncash investing and
financing activity of $56 million, which was the carrying value of the
indexed debt at March 31, 1999.
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 $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.
7. Income from operations includes net periodic pension credits of $88
million and $51 million in the second quarter of 1999 and 1998,
respectively, ($141 million and $102 million in the first six months of
1999 and 1998, respectively.) These pension credits are primarily noncash
and for the most part are included in selling, general and administrative
expenses.
In the second quarter of 1999, the U. S. Steel Group recognized a one-
time pretax settlement gain of $35 million, related mainly to pension costs
of employees who retired under the U. S. Steel Group 1998 voluntary early
retirement program. This noncash settlement gain is included in selling,
general and administrative expenses.
8. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
-------------------------
June 30 December 31
1999 1998
----------- -----------
Raw materials $128 $185
Semi-finished products 368 282
Finished products 217 182
Supplies and sundry items 55 49
---- ----
Total $768 $698
==== ====
70
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. The U. S. Steel Group participates in an agreement (the program) to
sell an undivided interest in certain accounts receivable. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At June 30, 1999,
the amount sold under the program that had not been collected was $350
million, which will be forwarded to the buyers at the end of the agreement,
or in the event of earlier contract termination. If the U. S. Steel Group
does not have a sufficient quantity of eligible accounts receivable to
reinvest in for the buyers, the size of the program will be reduced
accordingly. The buyers have rights to a pool of receivables that must be
maintained at a level of at least 115% of the program size. In the event
of a change in control of USX, as defined in the agreement, the U. S. Steel
Group may be required to forward payments collected on sold accounts
receivable to the buyers.
10. At June 30, 1999, accounts receivable includes an estimated income tax
receivable from the Marathon Group of $24 million, determined in accordance
with the tax allocation policy discussed in Note 2.
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 June 30, 1999, and December
31, 1998, accrued liabilities for remediation totaled $101 million and $97
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 first six months of 1999
and for the years 1998 and 1997, such capital expenditures totaled $13
million, $49 million and $43 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.
71
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
Guarantees by USX of the liabilities of affiliated entities of the U.
S. Steel Group totaled $87 million at June 30, 1999. In the event that any
defaults of guaranteed liabilities occur, USX has access to its interest in
the assets of the affiliates to reduce U. S. Steel Group losses resulting
from these guarantees. As of June 30, 1999, the largest guarantee for a
single affiliate was $59 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at June 30, 1999, totaled $122 million compared with
$188 million at December 31, 1998.
12. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced
that they had entered into a letter of intent with Blackstone Capital
Partners II (Blackstone) to combine the steelmaking and bar producing
assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by
Blackstone, Republic Technologies International, Inc., Republic Engineered
Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In
addition, on August 6, 1999, USX agreed to a $15 million equity
investment in Republic when the combination is consummated. USX
currently owns 50% of USS/Kobe and will own approximately 15% of
Republic. The seamless pipe business of USS/Kobe is excluded from this
transaction and will continue to operate as a joint venture
between USX and Kobe Steel.
The transaction was subject to numerous conditions, including financing.
As of the date of issuance of the accompanying financial statements, it was
uncertain whether several of these conditions would be resolved and the
transaction would be completed. Due to these uncertainties, neither USX
nor USS/Kobe recognized any financial effects of the transaction in the
second quarter 1999. On August 6, 1999, Republic received financing
commitments sufficient to complete the transaction, which is scheduled to
be closed on August 13, 1999.
The estimated fair value of USX's investment in Republic, based upon
preliminary information supplied by Republic, is approximately $80 million
less than USX's carrying value of its investment in the steelmaking and bar
producing assets of USS/Kobe. Based on the resolution of the uncertainties
and the anticipated closing of the transaction, USX expects to recognize an
estimated impairment of $80 million in the third quarter of 1999.
72
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is engaged in the
production, transportation and sale of steel mill products, coke, and taconite
pellets; the management of mineral resources; domestic coal mining; real estate
development; and engineering and consulting services. Certain business
activities are conducted through joint ventures and partially owned companies,
such as USS/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO"),
PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B
Partnership, and VSZ U. S. Steel, s. r.o. Management's Discussion and Analysis
should be read in conjunction with the U. S. Steel Group's Financial Statements
and Notes to Financial Statements. The discussion of Results of Operations
should be read in conjunction with the Supplemental Statistics provided on page
85.
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 Statements in USX 1998 Form 10-K.
