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                                    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 March 31,June 30, 1999

                                       ORor

      [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

           For the transition period from ------------ to Commission file number 1-5153------------


                                 USX CORPORATION
- --------------------------------------------------------------------------------
                                      ----
             (Exact name of registrant as specified in its charter)


           Delaware                  1-5153                 25-0996816
       ---------------            ------------         -------------------
       (State or other            (Commission             (IRS Employer
       jurisdiction of            Incorporation)       (I.R.S. EmployerFile Number)         Identification No.)
        incorporation)

600 Grant Street, Pittsburgh, PA                            15219-4776
- ---------------------------------------                     ----------
(Address of principal executive offices)                    Tel. No.(Zip Code)

                                 (412) 433-1121
                         ------------------------------
                         (Registrant's telephone number,
                              including area code)


- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes [x]    NoYes..X..No.....

Common stock outstanding at April 30,July 31, 1999 follows:

               USX-Marathon Group       -  308,650,075308,744,772 shares
               USX-U.S.SteelUSX-U. S. Steel Group    -   88,362,07888,369,055 shares

 2

                                 USX CORPORATION
                                  SEC FORM 10-Q
                           QUARTER ENDED March 31,June 30, 1999
                           ---------------------------

                                     INDEX                        Page
                                     -----                        ----
PART I - FINANCIAL INFORMATION

   A.  Consolidated Corporation

       Item 1. Financial Statements:

               Consolidated Statement of Operations                  4

               Consolidated Balance Sheet                            6

               Consolidated Statement of Cash Flows                  8

               Selected Notes to Consolidated
                 Financial Statements                                9

               Ratio of Earnings to Combined Fixed Charges
                 and Preferred Stock Dividends and Ratio of
                 Earnings to Fixed Charges                          1721

       Item 2. Management's Discussion and Analysis of
                 Financial Condition and Results of
                 Operations                                         1822

       Item 3. Quantitative and Qualitative Disclosures aboutAbout
                 Market Risk                                        2430

               Financial Statistics                                 2632

   B.  Marathon Group

       Item 1. Financial Statements:

               Marathon Group Statement of Operations               2733

               Marathon Group Balance Sheet                         2834

               Marathon Group Statement of Cash Flows               2935

               Selected Notes to Financial Statements               3036

       Item 2. Marathon Group Management's Discussion and
                 Analysis of Financial Condition and
                 Results of Operations                              3745

       Item 3. Quantitative and Qualitative Disclosures aboutAbout
                 Market Risk                                        4959

               Supplemental Statistics                              5161
 3

                                 USX CORPORATION
                                  SEC FORM 10-Q
                           QUARTER ENDED March 31,June 30, 1999
                           ---------------------------

                                     INDEX                        Page
                                     -----                        ----
PART I - FINANCIAL INFORMATION (Continued)

   C.  U. S. Steel Group

       Item 1. Financial Statements:

               U. S. Steel Group Statement of Operations            5362

               U. S. Steel Group Balance Sheet                      5463

               U. S. Steel Group Statement of Cash Flows            5564

               Selected Notes to Financial Statements               5665

       Item 2. U. S. Steel Group Management's Discussion
                 and Analysis of Financial Condition
                 and Results of Operations                          6272

       Item 3. Quantitative and Qualitative Disclosures aboutAbout
                 Market Risk                                        7183

               Supplemental Statistics                              7385

PART II - OTHER INFORMATION


Item 1.        Legal Proceedings                                    86

Item 4.        Submission of Matters to a Vote of Security Holders  87

Item 5.        Other Information                                    7488

Item 6.        Exhibits and Reports on Form 8-K                     7589


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Part I - Financial Information

