Exhibit 99.2
Marathon Group
Index to 1999 Financial Statements and Supplementary Data
Page
----
Management's Report....................................... M-1
Audited Financial Statements:
Report of Independent Accountants....................... M-1
Statement of Operations................................. M-2
Balance Sheet........................................... M-3
Statement of Cash Flows................................. M-4
Notes to Financial Statements........................... M-5
Selected Quarterly Financial Data......................... M-21
Principal Unconsolidated Affiliates....................... M-21
Supplementary Information................................. M-21
Marathon Group
Explanatory Note Regarding Financial Information
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 does not
affect legal title to such assets and responsibility for such
liabilities. Holders of USX - Marathon Group Common Stock and
USX -U. S. Steel Group Common 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, will reduce the funds of USX
legally available for payment of dividends on both classes of USX
Common Stock. Accordingly, the USX consolidated financial
information should be read in connection with the Marathon Group
financial information.
Management's Report
The accompanying financial statements of the Marathon Group are the
responsibility of and have been prepared by USX Corporation (USX)
in conformity with accounting principles generally accepted in the
United States. They necessarily include some amounts that are based
on best judgments and estimates. The Marathon Group financial
information displayed in other sections of this report is
consistent with these financial statements.
USX seeks to assure the objectivity and integrity of its
financial records by careful selection of its managers, by
organizational arrangements that provide an appropriate division of
responsibility and by communications programs aimed at assuring
that its policies and methods are understood throughout the
organization.
USX has a comprehensive formalized system of internal
accounting controls designed to provide reasonable assurance that
assets are safeguarded and that financial records are reliable.
Appropriate management monitors the system for compliance, and the
internal auditors independently measure its effectiveness and
recommend possible improvements thereto. In addition, as part of
their audit of the financial statements, USX's independent
accountants, who are elected by the stockholders, review and test
the internal accounting controls selectively to establish a basis
of reliance thereon in determining the nature, extent and timing of
audit tests to be applied.
The Board of Directors pursues its oversight role in the area
of financial reporting and internal accounting control through its
Audit Committee. This Committee, composed solely of nonmanagement
directors, regularly meets (jointly and separately) with the
independent accountants, management and internal auditors to
monitor the proper discharge by each of its responsibilities
relative to internal accounting controls and the consolidated and
group financial statements.
Thomas J. Usher Robert M. Hernandez Kenneth L. Matheny
Chairman, Board of Directors Vice Chairman Vice President
& Chief Executive Officer & Chief Financial Officer & Comptroller
Report of Independent Accountants
To the Stockholders of USX Corporation:
In our opinion, the accompanying financial statements appearing on
pages M-2 through M-20 present fairly, in all material respects,
the financial position of the Marathon Group at December 31, 1999
and 1998, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of
USX's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The Marathon Group is a business unit of USX Corporation (as
described in Note 1, page M-5); accordingly, the financial
statements of the Marathon Group should be read in connection with
the consolidated financial statements of USX Corporation.
PricewaterhouseCoopers LLP
600 Grant Street, Pittsburgh, Pennsylvania 15219-2794
February 8, 2000
M-1
Statement of Operations
(Dollars in millions) 1999 1998 1997
-------------------------------------------------------------------------------------
Revenues:
Sales (Note 7) $24,212 $21,628 $15,760
Dividend and affiliate income 69 50 36
Net gains on disposal of assets - 28 37
Gain on ownership change in
Marathon Ashland Petroleum LLC (Note 5) 17 245 -
Other income 29 26 13
------- ------- -------
Total revenues 24,327 21,977 15,846
------- ------- -------
Costs and expenses:
Cost of sales (excludes items shown below) 17,273 14,984 10,392
Selling, general and administrative expenses 486 505 355
Depreciation, depletion and amortization 950 941 664
Taxes other than income taxes 4,218 4,029 3,030
Exploration expenses 238 313 189
Inventory market valuation charges (credits) (Note 20) (551) 267 284
------- ------- -------
Total costs and expenses 22,614 21,039 14,914
------- ------- -------
Income from operations 1,713 938 932
Net interest and other financial costs (Note 8) 288 237 260
Minority interest in income of
Marathon Ashland Petroleum LLC (Note 5) 447 249 -
------- ------- -------
Income before income taxes 978 452 672
Provision for estimated income taxes (Note 18) 324 142 216
------- ------- -------
Net income $ 654 $ 310 $ 456
-------------------------------------------------------------------------------------
Income Per Common Share
1999 1998 1997
-------------------------------------------------------------------------------------
Basic $ 2.11 $ 1.06 $ 1.59
Diluted 2.11 1.05 1.58
-------------------------------------------------------------------------------------
See Note 22, for a description and computation of income per common
share.
The accompanying notes are an integral part of these financial
statements.
M-2
Balance Sheet
(Dollars in millions) December 31 1999 1998
------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (Note 6) $ 111 $ 137
Receivables, less allowance for doubtful accounts
of $2 and $3 1,866 1,277
Inventories (Note 20) 1,884 1,310
Other current assets 241 252
------- -------
Total current assets 4,102 2,976
Investments and long-term receivables (Note 19) 772 603
Property, plant and equipment - net (Note 16) 10,293 10,429
Prepaid pensions (Note 14) 225 241
Other noncurrent assets 313 295
------- -------
Total assets $15,705 $14,544
------------------------------------------------------------------------------------------------------
Liabilities
Current liabilities:
Notes payable $ - $ 132
Accounts payable 2,659 1,940
Income taxes payable (Note 23) 97 -
Distribution payable to minority shareholder of
Marathon Ashland Petroleum LLC (Note 6) - 103
Payroll and benefits payable 146 190
Accrued taxes 107 99
Accrued interest 92 87
Long-term debt due within one year (Note 12) 48 59
------- -------
Total current liabilities 3,149 2,610
Long-term debt (Note 12) 3,320 3,456
Deferred income taxes (Note 18) 1,495 1,450
Employee benefits (Note 14) 564 553
Deferred credits and other liabilities (Note 23) 440 389
Preferred stock of subsidiary (Note 9) 184 184
Minority interest in Marathon Ashland Petroleum LLC (Note 5) 1,753 1,590
Common Stockholders' Equity (Note 17) 4,800 4,312
------- -------
Total liabilities and common stockholders' equity $15,705 $14,544
-----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
M-3
Statement of Cash Flows
(Dollars in millions) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
Operating activities:
Net income $ 654 $ 310 $ 456
Adjustments to reconcile to net cash
provided from operating activities:
Minority interest in income of
Marathon Ashland Petroleum LLC 447 249 -
Depreciation, depletion and amortization 950 941 664
Exploratory dry well costs 109 186 78
Inventory market valuation charges (credits) (551) 267 284
Pensions and other postretirement benefits 36 34 6
Deferred income taxes 105 26 30
Gain on ownership change in
Marathon Ashland Petroleum LLC (17) (245) -
Net gains on disposal of assets - (28) (37)
Changes in: Current receivables - sold - - (340)
- operating turnover (833) 240 97
Inventories (63) (13) 18
Current accounts payable and accrued expenses 1,095 (233) 11
All other - net 84 (92) (21)
------- ------- -------
Net cash provided from operating activities 2,016 1,642 1,246
------- ------- -------
Investing activities:
Capital expenditures (1,378) (1,270) (1,038)
Acquisition of Tarragon Oil and Gas Limited - (686) -
Disposal of assets 356 65 60
Restricted cash - withdrawals 45 11 108
- deposits (44) (32) (10)
Affiliates - investments (59) (42) (193)
- loans and advances (70) (103) (46)
- returns and repayments 1 71 8
All other - net (25) (18) (2)
------- ------- -------
Net cash used in investing activities (1,174) (2,004) (1,113)
------- ------- -------
Financing activities (Note 9):
Increase (decrease) in Marathon Group's
portion of USX consolidated debt (296) 329 97
Specifically attributed debt:
Borrowings 141 366 -
Repayments (144) (389) (39)
Marathon Stock issued 89 613 34
Dividends paid (257) (246) (219)
Distributions to minority shareholder of
Marathon Ashland Petroleum LLC (400) (211) -
------- ------- -------
Net cash provided from (used in) financing activities (867) 462 (127)
------- ------- -------
Effect of exchange rate changes on cash (1) 1 (2)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (26) 101 4
Cash and cash equivalents at beginning of year 137 36 32
------- ------- -------
Cash and cash equivalents at end of year $ 111 $ 137 $ 36
----------------------------------------------------------------------------------------------------------------------
See Note 13, for supplemental cash flow information.