Results of Operations
- ---------------------
Revenues for the second quarter and first six months of 1999 and 1998 are
set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Sales $1,303 $1,689 $2,549 $3,359
Income (loss) from affiliates (10) 28 (33) 43
Gain (loss) on disposal of assets 10 17 (2) 28
Other income (loss) 1 (1) 1 (1)
----- ----- ----- -----
Total Revenues $1,304 $1,733 $2,515 $3,429
Total revenues decreased by $429 million and $914 million in the second
quarter and first six months of 1999, respectively, compared with the same
periods in 1998. The decreases primarily reflected lower average steel product
prices (prices decreased $53/ton and $46/ton in the second quarter and first six
months of 1999, respectively), lower shipment volumes (shipments decreased
309,000 tons and 861,000 tons in the second quarter and first six months of
1999, respectively), and lower income from affiliates.
73
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Income from operations for the U. S. Steel Group for the second quarter and
first six months of 1999 and 1998 is set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Segment income (loss) for U. S. Steel
Operations (a) $(9) $154 $(68) $260
Items not allocated to segment:
Pension credits 140 93 248 186
Administrative expenses (8) (5) (13) (14)
Costs related to former business activities (b) (20) (25) (44) (53)
Loss on investment in RTI stock used to satisfy
indexed debt obligations (c) - - (22) -
----- ----- ----- -----
Total Group income from operations $103 $217 $101 $379
===== ===== ===== =====
- -----
<FN>
(a) Includes income (loss) from the production and sale of steel mill
products, coke and taconite pellets; the management of mineral resources;
domestic coal mining; real estate development; and engineering and
consulting services.
(b) Includes the portion of 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 6 to the U. S. Steel Group Financial
Statements.
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations decreased $163 million and $328
million in the second quarter and first six months of 1999, respectively,
compared with the same periods in 1998. The decreases in segment income were
primarily due to lower average steel prices, lower shipments and lower income
from affiliates. Segment income for the first six months included a $10 million
charge for environmental accruals. Results in second quarter 1998 included a
favorable $30 million (net of charges and reserves) insurance litigation
settlement pertaining to the Gary (Ind.) Works No. 8 blast furnace explosion.
Steel product prices and shipment volumes continue to be negatively
affected by the ongoing effects of steel imports, and the continued weakness in
tubular and plate markets.
Items not allocated to segment
Pension credits associated with pension plan assets and liabilities
allocated to pre-1987 retirees, former businesses, and certain corporate
activities are not included in segment income for U. S. Steel operations. These
pension credits, which are primarily noncash, totaled $140 million and $248
million in the second quarter and first six months of 1999, respectively,
compared to $93 million and $186 million in the same period in 1998. Pension
credits in the second quarter and first six months of 1999 included $35 million
for a one-time favorable settlement primarily related to the 1998 voluntary
early retirement program for salaried employees completed during the second
quarter 1999.
Pension credits, combined with pension costs included in segment income for
U. S. Steel operations, resulted in net pension credits of $88 million and $140
74
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
million in the second quarter and first six months of 1999, respectively,
compared to $48 million and $97 million in the same periods in 1998. Future net
pension credits can be volatile depending upon the future marketplace
performance of plan assets, changes in actuarial assumptions regarding such
factors as a selection of a discount rate and rate of return on assets, changes
in the amortization levels of transition amounts or prior period service costs,
plan amendments affecting benefit payout levels and profile changes in the
beneficiary populations being valued. 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. For
additional information on pensions, see the discussion of "Outlook" below.
Net interest and other financial costs for the second quarter and first six
months of 1999 and 1998 are set forth in the following table:
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Net interest and other financial costs $20 $22 $28 $50
Less:
Favorable (unfavorable) adjustments to
carrying value of indexed debt (a) - - 13 (4)
----- ----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $20 $22 $41 $46
===== ===== ===== =====
- -----
<FN>
(a) For discussion, see Note 6 to the U. S. Steel Group Financial
Statements.
Adjusted net interest and other financial costs decreased by $2 million and
$5 million in the second quarter and first six months of 1999, respectively, as
compared with the same periods in 1998.
The provision for estimated income taxes in the second quarter and first
six months of 1999 decreased compared to the same periods in 1998 due to a
decline in income from operations. The provision for estimated income taxes for
the second quarter and first six months of 1998 included a $9 million favorable
foreign tax adjustment as a result of a favorable resolution of foreign tax
litigation.
The extraordinary loss on extinguishment of debt of $5 million (net of $3
million income tax benefit) in the first six months of 1999 represents prepaid
interest expense and the write-off of unamortized debt issue costs resulting
from the satisfaction of USX's obligation of its indexed debt. For further
discussion, see Note 6 to the U. S. Steel Group Financial Statements.