   A.  Consolidated Corporation
USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) ------------------------------------------------ FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- REVENUES: Sales $6,078 $6,887$6,731 $7,182 $12,809 $14,082 Dividend and affiliate income (loss) (7) 2518 46 11 71 Gain (loss) on disposal of assets (22) 149 30 (13) 44 Gain on ownership change in Marathon Ashland Petroleum LLC - 248(2) - 246 Other income 58 4 13 17 ------ ------ ------ ------ Total revenues 6,054 7,1876,766 7,260 12,820 14,460 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of sales (excludes items shown below) 4,554 5,1714,810 5,095 9,364 10,266 Selling, general and administrative expenses 52 8537 67 89 152 Depreciation, depletion and amortization 308 347301 281 609 628 Taxes other than income taxes 1,025 9631,123 1,075 2,148 2,051 Exploration expenses 63 8259 75 122 157 Inventory market valuation credits (349) (25)(66) (3) (415) (28) ------ ------ ------ ------ Total costs and expenses 5,653 6,6236,264 6,590 11,917 13,226 ------ ------ ------ ------ INCOME FROM OPERATIONS 401 564502 670 903 1,234 Net interest and other financial costs 83 8291 71 174 153 Minority interest in income of Marathon Ashland Petroleum LLC 145 54112 158 257 212 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY LOSS 173 428299 441 472 869 Provision for estimated income taxes 63 158110 143 173 301 ------ ------ ------ ------ INCOME BEFORE EXTRAORDINARY LOSS 110 270189 298 299 568 Extraordinary loss on extinguishment of debt, net of income tax - - 5 - ------ ------ ------ ------ NET INCOME 105 270189 298 294 568 Dividends on preferred stock 2 23 3 5 5 ------ ------ ------ ------ NET INCOME APPLICABLE TO COMMON STOCKS $103 $268$186 $295 $289 $563 ====== ====== ====== ====== Selected notes to financial statements appear on pages 9-16.9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited) INCOME PER COMMON SHARE ------------------------------------------------------------ FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions, except per share amounts) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- APPLICABLE TO MARATHON STOCK: Net income $119 $183$134 $162 $253 $345 - Per share - basic and diluted .38 .63.43 .56 .82 1.19 Dividends paid per share .21 .21 .42 .42 Weighted average shares, in thousands - Basic 309,029 288,846309,054 289,591 309,041 289,220 - Diluted 309,196 289,490309,462 290,263 309,332 289,879 APPLICABLE TO STEEL STOCK: Income (loss) before extraordinary loss $(11) $85$52 $133 $41 $218 - Per share - basic (.13) .98.60 1.53 .47 2.51 - diluted (.13) .95.59 1.46 .47 2.41 Extraordinary loss, net of income tax - - 5 - - Per share - basic and diluted .05- - .06 - Net income (loss) $(16) $85$52 $133 $36 $218 - Per share - basic (.18) .98.60 1.53 .41 2.51 - diluted (.18) .95.59 1.46 .41 2.41 Dividends paid per share .25 .25 .50 .50 Weighted average shares, in thousands - Basic 88,368 86,60088,387 86,953 88,378 86,777 - Diluted 88,368 94,12592,647 94,507 88,379 94,314 Selected notes to financial statements appear on pages 9-16.9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Unaudited) ---------------------------------------- ASSETS March 31June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $77$99 $146 Receivables, less allowance for doubtful accounts of $8 and $12 1,5301,689 1,663 Inventories 2,4262,607 2,008 Deferred income tax benefits 218 217 217 Net assets held for sale 136 - Other current assets 236230 172 ------ ------ Total current assets 4,6224,843 4,206 Investments and long-term receivables, less reserves of $3 and $10 1,1511,175 1,249 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $16,415$16,632 and $16,238 12,72212,723 12,929 Prepaid pensions 2,4322,530 2,413 Other noncurrent assets 314329 336 ------ ------ Total assets $21,241$21,600 $21,133 ====== ====== Selected notes to financial statements appear on pages 9-16.9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET (Continued) (Unaudited) -------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY March 31June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- LIABILITIES Current liabilities: Notes payable $67$149 $145 Accounts payable 2,4162,526 2,478 Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC - 103 Payroll and benefits payable 441445 480 Accrued taxes 270301 245 Accrued interest 57103 97 Long-term debt due within one year 8082 71 ------ ------ Total current liabilities 3,3313,606 3,619 Long-term debt, less unamortized discount 4,1504,059 3,920 Long-term deferred income taxes 1,6141,656 1,579 Employee benefits 2,8412,858 2,868 Deferred credits and other liabilities 717726 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 1,7351,744 1,590 STOCKHOLDERS' EQUITY Preferred stock - 6.50% Cumulative Convertible issued - 2,767,787 shares ($138 liquidation preference) 3 3 Common stocks: Marathon Stock issued - 308,650,075308,722,152 shares and 308,458,835 shares 309 308 Steel Stock issued - 88,362,04288,368,566 shares and 88,336,439 shares 88 88 Securities exchangeable solely into Marathon Stock issued - 316,738309,138 shares and 507,324 shares - 1 Additional paid-in capital 4,5884,592 4,587 Deferred compensation -(1) (1) Retained earnings 1,4831,582 1,467 Accumulated other comprehensive income (loss) (50)(54) (48) ------ ------ Total stockholders' equity 6,4216,519 6,405 ------ ------ Total liabilities and stockholders' equity $21,241$21,600 $21,133 ====== ====== Selected notes to financial statements appear on pages 9-16.9-20.
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USX CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------------------ First QuarterSix Months Ended March 31June 30 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $105 $270$294 $568 Adjustments to reconcile to net cash provided from operating activities: Extraordinary loss 5 - Minority interest in income of Marathon Ashland Petroleum LLC - net of distributions 42 3051 82 Depreciation, depletion and amortization 308 347609 628 Exploratory dry well costs 31 5662 97 Inventory market valuation credits (349) (25)(415) (28) Pensions and other postretirement benefits (38) (52)(116) (101) Deferred income taxes 35 9298 180 Gain on ownership change in Marathon Ashland Petroleum LLC - (248)(246) (Gain) loss on disposal of assets 22 (14)13 (44) Changes in: Current receivables - sold 30 - - operating turnover (143) 224(301) 236 Inventories (106) (67)(221) (193) Current accounts payable and accrued expenses 190 53385 6 All other - net (78) (23)(33) (96) ------ ------ Net cash provided from operating activities 54 643461 1,089 ------ ------ INVESTING ACTIVITIES: Capital expenditures (275) (276)(685) (686) Disposal of assets 23 6182 45 Restricted cash-withdrawals 29 19639 202 - deposits (19) (3)(26) (390) Affiliates -investments - investmentsnet - (73)(71) - loans and advances (20) (22)(56) (58) - repayments of loans and advances - 63 All other - net 1 20(3) 26 ------ ------ Net cash used in investing activities (261) (152)(549) (869) ------ ------ FINANCING ACTIVITIES: Commercial paper and revolving credit arrangements - net (46) (120)(51) (121) Other debt - borrowings 297 462459 842 - repayments (29) (31)(195) (100) Common stock - issued 6 58 75 - repurchased - (195) Cash restricted for redemption of debt - (66) Dividends paid (89) (85)(179) (170) ------ ------ Net cash provided from (used in) financing activities 139 (30)42 331 ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (69) 461(47) 551 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 146 54 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $77 $515$99 $605 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(129) $(115)$(178) $(144) Income taxes paid (3) (47)(12) (150) Selected notes to financial statements appear on pages 9-16.9-20.
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. 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 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 $248 million, which is included in first quarter 1998 revenues. Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Results for the first quarter of 1999 include the operations of Marathon Canada Limited, formerly known as Tarragon. 3. In 1997, USX sold its stock in Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group. The net proceeds of the sale of $195 million were used to redeem all shares of USX- Delhi Group Common Stock (Delhi Stock) and were distributed to the holders thereof on January 26, 1998. After the redemption, 50,000,000 shares of Delhi Stock remain authorized but unissued. 4. 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) ------------------------ March 31 December 31 1999 1998 -------- ----------- Raw materials $864 $916 Semi-finished products 319 282 Finished products 1,289 1,205 Supplies and sundry items 156 156 ------ ------ Total (at cost) 2,628 2,559 Less inventory market valuation reserve 202 551 ------ ------ Net inventory carrying value $2,426 $2,008 ====== ======
10 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued) 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. 5. Total comprehensive income for the first quarter of 1999 was $103 million and $271 million for the first quarter of 1998. 6. On March 19, 1999, MAP announced that it had signed a definitive agreement to sell Scurlock Permian LLC (Scurlock), its crude oil gathering business, to Plains Marketing, L.P. At March 31, 1999, the net assets held for sale totaled $136 million and have been reclassified as current assets in the consolidated balance sheet. During the first quarter of 1999, MAP recorded an estimated pretax loss of $16 million related to the sale. Scurlock has been reported as part of the Marathon Group's refining, marketing and transportation operating segment. 7. The method of calculating net income (loss) per share for the Marathon Stock and Steel Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group and the U. S. Steel Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. 11 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 7. (Continued)
COMPUTATION OF INCOME PER SHARE First Quarter Ended March 31 1999 1998 Basic Diluted Basic Diluted - -------------------------------------------------------------------------------- Marathon Group Net income (millions) $119 $119 $183 $183 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,029 309,029 288,846 288,846 Effect of dilutive securities - stock options - 167 - 644 ------ ------ ------ ------ Average common shares and dilutive effect 309,029 309,196 288,846 289,490 ====== ====== ====== ====== Net income per share $.38 $.38 $.63 $.63 ====== ====== ====== ====== U. S. Steel Group Net income (loss) (millions): Income (loss) before extraordinary loss $(9) $(9) $87 $87 Dividends on preferred stock 2 2 2 - Extraordinary loss 5 5 - - ------ ------ ------ ------ Net income (loss) applicable to Steel Stock (16) (16) 85 87 Effect of dilutive convertible securities - - - 2 ------ ------ ------ ------ Net income (loss) assuming conversions $(16) $(16) $85 $89 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,368 88,368 86,600 86,600 Effect of dilutive securities: Trust preferred securities - - - 4,256 Preferred stock - - - 3,211 Stock options - - - 58 ------ ------ ------ ------ Average common shares and dilutive effect 88,368 88,368 86,600 94,125 ====== ====== ====== ====== Per share: Income (loss) before extraordinary loss $(.13) $(.13) $.98 $.95 Extraordinary loss .05 .05 - - ------ ------ ------ ------ Net income (loss) $(.18) $(.18) $.98 $.95 ====== ====== ====== ======
12 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 8. 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. The indexed debt adjustment in the first quarter of 1998 resulted in a charge of $4 million. In December 1996, USX had issued the $117 million of notes indexed to the common share price of RTI. At maturity, USX would have been required to exchange the notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. USX had a 26% investment in RTI and accounted for its investment using the equity method of accounting. 9. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------- First Quarter Ended March 31 1999 1998 ---- ---- Consumer excise taxes on petroleum products and merchandise $913 $863 Matching crude oil and refined product buy/sell transactions settled in cash 872 988
10. Income from operations includes net periodic pension credits of $45 million and $50 million in3. Total comprehensive income for the firstsecond quarter of 1999 and 1998 respectively. These pension credits are primarily noncashwas $185 million and $294 million, respectively, and $288 million and $565 million for the most part are included in selling, generalsix months of 1999 and administrative expenses. 11. 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.1998, respectively. 1310 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 12.4. The Marathon Group's operations consists of three reportable operating segments: 1) Exploration and Production (E&P) - explores for and produces crude oil and natural gas on a worldwide basis; 2) Refining, Marketing and Transportation (RM&T) - refines, markets and transports crude oil and petroleum products, primarily in the Midwest and southeastern United States through MAP;Marathon Ashland Petroleum LLC (MAP); and 3) Other Energy Related Businesses (OERB). OERB is an aggregation of two segments which fall below the quantitative reporting thresholds: 1) Natural Gas and Crude Oil Marketing and Transportation - markets and transports its own and third-partythird- 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 - -------------------------------------------------------------------------------- FIRST SECOND QUARTER 1999 Revenues: Customer $572 $4,179 $82 $4,833$1,245 $6,078$689 $4,637 $113 $5,439 $1,292 $6,731 Intersegment (a) 34 5 9 484 6 44 - 4844 Intergroup (a) 34 - 4 7 1 8 11 19 Equity in earnings (loss)(losses) of unconsolidated affiliates 1 3 84 5 12 (23) (11)(10) 2 Other 13 10 6 6 3 15 10 2529 11 40 ----- ----- ----- ----- ----- ----- Total revenues $616 $4,193 $106 $4,915$1,233 $6,148$743 $4,655 $134 $5,532 $1,304 $6,836 ===== ===== ===== ===== ===== ===== Segment income (loss) $36 $45 $15 $96 $(59) $37$124 $228 $19 $371 $(9) $362 ===== ===== ===== ===== ===== ===== FIRSTSECOND QUARTER 1998 Revenues: Customer $518 $4,579 $96 $5,193$1,669 $6,862$499 $4,928 $66 $5,493$1,689 $7,182 Intersegment (a) 4341 1 2 4644 - 4644 Intergroup (a) 42 - 1 3 7 - 73 Equity in earnings (loss) of unconsolidated affiliates (1)2 3 5 7 15 221 6 28 34 Other 1 13 220 11 3 34 16 12 2850 ----- ----- ----- ----- ----- ----- Total revenues $565 $4,596 $108 $5,269$1,696 $6,965$564 $4,943 $73 $5,580 $1,733 $7,313 ===== ===== ===== ===== ========= ===== Segment income $124 $128 $14 $266 $106 $372$73 $397 $3 $473 $154 $627 ===== ===== ===== ===== ===== ===== (a)Intersegment and intergroup sales and transfers were conducted on an arms-arm's- length basis.
1411
USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued) Total Marathon (In millions) E&P RM&T OERB Segments USS Total - -------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1999 Revenues: Customer $1,261 $8,816 $195 $10,272 $2,537 $12,809 Intersegment (a) 68 9 15 92 - 92 Intergroup (a) 7 - 8 15 12 27 Equity in earnings (losses) of unconsolidated affiliates 4 7 13 24 (33) (9) Other 19 16 9 44 21 65 ----- ----- ----- ----- ----- ----- Total revenues $1,359 $8,848 $240 $10,447 $2,537 $12,984 ===== ===== ===== ===== ===== ===== Segment income (loss) $160 $273 $34 $467 $(68) $399 ===== ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1998 Revenues: Customer $1,017 $9,520 $162 $10,699 $3,358 $14,057 Intersegment (a) 84 2 4 90 - 90 Intergroup (a) 6 - 4 10 - 10 Equity in earnings of unconsolidated affiliates 1 6 6 13 43 56 Other 21 24 5 50 28 78 ----- ----- ----- ----- ----- ----- Total revenues $1,129 $9,552 $181 $10,862 $3,429 $14,291 ===== ===== ===== ===== ==== ===== Segment income $197 $525 $17 $739 $260 $999 ===== ===== ===== ===== ===== ===== (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) 12.4. (Continued) The following schedule reconcilesschedules reconcile segment revenues and income (loss) to amounts reported in the Marathon and U. S. Steel Groups' financial statements:
Marathon Group U.S.GroupU. S. Steel Group FirstSecond Quarter FirstSecond Quarter Ended Ended March 31 March 31June 30 June 30 (In millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $4,915 $5,269 $1,233 $1,696$5,532 $5,580 $1,304 $1,733 Items not allocated to segments: GainLoss on ownership change in MAP - 248(2) - - Other (16) 24 (22)(7) - - - Elimination of intersegment revenues (48) (46)(44) (44) - - Administrative revenues - 3(4) - - ------ ------ ----- ----- Total Group revenues $4,851 $5,498 $1,211 $1,696$5,481 $5,530 $1,304 $1,733 ====== ====== ====== ====== Income: Income (loss) for reportable segments $96 $266 $(59) $106$371 $473 $(9) $154 Items not allocated to segments: GainLoss on ownership change in MAP - 248(2) - - Administrative expenses (26) (38)(31) (21) (8) (5) (9) Pension credits - - 108140 93 Costs related to former business activities - - (24) (28)(20) (25) Inventory market valuation adjustments 349 2566 3 - - Other (a) (16) (99) (22)(7) - - - ------ ------ ------ ------ Total Group income (loss) from operations $403 $402 $(2) $162$399 $453 $103 $217 ====== ====== ====== ====== (a)Represents for the Marathon Group in 1999, estimated loss on sale of Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie).
13
USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 4. (Continued) Marathon GroupU. S. Steel Group Six Months Six Months Ended Ended June 30 June 30 (In millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $10,447 $10,862 $2,537 $3,429 Items not allocated to segments: Gain on ownership change in MAP - 246 - - Other (23) 24 (22) - Elimination of intersegment revenues (92) (90) - - Administrative revenues - (1) - - ------ ------ ----- ----- Total Group revenues $10,332 $11,041 $2,515 $3,429 ====== ====== ====== ====== Income: Income (loss) for reportable segments $467 $739 $(68) $260 Items not allocated to segments: Gain on ownership change in MAP - 246 - - Administrative expenses (57) (59) (13) (14) Pension credits - - 248 186 Costs related to former business activities - - (44) (53) Inventory market valuation adjustments 415 28 - - Other (a) (23) (99) (22) - ------ ------ ------ ------ Total Group income from operations $802 $855 $101 $379 ====== ====== ====== ====== (a) Represents for the Marathon Group in 1999, loss on sale of Scurlock and Carnegie, and in 1998, international exploration and production property impairments, MAP transition charges and gas contract settlement. For the U. S. Steel Group in 1999, represents loss on investment in RTI stock used to satisfy indexed debt obligations.
5. In the second quarter of 1999, MAP sold Scurlock Permian LLC (Scurlock), its crude oil gathering business, to Plains Marketing, L.P for $136 million. During the first six months of 1999, MAP recorded a pretax loss of $16 million related to the sale. Scurlock had been reported as part of the Marathon Group's refining, marketing and transportation operating segment. On June 1, 1999, the Marathon Group announced that it had signed a definitive agreement to sell Carnegie to Equitable Resources, Inc. The transaction is expected to close later this year. Carnegie is engaged in natural gas production, transmission, distribution, sales and storage activities in Pennsylvania and West Virginia. At June 30, 1999, the net assets held for sale have been included in other current assets in the consolidated balance sheet. During the second quarter of 1999, USX recorded an estimated pretax loss of $7 million related to the sale. Carnegie has been reported as part of the Marathon Group's other energy related businesses operating segment. 14 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 6. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 1999 1998 1999 1998 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $1,003 $958 $1,916 $1,834 Matching crude oil and refined product buy/sell transactions settled in cash 698 994 1,570 1,982
7. Income from operations includes net periodic pension credits of $83 million and $48 million in the second quarter of 1999 and 1998, respectively, ($128 million and $98 million in the first six months of 1999 and 1998, respectively.) These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. In the second quarter of 1999, USX recognized a one-time pretax settlement gain of $35 million, related mainly to pension costs of employees who retired under the U. S. Steel Group 1998 voluntary early retirement program. This noncash settlement gain is included in selling, general and administrative expenses. 8. The provision for estimated income taxes for the periods reported is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. 9. The method of calculating net income per share for the Marathon Stock and Steel Stock reflects the USX Board of Directors' intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. The financial statements of the Marathon Group and the U. S. Steel Group, taken together, include all accounts which comprise the corresponding consolidated financial statements of USX. Basic net income per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. 15 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 9. (Continued)
COMPUTATION OF INCOME PER SHARE Second Quarter Ended June 30 1999 1998 Basic Diluted Basic Diluted - -------------------------------------------------------------------------------- Marathon Group Net income (millions) $134 $134 $162 $162 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,054 309,054 289,591 289,591 Effect of dilutive stock options - 408 - 672 ------ ------ ------ ------ Average common shares and dilutive effect 309,054 309,462 289,591 290,263 ====== ====== ====== ====== Net income per share $.43 $.43 $.56 $.56 ====== ====== ====== ====== U. S. Steel Group Net income (millions): Net income $55 $55 $136 $136 Dividends on preferred stock 3 3 3 - ------ ------ ------ ------ Net income applicable to Steel Stock 52 52 133 136 Effect of dilutive convertible securities - 2 - 2 ------ ------ ------ ------ Net income assuming conversions $52 $54 $133 $138 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,387 88,387 86,953 86,953 Effect of dilutive securities: Trust preferred securities - 4,256 - 4,256 Preferred stock - - - 3,211 Stock options - 4 - 87 ------ ------ ------ ------ Average common shares and dilutive effect 88,387 92,647 86,953 94,507 ====== ====== ====== ====== Net income per share $.60 $.59 $1.53 $1.46 ====== ====== ====== ======
16 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 9. (Continued)
COMPUTATION OF INCOME PER SHARE Six Months Ended June 30 1999 1998 Basic Diluted Basic Diluted - -------------------------------------------------------------------------------- Marathon Group Net income (millions) $253 $253 $345 $345 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 309,041 309,041 289,220 289,220 Effect of dilutive stock options - 291 - 659 ------ ------ ------ ------ Average common shares and dilutive effect 309,041 309,332 289,220 289,879 ====== ====== ====== ====== Net income per share $.82 $.82 $1.19 $1.19 ====== ====== ====== ====== U. S. Steel Group Net income (millions): Income before extraordinary loss $46 $46 $223 $223 Dividends on preferred stock 5 5 5 - Extraordinary loss 5 5 - - ------ ------ ------ ------ Net income applicable to Steel Stock 36 36 218 223 Effect of dilutive convertible securities - - - 4 ------ ------ ------ ------ Net income assuming conversions $36 $36 $218 $227 ====== ====== ====== ====== Shares of common stock outstanding (thousands): Average number of common shares outstanding 88,378 88,378 86,777 86,777 Effect of dilutive securities: Trust preferred securities - - - 4,256 Preferred stock - - - 3,211 Stock options - 1 - 70 ------ ------ ------ ------ Average common shares and dilutive effect 88,378 88,379 86,777 94,314 ====== ====== ====== ====== Per share: Income before extraordinary loss $.47 $.47 $2.51 $2.41 Extraordinary loss .06 .06 - - ------ ------ ------ ------ Net income $.41 $.41 $2.51 $2.41 ====== ====== ====== ======