The accompanying notes are an integral part of these financial
statements.
M-4
Notes to Financial Statements
1. Basis of Presentation
After the redemption of the USX - Delhi Group stock on January
26, 1998, USX Corporation (USX) has two classes of common stock:
USX - Marathon Group Common Stock (Marathon Stock) and USX -
U. S. Steel Group Common Stock (Steel Stock), which are intended
to reflect the performance of the Marathon Group and the U. S.
Steel Group, respectively.
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. The Marathon
Group financial statements are prepared using the amounts
included in the USX consolidated financial statements. For a
description of the Marathon Group's operating segments, see Note
10.
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 or responsibility for
such liabilities. Holders of Marathon Stock and 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 and 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.
- --------------------------------------------------------------------------------
2. Summary of Principal Accounting Policies
Principles applied in consolidation - These financial statements
include the accounts of the businesses comprising the Marathon
Group. The Marathon Group and the U. S. Steel Group financial
statements, taken together, comprise all of the accounts included
in the USX consolidated financial statements.
Investments in unincorporated oil and gas joint ventures,
undivided interest pipelines and jointly owned gas processing
plants are consolidated on a pro rata basis.
Investments in entities over which the Marathon Group has
significant influence are accounted for using the equity method
of accounting and are carried at the Marathon Group's share of
net assets plus loans and advances.
Investments in companies whose stock is publicly traded are
carried at market value. The difference between the cost of these
investments and market value is recorded in other comprehensive
income (net of tax). Investments in companies whose stock has no
readily determinable fair value are carried at cost.
Use of estimates - Generally accepted accounting principles
require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the year. Significant
items subject to such estimates and assumptions include the
carrying value of long-lived assets; valuation allowances for
receivables, inventories and deferred income tax assets;
environmental liabilities; liabilities for potential tax
deficiencies and potential litigation claims and settlements; and
assets and obligations related to employee benefits.
Additionally, certain estimated liabilities are recorded when
management commits to a plan to close an operating facility or to
exit a business activity. Actual results could differ from the
estimates and assumptions used.
M-5
Revenue recognition - Revenues principally include sales,
dividend and affiliate income, gains or losses on the disposal of
assets and gains or losses from changes in ownership interests.
Sales - Sales are recognized when products are shipped or
services are provided to customers. Consumer excise taxes on
petroleum products and merchandise and matching crude oil
and refined products buy/sell transactions settled in cash
are included in both revenues and costs and expenses, with
no effect on income.
Dividend and Affiliate Income - Dividend and affiliate
income includes the Marathon Group's proportionate share of
income from equity method investments and dividend income
from other investments. Dividend income is recognized when
dividend payments are received.
Disposal of Assets - When long-lived assets depreciated on
an individual basis are sold or otherwise disposed of, any
gains or losses are reflected in income. Gains on disposal
of long-lived assets are recognized when earned, which is
generally at the time of closing. If a loss on disposal is
expected, such losses are recognized when long-lived assets
are reclassified as assets held for sale. Proceeds from
disposal of long-lived assets depreciated on a group basis
are credited to accumulated depreciation, depletion and
amortization with no immediate effect on income.
Gas Balancing - The Marathon Group follows the sales method
of accounting for gas production imbalances and would
recognize a liability if the existing proved reserves were
not adequate to cover the current imbalance situation.
Change in Ownership Interest - Gains or losses from a change
in ownership of a consolidated subsidiary or an
unconsolidated affiliate are recognized in revenues in the
period of change.
Cash and cash equivalents - Cash and cash equivalents include
cash on hand and on deposit and investments in highly liquid debt
instruments with maturities generally of three months or less.
Inventories - Inventories are carried at lower of cost or market.
Cost of inventories is determined primarily under the last-in,
first-out (LIFO) method.
Derivative instruments - The Marathon Group uses commodity-based
and foreign currency derivative instruments to manage its
exposure to price risk. Management is authorized to use futures,
forwards, swaps and options related to the purchase, production
or sale of crude oil, natural gas, refined products and
electricity. While the Marathon Group's risk management
activities generally reduce market risk exposure due to
unfavorable commodity price changes for raw material purchases
and products sold, such activities can also encompass strategies
which assume price risk.
Commodity-Based Hedging Transactions - For transactions that
qualify for hedge accounting, the resulting gains or losses
are deferred and subsequently recognized in income from
operations, as a component of sales or cost of sales, in the
same period as the underlying physical transaction. To
qualify for hedge accounting, derivative positions cannot
remain open if the underlying physical market risk has been
removed. If such derivative positions remain in place, they
would be marked-to-market and accounted for as trading or
other activities. Recorded deferred gains or losses are
reflected within other current and noncurrent assets or
accounts payable and deferred credits and other liabilities,
as appropriate.
Commodity-Based Trading and Other Activities - Derivative
instruments used for trading and other activities are
marked-to-market and the resulting gains or losses are
recognized in the current period within income from
operations. This category also includes the use of
derivative instruments that have no offsetting underlying
physical market risk.
Foreign Currency Transactions - The Marathon Group uses
forward exchange contracts to manage currency risks. Gains
or losses related to firm commitments are deferred and
recognized concurrent with the underlying transaction. All
other gains or losses are recognized in income in the
current period as sales, cost of sales, interest income or
expense, or other income, as appropriate. Forward exchange
contracts are recorded as receivables or payables, as
appropriate.
Exploration and development - The Marathon Group follows the
successful efforts method of accounting for oil and gas
exploration and development.
M-6
Long-lived assets - Depreciation and depletion of oil and gas
producing properties are computed using predetermined rates based
upon estimated proved oil and gas reserves applied on a units-of-
production method. Other items of property, plant and equipment
are depreciated principally by the straight-line method.
The Marathon Group evaluates impairment of its oil and gas
producing assets primarily on a field-by-field basis using
undiscounted cash flows based on total proved reserves. Other
assets are evaluated on an individual asset basis or by logical
groupings of assets. Assets deemed to be impaired are written
down to their fair value, including any related goodwill, using
discounted future cash flows and, if available, comparable market
values.
Environmental liabilities - The Marathon Group provides for
remediation costs and penalties when the responsibility to
remediate is probable and the amount of associated costs is
reasonably determinable. Generally, the timing of remediation
accruals coincides with completion of a feasibility study or the
commitment to a formal plan of action. Remediation liabilities
are accrued based on estimates of known environmental exposure
and are discounted in certain instances. If recoveries of
remediation costs from third parties are probable, a receivable
is recorded. Estimated abandonment and dismantlement costs of
offshore production platforms are accrued based upon estimated
proved oil and gas reserves on a units-of-production method.
Insurance - The Marathon Group is insured for catastrophic
casualty and certain property and business interruption
exposures, as well as those risks required to be insured by law
or contract. Costs resulting from noninsured losses are charged
against income upon occurrence.
Reclassifications - Certain reclassifications of prior years'
data have been made to conform to 1999 classifications.
- --------------------------------------------------------------------------------
3. New Accounting Standards
Effective January 1, 1997, USX adopted American Institute of
Certified Public Accountants Statement of Position No. 96-1,
"Environmental Remediation Liabilities" (SOP 96-1), which
provides additional interpretation of existing accounting
standards related to recognition, measurement and disclosure of
environmental remediation liabilities. As a result of adopting
SOP 96-1, the Marathon Group identified additional environmental
remediation liabilities of $11 million. Estimated receivables for
recoverable costs related to adoption of SOP 96-1 were $4
million. The net unfavorable effect of adoption on the Marathon
Group's income from operations at January 1, 1997, was $7
million.
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
(SFAS No. 133). This new Standard requires recognition of all
derivatives as either assets or liabilities at fair value. SFAS
No. 133 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. The
transition adjustment resulting from adoption of SFAS No. 133
will be reported as a cumulative effect of a change in accounting
principle.