Net income decreased $81 million and $182 million in the second quarter and
first six months of 1999, respectively, compared to the same periods in 1998,
primarily reflecting the factors discussed above.
Operating Statistics
- --------------------
Second quarter and first six months of 1999 steel shipments of 2.5 million
tons and 4.9 million tons, decreased 11% and 15%, respectively, from the same
75
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
periods in 1998. Raw steel production in the second quarter of 1999 of 3.1
million tons, increased 7% from the same period in 1998. Raw steel production in
the first six months of 1999 of 5.8 million tons, decreased 3% from the same
period in 1998. Raw steel capability utilization in the second quarter of 1999
averaged 96.9%, compared to 90.9% in the same period in 1998. Raw steel
capability utilization in the first six months of 1999 averaged 92.0%, compared
to 95.3% in the same period in 1998. Steel shipments, production and raw steel
capability utilization in the first six months of 1999 continued to be
negatively impacted by the ongoing effects of steel imports and weak plate and
tubular markets.
Cash Flows
- ----------
Net cash provided from operating activities in the first six months of 1999
was $124 million, compared with $242 million in the same period in 1998. The
first six months of 1998 included proceeds of $38 million for the insurance
litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace
explosion. Excluding this item, net cash provided from operating activities
decreased $80 million due mainly to decreased profitability.
Capital expenditures in the first six months of 1999 were $153 million,
compared with $136 million in the same period in 1998. Contract commitments for
capital expenditures at June 30, 1999, totaled $122 million, compared with $188
million at year-end 1998.
Net cash used in investments in equity affiliates in the first six months
of 1998 of $63 million primarily reflects funding for entry into a joint venture
in Slovakia with VSZ a.s.
Financial obligations (excluding the noncash satisfaction of the indexed
debt) increased by $94 million in the first six months of 1999. 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. The increase in
financial obligations resulted from capital expenditures and dividend payments
exceeding cash from operating activities.
Derivative Instruments
See Quantitative and Qualitative Disclosures About Market Risk for
discussion of derivative instruments and associated market risk for U. S. Steel
Group.
Liquidity
For discussion of USX's liquidity and capital resources, see Management's
Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and
Liquidity.
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
76
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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
25 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act (``CERCLA'') as of June
30, 1999. In addition, there are 12 sites related to the U. S. Steel Group
where USX has received information requests or other indications that USX may be
a PRP under CERCLA but where sufficient information is not presently available
to confirm the existence of liability or make any judgment as to the amount
thereof. There are also 32 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.
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
- -------
Shipment volumes in the third quarter for U. S. Steel Group are expected to
be higher than second quarter 1999. However, the favorable effects of increased
shipments are expected to be more than offset by lower price realizations due to
continued unfavorable product mix, including a substantial amount of semi-
finished sales, and continued weakness in plate and tubular markets. The third
quarter will also be impacted by higher benefit costs associated with the
recently ratified labor contract and unfavorable manufacturing costs related to
planned outages. In recent years, demand for steel in the United States has
been at high levels. Any weakness in the United States economy for capital goods
or consumer durables could further adversely impact U. S. Steel Group's product
prices and shipment levels.
On June 25, 1999, U. S. Steel reached an agreement with the United Steel
Workers of America ("USWA") on a new five-year labor contract covering
approximately 14,500 employees effective August 1, 1999. The union membership
ratified the contract on August 6, 1999. The new labor contract, which includes
$2.00 in hourly wage increases phased in over the term of the agreement
beginning in 2000 as well as pension and other benefit improvements for active
and retired employees and spouses, will result in higher labor and benefit costs
for the U. S. Steel Group each year throughout the term of the contract. Net
pension credits for the U. S. Steel Group are estimated to be reduced by
approximately $5 million per month beginning August 1, 1999 for the balance of
the year. As a result of the pension changes in the new labor contract, net
pension credits for 1999 are now expected to total approximately $225 million,
which includes the $35 million for the one-time favorable settlement recorded in
the second quarter of 1999. Management believes that this agreement is
competitive with labor agreements reached by U. S. Steel's major domestic
integrated competitors and thus does not believe that U. S. Steel's competitive
position with regard to such other competitors will be materially affected.
77
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
During the third quarter of 1999, a number of minor outages are planned at
various U. S. Steel Group facilities that in aggregate are expected to result in
higher manufacturing costs.