17 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 10. During 1997, Marathon Oil Company (Marathon) and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to MAP, a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $246 million, which is included in the first six months 1998 revenues. Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Results for 1999 include the operations of Marathon Canada Limited, formerly known as Tarragon. 11. Inventories are carried at lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------ June 30 December 31 1999 1998 ------- ----------- Raw materials $840 $916 Semi-finished products 368 282 Finished products 1,370 1,205 Supplies and sundry items 165 156 ------ ------ Total (at cost) 2,743 2,559 Less inventory market valuation reserve 136 551 ------ ------ Net inventory carrying value $2,607 $2,008 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. For additional information, see discussion of results of operations in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 12. In 1997, USX sold its stock in Delhi Gas Pipeline Corporation and other subsidiaries of USX that comprised all of the Delhi Group. The net proceeds of the sale of $195 million were used to redeem all shares of USX- Delhi Group Common Stock (Delhi Stock) and were distributed to the holders thereof on January 26, 1998. After the redemption, 50,000,000 shares of Delhi Stock remain authorized but unissued. 18 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 13. At March 31,June 30, 1999, USX had $550$400 million in borrowings against its $2,350 million long-term revolving credit agreement. At March 31,June 30, 1999, Marathon Ashland Petroleum LLC (MAP)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 March 31,June 30, 1999. Interest is based on the bank's prime rate or London Interbank Offered Rate (LIBOR), and carries a facility fee of .15%. Certain other banks provide short-term lines of credit totaling $150 million which require a .125% fee or maintenance of compensating balances of 3%. At March 31,June 30, 1999, there were no borrowings against these facilities. USX had other outstanding short-term borrowings of $67$149 million. In the event of a change in control of USX, debt obligations totaling $3,739$3,571 million at March 31,June 30, 1999, may be declared immediately due and payable. 14. In the first quarter of 1999, USX issued $300 million in aggregate principal amount of 6.65% Notes due 2006. On March 31, 1999, USX extinguished $117 million of indexed debt, representing 6-3/4% Exchangeable Notes due February 1, 2000. See Note 82 for further discussion. 15. USX has an agreement (the program) to sell an undivided interest in certain accounts receivable of the U. S. Steel Group. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At March 31,June 30, 1999, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If USX does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program's size. In the event of a change in control of USX, as defined in the agreement, USX may be required to forward payments collected on sold accounts receivable to the buyers. 16. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the consolidated financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. 1619 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 16. (Continued) USX is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At March 31,June 30, 1999, and December 31, 1998, accrued liabilities for remediation totaled $152$160 million and $145 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. Receivables for recoverable costs from certain states, under programs to assist companies in cleanup efforts related to underground storage tanks at retail marketing outlets, were $42$47 million at March 31,June 30, 1999, and $41 million at December 31, 1998. For a number of years, USX has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first quartersix months of 1999 and for the years 1998 and 1997, such capital expenditures totaled $21$42 million, $173 million and $134 million, respectively. USX anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. At March 31,June 30, 1999, and December 31, 1998, accrued liabilities for platform abandonment and dismantlement totaled $147$142 million and $141 million, respectively. Guarantees by USX of the liabilities of affiliated entities totaled $217$218 million at March 31,June 30, 1999. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of most of the affiliates to reduce losses resulting from these guarantees. As of March 31,June 30, 1999, the largest guarantee for a single affiliate was $131 million. At March 31,June 30, 1999, USX's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $165$163 million. Under the agreements, USX is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. Contract commitments to acquire property, plant and equipment and long-term investments at March 31,June 30, 1999, totaled $843$983 million compared with $812 million at December 31, 1998. 20 USX CORPORATION AND SUBSIDIARY COMPANIES SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) --------------------------------------------------------------- (Unaudited) 17. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced that they had entered into a letter of intent with Blackstone Capital Partners II (Blackstone) to combine the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone, Republic Technologies International, Inc., Republic Engineered Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In addition, on August 6, 1999, USX agreed to a $15 million equity investment in Republic when the combination is consummated. USX currently owns 50% of USS/Kobe and will own approximately 15% of Republic. The seamless pipe business of USS/Kobe is excluded from this transaction and will continue to operate as a joint venture between USX and Kobe Steel. The transaction was subject to numerous conditions, including financing. As of the date of issuance of the accompanying financial statements, it was uncertain whether several of these conditions would be resolved and the transaction would be completed. Due to these uncertainties, neither USX nor USS/Kobe recognized any financial effects of the transaction in the second quarter 1999. On August 1,6, 1999, U. S. Steel, along with several major steel competitors, facesRepublic received financing commitments sufficient to complete the expirationtransaction, which is scheduled to be closed on August 13, 1999. The estimated fair value of USX's investment in Republic, based upon preliminary information supplied by Republic, is approximately $80 million less than USX's carrying value of its investment in the steelmaking and bar producing assets of USS/Kobe. Based on the resolution of the labor agreement withuncertainties and the United Steelworkersanticipated closing of America. U. S. Steel's abilitythe transaction, USX expects to negotiaterecognize an acceptable labor contract is essential to its ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow.estimated impairment of $80 million in the third quarter of 1999. 1721
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS TOTAL ENTERPRISE BASIS - (Unaudited) ---------------------------------------------------------- First QuarterSix Months Ended March 31June 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- 3.52 5.083.89 5.48 3.36 3.92 3.62 1.49 2.01 ==== ==== ==== ==== ==== ==== ====
USX CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES TOTAL ENTERPRISE BASIS - (Unaudited) ------------------------------------------------- First QuarterSix Months Ended March 31June 30 Year Ended December 31 - --------------------- ------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- 3.63 5.264.00 5.67 3.47 4.11 3.90 1.62 2.18 ==== ==== ==== ==== ==== ==== ====
1822 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX Corporation ("USX") is a diversified company whichthat is principally engaged in the energy business through its Marathon Group and in the steel business through its U. S. Steel Group. The following discussion should be read in conjunction with the second quarter and first quartersix months of 1999 USX Consolidated Financial Statements and selected notes. For income per common share amounts applicable to USX's two classes of common stock, USX-Marathon Group Common Stock ("Marathon Stock") and USX-U. S. Steel Group Common Stock ("Steel Stock"), see Consolidated Statement of Operations - Income per Common Share. For Group results, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. For operating statistics, see Supplemental Statistics following Management's Discussion and Analysis of Financial Condition and Results of Operations for the respective Groups. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting USX. These statements typically contain words such as "anticipates", "believes", "estimates", "expects" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in the forward-looking statements. For additional risk factors affecting the businesses of USX, see Supplementary Data - Disclosures About Forward-Looking Statements in the USX 1998 Form 10-K. 23 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Revenues for the second quarter and the first quartersix months of 1999 and 1998 are set forth in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ------ ------ ------ ------ Revenues Marathon Group $4,851 $5,498$5,481 $5,530 $10,332 $11,041 U. S. Steel Group 1,211 1,6961,304 1,733 2,515 3,429 Eliminations (8) (7)(19) (3) (27) (10) ------ ------ ------- ------- Total USX Corporation revenues 6,054 7,187$6,766 $7,260 $12,820 $14,460 Less: Excise taxes (a)(b) 913 8631,003 958 1,916 1,834 Matching buy/sell transactions (a)(c) 872 988698 994 1,570 1,982 ------ ------ ------ ------ Revenues excluding above items $4,269 $5,336$5,065 $5,308 $9,334 $10,644 ====== ====== ====== ====== - ------ (a) Included in both revenues and costs and expenses for the Marathon Group and USX Consolidated.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 and excise taxes)transactions) decreased by $1,067$243 million in the firstsecond quarter of 1999 as compared with the firstsecond quarter of 1998. The decline reflected1998, reflecting a decrease of $429 million for the U. S. Steel Group offset by an increase of $202 million for the Marathon Group. For the first six months of 1999 revenues decreased $1,310 million as compared with the same period of 1998, reflecting decreases of 16%$379 million for the Marathon Group and 29%$914 million for the U. S. Steel Group. For discussion of revenues by groupGroup, see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 1924 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income from operations for the second quarter and the first quartersix months of 1999 and 1998 are set forth in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ------ ------ ------ ------ Reportable segments Marathon Group Exploration & production 36 124$124 $73 $160 $197 Refining, marketing & transportation 45 128228 397 273 525 Other energy related businesses 15 1419 3 34 17 ---- ---- ---- ---- Income for reportable segments - Marathon Group 96 266$371 $473 $467 $739 U. S. Steel Group U. S. Steel operations (59) 106Income for reportable segment (9) 154 (68) 260 --- ---- ---- ---- Income for reportable segments - USX Corporation 37 372362 627 399 999 Items not allocated to reportable segments: Marathon Group 307 13628 (20) 335 116 U. S. Steel Group 57 56112 63 169 119 ---- ---- ---- ---- Total income from operations - USX Corporation 401 564$502 $670 $903 $1,234
Income for reportable segments decreased by $335$265 million in the firstsecond quarter of 1999 as compared with the firstsecond quarter of 1998, reflecting decreases of $170$102 million for the Marathon Group reportable segments and $165$163 million for U. S. Steel operations.Group reportable segment. Income for reportable segments in the first six months of 1999 decreased by $600 million compared with the first six months of 1998, reflecting decreases of $272 million for the Marathon Group reportable segments and $328 million for U. S. Steel Group reportable segment. For discussion of income from operations by segment see Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 2025 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Net interest and other financial costs for the second quarter and first quartersix months of 1999 and 1998 are set forth in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ------ ------ ------ ------ Net interest and other financial costs 83 82$91 $71 $174 $153 Less: Favorable (unfavorable) adjustment to carrying value of indexed debt (a) - - 13 (4) ----- ------ ------ ------ Net interest and other financial costs adjusted to exclude above item $96 $78$91 $71 $187 $149 ===== ====== ====== ====== - ------ (a) In December 1996, USX issued $117 million of 6-3/4% Exchangeable Notes Due February 1, 2000 ("indexed debt"), indexed to the price of RTI common stock. On March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million common 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. 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. If the market price of RTI common stock at maturity exceeds $21.375 per share the entire 5.5 million shares will not be required to satisfy USX's obligation under the indexed debt. Ownership of any shares not required for satisfaction of the indexed debt will revert to USX. A maximum of 838,000 shares, or 4% of the shares of RTI common stock outstanding on March 31, 1999, would revert to USX if the market price of RTI common stock at maturity equals or exceeds $25.23 per share. There will be no indexed debt adjustment or interest expense related to indexed debt in future quarters. For further discussion, see Note 82 to the USX Consolidated Financial Statements.
Excluding the adjustment to the carrying value of indexed debt,Adjusted net interest and other financial costs increased by $18$20 million in the second quarter of 1999 and $38 million in the first quartersix months of 1999 as compared with the first quartersame periods of 1998, due primarily to increased costs resulting from higher average debt levels and lower interest income. ProvisionProvisions for estimated income taxes of $63$110 million and $158$173 million for the second quarter and the first quartersix months of 1999 and 1998 were based on tax rates and amounts that recognize management's best estimate of current and deferred tax assets and liabilities. The U. S. Steel Group's provision for estimated income taxes for the second quarter and first six months of 1998 included a $9 million favorable foreign tax adjustment as a result of a favorable resolution of foreign tax litigation. Extraordinary loss on extinguishment of debt of $5 million, net of a $3 million income tax benefit, in the first quartersix 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.debt in the first quarter of 1999. For further discussion, see Note 82 to the USX Consolidated Financial Statements. Net income was $105$189 million infor the firstsecond quarter of 1999, a decrease of $165$109 million from the firstsecond quarter of 1998 reflecting decreases of $101$28 million for the Marathon Group and $64$81 million for the U. S. Steel Group andGroup. Net income was $294 million for the first six months of 1999, a decrease of $274 million as compared with the first six months of 1998, reflecting decreases of $92 million for the Marathon Group respectively.and $182 million for the U. S. Steel Group. 26 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Dividends to Stockholders - ------------------------- On AprilJuly 27, 1999, the USX Board of Directors (the "Board") declared dividends of 21 cents per share on Marathon Stock and 25 cents per share on Steel Stock, payable JuneSeptember 10, 1999, to stockholders of record at the close of business on May 19,August 18, 1999. The Board also declared a dividend of $0.8125 per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable JuneSeptember 30, 1999, to stockholders of record at the close of business on June 1,August 31, 1999. 21 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- On AprilJuly 27, 1999, Marathon Oil Canada Limited, an indirect subsidiary of Marathon Oil Company, declared a dividend of CDN $0.3105$0.3178 per share on its non- voting Exchangeable Shares, payable JuneSeptember 10, 1999, to stockholders of record at the close of business on May 19,August 18, 1999. Cash Flows - ---------- Cash and cash equivalents totaled $77$99 million at March 31,June 30, 1999, compared with $146$605 million at December 31, 1998. TheJune 30, 1998, a decrease is the result of $506 million reflecting a $78$510 million decrease for the Marathon Group partially offset by a $9$4 million increase for the U. S. Steel Group. The decrease for the Marathon Group was primarily the result of a temporary change in excise tax payment patterns in 1998 that reversed later in the year. Net cash provided from operating activities totaled $54$461 million in the first quartersix months of 1999, compared with $643a $628 million indecrease from the first quartersix months of 1998. The $5891998, reflecting a $510 million decrease for the Marathon Group and a $118 million decrease for the U. S. Steel Group. The decrease for the Marathon Group mainly reflected lower profitability, unfavorable working capital changes decreased profitability and a distributionan increase from the previous period in the amount distributed by MAP to Ashland of $103 million in first quarter 1999 as compared to $24 million in first quarter 1998.Ashland. Capital expenditures for property, plant and equipment in the first quartersix months of 1999 were $275$685 million compared with $276$686 million infor the first quartersix months of 1998. For further details, see USX Corporation - Financial Statistics, following Management's Discussion and Analysis of Financial Condition and Results of Operations. Investments inLoans and advances to affiliates of $73were $56 million in the first quartersix months of 1999 compared with $58 million in the first six months of 1998. Cash outflows in both periods mainly reflected funding by the Marathon Group to equity affiliates for capital projects, primarily the Sakhalin II project in Russia. Repayments of loans and advances from affiliates were $63 million in the first six months of 1998 primarily reflects funding for entry into VSZ U. S. Steel, s. r.o.,as a joint ventureresult of repayments by Sakhalin Energy Investment Company, Ltd. of advances made by the Marathon Group in Slovakiaconjunction with VSZ a.s. for the U. S. Steel Group.Sakhalin II project in Russia. Contract commitments to acquire property, plant and equipment and long-term investments at March 31,June 30, 1999, totaled $843$983 million compared with $812 million at December 31, 1998. The withdrawal of restricted cash of $196 million in 1998increase was primarily due to the resultpending acquisition of redeeming all of the outstanding shares of USX - Delhi Group Common Stock with the $195 million net proceeds from the sale of the Delhi Companies that had been classified as restricted cash in 1997.certain Ultramar Diamond Shamrock refining, marketing and transportation. USX's total long-term debt, preferred stock of subsidiary, USX obligated preferred securities of a subsidiarysubsidary trust and notes payable, was $4,729totaled $4,722 million at March 31,June 30, 1999, up $161$154 million from December 31, 1998 primarily due to the issuance of $300 million ofthe 6.65% Notes due 2006 and an increase in commercial paper issuances partially offset by repayments on revolving credit agreements and the settlement of the indexed debt. For further discussion of the settlement of indexed debt, see Note 8 to the 27 USX Consolidated Financial Statements.CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Liquidity - --------- At March 31,June 30, 1999, USX had $550$400 million of borrowings against its $2,350 million long-term revolving credit agreement and $67$149 million of borrowings against other short-term lines. There were no borrowings against the MAP revolving credit agreements at March 31,June 30, 1999. USX management believes that its short-term and long-term liquidity is adequate to satisfy its obligations as of March 31,June 30, 1999, and to complete currently authorized capital spending programs. Future requirements for USX's business needs, including the funding of capital expenditures, debt maturities for the balance of 1999 and years 2000 and 2001, and any amounts that may ultimately be paid in connection with contingencies (which are discussed in Note 16 to the USX Consolidated Financial Statements), are expected to be financed by a combination of internally generated funds, proceeds from the sale of stock, borrowings and other external financing sources. 22 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX management's opinion concerning liquidity and USX's ability to avail itself in the future of the financing options mentioned in the above forward- looking statements are based on currently available information. To the extent that this information proves to be inaccurate, future availability of financing may be adversely affected. Factors that could affect the availability of financing include the performance of each Group (as measured by various factors including cash provided from operating activities), the state of worldwide debt and equity markets, investor perceptions and expectations of past and future performance, the overall U.S. financial climate, and, in particular, with respect to borrowings, by levels of USX's outstanding debt and credit ratings by rating agencies. Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- USX has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of USX's products and services, operating results will be adversely affected. USX believes that domestic competitors of the U. S. Steel Group and substantially all the competitors of the Marathon Group are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. USX has been notified that it is a potentially responsible party ("PRP") at 4341 waste sites under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of March 31,June 30, 1999. In addition, there are 2119 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 132140 additional sites, excluding retail gasoline stations, where remediation is being sought under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. Of these sites, 17 were associated with properties conveyed to MAP by Ashland for which Ashland has retained liability for all costs associated with remediation. At many of these sites, 28 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. USX accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. In October 1998, the National Enforcement Investigations Center and Region V of the United States Environmental Protection Agency ("EPA")conducted a multi-mediamulti- 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. AlthoughThus far, MAP has 23 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- been advised as to certain compliance issues, including one contested Noticeserved with two Notices of Violation regarding MAP's("NOV") and two Findings of Violation in connection with the multi-media inspection at its Detroit refinery, and a NOV as a result of the inspection at its Robinson refinery. MAP can contest the factual and the legal basis for the allegations prior to the EPA taking enforcement action. At this time, it is not known when complete findings on the results of thethese multi-media inspections will be issued. In an action separate from the multi-media inspection, the Department of Justice filed a civil complaint in February 1999, alleging violation of the Clean Air Act with respect to benzene releases at the Robinson refinery. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments involving a variety of matters, including laws and regulations relating to the environment (see Note 16 to the USX Consolidated Financial Statements for a discussion of certain of these matters). The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the USX Consolidated Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably. See discussion of Liquidity herein. Outlook - ------- See Outlook in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. Year 2000 Readiness Disclosure - ------------------------------ See Year 2000 Readiness Disclosure in Management's Discussion and Analysis of Financial Condition and Results of Operations for the Marathon Group and the U. S. Steel Group. 29 USX CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Accounting Standard - ------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible thatUpon adoption, there willmay be derivative instruments employed in our businessesby USX that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX plans to adopt the standard effective January 1, 2000,2001, as required. 2430 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Management Opinion Concerning Derivative Instruments - -------------------------------------- USX utilizes derivative instruments principally in hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. Recently, the Marathon Group's risk management policy was expanded to include the use of derivative instruments for certain nonhedging and trading activities. These instruments will be marked-to-market each period and the related income or loss will be included in income from operations. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose USX to material risk. The use of derivative instruments could materially affect USX's results of operations in particular quarterly or annual periods. However, management believes that use of derivative instruments will not have a material adverse effect on financial position or liquidity. Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of March 31,June 30, 1999 are provided in the following table: (a)table(a):
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- - ---- Derivative Commodity Instruments Marathon Group (b) (c) Crude oil (price decrease)increase) (d) $4.8 $28.3$21.8 $56.9 Natural gas (price decrease) (d) 9.2 23.79.6 24.8 Refined products (price decrease)increase) (d) 4.1 10.8.1 .2 U. S. Steel Group Natural gas (price decrease) (d) $2.4 $6.0$2.5 $6.3 Zinc (price decrease) (d) 2.0 4.63.0 7.6 Tin (price decrease) (d) .3 .6.4 .7 Nickel (price decrease) (d) .1 .2 (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 March 31,June 30, 1999. Marathon Group and U. S. Steel Group management evaluate their portfolios of derivative commodity instruments on an ongoing basis and add or revise strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolios subsequent to March 31, 1999, would cause future pretax income effects to differ from those presented in the table. (b) The number of net open contracts varied throughout first quarterJune 30, 1999, would cause future pretax income effects to differ from a low of 453 contracts at March 11, to a high of 19,223 contracts at March 31, and averaged 8,321 forthose presented in the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout firsttable.
31 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- (b) The number of net open contracts varied throughout second quarter 1999, from a low of 2,476 contracts at June 30, 1999, to a high of 34,199 contracts at April 16, 1999, and averaged 25,914 for the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout second quarter 1999, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. (c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity. 25 USX CORPORATION AND SUBSIDIARY COMPANIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Interest Rate Risk - ------------------ As of March 31,June 30, 1999, the discussion of USX's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- As of March 31,June 30, 1999, the discussion of USX's foreign currency exchange rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Equity Price Risk - ----------------- USX was subject to equity price risk resulting from its issuance in December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000 ("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million shares it owned in RTI. The deposit of shares resulted in the satisfaction of USX's obligation under the indexed debt. Under the terms of the indenture, the trustee will exchange the RTI shares for the notes at maturity. USX is no longer exposed to any negative risks associated with changes in the value of RTI common stock. For further discussion, see Note 82 to the USX Consolidated Financial Statements. Safe Harbor - ----------- USX's quantitativeQuantitative and qualitative disclosures about market riskQualitative 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 programsderivative usage may differ materially from those discussed in the forward-looking statements. 2632
USX CORPORATION FINANCIAL STATISTICS (Unaudited) -------------------------------- FirstSecond Quarter Six Months Ended March 31 ----------------Ended June 30 June 30 -------------- -------------- (Dollars in Millions)millions) 1999 1998 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------------------------------------------- REVENUES Marathon Group $4,851 $5,498$5,481 $5,530 $10,332 $11,041 U. S. Steel Group 1,211 1,6961,304 1,733 2,515 3,429 Eliminations (8) (7)(19) (3) (27) (10) ------- ------- ------- ------- Total $6,054 $7,187$6,766 $7,260 $12,820 $14,460 INCOME (LOSS) FROM OPERATIONS Marathon Group $403 $402$399 $453 $802 $855 U. S. Steel Group (2) 162 ----- -----103 217 101 379 ------ ------ ------ ------ Total $401 $564$502 $670 $903 $1,234 CASH FLOW DATA - -------------- CAPITAL EXPENDITURES Marathon Group $196 $219$336 $331 $532 $550 U. S. Steel Group 74 79 57 ----- -----153 136 ------ ------ ------ ------ Total $275 $276$410 $410 $685 $686 INVESTMENTS IN AFFILIATES(RETURNS) & OTHER AFFILIATE ACTIVITY - NET Marathon Group $ - $7$37 $(22) $56 $3 U. S. Steel Group - 66 ----- ------ - 63 ------ ------ ------ ------ Total $ - $73$37 $(22) $56 $66
2733 Part I - Financial Information (Continued): B. Marathon Group
MARATHON GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ----------------------------------- FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions, except per share amounts) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- REVENUES: Sales $4,840 $5,224$5,447 $5,496 $10,287 $10,733 Dividend and affiliate income 16 1028 18 44 28 Gain (loss) on disposal of assets (10) 3(1) 13 (11) 16 Gain on ownership change in Marathon Ashland Petroleum LLC - 248(2) - 246 Other income 7 5 1312 18 ------ ------ ------ ------ Total revenues 4,851 5,4985,481 5,530 10,332 11,041 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of sales (excludes items shown below) 3,405 3,7233,669 3,662 7,074 7,385 Selling, general and administrative expenses 122 131132 120 254 251 Depreciation, depletion and amortization 237 270222 209 459 479 Taxes other than income taxes 970 9151,066 1,014 2,036 1,942 Exploration expenses 63 8259 75 122 157 Inventory market valuation credits (349) (25)(66) (3) (415) (28) ------ ------ ------ ------ Total costs and expenses 4,448 5,0965,082 5,077 9,530 10,186 ------ ------ ------ ------ INCOME FROM OPERATIONS 403 402399 453 802 855 Net interest and other financial costs 75 5471 49 146 103 Minority interest in income of Marathon Ashland Petroleum LLC 145 54112 158 257 212 ------ ------ ------ ------ INCOME BEFORE INCOME TAXES 183 294216 246 399 540 Provision for estimated income taxes 64 11182 84 146 195 ------ ------ ------ ------ NET INCOME $119 $183$134 $162 $253 $345 ====== ====== ====== ====== MARATHON STOCK DATA: Net income per share - basicBasic and diluted $.38 $.63$.43 $.56 $.82 $1.19 Dividends paid per share .21 .21 .42 .42 Weighted average shares, in thousands - Basic 309,029 288,846309,054 289,591 309,041 289,220 - Diluted 309,196 289,490309,462 290,263 309,332 289,879 Selected notes to financial statements appear on pages 30-36.36-44.