Under the new Standard, USX may elect not to designate
certain derivative instruments as hedges even if the strategy
qualifies for hedge accounting treatment. This approach would
eliminate the administrative effort needed to measure
effectiveness and monitor such instruments; however, this
approach also may result in additional volatility in current
period earnings.
USX cannot reasonably estimate the effect of adoption on
either the financial position or results of operations. It is not
possible to estimate what effect this Statement will have on
future results of operations, although greater period-to-period
volatility is likely. USX plans to adopt the Standard effective
January 1, 2001.
M-7
- --------------------------------------------------------------------------------
4. Corporate Activities
Financial activities - As a matter of policy, USX manages most
financial activities on a centralized, consolidated basis. Such
financial activities include the investment of surplus cash; the
issuance, repayment and repurchase of short-term and long-term
debt; the issuance, repurchase and redemption of preferred stock;
and the issuance and repurchase of common stock. Transactions
related primarily to invested cash, short-term and long-term debt
(including convertible debt), related net interest and other
financial costs, and preferred stock and related dividends are
attributed to the Marathon Group, the U. S. Steel Group and,
prior to November 1, 1997, the Delhi Group based upon the cash
flows of each group for the periods presented and the initial
capital structure of each group. Most financing transactions are
attributed to and reflected in the financial statements of all
groups. See Note 9, for the Marathon Group's portion of USX's
financial activities attributed to all groups. However,
transactions such as leases, certain collaterized financings,
certain indexed debt instruments, financial activities of
consolidated entities which are less than wholly owned by USX and
transactions related to securities convertible solely into any
one class of common stock are or will be specifically attributed
to and reflected in their entirety in the financial statements of
the group to which they relate.
Corporate general and administrative costs - Corporate general
and administrative costs are allocated to the Marathon Group, the
U. S. Steel Group and, prior to November 1, 1997, the Delhi Group
based upon utilization or other methods management believes to be
reasonable and which consider certain measures of business
activities, such as employment, investments and sales. The costs
allocated to the Marathon Group were $26 million in 1999, $28
million in 1998 and $37 million in 1997, and primarily consist of
employment costs including pension effects, professional
services, facilities and other related costs associated with
corporate activities.
Income taxes - All members of the USX affiliated group are
included in the consolidated United States federal income tax
return filed by USX. Accordingly, the provision for federal
income taxes and the related payments or refunds of tax are
determined on a consolidated basis. The consolidated provision
and the related tax payments or refunds have been reflected in
the Marathon Group, the U. S. Steel Group and, prior to November
1, 1997, the Delhi Group financial statements in accordance with
USX's tax allocation policy. In general, such policy provides
that the consolidated tax provision and related tax payments or
refunds are allocated among the Marathon Group, the U. S. Steel
Group and, prior to November 1, 1997, the Delhi 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.
For tax provision and settlement purposes, tax benefits
resulting from attributes (principally net operating losses and
various tax credits), which cannot be utilized by one of the
groups on a separate return basis but which can be utilized on a
consolidated basis in that year or in a carryback year, are
allocated to the group that generated the attributes. To the
extent that one of the groups is allocated a consolidated tax
attribute which, as a result of expiration or otherwise, is not
ultimately utilized on the consolidated tax return, the prior
years' allocation of such attribute is adjusted such that the
effect of the expiration is borne by the group that generated the
attribute. Also, if a tax attribute cannot be utilized on a
consolidated basis in the year generated or in a carryback year,
the prior years' allocation of such consolidated tax effects is
adjusted in a subsequent year to the extent necessary to allocate
the tax benefits to the group that would have realized the tax
benefits on a separate return basis. As a result, the allocated
group amounts of taxes payable or refundable are not necessarily
comparable to those that would have resulted if the groups had
filed separate tax returns.
- --------------------------------------------------------------------------------
5. Business Combinations
In August 1998, Marathon acquired Tarragon Oil and Gas Limited
(Tarragon), a Canadian oil and gas exploration and production
company. Securityholders of Tarragon received, at their election,
Cdn$14.25 for each Tarragon share, or the economic equivalent in
Exchangeable Shares of an indirect Canadian subsidiary of
Marathon, which are exchangeable solely on a one-for-one basis
into Marathon Stock. The purchase price included cash payments of
$686 million, issuance of 878,074 Exchangeable Shares valued at
$29 million and the assumption of $345 million in debt.
The Exchangeable Shares are exchangeable at the option of
the holder at any time and automatically redeemable on August 11,
2003 (and, in certain circumstances, as early as August 11,
2001). The holders of Exchangeable Shares are entitled to receive
declared dividends equivalent to dividends declared from time to
time by USX on Marathon Stock.
Marathon accounted for the acquisition using the purchase
method of accounting. The 1998 results of operations include the
operations of Marathon Canada Limited, formerly known as
Tarragon, commencing August 12, 1998.
M-8
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 Marathon Ashland Petroleum
LLC (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 1998
revenues. In accordance with MAP closing agreements, Marathon and
Ashland made capital contributions to MAP for environmental
improvements. The closing agreements stipulate that ownership
interests in MAP will not be adjusted as a result of such
contributions. Accordingly, Marathon recognized a gain on
ownership change of $17 million in 1999.
In connection with the formation of MAP, Marathon and
Ashland entered into a Limited Liability Company Agreement dated
January 1, 1998 (the LLC Agreement). The LLC Agreement provides
for an initial term of MAP expiring on December 31, 2022 (25
years from its formation). The term will automatically be
extended for ten-year periods, unless a termination notice is
given by either party.
Also in connection with the formation of MAP, the parties
entered into a Put/Call, Registration Rights and Standstill
Agreement (the Put/Call Agreement). The Put/Call Agreement
provides that at any time after December 31, 2004, Ashland will
have the right to sell to Marathon all of Ashland's ownership
interest in MAP, for an amount in cash and/or Marathon or USX
debt or equity securities equal to the product of 85% (90% if
equity securities are used) of the fair market value of MAP at
that time, multiplied by Ashland's percentage interest in MAP.
Payment could be made at closing, or at Marathon's option, in
three equal annual installments, the first of which would be
payable at closing. At any time after December 31, 2004, Marathon
will have the right to purchase all of Ashland's ownership
interests in MAP, for an amount in cash equal to the product of
115% of the fair market value of MAP at that time, multiplied by
Ashland's percentage interest in MAP.
The following unaudited pro forma data for the Marathon
Group includes the results of operations of Tarragon for 1998 and
1997, and the Ashland RM&T net assets for 1997, giving effect to
the acquisitions as if they had been consummated at the beginning
of the years presented. The pro forma data is based on historical
information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of
future results of operations.
(In millions, except per share amounts) 1998 1997
-------------------------------------------------------------------------------------
Revenues $ 22,071 $ 23,425
Net income 279 /(a)/ 457 /(a)/
Net income per common share -
Basic and diluted .95 1.58
-------------------------------------------------------------------------------------
/(a)/ Excluding the pro forma inventory market valuation
adjustment, pro forma net income would have been $383
million in 1998 and $619 million in 1997. Reported net
income, excluding the reported inventory market valuation
adjustment, would have been $414 million in 1998 and $635
million in 1997.
- --------------------------------------------------------------------------------
6. Transactions Between MAP and Ashland
At December 31, 1999 and 1998, MAP had current receivables from
Ashland of $26 million and $22 million, respectively, and current
payables to Ashland of $2 million at December 31, 1999, and at
December 31, 1998, $106 million, including distributions payable.
At December 31, 1998, MAP's cash and cash equivalents
included a $103 million demand note invested with Ashland, which
was repaid in January 1999.
MAP has a $190 million short-term revolving credit agreement
with Ashland. Interest on borrowings is based on the Federal
Funds Rate in effect each day during the period plus 0.30 of 1%.
At December 31, 1999, there were no borrowings against this
facility.
During 1999 and 1998, MAP's sales to Ashland consisting
primarily of petroleum products, were $198 million and $185
million, respectively, and MAP's purchases of products and
services from Ashland were $25 million and $45 million,
respectively. These transactions were conducted under terms
comparable to those with unrelated parties.
- --------------------------------------------------------------------------------
7. Revenues
The items below are included in revenues and costs and expenses,
with no effect on income.