Steel imports to the United States accounted for an estimated 25%, 30% and
24% of the domestic steel market in the first four months of 1999, and for the
years 1998 and 1997, respectively. Steel imports of cut-to-length plate and
cold-rolled increased 28% and 22%, respectively, in the first four months of
1999, compared to the same period in 1998.
On September 30, 1998, USX joined with 11 other producers, the USWA and the
Independent Steelworkers Union ("ISU") to file trade cases against Japan,
Russia, and Brazil. Those filings contended that millions of tons of unfairly
traded hot-rolled carbon sheet products have caused serious injury to the
domestic steel industry through rapidly falling prices and lost business. In the
case against Japan, on April 28, 1999, the U.S. Department of Commerce
("Commerce"), announced final antidumping ("AD") duty determinations and, on
June 11, 1999, the U.S. International Trade Commission ("ITC") announced its
final determination that the imports from Japan were injuring the domestic
industry. The final AD order against Japan was issued on June 23, 1999. In the
cases against Brazil, on July 7, 1999, Commerce announced final countervailing
("CVD") and AD duty determinations and, contemporaneously, announced that it had
entered into agreements with Brazil to
suspend the investigations. In the case against Russia, on July 13, 1999,
Commerce announced final AD duty determinations and, contemporaneously,
announced that it had entered into an agreement with Russia to suspend the
investigation. In addition, Commerce announced that it had also entered into a
comprehensive agreement concerning all steel product imports from Russia except
for plate products and hot-rolled products. Plate products from Russia are
subject to a suspension agreement signed in 1997. USX is evaluating whether to
appeal the recently announced suspension agreements with Brazil and Russia.
On February 16, 1999, USX joined with four other producers and the USWA to
file trade cases against eight countries (Japan, South Korea, India, Indonesia,
Macedonia, the Czech Republic, France, and Italy) concerning imports of cut-to-
length plate products. AD cases were filed against all the countries and CVD
duty cases were filed against six of the countries. On April 2, 1999, the ITC
issued its preliminary determination that the domestic industry was being
injured or threatened with injury as the result of imports from six of the
countries. The ITC determined that the volume of imports from Macedonia and the
Czech Republic were negligible and had declined in importance in the United
States market relative to the other countries. On July 20, 1999, Commerce
announced preliminary AD and CVD duty determinations. The preliminary injury
determination and the preliminary duty determinations are subject to further
investigation by the ITC and Commerce.
On June 2, 1999, USX joined with eight other producers and the USWA and the
ISU to file trade cases against twelve countries (Argentina, Brazil, China,
Indonesia, Japan, Russia, South Africa, Slovakia, Taiwan, Thailand, Turkey, and
Venezuela) concerning imports of cold-rolled products. AD cases were filed
against all the countries and CVD duty cases were filed against Brazil,
Indonesia, Thailand, and Venezuela. On July 19, 1999, the ITC issued its
preliminary determination that the domestic industry was being injured or
threatened with injury as the result of imports from all of the countries. The
ITC, by a divided vote, decided to discontinue the CVD investigations of
subsidized imports from Indonesia, Thailand, and Venezuela. Commerce is
expected to announce preliminary duty determinations later in the year. These
cases are subject to further investigation by both the ITC and Commerce.
On June 30, 1999, USX joined with four other producers and the USWA to file
trade cases against five countries (the Czech Republic, Japan, Mexico, Romania,
and
78
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
South Africa) concerning imports of large and small diameter carbon and alloy
standard, line, and pressure pipe. On July 20, 1999, Commerce announced its
decision to initiate an investigation and the ITC's preliminary staff hearing
was conducted on July 21, 1999. The ITC's preliminary injury determination is
expected to be announced in mid-August and, assuming a preliminary determination
of injury, Commerce is expected to announce preliminary duty determinations
later in the year. Any preliminary injury determination and preliminary duty
determinations are subject to further investigation by the ITC and Commerce.
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.
The forgoing discussion includes statements concerning anticipated steel
pricing, product mix, and shipment levels are forward-looking and are based upon
assumptions as to future product demand, prices and mix, and levels of steel
production capability, production and shipments. These forward-looking
statements can be affected by imports, domestic and international economies,
domestic production capacity, and customer demand. In the event these
assumptions prove to be inaccurate, actual results may differ significantly from
those presently anticipated.
