1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at October 31, 1999 follows:
USX-Marathon Group - 310,719,384 shares
USX-U. S. Steel Group - 88,393,856 shares
2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 30, 1999
---------------------------
INDEX Page
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PART I - FINANCIAL INFORMATION
A. Consolidated Corporation
Item 1. Financial Statements:
Consolidated Statement of Operations 4
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 8
Selected Notes to Consolidated
Financial Statements 9
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends and Ratio of
Earnings to Fixed Charges 21
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 31
Financial Statistics 33
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 34
Marathon Group Balance Sheet 35
Marathon Group Statement of Cash Flows 36
Selected Notes to Financial Statements 37
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 46
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 63
Supplemental Statistics 65
3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 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 66
U. S. Steel Group Balance Sheet 67
U. S. Steel Group Statement of Cash Flows 68
Selected Notes to Financial Statements 69
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 76
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 86
Supplemental Statistics 88
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 89
Item 2. Changes in Securities and Use of Proceeds 90
Item 5. Other Information 91
Item 6. Exhibits and Reports on Form 8-K 92
4
Part I - Financial Information
A. Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES:
Sales $7,827 $7,062 $20,636 $21,144
Dividend and affiliate income (loss) (42) 12 (31) 83
Gain (loss) on disposal of assets 5 14 (8) 58
Gain (loss) on ownership change in Marathon
Ashland Petroleum LLC 11 (1) 11 245
Other income 9 4 22 21
------ ------ ------ ------
Total revenues 7,810 7,091 20,630 21,551
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 5,896 5,195 15,260 15,461
Selling, general and administrative expenses 60 81 149 233
Depreciation, depletion and amortization 297 293 906 921
Taxes other than income taxes 1,121 1,106 3,269 3,157
Exploration expenses 40 46 162 203
Inventory market valuation charges (credits) (136) 50 (551) 22
------ ------ ------ ------
Total costs and expenses 7,278 6,771 19,195 19,997
------ ------ ------ ------
INCOME FROM OPERATIONS 532 320 1,435 1,554
Net interest and other financial costs 92 73 266 226
Minority interest in income of Marathon Ashland
Petroleum LLC 148 70 405 282
------ ------ ------ ------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 292 177 764 1,046
Provision for estimated income taxes 93 61 266 362
------ ------ ------ ------
INCOME BEFORE EXTRAORDINARY LOSS 199 116 498 684
Extraordinary loss on extinguishment of debt,
net of income tax - - 5 -
------ ------ ------ ------
NET INCOME 199 116 493 684
Dividends on preferred stock 2 2 7 7
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $197 $114 $486 $677
====== ====== ====== ======
<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
------------------------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
APPLICABLE TO MARATHON STOCK:
Net income $230 $51 $483 $396
- Per share - basic .74 .18 1.56 1.37
- diluted .74 .17 1.56 1.36
Dividends paid per share .21 .21 .63 .63
Weighted average shares, in thousands
- Basic 309,392 291,320 309,160 289,928
- Diluted 309,810 291,803 309,491 290,528
APPLICABLE TO STEEL STOCK:
Income (loss) before extraordinary loss $(33) $63 $8 $281
- Per share - basic (.37) .72 .10 3.22
- diluted (.37) .71 .10 3.11
Extraordinary loss, net of income tax - - 5 -
- Per share - basic and diluted - - .06 -
Net income (loss) $(33) $63 $3 $281
- Per share - basic (.37) .72 .04 3.22
- diluted (.37) .71 .04 3.11
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Basic 88,394 88,099 88,383 87,223
- Diluted 88,394 92,359 88,385 94,717
<FN>
Selected notes to financial statements appear on pages 9-20.
6
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
ASSETS
September 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $93 $146
Receivables, less allowance for doubtful
accounts of $9 and $12 2,152 1,663
Inventories 2,638 2,008
Deferred income tax benefits 222 217
Other current assets 231 172
------ ------
Total current assets 5,336 4,206
Investments and long-term receivables,
less reserves of $3 and $10 1,251 1,249
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$16,729 and $16,238 12,687 12,929
Prepaid pensions 2,578 2,413
Other noncurrent assets 298 336
------ ------
Total assets $22,150 $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
September 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
LIABILITIES
Current liabilities:
Notes payable $76 $145
Accounts payable 2,947 2,478
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Payroll and benefits payable 434 480
Accrued taxes 334 245
Accrued interest 59 97
Long-term debt due within one year 57 71
------ ------
Total current liabilities 3,907 3,619
Long-term debt, less unamortized discount 4,040 3,920
Long-term deferred income taxes 1,732 1,579
Employee benefits 2,869 2,868
Deferred credits and other liabilities 718 720
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 1,773 1,590
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,755,887 shares and
2,767,787 shares ($138 liquidation preference) 3 3
Common stocks:
Marathon Stock issued - 310,078,463 shares and
308,458,835 shares 310 308
Steel Stock issued - 88,369,115 shares and
88,336,439 shares 88 88
Securities exchangeable solely into Marathon Stock
issued - 293,811 shares and 507,324 shares - 1
Additional paid-in capital 4,631 4,587
Deferred compensation - (1)
Retained earnings 1,692 1,467
Accumulated other comprehensive income (loss) (45) (48)
------ ------
Total stockholders' equity 6,679 6,405
------ ------
Total liabilities and stockholders' equity $22,150 $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)
------------------------------------------------
Nine Months Ended
September 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $493 $684
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Minority interest in income of Marathon Ashland
Petroleum LLC 405 282
Depreciation, depletion and amortization 906 921
Exploratory dry well costs 74 111
Inventory market valuation charges (credits) (551) 22
Pensions and other postretirement benefits (156) (168)
Deferred income taxes 161 249
Gain on ownership change in Marathon
Ashland Petroleum LLC (11) (245)
(Gain) loss on disposal of assets 8 (58)
Changes in:
Current receivables - sold 30 -
- operating turnover (816) 133
Inventories (116) (148)
Current accounts payable and accrued expenses 803 (88)
All other - net 67 (67)
------ ------
Net cash provided from operating activities 1,302 1,628
------ ------
INVESTING ACTIVITIES:
Capital expenditures (1,048) (1,063)
Acquisition of Tarragon Oil and Gas Limited - (686)
Disposal of assets 261 61
Restricted cash -withdrawals 54 203
- deposits (39) (44)
Affiliates - investments - net (16) (96)
- loans and advances (104) (85)
- repayments of loans and advances - 63
All other - net (4) -
------ ------
Net cash used in investing activities (896) (1,647)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit
arrangements - net (126) 1,439
Other debt - borrowings 460 827
- repayments (240) (1,230)
Common stock -issued 46 139
- repurchased - (195)
Preferred stock repurchased - (8)
Dividends paid (266) (256)
Distributions to minority shareholder of Marathon
Ashland Petroleum LLC (333) (211)
------ ------
Net cash provided from (used in) financing activities (459) 505
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 1
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (53) 487
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 146 54
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $93 $541
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(313) $(288)
Income taxes paid (36) (181)
<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 August 13, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing assets of
USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone
Capital Partners II-those companies being Republic Technologies
International, Inc., Republic Engineered Steels, Inc. and Bar Technologies,
Inc. (collectively Republic). In addition, USX made a $15 million equity
investment in Republic. USX owned 50% of USS/Kobe and now owns
approximately 16% of Republic. USX will account for its investment in
Republic under the equity method of accounting. The seamless pipe business
of USS/Kobe was excluded from this transaction. That business, now known
as Lorain Tubular Company LLC, will continue to operate as a joint venture
between USX and Kobe Steel. Third quarter 1999 dividend and affiliate
income (loss) includes $53 million in charges related to the impairment of
the carrying value of USX's investment in USS/Kobe and costs related to the
formation of Republic.
In the 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 $137 million. During the nine 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 September 30, 1999, the net assets held
for sale have been included in other current assets in the consolidated
balance sheet. During the second and third quarters of 1999, USX recorded
an estimated pretax loss of $8 million related to the sale. Carnegie has
been reported as part of the Marathon Group's other energy related
businesses operating segment.
10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
3. 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.
4. Total comprehensive income for the third quarter of 1999 and 1998 was
$208 million and $113 million, respectively, and $496 million and
$678 million for the nine months of 1999 and 1998, respectively.
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).
11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. (Continued)
OERB is an aggregation of two segments which fall below the
quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing
and Transportation - markets and transports its own and third-party natural
gas and crude oil in the United States; and 2) Power Generation - develops,
constructs and operates independent electric power projects worldwide. The
U. S. Steel Group consists of one operating segment, U. S. Steel (USS).
USS is engaged in the production and sale of steel mill products, coke and
taconite pellets. USS also engages in the following related business
activities: the management of mineral resources, domestic coal mining,
engineering and consulting services, and real estate development and
management. The results of segment operations are as follows:
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
THIRD QUARTER 1999
Revenues:
Customer $820 $5,413 $219 $6,452$1,376 $7,828
Intersegment (a) 61 16 9 86 - 86
Intergroup (a) 5 - 7 12 2 14
Equity in earnings (losses) of
unconsolidated affiliates (2) 6 5 9 (3) 6
Other 1 12 3 16 12 28
----- ----- ----- ----- ----- -----
Total revenues $885 $5,447 $243 $6,575$1,387 $7,962
===== ===== ===== ===== ===== =====
Segment income (loss) $201 $236 $13 $450 $(51) $399
===== ===== ===== ===== ===== =====
THIRD QUARTER 1998
Revenues:
Customer $534 $4,976 $72 $5,582$1,480 $7,062
Intersegment (a) 29 7 1 37 - 37
Intergroup (a) 1 - 1 2 1 3
Equity in earnings of
unconsolidated affiliates - 4 2 6 3 9
Other 2 5 3 10 13 23
----- ----- ----- ----- ----- -----
Total revenues $566 $4,992 $79 $5,637$1,497 $7,134
===== ===== ===== ===== ==== =====
Segment income $60 $224 $6 $290 $41 $331
===== ===== ===== ===== ===== =====
<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)
5. (Continued)
Total
Marathon
(In millions) E&P RM&T OERB Segments USS Total
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues:
Customer $2,081 $14,229 $414$16,724$3,913$20,637
Intersegment (a) 129 25 24 178 - 178
Intergroup (a) 12 - 15 27 14 41
Equity in earnings (losses) of
unconsolidated affiliates 2 13 18 33 (36) (3)
Other 20 28 12 60 33 93
----- ----- ----- ----- ----- -----
Total revenues $2,244 $14,295 $483 $17,022 $3,924 $20,946
===== ===== ===== ===== ===== =====
Segment income (loss) $361 $509 $47 $917 $(119) $798
===== ===== ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues:
Customer $1,551 $14,496 $234$16,281$4,838$21,119
Intersegment (a) 113 9 5 127 - 127
Intergroup (a) 7 - 5 12 1 13
Equity in earnings of
unconsolidated affiliates 1 10 8 19 46 65
Other 23 29 8 60 41 101
----- ----- ----- ----- ----- -----
Total revenues $1,695 $14,544 $260$16,499$4,926$21,425
===== ===== ===== ===== ==== =====
Segment income $257 $749 $23 $1,029 $301 $1,330
===== ===== ===== ===== ===== =====
<FN>
(a)Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. (Continued)
The following schedules reconcile segment revenues and income (loss) to
amounts reported in the Marathon and U. S. Steel Groups' financial
statements:
Marathon Group U.S. Steel Group
Third Quarter Third Quarter
Ended Ended
September 30 September 30
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $6,575 $5,637 $1,387 $1,497
Items not allocated to segments:
Gain (loss) on ownership change in MAP 11 (1) - -
Other (10) - (53) -
Elimination of intersegment revenues (86) (37) - -
Administrative revenues - (2) - -
------ ------ ----- -----
Total Group revenues $6,490 $5,597 $1,334 $1,497
====== ====== ====== ======
Income:
Income (loss) for reportable segments $450 $290 $(51) $41
Items not allocated to segments:
Gain (loss) on ownership change in MAP 11 (1) - -
Administrative expenses (26) (25) (4) (6)
Pension credits - - 100 94
Costs related to former business activities - - (21) (24)
Inventory market valuation adjustments 136 (50) - -
Other (a) (10) 1 (53) -
------ ------ ------ ------
Total Group income (loss) from operations $561 $215 $(29) $105
====== ====== ====== ======
<FN>
(a)Represents in 1999 for the Marathon Group, mainly the loss on sale of
certain domestic production properties and for the U. S. Steel Group,
impairment of investment in USS/Kobe and costs related to the formation of
Republic.