2834
MARATHON GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) --------------------------------- March 31June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $59$79 $137 Receivables, less allowance for doubtful accounts of $3 and $3 1,1401,296 1,277 Inventories 1,7141,839 1,310 Deferred income tax benefits 81 80 80 Net assets held for sale 136 - Other current assets 236230 172 ------ ------ Total current assets 3,3653,525 2,976 Investments and long-term receivables 611652 603 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $10,415$10,557 and $10,299 10,21610,224 10,429 Prepaid pensions 200203 241 Other noncurrent assets 278301 295 ------ ------ Total assets $14,670$14,905 $14,544 ====== ====== LIABILITIES Current liabilities: Notes payable $60$132 $132 Accounts payable 1,8531,940 1,980 Payroll and benefits payable 128130 150 Distribution payable to minority shareholder of Marathon Ashland Petroleum LLC - 103 Accrued taxes 137173 99 Accrued interest 5092 87 Long-term debt due within one year 6967 59 ------ ------ Total current liabilities 2,2972,534 2,610 Long-term debt, less unamortized discount 3,7063,568 3,456 Long-term deferred income taxes 1,4661,482 1,450 Employee benefits 522542 553 Deferred credits and other liabilities 392411 389 Preferred stock of subsidiary 184 184 Minority interest in Marathon Ashland Petroleum LLC 1,7351,744 1,590 COMMON STOCKHOLDERS' EQUITY 4,3684,440 4,312 ------ ------ Total liabilities and common stockholders' equity $14,670$14,905 $14,544 ====== ====== Selected notes to financial statements appear on pages 30-36.36-44.
2935
MARATHON GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ----------------------------------- First QuarterSix Months Ended March 31June 30 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income $119 $183$253 $345 Adjustments to reconcile to net cash provided from (used in) operating activities: Minority interest in income of Marathon Ashland Petroleum LLC - net of distributions 42 3051 82 Depreciation, depletion and amortization 237 270459 479 Exploratory dry well costs 31 5662 97 Inventory market valuation credits (349) (25)(415) (28) Pensions and other postretirement benefits 13 -27 6 Deferred income taxes 13 49 91 Gain on ownership change in Marathon Ashland Petroleum LLC - (248)(246) (Gain) loss on disposal of assets 10 (3)11 (16) Changes in: Current receivables (107) 167(265) 161 Inventories (92) (54)(151) (160) Current accounts payable and accrued expenses 158 86333 105 All other - net (101) (2)(77) (69) ------ ------ Net cash provided from (used in) operating activities (26) 509337 847 ------ ------ INVESTING ACTIVITIES: Capital expenditures (196) (219)(532) (550) Disposal of assets 21 4178 30 Restricted cash - withdrawals 29 1-withdrawals 39 4 - deposits (15) (3)(20) (387) Affiliates - investments - (7)net - (8) - loans and advances (20) (22)(56) (58) - repayments of loans and advances - 63 All other - net 1 17- 13 ------ ------ Net cash used in investing activities (180) (229)(391) (893) ------ ------ FINANCING ACTIVITIES: Increase in Marathon Group's portion of USX consolidated debt 188 304119 292 Specifically attributed debt -debt- borrowings 138 -140 379 - repayments (138)(140) - Marathon Stock issued 6 3 Cash restricted for redemption of debt - (59)8 50 Dividends paid (65) (61)(130) (122) ------ ------ Net cash provided from (used in) financing activities 129 187(3) 599 ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (1) - ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (78) 467(58) 553 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 137 36 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $59 $503$79 $589 ====== ====== Cash used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(104) $(92)$(136) $(105) Income taxes paid, including settlements with the U. S. Steel Group (1) (63)(7) (136) Selected notes to financial statements appear on pages 30-36.36-44.
3036 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. 3137 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 2. (Continued) The financial statement provision for estimated income taxes and related tax payments or refunds have been reflected in the Marathon Group and the U. S. Steel Group financial statements in accordance with USX's tax allocation policy for such groups. In general, such policy provides that the consolidated tax provision and related tax payments or refunds are allocated between the Marathon Group and the U. S. Steel Group for group financial statement purposes, based principally upon the financial income, taxable income, credits, preferences and other amounts directly related to the respective groups. The provision for estimated income taxes for the Marathon Group is based on tax rates and amounts which recognize management's best estimate of current and deferred tax assets and liabilities. Differences between the combined interim tax provisions of the Marathon and U. S. Steel Groups and USX consolidated are allocated to each group based on the relationship of the individual group provisions to the combined interim provisions. 3. The method of calculating net income (loss) per common share for the Marathon Stock and Steel Stock reflects the Board's intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. See Note 7 of the Notes to USX Consolidated Financial Statements for the computation of income per share. 4. 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 $248 million, which is included in first quarter 1998 revenues. Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Results for the first quarter of 1999 include the operations of Marathon Canada Limited, formerly known as Tarragon. 32 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------- First Quarter Ended March 31 1999 1998 ---- ---- Consumer excise taxes on petroleum products and merchandise $913 $863 Matching crude oil and refined product buy/sell transactions settled in cash 872 988
6. The Marathon Group's total comprehensive income for the firstsecond quarter of 1999 and 1998 was $121$134 million and $184$160 million, respectively, and $255 million and $344 million for the firstsix months of 1999 and 1998, respectively. 4. In the second quarter of 1998. 7. On March 19, 1999, MAP announced that it had signed a definitive agreement to sellMarathon Ashland Petroleum LLC (MAP) sold Scurlock Permian LLC (Scurlock), its crude oil gathering business, to Plains Marketing, L.P. At March 31, 1999, the net assets heldL.P for sale totaled $136 million and have been reclassified as current assets in the balance sheet.million. During the first quartersix months of 1999, MAP recorded an estimateda pretax loss of $16 million related to the sale. Scurlock had been reported as part of the Marathon Group's refining, marketing and transportation operating segment. On June 1, 1999, the Marathon Group announced that it had signed a definitive agreement to sell Carnegie Natural Gas Company and affiliated subsidiaries (Carnegie) to Equitable Resources, Inc. The transaction is expected to close later this year. Carnegie is engaged in natural gas production, transmission, distribution, sales and storage activities in Pennsylvania and West Virginia. At June 30, 1999, the net assets held for sale have been included in other current assets in the balance sheet. During the second quarter of 1999, the Marathon Group recorded an estimated pretax loss of $7 million related to the sale. Carnegie has been reported as part of the refining, marketing and transportationMarathon Group's other energy related businesses operating segment. 8.5. 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: 3338 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8.5. (Continued)
Total (In millions) E&P RM&T OERB Segments - -------------------------------------------------------------------------------- FIRSTSECOND QUARTER 1999 Revenues: Customer $572 $4,179 $82 $4,833$689 $4,637 $113 $5,439 Intersegment (a) 34 5 9 484 6 44 Intergroup (a) 34 - 4 78 Equity in earnings of unconsolidated affiliates 1 3 84 5 12 Other 13 10 6 6 3 1529 ------ ------ ------ ------ Total revenues $616 $4,193 $106 $4,915 ====== ====== ====== ====== Segment income $36 $45 $15 $96 ====== ====== ====== ====== FIRST QUARTER 1998 Revenues: Customer $518 $4,579 $96 $5,193 Intersegment (a) 43 1 2 46 Intergroup (a) 4 - 3 7 Equity in earnings (loss) of unconsolidated affiliates (1) 3 5 7 Other 1 13 2 16 ------ ------ ------ ------ Total revenues $565 $4,596 $108 $5,269$743 $4,655 $134 $5,532 ====== ====== ====== ====== Segment income $124 $128 $14 $266$228 $19 $371 ====== ====== ====== ====== SECOND QUARTER 1998 Revenues: Customer $499 $4,928 $66 $5,493 Intersegment (a) 41 1 2 44 Intergroup (a) 2 - 1 3 Equity in earnings of unconsolidated affiliates 2 3 1 6 Other 20 11 3 34 ------ ------ ------ ------ Total revenues $564 $4,943 $73 $5,580 ====== ====== ====== ====== Segment income $73 $397 $3 $473 ====== ====== ====== ====== (a)Intersegment and intergroup sales and transfers were conducted on an arms-arm's- length basis.
3439 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 8.5. (Continued)
Total (In millions) E&P RM&T OERB Segments - -------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1999 Revenues: Customer $1,261 $8,816 $195 $10,272 Intersegment (a) 68 9 15 92 Intergroup (a) 7 - 8 15 Equity in earnings of unconsolidated affiliates 4 7 13 24 Other 19 16 9 44 ------ ------ ------ ------ Total revenues $1,359 $8,848 $240 $10,447 ====== ====== ====== ====== Segment income $160 $273 $34 $467 ====== ====== ====== ====== SIX MONTHS ENDED JUNE 30, 1998 Revenues: Customer $1,017 $9,520 $162 $10,699 Intersegment (a) 84 2 4 90 Intergroup (a) 6 - 4 10 Equity in earnings of unconsolidated affiliates 1 6 6 13 Other 21 24 5 50 ------ ------ ------ ------ Total revenues $1,129 $9,552 $181 $10,862 ====== ====== ====== ====== Segment income $197 $525 $17 $739 ====== ====== ====== ====== (a) Intersegment and intergroup sales and transfers were conducted on an arm's- length basis.
40 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued) The following schedule reconcilesschedules reconcile segment revenues and income to amounts reported in the Marathon Group financial statements:
FirstSecond Quarter Ended March 31June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $4,915 $5,269$5,532 $5,580 Items not allocated to segments: Loss on ownership change in MAP - (2) Other (7) - Elimination of intersegment revenues (44) (44) Administrative revenues - (4) ------ ------ Total Group revenues $5,481 $5,530 ====== ====== Income: Income for reportable segments $371 $473 Items not allocated to segments: Loss on ownership change in MAP - (2) Administrative expenses (31) (21) Inventory market valuation adjustments 66 3 Other (a) (7) - ------ ------ Total Group income from operations $399 $453 ====== ====== (a)Represents estimated loss on sale of Carnegie.
41 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5. (Continued)
Six Months Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Revenues of reportable segments $10,447 $10,862 Items not allocated to segments: Gain on ownership change in MAP - 248246 Other (16)(23) 24 Elimination of intersegment revenues (48) (46)(92) (90) Administrative revenues - 3(1) ------ ------ Total Group revenues $4,851 $5,498$10,332 $11,041 ====== ====== Income: Income for reportable segments $96 $266$467 $739 Items not allocated to segments: Gain on ownership change in MAP - 248246 Administrative expenses (26) (38)(57) (59) Inventory market valuation adjustments 349 25415 28 Other (a) (16)(23) (99) ------ ------ Total Group income from operations $403 $402$802 $855 ====== ====== (a)Represents in 1999, estimated loss on sale of Scurlock and Carnegie, and in 1998, international exploration and production property impairments, MAP transition charges and gas contract settlement.
356. The items below are included in both revenues and costs and expenses, resulting in no effect on income.
(In millions) ------------------------------- Second Quarter Six Months Ended Ended June 30 June 30 1999 1998 1999 1998 ---- ---- ---- ---- Consumer excise taxes on petroleum products and merchandise $1,003 $958 $1,916 $1,834 Matching crude oil and refined product buy/sell transactions settled in cash 698 994 1,570 1,982
PAGE> 42 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 9.7. The method of calculating net income per common share for the Marathon Stock and Steel Stock reflects the Board's intent that the separately reported earnings and surplus of the Marathon Group and the U. S. Steel Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income per share is based on the weighted average number of common shares outstanding. Diluted net income per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. See Note 9 of the Notes to USX Consolidated Financial Statements for the computation of income per share. 8. Inventories are carried at the lower of cost or market. Cost of inventories of crude oil and refined products is determined under the last- in, first-out (LIFO) method.
(In millions) ------------------------ March 31June 30 December 31 1999 1998 ----------- ----------- Crude oil and natural gas liquids $707$712 $731 Refined products and merchandise 1,1021,153 1,023 Supplies and sundry items 107110 107 ------ ------ Total (at cost) 1,9161,975 1,861 Less inventory market valuation reserve 202136 551 ------ ------ Net inventory carrying value $1,714$1,839 $1,310 ====== ======
The inventory market valuation reserve reflects the extent that the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. The reserve is decreased to reflect increases in market prices and inventory turnover and increased to reflect decreases in market prices. Changes in the inventory market valuation reserve result in noncash charges or credits to costs and expenses. For additional information, see discussion of results of operations in the Marathon Group's Management's Discussion and Analysis of Financial Condition and Results of Operations. 10.9. At March 31,June 30, 1999, accounts payable includes an estimated income tax payable to the U. S. Steel Group of $13$24 million, determined in accordance with the tax allocation policy discussed in Note 2. PAGE> 43 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 10. During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major elements of their refining, marketing and transportation (RM&T) operations. On January 1, 1998, Marathon transferred certain RM&T net assets to MAP, a new consolidated subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange for a 38% interest in MAP. The acquisition was accounted for under the purchase method of accounting. The purchase price was determined to be $1.9 billion, based upon an external valuation. The change in Marathon's ownership interest in MAP resulted in a gain of $246 million, which is included in the first six months 1998 revenues. Effective August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas exploration and production company. Results for 1999 include the operations of Marathon Canada Limited, formerly known as Tarragon. 11. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The Marathon Group is subject to federal, state, local and foreign laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At March 31,June 30, 1999, and December 31, 1998, accrued liabilities for remediation totaled $59 million and $48 million.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 $42$47 million at March 31,June 30, 1999, and $41 million at December 31, 1998. 36 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 11. (Continued) 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 quartersix months of 1999 and for the years 1998 and 1997, such capital expenditures totaled $15$29 million, $124 million and $81 million, respectively. The Marathon Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. 44 MARATHON GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 11. (Continued) At March 31,June 30, 1999, and December 31, 1998, accrued liabilities for platform abandonment and dismantlement totaled $147$142 million and $141 million, respectively. Guarantees by USX and its consolidated subsidiaries of the liabilities of an affiliated entity of the Marathon Group totaled $131 million at March 31,June 30, 1999, and December 31, 1998. At March 31,June 30, 1999, the Marathon Group's pro rata share of obligations of LOOP LLC and various pipeline affiliates secured by throughput and deficiency agreements totaled $165$163 million. Under the agreements, the Marathon Group is required to advance funds if the affiliates are unable to service debt. Any such advances are prepayments of future transportation charges. The Marathon Group's contract commitments to acquire property, plant and equipment and long-term investments at March 31,June 30, 1999, totaled $675$861 million compared with $624 million at December 31, 1998. 3745 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The Marathon Group includes Marathon Oil Company ("Marathon") and certain other subsidiaries of USX Corporation ("USX"), which are engaged in worldwide exploration and production of crude oil and natural gas; domestic refining, marketing and transportation of petroleum products primarily through Marathon Ashland Petroleum ("MAP"), owned 62% by Marathon; and other energy related businesses. Net income and related per share amounts are net of Ashland Inc.'s 38% minority interest in MAP's income. The Management's Discussion and Analysis should be read in conjunction with the Marathon Group's Financial Statements and Notes to Financial Statements. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on pages 51 and 52.page 61. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the Marathon Group. These statements typically contain words such as "anticipates", "believes", "estimates", "expects", "targets", "scheduled" or similar words indicating that future outcomes are uncertain. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the Marathon Group, see Supplementary Data - Disclosures About Forward-Looking Statements in USX's 1998the USX Annual Report on Form 10-K.10-K for the year ended December 31, 1998. 3846 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Revenues for the second quarter and first quartersix months of 1999 and 1998 are summarized in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ----- ----- ----- ----- Sales by product: Refined products $1,748 $2,126 Merchandise 459 403 Liquid hydrocarbons 498 420 Natural gas 291 345 Transportation and other products 59 79 Exploration & production ("E&P") $743 $564 $1,359 $1,129 Refining, marketing & transportation 4,655 4,943 8,848 9,552 Other energy related businesses 134 73 240 181 ------ ------ ------ ------ Revenues of reportable segments $5,532 $5,580 $10,447 $10,862 Items not allocated to segments: Gain on ownership change in MAP - (2) - 246 Other (a) (7) - 248 Other (b) 11 26(23) 24 Elimination of intersegment revenues (44) (44) (92) (90) Administrative revenues - (4) - (1) ------ ------ Subtotal 3,066 3,647 Excise taxes (c)(e) 913 863 Matching buy/sell transactions (d)(e) 872 988 ------ ------ Total Group revenues $4,851 $5,498$5,481 $5,530 $10,332 $11,041 ====== ====== - -------- (a) See Note 4 to the Marathon Group Financial Statements for a discussion of the gain on ownership change in MAP. (b) Includes dividend and affiliate income, gains and losses on disposal of assets and other income. (c)====== ======
Items included in both revenues and costs and expenses, resulting in no effect on income:
Consumer excise taxes on petroleum products and merchandise. (d)merchandise $1,003 $958 $1,916 $1,834 Matching crude oil and refined product buy/sell transactions settled in cash. (e) Includedcash 698 994 1,570 1,982 - --------- (a)Represents in both revenues1999, loss on sale of Scurlock and operating costs, resultingCarnegie, and in no effect on income.1998, a gas contract settlement.
Revenues (excluding matching buy/sell transactions and excise taxes) decreasedE&P revenues increased by $581$179 million in the second quarter of 1999 from the comparable prior-year period. The increase primarily reflected increased domestic liquid hydrocarbon prices and volumes. For the first six months of 1999, E&P revenues increased by $230 million from the prior-year period due to higher domestic liquid hydrocarbon volumes and prices and international gas volumes, partially offset by lower worldwide natural gas prices. Refining, marketing and transportation revenues decreased by $288 million in the second quarter of 1999 from the comparable prior-year period. The decrease primarily reflected lower averagethe loss of revenues from Scurlock Permian LLC, partially offset by higher volumes of refined product sales, increased refined product prices and worldwide liquid hydrocarbon and natural gas prices, partially offset by higher merchandise sales. For the first six months of 1999, refining, marketing and transportation revenues decreased by $704 million from the prior-year period primarily due to the factors discussed previously, except for refined product prices, which decreased. Merchandise sales increased by $52 million and increased worldwide crude oil$108 million from last year's second quarter and natural gas volumes.first six months, respectively. 3947 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Other energy related businesses revenues increased by $61 million in the second quarter of 1999 from the comparable prior-year period. For the first six months of 1999, revenues increased by $59 million from the prior-year period. The increase in both periods primarily reflected increased oil and gas resale activity and higher equity earnings from increased pipeline throughput. Income from operations for the second quarter and first quartersix months of 1999 and 1998 are summarizedset forth in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ----- ----- ----- ----- Exploration & production ("E&P")&P Domestic $38 $74$93 $41 $131 $115 International (2) 50 ---- ----(a) 31 32 29 82 ------ ------ ------ ------ Income for E&P reportable segment 36 124 73 160 197 Refining, marketing & transportation 45 128228 397 273 525 Other energy related businesses (a) 15 14 ---- ----(b) 19 3 34 17 ------ ------ ------ ------ Income for reportable segments $96 $266$371 $473 $467 $739 Items not allocated to reportable segments: Administrative expenses (b) $(26) $(38)(c) $(31) $(21) $(57) $(59) IMV reserve adjustment (c) 349 25(d) 66 3 415 28 Estimated loss on sale of Scurlock Permian LLC (d) (16)assets (e) (7) - (23) - Gain on ownership change & transition chargestrans. charges-MAP (f) - MAP (e)(2) - 225223 E&P int'l impairment & domesticdom. contract settlement (f)(g)- - - (76) ----- ----------- ------ ------ ------ Total Group income from operations $403 $402 $399 $453 $802 $855 ====== ====== ====== ====== - -------- (a)Includes marketingWhere applicable, second quarter and transportation ofsix months 1999 results include Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was acquired by Marathon on August 11, 1998. (b)Includes domestic natural gas and crude oil marketing and transportation, and power generation. (b)(c)Includes the portion of the Marathon Group's administrative costs not charged to the operating segments and the portion of USX corporate general and administrative costs allocated to the Marathon Group. (c)(d)The inventory market valuation ("IMV") reserve reflects the extent to which the recorded LIFO cost basis of crude oil and refined products inventories exceeds net realizable value. (d)For additional information regarding the estimated loss on sale of Scurlock Permian LLC, seeSee Note 78 to the Marathon Group Financial Statements. (e)For additional information regarding the loss on the sale of Scurlock Permian LLC and the estimated loss on the sale of Carnegie Natural Gas Company and affiliated subsidiaries, see Note 4 to the Marathon Group Financial Statements. (f)The gain on ownership change and one-time transition charges relatedrelate to the formation of MAP. For additional discussion of the gain on ownership change in MAP, see Note 410 to the Marathon Group Financial Statements. (f)(g)This represents a write-off of certain non-revenue producing international investments and the gain from the resolution of contract disputes with a purchaser of Marathon'sthe Marathon Group's natural gas production from certain domestic properties.