On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced that they
had entered into a letter of intent with Blackstone Capital Partners II
(Blackstone) to combine the steelmaking and bar producing assets of USS/Kobe
Steel Company (USS/Kobe) with companies controlled by Blackstone, Republic
Technologies International, Inc., Republic Engineered Steels, Inc. and Bar
Technologies, Inc. (collectively Republic). In addition, on August 6, 1999, USX
agreed to a $15 million equity investment in Repubic when the combination is
consummated. USX currently owns 50% of USS/Kobe and will own approximately 15%
of Republic. The seamless pipe business of USS/Kobe is excluded from this
transaction and will continue to operate as a joint venture between USX and Kobe
Steel.
The transaction was subject to numerous conditions, including financing.
As of the date of the issuance of the accompanying financial statements, it was
uncertain whether several of these conditions would be resolved and the
transaction would be completed. Due to these uncertainties, neither USX nor
USS/Kobe recognized any financial effects of the transaction in the second
quarter 1999. On August 6, 1999, Republic received financing commitments
sufficient to complete the transaction, which is scheduled to be closed on
August 13, 1999.
The estimated fair value of USX's investment in Republic, based upon
preliminary information supplied by Republic, is approximately $80 million less
than USX's carrying value of its investment in the steelmaking and bar producing
assets of USS/Kobe. Based on the resolution of the uncertainties and the
anticipated closing of the transaction, USX expects to recognize an estimated
impairment of $80 million in the third quarter of 1999. The statement with
respect to the amount of the estimated impairment is forward-looking and is
based on a number of assumptions including but not limited to fair value
determination of Republic, equity investment and asset allocation. In the
event these assumptions prove to be inaccurate, the actual impairment may differ
significantly from the amount presently anticipated.
If the transaction closes as anticipated, Republic has stated that it
expects to incur operating losses through 2000, which will include restructuring
charges associated with the consolidation of the combined operations. USX will
recognize its share of any such losses under the equity method of accounting.
79
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Year 2000 Readiness Disclosure
- ------------------------------
A multi-functional Year 2000 task force continues to execute a preparedness
plan which addresses readiness requirements for business computer systems,
technical infrastructure, end-user computing, third parties, manufacturing,
environmental operations, systems products produced and sold, and dedicated R&D
test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan
which includes:
. prioritizing and focusing on those computerized and automated systems
and processes critical to the operations in terms of material safety,
operational, environmental, quality and financial risk to the company.
. allocating and committing appropriate resources to fix the problem.
. communicating with, and aggressively pursuing, critical third parties
to help ensure the Year 2000 readiness of their products and services
through use of mailings, telephone contacts, on-site assessments and
the inclusion of Year 2000 readiness language in purchase orders and
contracts.
. performing rigorous Year 2000 tests of critical systems.
. participating in, and exchanging Year 2000 information with industry
trade associations, such as the American Iron & Steel Institute,
Association of Iron & Steel Engineers and the Steel Industry Systems
Association.
. engaging qualified outside engineering and information technology
consulting firms to assist in the Year 2000 impact assessment and
readiness effort.
State of Readiness
The Year 2000 inventory and date impact assessment activities for both
information technology (IT) and non-IT systems/processes within the U. S. Steel
Group are complete. IT systems/processes are 98% Year 2000 ready as of June 30,
1999, and the non-IT area is 99% ready. Progress on achieving Year 2000
readiness for both critical and non-critical systems/processes is ahead of the
stated U. S. Steel Group objectives. All systems/processes for IT and non-IT are
targeted to be Year 2000 ready, including testing on the exchange of information
among systems/processes (integration testing), by the end of September, 1999.
There are several systems/processes which will be replaced and/or upgraded with
third-party Year 2000 ready products and services during the third quarter,
1999; however, implementation schedules have been established for such
systems/processes.
The remaining Year 2000 efforts in 1999 will primarily focus on (1)
tracking and verifying the readiness of third parties critical to the business
operations, (2) reviewing the effectiveness of the contingency plans that have
been developed, (3) establishing Year 2000 crisis management command centers,
(4) preparing and communicating final plans to the workforce and affected
entities for the transition to the new century and (5) conducting the final
round of Year 2000 assessments by the internal audit team.
80
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The following table provides the percent of completion for the inventory of
systems and processes that may be affected by the year 2000 ("Y2K Inventory"),
the analysis performed to determine the Year 2000 date impact on inventoried
systems and processes ("Y2K Impact Assessment") and the year 2000 readiness of
the U. S. Steel Group`s year 2000 inventory ("Y2K Readiness of Overall
Inventory"). The percent of completion for Y2K Readiness of Overall Inventory
includes all inventory items not date impacted, those items already Year 2000
ready and those corrected and made Year 2000 ready through the
renovation/replacement, testing and implementation activities.
