<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------ to ------------
USX CORPORATION
- --------------------------------------------------------------------------------
----
(Exact name of registrant as specified in its charter)
Delaware 1-5153 25-0996816
--------------- ------------ -------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
600 Grant Street, Pittsburgh, PA 15219-4776
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(412) 433-1121
------------------------------
(Registrant's telephone number,
including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes..X..No.....
Common stock outstanding at October 31, 1998 follows:
USX-Marathon Group - 291,453,594 shares
USX-U. S. Steel Group - 88,336,441 shares
<PAGE> 2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 30, 1998
---------------------------
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 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 27
Financial Statistics 29
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 30
Marathon Group Balance Sheet 31
Marathon Group Statement of Cash Flows 32
Selected Notes to Financial Statements 33
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 38
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 51
Supplemental Statistics 53
<PAGE> 3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED September 30, 1998
---------------------------
INDEX Page
----- ----
PART I - FINANCIAL INFORMATION (Continued)
C. U. S. Steel Group
Item 1. Financial Statements:
U. S. Steel Group Statement of Operations 55
U. S. Steel Group Balance Sheet 56
U. S. Steel Group Statement of Cash Flows 57
Selected Notes to Financial Statements 58
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 62
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 73
Supplemental Statistics 75
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 76
Item 2 Changes in Securities and the Use of Proceeds 76
Item 5. Other Information 77
Item 6. Exhibits and Reports on Form 8-K 78
<PAGE> 4
Part I - Financial Information
A. Consolidated Corporation
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $7,127 $5,603 $21,228 $16,725
Dividend and affiliate income 12 18 83 61
Gain on disposal of assets 14 31 58 57
Gain on ownership change in Marathon Ashland
Petroleum LLC (1) - 245 -
Other income 4 5 21 11
------ ------ ------ -------
Total revenues 7,156 5,657 21,635 16,854
------ ------ ------ -------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 5,297 3,934 15,765 11,952
Selling, general and administrative expenses 81 66 233 163
Depreciation, depletion and amortization 293 235 921 722
Taxes other than income taxes 1,069 851 2,937 2,392
Exploration expenses 46 55 203 129
Inventory market valuation charges (credits) 50 (41) 22 137
------ ------ ------ -------
Total costs and expenses 6,836 5,100 20,081 15,495
------ ------ ------ -------
INCOME FROM OPERATIONS 320 557 1,554 1,359
Net interest and other financial costs 73 86 226 272
Minority interest in income of Marathon Ashland
Petroleum LLC 70 - 282 -
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 177 471 1,046 1,087
Provision for estimated income taxes 61 163 362 369
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS 116 308 684 718
LOSS FROM DISCONTINUED OPERATIONS (net of
income tax) - (1) - (1)
------ ------ ------ ------
NET INCOME 116 307 684 717
Noncash credit from exchange of preferred stock - - - 10
Dividends on preferred stock (2) (2) (7) (10)
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $114 $305 $677 $717
====== ====== ====== ======
<FN>
Selected notes to financial statements appear on pages 9-16.
</TABLE>
<PAGE> 5
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued) (Unaudited)
INCOME PER COMMON SHARE
------------------------------------------------------------
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
APPLICABLE TO MARATHON STOCK:
Net income $51 $192 $396 $418
- Per share - basic .18 .67 1.37 1.45
- diluted .17 .66 1.36 1.44
Dividends paid per share .21 .19 .63 .57
Weighted average shares, in thousands
- Basic 291,320 288,095 289,928 287,853
- Diluted 291,803 291,857 290,528 294,090
APPLICABLE TO STEEL STOCK:
Net income $63 $114 $281 $300
- Per share - basic .72 1.32 3.22 3.50
- diluted .71 1.25 3.11 3.24
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Basic 88,099 85,770 87,223 85,463
- Diluted 92,359 93,952 94,717 94,176
<FN>
Selected notes to financial statements appear on pages 9-16.
</TABLE>
<PAGE> 6
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Unaudited)
----------------------------------------
<CAPTION>
ASSETS
September 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $488 $54
Receivables, less allowance for doubtful
accounts of $11 and $15 1,947 1,417
Inventories 2,400 1,685
Deferred income tax benefits 230 229
Other current assets 111 87
------ ------
Total current assets 5,176 3,472
Investments and long-term receivables,
less reserves of $12 and $15 1,266 1,028
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$15,988 and $15,466 12,712 10,062
Prepaid pensions 2,429 2,247
Other noncurrent assets 265 280
Cash restricted for redemption of Delhi Stock - 195
------ ------
Total assets $21,848 $17,284
====== ======
<FN>
Selected notes to financial statements appear on pages 9-16.
</TABLE>
<PAGE> 7
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET (Continued) (Unaudited)
--------------------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $259 $121
Accounts payable 2,840 2,011
Payroll and benefits payable 477 521
Accrued taxes 285 304
Accrued interest 56 95
Long-term debt due within one year 72 471
------ ------
Total current liabilities 3,989 3,523
Long-term debt, less unamortized discount 4,556 2,932
Long-term deferred income taxes 1,586 1,353
Employee benefits 2,892 2,713
Deferred credits and other liabilities 685 736
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 1,726 -
Redeemable Delhi Stock - 195
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,780,687 shares and
2,962,037 shares ($148 liquidation preference) 3 3
Common stocks:
Marathon Stock issued - 291,344,009 shares and
288,786,343 shares 291 289
Steel Stock issued - 88,336,441 shares and
86,577,799 shares 88 86
Securities exchangeable solely into Marathon Stock
issued - 589,049 shares 1 -
Additional paid-in capital 4,076 3,924
Retained earnings 1,566 1,138
Deferred compensation adjustments - (3)
Accumulated other comprehensive income (loss) (43) (37)
------ ------
Total stockholders' equity 5,982 5,400
------ ------
Total liabilities and stockholders' equity $21,848 $17,284
====== ======
<FN>
Selected notes to financial statements appear on pages 9-16.
</TABLE>
<PAGE> 8
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------------------
<CAPTION>
Nine Months Ended
September 30
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $684 $717
Adjustments to reconcile to net cash provided
from operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 71 -
Depreciation, depletion and amortization 921 740
Exploratory dry well costs 111 57
Inventory market valuation charges 22 137
Pensions (181) (196)
Postretirement benefits other than pensions 13 11
Deferred income taxes 249 107
Gain on disposal of assets (58) (58)
Gain on ownership change in Marathon Ashland
Petroleum LLC (245) -
Changes in:
Current receivables 133 116
Inventories (148) (121)
Current accounts payable and accrued expenses (141) (50)
All other - net (67) (105)
------ ------
Net cash provided from operating activities 1,364 1,355
------ ------
INVESTING ACTIVITIES:
Capital expenditures (1,063) (887)
Acquisition of Tarragon Oil and Gas Limited (686) -
Disposal of assets 61 430
Investments in equity affiliates - net (118) (217)
Withdrawals of restricted cash - net 159 97
All other - net - 9
------ ------
Net cash used in investing activities (1,647) (568)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving
credit arrangements - net 1,439 6
Other debt - borrowings 827 -
- repayments (1,230) (588)
Common stock - issued 139 47
- repurchased (195) -
Preferred stock repurchased (8) -
Dividends paid (256) (238)
------ ------
Net cash provided from (used in)
financing activities 716 (773)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (2)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 434 12
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 54 55
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $488 $67
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(288) $(340)
Income taxes paid (181) (275)
<FN>
Selected notes to financial statements appear on pages 9-16.
</TABLE>
<PAGE> 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. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1997.
2. Effective January 1, 1998, USX adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). This statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by and distributions to owners. Total
comprehensive income for the third quarter and nine months of 1998 was $113
million and $678 million, respectively. Total comprehensive income for the
same 1997 periods was $307 million and $717 million, respectively.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, USX identified additional environmental
remediation liabilities of $46 million, of which $28 million was discounted
to a present value of $13 million and $18 million was not discounted.
Assumptions used in the calculation of the present value amount included an
inflation factor of 2% and an interest rate of 7% over a range of 22 to 30
years. Estimated receivables for recoverable costs related to adoption of
SOP 96-1 were $4 million. The net unfavorable effect of adoption on income
from operations at January 1, 1997, was $27 million.
3. Effective October 31, 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.
<PAGE> 10
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
4. Inventories are carried at lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
------------------------
September 30 December 31
1998 1997
------------ -----------
<S> <C> <C>
Raw materials $926 $582
Semi-finished products 312 331
Finished products 1,303 922
Supplies and sundry items 165 134
------ ------
Total (at cost) 2,706 1,969
Less inventory market valuation reserve 306 284
------ ------
Net inventory carrying value $2,400 $1,685
====== ======
</TABLE>
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. The method of calculating net income per share for the Marathon Stock,
Steel Stock and, prior to November 1, 1997, the Delhi Stock reflects the
USX Board of Directors' intent that the separately reported earnings and
surplus of the Marathon Group, the U. S. Steel Group and the Delhi Group,
as determined consistent with the USX 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, the U. S. Steel Group and the
Delhi 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, in 1997, the noncash credit
on exchange 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.
<PAGE> 11
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. (Continued)
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER COMMON SHARE
Third Quarter Ended
September 30
1998 1997
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
Marathon Group
Net income (millions):
Net income $51 $51 $192 $192
Effect of dilutive securities -
Convertible Debentures - - - 1
------ ------ ------ ------
Net income assuming conversions $51 $51 $192 $193
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 291,320 291,320 288,095 288,095
Effect of dilutive securities:
Convertible debentures - - - 3,154
Stock options - 483 - 608
------ ------ ------ ------
Average common shares and dilutive effect 291,320 291,803 288,095 291,857
====== ====== ====== ======
Net income per share $.18 $.17 $.67 $.66
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Net income $65 $65 $116 $116
Dividends on preferred stock (2) (2) (2) -
------ ------ ------ ------
Net income applicable to Steel Stock 63 63 114 116
Effect of dilutive convertible securities - 2 - 2
------ ------ ------ ------
Net income assuming conversions $63 $65 $114 $118
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 88,099 88,099 85,770 85,770
Effect of dilutive securities:
Trust preferred securities - 4,256 - 4,256
Preferred stock - - - 3,216
Convertible debentures - - - 631
Stock options - 4 - 79
------ ------ ------ ------
Average common shares and dilutive effect 88,099 92,359 85,770 93,952
====== ====== ====== ======
Net income per share $.72 $.71 $1.32 $1.25
====== ====== ====== ======
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. (Continued)
COMPUTATION OF INCOME PER COMMON SHARE
Nine Months Ended
September 30
1998 1997
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
Marathon Group
Net income (millions):
Net income $396 $396 $418 $418
Effect of dilutive securities -
Convertible debentures - - - 6
------ ------ ------ ------
Net income assuming conversions $396 $396 $418 $424
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 289,928 289,928 287,853 287,853
Effect of dilutive securities:
Convertible debentures - - - 5,752
Stock options - 600 - 485
------ ------ ------ ------
Average common shares and dilutive effect 289,928 290,528 287,853 294,090
====== ====== ====== ======
Net income per share $1.37 $1.36 $1.45 $1.44
====== ====== ====== ======
U. S. Steel Group
Net income (millions):
Net income $288 $288 $300 $300
Dividends on preferred stock (7) - (10) -
Noncash credit from exchange of preferred stock - - 10 -
------ ------ ------ ------
Net income applicable to Steel Stock 281 288 300 300
Effect of dilutive convertible securities - 7 - 5
------ ------ ------ ------
Net income assuming conversions $281 $295 $300 $305
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 87,223 87,223 85,463 85,463
Effect of dilutive securities:
Trust preferred securities - 4,256 - 2,128
Preferred stock - 3,190 - 5,345
Convertible debentures - - - 1,200
Stock options - 48 - 40
------ ------ ------ ------
Average common shares and dilutive effect 87,223 94,717 85,463 94,176
====== ====== ====== ======
Net income per share $3.22 $3.11 $3.50 $3.24
====== ====== ====== ======
</TABLE>
<PAGE> 13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
6. In August 1998, Marathon Oil Company (Marathon) acquired Tarragon Oil and
Gas Limited (Tarragon), a Canadian oil and gas exploration and production
company. Securityholders of Tarragon received, at their election, Cdn$14.25
for each Tarragon share, or the economic equivalent in Exchangeable Shares
of an indirect Canadian subsidiary of Marathon, which are exchangeable
solely on a one-for-one basis into Marathon Stock. The purchase price
included cash payments of $686 million, issuance of approximately 878,000
Exchangeable Shares valued at $29 million and the assumption of $345 million
in debt. USX accounted for the acquisition using the purchase method of
accounting. Third quarter 1998 results of operations include the operations
of Marathon Canada Limited, formerly known as Tarragon, commencing
August 12, 1998.
During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the major
elements of their refining, marketing and transportation (RM&T) operations.
On January 1, 1998, Marathon transferred certain RM&T net assets to Marathon
Ashland Petroleum LLC (MAP), a new consolidated subsidiary. Also on January
1, 1998, Marathon acquired certain RM&T net assets from Ashland in exchange
for a 38% interest in MAP. The acquisition was accounted for under the
purchase method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $245 million, which is
included in the first nine months of 1998 revenues.
The following unaudited pro forma data for USX includes the results of
operations of Tarragon for 1998 and 1997, and the Ashland RM&T net assets
for 1997, giving effect to the acquisitions as if they had been consummated
at the beginning of the years presented. The pro forma data is based on
historical information and does not necessarily reflect the actual results
that would have occurred nor is it necessarily indicative of future results
of operations.
<TABLE>
<CAPTION>
(In millions, except per share amounts)
Third Quarter Nine Months
Ended Ended
September 30 September 30
1998(a) 1997(a) 1998(a) 1997(a)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $7,173 $7,517 $21,729 $22,617
Net income (b) 107 298 653 709
Net income per common share of Marathon
Stock:
Basic .14 .63 1.26 1.42
Diluted .14 .63 1.25 1.41
<FN>
(a) Pro forma data is based on USX and Tarragon results of operations
for the quarters and nine months ended September 30, 1998 and 1997, and
USX and Ashland RM&T results of operations for the quarter and nine
months ended September 30, 1997.
(b) Excluding the pro forma inventory market valuation reserve
adjustment, pro forma net income would have been $661 million and $786
million for the 1998 and 1997 nine months, respectively ($126 million and
$274 million in the third quarter of 1998 and 1997, respectively.)
Reported 1998 and 1997 net income for the nine months, excluding the
reported inventory market valuation reserve adjustment, was $692 million
and $803 million, respectively ($135 million and $281 million in the
third quarter of 1998 and 1997, respectively).
</TABLE>
<PAGE> 14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
7. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Matching crude oil and refined product
buy/sell transactions settled in cash $1,012 $539 $2,994 $1,845
Consumer excise taxes on petroleum
products and merchandise 963 738 2,614 2,057
</TABLE>
8. Income from operations includes net periodic pension credits of $151
million and $117 million in the first nine months of 1998 and 1997,
respectively ($53 million and $41 million in the third quarter of 1998 and
1997, respectively.) These pension credits are primarily noncash and for
the most part are included in selling, general and administrative expenses.
9. The provision for estimated income taxes for the periods reported is
based on tax rates and amounts which recognize management's best estimate
of current and deferred tax assets and liabilities. The nine months 1998
provision for estimated income taxes was decreased by a $9 million foreign
tax adjustment as a result of a favorable resolution of foreign tax
litigation.