(In millions) 1999 1998 1997
---------------------------------------------------------------------------------
Consumer excise taxes on petroleum products
and merchandise $ 3,973 $ 3,824 $ 2,828
Matching crude oil and refined product
buy/sell transactions settled in cash 3,539 3,948 2,436
---------------------------------------------------------------------------------
M-9
- --------------------------------------------------------------------------------
8. Other Items
(In millions) 1999 1998 1997
-----------------------------------------------------------------------------------------------
Net interest and other financial costs
Interest and other financial income/(a)/:
Interest income $ 15 $ 30 $ 7
Other (13) 4 (6)
----- ----- -----
Total 2 34 1
----- ----- -----
Interest and other financial costs/(a)/:
Interest incurred 281 285 232
Less interest capitalized 20 40 24
----- ----- -----
Net interest 261 245 208
Interest on tax issues 5 5 7
Financial costs on preferred stock of subsidiary 17 17 16
Amortization of discounts 2 4 4
Expenses on sales of accounts receivable - - 19
Other 5 - 7
----- ----- -----
Total 290 271 261
----- ----- -----
Net interest and other financial costs/(a)/ $ 288 $ 237 $ 260
-----------------------------------------------------------------------------------------------
/(a)/ See Note 4, for discussion of USX net interest and
other financial costs attributable to the Marathon
Group.
----------------------------------------------------------------
Foreign currency transactions
For 1999, 1998 and 1997, the aggregate foreign currency
transaction gains (losses) included in determining net income
were $(12) million, $13 million and $4 million, respectively.
- --------------------------------------------------------------------------------
9. Financial Activities Attributed to Groups
The following is the portion of USX financial activities
attributed to the Marathon Group. These amounts exclude amounts
specifically attributed to the Marathon Group.
Marathon Group Consolidated USX/(a)/
-------------- ---------------------
(In millions) December 31 1999 1998 1999 1998
------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 8 $ 4 $ 9 $ 4
Other noncurrent assets 7 7 8 8
------ ------ ------ ------
Total assets $ 15 $ 11 $ 17 $ 12
------------------------------------------------------------------------------------------------------
Notes payable $ - $ 132 $ - $ 145
Accrued interest 82 80 95 88
Long-term debt due within one year (Note 12) 47 59 54 66
Long-term debt (Note 12) 3,305 3,456 3,771 3,762
Preferred stock of subsidiary 184 184 250 250
------ ------ ------ ------
Total liabilities $3,618 $3,911 $4,170 $4,311
------------------------------------------------------------------------------------------------------
Marathon Group/(b)/ Consolidated USX
------------------- ----------------
(In millions) 1999 1998 1997 1999 1998 1997
------------------------------------------------------------------------------------------------------------------
Net interest and other financial costs (Note 8) $ 295 $ 295 $ 246 $ 334 $ 324 $ 309
------------------------------------------------------------------------------------------------------------------
/(a)/ For details of USX long-term debt and preferred stock of
subsidiary, see Notes 16 and 23, respectively, to the USX
consolidated financial statements.
/(b)/ The Marathon Group's net interest and other financial costs
reflect weighted average effects of all financial activities
attributed to all groups.
- --------------------------------------------------------------------------------
10. Segment Information
The Marathon Group's operations consists of three reportable
operating segments: 1) Exploration and Production - explores for
and produces crude oil and natural gas on a worldwide basis; 2)
Refining, Marketing and Transportation - 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. Other Energy Related Businesses 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.
M-10
Sales by product line are:
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Refined products $10,873 $8,750 $7,012
Merchandise 2,088 1,873 1,045
Liquid hydrocarbons 2,159 1,818 941
Natural gas 1,381 1,144 1,331
Transportation and other products 199 271 167
- --------------------------------------------------------------------------------
Segment income represents income from operations allocable to operating
segments. USX corporate general and administrative costs are not allocated to
operating segments. These costs primarily consist of employment costs including
pension effects, professional services, facilities and other related costs
associated with corporate activities. Certain general and administrative costs
related to all Marathon Group operating segments in excess of amounts billed to
MAP under service contracts and amounts charged out to operating segments under
Marathon's shared services procedures also are not allocated to operating
segments. Additionally, the following items are not allocated to operating
segments: inventory market valuation adjustments, gain on ownership change in
MAP and certain other items not allocated to operating segments for business
performance reporting purposes (see (a) in reconcilement table on page M-12).
Refining, Other
Exploration Marketing Energy
and and Related
(In millions) Production Transportation Businesses Total
- --------------------------------------------------------------------------------------------------------------------------------
1999
Revenues:
Customer $3,230 $20,210 $731 $24,171
Intersegment/(a)/ 202 47 40 289
Intergroup/(a)/ 19 - 22 41
Equity in earnings (losses) of unconsolidated affiliates (2) 17 26 41
Other 30 48 15 93
------ ------- ---- -------
Total revenues $3,479 $20,322 $834 $24,635
====== ======= ==== =======
Segment income $ 618 $ 611 $ 61 $ 1,290
Significant noncash items included in segment income:
Depreciation, depletion and amortization/(b)/ 638 280 5 923
Pension expenses/(c)/ 3 32 2 37
Capital expenditures/(d)/ 744 612 4 1,360
Affiliates - investments 56 - 3 59
- --------------------------------------------------------------------------------------------------------------------------------
1998
Revenues:
Customer $2,085 $19,192 $306 $21,583
Intersegment/(a)/ 144 10 17 171
Intergroup/(a)/ 13 - 7 20
Equity in earnings of unconsolidated affiliates 2 12 14 28
Other 26 40 11 77
------ ------- ---- -------
Total revenues $2,270 $19,254 $355 $21,879
====== ======= ==== =======
Segment income $ 278 $ 896 $ 33 $ 1,207
Significant noncash items included in segment income:
Depreciation, depletion and amortization/(b)/ 581 272 6 859
Pension expenses/(c)/ 3 16 2 21
Capital expenditures/(d)/ 839 410 8 1,257
Affiliates - investments/(d)/ - 22 17 39
- --------------------------------------------------------------------------------------------------------------------------------
1997
Revenues:
Customer $1,575 $13,698 $381 $15,654
Intersegment/(a)/ 619 - - 619
Intergroup/(a)/ 99 - 6 105
Equity in earnings of unconsolidated affiliates 14 4 7 25
Other 7 20 30 57
------ ------- ---- -------
Total revenues $2,314 $13,722 $424 $16,460
====== ======= ==== =======
Segment income $ 773 $ 563 $ 48 $ 1,384
Significant noncash items included in segment income:
Depreciation, depletion and amortization/(b)/ 469 173 7 649
Pension expenses/(c)/ 3 8 1 12
Capital expenditures/(d)/ 810 205 6 1,021
Affiliates - investments/(d)/ 114 - 73 187
- --------------------------------------------------------------------------------------------------------------------------------
/(a)/ Intersegment and intergroup sales and transfers were conducted under
terms comparable to those with unrelated parties.
/(b)/ Differences between segment totals and group totals represent amounts
included in administrative expenses and, in 1999 and 1998, international
and domestic exploration and production property impairments.
/(c)/ Differences between segment totals and group totals represent amounts
included in administrative expenses.
/(d)/ Differences between segment totals and group totals represent amounts
related to corporate administrative activities.
The following reconciles segment revenues and income to amounts reported in
the Marathon Group financial statements:
(In millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
Revenues:
Revenues of reportable segments $24,635 $21,879 $16,460
Items not allocated to segments:
Gain on ownership change in MAP 17 245 -
Other (36) 24 -
Elimination of intersegment revenues (289) (171) (619)
Administrative revenues - - 5
------- ------- -------
Total Group revenues $24,327 $21,977 $15,846
======= ======= =======
Income:
Income for reportable segments $ 1,290 $ 1,207 $ 1,384
Items not allocated to segments:
Gain on ownership change in MAP 17 245 -
Administrative expenses (108) (106) (168)
Inventory market valuation adjustments 551 (267) (284)
Other/(a)/ (37) (141) -
------- ------- -------
Total Group income from operations $ 1,713 $ 938 $ 932
- ---------------------------------------------------------------------------------------------------
/(a)/ Represents in 1999, primarily certain domestic exploration and production
impairments, net losses on certain asset sales and costs of a voluntary
early retirement program. Represents in 1998 certain international
exploration and production property impairments, certain suspended
exploration well write-offs, a gas contract settlement and MAP transition
charges.