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
As of June 30, 1999 Inventory ment Inventory
------ ------ ------
Information Technology 100% 100% 98%
Non-Information Technology 100% 100% 99%
Third Parties
The U. S. Steel Group continues to review and track the Year 2000 readiness of
its third party relationships (including, but not limited to outside processors,
process control systems and hardware suppliers, telecommunication providers, and
transportation carriers) who are critical to its operations. The majority of
contacts have been made with critical third parties to determine if they will be
able to provide their products and services to the U. S. Steel Group after the
Year 2000. An aggressive follow-up process with those third parties not
responding or returning an unacceptable response is underway. Communications
with U. S. Steel Group's third parties is an on-going process which includes
mailings, telephone contacts and on-site visits. If it is determined that there
is a significant risk with a third party, an effort will be made to work with
those third parties to resolve the issue, or a new provider of the same products
or services will be investigated and secured. As of June 30, 1999, the U. S.
Steel Group has sent out approximately 900 inquiries and over 92% have
responded. Approximately 490 of these third parties are considered critical
vendors/suppliers or outside steel processors. The response rate for the
critical third parties is at 100%. Follow-up phone assessments have been made
on 74% (362) of the critical third parties. For over 95% of those assessed to
date, there is a medium to high level of assurance that the critical third
parties will be Year 2000 ready. In addition, on-site Year 2000 assessments have
also been made on several critical third parties to verify the effectiveness and
accuracy of their responses. Other on-site assessments are planned, as
conditions warrant. Additional phone and/or on-site assessments of critical
third parties, as deemed necessary, are scheduled for completion by the end of
third quarter, 1999; however, plans are to continue to monitor the readiness of
critical third parties for the remainder of 1999.
81
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
The Costs to Address Year 2000 Issues
The current estimated cost associated with Year 2000 readiness, is
approximately $29 million, which includes $16 million in incremental cost. Total
costs incurred as of June 30, 1999, were $19 million, including $8 million of
incremental costs. In the third quarter, the estimated costs will be re-
evaluated in consideration of the remaining project activities including the
present state of readiness, implementation of contingency plans, continued
monitoring of critical third parties, preparations and transition to the new
century, and internal assessments of Year 2000 readiness.
Year 2000 Risks to the Company
The most reasonably likely worst case Year 2000 scenario would be the
inability of third party suppliers, such as utility providers, telecommunication
companies, outside processors, and other critical suppliers, to continue
providing
their products and services. This could pose the greatest material safety,
operational, environmental, quality and/or financial risk to the company.
In addition, the lack of accurate and timely Year 2000 date impact
information from suppliers of automation and process control systems and
processes is a concern to the U. S. Steel Group. Without timely and reliable
information from suppliers, specifically on embedded chip technology, schedules
for attaining readiness can be impacted and some Year 2000 problems could go
undetected during the transition to the year 2000.
Contingency Planning
Since no one can predict with certainty the outcome of this unprecedented
Year 2000 event, the U. S. Steel Group's primary strategy and defense against
Year 2000 related problems is to diligently continue to mitigate risks through
review and extensive testing of its critical systems/processes. From a Year
2000 contingency planning perspective, contingency plans have been developed and
documented to provide continuity in the key business operations and corollary
customer service. These plans were developed by contingency planning work
groups representing each business/producing location with an executive steering
committee overseeing the development process.
The contingency planning strategies generally being employed include; (1)
idle or shut down facilities for a short duration (minutes/hours in most cases
as opposed to days) over the critical period during the change of the century to
protect personnel and safeguard equipment and facilities, (2) curtail the
processing of hot metal during the highest period of risk, (3) schedule extra
key personnel over the critical turn of the century period to prepare the
processing environment, to monitor conditions and to evaluate when it is safe to
resume normal operations, (4) procure auxiliary power generation for critical
functions with consideration to both the potential impact of Year 2000 and
extreme inclement weather conditions, (5) establish strategically located
command centers with appropriate communication facilities to collect and
disseminate important information and to activate emergency escalation
procedures, (6) review and adjust inventory levels as business conditions
dictate to provide continuity in customer service, and (7) continue to evaluate
the readiness of regular and alternate third party suppliers and service
providers to help assure the availability and continuity of critical products
and services.
During the remainder of 1999, the contingency plans will be adjusted and
tested, as applicable, as business conditions warrant.
This discussion includes forward-looking statements of the U. S. Steel
Group's efforts and management's expectations relating to Year 2000 readiness.