10. At September 30, 1998, USX had $1,300 million in borrowings against
its $2,350 million long-term revolving credit agreement.
Effective as of July 31, 1998, MAP entered into two revolving credit
agreements totaling $500 million. There were no borrowings against these
agreements at September 30, 1998.
USX has a short-term credit agreement totaling $125 million at
September 30, 1998. 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 $200
million which require a .125% fee or maintenance of compensating balances
of 3%. At September 30, 1998, there were $50 million in borrowings against
these facilities.
In the event of a change in control of USX, debt obligations totaling
$4,176 million at September 30, 1998, may be declared immediately due and
payable.
11. In the third quarter of 1998, USX borrowed $1.3 billion under its
revolving credit agreement. These borrowings were primarily related to the
funding of the Tarragon acquisition.
In the first quarter of 1998, USX issued $400 million in aggregate
principal amount of 6.85% Notes due 2008.
<PAGE> 15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
12. 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 September 30,
1998, 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.
13. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments involving a variety
of matters, including laws and regulations relating to the environment.
Certain of these matters are discussed below. The ultimate resolution of
these contingencies could, individually or in the aggregate, be material to
the consolidated financial statements. However, management believes that
USX will remain a viable and competitive enterprise even though it is
possible that these contingencies could be resolved unfavorably. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
USX is subject to federal, state, local and foreign laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At September 30, 1998, and
December 31, 1997, accrued liabilities for remediation totaled $149 million
and $158 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 $40
million at September 30, 1998, and $42 million at December 31, 1997.
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 nine months of 1998 and for the years 1997
and 1996, such capital expenditures totaled $111 million, $134 million and
$165 million, respectively. USX anticipates making additional such
expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
At September 30, 1998, and December 31, 1997, accrued liabilities for
platform abandonment and dismantlement totaled $140 million and $128
million, respectively.
<PAGE> 16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
13. (Continued)
Guarantees by USX of the liabilities of affiliated entities totaled
$191 million at September 30, 1998. In the event that any defaults of
guaranteed liabilities occur, USX has access to its interest in the assets
of most of the affiliates to reduce losses resulting from these guarantees.
As of September 30, 1998, the largest guarantee for a single affiliate was
$119 million.
At September 30, 1998, USX's pro rata share of obligations of LOOP LLC
and various pipeline affiliates secured by throughput and deficiency
agreements totaled $164 million. Under the agreements, USX is required to
advance funds if the affiliates are unable to service debt. Any such
advances are prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and
long-term investments at September 30, 1998, totaled $917 million
compared with $533 million at December 31, 1997.
14. On November 4, 1998, USX sold 17 million shares of Marathon Stock.
Closing of the transaction is expected to be made on Tuesday, November 10,
1998. Net proceeds to USX are expected to be approximately $528
million, which will be used to reduce indebtedness incurred to fund the
Tarragon acquisition. The net proceeds will be reflected in their
entirety in the Marathon Group financial statements.
<PAGE> 17
<TABLE>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
----------------------------------------------------------
<CAPTION>
Nine Months Ended
September 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
3.81 4.13 3.92 3.62 1.49 2.01 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $356 million for 1993.
</TABLE>
<TABLE>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
-------------------------------------------------
<CAPTION>
Nine Months Ended
September 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
3.94 4.34 4.11 3.90 1.62 2.18 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover fixed charges by $312 million for 1993.
</TABLE>
<PAGE> 18
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX Corporation ("USX") is a diversified company engaged primarily in the
energy business through its Marathon Group and in the steel business through its
U. S. Steel Group. The following discussion should be read in conjunction with
the third quarter and first nine months of 1998 USX Consolidated Financial
Statements and selected notes. For net 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.
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 percent interest in MAP.
Financial measures such as revenues, income from operations and capital
expenditures in 1998 include 100 percent of MAP and are not comparable to prior
period amounts. Net income and related per share amounts for 1998 are net of
the minority interest. For further discussion of MAP and pro forma information,
see Note 6 to the USX Consolidated Financial Statements and Marathon Group
Supplemental Statistics on pages 53 and 54.
On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited
("Tarragon"), a Canadian oil and gas exploration and production company. The
purchase price included $686 million in cash payments, the assumption of $345
million in debt and the issuance of Exchangeable Shares of an indirect Canadian
subsidiary of Marathon valued at $29 million. The Exchangeable Shares are
exchangeable at any time on a one-for-one basis for shares of Marathon Stock.
The Tarragon acquisition was initially funded with borrowings against USX's
long-term revolving credit agreement. On November 4, 1998, USX sold 17 million
shares of Marathon Stock. Net proceeds to USX are expected to be
approximately $528 million, which will be used to reduce indebtedness incurred
to fund the Tarragon acquisition. Third quarter results include operations of
Marathon Canada Limited, formerly known as Tarragon, commencing August 12, 1998.
For further discussion of Tarragon and pro forma information, see Note 6 to the
USX Consolidated Financial Statements and Marathon Group Supplemental Statistics
on pages 53 and 54.
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 1997 Form 10-K.
<PAGE> 19
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1998 and 1997 are
set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues (a)
Marathon Group $5,662 $3,944 $16,722 $11,834
U. S. Steel Group 1,497 1,735 4,926 5,103
Eliminations (3) (22) (13) (83)
------ ------ ------- -------
Total USX Corporation revenues $7,156 $5,657 $21,635 $16,854
Less:
Excise taxes (b)(c) 963 738 2,614 2,057
Matching buy/sell transactions (b)(d) 1,012 539 2,994 1,845
------ ------ ------ ------
Revenues excluding above items $5,181 $4,380 $16,027 $12,952
====== ====== ====== ======
- ------
<FN>
(a) Amounts for the third quarter and first nine months of 1997 were
reclassified to conform to 1998 classifications.
(b) Included in both revenues and costs and expenses for the Marathon Group and
USX Consolidated.
(c) Consumer excise taxes on petroleum products and merchandise.
(d) Matching crude oil and refined products buy/sell transactions settled in
cash.
</TABLE>
Revenues (excluding excise taxes and matching buy/sell transactions)
increased by $801 million in the third quarter of 1998 as compared with the
third quarter of 1997, primarily reflecting an increase of $1,020 million for
the Marathon Group, and a decrease of $238 million for the U. S. Steel Group.
Revenues (excluding excise taxes and matching buy/sell transactions) increased
by $3,075 million in the first nine months of 1998 as compared with the first
nine months of 1997, primarily reflecting an increase of $3,182 million for the
Marathon Group, and a decrease of $177 million for the U. S. Steel Group.
For discussion of revenues by group see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the U. S. Steel
Group and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Marathon Group, which includes discussion of pro
forma revenues, giving effect to the assumed acquisition of Ashland's RM&T net
assets on January 1, 1997, for the third quarter and first nine months of 1997,
and the assumed acquisition of Tarragon on January 1, of each year for the
periods presented.
<PAGE> 20
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations and certain items included in income from operations
for the third quarter and first nine months of 1998 and 1997 are set forth in
the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income from operations (a) $320 $557 $1,554 $1,359
Less: certain favorable (unfavorable) items for
Marathon Group
Inventory market valuation
reserve adjustment (b) (50) 41 (22) (137)
Write-off of certain international investments
net of a favorable domestic contract
settlement (c) - - (76) -
Gain on ownership change net of one-time
transition charges - MAP (d) - - 223 -
U. S. Steel Group
Insurance litigation settlement for Gary Works
No. 8 blast furnace (net of related charges and
reserves) (e) - - 30 -
Insurance settlement related to the
1996 hearth breakout at Gary Works No. 13 blast
furnace - 25 - 40
Effect of adoption of SOP 96-1 (f) - - - (20)
Other environmental accrual adjustments - net - - - 11
----- ----- ----- -----
Subtotal (50) 66 155 (106)
----- ----- ----- -----
Income from operations adjusted to exclude
above items $370 $491 $1,399 $1,465
===== ===== ===== =====
- ------
<FN>
(a) Amounts for the third quarter and first nine months of 1997 were
reclassified to conform to 1998 classifications.
(b) The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined product inventories
exceeds net realizable value. For additional discussion of the IMV reserve
adjustment, see Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Marathon Group.
(c) This represents a write-off of certain non-revenue producing international
investments and the gain from the resolution of contract disputes with a
purchaser of the Marathon Group's natural gas production from certain domestic
properties.
(d) The gain on ownership change and one-time transition charges relate to the
formation of MAP. For additional discussion of the gain on ownership
change in MAP, see Note 6 to the USX Consolidated Financial Statements.
(e) Settlement of litigation against USX's property insurers to recover losses
related to a 1995 explosion at the Gary Works No. 8 blast furnace.
(f) American Institute of Certified Public Accountants Statement of Position
No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1") provides
additional guidance on recognition, measurement and disclosure of remediation
liabilities.
</TABLE>
<PAGE> 21
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Adjusted income from operations decreased by $121 million in the third
quarter of 1998 as compared with the third quarter of 1997, reflecting decreases
of $67 million for the U. S. Steel Group and $54 million for the Marathon Group.
Adjusted income from operations decreased by $66 million in the first nine
months of 1998 as compared with the first nine months of 1997, reflecting
decreases of $36 million for the U. S. Steel Group and $30 million for the
Marathon Group.
For discussion of adjusted income from operations by group see Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
U. S. Steel Group and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Marathon Group, which includes
discussion of pro forma adjusted income from operations, giving effect to the
assumed acquisition of Ashland's RM&T net assets on January 1, 1997, for the
third quarter and first nine months of 1997, and the assumed acquisition of
Tarragon on January 1, of each year for the periods presented.
Net interest and other financial costs for the third quarter and first nine
months of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and other financial income $11 $3 $33 $2
Interest and other financial costs (84) (89) (259) (274)
----- ------ ------ ------
Net interest and other financial costs (73) (86) (226) (272)
Less:
Adjustment to carrying value of indexed debt(a) 11 - 7 6
----- ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $(84) $(86) $(233) $(278)
===== ====== ====== ======
- ------
<FN>
(a) In December 1996, USX issued $117 million in aggregate principal amount
of 6-3/4% Notes Due February 1, 2000 ("indexed debt"), mandatorily
exchangeable at maturity for common stock of RTI International Metals, Inc.
(formerly RMI Titanium Company) ("RTI") (or for the equivalent amount of cash,
at USX's option). The carrying value of indexed debt is adjusted quarterly to
settlement value based on changes in the value of RTI common stock. Any
resulting adjustment is charged or credited to income and included in interest
and other financial costs. USX's 27 percent interest in RTI continues to be
accounted for under the equity method.
</TABLE>
Excluding the adjustment to the carrying value of indexed debt, net
interest and other financial costs decreased by $2 million and $45 million in
the third quarter and first nine months of 1998, respectively, as compared with
the third quarter and first nine months of 1997, due primarily to increased
interest income and capitalized interest on upstream projects for the Marathon
Group, and lower average debt levels for the U. S. Steel Group.
Provision for estimated income taxes in the first nine months of 1998 was
reduced by a $9 million foreign tax adjustment as a result of a favorable
resolution of foreign tax litigation for the U. S. Steel Group.
<PAGE> 22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net income decreased $191 million and $33 million in the third quarter and
first nine months of 1998, respectively, as compared to the third quarter and
first nine months of 1997, mainly due to the items discussed above.
Noncash credit from exchange of preferred stock was $10 million in the first
nine months of 1997. On May 16, 1997, USX exchanged approximately 3.9 million
6.75% Convertible Quarterly Income Preferred Securities ("Trust Preferred
Securities") of USX Capital Trust I, for an equivalent number of shares of its
outstanding 6.50% Cumulative Convertible Preferred Stock (6.50% Preferred
Stock). The $10 million noncash credit reflects the difference between the
carrying value of the 6.50% Preferred Stock ($192 million) and the fair value of
the Trust Preferred Securities ($182 million), at the date of the exchange.
Dividends to Stockholders
- -------------------------
On October 27, 1998, the USX Board of Directors (the "Board") declared
dividends of 21 cents per share on Marathon Stock and 25 cents per share on
Steel Stock, payable December 10, 1998, to stockholders of record at the close
of business on November 18, 1998. The Board also declared a dividend of $0.8125
per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable
December 31, 1998, to stockholders of record at the close of business on
December 1, 1998.
On October 27, 1998, Marathon Oil Canada Limited, an indirect subsidiary of
Marathon Oil Company, declared a dividend of CDN $0.3235 per share on its non-
voting Exchangeable Shares, payable December 10, 1998, to stockholders of record
at the close of business on November 18, 1998.
Cash Flows
- ----------
Net cash provided from operating activities totaled $1,364 million in the
first nine months of 1998, compared with $1,355 million in the first nine months
of 1997. The Marathon Group had an $80 million increase in net cash provided
from operating activities in the first nine months of 1998 as compared to the
first nine months of 1997. The increase was primarily due to an increase in net
income (excluding the IMV reserve adjustment, the gain on ownership change in
MAP and other noncash items), partially offset by distributions by MAP to
Ashland. The U. S. Steel Group had a $60 million decrease in net cash provided
from operating activities in the first nine months of 1998 as compared to the
first nine months of 1997. The decrease was primarily due to unfavorable
working capital changes.
Cash from the disposal of assets was $61 million in the first nine months
of 1998, compared with $430 million in the first nine months of 1997. The 1997
proceeds included $361 million resulting from USX's entry into a strategic
partnership with two limited partners to acquire an interest in three coke
batteries at the U. S. Steel Group's Clairton Works.
The net withdrawals of restricted cash were $159 million in the first nine
months of 1998, compared to $97 million in the first nine months of 1997. The
1998 amount primarily represents the withdrawal from restricted cash of $195
million for the redemption of all of the shares of USX-Delhi Group Common Stock
in the first quarter of 1998. The $97 million withdrawal in 1997 mainly
represents cash withdrawn from an interest-bearing escrow account that was
established in the fourth quarter of 1996 in connection with the disposal of
Marathon Group oil production properties in Alaska.
<PAGE> 23
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Capital expenditures for property, plant and equipment in the first nine
months of 1998 were $1,063 million, compared with $887 million in the first nine
months of 1997. For further details, see USX Corporation - Financial Statistics
on page 29, and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Marathon Group and the U. S. Steel Group.
Net investments in equity affiliates was $118 million in the first nine
months of 1998, compared with $217 million in the first nine months of 1997.
Net investments in equity affiliates in 1998 decreased $145 million for the
Marathon Group. Net investments in 1998 were reduced by $59 million 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. The 1997 amount
included the acquisition of an additional 7.5% interest in Sakhalin II project,
investments in the Nautilus natural gas and Odyssey crude oil pipeline systems
in the Gulf of Mexico and the purchase of a 50 percent interest in an Ecuadorian
power generation company. Net cash invested in equity affiliates for the
U. S. Steel Group increased $46 million, primarily due to the funding for the
entry into a joint venture in Slovakia.
Contract commitments to acquire property, plant and equipment and long-term
investments at September 30, 1998, totaled $917 million compared with $533
million at December 31, 1997.
USX's total long-term debt, preferred stock of subsidiary, USX obligated
preferred securities of a subsidiary trust and notes payable was $5.319 billion
at September 30, 1998, an increase of $1.363 billion from December 31, 1997.