14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. (Continued)
Marathon GroupU. S. Steel Group
Nine Months Nine Months
Ended Ended
September 30 September 30
(In millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $17,022 $16,499 $3,924 $4,926
Items not allocated to segments:
Gain on ownership change in MAP 11 245 - -
Other (33) 24 (75) -
Elimination of intersegment revenues (178) (127) - -
Administrative revenues - (3) - -
------ ------ ----- -----
Total Group revenues $16,822 $16,638 $3,849 $4,926
====== ====== ====== ======
Income:
Income (loss) for reportable segments $917 $1,029 $(119) $301
Items not allocated to segments:
Gain on ownership change in MAP 11 245 - -
Administrative expenses (83) (84) (17) (20)
Pension credits - - 348 280
Costs related to former business activities - - (65) (77)
Inventory market valuation adjustments 551 (22) - -
Other (a) (33) (98) (75) -
------ ------ ------ ------
Total Group income from operations $1,363 $1,070 $72 $484
====== ====== ====== ======
<FN>
(a) Represents for the Marathon Group in 1999, mainly the loss on sale of
Scurlock, Carnegie and certain domestic production properties, 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 impairment of investment in USS/Kobe, costs related to
the formation of Republic and loss on investment in RTI stock used to
satisfy indexed debt obligations.
15
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)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
Consumer excise taxes on petroleum
products and merchandise $1,007 $1,000 $2,923 $2,834
Matching crude oil and refined product
buy/sell transactions settled in cash 901 1,012 2,471 2,994
7. Income from operations includes net periodic pension credits of $37
million and $53 million in the third quarter of 1999 and 1998,
respectively, ($165 million and $151 million in the nine 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 (loss) per share for the Marathon
Stock and Steel Stock reflects the USX Board of Directors' intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Restated
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts. The financial statements of the Marathon
Group and the U. S. Steel Group, taken together, include all accounts which
comprise the corresponding consolidated financial statements of USX.
Basic net income (loss) per share is calculated by adjusting net
income (loss) for dividend requirements of preferred stock and is based on
the weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. (Continued)
COMPUTATION OF INCOME (LOSS) PER SHARE
Third Quarter Ended
September 30
1999 1998
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
Net income (millions) $230 $230 $51 $51
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,392 309,392 291,320 291,320
Effect of dilutive stock options - 418 - 483
------ ------ ------ ------
Average common shares and dilutive effect 309,392 309,810 291,320 291,803
====== ====== ====== ======
Net income per share $.74 $.74 $.18 $.17
====== ====== ====== ======
U. S. Steel Group
Net income (loss) (millions):
Net income (loss) $(31) $(31) $65 $65
Dividends on preferred stock 2 2 2 2
------ ------ ------ ------
Net income (loss) applicable to Steel Stock (33) (33) 63 63
Effect of dilutive convertible securities - - - 2
------ ------ ------ ------
Net income (loss) assuming conversions $(33) $(33) $63 $65
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,394 88,394 88,099 88,099
Effect of dilutive securities:
Trust preferred securities - - - 4,256
Stock options - - - 4
------ ------ ------ ------
Average common shares and dilutive effect 88,394 88,394 88,099 92,359
====== ====== ====== ======
Net income (loss) per share $(.37) $(.37) $.72 $.71
====== ====== ====== ======
17
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
9. (Continued)
COMPUTATION OF INCOME (LOSS) PER SHARE
Nine Months Ended
September 30
1999 1998
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
Marathon Group
Net income (millions) $483 $483 $396 $396
====== ====== ====== ======
Shares of common stock outstanding (thousands)
Average number of common shares outstanding 309,160 309,160 289,928 289,928
Effect of dilutive stock options - 331 - 600
------ ------ ------ ------
Average common shares and dilutive effect 309,160 309,491 289,928 290,528
====== ====== ====== ======
Net income per share $1.56 $1.56 $1.37 $1.36
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Income before extraordinary loss $15 $15 $288 $288
Dividends on preferred stock 7 7 7 -
Extraordinary loss 5 5 - -
------ ------ ------ ------
Net income applicable to Steel Stock 3 3 281 288
Effect of dilutive convertible securities - - - 7
------ ------ ------ ------
Net income assuming conversions $3 $3 $281 $295
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,383 88,383 87,223 87,223
Effect of dilutive securities:
Trust preferred securities - - - 4,256
Preferred stock - - - 3,190
Stock options - 2 - 48
------ ------ ------ ------
Average common shares and dilutive effect 88,383 88,385 87,223 94,717
====== ====== ====== ======
Per share:
Income before extraordinary loss $.10 $.10 $3.22 $3.11
Extraordinary loss .06 .06 - -
------ ------ ------ ------
Net income $.04 $.04 $3.22 $3.11
====== ====== ====== ======
18
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 $245
million, which is included in the first nine months 1998 revenues. In
accordance with MAP closing agreements, Marathon and Ashland made capital
contributions to MAP for environmental improvements, approximating $2
million and $19 million, respectively. The closing agreements stipulate
that ownership interests in MAP will not be adjusted as a result of such
contributions. Accordingly, Marathon recognized a gain on ownership change
of $11 million in the third quarter of 1999.
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)
------------------------
September 30 December 31
1999 1998
----------- -----------
Raw materials $808 $916
Semi-finished products 350 282
Finished products 1,324 1,205
Supplies and sundry items 156 156
------ ------
Total (at cost) 2,638 2,559
Less inventory market valuation reserve - 551
------ ------
Net inventory carrying value $2,638 $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.
19
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
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.
13. At September 30, 1999, USX had $400 million in borrowings against its
$2,350 million long-term revolving credit agreement.
At September 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
September 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 September 30, 1999, there were no borrowings against these
facilities. USX had other outstanding short-term borrowings of $76
million.
In the event of a change in control of USX, debt obligations totaling
$3,535 million at September 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 3
for further discussion.
15. USX had an agreement (the program) to sell an undivided interest in
certain accounts receivable of the U. S. Steel Group. At September 30,
1999, the amount sold under the program that had not been collected
was $350 million. The agreement expired on October 15, 1999.
20
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
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.
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At September 30, 1999, and
December 31, 1998, accrued liabilities for remediation totaled $167 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 $53
million at September 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 nine months of 1999 and for the years 1998 and
1997, such capital expenditures totaled $58 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 September 30, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $147 million and $141
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$220 million at September 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 September 30, 1999, the largest guarantee for a single affiliate was
$131 million.
At September 30, 1999, USX's pro rata share of obligations of LOOP LLC
and various pipeline affiliates secured by throughput and deficiency
agreements totaled $153 million. Under the agreements, USX is required to
advance funds if the affiliates are unable to service debt. Any such
advances are prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and
long-term investments at September 30, 1999, totaled $878 million
compared with $812 million at December 31, 1998.
21
USX CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
--------------------------------------------
Nine Months Ended Six Months Ended Three Months Ended
September 30 June 30 March 31
1999 1998* 1999* 1998* 1999* 1998*
------------------ ----------------- -----------------
4.51 4.60 4.13 5.58 3.76 5.16
==== ==== ==== ==== ==== ====
USX CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
------------------------------------
Nine Months Ended Six Months Ended Three Months Ended
September 30 June 30 March 31
1999 1998* 1999* 1998* 1999* 1998*
------------------ ---------------- -------------------
4.65 4.74 4.27 5.78 3.89 5.35
==== ==== ==== ==== ==== ====
<FN>
*Restated in September 1999.
22
USX CORPORATION
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
--------------------------------------------
Year Ended December 31*
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
3.45 3.98 3.72 1.51 2.05
==== ==== ==== ==== ====
USX CORPORATION
RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
CONTINUING OPERATIONS
------------------------------------
Year Ended December 31*
-------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
3.56 4.18 4.02 1.64 2.22
===== ===== ===== ===== =====
<FN>
*Restated in 1999.
23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company that is principally
engaged in the energy business through its Marathon Group and in the steel
business through its U. S. Steel Group. The following discussion should be read
in conjunction with the third quarter and first nine 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 individual Group results, see Management's Discussion and Analysis of
Financial Condition and Results of Operations for the Marathon Group and the U.
S. Steel Group. For operating statistics, see Supplemental Statistics following
Management's Discussion and Analysis of Financial Condition and Results of
Operations for each of the respective Groups.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting USX. These
statements typically contain words such as "anticipates", "believes",
"estimates", "expects" or similar words indicating that future outcomes are
uncertain. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
the forward-looking statements. For additional risk factors affecting the
businesses of USX, see Supplementary Data - Disclosures About Forward-Looking
Statements in the USX 1998 Form 10-K.
24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and the first nine months of 1999 and 1998
are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Revenues
Marathon Group $6,490 $5,597 $16,822 $16,638
U. S. Steel Group 1,334 1,497 3,849 4,926
Eliminations (14) (3) (41) (13)
------ ------ ------- -------
Total USX Corporation revenues $7,810 $7,091 $20,630 $21,551
Less:
Excise taxes (a)(b) 1,007 1,000 2,923 2,834
Matching buy/sell transactions (a)(c) 901 1,012 2,471 2,994
------ ------ ------ ------
Revenues excluding above items $5,902 $5,079 $15,236 $15,723
====== ====== ====== ======
- ------
<FN>
(a) Included in both revenues and costs and expenses for the Marathon Group and
USX consolidated.
(b) Consumer excise taxes on petroleum products and merchandise.
(c) Matching crude oil and refined products buy/sell transactions settled in
cash.
Revenues (excluding excise taxes and matching buy/sell transactions)
increased $823 million in the third quarter of 1999 compared with the third
quarter of 1998, reflecting an increase of $997 million for the Marathon Group
offset by a decrease of $163 million for the U. S. Steel Group. For the first
nine months of 1999, revenues (excluding excise taxes and matching buy/sell
transactions) decreased $487 million compared with the same period of 1998,
reflecting an increase of $618 million for the Marathon Group and a decrease of
$1,077 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.
25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the third quarter and the first nine months of
1999 and 1998 is set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Reportable segments
Marathon Group
Exploration & production $201 $60 $361 $257
Refining, marketing & transportation 236 224 509 749
Other energy related businesses 13 6 47 23
------ ------ ------- -------
Income for reportable segments - Marathon Group $450 $290 $917 $1,029
U. S. Steel Group
Income for reportable segment (51) 41 (119) 301
------ ------ ------- -------
Income for reportable segments - USX Corporation 399 331 798 1,330
Items not allocated to segments:
Marathon Group 111 (75) 446 41
U. S. Steel Group 22 64 191 183
------ ------ ------- -------
Total income from operations - USX Corporation $532 $320 $1,435 $1,554
Income for reportable segments increased $68 million in the third quarter
of 1999 compared with the third quarter of 1998, reflecting an increase of $160
million for the Marathon Group reportable segments and a decrease of $92 million
for the U. S. Steel Group reportable segment. Income for reportable segments in
the first nine months of 1999 decreased by $532 million compared with the first
nine months of 1998, reflecting decreases of $112 million for the Marathon Group
reportable segments and $420 million for the U. S. Steel Group reportable
segment.
For discussion of income from operations, see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon Group
and the U. S. Steel Group.
26
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs were $92 million for the third
quarter of 1999, an increase of $19 million from the third quarter of 1998. The
increase was primarily due to an $11 million favorable adjustment to indexed
debt in the third quarter of 1998. Net interest and other financial costs were
$266 million for the first nine months of 1999, a $40 million increase from the
first nine months of 1998, due primarily to the Marathon Group's lower interest
income, lower capitalized interest on upstream projects and increased interest
costs resulting from higher average debt levels.