Income for reportable segments in the first quarter of 1999 decreased by $170 million from last year's first quarter, due primarily to lower worldwide liquid hydrocarbon and natural gas prices and lower refined product margins. 4048 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Income for reportable segments in the second quarter of 1999 declined by $102 million from last year's second quarter, due primarily to lower refined product margins, partially offset by higher domestic liquid hydrocarbon prices and production and increased refined product sales volumes. Income for reportable segments in the first six months of 1999 decreased by $272 million from the first six months of 1998, due primarily to lower refined product margins and lower natural gas prices, partially offset by increased domestic liquid hydrocarbon production and higher domestic liquid hydrocarbon prices. Worldwide E&P ("upstream") segment income in the second quarter of 1999 increased by $51 million from last year's second quarter. Results in the first six months of 1999 decreased by $37 million from the same period in 1998. Domestic E&P income in the second quarter of 1999 increased by $52 million from last year's second quarter. This increase was mainly due to higher liquid hydrocarbon prices. Results in the first six months of 1999 increased by $16 million from the same period in 1998. The increase was primarily due to lower exploration expense, increased liquid hydrocarbon and natural gas production and increased liquid hydrocarbon prices, partially offset by lower natural gas prices. International E&P income in the second quarter of 1999 decreased by $88$1 million from last year's first quarter, primarily due to the factors discussed below. Domestic E&P incomesecond quarter. Results in the first quartersix months of 1999 decreased by $36$53 million from last year's first quarter.the same period in 1998. This decrease was mainly due to lower liquid hydrocarbon and natural gas prices, partially offset by higher liquid hydrocarbon volumes primarily from the Gulf of Mexico and lower exploration expense. For additional information regarding production and prices, refer to the Supplemental Statistics on pages 51 and 52. International E&P income in the first quarter of 1999 decreased by $52 million from last year's first quarter. This decrease was mainly due toEurope, higher exploration expense and lower liquid hydrocarbon and natural gas prices. For additional information regarding production and prices, refer to the Supplemental Statistics on pages 51 and 52. Refining, marketing and transportation ("downstream") segment income in the firstsecond quarter of 1999 decreased by $83$169 million from last year's second quarter. Results in the first quarter.six months 1999 decreased by $252 million from the same period in 1998. The declinedecreases in downstream segment income was primarilyboth periods were mainly due to lower refined product margins, and an additional accrual for variable pay plan awards for the 1998 performance year, partially offset by a recognized marked-to marketmark-to-market derivative gaingains from nonhedging activities, increased refined product sales volumes and increased merchandise sales volumes at Speedway SuperAmerica LLC. Other energy related businesses segment income in the firstsecond quarter of 1999 increased by $1$16 million from last year's second quarter. Results in the first quarter.six months of 1999 increased by $17 million from the same period in 1998. The 1999 results included a reversal of abandonment accruals ($10 million) resulting from revised cost estimates and higher equity earnings as a result of increased pipeline throughput. Items not allocated to reportable segments Administrative expenses in the firstsecond quarter of 1999 decreasedincreased by $12$10 million from last year's firstsecond quarter. The decreaseincrease was primarily due to lowerhigher accruals for employee benefit plans. IMV reserve adjustment - When U. S. Steel Corporation acquired Marathon Oil Company in March 1982, crude oil and refined product prices were at historically high levels. In applying the purchase method of accounting, the Marathon Group's crude oil and refined product inventories were revalued by reference to current prices at the time of acquisition, and this became the new LIFO cost basis of the inventories. Generally accepted accounting principles require that inventories be carried at lower of cost or market. Accordingly, the Marathon Group has established an IMV reserve to reduce the cost basis of its inventories to net realizable value. Quarterly adjustments to the IMV reserve result in noncash charges or credits to income from operations. 49 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- When Marathon acquired the crude oil and refined product inventories associated with Ashland's RM&T operations on January 1, 1998, the Marathon Group established a new LIFO cost basis for those inventories. The acquisition cost of these inventories lowered the overall average cost of the Marathon Group's combined RM&T inventories. As a result, the price threshold at which an IMV reserve will be recorded has also been lowered. This acquisition resulted in a one-time reduction in the IMV reserve, yielding a net favorable IMV reserve adjustment of $25 million in the first quarter of 1998. 41 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- These adjustments affect the comparability of financial results from period to period as well as comparisons with other energy companies, many of which do not have such adjustments. Therefore, the Marathon Group reports separately the effects of the IMV reserve adjustments on financial results. In management's opinion, the effects of such adjustments should be considered separately when evaluating operating performance. Net interest and other financial costs in the first threesix months of 1999 increased by $21$43 million from the comparable 1998 period, mainly due to increased costs resulting from higher average debt levels and lower interest income. The provision for estimated income taxes in the first quartersix months of 1999 decreased by $47$49 million from last year's first quarterthe comparable 1998 period due to a decline in income before taxes. Net income for the second quarter and first quartersix months decreased by $64$28 million and $92 million, respectively, in 1999 from 1998, primarily reflecting the factors discussed above. Cash Flows - ---------- Net cash provided from (used in) operating activities was ($26)$337 million in the first quartersix months of 1999, compared with $509$847 million in the first quartersix months of 1998. The $535$510 million decrease mainly reflected lower profitability, unfavorable working capital changes decreased profitability and a distributiondistributions by MAP to Ashland of $103$206 million in the first quartersix months of 1999 as compared to $24$130 million in first quarter 1998.the comparable 1998 period. The favorable working capital change reported in the first quartersix months of 1998 was due to a temporary change in excise tax payment patterns, which reversed later in the year. Capital expenditures in the first quartersix months of 1999 totaled $196$532 million, compared with $219$550 million in the first quarter of 1998.comparable 1998 period. For additional information regarding capital expenditures, refer to the Supplemental Statistics on page 50.61. Cash from disposal of assets was $21$178 million in the first quarter ofsix months 1999, compared with $4$30 million in the first quarter of 1998.comparable 1998 period. Proceeds in 1999 were mainly from the sale of Scurlock Permian LLC and domestic production properties. 50 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The net change in restricted cash was a net withdrawal of $14$19 million in the first quartersix months of 1999, compared to a net deposit of $2$383 million in the first quarter of 1998.comparable 1998 period. The 1999 amount primarily represents net cash withdrawn for the purchase and cash deposited from the sale of domestic production properties. The 1998 amount primarily represents the proceeds from a Cdn$550 million loan agreement Marathon entered into to finance a portion of the Tarragon Oil and Gas Limited acquisition, which were restricted to collateralize a loan and invested in short-term investments. Loans and advances to affiliates were $20$56 million in the first quartersix months of 1999, compared with $22$58 million in the first quarter of 1998.comparable 1998 period. Cash outflows in both periods mainly reflected funding provided to equity affiliates for capital projects, primarily the Sakhalin II project in Russia. Repayments of loans and advances to affiliates were $63 million in the first six months of 1998 as a result of repayments by Sakhalin Energy Investment Company, Ltd. of advances made by Marathon in conjunction with the Sakhalin II project in Russia. Contract commitments for property, plant and equipment acquisitions and long-term investments at March 31,June 30, 1999 totaled $675$861 million compared with $624 million at year-endDecember 31, 1998. 42 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------The increase was primarily due to the pending acquisition of certain Ultramar Diamond Shamrock refining, marketing and transportation assets. Financial obligations, which consist of the Marathon Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt specifically attributed to the Marathon Group, increased by $188$119 million in the first quartersix months of 1999. Financial obligations increased primarily because capital expenditures and dividend payments exceeded cash from operating activities.activities and proceeds from asset sales. These obligations were partially funded by a reduction in cash of $78$58 million. For further details, see USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Derivative Instruments - ---------------------- See Quantitative and Qualitative Disclosure About Market Risk for discussion of derivative instruments and associated market risk for the Marathon Group. Liquidity - --------- For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. 51 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Environmental Matters, Contingencies and Commitments - ---------------------------------------------------- The Marathon Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the Marathon Group's products and services, operating results will be adversely affected. The Marathon Group believes that substantially all of its competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and whether or not it is engaged in the petrochemical business, power business or the marine transportation of crude oil and refined products. USX has been notified that it is a potentially responsible party ("PRP") at 1816 waste sites related to the Marathon Group under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as of March 31,June 30, 1999. In addition, there are 87 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 98108 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 of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The Marathon Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. 4352 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- 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. Although MAP has been advised as to certain compliance issues including one contested Notice of Violation regarding MAP's Detroit refinery, it is not known when complete findings on the results of the inspections will be issued. In an action separate fromThus far, MAP has been served with two Notices of Violation ("NOV") and two Findings of Violation in connection with the multi-mediamulti- media inspection the Department of Justice filedat its Detroit refinery, and a civil complaint in February 1999, alleging violationNOV as a result of the Clean Air Act with respectinspection at its Robinson refinery. MAP can contest the factual and the legal basis for the allegations prior to benzene releases at the Robinson refinery.EPA taking enforcement action. At this time, it is not known when complete findings on the results of these multi-media inspections will be issued. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the Marathon Group involving a variety of matters, including laws and regulations relating to the environment. See Note 11 to the Marathon Group Financial Statements for a discussion of certain of these matters. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the Marathon Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the Marathon Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. Outlook - ------- The outlook regarding the Marathon Group's upstream revenues and income is largely dependent upon future prices and volumes of liquid hydrocarbons and natural gas. Prices have historically been volatile and have frequently been affected by unpredictable changes in supply and demand resulting from fluctuations in worldwide economic activity and political developments in the world's major oil and gas producing and consuming areas. Any significant decline in prices could have a material adverse effect on the Marathon Group's results of operations. A prolonged decline in such prices could also adversely affect the quantity of crude oil and natural gas reserves that can be economically produced and the amount of capital available for exploration and development. 53 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Marathon's 1999 worldwide liquid hydrocarbon production is currently estimated to average in the range of 225,000215,000 to 230,000220,000 barrels per day ("bpd"). This estimate assumes production from the Stellaria field in the Gulf of Mexico will commence in the third quarter 1999, rather than the second quarter 1999 as originally anticipated. Worldwide natural gas volumes for 1999 are expected to average in the range of 1.33 tobe approximately 1.35 billion cubic feet per day. Liquidday ("bcfpd"). These estimates reflect the anticipated sale of Marathon fields in Egypt, as well as timing delays in both domestic and international offshore developments. Marathon expects liquid hydrocarbon production to increase approximately seven percent annually in 2000 and 2001. Natural gas volumes in 2000 are expected to be flat with 1999 and up approximately four percent in 2001. These projections are based on known discoveries and do not include the impact of potential or future major acquisitions, dispositions, or wildcat drilling. On July 16, 1999, Marathon agreed to sell its interests in two fields in Egypt. The transaction included a 50 percent interest in the Ashrafi oilfield offshore in the southwest Gulf of Suez and a 25 percent interest in the El Qar'a natural gas and condensate field in the Nile Delta. Marathon's second quarter production estimates for 2000was about 6,000 bpd from the two fields. The transaction is expected to close in the third quarter of 1999 with an effective date of June 1, 1999. The sale is subject to final approval by the Egyptian authorities, consents of third parties and 2001satisfaction of customary closing conditions. On July 5, 1999, oil production commenced from the Piltun-Astokhskoye field offshore Sakahlin Island in the Russian Far East Region. Marathon holds a 37.5% interest in Sakhalin Energy Investment Company Ltd. ("Sakhalin Energy"), which is the first enterprise to develop and produce oil and gas resources in Russia under a production sharing agreement. Production, limited to the ice-free season of the year, is expected to reach 90,000 gross barrels of oil per day by the start of the second producing season in 2000. On May 27, 1999, Marathon was awarded a 10 percent equity interest in Blocks 31 and 32 offshore Angola. The blocks, which are stilllocated approximately 90 miles northwest of Luanda in linewater depths between 5,400 and 9,200 feet, are adjacent to Blocks 15 and 17 where major discoveries by others have been made. Marathon, bidding with previous estimates.others, was recently awarded three parcels offshore Nova Scotia. Marathon and its partners submitted high gross bids of $118 million with Marathon's share being approximately $39 million. The high bids represent exploration expenditures which will be made during the initial five years of a nine-year license. Marathon has a 30, 33.75 and 37.5 percent interest in Parcels 11, 18 and 10, respectively and will be operator of Parcel 11. 4454 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- The above discussion includes forward-looking statements with respect to worldwideprojected liquid hydrocarbon production levels and natural gas volumes for 1999, 2000 and 2001 commencementand timing/levels of projects and dates of initial production.gross production for Sakhalin Energy. These statements are based on a number of assumptions, including (among others) prices, amount of capital available for exploration and development, worldwide supply and demand for petroleum products, regulatory constraints, reserve estimates, production decline rates of mature fields, timing of commencing production from new wells, timing and results of future development drilling, reserve replacement rates, and other geological, operating and economic considerations. In addition, development of new production properties in countries outside the United States may require protracted negotiations with host governments and is frequently subject to political considerations, such as tax regulations, which could adversely affect the timing and economics of projects. To the extent these assumptions prove inaccurate and/or negotiations and other considerations are not satisfactorily resolved, actual results could be materially different than present expectations. Downstream income of the Marathon Group is largely dependent upon refining crack spreads (the difference between light product prices and crude costs). Refined product margins have been historically volatile and vary with the level of economic activity in the various marketing areas, the regulatory climate and the available supply of crude oil and refined products. Refined product demand in the United States is expected to be positively impacted as demand for transportation fuels keeps pace with economic activity. In addition, asphalt demand should reflect increased activity in infrastructure repairs. The foregoing discussion includes forward-looking statements with respect to demand for petroleum products. Some factors that could potentially cause actual results to differ materially from present expectations include (among others) pricing, supply and demand for petroleum products, regulatory constraints and unforeseen hazards such as weather conditions. In MarchOn May 24, 1999, MAP signed an agreement with Ultramar Diamond Shamrock ("UDS") to purchase 179 UDS owned-and-operated convenience stores, 5 product terminals and an assignment of supply contracts for about 240 branded UDS jobber stations in Michigan. Additionally, MAP will lease a definitive agreement to sell Scurlock Permian LLC to Plains Marketing, L.P. for approximately $136 million. Scurlock Permian LLC, a wholly owned subsidiary of MAP, is engaged in crude oil transportation, trading and marketing in an area reachingsixth product terminal from the Rocky Mountains to the Gulf Coast.UDS. The transaction is expected to close in the second quarter with an effective date of April 1, 1999. MAP recorded an estimated pretax loss on the sale of Scurlock Permian LLC of $16 million in first quarter 1999. The statement as to the expected close of the transactionlater this year. This is a forward-looking statement. Some factors that could potentially affect the timing of the UDS closing include (among others) receipt of government approvals, consents of third parties and satisfaction of customary closing conditions. On May 20, 1999, MAP reached an agreement with P.M.I. Comercio Internacional, S.A. de C.V., (PMI), an affiliate of Petroleos Mexicanos, (PEMEX), to purchase approximately 90,000 bpd of heavy Maya crude oil. The multi-year contract will begin upon completion of a 34,500 bpd delayed-coking project planned for MAP's refinery in Garyville, Louisiana. This work is anticipated to be completed in fourth quarter 2001. This is a forward-looking statement. Some factors that could potentially affect the completion of the delayed-coking project include (among others) levels of cash flow from operations, obtaining the necessary construction and environmental permits, unforeseen hazards such as weather conditions and regulatory constraints. On August 3, 1999, Marathon announced a voluntary early retirement incentive program. Eligibility is extended to approximately 500 employees in specific organizations and groups, which does not include MAP and Information Technology employees. Retirement effective dates under this program will be November 1, 1999. 4555 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Year 2000 Readiness Disclosure - ------------------------------ The Marathon Group is executing Year 2000 action plans which include: * prioritizing and focusing on those computerized and automated systems and processes ("systems") critical to the Marathon Group's operations in terms of material operational, safety, environmental and financial risk to the company. * allocating and committing appropriate resources to fix the problem. * developing detailed contingency plans for those systems critical to the operations in terms of material operational, safety, environmental and financial risk to the company. * communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, and the inclusion of Year 2000 readiness language in purchase orders and contracts. * performing rigorous Year 2000 tests of critical systems. * participating in, and exchanging Year 2000 information with industry trade associations, such as the American Petroleum Institute ("API"). * engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 inventory, assessment and readiness. State of Readiness Information Technology (IT) systems are 89%96% ready as of March 31,June 30, 1999. This is a decrease from 92% as of January 31, 1999 as reported in USX's 1998 Form 10-K. As a result of internal audits and continuing business unit review, additional IT systems (third party software packages) were identified in February and March 1999. These additional IT systems have been inventoried and assessed, however, Year 2000 readiness has not been achieved for all of them. As a result, the overall readiness percent for IT systems decreased. Efforts continue to identify systems and processes that may be affected by the Year 2000, however, management believes the higher-risk systems have been identified. IT systems not Year 2000 ready at March 31, 1999 are expected to be completed100% ready by September 30, 1999 with minor exceptions. The exceptions identified currently are third party software vendors whose upgrade schedules have been delayed until fourth quarter 1999. In these cases, contingency plans are scheduled to be in place by September 30, 1999 for the affected software to ensure there will be no significant business impact. Inventorying of Non-Information Technology (Non-IT) systems was 98% complete as of March 31, 1999. Assessmentand assessment of these inventoried systems was 86% completed.99% complete as of June 30, 1999. Of the inventory assessed, few systems require remediation. All Non-IT systems are scheduled to be Year 2000 ready by the end of the third quarter of 1999 except for a few system remediations which will be implemented during fourth quarter 1999 in conjunction with scheduled plant maintenance shutdowns.1999. The following chart provides the percent of completion for the (i) inventory of systems and processes that may be affected by the Year 2000 ("Y2K Inventory"), (ii) analysis performed to determine the Year 2000 date impact of inventoried systems and processes ("Y2K Impact Assessment") and (iii) overall Year 2000 readiness of the Marathon Group's Year 2000 inventory ("Y2K Readiness of Overall Inventory"). The percent of completion for Y2K Readiness of overallOverall Inventory includes all inventory systems not date impacted, those systems already Year 2000 ready and those corrected and made Year 2000 ready through the renovation/replacement, testing and implementation activities.activities; however, the implementation of certain Year 2000 ready IT systems has been deferred until the fourth quarter of 1999 due to third party software vendor upgrade schedules. 4656
MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------
Percent Completed Y2K Y2K Readiness As of March 31,June 30, 1999 Impact of Y2K Assess- Overall Inventory ment Inventory ------ ------ ------ Information Technology 100% 100% 89%96% Non-Information Technology 98% 86% 75%99% 99% 97%
Third Parties Third parties include suppliers, customers and vendors. Third party vendors are covered under the IT readiness efforts. Contacts have been made with all critical third parties to determine if they will be able to provide their services to the Marathon Group after the Year 2000. EachThird party vendors' responses have been graded in order to rate their Y2K readiness. Those with an average or below average grade have been contacted directly by the appropriate business units to discuss their Y2K readiness. Using a Year 2000 ready test environment, testing is underway on third party software to validate that it is Year 2000 ready. In addition, third party software that poses a risk to a business unit is reviewing the compliancy status of critical third parties and contacting those that have not responded or have responded with an unacceptable status. Third parties risk to the business are being addressed as a part ofincluded within the business unit's contingency planning and the appropriate plans are being developed to overcome any potential risk.plans. The Costs to Address Year 2000 Issues Total costs incurred as of June 30, 1999, were $25 million, including $11 million of incremental costs. The total estimated costs associated with Year 2000 readiness are $42expected to be $39 million, of which $21$20 million are incremental costs. This reflects an increasea decrease of $6$3 million from the previously reported estimate, of which $2 million are incremental costs. The increase in estimated costs results primarily from increased use of external consultants, increased internal staffing, and the cost of replacing non-compliant non-IT systems. Total costs incurred as of March 31, 1999, were $21 million, including $9 million of incremental costs. Year 2000 costs may increase in the future as a result of problems that may be encountered during testing and requirements of the contingency plans that are being developed.estimate. The Risks of the Company's Year 2000 Issues The most reasonably likely worst case Year 2000 scenario would be the inability of critical third party suppliers, such as utility providers, telecommunication companies, and other critical suppliers, such as 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. In addition, theThese critical third party suppliers have generally indicated that they are or expect to be Year 2000 ready in a timely manner. The lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is also a concern. Without quality information from suppliers, specifically on embedded chip technology, some Year 2000 problems could go undetected until after January 1, 2000. According to information received from suppliers of these systems, oil and gas industry surveys and Marathon Group's own test results, These embedded systems do not appear to pose significant problems or involve the possibility of major failures that could affect vital operations. An additional risk is the ability of some third party software vendors to provide timely software upgrades to make their product Year 2000 ready. Communication continues with these vendors to expedite the completion of upgrades as much as possible. Contingency plans are being developed in case timely upgrades are not available. 4757 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- In a report issued February 24, 1999 by the United States Senate Special Committee on the Year 2000 Technology Problem, the committee expressed concern that many of the countries from which the United States imports oil are significantly behind the United States in their Year 2000 remediation efforts and oil production and transportation could be at some risk. In 1998, 64% or 577,000 bpd of the crude oil processed by MAP's refineries was from foreign sources and acquired primarily from various foreign national oil companies, producing companies and traders. Of this total, approximately 330,000 bpd was acquired from the Middle East. According to a report by the American Petroleum Institute and a February 1999 report by the United States Department of Energy, the four largest exporters of petroleum to the United States expect all critical systems to be Year 2000 compliantready by the end of 1999. If any country is unable to export oil, other countries may be able to compensate.increase production and exports. According to the API report, in any event, importingimport deliveries of oil would not stop instantaneouslyimmediately as there is always some 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 interruptioninterruptions in foreign oil supplies. The Marathon Group could be adversely affected by a disruption in supply if alternate sources of supply wereare not available. In the initial review of assets to be acquired from UDS, Marathon determined that certain facilities and systems may not be completely Y2K ready. Once the transaction is closed, Marathon will undertake thorough Y2K inventory, assessment and remediation (where necessary) of acquired facilities. Marathon expects this work can be completed by December 31, 1999. If the closing is delayed or if the required remediation is greater than expected, there is a risk some of the acquired facilities may not be Y2K ready. The completion percentages in the chart on page 56 do not include UDS IT or Non-IT systems. Contingency Planning The Marathon Group has participated in an API work group to develop a Year 2000 contingency plan format. This format, which addresses all Year 2000 areas of concern, has been adopted as the industry standard. Marathon business units are working on the "Plan Formulation" step of the APIreviewing their written contingency plan format.plans within their business units and with other business units with which they interact. Overall, contingency planning is 39%66% completed, which is slightly ahead of the 30% milestone that was projected for March 31, 1999.schedule. These plans are to be completed and tested, when practical, by the end of the third quarter of 1999. A multiple occurrence emergency response drill for Year 2000 was conducted during the last week of July 1999. Planning is planned forprogressing with the third quarter of 1999. The foregoingyear-end Marathon Group Year 2000 monitoring center. Marathon will also be participating in the API Year 2000 monitoring center currently in development. These centers will be used to track and report the Y2K impact as each time zone rolls over to January 1, 2000. As Marathon Group business units and API member companies report problems and related solutions, the information will be shared with other business units so they can proactively prepare to deal with a similar situation. This discussion includes forward-looking statements of the Marathon Group's efforts and management's expectations and costs relating to Year 2000 readiness. These statements are based on certain assumptions including, but not limitedThe Marathon Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review,review. Also, the Marathon Group's ability to mitigate Year 2000 risks could be adversely impacted by the effectiveness and execution of contingency plans and the level of incremental costs associated with Year 2000 readiness efforts. If these assumptions prove to be incorrect, actual results could differ materially from present expectations.plans. 