The increase from December 31, 1997, was primarily the result of borrowings of
$1.3 billion against a long-term revolving credit agreement and the issuance of
$400 million of 6.85% notes due in 2008, partially offset by a net reduction of
current maturities of long-term debt totaling $399 million. The borrowings
against the long-term credit agreement were primarily related to the funding of
the Tarragon acquisition.
Debt and Preferred Stock Ratings
- --------------------------------
In June 1998, Moody's Investors Services, Inc. upgraded the ratings on
USX's and Marathon's senior debt to Baa2 from Baa3, on USX's subordinated debt
to Baa3 from Ba2, and on USX's preferred stock to Ba1 from Ba2.
Liquidity
- ---------
At September 30, 1998, USX had $1.3 billion of borrowings against its $2.35
billion long-term revolving credit agreement. These borrowings were primarily
related to the Tarragon acquisition.
Effective as of July 31, 1998, MAP entered into two revolving credit
agreements totaling $500 million. There were no borrowings against these
agreements at September 30, 1998.
At September 30, 1998, USX had no borrowings against its $125 million
short-term credit agreement and $50 million of borrowings against additional
short-term lines of credit.
USX filed with the Securities and Exchange Commission a shelf registration
statement, which became effective July 31, 1998, which allows USX to offer and
issue unsecured debt securities, common and preferred stock and warrants in an
aggregate principal amount of up to $1 billion in one or more separate offerings
on terms to be determined at the time of sale. Including this shelf
registration statement, USX had a total of $1.543 billion available under
existing shelf registration statements at July 31, 1998.
<PAGE> 24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On August 12, 1998, USX filed a prospectus relating to approximately
$29 million of USX-Marathon Group Common Stock ("Marathon Stock").
This stock is only to be issued in exchange for the Exchangeable Shares
issued in connection with the Tarragon acquisition.
On November 4, 1998, USX sold 17 million shares of Marathon Stock.
Closing of the transaction is expected to be made on Tuesday, November 10, 1998.
Net proceeds to USX are expected to be approximately $528 million, which
will be used to reduce indebtedness incurred to fund the Tarragon acquisition.
The net proceeds will be reflected in their entirety in the Marathon Group
Financial Statements.
As a result of the actions described in the preceding two paragraphs, as
of November 4, 1998, USX has approximately $1 billion available under
existing shelf registrations.
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of September 30, 1998, 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 1998 and years 1999 and 2000, and any amounts that may
ultimately be paid in connection with contingencies (which are discussed in Note
13 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 or other external financing sources.
USX management's opinion concerning liquidity and USX's ability to avail
itself in the future of the financing options mentioned in the above forward-
looking statements are based on currently available information. To the extent
that this information proves to be inaccurate, future availability of financing
may be adversely affected. Factors that could affect the availability of
financing include the performance of each group (as measured by various factors
including cash provided from operating activities), the state of worldwide debt
and equity markets, investor perceptions and expectations of past and future
performance, the overall U.S. financial climate, and, in particular, with
respect to borrowings, by levels of USX's outstanding debt and credit ratings by
rating agencies.
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
USX has incurred and will continue to incur substantial capital, operating
and maintenance, and remediation expenditures as a result of environmental laws
and regulations. To the extent these expenditures, as with all costs, are not
ultimately reflected in the prices of USX's products and services, operating
results will be adversely affected. USX believes that domestic competitors of
the U. S. Steel Group and substantially all the competitors of the Marathon
Group are subject to similar environmental laws and regulations. However, the
specific impact on each competitor may vary depending on a number of factors,
including the age and location of its operating facilities, marketing areas,
production processes and the specific products and services it provides.
USX has been notified that it is a potentially responsible party ("PRP") at
43 waste sites under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") as of September 30, 1998. In addition, there are 25
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.
<PAGE> 25
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
There are also 119 additional sites, excluding retail marketing outlets,
where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. Of these sites, 15 were associated with properties
conveyed to MAP by Ashland for which Ashland has retained liability for all
costs associated with remediation.
At many sites, USX is one of a number of parties involved and the total
cost of remediation, as well as USX's share thereof, is frequently dependent
upon the outcome of investigations and remedial studies. USX accrues for
environmental remediation activities when the responsibility to remediate is
probable and the amount of associated costs is reasonably determinable. As
environmental remediation matters proceed toward ultimate resolution or as
additional remediation obligations arise, charges in excess of those previously
accrued may be required.
In October 1998, the National Enforcement Investigation Center of the
United States Environmental Protection Agency conducted a multi-media inspection
of MAP's Detroit refinery. The inspection 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 informally advised
as to certain compliance issues, it is not known when findings on the results of
the inspection will be issued.
USX is the subject of, or a party to, a number of pending or threatened
legal actions, contingencies and commitments involving a variety of matters,
including laws and regulations relating to the environment (see Note 13 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.
Accounting Standards
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable operating segments of an enterprise. USX will adopt the
standard, effective with its 1998 annual financial statements.
<PAGE> 26
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". USX will adopt the standard,
effective with its 1998 annual financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidelines for companies to capitalize or expense costs incurred to
develop or obtain internal-use software. USX will adopt SOP 98-1 effective
January 1, 1999. The incremental impact on results of operations of adoption of
SOP 98-1 has not been determined, although it is likely that it will be
initially favorable since certain qualifying costs will be capitalized and
amortized over future periods.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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
Stockholders' Equity 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 that there will be derivative instruments
employed in our businesses 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 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. USX plans to adopt the standard effective January 1,
2000, as required.
<PAGE> 27
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of September 30, 1998 are provided in the following
table: (a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) (d) $10.0 $26.2
Natural gas (price decrease) (d) 2.8 1.2
Refined products (price increase) (d) 4.7 15.6
U. S. Steel Group
Natural gas (price decrease) (d) $3.5 $8.8
Zinc (price decrease) (d) .8 2.1
Heating oil (price decrease) (d) .2 .4
Nickel (price decrease) (d) .1 .2
Tin (price decrease) (d) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at September 30, 1998. Marathon Group and U. S. Steel Group management
evaluate their portfolios of derivative commodity instruments on an
ongoing basis and add or revise strategies to reflect anticipated market
conditions and changes in risk profiles. Changes to the portfolios
subsequent to September 30, 1998, would cause future pretax income
effects to differ from those presented in the table.
(b) The number of net open contracts varied throughout the third quarter
of 1998, from a low of 6,250 contracts at August 26, to a high of 17,359
contracts at September 24, and averaged 9,790 for the quarter. The
derivative commodity instruments used and hedging positions taken also
varied throughout the third quarter of 1998, 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.
</TABLE>
<PAGE> 28
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
Interest Rate Risk
- ------------------
As of September 30, 1998, 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 the USX 1997 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
USX is subject to the risk of price fluctuations related to firm
commitments for capital expenditures and existing assets or liabilities
denominated in currencies other than U.S. dollars. USX has not generally used
derivative instruments to manage this risk. However, USX has made limited use
of forward currency contracts to manage exposure to certain currency price
fluctuations. At September 30, 1998, USX had no forward currency contracts.
Equity Price Risk
- -----------------
USX is 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"). At maturity, USX must exchange the notes for shares of RTI
International Metals, Inc. (formerly RMI Titanium Company) ("RTI") common stock,
or redeem the notes for the equivalent amount of cash. Each quarter, USX
adjusts the carrying value of Indexed Debt to settlement value, based on changes
in the value of RTI common stock. Any resulting adjustment is charged or
credited to income and included in interest and other financial costs. At
September 30, 1998, a hypothetical 10% increase in the value of RTI common stock
would have resulted in an $11 million unfavorable effect on pretax income. USX
holds a 27% interest in RTI which is accounted for under the equity method. The
unfavorable effects on income described above would generally be offset by
changes in the market value of USX's investment in RTI. However, under the
equity method of accounting, USX cannot recognize in income these changes in the
market value until the investment is liquidated.
Safe Harbor
- -----------
USX's quantitative and qualitative disclosures about market risk include
forward-looking statements with respect to management's opinion about risks
associated with USX's use of derivative instruments, and projected changes in
the size and composition of the Marathon Group and U. S. Steel Group hedge
portfolios. These forward-looking statements are based on certain assumptions
with respect to market prices and industry supply of and demand for crude oil,
natural gas, refined products, steel products and certain raw materials. To the
extent that these assumptions prove to be inaccurate, future outcomes with
respect to USX's hedging programs may differ materially from those discussed in
the forward-looking statements.
<PAGE> 29
<TABLE>
<CAPTION>
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
-------------- --------------
(Dollars in millions) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Marathon Group (a) $5,662 $3,944 $16,722 $11,834
U. S. Steel Group 1,497 1,735 4,926 5,103
Eliminations (3) (22) (13) (83)
------- ------- ------- -------
Total $7,156 $5,657 $21,635 $16,854
INCOME FROM OPERATIONS
Marathon Group (a) $215 $360 $1,070 $838
U. S. Steel Group 105 197 484 521
------ ------ ------ ------
Total $320 $557 $1,554 $1,359
CASH FLOW DATA
- --------------
CAPITAL EXPENDITURES
Marathon Group (a) $285 $263 $835 $652
U. S. Steel Group 92 59 228 176
Discontinued Operations - 21 - 59
------ ------ ------ ------
Total $377 $343 $1,063 $887
INVESTMENTS IN EQUITY AFFILIATES - NET
Marathon Group (a) $49 $60 $52 $197
U. S. Steel Group 3 5 66 20
------ ------ ------ ------
Total $52 $65 $118 $217
- ------
<FN>
(a) Amounts in 1998 include 100 percent of MAP.
</TABLE>
<PAGE> 30
Part I - Financial Information (Continued):
B. Marathon Group
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $5,647 $3,924 $16,399 $11,773
Dividend and affiliate income 9 6 37 22
Gain on disposal of assets 3 10 19 29
Gain on ownership change in Marathon Ashland
Petroleum LLC (1) - 245 -
Other income 4 4 22 10
------ ------ ------ -------
Total revenues 5,662 3,944 16,722 11,834
------ ------ ------ -------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 3,988 2,523 11,575 7,760
Selling, general and administrative expenses 132 96 383 263
Depreciation, depletion and amortization 222 163 701 497
Taxes other than income taxes 1,009 788 2,768 2,210
Exploration expenses 46 55 203 129
Inventory market valuation charges (credits) 50 (41) 22 137
------ ------ ------ -------
Total costs and expenses 5,447 3,584 15,652 10,996
------ ------ ------ -------
INCOME FROM OPERATIONS 215 360 1,070 838
Net interest and other financial costs 63 64 166 202
Minority interest in income of Marathon Ashland
Petroleum LLC 70 - 282 -
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 82 296 622 636
Provision for estimated income taxes 31 104 226 218
------ ------ ------ ------
NET INCOME $51 $192 $396 $418
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share - basic $.18 $.67 $1.37 $1.45
- diluted .17 .66 1.36 1.44
Dividends paid per share .21 .19 .63 .57
Weighted average shares, in thousands
- Basic 291,320 288,095 289,928 287,853
- Diluted 291,803 291,857 290,528 294,090
<FN>
Selected notes to financial statements appear on pages 33-37.
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
September 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $465 $36
Receivables, less allowance for doubtful
accounts of $5 and $2 1,507 856
Inventories 1,624 980
Other current assets 169 146
------ ------
Total current assets 3,765 2,018
Investments and long-term receivables 600 455
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$10,095 and $9,667 10,223 7,566
Prepaid pensions 303 290
Other noncurrent assets 232 236
------ ------
Total assets $15,123 $10,565
====== ======
LIABILITIES
Current liabilities:
Notes payable $238 $108
Accounts payable 2,223 1,348
Payroll and benefits payable 144 142
Accrued taxes 91 102
Deferred income taxes 66 61
Accrued interest 49 84
Long-term debt due within one year 61 417
------ ------
Total current liabilities 2,872 2,262
Long-term debt, less unamortized discount 4,055 2,476
Long-term deferred income taxes 1,447 1,318
Employee benefits 563 375
Deferred credits and other liabilities 339 332
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,726 -
COMMON STOCKHOLDERS' EQUITY 3,937 3,618
------ ------
Total liabilities and common
stockholders' equity $15,123 $10,565
====== ======
<FN>
Selected notes to financial statements appear on pages 33-37.
</TABLE>
<PAGE> 32
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Nine Months Ended
September 30
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $396 $418
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 71 -
Depreciation, depletion and amortization 701 497
Exploratory dry well costs 111 57
Inventory market valuation charges 22 137
Pensions (10) (14)
Postretirement benefits other than pensions 17 8
Deferred income taxes 140 65
Gain on disposal of assets (19) (29)
Gain on ownership change in Marathon Ashland
Petroleum LLC (245) -
Changes in:
Current receivables 13 99
Inventories (77) (58)
Current accounts payable and accrued expenses (34) (136)
All other - net (15) (53)
------ ------
Net cash provided from operating activities 1,071 991
------ ------
INVESTING ACTIVITIES:
Capital expenditures (835) (652)
Acquisition of Tarragon Oil and Gas Limited (686) -
Disposal of assets 44 39
Investments in equity affiliates - net (52) (197)
Withdrawals (deposits) of restricted cash - net (20) 97
All other - net (13) -
------ ------
Net cash used in investing activities (1,562) (713)
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in Marathon Group's portion of USX
consolidated debt 1,018 (72)
Specifically attributed debt - borrowings 365 -
- repayments (365) (40)
Marathon Stock issued 84 18
Dividends paid (183) (164)
------ ------
Net cash provided from (used in)
financing activities 919 (258)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (2)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 429 18
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36 32
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $465 $50
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(227) $(238)
Income taxes paid, including settlements with other
groups (149) (187)
<FN>
Selected notes to financial statements appear on pages 33-37.
</TABLE>
<PAGE> 33
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. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1997.
2. Effective January 1, 1998, USX adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). This statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by and distributions to owners. The Marathon
Group's total comprehensive income for the third quarter and nine months of
1998 was $49 million and $393 million, respectively. Total comprehensive
income for the same 1997 periods was $192 million and $419 million,
respectively.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, the Marathon Group identified additional
environmental remediation liabilities of $11 million. Estimated
receivables for recoverable costs related to adoption of SOP 96-1 were $4
million. The net unfavorable effect of adoption on the Marathon Group's
income from operations at January 1, 1997, was $7 million.
3. 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.
<PAGE> 34
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
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 among 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.
The financial statement provision for estimated income taxes and
related tax payments or refunds have been reflected in the Marathon Group,
the U. S. Steel Group and, prior to November 1, 1997, the Delhi Group
financial statements in accordance with USX's tax allocation policy for
such groups. In general, such policy provides that the consolidated tax
provision and related tax payments or refunds are allocated among the
Marathon Group, the U. S. Steel Group and, prior to November 1, 1997, the
Delhi Group for group financial statement purposes, based principally upon
the financial income, taxable income, credits, preferences and other
amounts directly related to the respective groups.
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, U. S. Steel and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
4. The method of calculating net income per share for the Marathon Stock,
Steel Stock and, prior to November 1, 1997, Delhi Stock reflects the
Board's intent that the separately reported earnings and surplus of the
Marathon Group, the U. S. Steel Group and the Delhi Group, as determined
consistent with the USX 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.
<PAGE> 35
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. (Continued)
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 5 of the Notes to USX Consolidated Financial Statements for
the computation of income per common share.
5. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Matching crude oil and refined product
buy/sell transactions settled in cash $1,012 $539 $2,994 $1,845
Consumer excise taxes on petroleum
products and merchandise 963 738 2,614 2,057
</TABLE>
6. In August 1998, Marathon acquired Tarragon Oil and Gas Limited
(Tarragon), a Canadian oil and gas exploration and production company.
Securityholders of Tarragon received, at their election, Cdn$14.25 for each
Tarragon share, or the economic equivalent in Exchangeable Shares of an
indirect Canadian subsidiary of Marathon, which are exchangeable solely on
a one-for-one basis into Marathon Stock. The purchase price included cash
payments of $686 million, issuance of approximately 878,000 Exchangeable
Shares valued at $29 million and the assumption of $345 million in debt.
Marathon accounted for the acquisition using the purchase method of
accounting. Third quarter 1998 results of operations include the
operations of Marathon Canada Limited, formerly known as Tarragon,
commencing August 12, 1998.
During 1997, Marathon and Ashland Inc. (Ashland) agreed to combine the
major elements of their refining, marketing and transportation (RM&T)
operations. On January 1, 1998, Marathon transferred certain RM&T net
assets to Marathon Ashland Petroleum LLC (MAP), a new consolidated
subsidiary. Also on January 1, 1998, Marathon acquired certain RM&T net
assets from Ashland in exchange for a 38% interest in MAP. The acquisition
was accounted for under the purchase method of accounting. The purchase
price was determined to be $1.9 billion, based upon an external valuation.
The change in Marathon's ownership interest in MAP resulted in a gain of
$245 million, which is included in the first nine months of 1998 revenues.
The following unaudited pro forma data for the Marathon Group includes
the results of operations of Tarragon for 1998 and 1997, and the Ashland
RM&T net assets for 1997, giving effect to the acquisitions as if they had
been consummated at the beginning of the years presented. The pro forma
data is based on historical information and does not necessarily reflect
the actual results that would have occurred nor is it necessarily
indicative of future results of operations.
<PAGE> 36
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. (Continued)
<TABLE>
<CAPTION>
(In millions, except per share amounts)
Third Quarter Nine Months
Ended Ended
September 30 September 30
1998(a) 1997(a) 1998(a) 1997(a)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $5,679 $5,804 $16,816 $17,597
Net income (b) 42 183 365 410
Net income per common share:
Basic .14 .63 1.26 1.42
Diluted .14 .63 1.25 1.41
<FN>
(a) Pro forma data is based on the Marathon Group and Tarragon results
of operations for the quarters and nine months ended September 30, 1998
and 1997, and the Marathon Group and Ashland RM&T results of operations
for the quarter and nine months ended September 30, 1997.
(b) Excluding the pro forma inventory market valuation reserve
adjustment, pro forma net income would have been $373 million and $487
million for the 1998 and 1997 nine months, respectively ($61 million and
$159 million in the third quarter of 1998 and 1997, respectively.)
Reported 1998 and 1997 net income for the nine months, excluding the
reported inventory market valuation reserve adjustment, was $404 million
and $504 million, respectively ($70 million and $166 million in the third
quarter of 1998 and 1997, respectively).
</TABLE>
7. 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.
<TABLE>
<CAPTION>
(In millions)
------------------------
September 30 December 31
1998 1997
----------- -----------
<S> <C> <C>
Crude oil and natural gas liquids $739 $452
Refined products and merchandise 1,082 735
Supplies and sundry items 109 77
------ ------
Total (at cost) 1,930 1,264
Less inventory market valuation reserve 306 284
------ ------
Net inventory carrying value $1,624 $980
====== ======
</TABLE>
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.
<PAGE> 37
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At September 30, 1998,
and December 31, 1997, accrued liabilities for remediation totaled $51
million and $52 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 $40 million at September 30, 1998, and $42 million at December 31,
1997.
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 nine months of 1998 and for the years
1997 and 1996, such capital expenditures totaled $73 million, $81 million
and $66 million, respectively. The Marathon Group anticipates making
additional such expenditures in the future; however, the exact amounts and
timing of such expenditures are uncertain because of the continuing
evolution of specific regulatory requirements.
At September 30, 1998, and December 31, 1997, accrued liabilities for
platform abandonment and dismantlement totaled $140 million and $128
million, respectively.
Guarantees by USX of the liabilities of an affiliated entity of the
Marathon Group totaled $119 million at September 30, 1998.
At September 30, 1998, the Marathon Group's pro rata share of
obligations of LOOP LLC and various pipeline affiliates secured by
throughput and deficiency agreements totaled $164 million. Under the
agreements, the Marathon Group is required to advance funds if the
affiliates are unable to service debt. Any such advances are prepayments
of future transportation charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at September 30, 1998, totaled
$679 million compared with $377 million at December 31, 1997.
9. On November 4, 1998, USX sold 17 million shares of Marathon Stock.
Closing of the transaction is expected to be made on Tuesday, November 10,
1998. Net proceeds to USX are expected to be approximately $528 million,
which will be used to reduce indebtedness incurred to fund the Tarragon
acquisition. The net proceeds will be reflected in their entirety in the
Marathon Group financial statements.
<PAGE> 38
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; and other energy related
businesses. Management's Discussion and Analysis should be read in conjunction
with the third quarter and first nine months 1998 USX consolidated financial
information and the Marathon Group Financial Statements and selected notes. The
discussion of Results of Operations should be read in conjunction with the
Supplemental Statistics provided on pages 53 and 54.
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 percent interest in MAP. Financial measures such as revenues,
income from operations and capital expenditures in 1998 include 100 percent of
MAP and are not comparable to prior period amounts. Net income and related per
share amounts for 1998 are net of the minority interest. For further discussion
of MAP, see Note 6 to the Marathon Group Financial Statements.
On August 11, 1998, Marathon acquired Tarragon Oil and Gas Limited
("Tarragon"), a Canadian oil and gas exploration and production company. The
purchase price included $686 million in cash payments, the assumption of $345
million in debt and the issuance of Exchangeable Shares of an indirect Canadian
subsidiary of Marathon valued at $29 million. The Exchangeable Shares are
exchangeable at any time on a one-for-one basis for shares of Marathon stock.
The Tarragon acquisition was initially funded with borrowings against USX's
long-term revolving credit agreement. On November 4, 1998, USX sold 17 million
shares of Marathon stock. Net proceeds to USX are expected to be
approximately $528 million, which will be used to reduce indebtedness incurred
to fund the Tarragon acquisition. Third quarter results include the operations
of Marathon Canada Limited ("MCL"), formerly known as Tarragon, commencing
August 12, 1998. For further discussion of Tarragon and pro forma
information, see Note 6 to the Marathon Group Financial Statements and
Supplemental Statistics on page 54.
Certain sections of Management's Discussion and Analysis may include
forward-looking statements concerning trends or events potentially affecting the
businesses of the Marathon Group. These statements typically contain words such
as "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 forward-looking statements.
<PAGE> 39
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1998 and 1997 are
summarized in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Refined products $2,356 $1,854 $6,997 $5,264
Merchandise 510 276 1,386 780
Liquid hydrocarbons 493 205 1,332 713
Natural gas 257 270 872 990
Transportation and other (a) 72 62 282 185
Gain on ownership change in MAP (b) (1) - 245 -
------ ------ ------ ------
Subtotal 3,687 2,667 11,114 7,932
Excise taxes (c) (e) 963 738 2,614 2,057
Matching buy/sell transactions (d) (e) 1,012 539 2,994 1,845
------ ------ ------ ------
Total Revenues (a) $5,662 $3,944 $16,722 $11,834
====== ====== ====== ======
- --------
<FN>
(a)Amounts for third quarter and first nine months of 1997 were reclassified to
conform to 1998 classifications.
(b)See Note 6 to the Marathon Group Financial Statements for a discussion of
the gain on ownership change in MAP.
(c)Consumer excise taxes on petroleum products and merchandise.
(d)Matching crude oil and refined products buy/sell transactions settled in
cash.
(e)Included in both revenues and costs and expenses, resulting in no effect on
income.
</TABLE>
In 1998, Marathon Group revenues included 100 percent of MAP revenues,
and MCL's revenues commencing August 12, 1998. On a pro forma basis, giving
effect to the assumed acquisitions of Tarragon's operations and Ashland's RM&T
net assets on January 1, 1997, revenues (excluding matching buy/sell
transactions and excise taxes) for the third quarter and first nine months of
1997 would have been $4,131 million and $12,219 million, respectively.
Revenues in the third quarter and first nine months of 1998 were lower than
pro forma revenues in the same periods of 1997, primarily due to lower
worldwide liquid hydrocarbon prices, lower domestic natural gas prices, and
lower refined product prices, partially offset by higher liquid hydrocarbon
sales volumes. In addition, for the first nine months of 1998, these
decreases were partially offset by the gain on ownership change
in MAP. For additional information regarding pro forma revenues, see
Supplemental Statistics on page 54.
<PAGE> 40
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from Operations and certain items included in income from operations
for the third quarter and first nine months of 1998 and 1997 are set forth in
the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Income from Operations (a) $215 $360 $1,070 $838
Less: certain favorable (unfavorable) items
IMV reserve adjustment (b) (50) 41 (22) (137)
Write-off of certain international investments net
of a favorable domestic contract settlement (c) - - (76) -
Gain on ownership change net of one-time
transition charges - MAP (d) - - 223 -
------ ------ ------ ------
Subtotal (50) 41 125 (137)
------ ------ ------ ------
Income from operations adjusted to exclude
above items $265 $319 $945 $975
====== ====== ====== ======
- --------
<FN>
(a)Amounts for third quarter and first nine months of 1997 were reclassified to
conform to 1998 classifications.
(b)The inventory market valuation ("IMV") reserve reflects the extent to which
the recorded LIFO cost basis of crude oil and refined products inventories
exceeds net realizable value. For additional details of this noncash
adjustment, see discussion below.
(c)This represents a write-off of certain non-revenue producing international
investments and the gain from the resolution of contract disputes with a
purchaser of the Marathon Group's natural gas production from certain
domestic properties.
(d)The gain on ownership change and one-time transition charges relate to the
formation of MAP. For additional discussion of the gain on ownership change
in MAP, see Note 6 to the Marathon Group Financial Statements.
</TABLE>
In 1998, Marathon Group income from operations included 100 percent of
MAP, and MCL's results of operations commencing August 12, 1998. On a pro
forma basis, giving effect to the assumed acquisitions of Tarragon's
operations and Ashland's RM&T net assets on January 1, 1997, income from
operations for third quarter 1997, excluding the effects of the pro forma
IMV reserve adjustment, would have been $461 million. Third quarter 1998
adjusted income from operations of $265 million was lower than adjusted pro
forma income from operations for third quarter 1997 primarily due to lower
RM&T income from operations and lower worldwide exploration and production
income from operations. These decreases were partially offset by lower
administrative expenses.
<PAGE> 41
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On a pro forma basis, adjusted income from operations, for the first nine
months of 1997, excluding the effects of the pro forma IMV reserve adjustment,
would have been $1,276 million. The first nine months of 1998 adjusted income
from operations of $945 million was lower than adjusted pro forma income from
operations in the comparable 1997 period primarily due to lower worldwide
exploration and production income from operations. This decrease was partially
offset by lower administrative expenses and increased RM&T income from
operations in 1998. For additional information regarding pro forma income from
operations, see Supplemental Statistics on page 54.
With respect to the 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 the acquisition, and this
became the new LIFO cost basis of the inventories. Generally accepted
accounting principles require that inventories be reported at the lower of
recorded cost or current market value. Accordingly, the Marathon Group has
established an IMV reserve to reduce the cost basis of its inventories to
current market value. Quarterly adjustments to the IMV reserve result in
noncash charges or credits to income from 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.
When Marathon acquired the crude oil and refined product inventories
associated with Ashland's RM&T operations in January 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, resulting in a net favorable IMV reserve
adjustment of $25 million in first quarter 1998.
Third quarter income from operations for domestic exploration and
production ("upstream") decreased by $43 million in 1998 from 1997. Results in
the first nine months, excluding a favorable natural gas contract settlement,
decreased $217 million from the same period in 1997. The decreases in both
periods were due mainly to lower liquid hydrocarbon and natural gas prices,
partially offset by increased liquid hydrocarbon volumes. In addition, the
decrease in third quarter was also offset by lower exploration expenses. Third
quarter results were negatively impacted by three tropical storms in September
that moved through the Gulf of Mexico and resulted in temporary shut-ins of
offshore production facilities. As a result of these storms, reported
production for the quarter was reduced by an estimated 8,000 barrels per day
("bpd") and 12 million cubic feet of natural gas per day ("mmcfpd").
Third quarter income from operations for international upstream operations
decreased by $24 million in 1998 from 1997. The decline was mainly due to lower
liquid hydrocarbon prices, partially offset by increased liquid hydrocarbon
sales volumes primarily reflecting the acquisition of Tarragon and new
production in Gabon and the United Kingdom.
<PAGE> 42
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Third quarter 1998 results include the operations of MCL, commencing August
12, 1998. Tarragon production averaged 15,900 bpd and 158 mmcfpd from August
12, 1998 through the end of the quarter. See Note 6 to the attached Marathon
Group Financial Statements for additional information regarding the Tarragon
acquisition.
International upstream income from operations in the first nine months,
excluding the impairment of certain international investments in the first
quarter, decreased $121 million from the same period in 1997. This decrease was
mainly due to lower liquid hydrocarbon prices, higher exploration expense,
higher depreciation, depletion and amortization, and lower natural gas volumes,
partially offset by increased liquid hydrocarbon sales volumes.
In 1998, income from operations for refining, marketing, and transportation
("downstream") operations include 100 percent of MAP. Third quarter 1998 income
from operations for downstream operations, excluding the effects of the IMV
reserve adjustment, was $224 million, compared to $231 million in the prior-year
period. On a pro forma basis, giving effect to the assumed acquisition of
Ashland's RM&T net assets on January 1, 1997, income from operations for the
combined downstream operations of Marathon and Ashland for third quarter 1997,
excluding the effects of the pro forma IMV reserve adjustment, would have been
$358 million. Income from operations for the first nine months of 1998 for
downstream operations, excluding the effects of special items, was $749 million
compared to $475 million in the prior-year period. On a pro forma basis,
downstream income from operations for the first nine months of 1997, excluding
the effects of the pro forma IMV reserve adjustment, would have been $729
million. Refined product margins in third quarter 1998 were lower compared to
the same period in 1997. In addition, third quarter results were negatively
impacted by three tropical storms in September that moved through the Gulf of
Mexico and resulted in temporary shut-ins of the Louisiana Offshore Oil Port and
the Garyville refinery. As a result, refinery crude runs were curtailed by
nearly 10,000 bpd for the quarter. For additional information regarding pro
forma downstream income from operations, see Supplemental Statistics on page 54.
Other energy related businesses recorded income from operations of $6
million in third quarter 1998 compared to $8 million for the prior-year period.
Income from operations for the first nine months of 1998 was $23 million
compared to $39 million for the prior-year period. The first nine months 1997
included an $8 million gain on the sales of the Marathon Group's interests in a
domestic pipeline company.
Administrative expenses in the third quarter decreased by $22 million in
1998 from 1997, primarily as a result of an increase in the administrative costs
being charged to MAP and reported in RM&T that were previously reported in
Administrative and lower accruals for employee benefit and compensation plans.
Administrative expenses for the first nine months of 1998 decreased $50 million
from the same period in 1997. In addition to the factors discussed previously,
the decrease was also due to lower litigation accruals.