Provisions for estimated income taxes of $93 million and $266 million for
the third quarter and the first nine 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 first nine 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 nine 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 3 to the USX Consolidated
Financial Statements.
Net income was $199 million for the third quarter of 1999, an increase of
$83 million from the third quarter of 1998 reflecting an increase of $179
million for the Marathon Group and a decrease of $96 million for the U. S. Steel
Group. Net income decreased $191 million compared with the first nine months of
1998, reflecting an increase of $87 million for the Marathon Group and a
decrease of $278 million for the U. S. Steel Group. For further discussion of
net income 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.
Dividends to Stockholders
- -------------------------
On October 26, 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 December 10, 1999, to stockholders of record at the close
of business on November 17, 1999. The Board also declared a dividend of $0.8125
per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable
December 31, 1999, to stockholders of record at the close of business on
December 1, 1999.
On October 26, 1999, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3090 per share on its non-
voting Exchangeable Shares, payable December 10, 1999, to stockholders of record
at the close of business on November 17, 1999.
27
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash Flows
- ----------
Cash and cash equivalents totaled $93 million at September 30, 1999,
compared with $541 million at September 30, 1998, a decrease of $448 million
reflecting decreases of $431 million for the Marathon Group and $17 million 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 $1,302 million in the
first nine months of 1999, a $326 million decrease from the first nine months of
1998. The decrease was mainly due to lower net income (excluding the IMV
reserve adjustment and other noncash items).
Capital expenditures for property, plant and equipment in the first nine
months of 1999 were $1,048 million compared with $1,063 million for the first
nine months of 1998. For further details, see USX Corporation - Financial
Statistics, following Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Loan and advances to affiliates were $104 million in the first nine months
of 1999 compared with $85 million in the first nine 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 nine 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 September 30, 1999, totaled $878 million compared with $812
million at December 31, 1998.
USX's total notes payable, long-term debt, preferred stock of subsidiary
and USX obligated preferred securities of a subsidiary trust totaled $4,605
million at September 30, 1999, up $37 million from December 31, 1998.
28
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Liquidity
- ---------
At September 30, 1999, USX had $400 million of borrowings against its
$2,350 million long-term revolving credit agreement and $76 million of
borrowings against other short-term lines. There were no borrowings against the
MAP revolving credit agreements at September 30, 1999.
On October 15, 1999, USX borrowed an additional $350 million against its
long-term revolving credit agreement related to the expiration of the
U. S. Steel Group accounts receivable sales program. Subsequent to the
expiration of the program, on October 15, 1999, USX entered into an agreement
to repurchase all accounts remaining outstanding. See Note 15 to the USX
Consolidated Financial Statements.
USX filed with the Securities and Exchange Commission a shelf registration
statement that became effective October 20, 1999. The shelf registration
statement allows USX to offer and issue unsecured debt securites, common and
preferred stock and warrants in an aggregate principal amount up to $1 billion
in one or more separate offerings on terms to be determined at the time of sale.
Including this shelf registration statement, USX had a total of $1.678 billion
available under existing shelf registration statements at November 1, 1999.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of September 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.
29
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 September 30, 1999. In addition, there are 20
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 143 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, 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 three Findings of Violation in connection with the multi-media
inspection at its Detroit 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.
30
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. These instruments 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.
31
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. In 1999, the Marathon Group's risk management policy was expanded to
include the use of derivative instruments for certain non-hedging 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 September 30, 1999 are provided in the following
table:
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) $6.8 $22.4
Natural gas (price decrease) (d) 2.4 10.2
Refined products (price decrease) (d) .9 3.0
U. S. Steel Group
Natural gas (price decrease) (d) $2.8 $7.0
Zinc (price decrease) (d) 2.7 6.8
Tin (price decrease) (d) .3 .7
Nickel (price decrease) (d) 0 .1
<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 September 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 September 30, 1999, would cause future pretax income
effects to differ from those presented in the table.
32
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
(b) The number of net open contracts varied throughout third quarter
1999, from a low of 107 contracts at July 14, 1999, to a high of 16,688
contracts at September 15, 1999, and averaged 8,756 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout third 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 September 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
- -----------------------------------
USX is subject to the risk of price fluctuations related to anticipated
revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies other than U.S.
dollars. USX has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to manage
exposure to certain currency price fluctuations. At September 30, 1999, USX had
open Canadian dollar forward purchase contracts with a total carrying value of
$18 million. A 10% increase in the September 30, 1999, Canadian dollar to U.S.
dollar forward rate would result in a charge to income of $2 million.
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
3 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 hedging programs may differ materially
from those discussed in the forward-looking statements.
33
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
-------------- --------------
(Dollars in millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------
REVENUES
Marathon Group $6,490 $5,597 $16,822 $16,638
U. S. Steel Group 1,334 1,497 3,849 4,926
Eliminations (14) (3) (41) (13)
------- ------- ------- -------
Total $7,810 $7,091 $20,630 $21,551
INCOME FROM OPERATIONS
Marathon Group $561 $215 $1,363 $1,070
U. S. Steel Group (29) 105 72 484
------ ------ ------ ------
Total $532 $320 $1,435 $1,554
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group $295 $285 $827 $835
U. S. Steel Group 68 92 221 228
------ ------ ------ ------
Total $363 $377 $1,048 $1,063
INVESTMENTS (RETURNS) & OTHER AFFILIATE ACTIVITY - NET
Marathon Group $49 $49 $105 $52
U. S. Steel Group 15 3 15 66
------ ------ ------ ------
Total $64 $52 $120 $118
34
Part I - Financial Information (Continued):
B. Marathon Group
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES:
Sales $6,464 $5,582 $16,751 $16,315
Dividend and affiliate income 14 9 58 37
Gain (loss) on disposal of assets (6) 3 (17) 19
Gain (loss) on ownership change in Marathon
Ashland Petroleum LLC 11 (1) 11 245
Other income 7 4 19 22
------ ------ ------ ------
Total revenues 6,490 5,597 16,822 16,638
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 4,621 3,886 11,695 11,271
Selling, general and administrative expenses 121 132 375 383
Depreciation, depletion and amortization 219 222 678 701
Taxes other than income taxes 1,064 1,046 3,100 2,988
Exploration expenses 40 46 162 203
Inventory market valuation charges (credits) (136) 50 (551) 22
------ ------ ------ ------
Total costs and expenses 5,929 5,382 15,459 15,568
------ ------ ------ ------
INCOME FROM OPERATIONS 561 215 1,363 1,070
Net interest and other financial costs 72 63 218 166
Minority interest in income of Marathon Ashland
Petroleum LLC 148 70 405 282
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 341 82 740 622
Provision for estimated income taxes 111 31 257 226
------ ------ ------ ------
NET INCOME $230 $51 $483 $396
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share
- Basic $.74 $.18 $1.56 $1.37
- Diluted .74 .17 1.56 1.36
Dividends paid per share .21 .21 .63 .63
Weighted average shares, in thousands
- Basic 309,392 291,320 309,160 289,928
- Diluted 309,810 291,803 309,491 290,528
<FN>
Selected notes to financial statements appear on pages 37-45.
35
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
September 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $87 $137
Receivables, less allowance for doubtful
accounts of $3 and $3 1,686 1,277
Inventories 1,919 1,310
Deferred income tax benefits 80 80
Other current assets 230 172
------ ------
Total current assets 4,002 2,976
Investments and long-term receivables 742 603
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,624 and $10,299 10,196 10,429
Prepaid pensions 207 241
Other noncurrent assets 266 295
------ ------
Total assets $15,413 $14,544
====== ======
LIABILITIES
Current liabilities:
Notes payable $66 $132
Accounts payable 2,313 1,980
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC - 103
Payroll and benefits payable 148 150
Accrued taxes 181 99
Accrued interest 51 87
Long-term debt due within one year 44 59
------ ------
Total current liabilities 2,803 2,610
Long-term debt, less unamortized discount 3,497 3,456
Long-term deferred income taxes 1,533 1,450
Employee benefits 556 553
Deferred credits and other liabilities 418 389
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,773 1,590
COMMON STOCKHOLDERS' EQUITY 4,649 4,312
------ ------
Total liabilities and common stockholders' equity $15,413 $14,544
====== ======
<FN>
Selected notes to financial statements appear on pages 37-45.
36
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Nine Months Ended
September 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $483 $396
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC 405 282
Depreciation, depletion and amortization 678 701
Exploratory dry well costs 74 111
Inventory market valuation charges (credits) (551) 22
Pensions and other postretirement benefits 41 7
Deferred income taxes 89 140
Gain on ownership change in Marathon Ashland
Petroleum LLC (11) (245)
(Gain) loss on disposal of assets 17 (19)
Changes in:
Current receivables (667) 13
Inventories (95) (77)
Current accounts payable and accrued expenses 691 19
All other - net (10) (15)
------ ------
Net cash provided from operating activities 1,144 1,335
------ ------
INVESTING ACTIVITIES:
Capital expenditures (827) (835)
Acquisition of Tarragon Oil and Gas Limited - (686)
Disposal of assets 255 44
Restricted cash -withdrawals 39 5
- deposits (25) (25)
Affiliates - investments - net (1) (30)
- loans and advances (104) (85)
- repayments of loans and advances - 63
All other - net (10) (13)
------ ------
Net cash used in investing activities (673) (1,562)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in Marathon Group's portion of USX
consolidated debt (41) 1,018
Specifically attributed debt borrowings 141 365
- repayments (141) (365)
Marathon Stock issued 46 84
Dividends paid (193) (183)
Distributions to minority shareholder of Marathon
Ashland Petroleum LLC (333) (211)
------ ------
Net cash provided from (used in) financing activities (521) 708
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - 1
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (50) 482
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137 36
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $87 $518
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(250) $(227)
Income taxes paid, including settlements with the
U. S. Steel Group (31) (149)
<FN>
Selected notes to financial statements appear on pages 37-45.
37
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS
--------------------------------------
(Unaudited)
1. The information furnished in these financial statements is unaudited
but, in the opinion of management, reflects all adjustments necessary for a
fair presentation of the results for the periods covered. All such
adjustments are of a normal recurring nature unless disclosed otherwise.
These financial statements, including selected notes, have been prepared in
accordance with the applicable rules of the Securities and Exchange
Commission and do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. Certain reclassifications of prior year data have been made to
conform to 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.
38
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
2. (Continued)
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the Marathon Group
and the U. S. Steel Group financial statements in accordance with USX's tax
allocation policy for such groups. In general, such policy provides that
the consolidated tax provision and related tax payments or refunds are
allocated between the Marathon Group and the U. S. Steel Group for group
financial statement purposes, based principally upon the financial income,
taxable income, credits, preferences and other amounts directly related to
the respective groups.
The provision for estimated income taxes for the Marathon Group is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. Differences between
the combined interim tax provisions of the Marathon and U. S. Steel Groups
and USX consolidated are allocated to each group based on the relationship
of the individual group provisions to the combined interim provisions.
3. The Marathon Group's total comprehensive income for the third quarter
of 1999 and 1998 was $233 million and $49 million, respectively, and $488
million and $393 million for the nine 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 $137 million. During the nine 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 September 30, 1999, the net assets held
for sale have been included in other current assets in the balance sheet.