4858 MARATHON GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Accounting Standard - -------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This new standard requires recognition of all derivatives as either assets or liabilities at fair value. This new standard may result in additional volatility in both current period earnings and other comprehensive income as a result of recording recognized and unrecognized gains and losses resulting from changes in the fair value of derivative instruments. At adoption this new standard requires a comprehensive review of all outstanding derivative instruments to determine whether or not their use meets the hedge accounting criteria. It is possible thatUpon adoption, there willmay be derivative instruments employed in our businessesby USX that do not meet all of the designated hedge criteria and they will be reflected in income on a mark-to-market basis. Based upon the strategies currently used by USX and the level of activity related to forward exchange contracts and commodity-based derivative instruments in recent periods, USX does not anticipate the effect of adoption to have a material impact on either financial position or results of operations of the Marathon Group. The effective date of SFAS No. 133 was amended by SFAS No. 137. USX plans to adopt the standard effective January 1, 2000,2001, as required. 4959 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Management Opinion Concerning Derivative Instruments - -------------------------------------- USX utilizes derivative instruments principally in hedging activities, whereby gains and losses are generally offset by price changes in the underlying commodity. Recently, the Marathon Group's risk management policy was expanded to include the use of derivative instruments for certain nonhedging and trading activities. These instruments will be marked-to-market each period and the related income or loss will be included in income from operations. Management believes that use of derivative instruments along with risk assessment procedures and internal controls does not expose the Marathon Group to material risk. The use of derivative instruments could materially affect the Marathon Group's results of operations in particular quarterly or annual periods. However, management believes that use of derivative instruments will not have a material adverse effect on financial position or liquidity. Commodity Price Risk and Related Risks - -------------------------------------- Sensitivity analysis of the incremental effects on pretax income of hypothetical 10% and 25% changes in commodity prices for open derivative commodity instruments as of March 31,June 30, 1999 are provided in the following table: (a)table(a):
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments Marathon Group (b) (c) Crude oil (price decrease)increase) (d) $4.8 $28.3$21.8 $56.9 Natural gas (price decrease) (d) 9.2 23.79.6 24.8 Refined products (price decrease)increase) (d) 4.1 10.8.1 .2 (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 March 31,June 30, 1999. Marathon Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to March 31,June 30, 1999 would cause future pretax income effects to differ from those presented in the table. (b) The number of net open contracts varied throughout firstsecond quarter 1999 from a low of 4532,476 contracts at March 11,June 30, 1999, to a high of 19,22334,199 contracts at March 31,April 16, 1999, and averaged 8,32125,914 for the quarter. The derivative commodity instruments used and hedging positions taken also varied throughout firstsecond quarter 1999, and will continue to vary in the future. Because of these variations in the composition of the portfolio over time, the number of open contracts, by itself, cannot be used to predict future income effects. (c) The calculation of sensitivity amounts for basis swaps assumes that the physical and paper indices are perfectly correlated. Gains and losses on options are based on changes in intrinsic value only. 60 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- (d) The direction of the price change used in calculating the sensitivity amount for each commodity reflects that which would result in the largest incremental decrease in pretax income when applied to the derivative commodity instruments used to hedge that commodity.
50 MARATHON GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Interest Rate Risk - ------------------ As of March 31,June 30, 1999, the discussion of the Marathon Group's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- As of March 31,June 30, 1999, the discussion of the Marathon Group's foreign currency exchange rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Equity Price Risk - ----------------- As of March 31,June 30, 1999, the Marathon Group had no material exposure to equity price risk. Safe Harbor - ----------- The Marathon Group's quantitativeQuantitative and qualitative disclosures about market riskQualitative 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 programsderivative usage may differ materially from those discussed in the forward-looking statements. 5161
MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ----------------------------------- ($------------------------------------------------ Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in Millions) First Quarter Ended March 31 --------------millions) 1999(a) 1998 ---- ----1999(a) 1998 - -------------------------------------------------------------------------------- INCOME (LOSS) FROM OPERATIONS Exploration & Production ("E&P") Domestic $38 $74$93 $41 $131 $115 International (2) 5031 32 29 82 ----- ----- ----- ----- Income For E&P Reportable Segment 36 124 73 160 197 Refining, Marketing & Transportation 45 128228 397 273 525 Other Energy Related Businesses (b) 15 14Businesses(b) 19 3 34 17 ----- ----- ----- ----- Income For Reportable Segments $96 $266$371 $473 $467 739 Items Not Allocated To Reportable Segments: Administrative Expenses $(26) $(38)$(31) $(21) $(57) $(59) Inventory Market Val. Res. Adjustment 349 2566 3 415 28 Estimated lossLoss on Sale of Scurlock Permian (16)Assets (7) - (23) - Gain on Ownership Change & Transition Charges-MAPTrans. Charges - 225MAP - (2) - 223 E&P Int'l.Int'l Impairment & DomesticDom. Contract Settlement - - - (76) ---- ----------- ------ ------ ------ Marathon Group Income From Operations $403 $402$399 $453 $802 $855 CAPITAL EXPENDITURES Exploration & Production $149 $167$261 $256 $410 $423 Refining, Marketing & Transportation 46 5073 69 119 119 Other (c) 1 2 6 3 8 ----- ----- ----- ----- Total $196 $219$336 $331 $532 $550 EXPLORATION EXPENSE Domestic $22 $38$44 $54 $66 $92 International (d) 41 4415 21 56 65 ----- ----- ----- ----- Total $63 $82 INVESTMENTS IN AFFILIATES - $7 LOANS AND ADVANCES TO AFFILIATES $20 $22$59 $75 $122 $157 INVESTMENTS(RETURNS) & OTHER AFFILIATE ACTIVITY-NET $37 $(22) $56 $3 OPERATING STATISTICS Net Liquid Hydrocarbon Production (e): United States 143.1 125.8148.7 137.9 145.9 131.9 Europe 34.0 40.434.6 45.6 34.3 43.0 Other International 31.0 5.7 ----- -----29.8 13.8 30.4 9.8 ------ ------ ------ ------ Worldwide 208.1 171.9213.1 197.3 210.6 184.7 Net Natural Gas Production (f): United States 769.3 748.2741.8 723.2 755.5 735.6 Europe (g) 399.5 453.6346.9 402.8 373.1 428.0 Other International 189.5 13.1 -----171.0 12.7 180.2 12.9 ------ ------ ------- ------- Total Consolidated 1,358.3 1,214.91259.7 1138.7 1308.8 1176.5 Equity Affiliate 35.6 42.5 -----36.6 35.6 39.6 ------- ------- ------- ------- Worldwide 1,393.9 1,257.4
52
MARATHON GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Continued) (Unaudited) ----------------------------------- First Quarter Ended March 31 -------------- 1999(a) 1998 ---- ---- 1295.3 1175.3 1344.4 1216.1 Average Equity Sales Prices (h): Liquid Hydrocarbons (per Bbl) Domestic $9.16 $12.10$13.56 $9.97 $11.41 $10.98 International 10.73 13.7514.87 12.85 12.80 13.24 Natural Gas (per Mcf) Domestic $1.48 $1.90$1.81 $1.87 $1.64 $1.89 International 1.86 2.161.77 2.05 1.82 2.11 Crude Oil Refined (e) 848.2 905.3939.0 923.2 893.8 914.3 Refined Products Sold (e) 1,121.0 1,142.51259.3 1178.9 1190.5 1160.8 Matching buy/sell volumes included in refined products sold (e) 38.1 47.6.................... 56.0 32.1 47.1 39.8 - -------------------------- (a) Where applicable, results for firstsecond quarter and six months 1999 results include Marathon Canada Limited, formerly Tarragon Oil and Gas Limited, which was acquired by Marathon on August 12,11, 1998. (b) Includes domestic natural gas and crude oil marketing and transportation, and power generation. (c) Includes other energy related businesses and corporate capital expenditures. (d) IncludesSix months ended June 30, 1998 includes $30 million for impairment in the first quarter of 1998. (e) Thousands of barrels per day (f) Millions of cubic feet per day (g) Includes gas acquired for injection and subsequent resale of 2016.1, 17.8, 24.5 and 2625.2 mmcfd in the firstsecond quarters ofand six months year-to- date 1999 and 1998, respectively. (h) Prices exclude gains and losses from hedging activities.
5362 Part I - Financial Information (Continued): C. U. S. Steel Group
U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF OPERATIONS (Unaudited) ------------------------------------ FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions, except per share amounts) 1999 1998 1999 1998 - -------------------------------------------------------------------------------- REVENUES: Sales $1,246 $1,670$1,303 $1,689 $2,549 $3,359 Income (loss) from affiliates (23) 15(10) 28 (33) 43 Gain (loss) on disposal of assets (12) 1110 17 (2) 28 Other income (loss) 1 (1) 1 (1) ------ ------ ------ ------ Total revenues 1,211 1,6961,304 1,733 2,515 3,429 ------ ------ ------ ------ COSTS AND EXPENSES: Cost of sales (excludes items shown below) 1,157 1,4551,160 1,436 2,317 2,891 Selling, general and administrative expenses (credits) (70) (46)(95) (53) (165) (99) Depreciation, depletion and amortization 71 7779 72 150 149 Taxes other than income taxes 55 4857 61 112 109 ------ ------ ------ ------ Total costs and expenses 1,213 1,5341,201 1,516 2,414 3,050 ------ ------ ------ ------ INCOME (LOSS) FROM OPERATIONS (2) 162103 217 101 379 Net interest and other financial costs 820 22 28 50 ------ ------ ------ ------ INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS (10) 13483 195 73 329 Provision (credit) for estimated income taxes (1) 4728 59 27 106 ------ ------ ------ ------ INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (9) 8755 136 46 223 Extraordinary loss on extinguishment of debt, net of income tax - - 5 - ------ ------ ------ ------ NET INCOME (LOSS) (14) 8755 136 41 223 Dividends on preferred stock 2 23 3 5 5 ------ ------ ------ ------ NET INCOME (LOSS) APPLICABLE TO STEEL STOCK $(16) $85$52 $133 $36 $218 ====== ====== ====== ====== STEEL STOCK DATA: Income (loss) before extraordinary loss $(11) $85$52 $133 $41 $218 - Per share - basic (.13) .98.60 1.53 .47 2.51 - diluted (.13) .95.59 1.46 .47 2.41 Extraordinary loss, net of income tax - - 5 - - Per share - basic and diluted .05- - .06 - Net income (loss) $(16) $85$52 $133 $36 $218 - Per share - basic (.18) .98.60 1.53 .41 2.51 - diluted (.18) .95.59 1.46 .41 2.41 Dividends paid per share .25 .25 .50 .50 Weighted average shares, in thousands - Basic 88,368 86,60088,387 86,953 88,378 86,777 - Diluted 88,368 94,12592,647 94,507 88,379 94,314 Selected notes to financial statements appear on pages 56-61.65-71.
5463
U. S. STEEL GROUP OF USX CORPORATION BALANCE SHEET (Unaudited) ------------------------------------ March 31June 30 December 31 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $18$20 $9 Receivables, less allowance for doubtful accounts of $5 and $9 406423 392 Inventories 712768 698 Deferred income tax benefits 177176 176 ------ ------ Total current assets 1,3131,387 1,275 Investments and long-term receivables, less reserves of $3 and $10 637620 743 Property, plant and equipment, less accumulated depreciation, depletion and amortization of $6,000$6,075 and $5,939 2,5062,499 2,500 Prepaid pensions 2,2322,327 2,172 Other noncurrent assets 5651 59 ----------- ------ Total assets $6,744$6,884 $6,749 ====== ====== LIABILITIES Current liabilities: Notes payable $7$17 $13 Accounts payable 577612 501 Payroll and benefits payable 313315 330 Accrued taxes 137132 150 Accrued interest 711 10 Long-term debt due within one year 1115 12 ------ ------ Total current liabilities 1,0521,102 1,016 Long-term debt, less unamortized discount 444491 464 Long-term deferred income taxes 148174 129 Employee benefits 2,3192,316 2,315 Deferred credits and other liabilities 480474 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 2,0502,076 2,090 ------ ------ Total stockholders' equity 2,0532,079 2,093 ------ ------ Total liabilities and stockholders' equity $6,744$6,884 $6,749 ====== ====== Selected notes to financial statements appear on pages 56-61.65-71.
5564
U. S. STEEL GROUP OF USX CORPORATION STATEMENT OF CASH FLOWS (Unaudited) ------------------------------------ First QuarterSix Months Ended March 31June 30 (Dollars in millions) 1999 1998 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: Net income (loss) $(14) $87$41 $223 Adjustments to reconcile to net cash provided from operating activities: Extraordinary loss 5 - Depreciation, depletion and amortization 71 77150 149 Pensions and other postretirement benefits (51) (52)(143) (107) Deferred income taxes 22 4349 89 (Gain) loss on disposal of assets 12 (11)2 (28) Changes in: Current receivables - sold 30 - - operating turnover (33) 70(60) 94 Inventories (14) (13)(70) (33) Current accounts payable and accrued expenses 30 (44)76 (116) All other - net 22 (23)44 (29) ------ ------ Net cash provided from operating activities 80 134124 242 ------ ------ INVESTING ACTIVITIES: Capital expenditures (79) (57)(153) (136) Disposal of assets 2 24 15 Restricted cash -withdrawals - 3 - deposits (4) -(6) (3) Affiliates - investments - (66)net - (63) All other - net - 3(3) 13 ------ ------ Net cash used in investing activities (81) (118)(158) (171) ------ ------ FINANCING ACTIVITIES: Increase (decrease) in U. S. Steel Group's portion of USX consolidated debt 42 7105 (47) Specifically attributed debt repayments (8) -(11) (3) Steel Stock issued - 2 Cash restricted for redemption of debt - (7)25 Dividends paid (24) (24)(49) (48) ------ ------ Net cash provided from (used in) financing activities 10 (22)45 (73) ------ ------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9 (6)11 (2) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9 18 ------ ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $18 $12$20 $16 ====== ====== Cash provided from (used in)used in operating activities included: Interest and other financial costs paid (net of amount capitalized) $(25) $(23)$(42) $(39) Income taxes (paid) refunded,paid, including settlements with the Marathon Group (2) 16(5) (14) Selected notes to financial statements appear on pages 56-61.65-71.
5665 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 5766 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.The3. The U. S. Steel Group's total comprehensive income (loss) for the firstsecond quarter of 1999 and 1998 was $(18)$51 million and $87$134 million, respectively, and $33 million and $221 million for the first quartersix months of 1998.1999 and 1998, respectively. 4. The U. S. Steel Group consists of one operating segment, U. S. Steel. U. S. Steel is engaged in the production and sale of steel mill products, coke and taconite pellets. U. S. Steel also engages in the following related business activities: the management of mineral resources, domestic coal mining, engineering and consulting services, and real estate development and management. The results of segment operations are as follows:
Second Quarter Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Customer $1,292 $1,689 Intergroup (a) 11 - Equity in earnings (losses) of unconsolidated affiliates (10) 28 Other 11 16 ------ ------ Total revenues $1,304 $1,733 ====== ====== Segment income (loss) $(9) $154 ====== ====== (a) Intergroup sales and transfers were conducted on an arm's-length basis.
67 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 4. (Continued)
Six Months Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Customer $2,537 $3,358 Intergroup (a) 12 - Equity in earnings (losses) of unconsolidated affiliates (33) 43 Other 21 28 ------ ------ Total revenues $2,537 $3,429 ====== ====== Segment income (loss) $(68) $260 ====== ====== (a) Intergroup sales and transfers were conducted on an arm's-length basis.
The following schedules reconcile segment revenue and income (loss) to amounts reported in the U. S. Steel Group's financial statements:
Second Quarter Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues of reportable segment and Group revenues $1,304 $1,733 ====== ====== Income (loss) for reportable segment $(9) $154 Items not allocated to segment: Administrative expenses (8) (5) Pension credits 140 93 Costs related to former business activities (20) (25) ------ ------ Total Group income from operations $103 $217 ====== ======
68 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited)
4. (Continued) Six Months Ended June 30 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues of reportable segment $2,537 $3,429 Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - ------ ------ Total Group revenues $2,515 $3,429 ====== ====== Income (loss) for reportable segment $(68) $260 Items not allocated to segment: Administrative expenses (13) (14) Pension credits 248 186 Costs related to former business activities (44) (53) Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - ------ ------ Total Group income from operations $101 $379 ====== ======
5. The method of calculating net income (loss) per common share for the Steel Stock and Marathon Stock reflects the Board's intent that the separately reported earnings and surplus of the U. S. Steel Group and the Marathon Group, as determined consistent with the USX Restated Certificate of Incorporation, are available for payment of dividends on the respective classes of stock, although legally available funds and liquidation preferences of these classes of stock do not necessarily correspond with these amounts. Basic net income (loss) per share is calculated by adjusting net income for dividend requirements of preferred stock and is based on the weighted average number of common shares outstanding. Diluted net income (loss) per share assumes conversion of convertible securities for the applicable periods outstanding and assumes exercise of stock options, provided in each case, the effect is not antidilutive. See Note 7,9, of the Notes to USX Consolidated Financial Statements for the computation of income per share. 5.6. On March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI International Metals, Inc. (RTI). The deposit of the shares resulted in the satisfaction of USX's obligation under its 6-3/4% Exchangeable Notes (indexed debt) due February 1, 2000. Under the terms of the indenture, the trustee will exchange the RTI shares for the notes at maturity. The notes are exchangeable for shares of RTI common stock on a variable basis up to one share per note depending on the market price of RTI common stock at maturity. Ownership of any shares not required for satisfaction of the indexed debt will revert to USX. As a result of the above transaction, USX recorded in the first quarter of 1999 an extraordinary loss of $5 million, net of a $3 million income tax benefit, representing prepaid interest expense and the write-off of unamortized debt issue costs, and a pretax charge of $22 million, representing 5869 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 5.6. (Continued) the difference between the carrying value of the investment in RTI and the carrying value of the indexed debt, which is included in gain (loss) on disposal of assets. This transaction represents a noncash investing and financing activity of $56 million, which was the carrying value of the indexed debt at March 31, 1999. Additionally, a $13 million credit to adjust the indexed debt to settlement value at March 31, 1999, is included in net interest and other financial costs. The indexed debt adjustment in the first quarter of 1998 resulted in a charge of $4 million. In December 1996, USX had issued the $117 million of notes indexed to the common share price of RTI. At maturity, USX would have been required to exchange the notes for shares of RTI common stock, or redeem the notes for the equivalent amount of cash. Since USX's investment in RTI was attributed to the U. S. Steel Group, the indexed debt was also attributed to the U. S. Steel Group. USX had a 26% investment in RTI and accounted for its investment using the equity method of accounting. 6. The U. S. Steel Group consists of one operating segment, U. S. Steel. U. S. Steel is engaged in the production and sale of steel mill products, coke and taconite pellets. U. S. Steel also engages in the following related business activities: the management of mineral resources, domestic coal mining, engineering and consulting services, and real estate development and management. The results of segment operations are as follows:
First Quarter Ended March 31 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues: Customer $1,245 $1,669 Intergroup (a) 1 - Equity in earnings (loss) of unconsolidated affiliates (23) 15 Other 10 12 ------ ------ Total revenues $1,233 $1,696 ====== ====== Segment income (loss) $(59) $106 ====== ====== (a) Intergroup sales and transfers were conducted on an arm's-length basis.
59 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 6. (Continued) The following schedule reconciles segment revenue and income (loss) to amounts reported in the U. S. Steel Group's financial statements:
First Quarter Ended March 31 (In millions) 1999 1998 - -------------------------------------------------------------------------------- Revenues of reportable segment $1,233 $1,696 Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - ------ ------ Total Group revenues $1,211 $1,696 ====== ====== Income (loss) for reportable segment $(59) $106 Items not allocated to segment: Administrative expenses (5) (9) Pension credits 108 93 Costs related to former business activities (24) (28) Loss on investment in RTI stock used to satisfy indexed debt obligations (22) - ------ ------ Total Group income (loss) from operations $(2) $162 ====== ======
7. Income (loss) from operations includes net periodic pension credits of $53$88 million and $51 million in the firstsecond quarter of 1999 and 1998, respectively, ($141 million and $102 million in the first six months of 1999 and 1998, respectively.) These pension credits are primarily noncash and for the most part are included in selling, general and administrative expenses. In the second quarter of 1999, the U. S. Steel Group recognized a one- time pretax settlement gain of $35 million, related mainly to pension costs of employees who retired under the U. S. Steel Group 1998 voluntary early retirement program. This noncash settlement gain is included in selling, general and administrative expenses. 8. Inventories are carried at the lower of cost or market. Cost of inventories is determined primarily under the last-in, first-out (LIFO) method.
(In millions) ------------------------- March 31June 30 December 31 1999 1998 ----------- ----------- Raw materials $157$128 $185 Semi-finished products 319368 282 Finished products 187217 182 Supplies and sundry items 4955 49 ---- ---- Total $712$768 $698 ==== ====