<PAGE> 43
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the third quarter and first nine
months of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Interest and other financial income $11 $2 $29 $0
Interest and other financial costs (74) (66) (195) (202)
------ ------ ------ ------
Net interest and other financial costs $(63) $(64) $(166) $(202)
====== ====== ===== =====
</TABLE>
In third quarter 1998, interest and other financial costs increased
primarily due to higher debt levels resulting from the acquisition of Tarragon,
partially offset by higher capitalized interest. Net interest and other
financial costs decreased in first nine months 1998 mainly due to increased
interest income and capitalized interest on upstream projects. Capitalized
interest was $10 million and $30 million in third quarter and first nine months
1998, respectively, compared with $5 million and $11 million in the same periods
in 1997.
Net income for the third quarter decreased by $141 million in 1998 from
1997 and by $22 million in the first nine months of 1998 as compared to the same
periods in 1997. Excluding the after-tax effects of the IMV reserve adjustment
and other special items, financial results decreased by $96 million for the
third quarter and $196 million for the first nine months of 1998 from 1997,
primarily reflecting the factors discussed above. For pro forma information,
see Supplemental Statistics on page 54.
Cash Flows
- ----------
Net cash provided from operating activities totaled $1,071 million in the
first nine months of 1998, compared with $991 million in the first nine months
of 1997. The $80 million increase mainly reflected an increase in net income
(excluding the IMV reserve adjustment, the gain on ownership change in MAP and
other noncash items), partially offset by distributions by MAP to Ashland.
Capital expenditures in the first nine months of 1998 totaled $835 million,
compared with $652 million in the comparable 1997 period. Capital expenditures
in 1998 include 100 percent of MAP. The increase in the first nine months of
1998 was approximately equal for downstream and upstream projects.
The acquisition of Tarragon Oil and Gas Limited included cash payments of
$686 million. For further discussion of Tarragon, see Note 6 to the Marathon
Group Financial Statements.
<PAGE> 44
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Deposits of restricted cash were $20 million in the first nine months of
1998 compared to withdrawals of $97 million in the comparable 1997 period. The
1998 amount represents cash deposited from the sales of domestic production
properties and equipment. The 1997 amount represents cash withdrawn from an
interest-bearing escrow account that was established in the fourth quarter of
1996 in connection with the 1996 disposal of oil production properties in
Alaska.
Net investments in equity affiliates were $52 million in the first nine
months of 1998, compared with $197 million in the comparable 1997 period. In
September 1998, MAP increased its ownership interest in the Capline crude oil
pipeline through the acquisition of an interest in Southcap Pipe Line Company
for $22 million. With this investment in Southcap, MAP's ownership in the
Capline system increased from 32.6% to 37.2%. Net investments in 1998 were
reduced by $59 million as a result of repayments by Sakhalin Energy Investment
Company, Ltd. (Sakhalin) of advances made by Marathon in conjunction with the
Sakhalin II project in Russia. The 1997 amount included Marathon's acquisition
of an additional 7.5% interest in Sakhalin, investments in the Nautilus natural
gas and Odyssey crude oil pipeline systems in the Gulf of Mexico, and the
purchase of a 50% interest in an Ecuadorian power generation company.
Contract commitments for property, plant and equipment acquisitions and
long-term investments at September 30, 1998, totaled $679 million compared with
$377 million at December 31, 1997.
Financial obligations increased by $1,018 million in the first nine months
of 1998. For further details, see USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations. Financial
obligations 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.
Dividends paid in the first nine months of 1998 increased by $19 million
from the first nine months of 1997 reflecting the two cents per share increase
in the quarterly USX-Marathon Group Common Stock dividend rate. This increase
was initially declared in January 1998.
Liquidity
- ---------
For discussion of USX's liquidity and capital resources, see USX
Consolidated Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<PAGE> 45
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 or the marine
transportation of crude oil and refined products.
USX has been notified that it is a potentially responsible party ("PRP") at
16 waste sites related to the Marathon Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 30, 1998. In addition, there are 8 sites related to the Marathon
Group where USX has received information requests or other indications that USX
may be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability.
There are also 84 additional sites, excluding retail marketing outlets,
related to the Marathon Group where remediation is being sought under other
environmental statutes, both federal and state, or where private parties are
seeking remediation through discussions or litigation. Of these sites, 15 were
associated with properties conveyed to MAP by Ashland for which Ashland has
retained liability for all costs associated with remediation.
At many 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.
In October 1998, the National Enforcement Investigation Center of the
United States Environmental Protection Agency conducted a multi-media inspection
of MAP's Detroit refinery. The inspection 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. It is not known at this time as to when
MAP will be notified as to the conclusion of the inspection. Although MAP has
been informally advised as to certain compliance issues, it is not known when
findings on the results of the inspection will be issued.
<PAGE> 46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 8 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. During third quarter
1998, liquid hydrocarbon prices were significantly lower than third quarter 1997
prices. This decline had an adverse effect on the Marathon Group's upstream
results in the third quarter and first nine months of 1998. Upstream results
will continue to be adversely affected if liquid hydrocarbon prices stay at
their current levels or decline further. A prolonged decline in liquid
hydrocarbon and natural gas 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.
Worldwide liquid hydrocarbon production for 1998 is currently estimated to
be 200,000 bpd, primarily reflecting delays in attaining full production in the
Troika field and the effects of three tropical storms in September 1998.
Natural gas volumes are expected to be approximately 1.25 bcfpd. In 1999,
liquid hydrocarbon production is estimated to be approximately 250,000 bpd and
natural gas volumes are expected to be approximately 1.4 bcfpd. In 2001, liquid
hydrocarbon production is expected to increase by 5 to 8 percent over 1999
production levels and natural gas sales are expected to increase by
approximately 5 percent over 1999 levels. These estimates include the effects
of the Tarragon acquisition. With the Tarragon acquisition, 1998 reserve
replacement is anticipated to exceed 200%.
Progress continues on development of the 1995 discovery on Viosca Knoll 786
("Petronius") in the deepwater Gulf. The Petronius project is estimated to have
recoverable reserves of 95 million gross barrels of oil equivalent. Initial
production is expected in second quarter 1999.
Offshore Gabon, production commenced from the 1995 discovery on Tchatamba
Marin in late January 1998 and is expected to average about 10,000 gross bpd for
the year due to start-up problems with platform processing equipment.
Marathon holds a 37.5% interest in Sakhalin Energy Investment Company, Ltd.
("Sakhalin"), an incorporated joint venture company responsible for the overall
management of the Sakhalin II project. This project includes development of the
Piltun-Astokhskoye ("P-A") oil field and the Lunskoye gas-condensate field,
which are located 10-12 miles offshore Sakhalin Island in the Russian Far East
Region. A development plan for the P-A field was approved in 1997 which
provides for an initial development of the Astokh Feature. Progress continues
on this first phase
<PAGE> 47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
of development with the Molikpaq, an offshore drilling and production vessel,
set in place on September 1, 1998. Development drilling from the Molikpaq is
expected to begin in fourth quarter 1998 and first production from the Astokh
Feature is on schedule for mid-1999. Marathon's investment in Sakhalin was $233
million at September 30, 1998.
The above discussion includes forward-looking statements with respect to
anticipated 1998 reserve replacement and liquid hydrocarbon production and
natural gas sales for 1998 and 1999. 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, other geological,
operating and economic considerations. In addition, development of new
production properties in countries outside the United States may require
protracted negotiations with host governments and is frequently subject to
political considerations, such as tax regulations, which could adversely affect
the economics of projects. With respect to the Sakhalin II project in Russia,
Sakhalin Energy continues to seek to have certain Russian laws and normative
acts at the Russian Federation and local levels brought into compliance with the
existing Production Sharing Agreement Law. 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 the
margin between the cost of crude oil and other feedstocks refined and the
selling prices of refined products. 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.
The integration process at MAP continues and management anticipates MAP
will exceed its initial goal of deriving efficiencies of $200 million annually
on a pre-tax basis. MAP expects annual repeatable pre-tax operating
efficiencies to reach $130 million in 1998, with an additional $100 million
expected in 1999. The current focus is on actively integrating the logistical,
retail marketing, wholesale marketing and refining operations, as well as
administrative functions, that Marathon and Ashland transferred to MAP.
The above statements with respect to the amount and timing of efficiencies
to be realized by MAP are forward looking statements. Some factors that could
potentially cause actual results to differ materially from present expectations
include unanticipated costs or delays associated with implementing shared
technology, completing logistical infrastructure projects and leveraging
volume procurement synergies.
Following an internal review, MAP implemented a maintenance and safety
improvement program in second quarter 1998 at the Catlettsburg (KY), Canton
(OH), and St. Paul Park (MN) refineries. This program will be substantially
completed by the end of 1998. The costs of the program, as well as the effects
of reduced production levels, will not have a material negative impact on the
profitability of either MAP or the Marathon Group.
<PAGE> 48
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 action plans which include:
* prioritizing and focusing on those computerized and automated systems and
processes critical to the operations in terms of material operational, safety,
environmental 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, 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
The majority of Information Technology (IT) systems readiness efforts and
critical systems testing are scheduled to be completed by the end of 1998. The
remaining systems are to be completed by end of the third quarter of 1999. We
have received responses from over 74% of our third party software vendors, with
99% indicating that they are or will be Year 2000 ready and will provide updated
software on a timely basis.
The majority of the Non-Information Technology (Non-IT) systems are
scheduled to be inventoried by the end of 1998. All Non-IT systems are
scheduled to be ready by the end of the third quarter of 1999 with minor
exceptions. Plant maintenance shutdowns scheduled for the fourth quarter of
1999 will allow us to complete any final readiness efforts.
The chart below provides the percent of completion for the inventory of
systems and processes that may be affected by the Year 2000 ("Y2K Inventory"),
analysis performed to determine the Year 2000 date impact of inventoried systems
and processes ("Y2K Impact Assessment") and the Year 2000 readiness of the
Marathon Group's Year 2000 inventory ("Y2K Readiness of Overall Inventory").
The percent of completion for Y2K Readiness of Overall Inventory includes all
inventory 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; however, the implementation of certain IT and
Non-IT systems has been deferred until 1999 for operational reasons.
<PAGE> 49
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
End of Third Quarter 1998 Impact of
Y2K Assess- Overall
Inventory ment Inventory
------ ------ ------
<S> <C> <C> <C>
Information Technology 100% 100% 89%
Non-Information Technology 40% 38% 18%
</TABLE>
Third Parties
Third parties are suppliers, customers and vendors, excluding third party
software vendors discussed previously. Contacts have been made with all
critical third parties to determine if they will be able to provide their
service to the Marathon Group after the Year 2000. An aggressive follow-up has
started with those third parties not responding or returning an unacceptable
response. If it is determined that there is a significant risk, an effort will
be made to work with this third party. If this is not successful, a new
provider of the same services will be found.
The Costs to Address Year 2000 Issues
The estimated costs associated with Year 2000 readiness, are approximately
$28 million, including $11 million of incremental costs. Total costs incurred
as of September 30, 1998, were $6 million, including $2 million of incremental
costs. As Y2K impact assessment nears completion and the renovation planning,
readiness implementation and testing evolve, the estimated costs may change.
The Risks of the Company's Year 2000 Issues
The most reasonably likely worst case Year 2000 scenario would be the
inability of our third party suppliers, such as utility providers,
telecommunication companies, and other critical suppliers, such as drilling
equipment suppliers, platform 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, we are concerned with the lack of accurate and timely Year
2000 date impact information from suppliers of automation and process control
systems and processes. Without quality information from suppliers, specifically
on embedded chip technology, some Year 2000 problems could go undetected until
after January 1, 2000.
Contingency Planning
Representatives of the Marathon Group have participated with a work group
of the API Year 2000 Task force to develop a contingency plan format. This
format includes a template and other guidelines to help develop a plan that will
cover the Year 2000 areas of concern. These plans are to be completed and
tested, when practical, by the end of the third quarter of 1999.
<PAGE> 50
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The foregoing Year 2000 discussion includes forward-looking statements of
the Marathon Group's efforts and management's expectations relating to Year 2000
readiness. The Marathon Group's ability to achieve Year 2000 readiness and the
level of incremental costs associated therewith, could be adversely impacted by,
among other things, the availability and cost of programming and testing
resources, vendors' ability to install or modify proprietary hardware and
software and unanticipated problems identified in the ongoing Year 2000
readiness review.
Accounting Standards
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable operating segments of an enterprise. USX will adopt the
standard, effective with its 1998 annual financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". USX will adopt the standard,
effective with its 1998 annual financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidelines for companies to capitalize or expense costs incurred to
develop or obtain internal-use software. USX will adopt SOP 98-1 effective
January 1, 1999. The incremental impact on results of operations of adoption of
SOP 98-1 has not been determined, although it is likely that it will be
initially favorable since certain qualifying costs will be capitalized and
amortized over future periods.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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
Stockholders' Equity 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 that there will be derivative instruments
employed in our businesses 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 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. USX plans to adopt the standard
effective January 1, 2000, as required.
<PAGE> 51
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
----------------------------------
Commodity Price Risk and Related Risks
- --------------------------------------
Sensitivity analysis of the incremental effects on pretax income of
hypothetical 10% and 25% changes in commodity prices for open derivative
commodity instruments as of September 30, 1998 are provided in the following
table: (a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
Marathon Group (b) (c)
Crude oil (price increase) (d) $10.0 $26.2
Natural gas (price decrease) (d) 2.8 1.2
Refined products (price increase) (d) 4.7 15.6
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at September 30, 1998. Marathon Group management evaluates its portfolio
of derivative commodity instruments on an ongoing basis and adds or
revises strategies to reflect anticipated market conditions and changes
in risk profiles. Changes to the portfolio subsequent to September 30,
1998, would cause future pretax income effects to differ from those
presented in the table.
(b) The number of net open contracts for the Marathon Group varied
throughout the third quarter of 1998, from a low of 6,250 contracts at
August 26, to a high of 17,359 contracts at September 24, and averaged
9,790 for the quarter. The derivative commodity instruments used and
hedging positions taken also varied throughout the third quarter of 1998,
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.
</TABLE>
<PAGE> 52
MARATHON GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
----------------------------------
Interest Rate Risk
- ------------------
As of September 30, 1998, the discussion of Marathon's interest rate risk
has not changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in the USX 1997 Form 10-K.
Foreign Currency Exchange Rate Risk
- -----------------------------------
The Marathon Group is subject to the risk of price fluctuations related to
firm commitments for capital expenditures and existing assets or liabilities
denominated in currencies other than U.S. dollars. USX has not generally used
derivative instruments to manage this risk. However, USX has made limited use
of forward currency contracts to manage exposure to certain currency price
fluctuations. At September 30, 1998, USX had no forward currency contracts.
Equity Price Risk
- -----------------
As of September 30, 1998, the discussion of Marathon's equity price risk
has not changed materially from that presented in Quantitative and Qualitative
Disclosures About Market Risk included in the USX 1997 Form 10-K.
Safe Harbor
- -----------
The Marathon Group's quantitative and qualitative disclosures about market
risk include forward-looking statements with respect to management's opinion
about risks associated with USX's use of derivative instruments, and projected
changes in the size and composition of the Marathon Group's hedge portfolio.