During the second and third quarters of 1999, the Marathon Group recorded
an estimated pretax loss of $8 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:
39
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
THIRD QUARTER 1999
Revenues:
Customer $820 $5,413 $219 $6,452
Intersegment (a) 61 16 9 86
Intergroup (a) 5 - 7 12
Equity in earnings (losses) of
unconsolidated affiliates (2) 6 5 9
Other 1 12 3 16
------ ------ ------ ------
Total revenues $885 $5,447 $243 $6,575
====== ====== ====== ======
Segment income $201 $236 $13 $450
====== ====== ====== ======
THIRD QUARTER 1998
Revenues:
Customer $534 $4,976 $72 $5,582
Intersegment (a) 29 7 1 37
Intergroup (a) 1 - 1 2
Equity in earnings of
unconsolidated affiliates - 4 2 6
Other 2 5 3 10
------ ------ ------ ------
Total revenues $566 $4,992 $79 $5,637
====== ====== ====== ======
Segment income $60 $224 $6 $290
====== ====== ====== ======
<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)
Total
(In millions) E&P RM&T OERB Segments
- --------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues:
Customer $2,081 $14,229 $414 $16,724
Intersegment (a) 129 25 24 178
Intergroup (a) 12 - 15 27
Equity in earnings of
unconsolidated affiliates 2 13 18 33
Other 20 28 12 60
------ ------ ------ ------
Total revenues $2,244 $14,295 $483 $17,022
====== ====== ====== ======
Segment income $361 $509 $47 $917
====== ====== ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 1998
Revenues:
Customer $1,551 $14,496 $234 $16,281
Intersegment (a) 113 9 5 127
Intergroup (a) 7 - 5 12
Equity in earnings of
unconsolidated affiliates 1 10 8 19
Other 23 29 8 60
------ ------ ------ ------
Total revenues $1,695 $14,544 $260 $16,499
====== ====== ====== ======
Segment income $257 $749 $23 $1,029
====== ====== ====== ======
<FN>
(a) Intersegment and intergroup sales and transfers were conducted on an arm's-
length basis.
41
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:
Third Quarter Ended
September 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $6,575 $5,637
Items not allocated to segments:
Gain (loss) on ownership change in MAP 11 (1)
Other (10) -
Elimination of intersegment revenues (86) (37)
Administrative revenues - (2)
------ ------
Total Group revenues $6,490 $5,597
====== ======
Income:
Income for reportable segments $450 $290
Items not allocated to segments:
Gain (loss) on ownership change in MAP 11 (1)
Administrative expenses (26) (25)
Inventory market valuation adjustments 136 (50)
Other (a) (10) 1
------ ------
Total Group income from operations $561 $215
====== ======
<FN>
(a)Represents mainly in 1999, loss on sale of certain domestic production
properties.
42
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Nine Months Ended
September 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $17,022 $16,499
Items not allocated to segments:
Gain on ownership change in MAP 11 245
Other (33) 24
Elimination of intersegment revenues (178) (127)
Administrative revenues - (3)
------ ------
Total Group revenues $16,822 $16,638
====== ======
Income:
Income for reportable segments $917 $1,029
Items not allocated to segments:
Gain on ownership change in MAP 11 245
Administrative expenses (83) (84)
Inventory market valuation adjustments 551 (22)
Other (a) (33) (98)
------ ------
Total Group income from operations $1,363 $1,070
====== ======
<FN>
(a)Represents in 1999, mainly the loss on sale of Scurlock, Carnegie, and
certain domestic production properties, 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)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
Consumer excise taxes on petroleum
products and merchandise $1,007 $1,000 $2,923 $2,834
Matching crude oil and refined product
buy/sell transactions settled in cash 901 1,012 2,471 2,994
PAGE> 43
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. The method of calculating net income (loss) per common share for the
Marathon Stock and Steel Stock reflects the Board's intent that the
separately reported earnings and surplus of the Marathon Group and the
U. S. Steel Group, as determined consistent with the USX Restated
Certificate of Incorporation, are available for payment of dividends on the
respective classes of stock, although legally available funds and
liquidation preferences of these classes of stock do not necessarily
correspond with these amounts.
Basic net income per share is based on the weighted average number of
common shares outstanding.
Diluted net income per share assumes 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 (loss) 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)
-------------------------
September 30 December 31
1999 1998
------------ -----------
Crude oil and natural gas liquids $692 $731
Refined products and merchandise 1,119 1,023
Supplies and sundry items 108 107
------ ------
Total (at cost) 1,919 1,861
Less inventory market valuation reserve - 551
------ ------
Net inventory carrying value $1,919 $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 September 30, 1999, accounts payable includes an estimated income
tax payable to the U. S. Steel Group of $59 million, determined in
accordance with the tax allocation policy discussed in Note 2.
44
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 $245 million, which is
included in the first nine months 1998 revenues. In accordance with MAP
closing agreements, Marathon and Ashland made capital contributions to MAP
for environmental improvements, approximating $2 million and $19 million,
respectively. The closing agreements stipulate that ownership interests in
MAP will not be adjusted as a result of such contributions. Accordingly,
Marathon recognized a gain on ownership change of $11 million in the third
quarter of 1999.
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 September 30, 1999,
and December 31, 1998, accrued liabilities for remediation totaled $69
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 $53 million at September 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 nine months of 1999 and for the
years 1998 and 1997, such capital expenditures totaled $39 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.
45
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
11. (Continued)
At September 30, 1999, and December 31, 1998, accrued liabilities for
platform abandonment and dismantlement totaled $147 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
September 30, 1999, and December 31, 1998.
At September 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 $153 million. Under the
agreements, the Marathon Group is required to advance funds if the
affiliates are unable to service debt. Any such advances are prepayments
of future transportation charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at September 30, 1999, totaled
$788 million compared with $624 million at December 31, 1998.
46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Marathon Oil Company ("Marathon") and certain
other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide
exploration and production of crude oil and natural gas; domestic refining,
marketing and transportation of petroleum products primarily through Marathon
Ashland Petroleum ("MAP"), owned 62% by Marathon; and other energy related
businesses. The Management's Discussion and Analysis should be read in
conjunction with the Marathon Group's Financial Statements and Notes to
Financial Statements. The discussion of Results of Operations should be read in
conjunction with the Supplemental Statistics provided on page 65.
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.
47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1999 and 1998 are
summarized in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
----- ----- ----- -----
Exploration & production ("E&P") $885 $566 $2,244 $1,695
Refining, marketing & transportation ("RM&T") 5,447 4,992 14,295 14,544
Other energy related businesses (a) 243 79 483 260
------ ------ ------ ------
Revenues of reportable segments $6,575 $5,637 $17,022 $16,499
Revenues not allocated to segments:
Gain (loss) on ownership change in MAP 11 (1) 11 245
Other (b) (10) - (33) 24
Elimination of intersegment revenues (86) (37) (178) (127)
Administrative revenues - (2) - (3)
------ ------ ------ ------
Total Group revenues $6,490 $5,597 $16,822 $16,638
====== ====== ====== ======
Items included in both revenues and costs and expenses, resulting in no effect
on income:
Consumer excise taxes on petroleum
products and merchandise $1,007 $1,000 $2,923 $2,834
Matching crude oil and refined product
buy/sell transactions settled in cash:
E&P 176 94 451 243
RM&T 725 918 2,020 2,751
- ---------
<FN>
(a)Includes domestic natural gas and crude oil marketing and transportation,
and power generation.
(b)For the third quarter 1999, this represents a loss on the sale of certain
domestic production properties, partially offset by a gain on the sale of
certain Egyptian properties. For the first nine months of 1999, this also
includes the loss on the sale of Scurlock Permian LLC and the estimated loss
on the sale of Carnegie Natural Gas Company and affiliated subsidiaries.
E&P segment revenues increased by $319 million in the third quarter of 1999
from the comparable prior-year period. The increase primarily reflected higher
worldwide liquid hydrocarbon prices, higher domestic gas prices and increased
E&P crude oil buy/sell volumes. For the first nine months of 1999, E&P segment
revenues increased by $549 million from the prior-year period due to higher
domestic liquid hydrocarbon prices and volumes, higher international gas volumes
and increased E&P crude oil buy/sell volumes, partially offset by lower
international natural gas prices.
48
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RM&T segment revenues increased by $455 million in the third quarter of
1999 from the comparable prior-year period. The increase primarily reflected
higher refined product prices, increased volumes of refined product sales and
higher merchandise sales, partially offset by reduced revenues resulting from
the sale of Scurlock Permian LLC. For the first nine months of 1999, RM&T
segment revenues decreased by $249 million from the comparable prior-year
period. The decrease primarily reflected reduced revenues resulting from the
sale of Scurlock Permian LLC, partially offset by higher refined product prices,
increased volumes of refined product sales and higher merchandise sales.
Merchandise sales increased by $51 million and $159 million from last year's
third quarter and first nine months, respectively.
Other energy related businesses segment revenues increased by $164 million
in the third quarter of 1999 from the comparable prior-year period. For the
first nine months of 1999, revenues increased by $223 million from the prior-
year period. The increase in both periods primarily reflected increased crude
oil and natural gas purchase and resale activity.
49
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for the third quarter and first nine months of 1999
and 1998 is set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
----- ----- ----- -----
E&P
Domestic $168 $44 $299 $159
International 33 16 62 98
------ ------ ------ ------
Income for E&P reportable segment 201 60 361 257
RM&T 236 224 509 749
Other energy related businesses 13 6 47 23
------ ------ ------ ------
Income for reportable segments $450 $290 $917 $1,029
Items not allocated to segments:
Administrative expenses (a) $(26) $(25) $(83) $(84)
IMV reserve adjustment (b) 136 (50) 551 (22)
Loss on disposal of assets (c) (10) - (33) -
Gain on ownership change & trans. charges-MAP (d) 11 - 11 223
E&P int'l impairment & dom. contract settlement (e) - - - (76)
------ ------ ------ ------
Total Group income from operations $561 $215 $1,363 $1,070
====== ====== ====== ======
- --------
<FN>
(a) Includes the portion of the Marathon Group's administrative costs not
charged to the operating segments and the portion of USX corporate general
and administrative costs allocated to the Marathon Group.
(b)The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. See Note 8 to the Marathon Group Financial
Statements.
(c)For the third quarter of 1999, this represents a loss on the sale of certain
domestic production properties, partially offset by a gain on the sale of
certain Egyptian properties. For the first nine months of 1999, this also
includes the loss on the sale of Scurlock Permian LLC and the estimated loss
on the sale of Carnegie Natural Gas Company and affiliated subsidiaries.
(d)The gain on ownership change and one-time transition charges in 1998 relate
to the formation of MAP. In addition, Marathon recognized a gain on
ownership change of $11 million in the third quarter of 1999. For
additional discussion of the gain on ownership change in MAP, see Note 10 to
the Marathon Group Financial Statements.
(e)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.
50
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income for reportable segments in the third quarter of 1999 increased by
$160 million from last year's third quarter, due primarily to higher worldwide
liquid hydrocarbon and domestic natural gas prices, partially offset by lower
refined product margins. Income for reportable segments in the first nine
months of 1999 decreased by $112 million from the first nine months of 1998, due
primarily to lower refined product margins, partially offset by higher worldwide
liquid hydrocarbon prices.
Worldwide E&P ("upstream") segment income in the third quarter of 1999
increased by $141 million from last year's third quarter. Results in the first
nine months of 1999 increased by $104 million from the same period in 1998.
Domestic E&P income in the third quarter of 1999 increased by $124 million
from last year's third quarter. This increase was mainly due to higher liquid
hydrocarbon and natural gas prices. Results in the first nine months of 1999
increased by $140 million from the same period in 1998. The increase was
primarily due to higher liquid hydrocarbon prices, lower exploration expense and
increased liquid hydrocarbon volumes.
International E&P income in the third quarter of 1999 increased by $17
million from last year's third quarter. This increase was mainly due to higher
liquid hydrocarbon prices, partially offset by a decrease in liquid hydrocarbon
volumes resulting from lower production and liftings in the United Kingdom and
the sale of certain Egyptian properties. Results in the first nine months of
1999 decreased by $36 million from the same period in 1998. This decrease was
mainly due to a decrease in liquid hydrocarbon and natural gas volumes resulting
from lower production and liftings in the United Kingdom, lower natural gas
prices and higher exploration expense, partially offset by higher liquid
hydrocarbon prices.