The Steel
82
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Group's ability to achieve Year 2000 readiness and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
the
availability and cost of programming and testing resources, vendors' ability to
install or modify proprietary hardware and software and unanticipated problems
identified in the ongoing Year 2000 readiness review. Also, the U. S. Steel
Group's ability to mitigate Year 2000 risks could be adversely impacted by the
effectiveness of contingency plans.
Accounting Standard
- --------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This new standard requires recognition of
all derivatives as either assets or liabilities at fair value. This new
standard may result in additional volatility in both current period earnings and
other comprehensive income as a result of recording recognized and unrecognized
gains and losses resulting from changes in the fair value of derivative
instruments. At adoption this new standard requires a comprehensive review of
all outstanding derivative instruments to determine whether or not their use
meets the hedge accounting criteria. Upon adoption, there may be derivative
instruments employed by USX that do not meet all of the designated hedge
criteria and they will be reflected in income on a mark-to-market basis. Based
upon the strategies currently used by USX and the level of activity related to
forward exchange contracts and commodity-based derivative instruments in recent
periods, USX does not anticipate the effect of adoption to have a material
impact on either financial position or results of operations for the U. S. Steel
Group. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX
plans to adopt the standard effective January 1, 2001, as required.
83
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 pretax income of
hypothetical 10% and 25% decreases in commodity prices for open derivative
commodity instruments as of June 30, 1999 are provided in the following
table(a):
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
Derivative Commodity Instruments
U. S. Steel Group
Natural gas (price decrease) $2.5 $6.3
Zinc (price decrease) 3.0 7.6
Tin (price decrease) .4 .7
Nickel (price decrease) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments 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 effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at June 30, 1999. U. S. Steel Group management evaluates its portfolio of
derivative commodity instruments on an ongoing basis and adds or revises
strategies to reflect anticipated market conditions and changes in risk
profiles. Changes to the portfolio subsequent to June 30, 1999, would
cause future pretax income effects to differ from those presented in the
table.
84
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of June 30, 1999, the discussion of the U. S. Steel Group's interest
rate risk has not changed materially from that presented in Quantitative and
Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
As of June 30, 1999, the U. S. Steel Group had no material exposure to
foreign currency exchange rate risk.
Equity Price Risk
- -----------------
USX was subject to equity price risk resulting from its issuance in
December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000
("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a
trustee the entire 5.5 million shares it owned in RTI. The deposit of shares
resulted in the satisfaction of USX's obligation under the indexed debt. Under
the terms of the indenture, the trustee will exchange the RTI shares for the
notes at maturity. USX is no longer exposed to any negative risks associated
with changes in the value of RTI common stock. For further discussion, see Note
6 to the U.S. Steel Group Financial Statements.
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.
85
U.S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES $1,304 $1,733 $2,515 $3,429
INCOME (LOSS) FROM OPERATIONS
U. S. Steel Operations (a) (b) $(9) $154 $(68) $260
Items not allocated to segment:
Pension Credits (c) 140 93 248 186
Administrative Expenses (8) (5) (13) (14)
Cost related to former business activities (d) (20) (25) (44) (53)
Loss on settlement of indexed debt with
RTI International Metals, Inc. Stock - - (22) -
---- ---- ---- ----
Total U. S. Steel Group 103 217 101 379
PENSION COSTS INCLUDED IN U. S. STEEL OPERATIONS $52 $45 $108 $89
CAPITAL EXPENDITURES $74 $79 $153 $136
OPERATING STATISTICS
Average steel price per ton $424 $477 $430 $476
Steel Shipments (e) 2,548 2,857 4,929 5,790
Raw Steel-Production (e) 3,091 2,902 5,840 6,045
Raw Steel-Capability Utilization (f) 96.9% 90.9% 92.0% 95.3%
Total iron ore shipments (e) 4,823 4,989 6,186 6,772
- ----------
<FN>
(a) Results in the first six months of 1999 included a $10 million
charge for environmental accruals. Results in second quarter and the
first six months of 1998 included approximately $30 million (net of
related charges and reserves) for the settlement of litigation against
company's property insurers to recover losses related to a 1995 explosion
at the Gary Works No. 8 blast furnace.
(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/Kobe Steel
Company, USS-POSCO Industries, PRO-TEC Coating Company, Transtar Inc.,
and until March 31, 1999 RTI International Metals, Inc. (formerly RMI
Titanium Company). Also includes results of real estate development and
management, and leasing and financing activities.
(c) Includes $35 million for a pension settlement gain primarily related
to the early retirement program completed during the second quarter 1999.
(d) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(e) Thousands of net tons
(f) Based on annual raw steel production capability of 12.8 million
tons.