These forward-looking statements are based on certain assumptions with respect
to market prices and industry supply of and demand for crude oil, natural gas,
refined products and certain raw materials. To the extent that these
assumptions prove to be inaccurate, future outcomes with respect to the Marathon
Group's hedging programs may differ materially from those discussed in the
forward-looking statements.
<PAGE> 53
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997(a) 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS (b)
Exploration & Production
Domestic $44 $87 $159 $376
International 16 40 98 219
Refining, Marketing & Transportation(c) 224 231 749 475
Other Energy Related Businesses(d) 6 8 23 39
Administrative (25) (47) (84) (134)
------ ------ ------ ------
$265 $319 $945 $975
Int'l. Write-off & Domestic Contract Settlement - - (76) -
Gain on Ownership Chg. & Transition Charges-MAP - - 223 -
Inventory Market Val. Res. Adjustment. (50) 41 (22) (137)
------ ------ ------ ------
Total Marathon Group $215 $360 $1,070 $838
CAPITAL EXPENDITURES (c) $285 $263 $835 $652
INVESTMENTS IN EQUITY AFFILIATES-NET 49 60 52 197
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (e):
Domestic 137.2 113.8 133.7 113.9
International (Liftings) 72.0 47.2 59.2 50.7
------ ------ ------ ------
Worldwide 209.2 161.0 192.9 164.6
Net Natural Gas Production (f):
Domestic 728.8 698.2 733.4 716.8
International - Equity 408.6 340.3 413.3 425.6
International - Other (g) 20.8 35.3 23.7 33.0
------- ------- ------- -------
Total Consolidated 1158.2 1073.8 1170.4 1175.4
Equity Affiliate 23.2 33.4 34.0 42.5
------- ------- ------- -------
Worldwide 1181.4 1107.2 1204.4 1217.9
Average Equity Sales Prices (h):
Liquid Hydrocarbons (per Bbl)
Domestic $10.23 $15.94 $10.72 $17.10
International 11.66 18.12 12.59 18.89
Natural Gas (per Mcf)
Domestic (j) $1.68 $1.87 $1.82 $2.14
International 1.90 1.87 2.04 2.01
Natural Gas Sales (f) (i):
Domestic 1067.6 1074.1 1122.1 1147.2
International 429.4 375.6 437.0 458.6
------- ------- ------- -------
Total Consolidated 1497.0 1449.7 1559.1 1605.8
Equity Affiliate 23.2 33.4 34.0 42.5
------- ------- ------- -------
Worldwide 1520.2 1483.1 1593.1 1648.3
Crude Oil Refined (e) (c) 885.5 562.6 904.6 513.2
Refined Products Sold (e) (c) 1228.6 793.3 1183.7 758.8
Matching buy/sell volumes included in refined
products sold (e) (c) 35.6 35.9 38.4 48.4
- --------------
<FN>
(a) Certain 1997 amounts have been reclassified to conform to 1998
classifications
(b) Income from operations for operating components includes operating
income previously reported, plus dividend and affiliate income and other
income.
(c) In 1998, income from operations, capital expenditures, refined
products sold, crude oil refined and matching buy/sell volumes include
100 percent of MAP and are not comparable to prior periods. For further
discussion of MAP, see Note 6 to the Marathon Group Statement Of
Operations.
(d) Includes domestic natural gas and crude oil marketing and
transportation, and power generation
(e) Thousands of barrels per day
(f) Millions of cubic feet per day
(g) Represents gas acquired for injection and subsequent resale
(h) Prices exclude gains and losses from hedging activities
(i) Represents equity, royalty and resale volumes
(j) The third quarter 1997 amount includes an unfavorable $.13
adjustment relating to a contract dispute.
</TABLE>
<PAGE> 54
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
The following unaudited pro forma data for the Marathon Group includes the pro
forma results of operations of Tarragon for 1998 and 1997, and the Ashland RM&T
net assets for 1997, giving effect to the acquisitions as if they had been
consummated at the beginning of the years presented. The pro forma data is
based on historical information and does not necessarily reflect the actual
results that would have occurred, nor is it necessarily indicative of future
results of operations. See Note 6 to the Marathon Group Financial
Statements for additional information.
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marathon Group:
Revenues $5,679 $5,804 $16,816 $17,597
Income from operations (a) 258 461 1,084 1,276
Net income (b) 42 183 365 410
Net income per common share:
Basic .14 .63 1.26 1.42
Diluted .14 .63 1.25 1.41
RM&T Operations (c) (d):
Income from operations (a) $224 $358 $749 $729
Thousands of barrels per day:
Crude oil refined 885.5 909.6 904.6 855.7
Refined products sold 1228.6 1220.7 1183.7 1170.8
Matching buy/sell volumes include in refined
products sold 35.6 49.7 38.4 68.9
<FN>
(a) Excludes the inventory market valuation reserve adjustments.
(b) Excluding the inventory market valuation reserve adjustment, pro
forma net income would have been $61 million and $373 million for the
1998 third quarter and nine months, respectively and $159 million and
$487 million for the 1997 third quarter and nine months, respectively.
(c) Pro forma data is based on results of operations from RM&T assets
contributed to MAP by Marathon and Ashland, purchase accounting effects
and other pro forma adjustments and reclassifications.
(d) Results for 1998 are actuals. There are no pro forma effects in
1998, since MAP commenced operations January 1, 1998.
</TABLE>
<PAGE> 55
Part I - Financial Information (Continued):
C. U. S. Steel Group
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $1,483 $1,701 $4,842 $5,035
Income from affiliates 3 12 46 39
Gain on disposal of assets 11 21 39 28
Other income (loss) - 1 (1) 1
------ ------ ------ -------
Total revenues 1,497 1,735 4,926 5,103
------ ------ ------ -------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,312 1,433 4,203 4,275
Selling, general and administrative expenses
(credits) (51) (30) (150) (100)
Depreciation, depletion and amortization 71 72 220 225
Taxes other than income taxes 60 63 169 182
------ ------ ------ -------
Total costs and expenses 1,392 1,538 4,442 4,582
------ ------ ------ -------
INCOME FROM OPERATIONS 105 197 484 521
Net interest and other financial costs 10 22 60 70
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 95 175 424 451
Provision for estimated income taxes 30 59 136 151
------ ------ ------ ------
NET INCOME 65 116 288 300
Noncash credit from exchange of preferred stock - - - 10
Dividends on preferred stock (2) (2) (7) (10)
------ ------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $63 $114 $281 $300
====== ====== ====== ======
STEEL STOCK DATA:
Net income per share
- Basic $.72 $1.32 $3.22 $3.50
- Diluted .71 1.25 3.11 3.24
Dividends paid per share .25 .25 .75 .75
Weighted average shares, in thousands
- Basic 88,099 85,770 87,223 85,463
- Diluted 92,359 93,952 94,717 94,176
<FN>
Selected notes to financial statements appear on pages 58-61.
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
September 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $23 $18
Receivables, less allowance for doubtful
accounts of $6 and $13 441 588
Inventories 776 705
Deferred income tax benefits 214 220
Other current assets 1 -
------ ------
Total current assets 1,455 1,531
Investments and long-term receivables,
less reserves of $12 and $15 763 670
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$5,893 and $5,799 2,489 2,496
Prepaid pensions 2,126 1,957
Other noncurrent assets 33 40
------ ------
Total assets $6,866 $6,694
====== ======
LIABILITIES
Current liabilities:
Notes payable $21 $13
Accounts payable 618 687
Payroll and benefits payable 333 379
Accrued taxes 171 190
Accrued interest 7 11
Long-term debt due within one year 11 54
------ ------
Total current liabilities 1,161 1,334
Long-term debt, less unamortized discount 501 456
Employee benefits 2,329 2,338
Deferred credits and other liabilities 582 536
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 2,042 1,779
------ ------
Total stockholders' equity 2,045 1,782
------ ------
Total liabilities and stockholders' equity $6,866 $6,694
====== ======
<FN>
Selected notes to financial statements appear on pages 58-61.
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Nine Months Ended
September 30
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $288 $300
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 220 225
Pensions (171) (184)
Postretirement benefits other than pensions (4) 3
Deferred income taxes 109 37
Gain on disposal of assets (39) (28)
Changes in:
Current receivables 148 47
Inventories (71) (66)
Current accounts payable and accrued expenses (132) 70
All other - net (55) (51)
------ ------
Net cash provided from operating activities 293 353
------ ------
INVESTING ACTIVITIES:
Capital expenditures (228) (176)
Disposal of assets 17 390
Investments in equity affiliates - net (66) (20)
Deposits of restricted cash - net (16) -
All other - net 13 9
------ ------
Net cash provided from (used in)
investing activities (280) 203
------ ------
FINANCING ACTIVITIES:
Increase (decrease) in U. S. Steel Group's portion of USX
consolidated debt 21 (513)
Specifically attributed debt repayments (3) (6)
Steel Stock issued 55 29
Preferred stock repurchased (8) -
Dividends paid (73) (72)
------ ------
Net cash used in financing activities (8) (562)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5 (6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18 23
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $23 $17
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(61) $(82)
Income taxes paid, including settlements
with other groups (32) (88)
<FN>
Selected notes to financial statements appear on pages 58-61.
</TABLE>
<PAGE> 58
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. Additional information is contained in the USX Annual Report
on Form 10-K for the year ended December 31, 1997.
2. Effective January 1, 1998, USX adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No.
130). This statement establishes standards for reporting and display of
comprehensive income and its components in the financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by and distributions to owners. The U. S. Steel
Group's total comprehensive income for the third quarter and nine months of
1998 was $64 million and $285 million, respectively. Total comprehensive
income for the same 1997 periods was $116 million and $299 million,
respectively.
Effective January 1, 1997, USX adopted American Institute of Certified
Public Accountants Statement of Position No. 96-1, "Environmental
Remediation Liabilities" (SOP 96-1), which provides additional
interpretation of existing accounting standards related to recognition,
measurement and disclosure of environmental remediation liabilities. As a
result of adopting SOP 96-1, the U. S. Steel Group identified additional
environmental remediation liabilities of $35 million, of which $28 million
was discounted to a present value of $13 million and $7 million was not
discounted. Assumptions used in the calculation of the present value
amount included an inflation factor of 2% and an interest rate of 7% over a
range of 22 to 30 years. The net unfavorable effect of adoption on income
from operations at January 1, 1997, was $20 million.
3. 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.
<PAGE> 59
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
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 among 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, the Marathon Group and, prior to November 1, 1997, the Delhi 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 among the U. S.
Steel Group, the Marathon Group and, prior to November 1, 1997, the Delhi
Group for group financial statement purposes, based principally upon the
financial income, taxable income, credits, preferences and other amounts
directly related to the respective groups.
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, Marathon and Delhi
Groups and USX consolidated are allocated to each group based on the
relationship of the individual group provisions to the combined interim
provisions.
The nine months 1998 provision for estimated income taxes was
decreased by a $9 million foreign tax adjustment as a result of a favorable
resolution of foreign tax litigation.
<PAGE> 60
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
4. The method of calculating net income per share for the Steel Stock,
Marathon Stock and, prior to November 1, 1997, Delhi Stock reflects the
Board's intent that the separately reported earnings and surplus of the U.
S. Steel Group, the Marathon Group and the Delhi 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 calculated by adjusting net income for
dividend requirements of preferred stock and, in 1997, the noncash credit
on exchange of preferred stock and is based on the weighted average number
of common shares outstanding.
Diluted net income per share assumes conversion of convertible
securities for the applicable periods outstanding and assumes exercise of
stock options, provided in each case, the effect is not antidilutive.
See Note 5, of the Notes to USX Consolidated Financial Statements for
the computation of income per common share.
5. Income from operations includes net periodic pension credits of $153
million and $114 million in the first nine months of 1998 and 1997,
respectively, ($51 million and $40 million in the third quarter of 1998 and
1997, respectively). These pension credits are primarily noncash and for
the most part are included in selling, general and administrative expenses.
6. Inventories are carried at the lower of cost or market. Cost of
inventories is determined primarily under the last-in, first-out (LIFO)
method.
<TABLE>
<CAPTION>
(In millions)
-------------------------
September 30 December 31
1998 1997
----------- -----------
<S> <C> <C>
Raw materials $187 $130
Semi-finished products 312 331
Finished products 221 187
Supplies and sundry items 56 57
---- ----
Total $776 $705
==== ====
</TABLE>
7. 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 September 30,
1998, 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
<PAGE> 61
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
7. (Continued)
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.
8. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the U.
S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At September 30, 1998, and
December 31, 1997, accrued liabilities for remediation totaled $98 million
and $106 million, respectively. It is not presently possible to estimate
the ultimate amount of all remediation costs that might be incurred or the
penalties that may be imposed.
For a number of years, the U. S. Steel Group has made substantial
capital expenditures to bring existing facilities into compliance with
various laws relating to the environment. In the first nine months of 1998
and for the years 1997 and 1996, such capital expenditures totaled $38
million, $43 million and $90 million, respectively. The U. S. Steel Group
anticipates making additional such expenditures in the future; however, the
exact amounts and timing of such expenditures are uncertain because of the
continuing evolution of specific regulatory requirements.
Guarantees by USX of the liabilities of affiliated entities of the U.
S. Steel Group totaled $72 million at September 30, 1998. In the event
that any defaults of guaranteed liabilities occur, USX has access to its
interest in the assets of the affiliates to reduce U. S. Steel Group losses
resulting from these guarantees. As of September 30, 1998, the largest
guarantee for a single affiliate was $44 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at September 30, 1998, totaled $238 million compared
with $156 million at December 31, 1997.
<PAGE> 62
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 primarily engaged in
the production and sale of steel mill products, coke and taconite pellets. The
U. S. Steel Group also includes the management of mineral resources, domestic
coal mining and engineering and consulting services (together with U. S. Steel,
the "Steel & Related Businesses"). Steel & Related - Equity Affiliates includes
Transtar Inc. and joint ventures such as USS/Kobe Steel Company ("USS/Kobe"),
USS-POSCO Industries ("USS-POSCO") and PRO-TEC Coating Company ("PRO-TEC").
Other businesses that are part of the U. S. Steel Group include real estate
development and management, and leasing and financing activities. Management's
Discussion and Analysis should be read in conjunction with the third quarter and
first nine months of 1998 USX consolidated financial information and the U. S.
Steel Group Financial Statements and selected notes. The discussion of Results
of Operations should be read in conjunction with the Supplemental Statistics
provided on page 75.
Certain sections of Management's Discussion and Analysis include forward-
looking statements concerning trends or events potentially affecting the
businesses of the U. S. Steel Group. These statements typically contain words
such as "anticipates", "believes", "estimates", "expects" or similar words
indicating that future outcomes are not known with certainty and subject to risk
factors that could cause these outcomes to differ significantly from those
projected. In accordance with "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, these statements are accompanied by
cautionary language identifying important factors, though not necessarily all
such factors, that could cause future outcomes to differ materially from those
set forth in forward-looking statements. For additional risk factors affecting
the businesses of the U. S. Steel Group, see Supplementary Data - Disclosures
About Forward-Looking Statements in USX's 1997 Form 10-K.
Results of Operations
- ---------------------
Revenues for the third quarter and first nine months of 1998 and 1997 are
set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Steel & Related Businesses $1,477 $1,702 $4,818 $5,009
Steel & Related - Equity Affiliates - 8 29 29
----- ----- ----- -----
Subtotal - Steel & Related 1,477 1,710 4,847 5,038
Administrative & Other Businesses 20 25 79 65
----- ----- ----- -----
Total Revenues (a) $1,497 $1,735 $4,926 $5,103
====== ====== ====== ======
- ------
<FN>
(a) Amounts for the third quarter and first nine months of 1997 were
reclassified to conform to 1998 classifications.