RM&T segment income in the third quarter of 1999 increased by $12 million
from last year's third quarter. This increase was mainly due to higher
merchandise sales at Speedway SuperAmerica LLC, lower expenses and increased
refined product sales volumes, partially offset by lower refined product
margins. Results in the first nine months of 1999 decreased by $240 million
from the same period in 1998. This decrease was mainly due to lower refined
product margins, partially offset by recognized mark-to-market derivative gains
from nonhedging activities, higher merchandise sales at Speedway SuperAmerica
LLC and increased refined product sales volumes.
Other energy related businesses segment income in the third quarter of 1999
increased by $7 million from last year's third quarter. This increase was
mainly due to higher equity earnings as a result of increased pipeline
throughput and higher margins on crude oil purchases for resale. Results in the
first nine months of 1999 increased by $24 million from the same period in 1998.
This increase was mainly due to a reversal of abandonment accruals of $10
million in the second quarter of 1999 and higher equity earnings as a result of
increased pipeline throughput.
51
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Items not allocated to segments
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.
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 nine months of 1999
increased by $52 million from the comparable 1998 period, mainly due to lower
interest income, lower capitalized interest on upstream projects and increased
costs resulting from higher average debt levels.
The provision for estimated income taxes in the third quarter and first
nine months of 1999 increased by $80 million and $31 million, respectively from
the comparable 1998 periods. These increases were primarily due to an increase
in income before taxes.
Net income for the third quarter and first nine months increased by $179
million and $87 million, respectively, in 1999 from 1998, primarily reflecting
the factors discussed above.
Cash Flows
- ----------
Net cash provided from operating activities was $1,144 million in the first
nine months of 1999, compared with $1,335 million in the first nine months of
1998. The $191 million decrease mainly reflected lower net income (excluding
the IMV reserve adjustment and other noncash items).
Capital expenditures in the first nine months of 1999 totaled $827 million,
compared with $835 million in the comparable 1998 period. For additional
information regarding capital expenditures, refer to the Supplemental Statistics
on page 65.
52
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash from disposal of assets was $255 million in the first nine months
1999, compared with $44 million in the comparable 1998 period. Proceeds in 1999
were mainly from the sale of Scurlock Permian LLC and domestic and international
production properties.
Restricted cash was a net withdrawal of $14 million in the first nine
months of 1999, compared to a net deposit of $20 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 cash deposited from the sales of domestic production properties and
equipment.
Net investments in affiliates of $30 million in the first nine months of
1998 primarily included MAP's acquisition of an interest in Southcap Pipe Line
Company.
Loans and advances to affiliates were $104 million in the first nine months
of 1999, compared with $85 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 nine 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 September 30, 1999 totaled $788 million compared with
$624 million at December 31, 1998.
Financial obligations, which consist of the Marathon Group's portion of USX
debt and preferred stock of a subsidiary attributed to both groups, as well as
debt specifically attributed to the Marathon Group, decreased by $41 million in
the first nine months of 1999.
Distributions to minority shareholder of MAP were $333 million in the first
nine months of 1999, compared with $211 million in the comparable 1998 period.
The increase was primarily due to a distribution of $103 million in the first
quarter 1999, which related to fourth quarter 1998 MAP activity. Previously,
these distributions were netted against minority interest in income of MAP
within the operating activity section of the Statement of Cash Flows.
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.
53
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
15 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 30, 1999. In addition, there are 8 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.
54
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 three Findings of Violation in connection with the multi-
media inspection at its Detroit 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.
55
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On October 1, 1999, Marathon announced the start of gas production from the
Southwest Kinsale field, located approximately 30 miles south of Cork, Ireland,
at an initial rate in excess of 50 million cubic feet per day ("mmcfpd").
Marathon has a 100 percent working interest in this field.
On September 29, 1999, Marathon sold 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 1999 net
production was about 6,000 bpd from the two fields.
On September 19, 1999, production commenced from the Angus field, a three-
well subsea development on Green Canyon Blocks 112 and 113 in the Gulf of
Mexico. Current gross production is 30,000 bpd and 45 mmcfpd. Marathon holds a
33.34 percent interest in this project.
On September 7, 1999, Marathon announced the start of production from the
Tchatamba South field in the Kowe permit located 20 miles offshore Gabon. The
Tchatamba South field is currently producing 18,000 gross bpd of 44-degree oil
from two wells in 150 feet of water. Production from Tchatamba South and
Tchatamba Marin fields is currently 32,000 gross bpd. Marathon has a 56.25
percent working interest in this development.
On July 5, 1999, Sakhalin Energy Investment Company, Ltd. ("Sakhalin
Energy") initiated oil production from the Astokh Feature of the Piltun-
Astokhskoye field offshore Sakhalin Island in the Russian Far East. The first
lifting occurred on September 20, 1999. In late September, production was shut-
in following a failure of the mooring system, and although re-started briefly in
late October, remains shut-in pending correction of the problem. A re-designed
mooring system has been installed and production is expected to resume in mid-
November and continue through the ice-free season, estimated to be mid-December.
In 2000, gross production is expected to average 36,000 gross bpd (on an
annualized basis), although operations will be limited to the ice-free season.
Marathon holds a 37.5 percent interest in Sakhalin Energy, which is the first
enterprise to develop and produce oil and gas resources in Russia under a
production sharing agreement.
Marathon's fourth quarter 1999 worldwide liquid hydrocarbon production is
expected to average in the range of 220,000 to 225,000 barrels per day ("bpd")
and worldwide natural gas production is expected to be approximately 1.37
billion cubic feet per day ("bcfpd"). Based on these fourth quarter
projections, average production for the full year 1999 is expected to be nearly
210,000 bpd and 1.31 bcfpd.
Liquid hydrocarbon production in 2000 is expected to average in the range
of 215,000 to 225,000 bpd and in 2001, between 230,000 to 240,000 bpd. Natural
gas volumes in 2000 are expected to remain consistent with 1999 and increase
approximately four percent in 2001. These projections are based on known
discoveries and do not include the impact of future acquisitions, dispositions,
or wildcat drilling.
56
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On August 18, 1999, Marathon announced a successful appraisal well was
drilled in licenses PL 2/93 and 3/94, which encompass the Corrib field, located
44 miles off the west coast of Ireland. The well, which was drilled in 1,145
feet of water, achieved test rates up to 64 gross mmcfpd. Development planning
is now underway. Marathon owns an 18.5 percent working interest in the
licenses.
On the same day, Marathon also announced a second discovery well was
drilled on the Q4 Block in the Dutch sector of the North Sea. The well tested
at 26 to 28 gross mmcfpd in two separate zones. Marathon indirectly holds a
16.5 percent equity interest in this block through Clam Petroleum B.V., a 50/50
joint venture.
On August 12, 1999, Marathon announced a deepwater natural gas discovery on
the Camden Hills prospect, located in the Gulf of Mexico on Mississippi Canyon
Block 348. The well was drilled to a depth of 15,080 feet and encountered over
200 feet of gas pay. Marathon is the operator and has a 50.03 percent working
interest. Further appraisal drilling is planned later this year to evaluate the
full extent of this discovery.
The above discussion includes forward-looking statements with respect to
projected liquid hydrocarbon production levels and natural gas volumes for 1999,
2000 and 2001. 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.
57
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Downstream income of the Marathon Group is largely dependent upon refined
product margins, which reflect the difference between the selling prices of
refined products and the cost of raw materials refined and manufacturing costs.
Refined product margins have been historically volatile and vary with the level
of economic activity in the various marketing areas, the regulatory climate,
crude oil costs, manufacturing costs 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. MAP, Wolverine Pipeline Company ("Wolverine") and UDS
received a second request for information from the Federal Trade Commission
("FTC") regarding the purchase by MAP and Wolverine of UDS' Michigan assets.
MAP has responded to the FTC and anticipates closing this transaction before the
end of the 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.
Speedway SuperAmerica LLC opened a travel center near Houston in Baytown,
Texas. This travel center marks the completion of MAP's first retail facility
outside of its traditional market in the Midwest and Southeast.
MAP has recently begun selling gasoline and diesel fuel under the Marathon
brand in Georgia and is in the process of branding a number of units in Florida.
MAP plans to develop a significant brand presence in these high growth states
where it already has the logistical assets in place to support these jobber
owned retail outlets.
On June 1, 1999, Marathon announced 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. This is a forward-
looking statement. Some factors that could potentially affect the timing of the
Carnegie closing include (among others) receipt of government approvals,
consents of third parties and satisfaction of customary closing conditions.
Carnegie is reported as part of the other energy related businesses operating
segment.
On August 3, 1999, Marathon announced a voluntary enhanced retirement
program, which resulted in the early fourth quarter retirement of approximately
260 employees, or about 8% of the Marathon Oil Company workforce. Annual pre-
tax cost savings as a result of this program are estimated to be approximately
$18 million.
58
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Year 2000 Readiness Disclosure
- ------------------------------
The Marathon Group has executed 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
Both Information Technology ("IT") and Non-IT systems are 99.9% ready as of
September 30, 1999. Systems, which are not yet Year 2000 ready are expected to
be completed in the fourth quarter. These include vendor-supplied software and
replacement components awaiting delivery of Year 2000 ready versions and
implementations deferred to coincide with operational shutdowns. These
remaining items are being monitored closely. Specific contingency plans have
been prepared which will provide a means to minimize any adverse impact on
business operations after December 31, 1999, if remediation is not completed as
expected.
Additional review and approval is being required for any modifications to
IT and Non-IT systems during the fourth quarter in order to avoid introducing
problems to systems already determined to be Year 2000 ready. Continued system
testing is being done to help further mitigate the risks of the Year 2000.
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").
59
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Percent Completed
Y2K
Y2K Readiness
As of September 30, 1999 Impact of
Y2K Assess- Overall
Inventory ment Inventory
------ ------ ------
Information Technology 100% 100% 99.9%
Non-Information Technology 100% 100% 99.9%
Third Parties
Third parties include suppliers, customers and vendors. The Marathon Group
has been actively identifying critical vendors and utilities needed for
continued operations, cash flow, and safety. Contacts were made with critical
third parties to determine if they will be able to provide their services to the
Marathon Group in the Year 2000. The responses were graded and unsatisfactory
responses were addressed through contingency planning, and in some cases,
selection of new vendors who appeared to be better prepared for the Year 2000.
Using a Year 2000 ready test environment, testing is complete on third
party software to validate that it is Year 2000 ready, with the exceptions noted
under State of Readiness above. In addition, contingency plans have been
prepared for third party software that is critical to operations.
The Costs to Address Year 2000 Issues
Total costs incurred as of September 30, 1999, were $30 million, including
$14 million of incremental costs. The total estimated costs associated with
Year 2000 readiness are expected to be $36 million, of which $18 million are
incremental costs.
60
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 Marathon Group has relied on information from suppliers of automation
and process control systems and processes, as well as the tests conducted on
critical components, to determine the readiness of embedded chips. There is a
risk some Year 2000 problems could go undetected until after January 1, 2000.
According to information received from the suppliers of these systems, oil and
gas industry surveys and the 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 have been developed in case
timely upgrades are not available.
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. The committee's
follow-up report dated September 22, 1999, continued to express concern that
many of the countries which export oil to the United States have a high risk of
Year 2000 disruption.
However, the Central Intelligence Agency ("CIA") has subsequently provided
additional information as to the risk to oil imports. In prepared testimony to
the U.S. House International Relations Committee on October 21, 1999, the CIA
stated, "Finally, the United States is unlikely to experience a significant
disruption in oil deliveries because our key suppliers appear to be ready.
Major multi-national firms have been in the forefront of remediation and testing
efforts, and operators of oil terminals and tankers have been similarly active
in correcting Y2K vulnerabilities."
61
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Furthermore, according to a report by the API and an August 1999 report by
the United States Department of Energy, several of the 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. An API survey conducted in September 1999, covering 96% of domestic
oil and gas consumption, showed more than 90% being Year 2000 ready as of
September 30, 1999. The remaining companies said they will be ready before
year's end.