Geographic Area:
The information below summarizes the operations in different
geographic areas. Transfers between geographic areas are at prices which
approximate market.
Revenues
--------------------------------------------
Within Between
(In millions) Year Geographic Areas Geographic Areas Total Assets/(a)/
- ----------------------------------------------------------------------------------------------------------
United States 1999 $23,337 $ - $23,337 $ 7,555
1998 21,191 - 21,191 7,659
1997 15,123 - 15,123 5,578
Canada 1999 425 521 946 1,112
1998 209 368 577 1,094
United Kingdom 1999 459 - 459 1,581
1998 462 - 462 1,739
1997 593 - 593 1,856
Other Foreign Countries 1999 106 88 194 735
1998 115 52 167 468
1997 130 39 169 530
Eliminations 1999 - (609) (609) -
1998 - (420) (420) -
1997 - (39) (39) -
Total 1999 $24,327 $ - $24,327 $10,983
1998 21,977 - 21,977 10,960
1997 15,846 - 15,846 7,964
- ----------------------------------------------------------------------------------------------------------
/(a)/ Includes property, plant and equipment and investments in affiliates.
- --------------------------------------------------------------------------------
11. Leases
Future minimum commitments for capital leases (including sale-
leasebacks accounted for as financings) and for operating leases
having remaining noncancelable lease terms in excess of one year
are as follows:
Capital Operating
(In millions) Leases Leases
----------------------------------------------------------------------------------------
2000 $ 2 $ 198
2001 2 77
2002 2 64
2003 2 40
2004 2 33
Later years 14 120
Sublease rentals - (35)
------ ------
Total minimum lease payments 24 $ 497
====== ======
Less imputed interest costs (9)
------
Present value of net minimum lease payments
included in long-term debt $ 15
----------------------------------------------------------------------------------------
Operating lease rental expense:
(In millions) 1999 1998 1997
----------------------------------------------------------------------------------------
Minimum rental $ 142 $ 157 $ 102
Contingent rental 11 10 10
Sublease rentals (6) (7) (7)
----- ----- -----
Net rental expense $ 147 $ 160 $ 105
----------------------------------------------------------------------------------------
M-12
The Marathon Group leases a wide variety of facilities and
equipment under operating leases, including land and building
space, office equipment, production facilities and transportation
equipment. Most long-term leases include renewal options and, in
certain leases, purchase options. In the event of a change in
control of USX, as defined in the agreements, or certain other
circumstances, operating lease obligations totaling $104 million
may be declared immediately due and payable.
- --------------------------------------------------------------------------------
12. Long-Term Debt
The Marathon Group's portion of USX's consolidated long-term
debt is as follows:
Marathon Group Consolidated USX/(a)/
---------------------- ----------------------
(In millions) December 31 1999 1998 1999 1998
--------------------------------------------------------------------------------------------------
Specifically attributed debt/(b)/:
Receivables facility $ - $ - $ 350 $ -
Sale-leaseback financing and capital leases 15 - 107 95
Indexed debt less unamortized discount - - - 68
Other 1 - 1 -
------ ------ ------ ------
Total 16 - 458 163
Less amount due within one year 1 - 7 5
------ ------ ------ ------
Total specifically attributed long-term debt $ 15 $ - $ 451 $ 158
--------------------------------------------------------------------------------------------------
Debt attributed to groups/(c)/ $3,375 $3,537 $3,852 $3,853
Less unamortized discount 23 22 27 25
Less amount due within one year 47 59 54 66
------ ------ ------ ------
Total long-term debt attributed to groups $3,305 $3,456 $3,771 $3,762
--------------------------------------------------------------------------------------------------
Total long-term debt due within one year $ 48 $ 59 $ 61 $ 71
Total long-term debt due after one year 3,320 3,456 4,222 3,920
--------------------------------------------------------------------------------------------------
/(a)/ See Note 16, to the USX consolidated financial statements
for details of interest rates, maturities and other terms
of long-term debt.
/(b)/ As described in Note 4, certain financial activities are
specifically attributed only to the Marathon Group and the
U. S. Steel Group.
/(c)/ Most long-term debt activities of USX Corporation and its
wholly owned subsidiaries are attributed to all groups (in
total, but not with respect to specific debt issues) based
on their respective cash flows (Notes 4, 9 and 13).
- --------------------------------------------------------------------------------------------------------------------------
13. Supplemental Cash Flow Information
(In millions) 1999 1998 1997
------------------------------------------------------------------------------------------------------------
Cash used in operating activities included:
Interest and other financial costs paid (net of amount capitalized) $ (289) $ (260) $ (257)
Income taxes paid, including settlements with other groups (101) (154) (178)
------------------------------------------------------------------------------------------------------------
USX debt attributed to all groups - net:
Commercial paper - issued $ 6,282 $ - $ -
- repayments (6,117) - -
Credit agreements - borrowings 5,529 17,486 10,454
- repayments (5,980) (16,817) (10,449)
Other credit arrangements - net (95) 55 36
Other debt - borrowings 319 671 10
- repayments (87) (1,053) (741)
-------- -------- -------
Total $ (149) $ 342 $ (690)
------------------------------------------------------------------------------------------------------------
Marathon Group activity $ (296) $ 329 $ 97
U. S. Steel Group activity 147 13 (561)
Delhi Group activity - - (226)
-------- -------- -------
Total $ (149) $ 342 $ (690)
------------------------------------------------------------------------------------------------------------
Noncash investing and financing activities:
Marathon Stock issued for dividend reinvestment and
employee stock plans $ 4 $ 3 $ 5
Marathon Stock issued for Exchangeable Shares 7 11 -
Affiliate preferred stock received in conversion of affiliate loan 142 - -
Disposal of assets:
Notes received 19 - -
Liabilities assumed by buyers - - 5
Business combinations:
Acquisition of Tarragon:
Exchangeable Shares issued - 29 -
Liabilities assumed - 433 -
Acquisition of Ashland RM&T net assets:
38% interest in MAP - 1,900 -
Liabilities assumed - 1,038 -
Other acquisitions - liabilities assumed 16 - -
------------------------------------------------------------------------------------------------------------
M-13
- --------------------------------------------------------------------------------
14. Pensions and Other Postretirement Benefits
The Marathon Group has noncontributory defined benefit pension
plans covering substantially all employees. Benefits under these
plans are based primarily upon years of service and final average
pensionable earnings. Certain subsidiaries provide benefits for
employees covered by other plans based primarily upon employees'
service and career earnings.
The Marathon Group also has defined benefit retiree health and
life insurance plans (other benefits) covering most employees upon
their retirement. Health benefits are provided through
comprehensive hospital, surgical and major medical benefit
provisions or through health maintenance organizations, both
subject to various cost sharing features. Life insurance benefits
are provided to certain nonunion and most union represented retiree
beneficiaries primarily based on employees' annual base salary at
retirement. Other benefits have not been prefunded.
Pension Benefits Other Benefits
---------------------------------- ---------------------------
(In millions) 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Change in benefit obligations
Benefit obligations at January 1 $ 1,080 $ 771 $ 597 $ 381
Service cost 65 48 17 12
Interest cost 67 57 36 31
Plan amendments 18 6 (44) (20)
Actuarial (gains) losses (197) 121 (108) 112
Plan merger and acquisition 14 145 4 98
Settlements, curtailments and termination benefits (122) - - -
Benefits paid (57) (68) (24) (17)
------------ ------------ ----------- --------------
Benefit obligations at December 31 $ 868 $ 1,080 $ 478 $ 597
-----------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at January 1 $ 1,331 $ 1,150
Actual return on plan assets 136 199
Plan merger and acquisition 12 55
Employer contributions 2 8
Trustee distributions/(a)/ (16) (14)
Settlements paid (99) -
Benefits paid from plan assets (56) (67)
------------ ------------
Fair value of plan assets at December 31 $ 1,310 $ 1,331
-----------------------------------------------------------------------------------------------------------------------
Funded status of plans at December 31 $ 442 /(b)/ $ 251 /(b)/ $ (478) $ (597)
Unrecognized net gain from transition (26) (35) - -
Unrecognized prior service costs (credits) 63 48 (72) (35)
Unrecognized actuarial (gains) losses (306) (88) 68 182
Additional minimum liability/(c)/ (8) (18) - -
------------ ------------ ----------- --------------
Prepaid (accrued) benefit cost $ 165 $ 158 $ (482) $ (450)
-----------------------------------------------------------------------------------------------------------------------
/(a)/ Represents transfers of excess pension assets to fund
retiree health care benefits accounts under Section 420 of
the Internal Revenue Code.