</TABLE>
Total revenues decreased $238 million and $177 million in the third quarter
and first nine months of 1998, respectively, compared with the same periods in
1997. The decrease in revenues resulted from lower shipment levels and lower
average steel product prices. An unprecedented surge in imports, weak tubular
markets, and the effects of the General Motors strike negatively affected
shipment levels, steel product prices and operating levels in the third quarter.
<PAGE> 63
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations (IFO) and certain items included in income from
operations for the third quarter and first nine months of 1998 and 1997 are set
forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total income from operations (a) $105 $197 $484 $521
Less: certain favorable (unfavorable) items for
Insurance litigation settlement No. 8 blast
furnace (net of related charges and reserves)(b) - - 30 -
Insurance settlement related to the 1996
hearth breakout at the Gary Works No. 13
blast furnace - 25 - 40
Effect of adoption of SOP 96-1 (c) - - - (20)
Other environmental accrual adjustments - net - - - 11
----- ----- ----- -----
Subtotal - 25 30 31
----- ----- ----- -----
IFO adjusted to exclude above items $105 $172 $454 $490
===== ===== ===== =====
- -----
<FN>
(a) Consists of operating income, affiliate income, net gains on
disposal of assets and other income. Amounts for 1997 were reclassified
in 1998 to include affiliate income and other income.
(b) Settlement of litigation against the company's property insurers to
recover losses related to a 1995 explosion at the Gary Works No. 8 blast
furnace.
(c) American Institute of Certified Public Accountants Statement of
Position No. 96-1, "Environmental Remediation Liabilities" ("SOP 96-1")
provides additional guidance on recognition, measurement and disclosure
of remediation liabilities. For additional information, see Note 2 to
the U. S. Steel Group Financial Statements.
</TABLE>
Adjusted income from operations for the U. S. Steel Group decreased $67
million and $36 million, respectively, in the third quarter and first nine
months of 1998 compared with the same periods in 1997. The decreases were
primarily due to lower results from Steel and Related Businesses, partially
offset by higher results from Administrative and Other Businesses.
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Steel & Related Businesses $32 $140 $235 $354
Steel & Related - Equity Affiliates - 8 29 29
----- ----- ----- -----
Subtotal - Steel & Related 32 148 264 383
Administrative & Other Businesses 73 49 220 138
----- ----- ----- -----
Total income from operations $105 $197 $484 $521
===== ===== ===== =====
</TABLE>
<PAGE> 64
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Income from operations for Steel & Related Businesses decreased $108
million in the third quarter of 1998 compared with the third quarter of 1997.
Results in the third quarter 1997 included a favorable $25 million in final
settlement payments related to the 1996 hearth breakout at the Gary Works No. 13
blast furnace. Excluding the settlement, income from operations for the third
quarter 1998 decreased $83 million from the same period in 1997. The decrease
was primarily due to lower shipment levels, lower average steel product prices,
and less efficient operating levels. An unprecedented surge in imports, weak
tubular markets, and the effects of the General Motors strike negatively
affected shipment levels, steel product prices and operating levels in the third
quarter.
Income from operations for Steel & Related Businesses decreased $119
million in the first nine months of 1998 compared with the same period in 1997.
Results in the first nine months of 1998 included a favorable $30 million (net
of charges and reserves) insurance litigation settlement pertaining to the 1995
Gary (Ind.) Works No. 8 blast furnace explosion. Results in the first nine
months of 1997 included $40 million in favorable insurance settlement payments
related to a 1996 hearth breakout at Gary Works No. 13 blast furnace. Excluding
these favorable items, income from operations for Steel & Related Businesses in
the first nine months of 1998 decreased $109 million from the same period in
1997. The decrease was primarily due to lower average steel prices, lower steel
shipments, and the cost effects of the planned reline at Gary Works No. 6 blast
furnace and the 10 day outage at Gary Works No. 13 blast furnace following a
tap hole failure.
The surge in the level of steel imports, weak tubular markets and the
General Motors strike contributed to lower average steel prices and reduced
shipments in the third quarter and first nine months of 1998.
Income from operations for Steel and Related - Equity Affiliates decreased
$8 million in the third quarter of 1998, compared with the same period in 1997.
The decrease was mainly due to lower income generated by USS-POSCO and PRO-TEC,
partially offset by income from VSZ U. S. Steel s. r.o. (for additional
information on VSZ U. S. Steel, see "Net cash used in investments in equity
affiliates" on page 66). Equity affiliates, especially USS-POSCO and USS/Kobe,
were also negatively impacted by the surge in imports and weak tubular markets.
Administrative and Other Businesses includes the portion of pension
credits, postretirement benefit costs and certain other expenses principally
attributable to the former businesses of the U. S. Steel Group as well as USX
corporate general and administrative costs allocated to the U. S. Steel Group.
Income from operations for Administrative and Other Businesses increased $24
million and $82 million in the third quarter and first nine months of 1998,
respectively, compared with the same periods in 1997. Income from operations
for Administrative and Other Businesses for the first nine months of 1997
included net charges of $9 million related to environmental accruals and the
adoption of SOP 96-1. Excluding these charges, income from operations for the
first nine months of 1998 increased $73 million from the same period in 1997
primarily due to higher pension credits, higher equity income from RTI
International Metals, Inc. (formerly RMI Titanium Company) ("RTI") primarily due
to a one-time tax adjustment and higher income from USX Realty Development,
partially offset by lower income from USX Credit.
The pension credits referred to in Administrative and Other Businesses,
combined with pension costs for ongoing operating units of the U. S. Steel
Group, resulted in net pension credits (which are primarily noncash) of $153
million and $114 million in the first nine months of 1998 and 1997,
respectively. To the extent that these credits decline in the future, income
from operations would be adversely affected.
<PAGE> 65
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Net interest and other financial costs for the third quarter and first nine
months of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and other financial income $- $1 $4 $2
Interest and other financial costs (10) (23) (64) (72)
----- ----- ----- -----
Net interest and other financial costs (10) (22) (60) (70)
Less:
Favorable (unfavorable) adjustments to
carrying value of indexed debt (a) 11 - 7 6
----- ----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $(21) $(22) $(67) $(76)
===== ===== ===== =====
- -----
<FN>
(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. At maturity, USX must exchange these notes for shares of
RTI common stock, or redeem the notes for the equivalent amount of cash.
The carrying value of indexed debt is adjusted quarterly to settlement
value, based on changes in the value of RTI common stock. Any resulting
adjustment is charged or credited to income and included in interest and
other financial costs. USX's 27% interest in RTI continues to be
accounted for under the equity method.
</TABLE>
Adjusted net interest and other financial costs decreased by $1 million and
$9 million in the third quarter and first nine months of 1998, respectively, as
compared with the same period in 1997, due primarily to lower average debt
levels in the U. S. Steel Group.
The provision for estimated income taxes in the first nine months of 1998
included a $9 million favorable foreign tax adjustment as a result of a
favorable resolution of foreign tax litigation.
Net income decreased $51 million and $12 million in the third quarter and
first nine months of 1998, respectively, as compared with the same periods in
1997.
Noncash credit from exchange of preferred stock totaled $10 million in the
first nine months of 1997. On May 16, 1997, USX exchanged approximately 3.9
million 6.75% Convertible Quarterly Income Preferred Securities ("Trust
Preferred Securities") of USX Capital Trust I, for an equivalent number of
shares of its outstanding 6.50% Cumulative Convertible Preferred Stock ("6.50%
Preferred Stock"). The noncash credit from exchange of preferred stock
represents the difference between the carrying value of the 6.50% Preferred
Stock ($192 million) and the fair value of the Trust Preferred Securities of USX
Capital Trust I ($182 million), at the date of the exchange.
<PAGE> 66
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Operating Statistics
- --------------------
Third quarter 1998 steel shipments of 2.6 million tons and raw steel
production of 2.7 million tons decreased 11% and 6%, respectively, from the same
period in 1997. First nine months of 1998 steel shipments of 8.3 million tons
and raw steel production of 8.8 million tons both decreased 4%, from the same
period in 1997. Raw steel capability utilization in the third quarter and first
nine months of 1998 averaged 84.6% and 91.6%, respectively, compared to 90.4%
and 95.6% in the same period in 1997. Production and raw steel capability
utilization in the third quarter and first nine months of 1998 were negatively
impacted by a surge in imports and by the planned and unplanned blast furnace
outages at Gary Works. As a result of current market conditions, U. S. Steel
Group has curtailed its production operations by keeping the Gary Works No. 6
blast furnace out of service even though a scheduled reline was completed in
Mid-August, cutting back raw steel production at Mon Valley Works and Fairfield
Works, suspending one of Minntac's five taconite pellet production lines in
Minnesota, and taking the Fairfield pipe mill down for several multiple-week
periods.
Cash Flows
- -----------
Net cash provided from operating activities in the first nine months of
1998 was $293 million, compared with $353 million in the same period in 1997.
The first nine months of 1998 included proceeds of $38 million for the insurance
litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace
explosion. The first nine months of 1997 included payments of $49 million to
fund the U. S. Steel Group's principal pension plan for the 1996 plan year and
receipts of $40 million in insurance recoveries related to the Gary Works No. 13
blast furnace breakout. Excluding these items, net cash provided from operating
activities decreased $107 million due primarily to unfavorable working capital
changes.
Capital expenditures in the first nine months of 1998 were $228 million,
compared with $176 million in the same period in 1997. Contract commitments to
acquire property, plant and equipment at September 30, 1998, totaled $238
million compared with $156 million at December 31, 1997.
Cash from the disposal of assets in 1997 included proceeds of $361 million
from U. S. Steel's entry into a strategic partnership with two limited partners
to acquire an interest in three coke batteries at its Clairton Works.
Net cash used in investments in equity affiliates of $66 million mainly
reflects funding for entry into a joint venture in Slovakia with VSZ a.s.
("VSZ"). In February 1998, the 50-50 joint venture, doing business as VSZ U. S.
Steel, s. r.o., took over ownership and commenced operation of an existing
tin mill facility at VSZ's Ocel plant in Kosice, with annual production
capability of 140,000 metric tons. The joint venture plans to add 200,000
annual metric tons of new tin mill production capability in the next two years.
Financing of the expansion may be subject to future economic and steel market
developments and the level of partners' support that potential lenders may
require.
Financial obligations increased by $18 million in the first nine months of
1998. 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.
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.
<PAGE> 67
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Environmental Matters, Contingencies and Commitments
- ----------------------------------------------------
The U. S. Steel Group has incurred and will continue to incur substantial
capital, operating and maintenance, and remediation expenditures as a result of
environmental laws and regulations. In recent years, these expenditures have
been mainly for process changes in order to meet Clean Air Act obligations,
although ongoing compliance costs have also been significant. To the extent
these expenditures, as with all costs, are not ultimately reflected in the
prices of the U. S. Steel Group's products and services, operating results will
be adversely affected. The U. S. Steel Group believes that all of its domestic
competitors are subject to similar environmental laws and regulations. However,
the specific impact on each competitor may vary depending on a number of
factors, including the age and location of its operating facilities,
marketing areas, production processes and the specific products and services
it provides. To the extent that competitors are not required to undertake
equivalent costs in their operations, the competitive position of the
U. S. Steel Group could be adversely affected.
USX has been notified that it is a potential responsible party ("PRP") at
27 waste sites related to the U. S. Steel Group under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") as of
September 30, 1998. In addition, there are 17 sites related to the U. S. Steel
Group where USX has received information requests or other indications that USX
may be a PRP under CERCLA but where sufficient information is not presently
available to confirm the existence of liability or make any judgment as to the
amount thereof. There are also 35 additional sites related to the U. S. Steel
Group where remediation is being sought under other environmental statutes, both
federal and state, or where private parties are seeking remediation through
discussions or litigation. At many of these sites, USX is one of a number of
parties involved and the total cost of remediation, as well as USX's share
thereof, is frequently dependent upon the outcome of investigations and remedial
studies. The U. S. Steel Group accrues for environmental remediation activities
when the responsibility to remediate is probable and the amount of associated
costs is reasonably determinable. As environmental remediation matters proceed
toward ultimate resolution or as additional remediation obligations arise,
charges in excess of those previously accrued may be required.
In 1990 a consent decree was signed by USX which, among other things,
required USX to study and implement a program to remediate the sediment in a
portion of the Grand Calumet River. On August 6, 1998, USX announced the signing
of a new consent decree under the federal Clean Water Act. The consent decree
provides for a sediment remediation project involving a five-mile stretch of the
Grand Calumet River that runs through Gary Works. The program cost, which has
been accrued, is approximately $30 million. The sediment remediation project is
scheduled for completion by 2003. In addition, USX disclosed the completion of
a series of wastewater capital projects at Gary Works costing approximately $25
million, which are necessary to comply with the new consent decree. The
wastewater capital projects will improve the plant's ability to prevent releases
of process materials into the river. In addition, USX also signed a consent
decree with the public trustees to settle natural resource damage claims for the
portion of the Grand Calumet River that runs through Gary Works. This
settlement obligates USX to purchase and restore several parcels of property.
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 9 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
<PAGE> 68
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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 fourth quarter for
the U. S. Steel Group and its domestic joint ventures are expected to be lower
than the fourth quarter of 1997 largely due to the continued surge in steel
imports and weak tubular markets. Faced with weak economies and markets,
foreign steelmakers are exporting their material to the United States at record
levels during 1998. The level of imports in the third quarter 1998, may have
caused domestic steel customers to build inventories, which could result in
weakness in steel demand in the fourth quarter. Growing domestic production and
finishing capability for flat-rolled products and high levels of imports could
continue to have an adverse effect on the U. S. Steel Group's product prices and
shipment levels. In addition, any weakness in the U.S. economy for capital
goods and consumer durables could further reduce U. S. Steel Group's product
prices and shipment levels.
As a result of current market conditions and depressed order levels, U. S.
Steel Group has curtailed its production operations by keeping the Gary Works
No. 6 blast furnace out of service even though a scheduled reline was completed
in Mid-August, cutting back raw steel production at Mon Valley Works and
Fairfield Works, suspending one of Minntac's five taconite pellet production
lines in Minnesota, and taking the Fairfield pipe mill down for several
multiple-week periods. Also, U. S. Steel Group plans to curtail operations
at Fairless Works by 70 percent by indefinitely idling selected sheet
finishing facilities. Further curtailments may be required. Such
curtailments will negatively impact unit manufacturing costs. In addition,
U. S. Steel Group has offered a Voluntary Early Retirement Program to
approximately 550 non-union employees which is expected to result in a charge
to net income in the fourth quarter 1998, currently estimated to be less
than $10 million.
Steel imports to the United States accounted for an estimated 28%, 24% and
23% of the domestic steel market in the first eight months of 1998, and for the
years 1997 and 1996, respectively. During July and August of 1998, steel
imports surged and accounted for 35% and 34%, respectively, of the domestic
steel market. On September 30, 1998, U. S. Steel joined with 11 other producers
and the United Steelworkers of America to file trade cases against Japan,
Russia, and Brazil. Those filings contend 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.
Information is continuing to be evaluated and the filing of additional trade
cases is anticipated.