In the first nine months of 1999, 62% or 565,000 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 326,000 bpd was acquired from the Middle East. If
any suppliers of foreign crude oil experience problems associated with the Year
2000, 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 might not be completely Year 2000
ready. Marathon has inventoried and assessed these assets and is prepared to
proceed promptly with the necessary remediation once the closing occurs.
Marathon currently anticipates closing this transaction before the end of the
year. There is a risk some of the facilities may not be Year 2000 ready by the
end of the year. The completion percentages in the chart on page 59 do not
include UDS IT and Non-IT systems.
Contingency Planning
Detailed contingency plans have been developed throughout the company, with
one percent remaining to be completed. In July, a multiple-occurrence emergency
response drill was conducted that included Year 2000 scenarios. This drill
helped identify specific improvements that could be made to the contingency
plans and year-end rollover monitoring processes. Except for the implementation
and training of personnel, which is scheduled in the fourth quarter, contingency
planning is complete.
The Marathon Group plans to quickly detect and correct problems that may
arise during the actual rollover to the new century. Year 2000 monitoring
centers have been established in major offices to collect and disseminate
information within the Marathon Group as well as with the Year 2000 monitoring
centers at U.S. Steel and the API. Personnel will be located at each of the
company's critical operating facilities throughout the world to report successes
and problems through these monitoring centers. The information from these
worldwide locations could give an early warning to correct similar problems in
other locations not yet affected.
62
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Similar to the drill conducted in July, another Year 2000 drill took place
in late October 1999. This drill focused on the business units and how they
collect and disseminate Year 2000 information internally and with the
centralized Year 2000 monitoring center. No significant issues were identified.
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, contingency plan 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.
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. These instruments 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.
63
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. In 1999, the Marathon Group's risk management policy was expanded to
include the use of derivative instruments for certain non-hedging 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 September 30, 1999 are provided in the following
table:
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) $6.8 $22.4
Natural gas (price decrease) (d) 2.4 10.2
Refined products (price decrease) (d) .9 3.0
<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 September 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 September 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 third quarter
1999 from a low of 107 contracts at July 14, 1999, to a high of 16,688
contracts at September 15, 1999, and averaged 8,756 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout third 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.
64
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 September 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
- -----------------------------------
USX is subject to the risk of price fluctuations related to anticipated
revenues and operating costs, firm commitments for capital expenditures and
existing assets or liabilities denominated in currencies other than U.S.
dollars. USX has not generally used derivative instruments to manage this risk.
However, USX has made limited use of forward currency contracts to manage
exposure to certain currency price fluctuations. At September 30, 1999, USX had
open Canadian dollar forward purchase contracts with a total carrying value of
$18 million. A 10% increase in the September 30, 1999, Canadian dollar to U.S.
dollar forward rate would result in a charge to income of $2 million. The
entire amount of these contracts is attributed to the Marathon Group.
Equity Price Risk
- -----------------
As of September 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 hedging programs may differ materially from
those discussed in the forward-looking statements.
PAGE> 65
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS
Exploration & Production ("E&P")
Domestic $168 $44 $299 $159
International 33 16 62 98
----- ----- ----- -----
Income For E&P Reportable Segment 201 60 361 257
Refining, Marketing & Transportation 236 224 509 749
Other Energy Related Businesses (a) 13 6 47 23
----- ----- ----- -----
Income For Reportable Segments $450 $290 $917 $1,029
Items Not Allocated To Segments:
Administrative Expenses $(26) $(25) $(83) $(84)
Inventory Market Val. Res. Adjustment 136 (50) 551 (22)
Loss on Disposal of Assets (10) - (33) -
Gain on Ownership Change & Trans. Charges - MAP 11 - 11 223
E&P Int'l Impairment & Dom. Contract Settlement - - - (76)
----- ----- ----- -----
Marathon Group Income From Operations $561 $215 $1,363 $1,070
CAPITAL EXPENDITURES
Exploration & Production $184 $183 $594 $606
Refining, Marketing & Transportation 107 89 226 208
Other (b) 4 13 7 21
----- ----- ----- -----
Total $295 $285 $827 $835
EXPLORATION EXPENSE
Domestic $26 $31 $92 $123
International (c) 14 15 70 80
----- ----- ----- -----
Total $40 $46 $162 $203
INVESTMENTS & OTHER AFFILIATE ACTIVITY-NET $49 $49 $105 $52
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (d):
United States 138.6 137.2 143.4 133.7
Europe 28.7 44.0 32.3 43.3
Other International 24.4 27.9 28.4 15.9
----- ----- ----- -----
Total Consolidated 191.7 209.1 204.1 192.9
Equity Affiliates (CLAM & Sakhalin Energy) 2.4 0.1 0.9 -
----- ----- ----- -----
Worldwide 194.1 209.2 205.0 192.9
Net Natural Gas Production (e):
United States 730.9 728.8 747.2 733.4
Europe (f) 291.1 326.6 345.5 393.9
Other International 149.1 102.8 169.7 43.1
----- ----- ----- -----
Total Consolidated 1171.1 1158.2 1262.4 1170.4
Equity Affiliate (CLAM) 25.1 23.2 32.0 34.0
------ ------ ------ ------
Worldwide 1196.2 1181.4 1294.4 1204.4
Average Equity Sales Prices (g) (h):
Liquid Hydrocarbons (per Bbl)
Domestic $17.78 $10.23 $13.48 $10.72
International 19.56 11.66 14.80 12.59
Natural Gas (per Mcf)
Domestic $2.22 $1.68 $1.83 $1.82
International 1.80 1.90 1.81 2.04
Crude Oil Refined (d) 940.4 885.5 909.5 904.6
Refined Products Sold (d) 1301.4 1228.6 1227.9 1183.7
Matching buy/sell volumes included in refined
products sold (d) 55.8 35.6 50.0 38.4
MAP Merchandise Sales $561 $510 $1,545 $1,386
- --------------
<FN>
(a) Includes domestic natural gas and crude oil marketing and
transportation, and power generation.
(b) Includes other energy related businesses and corporate capital
expenditures.
(c) Nine months ended September 30, 1998 includes $30 million of
impairment in first quarter 1998.
(d) Thousands of barrels per day
(e) Millions of cubic feet per day
(f) Includes gas acquired for injection and subsequent resale of 16.0,
17.2, 20.8 and 23.7 mmcfd in the third quarters and first nine months of
1999 and 1998, respectively.
(g) Prices exclude gains and losses from hedging activities.
(h) Prices exclude equity affiliates and purchase/resale gas.
66
Part I - Financial Information (Continued):
C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES:
Sales $1,377 $1,483 $3,926 $4,842
Income (loss) from affiliates (56) 3 (89) 46
Gain on disposal of assets 11 11 9 39
Other income (loss) 2 - 3 (1)
------ ------ ------ ------
Total revenues 1,334 1,497 3,849 4,926
------ ------ ------ ------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,289 1,312 3,606 4,203
Selling, general and administrative
expenses (credits) (61) (51) (226) (150)
Depreciation, depletion and amortization 78 71 228 220
Taxes other than income taxes 57 60 169 169
------ ------ ------ ------
Total costs and expenses 1,363 1,392 3,777 4,442
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS (29) 105 72 484
Net interest and other financial costs 20 10 48 60
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS (49) 95 24 424
Provision (credit) for estimated income taxes (18) 30 9 136
------ ------ ------ ------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (31) 65 15 288
Extraordinary loss on extinguishment of debt,
net of income tax - - 5 -
------ ------ ------ ------
NET INCOME (LOSS) (31) 65 10 288
Dividends on preferred stock 2 2 7 7
------ ------ ------ ------
NET INCOME (LOSS) APPLICABLE TO STEEL STOCK $(33) $63 $3 $281
====== ====== ====== ======
STEEL STOCK DATA:
Income (loss) before extraordinary loss $(33) $63 $8 $281
- Per share - basic (.37) .72 .10 3.22
- diluted (.37) .71 .10 3.11
Extraordinary loss, net of income tax - - 5 -
- Per share - basic and diluted - - .06 -
Net income (loss) $(33) $63 $3 $281
- Per share - basic (.37) .72 .04 3.22
- diluted (.37) .71 .04 3.11
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Basic 88,394 88,099 88,383 87,223
- Diluted 88,394 92,359 88,385 94,717
<FN>
Selected notes to financial statements appear on pages 69-75.
67
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
September 30 December 31
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $6 $9
Receivables, less allowance for doubtful
accounts of $6 and $9 532 392
Inventories 719 698
Deferred income tax benefits 180 176
------ ------
Total current assets 1,437 1,275
Investments and long-term receivables,
less reserves of $3 and $10 606 743
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$6,105 and $5,939 2,491 2,500
Prepaid pensions 2,371 2,172
Other noncurrent assets 55 59
----- ------
Total assets $6,960 $6,749
====== ======
LIABILITIES
Current liabilities:
Notes payable $10 $13
Accounts payable 694 501
Payroll and benefits payable 286 330
Accrued taxes 155 150
Accrued interest 8 10
Long-term debt due within one year 13 12
------ ------
Total current liabilities 1,166 1,016
Long-term debt, less unamortized discount 543 464
Long-term deferred income taxes 199 129
Employee benefits 2,313 2,315
Deferred credits and other liabilities 461 484
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 2,027 2,090
------ ------
Total stockholders' equity 2,030 2,093
------ ------
Total liabilities and stockholders' equity $6,960 $6,749
====== ======
<FN>
Selected notes to financial statements appear on pages 69-75.
68
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Nine Months Ended
September 30
(Dollars in millions) 1999 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $10 $288
Adjustments to reconcile to net cash provided
from operating activities:
Extraordinary loss 5 -
Depreciation, depletion and amortization 228 220
Pensions and other postretirement benefits (197) (175)
Deferred income taxes 72 109
Gain on disposal of assets (9) (39)
Changes in:
Current receivables - sold 30 -
- operating turnover (208) 148
Inventories (21) (71)
Current accounts payable and accrued expenses 170 (132)
All other - net 78 (55)
------ ------
Net cash provided from operating activities 158 293
------ ------
INVESTING ACTIVITIES:
Capital expenditures (221) (228)
Disposal of assets 6 17
Restricted cash -withdrawals 15 3
- deposits (14) (19)
Affiliates - investments - net (15) (66)
All other - net 6 13
------ ------
Net cash used in investing activities (223) (280)
------ ------
FINANCING ACTIVITIES:
Increase in U. S. Steel Group's portion of USX
consolidated debt 146 21
Specifically attributed debt repayments (11) (3)
Steel Stock issued - 55
Preferred stock repurchased - (8)
Dividends paid (73) (73)
------ ------
Net cash provided from (used in) financing activities 62 (8)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3) 5
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9 18
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $6 $23
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(63) $(61)
Income taxes paid, including settlements with
the Marathon Group (5) (32)
<FN>
Selected notes to financial statements appear on pages 69-75.
69
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
70
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. On August 13, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) completed a
transaction that combined the steelmaking and bar producing assets of
USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone
Capital Partners II-those companies being Republic Technologies
International, Inc., Republic Engineered Steels, Inc. and Bar Technologies,
Inc. (collectively Republic). In addition, USX made a $15 million equity
investment in Republic. USX owned 50% of USS/Kobe and now owns
approximately 16% of Republic. USX will account for its investment in
Republic under the equity method of accounting.
The seamless pipe business of USS/Kobe was excluded from this
transaction. That business, now known as Lorain Tubular Company LLC, will
continue to operate as a joint venture between USX and Kobe Steel.
Third quarter 1999 income (loss) from affiliates includes $53 million
in charges related to the impairment of the carrying value of USX's
investment in USS/Kobe and costs related to the formation of Republic.
4.The U. S. Steel Group's total comprehensive income (loss) for the third
quarter of 1999 and 1998 was $(25) million and $64 million, respectively,
and $8 million and $285 million for the nine months of 1999 and 1998,
respectively.