/(b)/ Includes several plans that have accumulated benefit
obligations in excess of plan assets:
Aggregate accumulated benefit obligations $(24) $(36)
Aggregate projected benefit obligations (37) (52)
Aggregate plan assets - -
/(c)/ Additional minimum liability recorded was offset
by the following:
Intangible asset $ 3 $ 2
---- ----
Accumulated other comprehensive income (losses):
Beginning of year $ (10) $ (7)
Change during year (net of tax) 7 (3)
---- ----
Balance at end of year $ (3) $(10)
-------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------------------ ---------------------------
(In millions) 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
Components of net periodic
benefit cost (credit)
Service cost $ 65 $ 48 $ 31 $ 17 $ 12 $ 6
Interest cost 67 57 45 36 31 22
Expected return on plan assets (114) (107) (85) - - -
Amortization - net transition gain (5) (5) (5) - - -
- prior service costs 4 3 1 (8) (3) (3)
(credits)
- actuarial losses 1 - 1 7 3 -
Other plans 5 5 4 - - -
Settlement
and
termination
gain (7) /(a)/ - - - - -
----- ----- ----- ----- ----- -----
Net periodic benefit cost (credit) $ 16 $ 1 $ (8) $ 52 $ 43 $ 25
---------------------------------------------------------------------------------------------------------------
/(a)/ Includes 1999 voluntary early retirement program.
M-14
Pension Benefits Other Benefits
------------------ ----------------
1999 1998 1999 1998
------------------------------------------------------------------------------
Weighted average actuarial assumptions
at December 31:
Discount rate 8.0% 6.5% 8.0% 6.5%
Expected annual return on plan assets 9.5% 9.5% 9.5% 9.5%
Increase in compensation rate 5.0% 5.0% 5.0% 5.0%
------------------------------------------------------------------------------
For measurement purposes, an 8% annual rate of increase in the
per capita cost of covered health care benefits was assumed for
2000. The rate was assumed to decrease gradually to 5% for 2006 and
remain at that level thereafter.
A one-percentage-point change in assumed health care cost trend
rates would have the following effects:
1-Percentage- 1-Percentage-
(In millions) Point Increase Point Decrease
------------------------------------------------------------------------------------------
Effect on total of service and interest cost components $ 8 $ (6)
Effect on other postretirement benefit obligations 58 (48)
------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15. Dividends
In accordance with the USX Restated Certificate of Incorporation,
dividends on the Marathon Stock and Steel Stock are limited to the
legally available funds of USX. Net losses of either Group, as well
as dividends and 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. Subject
to this limitation, the Board of Directors intends to declare and
pay dividends on the Marathon Stock based on the financial
condition and results of operations of the Marathon Group, although
it has no obligation under Delaware law to do so. In making its
dividend decisions with respect to Marathon Stock, the Board of
Directors considers among other things, the long-term earnings and
cash flow capabilities of the Marathon Group as well as the
dividend policies of similar publicly traded energy companies.
- --------------------------------------------------------------------------------
16. Property, Plant and Equipment
(In millions) December 31 1999 1998
--------------------------------------------------------------------------------------------------
Production $14,568 $14,707
Refining 2,439 2,251
Marketing 2,197 2,103
Transportation 1,374 1,402
Other 282 265
------- -------
Total 20,860 20,728
Less accumulated depreciation, depletion and amortization 10,567 10,299
------- -------
Net $10,293 $10,429
--------------------------------------------------------------------------------------------------
Property, plant and equipment at December 31, 1999, includes
gross assets acquired under capital leases of $20 million with no
related amounts in accumulated depreciation, depletion and
amortization.
- --------------------------------------------------------------------------------
17. Common Stockholders' Equity
(In millions, except per share data) 1999 1998 1997
---------------------------------------------------------------------------------
Balance at beginning of year $4,312 $3,618 $3,340
Net income 654 310 456
Marathon Stock issued 96 617 39
Exchangeable Shares:
Issued - 29 -
Exchanged for Marathon Stock (7) (12) -
Dividends on Marathon Stock
(per share: $.84 in 1999 and 1998 and $.76 in 1997) (261) (248) (219)
Deferred compensation - 2 1
Accumulated other comprehensive income (loss)/(a)/:
Foreign currency translation adjustments (1) 2 -
Minimum pension liability adjustments (Note 14) 7 (3) (2)
Unrealized holding gains (losses) on investments - (3) 3
------ ------ ------
Balance at end of year $4,800 $4,312 $3,618
---------------------------------------------------------------------------------
/(a)/ See page U-7 of the USX consolidated financial statements
relative to the annual activity of these adjustments and
gains (losses). Total comprehensive income for the Marathon
Group for the years 1999, 1998 and 1997 was $660 million,
$306 million and $457 million, respectively.
M-15
18. Income Taxes
Income tax provisions and related assets and liabilities attributed
to the Marathon Group are determined in accordance with the USX
group tax allocation policy (Note 4).
Provisions (credits) for estimated income taxes were:
1999 1998 1997
-------------------------- -------------------------- ---------------------------
(In millions) Current Deferred Total Current Deferred Total Current Deferred Total
------------------------------------------------------------------------------------------------------------
Federal $191 $ 158 $349 $ 83 $ 19 $ 102 $ 171 $ (5) $ 166
State and local 3 (7) (4) 30 9 39 3 7 10
Foreign 25 (46) (21) 3 (2) 1 12 28 40
---- ----- ---- ---- ----- ----- ------ ----- ------
Total $219 $ 105 $324 $116 $ 26 $ 142 $ 186 $ 30 $ 216
------------------------------------------------------------------------------------------------------------
A reconciliation of federal statutory tax rate (35%) to
total provisions follows:
(In millions) 1999 1998 1997
------------------------------------------------------------------------------------------------------------
Statutory rate applied to income before income taxes $ 342 $ 158 $ 235
Effects of foreign operations, including foreign tax credits (18) (26) (8)
State and local income taxes after federal income tax effects (3) 25 6
Credits other than foreign tax credits (7) (9) (9)
Effects of partially owned companies (5) (4) (6)
Dispositions of subsidiary investments 7 - -
Adjustment of prior years' federal income taxes 4 (5) (4)
Adjustment of valuation allowances - - (4)
Other 4 3 6
----- ------ ------
Total provisions $ 324 $ 142 $ 216
------------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities resulted from the following:
(In millions) December 31 1999 1998
------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Minimum tax credit carryforwards $ - $ 15
State tax loss carryforwards (expiring in 2000 through 2018) 57 54
Foreign tax loss carryforwards (portion of which expire in 2000 through 2014) 382 414
Employee benefits 206 201
Receivables, payables, and debt 14 13
Expected federal benefit for:
Crediting certain foreign deferred income taxes 530 528
Deducting state and other foreign deferred income taxes 36 51
Contingency and other accruals 150 140
Investments in foreign subsidiaries 52 52
Investments in subsidiaries and affiliates 20 22
Other 34 38
Valuation allowances:
Federal (30) (30)
State (11) (8)
Foreign (282) (260)
-------- -------
Total deferred tax assets/(a)/ 1,158 1,230
-------- -------
Deferred tax liabilities:
Property, plant and equipment 2,065 2,158
Inventory 324 170
Prepaid pensions 127 125
Other 111 150
-------- -------
Total deferred tax liabilities 2,627 2,603
-------- -------
Net deferred tax liabilities $ 1,469 $ 1,373
------------------------------------------------------------------------------------------------------------
/(a)/ USX expects to generate sufficient future taxable income to
realize the benefit of the Marathon Group's deferred tax
assets. In addition, the ability to realize the benefit of
foreign tax credits is based upon certain assumptions
concerning future operating conditions (particularly as
related to prevailing oil prices), income generated from
foreign sources and USX's tax profile in the years that such
credits may be claimed.