6070 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 9. The U. S. Steel Group participates in an agreement (the program) to sell an undivided interest in certain accounts receivable. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield, based on defined short-term market rates, is transferred to the buyers. At March 31,June 30, 1999, the amount sold under the program that had not been collected was $350 million, which will be forwarded to the buyers at the end of the agreement, or in the event of earlier contract termination. If the U. S. Steel Group does not have a sufficient quantity of eligible accounts receivable to reinvest in for the buyers, the size of the program will be reduced accordingly. The buyers have rights to a pool of receivables that must be maintained at a level of at least 115% of the program size. In the event of a change in control of USX, as defined in the agreement, the U. S. Steel Group may be required to forward payments collected on sold accounts receivable to the buyers. 10. At March 31,June 30, 1999, accounts receivable includes an estimated income tax receivable from the Marathon Group of $13$24 million, determined in accordance with the tax allocation policy discussed in Note 2. 11. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters including laws and regulations relating to the environment. Certain of these matters are discussed below. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group financial statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. See discussion of Liquidity in USX Consolidated Management's Discussion and Analysis of Financial Condition and Results of Operations. The U. S. Steel Group is subject to federal, state and local laws and regulations relating to the environment. These laws generally provide for control of pollutants released into the environment and require responsible parties to undertake remediation of hazardous waste disposal sites. Penalties may be imposed for noncompliance. At March 31,June 30, 1999, and December 31, 1998, accrued liabilities for remediation totaled $104$101 million and $97 million, respectively. It is not presently possible to estimate the ultimate amount of all remediation costs that might be incurred or the penalties that may be imposed. For a number of years, the U. S. Steel Group has made substantial capital expenditures to bring existing facilities into compliance with various laws relating to the environment. In the first quartersix months of 1999 and for the years 1998 and 1997, such capital expenditures totaled $6$13 million, $49 million and $43 million, respectively. The U. S. Steel Group anticipates making additional such expenditures in the future; however, the exact amounts and timing of such expenditures are uncertain because of the continuing evolution of specific regulatory requirements. 71 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 11. (Continued) Guarantees by USX of the liabilities of affiliated entities of the U. S. Steel Group totaled $86$87 million at March 31,June 30, 1999. In the event that any defaults of guaranteed liabilities occur, USX has access to its interest in the assets of the affiliates to reduce U. S. Steel Group losses resulting from these guarantees. As of March 31,June 30, 1999, the largest guarantee for a single affiliate was $58$59 million. 61 U. S. STEEL GROUP OF USX CORPORATION SELECTED NOTES TO FINANCIAL STATEMENTS (Continued) -------------------------------------------------- (Unaudited) 11. (Continued) The U. S. Steel Group's contract commitments to acquire property, plant and equipment at March 31,June 30, 1999, totaled $168$122 million compared with $188 million at December 31, 1998. 12. On April 12, 1999, USX and Kobe Steel, Ltd. (Kobe Steel) announced that they had entered into a letter of intent with Blackstone Capital Partners II (Blackstone) to combine the steelmaking and bar producing assets of USS/Kobe Steel Company (USS/Kobe) with companies controlled by Blackstone, Republic Technologies International, Inc., Republic Engineered Steels, Inc. and Bar Technologies, Inc. (collectively Republic). In addition, on August 6, 1999, USX agreed to a $15 million equity investment in Republic when the combination is consummated. USX currently owns 50% of USS/Kobe and will own approximately 15% of Republic. The seamless pipe business of USS/Kobe is excluded from this transaction and will continue to operate as a joint venture between USX and Kobe Steel. The transaction was subject to numerous conditions, including financing. As of the date of issuance of the accompanying financial statements, it was uncertain whether several of these conditions would be resolved and the transaction would be completed. Due to these uncertainties, neither USX nor USS/Kobe recognized any financial effects of the transaction in the second quarter 1999. On August 1,6, 1999, U. S. Steel, along with several major steel competitors, facesRepublic received financing commitments sufficient to complete the expirationtransaction, which is scheduled to be closed on August 13, 1999. The estimated fair value of USX's investment in Republic, based upon preliminary information supplied by Republic, is approximately $80 million less than USX's carrying value of its investment in the steelmaking and bar producing assets of USS/Kobe. Based on the resolution of the labor agreement withuncertainties and the United Steelworkersanticipated closing of America. U. S. Steel's abilitythe transaction, USX expects to negotiaterecognize an acceptable labor contract is essential to its ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow.estimated impairment of $80 million in the third quarter of 1999. 6272 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ----------------------------------------------- The U. S. Steel Group includes U. S. Steel, which is engaged in the production, transportation and sale of steel mill products, coke, and taconite pellets; the management of mineral resources; domestic coal mining; real estate development; and engineering and consulting services. Certain business activities are conducted through joint ventures and partially owned companies, such as USS/Kobe Steel Company ("USS/Kobe"), USS-POSCO Industries ("USS-POSCO"), PRO-TEC Coating Company ("PRO-TEC"), Transtar, Inc. ("Transtar"), Clairton 1314B Partnership, and VSZ U. S. Steel, s. r.o. Management's Discussion and Analysis should be read in conjunction with the U. S. Steel Group's Financial Statements and Notes to Financial Statements. The discussion of Results of Operations should be read in conjunction with the Supplemental Statistics provided on page 73.85. Certain sections of Management's Discussion and Analysis include forward- looking statements concerning trends or events potentially affecting the businesses of the U. S. Steel Group. These statements typically contain words such as "anticipates," "believes," "estimates," "expects" or similar words indicating that future outcomes are not known with certainty and subject to risk factors that could cause these outcomes to differ significantly from those projected. In accordance with "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, these statements are accompanied by cautionary language identifying important factors, though not necessarily all such factors, that could cause future outcomes to differ materially from those set forth in forward-looking statements. For additional risk factors affecting the businesses of the U. S. Steel Group, see Supplementary Data -- Disclosures About Forward- Looking InformationStatements in USX 1998 Form 10-K. Results of Operations - --------------------- Revenues for the second quarter and first quartersix months of 1999 and 1998 are set forth in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ------ ------ ------ ------ Sales $1,246 $1,670$1,303 $1,689 $2,549 $3,359 Income (loss) from affiliates (23) 15(10) 28 (33) 43 Gain (loss) on disposal of assets (12) 11 ------------10 17 (2) 28 Other income (loss) 1 (1) 1 (1) ----- ----- ----- ----- Total revenues 1,211 1,696 ====== ======Revenues $1,304 $1,733 $2,515 $3,429
Total revenues decreased by $485$429 million and $914 million in the second quarter and first quartersix months of 1999, respectively, compared with the first quarter ofsame periods in 1998. The decreasedecreases primarily reflected lower average steel product prices (average steel product prices(prices decreased $40/ton)$53/ton and $46/ton in the second quarter and first six months of 1999, respectively), lower shipment volumes (total steel shipments(shipments decreased approximately 552,000 tons)309,000 tons and 861,000 tons in the second quarter and first six months of 1999, respectively), and lower income from affiliates. 6373 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Income (loss) from operations for the U. S. Steel Group for the second quarter and first quartersix months of 1999 and 1998 areis set forth in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ------ ------ ------ ------ Segment income (loss) for U. S. Steel Operations (a) $(59) $106$(9) $154 $(68) $260 Items not allocated to segment: Pension credits 108140 93 248 186 Administrative expenses (8) (5) (9)(13) (14) Costs related to former business activities (b) (24) (28)(20) (25) (44) (53) Loss on investment in RTI stock used to satisfy indexed debt obligations (c) - - (22) - ------ ----------- ----- ----- ----- Total Group income (loss) from operations $(2) $162 ====== ======$103 $217 $101 $379 ===== ===== ===== ===== - ----------- (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 56 to the U. S. Steel Group Financial Statements.
Segment income for U. S. Steel operations Segment income for U. S. Steel operations which decreased $165$163 million and $328 million in the second quarter and first quartersix months of 1999, respectively, compared with the first quarter of 1998, included a $10 million charge for environmental accruals. In addition to the effect of this item, the decreasesame periods in 1998. The decreases in segment income in the first quarter of 1999 for U. S. Steel operations waswere primarily due to lower average steel prices, lower shipments and lower income from affiliates,affiliates. Segment income for the first six months included a $10 million charge for environmental accruals. Results in second quarter 1998 included a favorable $30 million (net of charges and increased pension costs chargedreserves) insurance litigation settlement pertaining to U. S. Steel operations.the Gary (Ind.) Works No. 8 blast furnace explosion. Steel product prices and shipment volumes continue to be negatively affected by the ongoing effects of steel imports, including the recent increase in imports of cut-to-length plate, and the continued weakness in tubular and plate markets. Items not allocated to segment Pension credits associated with pension plan assets and liabilities allocated to pre-1987 retirees, and former businesses, and certain corporate activities are not included in segment income for U. S. Steel operations. These pension credits, which are primarily noncash, totaled $108$140 million and $248 million in the second quarter and first quartersix months of 1999, respectively, compared to $93 million and $186 million in the same period in 1998. Pension credits in the second quarter and first six months of 1999 included $35 million for a one-time favorable settlement primarily related to the 1998 voluntary early retirement program for salaried employees completed during the second quarter of 1998.1999. Pension credits, combined with pension costs included in segment income for U. S. Steel operations, resulted in net pension credits of $52$88 million and $140 74 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- million in the second quarter and first quartersix months of 1999, respectively, compared to $48 million and $49$97 million in the first quarter ofsame periods in 1998. Future net pension credits can be volatile dependentdepending 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 Note 7 to the U. S. Steel Group Financial Statements. 64 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION --------------------------------------------discussion of "Outlook" below. Net interest and other financial costs for the second quarter and first quartersix months of 1999 and 1998 are set forth in the following table:
FirstSecond Quarter Six Months Ended March 31Ended June 30 June 30 (Dollars in millions) 1999 1998 - --------------------------------------------------------------------------------1999 1998 ------ ------ ------ ------ Net interest and other financial costs $8$20 $22 $28 $50 Less: Favorable (unfavorable) adjustmentadjustments to carrying value of indexed debt(a)debt (a) - - 13 (4) ------ ----------- ----- ----- ----- Net interest and other financial costs adjusted to exclude above item $21 $24 ====== ======$20 $22 $41 $46 ===== ===== ===== ===== - ----- - ------- (a)In December 1996, USX issued $117 million of 6 3/4% Exchangeable Notes Due February 1, 2000 ("indexed debt") indexed to the price of RTI common stock. On March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million common shares it owned in RTI. The deposit of shares resulted in the satisfaction of USX's obligation under its indexed debt. 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. If the market price of RTI common stock at maturity exceeds $21.375 per share the entire 5.5 million shares will not be required to satisfy USX's obligation under the indexed debt. Ownership of any shares not required for satisfaction of the indexed debt will revert to USX. A maximum of 838,000 shares, or 4% of the shares of RTI common stock outstanding on March 31, 1999, would revert to USX if the market price of RTI common stock at maturity equals or exceeds $25.23 per share. There will be no indexed debt adjustment or interest expense related to indexed debt in future quarters. For further discussion, see Note 56 to the U. S. Steel Group Financial Statements.
Adjusted net interest and other financial costs decreased by $3$2 million and $5 million in the second quarter and first quartersix months of 1999, respectively, as compared with the same periodperiods in 1998, due primarily to lower average interest rates.1998. The provision for estimated income taxes in the second quarter and first quartersix months of 1999 decreased compared to the same periodperiods in 1998 due to a decline in income from operations. The provision for estimated income taxes for the second quarter and first six months of 1998 included a $9 million favorable foreign tax adjustment as a result of a favorable resolution of foreign tax litigation. The extraordinary loss on extinguishment of debt of $5 million (net of $3 million income tax benefit) in the first quartersix 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 56 to the U. S. Steel Group Financial Statements. Net loss in the first quarter of 1999 was $14income decreased $81 million compared with net income of $87and $182 million in the second quarter and first quarter of 1998. Net income decreased $101 million in the first quartersix months of 1999, respectively, compared to the same periodperiods in 1998, primarily reflecting the factors discussed above. Operating Statistics - -------------------- FirstSecond quarter and first six months of 1999 steel shipments of 2.42.5 million tons and raw steel production of 2.74.9 million tons, decreased 19%11% and 13%15%, respectively, from the same period in 1998. Raw steel capability utilization in the first quarter of 1999 averaged 87.1%, compared to 99.6% in the same period in 1998. Production and raw steel capability utilization in the first quarter of 1999 continued to be negatively impacted by the ongoing effects of steel imports. 6575 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- periods in 1998. Raw steel production in the second quarter of 1999 of 3.1 million tons, increased 7% from the same period in 1998. Raw steel production in the first six months of 1999 of 5.8 million tons, decreased 3% from the same period in 1998. Raw steel capability utilization in the second quarter of 1999 averaged 96.9%, compared to 90.9% in the same period in 1998. Raw steel capability utilization in the first six months of 1999 averaged 92.0%, compared to 95.3% in the same period in 1998. Steel shipments, production and raw steel capability utilization in the first six months of 1999 continued to be negatively impacted by the ongoing effects of steel imports and weak plate and tubular markets. Cash Flows - ---------- Net cash provided from operating activities decreased $54in the first six months of 1999 was $124 million, compared with $242 million in the first quarter of 1999, compared with the first quarter ofsame period in 1998. The decrease wasfirst six months of 1998 included proceeds of $38 million for the insurance litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace explosion. Excluding this item, net cash provided from operating activities decreased $80 million due mainly to decreased profitability. Capital expenditures in the first quartersix months of 1999 were $79$153 million, compared with $57$136 million in the same period in 1998. Contract commitments for capital expenditures at March 31,June 30, 1999, totaled $168$122 million, compared with $188 million at year-end 1998. Net cash used in investments in equity affiliates in the first quartersix months of 1998 of $66$63 million primarily reflects funding for entry into a joint venture in Slovakia with VSZ a.s. ("VSZ"). In February 1998, this 50-50 joint venture, doing business as VSZ U. S. Steel, s. r.o., took over ownership and operation of an existing tin mill facility at VSZ's Ocel plant in Kosice, with annual production capability of 140,000 metric tons. Financial obligations (excluding the noncash satisfaction of the indexed debt) increased by $34$94 million in the first quartersix months of 1999. Financial obligations consist of the U. S. Steel Group's portion of USX debt and preferred stock of a subsidiary attributed to both groups, as well as debt and financing agreements specifically attributed to the U. S. Steel Group. The increase in financial obligations resulted from capital expenditures and dividend payments exceeding cash from operating activities. Derivative Instruments See Quantitative and Qualitative Disclosures About Market Risk for discussion of derivative instruments and associated market risk for U. S. Steel Group. Liquidity For discussion of USX's liquidity and capital resources, see Management's Discussion and Analysis of USX Consolidated Financial Condition, Cash Flows and Liquidity. Environmental Matters, Litigation and Contingencies - --------------------------------------------------- The U. S. Steel Group has incurred and will continue to incur substantial capital, operating and maintenance, and remediation expenditures as a result of environmental laws and regulations. In recent years, these expenditures have been mainly for process changes in order to meet Clean Air Act obligations, although ongoing compliance costs have also been significant. To the extent these expenditures, as with all costs, are not ultimately reflected in the prices of the U. S. Steel Group's products and services, operating results will be adversely affected. The U. S. Steel Group believes that all of its domestic competitors are subject to similar environmental laws and regulations. However, the specific impact on each competitor may vary depending on a number of factors, including the age and location of its operating facilities, marketing areas, production processes and the specific products and services it provides. To the extent that competitors are not 76 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- required to undertake equivalent costs in their operations, the competitive position of the U. S. Steel Group could be adversely affected. USX has been notified that it is a potential responsible party (``PRP'') at 25 waste sites related to the U. S. Steel Group under the Comprehensive Environmental Response, Compensation and Liability Act (``CERCLA'') as of March 31,June 30, 1999. In addition, there are 1312 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 3432 additional sites related to the U. S. Steel Group where remediation is being sought 66 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- under other environmental statutes, both federal and state, or where private parties are seeking remediation through discussions or litigation. At many of these sites, USX is one of a number of parties involved and the total cost of remediation, as well as USX's share thereof, is frequently dependent upon the outcome of investigations and remedial studies. The U. S. Steel Group accrues for environmental remediation activities when the responsibility to remediate is probable and the amount of associated costs is reasonably determinable. As environmental remediation matters proceed toward ultimate resolution or as additional remediation obligations arise, charges in excess of those previously accrued may be required. USX is the subject of, or a party to, a number of pending or threatened legal actions, contingencies and commitments relating to the U. S. Steel Group involving a variety of matters, including laws and regulations relating to the environment, certain of which are discussed in Note 11 to the U. S. Steel Group Financial Statements. The ultimate resolution of these contingencies could, individually or in the aggregate, be material to the U. S. Steel Group Financial Statements. However, management believes that USX will remain a viable and competitive enterprise even though it is possible that these contingencies could be resolved unfavorably to the U. S. Steel Group. Outlook - ------- Shipment volumes and average steel product prices in the secondthird quarter for U. S. Steel Group and its domestic joint ventures are expected to be lowerhigher than the second quarter 1999. However, the favorable effects of 1998increased shipments are expected to be more than offset by lower price realizations due to the ongoing effectscontinued unfavorable product mix, including a substantial amount of steel imports, including the recent increasesemi- finished sales, and continued weakness in imports of cut-to-length plate and continued weak tubular markets. The third quarter will also be impacted by higher benefit costs associated with the recently ratified labor contract and unfavorable manufacturing costs related to planned outages. In recent years, demand for steel in the United States has been at high levels. Any weakness in the U.S.United States economy for capital goods or consumer durables could further adversely impact U. S. Steel Group's product prices and shipment levels. DuringOn June 25, 1999, U. S. Steel reached an agreement with the United Steel Workers of America ("USWA") on a new five-year labor contract covering approximately 14,500 employees effective August 1, 1999. The union membership ratified the contract on August 6, 1999. The new labor contract, which includes $2.00 in hourly wage increases phased in over the term of the agreement beginning in 2000 as well as pension and other benefit improvements for active and retired employees and spouses, will result in higher labor and benefit costs for the U. S. Steel Group each year throughout the term of the contract. Net pension credits for the U. S. Steel Group are estimated to be reduced by approximately $5 million per month beginning August 1, 1999 for the balance of the year. As a result of the pension changes in the new labor contract, net pension credits for 1999 are now expected to total approximately $225 million, which includes the $35 million for the one-time favorable settlement recorded in the second quarter of 1999, the Fairfield Works seamless pipe mill1999. 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 down for approximately five weeks formaterially affected. 77 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- During the third quarter of 1999, a major upgrade which will improve the productivity and quality from that facility. On August 1, 1999,number of minor outages are planned at various U. S. Steel along with several major steel competitors, faces the expiration of the labor agreement with the United Steelworkers of America ("USWA"). U. S. Steel's abilityGroup facilities that in aggregate are expected to negotiate an acceptable labor contract is essential to ongoing operations. Any labor interruptions could have an adverse effect on operations, financial results and cash flow.result in higher manufacturing costs. Steel imports to the United States accounted for an estimated 26%25%, 30% and 24% of the domestic steel market in the first twofour months of 1999, and for the years 1998 and 1997, respectively. Steel imports of cut-to-length plate and cold-rolled increased 40%28% and 22%, respectively, in the first twofour months of 1999, compared to the same period in 1998. On September 30, 1998, U. S. SteelUSX joined with 11 other producers, the USWA and the USWAIndependent Steelworkers Union ("ISU") to file trade cases against Japan, Russia, and Brazil. Those filings contendcontended 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. The U. S. International Trade Commission ("ITC"), in its preliminary determination in November 1998, foundIn the domestic steel industry was being threatened with material injury as a result of imports of hot-rolled carbon sheet products from these three countries and,case against Japan, on February 12,April 28, 1999, the U.S. Department of Commerce ("Commerce"), announced preliminaryfinal 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 Brazil. Thereafter, on February 22, 1999, the Clinton Administration, 67 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- contemporaneous with announcing preliminaryAD duty determinations on hot-rolled product imports from Russia,and, contemporaneously, announced that it had initialed twoentered into agreements with Brazil to suspend the Russian government concerning steel imports. Oneinvestigations. 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 suspendswith Russia to suspend the investigation concerning hot-rolled product imports and the second isinvestigation. 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. On April 29, 1999, Commerce announced its final decision that Japan was dumping hot-rolled steel in the domestic market. Japan could be liable to pay duties rangingPlate products from 17.86 percent to 67.14 percent on the products. The Commerce decision means importers of steel from Japan will be required to post bonds to cover the duties on the imports, pending the outcome of a separate ruling by the ITC. The preliminary injury determination and the preliminary duty determinationsRussia are subject to further investigation bya suspension agreement signed in 1997. USX is evaluating whether to appeal the ITC on imports from Japan, Russia andrecently announced suspension agreements with Brazil and Commerce on imports from Russia and Brazil.Russia. On February 16, 1999, U.S. SteelUSX 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-lengthcut-to- length plate products. Anti-dumpingAD cases were filed against all the countries and countervailingCVD duty cases were filed against six of the countries. On April 2, 1999, the ITC issued its preliminary determination that the domestic industry was being injured or threatened with injury as the result of imports from six of the countries. (TheThe ITC determined that the volume of imports from Macedonia and the Czech Republic were negligible and had declined in importance in the United States market relative to the other countries.) On July 20, 1999, Commerce announced preliminary AD and CVD duty determinations. The preliminary injury determination and the preliminary duty determinations are subject to further investigation by the ITC and Commerce. On June 2, 1999, USX joined with eight other producers and the USWA and the ISU to file trade cases against twelve countries (Argentina, Brazil, China, Indonesia, Japan, Russia, South Africa, Slovakia, Taiwan, Thailand, Turkey, and Venezuela) concerning imports of cold-rolled products. AD cases were filed against all the countries and CVD duty cases were filed against Brazil, Indonesia, Thailand, and Venezuela. On July 19, 1999, the ITC issued its preliminary determination that the domestic industry was being injured or threatened with injury as the result of imports from all of the countries. The ITC, by a divided vote, decided to discontinue the CVD investigations of subsidized imports from Indonesia, Thailand, and Venezuela. Commerce is expected to announce preliminary duty determinations later in early July.the year. These cases are subject to further investigation by both the ITC and Commerce. On June 30, 1999, USX joined with four other producers and the USWA to file trade cases against five countries (the Czech Republic, Japan, Mexico, Romania, and 78 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- South Africa) concerning imports of large and small diameter carbon and alloy standard, line, and pressure pipe. On July 20, 1999, Commerce announced its decision to initiate an investigation and the ITC's preliminary staff hearing was conducted on July 21, 1999. The ITC's preliminary injury determination is expected to be announced in mid-August and, assuming a preliminary determination of injury, Commerce is expected to announce preliminary duty determinations later in the to-be-announcedyear. Any preliminary injury determination and preliminary duty determinations are subject to further investigation by the ITC and Commerce. USX intends to file additional anti-dumpingantidumping and countervailing duty petitions if unfairly traded imports adversely impact, or threaten to adversely impact, the results of the U. S. Steel Group. The forgoing discussion includes statements concerning anticipated steel demand, steel pricing, product mix, and shipment levels are forward-looking and are based upon assumptions as to future product demand, prices and mix, and levels of steel production capability, production and shipments. These forward-looking statements can be affected by imports, domestic and international economies, domestic production capacity, and customer demand. In the event these assumptions prove to be inaccurate, actual results may differ significantly from those presently anticipated. On April 12, 1999, U. S. Steel GroupUSX and Kobe Steel, Ltd. (Kobe Steel) announced that they had entered into a letter of intent with Blackstone Capital Partners II (Blackstone) to combine USS/KOBEthe steelmaking and bar producing assets in Lorain, Ohioof USS/Kobe Steel Company (USS/Kobe) with those of companies controlled by Blackstone, (RepublicRepublic Technologies International, Inc., Republic Engineered Steels, Inc., and Bar Technologies, Inc.) (collectively Republic). The transaction, whichIn addition, on August 6, 1999, USX agreed to a $15 million equity investment in Repubic when the combination is subject to numerous conditions, is not expected to close until summer.consummated. USX currently owns 50% of USS/Kobe and will own approximately 15% of Republic. The seamless pipe business of USS/KOBEKobe is excluded from this transaction and will continue to operate as a joint venture partnership between USX and Kobe Steel. The transaction was subject to numerous conditions, including financing. As of the date of the issuance of the accompanying financial statements, it was uncertain whether several of these conditions would be resolved and the transaction would be completed. Due to these uncertainties, neither USX nor USS/Kobe recognized any financial effects of the transaction in the second quarter 1999. On August 6, 1999, Republic received financing commitments sufficient to complete the transaction, which is scheduled to be closed on August 13, 1999. The estimated fair value of USX's investment in Republic, based upon preliminary information supplied by Republic, is approximately $80 million less than USX's carrying value of its investment in the steelmaking and Kobe would jointly own approximately 30%bar producing assets of USS/Kobe. Based on the resolution of the uncertainties and the anticipated closing of the transaction, USX expects to recognize an estimated impairment of $80 million in the third quarter of 1999. The statement with respect to the amount of the estimated impairment is forward-looking and is based on a number of assumptions including but not limited to fair value determination of Republic, equity investment and asset allocation. In the event these assumptions prove to be inaccurate, the actual impairment may differ significantly from the amount presently anticipated. If the transaction closes as anticipated, Republic has stated that it expects to incur operating losses through 2000, which will include restructuring charges associated with the consolidation of the combined operations. PendingUSX will recognize its share of any such losses under the equity method of accounting. 