5. The U. S. Steel Group consists of one operating segment, U. S. Steel.
U. S. Steel is engaged in the production and sale of steel mill products,
coke and taconite pellets. U. S. Steel also engages in the following
related business activities: the management of mineral resources, domestic
coal mining, engineering and consulting services, and real estate
development and management. The results of segment operations are as
follows:
71
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
Third Quarter Ended
September 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Customer $1,376 $1,480
Intergroup (a) 2 1
Equity in earnings (losses) of unconsolidated
affiliates (3) 3
Other 12 13
------ ------
Total revenues $1,387 $1,497
====== ======
Segment income (loss) $(51) $41
====== ======
Nine Months Ended
September 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Customer $3,913 $4,838
Intergroup (a) 14 1
Equity in earnings (losses) of unconsolidated
affiliates (36) 46
Other 33 41
------ ------
Total revenues $3,924 $4,926
====== ======
Segment income (loss) $(119) $301
====== ======
<FN>
(a) Intergroup sales and transfers were conducted on an arm's-length basis.
72
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. (Continued)
The following schedules reconcile segment revenue and income (loss) to
amounts reported in the U. S. Steel Group's financial statements:
Third Quarter Ended
September 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segment $1,387 $1,497
Items not allocated to segment - impairment of USS/Kobe
investment and costs related to formation of Republic (53) -
------ ------
Total Group revenues $1,334 $1,497
====== ======
Income:
Income (loss) for reportable segment $(51) $41
Items not allocated to segment:
Administrative expenses (4) (6)
Pension credits 100 94
Costs related to former business activities (21) (24)
Impairment of USS/Kobe investment and costs related
to formation of Republic (53) -
------ ------
Total Group income (loss) from operations $(29) $105
====== ======
Nine Months Ended
September 30
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revenues:
Revenues of reportable segment $3,924 $4,926
Items not allocated to segment:
Impairment of USS/Kobe investment and costs related
to formation of Republic (53) -
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group revenues $3,849 $4,926
====== ======
Income:
Income (loss) for reportable segment $(119) $301
Items not allocated to segment:
Administrative expenses (17) (20)
Pension credits 348 280
Costs related to former business activities (65) (77)
Impairment of USS/Kobe investment and costs related
to formation of Republic (53) -
Loss on investment in RTI stock used to satisfy
indexed debt obligations (22) -
------ ------
Total Group income from operations $72 $484
====== ======
73
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. The method of calculating net income (loss) per common share for the
Steel Stock and Marathon Stock reflects the Board's intent that the
separately reported earnings and surplus of the U. S. Steel Group and the
Marathon Group, as determined consistent with the USX Restated Certificate
of Incorporation, are available for payment of dividends on the respective
classes of stock, although legally available funds and liquidation
preferences of these classes of stock do not necessarily correspond with
these amounts.
Basic net income (loss) per share is calculated by adjusting net
income (loss) for dividend requirements of preferred stock and is based on
the weighted average number of common shares outstanding.
Diluted net income (loss) per share assumes 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 (loss) per share.
7. 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
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.
74
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. Income (loss) from operations includes net periodic pension credits of
$47 million and $51 million in the third quarter of 1999 and 1998,
respectively, ($188 million and $153 million in the nine 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.
9. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
(In millions)
-------------------------
September 30 December 31
1999 1998
----------- -----------
Raw materials $116 $185
Semi-finished products 350 282
Finished products 205 182
Supplies and sundry items 48 49
---- ----
Total $719 $698
==== ====
10. The U. S. Steel Group participated in an agreement (the program),
to sell an undivided interest in certain accounts receivable.
At September 30, 1999, the amount sold under the program that had not been
collected was $350 million. On October 15, 1999, the agreement expired.
11. At September 30, 1999, accounts receivable includes an estimated
income tax receivable from the Marathon Group of $59 million, determined in
accordance with the tax allocation policy discussed in Note 2.
75
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
12. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the U.
S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At September 30, 1999, and
December 31, 1998, accrued liabilities for remediation totaled $98 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 nine months of 1999
and for the years 1998 and 1997, such capital expenditures totaled $19
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.
Guarantees by USX of the liabilities of affiliated entities of the U.
S. Steel Group totaled $89 million at September 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 September 30, 1999, the largest
guarantee for a single affiliate was $61 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at September 30, 1999, totaled $90 million compared
with $188 million at December 31, 1998.
76
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------
The U. S. Steel Group includes U. S. Steel, which is engaged in the
production, transportation and sale of steel mill products, coke, and taconite
pellets; the management of mineral resources; domestic coal mining; real estate
development; and engineering and consulting services. Certain business
activities are conducted through joint ventures and partially owned companies,
such as, USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-
TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, Lorain Tubular
Company LLC, Republic Technologies International LLC ("Republic") and VSZ
U. S. Steel, s. r.o ("VSZ"). 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 88.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates," "believes," "estimates," "expects" or similar words
indicating that future outcomes are not known with certainty and subject to risk
factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, these statements are accompanied by cautionary
language identifying important factors, though not necessarily all such factors,
that could cause future outcomes to differ materially from those set forth in
forward-looking statements. For additional risk factors affecting the businesses
of the U. S. Steel Group, see Supplementary Data -- Disclosures About Forward-
Looking Statements in USX
1998 Form 10-K.
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1999 and 1998 are
set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Revenues of reportable segment $1,387 $1,497 $3,924 $4,926
Revenues not allocated to reportable segment (53) - (75) -
----- ----- ----- -----
Total Revenues $1,334 $1,497 $3,849 $4,926
Total reportable segment revenues decreased by $110 million and $1,002
million in the third quarter and first nine months of 1999, respectively,
compared with the same periods in 1998. The decrease in revenues in third
quarter 1999 primarily reflected lower average steel product prices (average
prices decreased $61/ton in the third quarter of 1999 compared to the same
period in 1998), partially offset by higher shipments. The decrease in revenues
in the first nine months of 1999 primarily reflected lower average steel product
prices (average prices decreased $52/ton in the first nine months of 1999
compared to the same period in 1998), lower shipment volumes (shipments
decreased 580,000 tons in the first nine months of 1999), and lower income from
affiliates.
77
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Income from operations for the U. S. Steel Group for the third quarter and
first nine months of 1999 and 1998 is set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Segment income (loss) for U.S.Steel Operations(a)$(51) $41 $(119) $301
Items not allocated to segment:
Pension credits 100 94 348 280
Administrative expenses (4) (6) (17) (20)
Costs related to former business activities (b) (21) (24) (65) (77)
Impairment of USX's investment in USS/Kobe and
costs related to formation of Republic (c) (53) - (53) -
Loss on investment in RTI stock used to satisfy
indexed debt obligations (d) - - (22) -
----- ----- ----- -----
Total Group income from operations $(29) $105 $72 $484
===== ===== ===== =====
- -----
<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 3 to the U. S. Steel Group Financial
Statements.
(d) For further details, see Note 7 to the U. S. Steel Group Financial
Statements.
Segment income for U. S. Steel operations
Segment income for U. S. Steel operations decreased $92 million and $420
million in the third quarter and first nine months of 1999, respectively,
compared with the same periods in 1998. The decrease in segment income in third
quarter 1999 was primarily due to lower average steel prices, less favorable
product mix, lower income from affiliates, and higher benefit costs including
provisions for the new labor contract. The decrease in segment income in the
first nine months of 1999 was primarily due to lower average steel prices, lower
shipment volumes, lower income from affiliates, and higher benefit costs
including provisions for the new labor contract. Segment income in the third
quarter of 1999 included a $7 million charge for legal accruals. Segment income
for the first nine months of 1999 included a $10 million charge for
environmental accruals. Results in the first nine months of 1998 included a
favorable $30 million (net of charges and reserves) insurance litigation
settlement pertaining to the 1995 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. U. S. Steel's average price realization was $405 per
ton and $421 per ton in third quarter and first nine months of 1999,
respectively, compared to $466 per ton and $473 per ton in the same periods in
1998.
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
78
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
are primarily noncash, totaled $100 million and $348 million in the third
quarter and first nine months of 1999, respectively, compared to $94 million and
$280 million in the same period in 1998. Pension credits in the first nine
months of 1999 included $35 million for a one-time favorable pension settlement,
which was recorded in second quarter 1999, primarily related to the voluntary
early retirement program for salaried employees.
Pension credits, combined with pension costs included in segment income for
U. S. Steel operations, resulted in net pension credits of $46 million and $186
million in the third quarter and first nine months of 1999, respectively,
compared to $50 million and $147 million in the same periods in 1998. Net
pension credits are expected to be approximately $235 million in 1999. 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 third quarter and first nine
months of 1999 and 1998 are set forth in the following table:
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
------ ------ ------ ------
Net interest and other financial costs $20 $10 $48 $60
Less:
Favorable adjustments to
carrying value of indexed debt (a) - 11 13 7
----- ----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $20 $21 $61 $67
===== ===== ===== =====
- -----
<FN>
(a) For discussion, see Note 7 to the U. S. Steel Group Financial
Statements.
Adjusted net interest and other financial costs decreased by $1 million and
$6 million in the third quarter and first nine months of 1999, respectively, as
compared with the same periods in 1998.
The provision (credit) for estimated income taxes in the third quarter and
first nine 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 first nine 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 nine 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 $96 million and $278 million in the third quarter and
first nine months of 1999, respectively, compared to the same periods in 1998,
primarily reflecting the factors discussed above.
79
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Operating Statistics
- --------------------
Steel shipments in third quarter 1999 of 2.8 million tons, increased 11%
from the same period in 1998. Steel shipments in the first nine months of 1999
of 7.8 million tons, decreased 7% from the same period in 1998. Third quarter
and first nine months of 1999 raw steel production of 3.1 million tons and 8.9
million tons, increased 12% and 1%, respectively, from the same periods in 1998.
Raw steel capability utilization in the third quarter and first nine months of
1999 averaged 94.9% and 93.0%, respectively, compared to 84.6% and 91.6% in the
same period in 1998. Steel shipments, production and raw steel capability
utilization in the first nine 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 nine months of
1999 was $158 million, compared with $293 million in the same period in 1998.
The first nine 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 $97 million due mainly to decreased profitability.
Capital expenditures in the first nine months of 1999 were $221 million,
compared with $228 million in the same period in 1998. Contract commitments for
capital expenditures at September 30, 1999, totaled $90 million, compared with
$188 million at year-end 1998.
Net cash used in investments in equity affiliates in the first nine months
of 1999 of $15 million primarily reflects an investment in Republic during the
third quarter (see Note 3 to the U. S. Steel Group Financial Statements for
further discussion). Net cash used in investments in equity affiliates in the
first nine months of 1998 of $66 million primarily reflects funding for VSZ.
Financial obligations (excluding the noncash satisfaction of the indexed
debt) increased by $135 million in the first nine 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.
USX had an agreement (the program) to sell an undivided interest in
certain accounts receivable of the U. S. Steel Group. Subsequent to the
expiration of the program on October 15, 1999, USX entered into an agreement
to repurchase all accounts remaining outstanding. See Note 10 to the
U. S. Steel Group Financial Statements.
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
80
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
mainly for process changes in order to meet Clean Air Act obligations, although
ongoing compliance costs have also been significant. To the extent these
expenditures, as with all costs, are not ultimately reflected in the prices of
the U. S. Steel Group's products and services, operating results will be
adversely affected. The U. S. Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities, marketing
areas, production processes and the specific products and services it provides.
To the extent that competitors are not required to undertake equivalent costs in
their operations, the competitive position of the U. S. Steel Group could be
adversely affected.
USX has been notified that it is a potential responsible party ("PRP") at
26 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 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 35 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 12 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 fourth quarter for U. S. Steel Group are expected
to be higher than fourth quarter 1998. However, the favorable effects of
increased shipments are expected to be more than offset by lower price
realizations, less favorable product mix including a substantial amount of semi-
finished sales, and weakness in plate. Price realizations in the fourth quarter
1999, while lower than fourth quarter 1998, are expected to be higher than the
third quarter 1999, as previously announced price increases are realized. 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.