The consolidated tax returns of USX for the years 1990
through 1997 are under various stages of audit and administrative
review by the IRS. USX believes it has made adequate provision for
income taxes and interest which may become payable for years not yet
settled.
Pretax income (loss) included $66 million, $(75) million
and $250 million attributable to foreign sources in 1999, 1998 and
1997, respectively.
Undistributed earnings of certain consolidated foreign
subsidiaries at December 31, 1999, amounted to $150 million. No
provision for deferred U.S. income taxes has been made for these
subsidiaries because the Marathon Group intends to permanently reinvest
such earnings in those foreign operations. If such earnings were not
permanently reinvested, a deferred tax liability of $53 million would
have been required.
M-16
- --------------------------------------------------------------------------------
19. Investments and Long-Term Receivables
(In millions) December 31 1999 1998
-------------------------------------------------------------------------------------------------------
Equity method investments $ 658 $ 498
Other investments 32 33
Receivables due after one year 56 46
Deposits of restricted cash 20 21
Other 6 5
------ ------
Total $ 772 $ 603
-------------------------------------------------------------------------------------------------------
Summarized financial information of affiliates accounted for by the
equity method of accounting follows:
(In millions) 1999 1998 1997
-------------------------------------------------------------------------------------------------------
Income data - year:
Revenues $ 422 $ 347 $ 562
Operating income 152 132 114
Net income 119 79 52
-------------------------------------------------------------------------------------------------------
Balance sheet data - December 31:
Current assets $ 387 $ 262
Noncurrent assets 2,606 2,233
Current liabilities 300 243
Noncurrent liabilities 1,066 1,254
-------------------------------------------------------------------------------------------------------
Dividends and partnership distributions received from equity
affiliates were $44 million in 1999, $23 million in 1998 and $21
million in 1997.
Marathon Group purchases from equity affiliates totaled $50
million, $64 million and $37 million in 1999, 1998 and 1997,
respectively. Marathon Group sales to USX equity affiliates were $22
million in 1999 and 1998 and $36 million in 1997.
- --------------------------------------------------------------------------------
20. Inventories
(In millions) December 31 1999 1998
-------------------------------------------------------------------------------------------------------
Crude oil and natural gas liquids $ 729 $ 731
Refined products and merchandise 1,046 1,023
Supplies and sundry items 109 107
------ ------
Total (at cost) 1,884 1,861
Less inventory market valuation reserve - 551
------ ------
Net inventory carrying value $1,884 $1,310
-------------------------------------------------------------------------------------------------------
Inventories of crude oil and refined products are valued by the
LIFO method. The LIFO method accounted for 90% and 88% of total
inventory value at December 31, 1999 and 1998, respectively. Current
acquisition costs were estimated to exceed the above inventory values
at December 31, 1999, by approximately $200 million.
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.
- --------------------------------------------------------------------------------
21. Stock-Based Compensation Plans and Stockholder Rights Plan
USX Stock-Based Compensation Plans and Stockholder Rights Plan are
discussed in Note 19, and Note 21, respectively, to the USX
consolidated financial statements.
The Marathon Group's actual stock-based compensation expense
(credit) was $(4) million in 1999, $(3) million in 1998 and $20
million in 1997. Incremental compensation expense, as determined
under a fair value model, was not material ($.02 or less per share
for all years presented). Therefore, pro forma net income and
earnings per share data have been omitted.
M-17
- --------------------------------------------------------------------------------
22. Income Per Common Share
The method of calculating net income per share for the
Marathon Stock, the Steel Stock and, prior to November 1,
1997, the Delhi Stock reflects the USX Board of Directors'
intent that the separately reported earnings and surplus of
the Marathon Group, the U. S. Steel Group and the Delhi
Group, as determined consistent with the USX Restated
Certificate of Incorporation, are available for payment of
dividends to 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.
1999 1998 1997
------------------- -------------------- --------------------
Computation of Income Per Share Basic Diluted Basic Diluted Basic Diluted
------------------------------- ----- ------- ----- ------- ----- ------
Net income (millions):
Net income $ 654 $ 654 $ 310 $ 310 $ 456 $ 456
Dilutive effect of convertible debentures - - - - - 3
-------- -------- -------- -------- -------- --------
Net income assuming conversions $ 654 $ 654 $ 310 $ 310 $ 456 $ 459
======== ======== ======== ======== ======== ========
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 309,696 309,696 292,876 292,876 288,038 288,038
Effect of dilutive securities:
Convertible debentures - - - - - 1,936
Stock options - 314 - 559 - 546
-------- -------- -------- -------- -------- --------
Average common shares and dilutive effect 309,696 310,010 292,876 293,435 288,038 290,520
======== ======== ======== ======== ======== ========
Net income per share $ 2.11 $ 2.11 $ 1.06 $ 1.05 $ 1.59 $ 1.58
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
23. Intergroup Transactions
Sales and purchases - Marathon Group sales to other groups
totaled $41 million, $21 million and $105 million in 1999,
1998 and 1997, respectively. Marathon Group purchases from
other groups totaled $17 million in 1999, $2 million in 1998
and $18 million in 1997. At December 31, 1999 and 1998,
Marathon Group receivables included $5 million and $3
million, respectively, related to transactions with the
U.S. Steel Group. These transactions were conducted under
terms comparable to those with unrelated parties. Since
October 31, 1997, transactions with the Delhi Companies are
third-party transactions.
Income taxes receivable from/payable to the U. S. Steel
Group -At December 31, 1999 and 1998, amounts receivable or
payable for income taxes were included in the balance sheet
as follows:
(In millions) December 31 1999 1998
------------------------------------------------------------------------------------------------------------
Current:
Receivables $ 1 $ 2
Income taxes payable 97 -
Noncurrent:
Deferred credits and other liabilities 97 97
------------------------------------------------------------------------------------------------------------
These amounts have been determined in accordance with
the tax allocation policy described in Note 4. Amounts
classified as current are settled in cash in the year
succeeding that in which such amounts are accrued.
Noncurrent amounts represent estimates of intergroup tax
effects of certain issues for years that are still under
various stages of audit and administrative review. Such tax
effects are not settled between the groups until the audit
of those respective tax years is closed. The amounts
ultimately settled for open tax years will be different than
recorded noncurrent amounts based on the final resolution of
all of the audit issues for those years.
- --------------------------------------------------------------------------------
24. Derivative Instruments
The Marathon Group remains at risk for possible changes in
the market value of the derivative instrument; however, such
risk should be mitigated by price changes in the underlying
hedged item. The Marathon Group is also exposed to credit
risk in the event of nonperformance by counterparties. The
credit worthiness of counterparties is subject to continuing
review, including the use of master netting agreements to
the extent practical, and full performance is anticipated.
The following table sets forth quantitative information
by class of derivative instrument:
M-18
Recognized
Fair Carrying Trading Recorded
Value Amount Gain or Deferred Aggregate
Assets Assets (Loss) for Gain or Contract
(In millions) (Liabilities)/(a)(b)/ (Liabilities) the Year (Loss) Values/(c)
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1999:
Exchange-traded commodity futures:
Trading $ - $ - $ 4 $ - $ 8
Other than trading - - - 28 344
Exchange-traded commodity options:
Trading - - 4 - 179
Other than trading (6) /(d)/ (6) - (10) 1,262
OTC commodity swaps/(e)/:
Trading - - - - -
Other than trading 3 /(f)/ 3 - 2 156
OTC commodity options:
Trading - - - - -
Other than trading 4 /(g)/ 4 - 5 238
-------- --------- -------- ------- --------
Total commodities $ 1 $ 1 $ 8 $ 25 $ 2,187
======== ========= ======== ======= ========
Forward exchange contracts/(h)/:
- receivable $ 52 $ 52 $ - $ - $ 51
- ---------------------------------------------------------------------------------------------------------------------------
December 31, 1998:
Exchange-traded commodity futures $ - $ - $ (2) $ 104
Exchange-traded commodity options 3 /(d)/ 2 3 776
OTC commodity swaps (2) /(f)/ (2) - 243
OTC commodity options 3 /(g)/ 3 3 147
-------- -------- ------- --------
Total commodities $ 4 $ 3 $ 4 $ 1,270
======== ======== ======= ========
Forward exchange contracts:
- receivable $ 36 $ 36 $ - $ 36
- --------------------------------------------------------------------------------
/(a)/ The fair value amounts for OTC positions are based on various indices or
dealer quotes. The fair value amounts for currency contracts are based on
dealer quotes of forward prices covering the remaining duration of the
forward exchange contract. The exchange-traded futures contracts and
certain option contracts do not have a corresponding fair value since
changes in the market prices are settled on a daily basis.