86
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Posted Price Litigation
The Marathon Group, alone or with other energy companies, has
been named in a number of lawsuits in State and Federal courts
alleging various causes of action related to crude oil royalty
payments based on posted prices, including underpayment of royalty
interests, underpayment of severance taxes, antitrust violations, and
violation of the Texas common purchaser statue. Plaintiffs in these
actions include governmental entities and private entities or
individuals, and some seek class action status. All of these cases
are in various states of preliminary activities. No class
certification has been determined as to Marathon in any case to date.
During November 1997, Marathon and over twenty other defendants
entered into a proposed class settlement agreement covering antitrust
and contract claims from January 1, 1986, through September 30, 1997,
excluding federal and Indian royalty claims, common purchaser claims
and severance tax claims. A new settlement agreement was filed with
the U.S. District Court in Texas on June, 26, 1998, which replaces the
November 1997 Settlement Agreement. The new settlement agreement
omits from the settlement class all State entities which receive
royalty payments and only covers private claimants. It will settle
all private claims, subject to opt-outs, for a period from January 1,
1986 to September 30, 1998. The agreement was approved by the Court
in April 1999. The approval of the settlement has been appealed to
the 5th Circuit Court of Appeals.
Marathon and approximately 20 other oil companies have settled a
claim by the state of Texas that the oil companies allegedly had
violated Texas's common purchaser statute and underpaid royalties on
oil produced from state lands. Under the settlement, the companies
will pay a total of $12.6 million.
Multi-media
In July, the U.S. Environmental Protection Agency ("EPA") served
MAP with one Notice of Violation and two Findings of Violation in
connection with its multimedia inspection of the Detroit Refinery.
These informal action notices allege violations of the Michigan State
Implementation Plan and the EPA New Source Performance Standards and
National Emission Standards for Hazardous Air Pollutants for benzene.
MAP has an opportunity to contest the factual and legal basis for the
allegations prior to the EPA taking enforcement action.
Other Environmental Cases
In July 1999, Speedway SuperAmerica LLC was assessed a
$112,000 penalty by the West Virginia Division of Environmental
Protection for the Resource Conservation and Recovery Act violations
including, among other things, the storing of ignitable and hazardous
waste and failing to correctly label hazardous waste containers and
properly characterize all waste.
87
At the Robinson refinery the Department of Justice filed a
civil complaint in February 1999, alleging violation of the Clean Air
Act with respect to benzene releases at the Robinson refinery.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held April 27, 1999. In
connection with the meeting, proxies were solicited pursuant to the
Securities Exchange Act. The following are the voting results on
proposals considered and voted upon at the meeting, all of which were
described in the proxy statement.
1. All nominees for director listed in the proxy statement were elected.
2. PricewaterhouseCoopers LLP was elected as the independent accountants
for 1999. (For, 356,025,355; against, 683,304; abstained, 1,415,852).
88
Part II - Other Information (Continued):
- ---------------------------
Item 5. OTHER INFORMATION (Continued)
Marathon Group
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
INCOME DATA:
Revenues $5,480 $5,524 $10,322 $11,026
Income from operations 415 460 823 868
Net income 143 148 254 321
(In millions)
-----------------------
June 30 December 31
1999 1998
-------- -----------
BALANCE SHEET DATA:
Assets:
Current assets $5,093 $4,742
Noncurrent assets 11,286 11,420
------ ------
Total assets $16,379 $16,162
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $2,430 $2,543
Noncurrent liabilities 9,353 9,428
Preferred stock of subsidiary 10 17
Minority interest in consolidated subsidiary 1,744 1,590
Stockholder's equity 2,842 2,584
------- -------
Total liabilities and stockholder's equity $16,379 $16,162
======= =======
89
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 USX Restated Certificate of
Incorporation dated
May 1, 1999.................
3.2 USX By-Laws, effective as of
May 1, 1999................
4.1 Amended and Restated Rights
Agreement.................. Incorporated by reference
to USX's Form 8 Amendment to
Form 8-A filed on October 9,
1992 (File No. 1-5153).
10(h) Amended and Restated Limited
Liability Agreement of Marathon
Ashland Petroleum LLC, dated as
of December 31, 1998.
10(i) Amendment No. 1 dated as of
December 31, 1998, to the Put/Call
Registration Rights and Standstill
Agreement dated as of January 1, 1998
of Marathon Ashland Petroleum LLC.
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
NONE
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/ Kenneth L. Matheny
Kenneth L. Matheny
Vice President &
Comptroller
August 13, 1999