Income from equity affiliates will be negatively impacted by losses
associated with Republic. Republic has stated that it expects to incur
operating losses through 2000 and nonrecurring charges associated with the
consolidation of the combined operations. USX will recognize its share of any
such losses under the equity method of accounting.
81
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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.
In August members of United Steelworkers of America ("USWA") ratified a new
five-year labor contract covering approximately 14,500 employees effective
August 1, 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 $4 million per month
beginning August 1, 1999 for the balance of the year. 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.
Steel imports to the United States accounted for an estimated 27%, 30% and
24% of the domestic steel market in the first eight months of 1999, and for the
years 1998 and 1997, respectively.
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. On August 16, 1999, USX,
along with four other integrated domestic producers, filed appeals with U.S.
Court of International Trade challenging the hot-rolled carbon sheet products
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
82
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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. On September 28,
1999, Commerce announced preliminary CVD duty determinations against Brazil, and
on November 2, 1999, announced preliminary AD duty determinations against
Argentina, Brazil, Japan, Russia, South Africa, Thailand, and Venezuela.
Commerce is expected to announce preliminary AD duty determinations with respect
to the other countries 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 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. On August 13, 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.
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.
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.
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 Year 2000 readiness plan 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.
- 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, on-site assessments and
the inclusion of Year 2000 readiness language in purchase orders and
contracts.
83
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
- 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 99.7% Year 2000 ready as of
September 30, 1999, and the non-IT area is 99.7% ready. There are a few
systems/processes which will be replaced or upgraded with third-party Year 2000
ready products and services during the fourth quarter, 1999. However, realistic
implementation schedules have been established for such systems/processes and
none of the remaining work will jeopardize or impede U.S. Steel Group's ability
to meet ongoing production and customer service commitments.
The remaining Year 2000 efforts in 1999 will primarily focus on (1)
monitoring 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) preparing and communicating final plans to the workforce and
affected entities for the transition to the new century and (4) conducting the
final round of Year 2000 assessments by the internal audit team.
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 September 30, 1999 Inventory ment Inventory
------ ------ ------
Information Technology 100% 100% 99.7%
Non-Information Technology 100% 100% 99.7%
Third Parties
The U. S. Steel Group continues to monitor and verify the Year 2000
readiness of its third party relationships (including, but not limited to
utility providers, outside processors, process control systems and hardware
suppliers, telecommunication providers, electronic commerce and transportation
carriers) who are critical to its operations. Contacts have already been made
with critical third
84
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
parties to determine if they will be able to provide their products and services
to the U. S. Steel Group after the Year 2000. 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. The U. S. Steel Group plans to continue monitoring the
readiness of its critical third parties for the remainder of the year.
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 September 30, 1999, were $23 million, including $13
million of incremental costs. In the third quarter, the estimated total project
costs were reaffirmed.
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 reliable information
from suppliers, specifically on embedded chip technology, some Year 2000
problems could go undetected during the transition to the year 2000. The U.S.
Steel Group has performed extensive testing on the systems and devices that
utilize a date function. However, in those cases where there is no date
function, the U.S. Steel Group relies on the supplier's Year 2000 readiness
information.
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. 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
85
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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 Group's ability to achieve Year 2000 readiness and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, vendors' ability to install or modify remaining 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.
86
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 September 30, 1999, are provided in the following
table:
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) $2.8 $7.0
Zinc (price decrease) 2.7 6.8
Tin (price decrease) .3 .7
Nickel (price decrease) 0 .1
<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 September 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
September 30, 1999, would cause future pretax income effects to differ
from those presented in the table.
87
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of September 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 September 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
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.
88
U.S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1999 1998 1999 1998
- --------------------------------------------------------------------------------
REVENUES $1,334 $1,497 $3,849 $4,926
INCOME (LOSS) FROM OPERATIONS
U. S. Steel Operations (a) (b) $(51) $41 $(119) $301
Items not allocated to segment:
Pension Credits (c) 100 94 348 280
Administrative Expenses (4) (6) (17) (20)
Cost related to former business activities (d) (21) (24) (65) (77)
Impairment of USX's investment in USS/Kobe
and costs related to the formation of
Republic (e) (53) - (53) -
Loss on settlement of indexed debt with
RTI International Metals, Inc. Stock - - (22) -
---- ---- ---- ----
Total U. S. Steel Group (29) 105 72 484
PENSION COSTS INCLUDED IN U. S. STEEL OPERATIONS $54 $44 $162 $133
CAPITAL EXPENDITURES $68 $92 $221 $228
OPERATING STATISTICS
Average steel price per ton $405 $466 $421 $473
Steel Shipments (f) 2,835 2,554 7,764 8,344
Raw Steel-Production (f) 3,061 2,729 8,901 8,774
Raw Steel-Capability Utilization (g) 94.9% 84.6% 93.0% 91.6%
Total iron ore shipments (f) 4,706 4,555 10,892 11,327
- ----------
<FN>
(a) Results in the third quarter of 1999 included a $7 million charge
for legal accruals. Results in the first nine months of 1999 included a
$10 million charge, which was recorded in first quarter 1999, for
environmental accruals. Results in first nine 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-POSCO
Industries, PRO-TEC Coating Company, Transtar Inc., Clairton 1314B
Partnership, VSZ U. S. Steel, s. r.o., Lorain Tubular Company LLC,
Republic Technologies International LLC, 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) Results in the first nine months included $35 million for a pension
settlement adjustment, which was recorded in second quarter 1999,
primarily related to the early retirement program.
(d) Includes other postretirement benefit costs and certain other
expenses principally attributable to former business units of the U. S.
Steel Group.
(e) For additional information on the impairment, see Note 3 to the U.
S. Steel Group Financial Statements.
(f) Thousands of net tons.
(g) Based on annual raw steel production capability of 12.8 million
tons.
89
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
U. S. Steel Group
Inland Steel Patent Litigation
In July 1991, Inland Steel Company ("Inland") filed an action
against USX and another domestic steel producer in the U. S. District
Court for the Northern District of Illinois, Eastern Division,
alleging defendants had infringed two of Inland's steel-related
patents. Inland seeks monetary damages of up to approximately $50
million and an injunction against future infringement. USX in its
answer and counterclaim alleges the patents are invalid and not
infringed and seeks a declaratory judgment to such effect. In May
1993, a jury found USX to have infringed the patents. The District
Court has yet to rule on the validity of the patents. In July 1993,
the U. S. Patent Office rejected the claims of the two Inland patents
upon a reexamination at the request of USX and the other steel
producer. A further request was submitted by USX to the Patent Office
in October 1993, presenting additional questions as to patentability
which was granted and consolidated for consideration with the original
request. In 1994, the Patent Office issued a decision rejecting all
claims of the Inland patents. On September 21, 1999, the Patent
Office Board of Appeals affirmed the decision of the Patent Office.
If Inland wishes to pursue this matter, it must now seek
reconsideration of the decision or appeal to the courts.
Mon Valley Works/Edgar Thomson Plant
In October 1999, USX agreed to a consent decree addressing issues
raised in a Notice of Violation ("NOV") issued by the U. S. EPA in
January 1997. The NOV alleged air quality violations at U. S. Steel's
Edgar Thomson Plant, which is part of Mon Valley Works. The consent
decree addressed various operational requirements which U. S. EPA
believes necessary or desirable to comply with the statute. In the
consent decree, USX agreed to pay a civil penalty of $550,000 and to
implement five supplemental environmental projects worth $1.6 million.
Storage Tank Permits
In October 1999, USX entered into a Consent Order and Agreement
with the Pennsylvania Department of Environmental Protection under the
Pennsylvania Storage Tank and Spill Prevention Act. The consent
decree relates to failure to obtain all necessary permits with respect
to the installation of three storage tanks at the Clairton Coke Works
and the Irvin Plant at the Mon Valley Works. The consent decree
requires USX to obtain the necessary permits and assesses a fine of
$115,000.
Gary Benzene
In February 1997, the U. S. EPA issued a Finding of Violation
alleging improper sampling of benzene waste streams at the Gary Coke
plant and demanding a cash payment of approximately $4 million. The
company is negotiating with the agency to settle the action.
90
Marathon Group
Reference is made to the Form 10-Q for the quarter ending June 30,
1999 for discussions concerning the Posted Price Litigation, multi-media
inspection and other environmental cases.
Item 2. Changes in Securities and Use of Proceeds
(a) On September 28, 1999, the Board of Directors of USX Corporation
(the "Company") approved the extension of the benefits afforded by the
Company's previous rights plan by adopting a new stockholder rights
plan. The new plan, like the previous plan, is intended to deter
coercive or partial offers which will not provide fair value to all
stockholders and enhance the Board's ability to represent all
stockholders and thereby maximize stockholder values.
Pursuant to the new Rights Agreement between the Company and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, (i), one
USX-U. S. Steel Group Right (a "Steel Right") was issued for each
outstanding share of USX-U. S. Steel Group Common Stock ("Steel
Stock") and (ii) one USX-Marathon Group Right (a "Marathon Right" and,
together with the Steel Rights, the "Rights") was issued for each
share of USX-Marathon Group Common Stock ("Marathon Stock" and,
together with the Steel Stock, the "Voting Stock") to stockholders of
record at the close of business on October 9, 1999, the day the
previous rights expired. Each of the new Rights entitle the
registered holder to purchase from the Company one one-hundredth of a
share of Series A Junior Preferred Stock, without par value, of the
Company, at a price of $110 per one one-hundredth of a share, subject
to adjustment. The Rights generally will not become exercisable
unless and until, among other things, any person acquires 15% or more
of the voting power of the outstanding Voting Stock. Like the
existing plan, the new rights plan contains a "qualifying offer"
feature that exempts fully financed all-cash tender offers for all
outstanding Voting Stock that satisfy certain defined conditions. The
new Rights are redeemable under certain circumstances at $.01 per
Right and will expire, unless earlier redeemed or extended, on October
9, 2009.
(c)On September 28, 1999, the registrant issued 67,133 shares of USX-
Marathon Group Common Stock in connection with the purchase of certain
oil and gas properties from two companies. The value of the shares
and the properties received in exchange was approximately $2.1
million. The shares were not registered under the Securities Act of
1933. Exemption from the registration provisions is based on Section
4(2) of the Act, as a transaction not involving a public offering.
91
Part II - Other Information (Continued):
- ---------------------------
Item 5. OTHER INFORMATION (Continued)
Marathon Group
SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY
Supplementary Data
---------------------------------------------------------------------
(Unaudited)
The following summarized consolidated financial information of Marathon Oil
Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in
satisfaction of the reporting obligation of Marathon which has debt securities
registered under the Securities Exchange Act. All such securities are
guaranteed by USX.
(In millions)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
INCOME DATA:
Revenues $6,483 $5,593 $16,805 $16,619
Income from operations 566 225 1,389 1,093
Net income 221 45 475 366
(In millions)
-----------------------
September 30 December 31
1999 1998
---- ----
BALANCE SHEET DATA:
Assets:
Current assets $5,696 $4,742
Noncurrent assets 11,318 11,420
------ ------
Total assets $17,014 $16,162
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $2,848 $2,543
Noncurrent liabilities 9,315 9,428
Preferred stock of subsidiary 10 17
Minority interest in consolidated subsidiary 1,773 1,590
Stockholder's equity 3,068 2,584
------- -------
Total liabilities and stockholder's equity $17,014 $16,162
======= =======
92
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
4. Rights Agreement, dated Incorporated by reference
as of September 28, 1999, to Exhibit 4 to USX's
between USX Corporation and Form 8-K filed on
ChaseMellon.Shareholder September 28, 1999.
Services, L.L.C., (File No. 1-5153).
as Rights Agent
10 Form of Severance Agreements
between the Corporation and
various officers.
12.1 Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred
Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K dated September 28, 1999, reporting under Item 5. Other
Events, the adoption of a new stockholder's rights plan.
Form 8-K dated October 13, 1999, reporting under Item 5. Other
Events, the retirement of Victor G. Beghini, president of Marathon Oil
Company on October 31.
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
November 10, 1999