The preceding statements concerning anticipated steel demand, steel
pricing, steel production and manufacturing costs, results of operation and
shipment levels are forward-looking and are based upon assumptions as to future
demand, product prices and mix, and levels of steel production capability,
production and shipments. These assumptions 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.
<PAGE> 69
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Year 2000 Readiness Disclosure
- ------------------------------
A multi-functional Year 2000 task force continues to execute a preparedness
plan which addresses readiness requirements for business computer systems,
technical infrastructure, end-user computing, third parties, manufacturing,
environmental operations, systems products produced and sold, and dedicated R&D
test facilities. The U. S. Steel Group is executing a Year 2000 readiness plan
which includes:
* prioritizing and focusing on those computerized and automated systems and
processes critical to the operations in terms of material safety,
operational, environmental, quality and financial risk to the company.
* allocating and committing appropriate resources to fix the problem.
* communicating with, and aggressively pursuing, critical third parties to
help ensure the Year 2000 readiness of their products and services through
use of mailings, telephone contacts, on-site assessments and the inclusion
of Year 2000 readiness language in purchase orders and contracts.
* performing rigorous Year 2000 tests of critical systems.
* participating in, and exchanging Year 2000 information with industry trade
associations, such as the American Iron & Steel Institute, Association of
Iron & Steel Engineers and the Steel Industry Systems Association.
* engaging qualified outside engineering and information technology consulting
firms to assist in the Year 2000 impact assessment and readiness effort.
State of Readiness
The U. S. Steel Group's objective is to achieve 90% Year 2000 readiness for
Information Technology (IT) and 80% for non-IT systems and processes by the end
of 1998. Certain systems/processes are to 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 of
the third quarter, 1999. This schedule may be impacted by the availability of
information and services from third-party suppliers/vendors on the Year 2000
readiness of their products and services. Generally, the year 1999 will be
primarily devoted to Year 2000 systems and integration testing, tracking of the
readiness of third parties, developing contingency plans and verifying the state
of Year 2000 readiness.
The chart below 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 of 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
<PAGE> 70
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
corrected and made Year 2000 ready through the renovation/replacement, testing
and implementation activities.
<TABLE>
<CAPTION>
Percent Completed
Y2K
Y2K Readiness
Impact of
Y2K Assess- Overall
End of Third Quarter 1998 Inventory ment Inventory
------ ------ ------
<S> <C> <C> <C>
Information Technology 100% 95% 84%
Non-Information Technology 100% 75% 70%
</TABLE>
Third Parties
The U. S. Steel Group continues to review its third party (including, but
not limited to outside processors, process control systems and hardware
suppliers, and transportation carriers)relationships to determine those 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 product and service
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 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 the third parties, an effort
will be made to work with the third parties to resolve the issue, or a new
provider of the same products or services will be investigated and secured.
Through the end of the third quarter the U. S. Steel Group sent out
approximately 700 inquiries and received over 450 responses.
The Costs to Address Year 2000 Issues
The estimated costs associated with Year 2000 readiness, are approximately
$25 million, including $10 million in incremental cost. Total costs incurred as
of September 30, 1998, were $9 million, including $5 million of incremental
costs. As Y2K Impact Assessment nears completion and the renovation planning,
readiness implementation and testing evolve, the estimated costs may change.
Year 2000 Risks to the Company
The most reasonably likely worst case Year 2000 scenario would be the
inability of our 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.
<PAGE> 71
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
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 quality
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 new century.
Contingency Planning
Guidelines have been issued to all business units for creating contingency
plans to address those critical facets of their operation that can cause a
material safety, operational, environmental, or financial risk to the company.
These plans are to be completed and tested, when practical, by the middle of
1999. Representatives of the U. S. Steel Group are participating with a Year
2000 subcommittee of the Association of Iron & Steel Engineers to develop a
contingency plan format for process control systems. This format will include a
contingency plan template and other guidelines to help entities develop a plan
that will cover the associated Year 2000 areas of concern.
This discussion includes forward-looking statements of the U. S. Steel
Group's efforts and management's expectations relating to Year 2000 readiness.
The Steel Group's ability to achieve Year 2000 readiness and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, 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.
Accounting Standard
- -------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which introduces a "management approach" for
identifying reportable operating segments of an enterprise. USX will adopt the
standard, effective with its 1998 annual financial statements.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". USX will adopt the standard
effective with its 1998 annual financial statements.
In March 1998, the American Institute of Certified Public Accountants
issued its Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidelines for companies to capitalize or expense costs incurred to
develop or obtain internal-use software. USX will adopt SOP 98-1 effective
January 1, 1999. The incremental impact on results of operations of adoption of
SOP 98-1 has not been determined, although it is likely that it will be
initially favorable since certain qualifying costs will be capitalized and
amortized over future periods.
<PAGE> 72
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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
Stockholders' Equity 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 that there will be derivative instruments
employed in our businesses 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 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. USX plans to adopt the
standard effective January 1, 2000, as required.
<PAGE> 73
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% changes in commodity prices for open derivative
commodity instruments as of September 30, 1998 are provided in the following
table: (a)
<TABLE>
<CAPTION>
Incremental Decrease
in Pretax Income
Assuming a Hypothetical
Price Change of(a)
(Dollars in millions) 10% 25%
- --------------------------------------------------------------------------------
<S> <C> <C>
Derivative Commodity Instruments
U. S. Steel Group
Natural gas (price decrease) (b) $3.5 $8.8
Zinc (price decrease) (b) .8 2.1
Heating oil (price decrease) (b) .2 .4
Nickel (price decrease) (b) .1 .2
Tin (price decrease) (b) .1 .2
<FN>
(a) Gains and losses on derivative commodity instruments are generally
offset by price changes in the underlying commodity. Effects of these
offsets are not reflected in the sensitivity analyses. Amounts reflect
the estimated incremental effect on pretax income of hypothetical 10% and
25% changes in closing commodity prices for each open contract position
at September 30, 1998. 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 portfolios subsequent to
September 30, 1998, would cause future pretax income effects to differ
from those presented in the table.
(b) 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.
</TABLE>
<PAGE> 74
U. S. STEEL GROUP OF USX CORPORATION
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-------------------------------------
Interest Rate Risk
- ------------------
As of September 30, 1998, 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 the USX
1997 Form 10-K.
Equity Price Risk
- -----------------
USX is 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"). At maturity, USX must exchange the notes for shares of RTI
International Metals, Inc. (formerly RMI Titanium Company) ("RTI") common stock,
or redeem the notes for the equivalent amount of cash. Each quarter, USX
adjusts the carrying value of Indexed Debt to settlement value, based on changes
in the value of RTI common stock. Any resulting adjustment is charged or
credited to income and included in interest and other financial costs. At
September 30, 1998, a hypothetical 10% increase in the value of RTI common stock
would have resulted in an $11 million unfavorable effect on pretax income. USX
holds a 27% interest in RTI which is accounted for under the equity method. The
unfavorable effects on income described above would generally be offset by
changes in the market value of USX's investment in RTI. However, under the
equity method of accounting, USX cannot recognize in income these changes in the
market value until the investment is liquidated.
Safe Harbor
- -----------
The U. S. Steel Group's quantitative and qualitative disclosures about
market risk include forward-looking statements with respect to management's
opinion about risks associated with USX's use of derivative instruments, and
projected changes in the size and composition of the U. S. Steel Group's hedge
portfolio. These forward-looking statements are based on certain assumptions
with respect to market prices and industry supply of and demand for steel
products and certain raw materials. To the extent that these assumptions prove
to be inaccurate, future outcomes with respect to the U. S. Steel Group's
hedging programs may differ materially from those discussed in the forward-
looking statements.
<PAGE> 75
<TABLE>
U.S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
-----------------------------------
($ in Millions)
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30 September 30
1998 1997(e) 1998 1997(e)
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES $1,497 $1,735 $4,926 $5,103
INCOME FROM OPERATIONS
Steel and Related Businesses (a) $32 $140 $235 $354
Steel and Related-Equity Affiliates - 8 29 29
---- ---- ---- ----
Subtotal - Steel & Related $32 $148 $264 $383
Administrative and Other (b) 73 49 220 138
---- ---- ---- ----
Total U. S. Steel Group $105 $197 $484 $521
CAPITAL EXPENDITURES $92 $59 $228 $176
OPERATING STATISTICS (Steel & Related Businesses)
Steel Shipments (c) 2,554 2,861 8,344 8,670
Raw Steel-Production (c) 2,729 2,915 8,774 9,157
Raw Steel-Capability Utilization (d) 84.6% 90.4% 91.6% 95.6%
- ------------
<FN>
(a) Includes the production and sale of steel products, coke and
taconite pellets; domestic coal mining; the management of mineral
resources; and engineering and consulting services.
(b) Includes pension credits, other postretirement benefit costs and
certain other expenses principally attributable to former business units
of the U. S. Steel Group. Also includes results of real estate
development and management, and leasing and financing activities and
equity income from RTI International Metals, Inc. (formerly RMI Titanium
Company).
(c) Thousands of net tons.
(d) Based on annual raw steel production capability of 12.8 million
tons.
(e) Certain 1997 amounts have been reclassified to conform to 1998
classifications.
</TABLE>
<PAGE> 76
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Federal Offshore Claim
On July 18, 1997, the United States Court of Federal Claims (Case
No. 92-331C) entered a final judgment in the amount of $78 million in
favor of Marathon Oil Company and against the United States of
America. The U.S. Government was effectively ordered to return lease
bonuses that Marathon paid in 1981 for interests in five oil and gas
leases offshore North Carolina. The lawsuit filed in May 1992
alleged, inter alia, that the federal government breached the leases
through passage of legislation which disrupted the company's rights to
explore, develop, and produce hydrocarbons from the leases. In
October 1998, the U. S. Government' appeal to the U. S. Court of
Appeals of the Federal Circuit was granted and the judgment was
reversed. Marathon intends to file a motion for reconsideration.
Reference is made to the Form 10-Q's for the first and second
quarters of 1998 for updated information on the Aloha Stadium
Litigation and the Posted Price Litigation.
Item 2. CHANGES IN SECURITIES AND THE USE OF PROCEEDS
On August 12, 1998, Marathon Oil Canada Limited, an indirect
subsidiary of the registrant, issued 878,000 Exchangeable Shares in
exchange for shares of Tarragon Oil and Gas Limited, an Ontario
Corporation in connection with the acquisition of Tarragon by
Marathon. The issuance of the shares was exempt from the registration
provision of the Securities Act pursuant to Section 3(a)(10) of the
Act. The Exchangeable Shares are exchangeable at any time on a one-
for-one basis for shares of USX-Marathon Group Common Stock. The
shares of Marathon Stock issuable upon exchange have been registered
under the Securities Act (File No. 333-56867), prospectus supplement
dated August 12, 1998).
<PAGE> 77
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.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Third Quarter Nine Months
Ended Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME DATA:
Revenues $5,658 $3,935 $16,703 $11,803
Income from operations 225 371 1,093 862
Net income 45 219 366 423
</TABLE>
<TABLE>
<CAPTION>
(In millions)
------------------------
September 30 December 31
1998 1997
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets $5,309 $3,436
Noncurrent assets 11,206 8,413
------ ------
Total assets $16,515 $11,849
====== ======
Liabilities and Stockholders' Equity:
Current liabilities $2,971 $1,997
Noncurrent liabilities 9,150 7,569
Preferred stock of subsidiary 19 -
Minority interest in consolidated subsidiary 1,726 -
Stockholders' equity 2,649 2,283
------ ------
Total liabilities and stockholders' equity $16,515 $11,849
====== ======
</TABLE>
<PAGE> 78
Part II - Other Information (Continued):
- ----------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 USX Restated Certificate of
Incorporation dated
September 1, 1996........... Incorporated by reference to
Exhibit 3.1 to the USX Report
on Form 10-Q for the quarter
ended March 31, 1997.
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.
4.1Amended and Restated Rights
Agreement........................ Incorporated by reference to
USX's Form 8 Amendment to
Form 8-A filed on October 9,
1992 (File No. 1-5153).
12.1 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends
12.2 Computation of Ratio of Earnings to Fixed Charges
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
Form 8-K dated July 13, 1998, reporting under Item 5. Other Events, the
schedule for the special meeting of Tarragon Oil and Gas Limited
("Tarragon") securityholders to vote on the approval of the acquisition
of Tarragon by the Marathon Oil Company subsidiary of USX Corporation,
and under Item 7. Financial Statements and Exhibits, unaudited pro forma
financial statements excerpted from Tarragon's Notice of Special Meeting,
Notice of Motion and Information Circular.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned chief accounting officer thereunto duly authorized.
USX CORPORATION
By /s/ Kenneth L. Matheny
Kenneth L. Matheny
Vice President &
Comptroller
November 6, 1998
Exhibit 12.1
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
----------------------------------------------------------
(Dollars in Millions)
Nine Months
Ended Year Ended December 31
September 30 --------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $62 $60 $82 $78 $76 $83 $81
Capitalized interest 35 16 31 11 13 58 105
Other interest and fixed
charges 240 243 312 382 452 456 365
Pretax earnings which would
be required to cover
preferred stock dividend
requirements of parent 12 17 20 36 46 49 44
---- ---- ---- ---- ---- ---- ----
Combined fixed charges
and preferred stock
dividends (A) $349 $336 $445 $507 $587 $646 $595
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $1329 $1386 $1745 $1837 $877 $1300 $239
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 3.81 4.13 3.92 3.62 1.49 2.01 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover combined fixed charges and preferred stock
dividends by $356 million for 1993.
</TABLE>
Exhibit 12.2
<TABLE>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
-------------------------------------------------
(Dollars in Millions)
Nine Months
Ended Year Ended December 31
September 30 --------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $62 $60 $82 $78 $76 $83 $81
Capitalized interest 35 16 31 11 13 58 105
Other interest and fixed
charges 240 243 312 382 452 456 365
---- ---- ---- ---- ----- ---- ----
Total fixed charges (A) $337 $319 $425 $471 $541 $597 $551
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $1329 $1386 $1745 $1837 $877 $1300 $239
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 3.94 4.34 4.11 3.90 1.62 2.18 (a)
==== ==== ==== ==== ==== ==== ====
<FN>
(a) Earnings did not cover fixed charges by $312 million for 1993.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 488
<SECURITIES> 0
<RECEIVABLES> 1958
<ALLOWANCES> 11
<INVENTORY> 2400
<CURRENT-ASSETS> 5176
<PP&E> 28700
<DEPRECIATION> 15988
<TOTAL-ASSETS> 21848
<CURRENT-LIABILITIES> 3989
<BONDS> 4556
182
3
<COMMON> 380<F1>
<OTHER-SE> 5599
<TOTAL-LIABILITY-AND-EQUITY> 21848
<SALES> 21228
<TOTAL-REVENUES> 21635
<CGS> 20081
<TOTAL-COSTS> 20081
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226
<INCOME-PRETAX> 1046
<INCOME-TAX> 362
<INCOME-CONTINUING> 684
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 684
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $291; Steel Stock issued, $88; Securities
exchangeable solely into Marathon Stock issued, $1.
<F2>Basic earnings per share applicable to Marathon Stock, $1.37; Steel Stock,
$3.22.
<F3>Diluted earnings per share applicable to Marathon Stock, $1.36; Steel Stock,
$3.11.
</FN>
</TABLE>