6879 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- negotiation of a definitive agreement, USX may need to consider an impairment of the carrying value of its investment in USS/Kobe Steel later in 1999. The need to recognize any impairment loss will depend upon the resolution of the contingencies to the proposed transaction, decisions to temporarily idle any operations or to reduce the workforce, and the completion of accounting valuations of the net assets of the combined businesses. Year 2000 Readiness Disclosure - ------------------------------ A multi-functional Year 2000 task force continues to execute a preparedness plan which addresses readiness requirements for business computer systems, technical infrastructure, end-user computing, third parties, manufacturing, environmental operations, systems products produced and sold, and dedicated R&D test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan which includes: . prioritizing and focusing on those computerized and automated systems and processes critical to the operations in terms of material safety, operational, environmental, quality and financial risk to the company. . allocating and committing appropriate resources to fix the problem. . communicating with, and aggressively pursuing, critical third parties to help ensure the Year 2000 readiness of their products and services through use of mailings, telephone contacts, on-site assessments and the inclusion of Year 2000 readiness language in purchase orders and contracts. . performing rigorous Year 2000 tests of critical systems. . participating in, and exchanging Year 2000 information with industry trade associations, such as the American Iron & Steel Institute, Association of Iron & Steel Engineers and the Steel Industry Systems Association. . engaging qualified outside engineering and information technology consulting firms to assist in the Year 2000 impact assessment and readiness effort. State of Readiness The Year 2000 inventory and date impact assessment activities for both information technology (IT) and non-IT systems/processes within the U. S. Steel Group's progressGroup are complete. IT systems/processes are 98% Year 2000 ready as of June 30, 1999, and the non-IT area is 99% ready. Progress on achieving Year 2000 readiness is currently on pace with stated objectives. Certainfor both critical and non-critical systems/processes is ahead of the stated U. S. Steel Group objectives. All systems/processes for IT and non-IT are targeted to be Year 2000 ready, including testing on the exchange of information among systems/processes (integration testing), by the end of September, 1999. There are several systems/processes which will be replaced and/or upgraded with third-party Year 2000 ready products and services. All systems and processes are targeted to be Year 2000 ready, including integration testing, by the end ofservices during the third quarter, 1999. This schedule may be impacted by the availability of information and services from third-party suppliers/vendors on the1999; however, implementation schedules have been established for such systems/processes. The remaining Year 2000 readiness of their products and services. Generally, efforts in 1999 will be primarily devoted to both Year 2000 systemsfocus on (1) tracking and integration testing, tracking ofverifying the readiness of third parties developingcritical to the business operations, (2) reviewing the effectiveness of the contingency plans that have been developed, (3) establishing Year 2000 crisis management command centers, (4) preparing and verifyingcommunicating final plans to the stateworkforce and affected entities for the transition to the new century and (5) conducting the final round of Year 2000 readiness.assessments by the internal audit team. 80 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- The following charttable 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. 69 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION --------------------------------------------
Percent Completed Y2K Y2K Readiness Impact of Y2K Assess- Overall As of March 31,June 30, 1999 Inventory ment Inventory ------ ------ ------ Information Technology 100% 99% 96%100% 98% Non-Information Technology 100% 98% 96%100% 99%
Third Parties The U. S. Steel Group continues to review and track the Year 2000 readiness of its third party relationships (including, but not limited to outside processors, process control systems and hardware suppliers, telecommunication providers, and transportation carriers) to determine thosewho are critical to its operations. The majority of contacts have been made with critical third parties to determine if they will be able to provide their productproducts and serviceservices to the U. S. Steel Group after the Year 2000. An aggressive follow-up process with those third parties not responding or returning an unacceptable response is underway. Communications with U. S. Steel Group's third parties is an on-going process which includes mailings, telephone contacts and on-site visits. If it is determined that there is a significant risk with a third party, an effort will be made to work with those third parties to resolve the issue, or a new provider of the same products or services will be investigated and secured. As of March 31,June 30, 1999, the U. S. Steel Group has sent out approximately 900 inquiries and over 85%92% have responded. Approximately 490 of these third parties are considered critical vendors/suppliers includingor outside steel processors. The response rate for the critical third parties is at 97%100%. Follow-up phone assessments have been made on 30% (145)74% (362) of the critical third parties. For over 82%95% of those assessed to date, there is a medium to high level of assurance that the critical third parties will be Year 2000 ready. In addition, on-site Year 2000 assessments have also been made on several critical third parties to verify the effectiveness and accuracy of their responses. Other on- siteon-site assessments are planned, as conditions warrant. Additional follow-up phone and/or on-site assessments of critical third parties, as deemed necessary, are scheduled for completion by the end of third quarter, 1999; however, plans are to continue to monitor the readiness of critical third parties for the remainder of 1999. 81 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- The Costs to Address Year 2000 Issues The current estimated cost associated with Year 2000 readiness, is approximately $29 million, which includes $16 million in incremental cost. Total costs incurred as of March 31,June 30, 1999, were $16$19 million, including $7$8 million of incremental costs. As Y2K Impact Assessment nears completion andIn the renovation planning, readiness implementation and testing evolve,third quarter, the estimated costs may change.will be re- evaluated in consideration of the remaining project activities including the present state of readiness, implementation of contingency plans, continued monitoring of critical third parties, preparations and transition to the new century, and internal assessments of Year 2000 readiness. Year 2000 Risks to the Company The most reasonably likely worst case Year 2000 scenario would be the inability of third party suppliers, such as utility providers, telecommunication companies, outside processors, and other critical suppliers, to continue providing their products and services. This could pose the greatest material safety, operational, environmental, quality and/or financial risk to the company. In addition, the lack of accurate and timely Year 2000 date impact information from suppliers of automation and process control systems and processes is a concern to the U. S. Steel Group. Without timely and qualityreliable information from suppliers, specifically on embedded chip technology, schedules for attaining readiness can be impacted and some Year 2000 problems could go undetected during the transition to the year 2000. 70 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Contingency Planning General guidelines have been issued to all business units for creating contingency plans to address those critical facetsSince no one can predict with certainty the outcome of operations that can cause a material safety, operational, environmental, or financial risk to the company. Representatives ofthis unprecedented Year 2000 event, the U. S. Steel Group are working with the AssociationGroup's primary strategy and defense against Year 2000 related problems is to diligently continue to mitigate risks through review and extensive testing of Iron & Steel Engineers and the American Iron & Steel Institute to developits critical systems/processes. From a Year 2000 contingency planning guidelinesperspective, contingency plans have been developed and documented to address issues specificprovide 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 steel industry. These guidelines are intendedcritical period during the change of the century to protect personnel and safeguard equipment and facilities, (2) curtail the processing of hot metal during the highest period of risk, (3) schedule extra key personnel over the critical turn of the century period to prepare the processing environment, to monitor conditions and to evaluate when it is safe to resume normal operations, (4) procure auxiliary power generation for critical functions with consideration to both the potential impact of Year 2000 and extreme inclement weather conditions, (5) establish strategically located command centers with appropriate communication facilities to collect and disseminate important information and to activate emergency escalation procedures, (6) review and adjust inventory levels as business conditions dictate to provide continuity in customer service, and (7) continue to evaluate the readiness of regular and alternate third party suppliers and service providers to help entities develop specificassure the availability and continuity of critical products and services. During the remainder of 1999, the contingency plans that will cover their associated Year 2000 risks and areas of concern. The U. S. Steel Group currently expects to have contingency plans completedbe adjusted and tested, when practical, by the middle of 1999.as applicable, as business conditions warrant. This discussion includes forward-looking statements of the U. S. Steel Group's efforts and management's expectations relating to Year 2000 readiness. The Steel 82 U. S. STEEL GROUP OF USX CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -------------------------------------------- Group's ability to achieve Year 2000 readiness and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to install or modify proprietary hardware and software and unanticipated problems identified in the ongoing Year 2000 readiness review. Also, the U. S. Steel Group's ability to mitigate Year 2000 risks could be adversely impacted by the ability to complete, and 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. It is possible thatUpon adoption, there willmay be derivative instruments employed in our businessesby 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, 2000,2001, as required. 7183 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 March 31,June 30, 1999 are provided in the following table: (a)table(a):
Incremental Decrease in Pretax Income Assuming a Hypothetical Price Change of(a) (Dollars in millions) 10% 25% - -------------------------------------------------------------------------------- Derivative Commodity Instruments U. S. Steel Group Natural gas $2.4 $6.0(price decrease) $2.5 $6.3 Zinc 2.0 4.6(price decrease) 3.0 7.6 Tin .3 .6(price decrease) .4 .7 Nickel (price decrease) .1 .2 (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 March 31,June 30, 1999. U. S. Steel Group management evaluates its portfolio of derivative commodity instruments on an ongoing basis and adds or revises strategies to reflect anticipated market conditions and changes in risk profiles. Changes to the portfolio subsequent to March 31,June 30, 1999, would cause future pretax income effects to differ from those presented in the table.
7284 U. S. STEEL GROUP OF USX CORPORATION QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ----------------------------------------- Interest Rate Risk - ------------------ As of March 31,June 30, 1999, the discussion of the U. S. Steel Group's interest rate risk has not changed materially from that presented in Quantitative and Qualitative Disclosures About Market Risk included in USX's 1998 Form 10-K. Foreign Currency Exchange Rate Risk - ----------------------------------- As of March 31,June 30, 1999, the U. S. Steel Group had no material exposure to foreign currency exchange rate risk. Equity Price Risk - ----------------- USX was subject to equity price risk resulting from its issuance in December 1996 of $117 million of 6 3/4% Exchangeable Notes due February 1, 2000 ("indexed debt"). However, on March 31, 1999, USX irrevocably deposited with a trustee the entire 5.5 million shares it owned in RTI. The deposit of shares resulted in the satisfaction of USX's obligation under the indexed debt. Under the terms of the indenture, the trustee will exchange the RTI shares for the notes at maturity. USX is no longer exposed to any negative risks associated with changes in the value of RTI common stock. For further discussion, see Note 56 to the U.S. Steel Group Financial Statements. Safe Harbor - ----------- The U. S. Steel Group's quantitativeQuantitative and qualitative disclosures about market riskQualitative Disclosures About Market Risk include forward-looking statements with respect to management's opinion about risks associated with the U. S. Steel Group's use of derivative instruments. These statements are based on certain assumptions with respect to market prices and industry supply and demand for steel products and certain raw materials. To the extent that these assumptions prove to be inaccurate, future outcomes with respect to the U. S. Steel Group's hedging programs may differ materially from those discussed in the forward-looking statements. 7385
U. S.U.S. STEEL GROUP OF USX CORPORATION SUPPLEMENTAL STATISTICS (Unaudited) ------------------------------------ ($----------------------------------- Second Quarter Six Months Ended June 30 Ended June 30 (Dollars in Millions) First Quarter Ended March 31 --------------millions) 1999 1998 ---- ----1999 1998 - -------------------------------------------------------------------------------- REVENUES $1,211 $1,696$1,304 $1,733 $2,515 $3,429 INCOME (LOSS) FROM OPERATIONS U. S. Steel Operations (a) (b) $(59) $106$(9) $154 $(68) $260 Items not allocated to segment: Pension Credits 108(c) 140 93 248 186 Administrative Expenses (8) (5) (9) Costs(13) (14) Cost related to former business activities (c) (24) (28)(d) (20) (25) (44) (53) Loss on investment in RTI stock used to satisfysettlement of indexed debt obligationswith RTI International Metals, Inc. Stock - - (22) - ----- --------- ---- ---- ---- Total U. S. Steel Group $(2) $162103 217 101 379 PENSION COSTS INCLUDED IN U. S. STEEL OPERATIONS $56 $44$52 $45 $108 $89 CAPITAL EXPENDITURES $74 $79 $57$153 $136 OPERATING STATISTICS Average steel price per ton $436$424 $477 $430 $476 Steel Shipments (d) 2,381 2,933(e) 2,548 2,857 4,929 5,790 Raw Steel-Production (d) 2,743 3,143(e) 3,091 2,902 5,840 6,045 Raw Steel-Capability Utilization (e) 87.1% 99.6%(f) 96.9% 90.9% 92.0% 95.3% Total iron ore shipments 1,363 1,783(e) 4,823 4,989 6,186 6,772 - --------------------- (a) Results in the first quartersix months of 1999 included a $10 million charge for environmental accruals. Results in second quarter and the first six months of 1998 included approximately $30 million (net of related charges and reserves) for the settlement of litigation against company's property insurers to recover losses related to a 1995 explosion at the Gary Works No. 8 blast furnace. (b) Includes the production and sale of steel products, coke and taconite pellets; domestic coal mining; the management of mineral resources; engineering and consulting services; and equity income from joint ventures and partially owned companies, such as USS/Kobe Steel Company, USS-POSCO Industries, PRO-TEC Coating Company, Transtar Inc., and until March 31, 1999 RTI International Metals, Inc. (formerly RMI Titanium Company). Also includes results of real estate development and management, and leasing and financing activities. (c) Includes $35 million for a pension settlement gain primarily related to the early retirement program completed during the second quarter 1999. (d) Includes other postretirement benefit costs and certain other expenses principally attributable to former business units of the U. S. Steel Group. (d)(e) Thousands of net tons (e)(f) Based on annual raw steel production capability of 12.8 million tons.
7486 Part II - Other Information - ---------------------------- Item 1. LEGAL PROCEEDINGS Marathon Group Posted Price Litigation The Marathon Group, alone or with other energy companies, has been named in a number of lawsuits in State and Federal courts alleging various causes of action related to crude oil royalty payments based on posted prices, including underpayment of royalty interests, underpayment of severance taxes, antitrust violations, and violation of the Texas common purchaser statue. Plaintiffs in these actions include governmental entities and private entities or individuals, and some seek class action status. All of these cases are in various states of preliminary activities. No class certification has been determined as to Marathon in any case to date. During November 1997, Marathon and over twenty other defendants entered into a proposed class settlement agreement covering antitrust and contract claims from January 1, 1986, through September 30, 1997, excluding federal and Indian royalty claims, common purchaser claims and severance tax claims. A new settlement agreement was filed with the U.S. District Court in Texas on June, 26, 1998, which replaces the November 1997 Settlement Agreement. The new settlement agreement omits from the settlement class all State entities which receive royalty payments and only covers private claimants. It will settle all private claims, subject to opt-outs, for a period from January 1, 1986 to September 30, 1998. The agreement was approved by the Court in April 1999. The approval of the settlement has been appealed to the 5th Circuit Court of Appeals. Marathon and approximately 20 other oil companies have settled a claim by the state of Texas that the oil companies allegedly had violated Texas's common purchaser statute and underpaid royalties on oil produced from state lands. Under the settlement, the companies will pay a total of $12.6 million. Multi-media In July, the U.S. Environmental Protection Agency ("EPA") served MAP with one Notice of Violation and two Findings of Violation in connection with its multimedia inspection of the Detroit Refinery. These informal action notices allege violations of the Michigan State Implementation Plan and the EPA New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants for benzene. MAP has an opportunity to contest the factual and legal basis for the allegations prior to the EPA taking enforcement action. Other Environmental Cases In July 1999, Speedway SuperAmerica LLC was assessed a $112,000 penalty by the West Virginia Division of Environmental Protection for the Resource Conservation and Recovery Act violations including, among other things, the storing of ignitable and hazardous waste and failing to correctly label hazardous waste containers and properly characterize all waste. 87 At the Robinson refinery the Department of Justice filed a civil complaint in February 1999, alleging violation of the Clean Air Act with respect to benzene releases at the Robinson refinery. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held April 27, 1999. In connection with the meeting, proxies were solicited pursuant to the Securities Exchange Act. The following are the voting results on proposals considered and voted upon at the meeting, all of which were described in the proxy statement. 1. All nominees for director listed in the proxy statement were elected. 2. PricewaterhouseCoopers LLP was elected as the independent accountants for 1999. (For, 356,025,355; against, 683,304; abstained, 1,415,852). 88 Part II - Other Information (Continued): - --------------------------- Item 5. OTHER INFORMATION (Continued) Marathon Group SUMMARIZED CONSOLIDATED FINANCIAL INFORMATION OF MARATHON OIL COMPANY Supplementary Data --------------------------------------------------------------------- (Unaudited) The following summarized consolidated financial information of Marathon Oil Company, a wholly owned subsidiary of USX, is included in this Form 10-Q in satisfaction of the reporting obligation of Marathon which has debt securities registered under the Securities Exchange Act. All such securities are guaranteed by USX.
(In millions) ------------------- First------------------------------- Second Quarter Six Months Ended March 31Ended June 30 June 30 1999 1998 1999 1998 ---- ---- ---- ---- INCOME DATA: INCOME DATA: Revenues $4,842 $5,489$5,480 $5,524 $10,322 $11,026 Income from operations 408 408415 460 823 868 Net income 111 173143 148 254 321
(In millions) ---------------------- March 31----------------------- June 30 December 31 1999 1998 -------- ----------- BALANCE SHEET DATA: BALANCE SHEET DATA: Assets: Current assets $4,771$5,093 $4,742 Noncurrent assets 11,15311,286 11,420 ------ ------ Total assets $15,924$16,379 $16,162 ====== ====== Liabilities and Stockholder's Equity: Current liabilities $2,318$2,430 $2,543 Noncurrent liabilities 9,1629,353 9,428 Preferred stock of subsidiary 1110 17 Minority interest in consolidated subsidiary 1,7351,744 1,590 Stockholder's equity 2,6982,842 2,584 ------ ------------- ------- Total liabilities and stockholder's equity $15,924$16,379 $16,162 ====== ============= =======
7589 Part II - Other Information (Continued): - ---------------------------------------- Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.1 USX Restated Certificate of Incorporation dated SeptemberMay 1, 1996................. Incorporated by reference to Exhibit 3.1 to the USX Report on Form 10-Q for the quarter ended March 31, 1997.1999................. 3.2 USX By-Laws, effective as of July 30, 1996.....................Incorporated by reference to Exhibit 3(a) to the USX Report on Form 10-Q for the quarter ended June 30, 1996. 3.3 Amendments to USX By-Laws adopted by the Board of Directors on February 23, 1999 Incorporated by reference to Exhibit 3(c) to the USX Report on Form 10-K for the year ended December 31, 1998May 1, 1999................ 4.1 Amended and Restated Rights Agreement.......................IncorporatedAgreement.................. Incorporated by reference to USX's Form 8 Amendment to Form 8-A filed on October 9, 1992 (File No. 1-5153). 10(h) Amended and Restated Limited Liability Agreement of Marathon Ashland Petroleum LLC, dated as of December 31, 1998. 10(i) Amendment No. 1 dated as of December 31, 1998, to the Put/Call Registration Rights and Standstill Agreement dated as of January 1, 1998 of Marathon Ashland Petroleum LLC. 12.1 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends 12.2 Computation of Ratio of Earnings to Fixed Charges 27. Financial Data Schedule (b) REPORTS ON FORM 8-K Form 8-K dated January 22, 1999, reporting under Item 5. Other Events, the announcement of fourth quarter and 1998 earnings and filing the related press releases. Form 8-K/A dated January 22, 1999, reporting under Item 5. Other Events, the announcement of fourth quarter and 1998 earnings and filing the related press releases in substantially the form as released, which superseded USX Corporation's earlier filing of such announcements. Form 8-K dated January 26, 1999, reporting under Item 5. Other Events, the announcement of the USX-Marathon Group 1999 capital, investment and exploration budget and filing the related press release. Also, under Item 5. Other Events, USX Corporation filed revised calculations of the computation of ratio of earnings to combined fixed charges and preferred stock dividends and the computation of the ratio of earnings to fixed charges for each of the year-to-date periods ended March 31, June 30, and September 30, 1998. Form 8-K dated January 27, 1999, reporting under Item 5. Other Events, and Underwriting Agreement in connection with the issuance of 6.65% Notes Due 2006 pursuant to a shelf registration on Form S-3, File No. 333- 56867. 76NONE 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 May 12,August 13, 1999