/(b)/ The aggregate average fair value of all trading activities for the period
ending December 31, 1999, was $3 million. Detail by class of instrument
was not available.
/(c)/ Contract or notional amounts do not quantify risk exposure, but are used
in the calculation of cash settlements under the contracts. The contract
or notional amounts do not reflect the extent to which positions may
offset one another.
/(d)/ Includes fair values as of December 31, 1999 and 1998, for assets of $11
million and $23 million and for liabilities of $(17) million and $(20)
million, respectively.
/(e)/ The OTC swap arrangements vary in duration with certain contracts
extending into 2008.
/(f)/ Includes fair values as of December 31, 1999 and 1998, for assets of $8
million and $29 million and for liabilities of $(5) million and
$(31) million, respectively.
/(g)/ Includes fair values as of December 31, 1999 and 1998, for assets of $5
million and for liabilities of $(1) million and $(2) million,
respectively.
/(h)/ The forward exchange contracts relating to USX's foreign operations have
various maturities ending in December 2000.
- --------------------------------------------------------------------------------
25. Fair Value of Financial Instruments
Fair value of the financial instruments disclosed herein is
not necessarily representative of the amount that could be
realized or settled, nor does the fair value amount consider
the tax consequences of realization or settlement. The
following table summarizes financial instruments, excluding
derivative financial instruments disclosed in Note 24, by
individual balance sheet account. As described in Note 4,
the Marathon Group's specifically attributed financial
instruments and the Marathon Group's portion of USX's
financial instruments attributed to all groups are as
follows:
1999 1998
----------------- -------------------
Fair Carrying Fair Carrying
(In millions) December 31 Value Amount Value Amount
-------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 111 $ 111 $ 137 $ 137
Receivables 1,866 1,866 1,277 1,277
Investments and long-term receivables 166 109 157 101
------ ------ ------ ------
Total financial assets $2,143 $2,086 $1,571 $1,515
-------------------------------------------------------------------------------------------------------------
Financial liabilities:
Notes payable $ - $ - $ 132 $ 132
Accounts payable (including intergroup payables) 2,756 2,756 1,940 1,940
Distribution payable to minority shareholder of MAP - - 103 103
Accrued interest 92 92 87 87
Long-term debt (including amounts due within one year) 3,443 3,353 3,797 3,515
Preferred stock of subsidiary 176 184 183 184
------ ------ ------ ------
Total financial liabilities $6,467 $6,385 $6,242 $5,961
-------------------------------------------------------------------------------------------------------------
M-19
Fair value of financial instruments classified as
current assets or liabilities approximates carrying value
due to the short-term maturity of the instruments. Fair
value of investments and long-term receivables was based on
discounted cash flows or other specific instrument analysis.
Fair value of preferred stock of subsidiary was based on
market prices. Fair value of long-term debt instruments was
based on market prices where available or current borrowing
rates available for financings with similar terms and
maturities.
The Marathon Group's unrecognized financial instruments
consist of financial guarantees. It is not practicable to
estimate the fair value of these forms of financial
instrument obligations because there are no quoted market
prices for transactions which are similar in nature. For
details relating to financial guarantees, see Note 26.
- --------------------------------------------------------------------------------
26. Contingencies and Commitments
USX is the subject of, or 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.
Environmental matters -
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 December 31, 1999 and 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
$52 million at December 31, 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 1999 and 1998, such capital expenditures
totaled $46 million and $83 million, respectively. The
Marathon Group anticipates making additional such
expenditures in the future; however, the exact amounts and
timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
At December 31, 1999 and 1998, accrued liabilities for
platform abandonment and dismantlement totaled $152 million
and $141 million, respectively.
Guarantees -
Guarantees by USX and its consolidated subsidiaries of
the liabilities of affiliated entities of the Marathon Group
totaled $131 million at December 31, 1999 and 1998. As of
December 31, 1999, the largest guarantee for a single
affiliate was $131 million.
At December 31, 1999 and 1998, the Marathon Group's pro
rata share of obligations of LOOP LLC and various pipeline
affiliates secured by throughput and deficiency agreements
totaled $146 million and $164 million, respectively. 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.
Commitments -
At December 31, 1999 and 1998, the Marathon Group's
contract commitments to acquire property, plant and
equipment and long-term investments totaled $485 million and
$624 million, respectively.
The Marathon Group is a party to a 15-year
transportation services agreement with a natural gas
transmission company. The contract requires the Marathon
Group to pay a minimum annual demand charge of approximately
$5 million starting in the year 2000 and concluding in the
year 2014. The payments are required even if the
transportation facility is not utilized.
M-20
Selected Quarterly Financial Data (Unaudited)
1999 1998
------------------------------------------------------ ----------------------------
(In millions, except per share data) 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr.
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 7,505 $ 6,490 $ 5,481 $ 4,851 $ 5,339 /(a)/ $ 5,597 /(a)/
Income (loss) from operations 350 561 399 403 (132) 215
Includes:
Inventory market valuation charges
(credits) - (136) (66) (349) 245 50
Gain on ownership
change in MAP (6) (11) - - - 1
Net income (loss) 171 230 134 119 (86) 51
- -----------------------------------------------------------------------------------------------------------------------------------
Marathon Stock data:
- -------------------
Net income (loss) per share:
Basic $ .55 $ .74 $ .43 $ .38 $ (.29) $ .18
Diluted .55 .74 .43 .38 (.29) .17
Dividends paid per share .21 .21 .21 .21 .21 .21
Price range of Marathon
Stock/(b)/:
- Low 23- 5/8 28- 1/2 25- 13/16 19- 5/8 26- 11/16 25
- High 30- 5/8 33- 7/8 32- 3/4 31- 3/8 38- 1/8 37- 1/8
- -----------------------------------------------------------------------------------------------------------------------------------
1998
--------------------------------
(In millions, except per share data) 2nd Qtr. 1st Qtr.
Revenues $ 5,530 /(a)/ $ 5,511 /(a)/
Income (loss) from operations 453 402
Includes:
Inventory market valuation charges
(credits) (3) (25)
Gain on ownership
change in MAP 2 (248)
Net income (loss) 162 183
- ------------------------------------------------------------------------------------
Marathon Stock data:
- -------------------
Net income (loss) per share:
Basic $ .56 $ .63
Diluted .56 .63
Dividends paid per share .21 .21
Price range of Marathon
Stock/(b)/:
- Low 32- 3/16 31
- High 38- 7/8 40- 1/2
- ------------------------------------------------------------------------------------
/(a)/ Reclassified to conform to 1999 classifications.
/(b)/ Composite tape.
Principal Unconsolidated Affiliates (Unaudited)
December 31, 1999
Company Country Ownership Activity
- -----------------------------------------------------------------------------------------------------------------------------------
CLAM Petroleum B.V. Netherlands 50% Oil & Gas Production
Kenai LNG Corporation United States 30% Natural Gas Liquification
LOCAP, Inc. United States 50% /(a)/ Pipeline & Storage Facilities
LOOP LLC United States 47% /(a)/ Offshore Oil Port
Manta Ray Offshore Gathering Company, LLC United States 24% Natural Gas Transmission
Minnesota Pipe Line Company United States 33% /(a)/ Pipeline Facility
Nautilus Pipeline Company, LLC United States 24% Natural Gas Transmission
Odyssey Pipeline LLC United States 29% Pipeline Facility
Poseidon Oil Pipeline Company, LLC United States 28% Crude Oil Transportation
Sakhalin Energy Investment Company Ltd. Russia 38% Oil & Gas Development
- -----------------------------------------------------------------------------------------------------------------------------------
/(a)/ Represents the ownership of MAP.
Supplementary Information on Oil and Gas Producing Activities (Unaudited)
See the USX consolidated financial statements for Supplementary Information on
Oil and Gas Producing Activities relating to the Marathon Group, pages U-30
through U-34.
M-21