<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 June 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 July 31, 1998 follows:
USX-Marathon Group - 290,589,455 shares
USX-U. S. Steel Group - 88,099,041 shares
<PAGE> 2
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 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 26
Financial Statistics 27
B. Marathon Group
Item 1. Financial Statements:
Marathon Group Statement of Operations 28
Marathon Group Balance Sheet 29
Marathon Group Statement of Cash Flows 30
Selected Notes to Financial Statements 31
Item 2. Marathon Group Management's Discussion and
Analysis of Financial Condition and
Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 47
Supplemental Statistics 48
<PAGE> 3
USX CORPORATION
SEC FORM 10-Q
QUARTER ENDED June 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 50
U. S. Steel Group Balance Sheet 51
U. S. Steel Group Statement of Cash Flows 52
Selected Notes to Financial Statements 53
Item 2. U. S. Steel Group Management's Discussion
and Analysis of Financial Condition
and Results of Operations 57
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 65
Supplemental Statistics 66
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 67
Item 4. Submission of Matters to a Vote of Security Holders 67
Item 5. Other Information 68
Item 6. Exhibits and Reports on Form 8-K 70
<PAGE> 4
Part I - Financial Information
A. Consolidated Corporation
<TABLE>
USX CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
------------------------------------------------
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $7,214 $5,461 $14,101 $11,122
Dividend and affiliate income 46 25 71 43
Gain on disposal of assets 30 13 44 26
Gain on ownership change in Marathon Ashland
Petroleum LLC (2) - 246 -
Other income 4 3 17 6
------ ------ ------ -------
Total revenues 7,292 5,502 14,479 11,197
------ ------ ------ -------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 5,198 3,895 10,468 8,018
Selling, general and administrative expenses 67 50 152 97
Depreciation, depletion and amortization 281 242 628 487
Taxes other than income taxes 1,004 774 1,868 1,541
Exploration expenses 75 41 157 74
Inventory market valuation charges (credits) (3) 64 (28) 178
------ ------ ------ -------
Total costs and expenses 6,622 5,066 13,245 10,395
------ ------ ------ -------
INCOME FROM OPERATIONS 670 436 1,234 802
Net interest and other financial costs 71 105 153 186
Minority interest in income of Marathon Ashland
Petroleum LLC 158 - 212 -
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 441 331 869 616
Provision for estimated income taxes 143 116 301 206
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS 298 215 568 410
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (net of
income tax) - (1) - -
------ ------ ------ ------
NET INCOME 298 214 568 410
Noncash credit from exchange of preferred stock - 10 - 10
Dividends on preferred stock (3) (2) (5) (8)
------ ------ ------ ------
NET INCOME APPLICABLE TO COMMON STOCKS $295 $222 $563 $412
====== ====== ====== ======
<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>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
APPLICABLE TO MARATHON STOCK:
Net income $162 $118 $345 $226
- Per share - basic and diluted .56 .41 1.19 .78
Dividends paid per share .21 .19 .42 .38
Weighted average shares, in thousands
- Basic 289,591 287,838 289,220 287,729
- Diluted 290,263 289,396 289,879 292,013
APPLICABLE TO STEEL STOCK:
Net income $133 $105 $218 $186
- Per share - basic 1.53 1.23 2.51 2.19
- diluted 1.46 1.06 2.41 1.99
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 86,953 85,614 86,777 85,307
- Diluted 94,507 93,983 94,314 94,284
<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
June 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $566 $54
Restricted cash 379 -
Receivables, less allowance for doubtful
accounts of $12 and $15 1,802 1,417
Inventories 2,488 1,685
Deferred income tax benefits 230 229
Other current assets 109 87
------ ------
Total current assets 5,574 3,472
Investments and long-term receivables,
less reserves of $15 and $15 1,197 1,028
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$15,763 and $15,466 11,565 10,062
Prepaid pensions 2,366 2,247
Other noncurrent assets 330 280
Cash restricted for redemption of Delhi Stock - 195
------ ------
Total assets $21,032 $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
June 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
Current liabilities:
Notes payable $379 $121
Accounts payable 2,848 2,011
Payroll and benefits payable 500 521
Accrued taxes 288 304
Accrued interest 105 95
Long-term debt due within one year 454 471
------ ------
Total current liabilities 4,574 3,523
Long-term debt, less unamortized discount 3,311 2,932
Long-term deferred income taxes 1,520 1,353
Employee benefits 2,883 2,713
Deferred credits and other liabilities 699 736
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 1,737 -
Redeemable Delhi Stock - 195
STOCKHOLDERS' EQUITY
Preferred stock -
6.50% Cumulative Convertible issued - 2,961,887 shares and
2,962,037 shares ($148 liquidation preference) 3 3
Common stocks:
Marathon Stock issued - 290,265,145 shares and
288,786,343 shares 290 289
Steel Stock issued - 87,291,033 shares and
86,577,799 shares 87 86
Additional paid-in capital 4,001 3,924
Retained earnings 1,536 1,138
Deferred compensation adjustments (1) (3)
Accumulated other comprehensive income (loss) (40) (37)
------ ------
Total stockholders' equity 5,876 5,400
------ ------
Total liabilities and stockholders' equity $21,032 $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>
Six Months Ended
June 30
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $568 $410
Adjustments to reconcile to net cash provided
from operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 82 -
Depreciation, depletion and amortization 628 499
Exploratory dry well costs 97 30
Inventory market valuation charges (credits) (28) 178
Pensions (110) (90)
Postretirement benefits other than pensions 9 4
Deferred income taxes 180 58
Gain on disposal of assets (44) (26)
Gain on ownership change in Marathon Ashland
Petroleum LLC (246) -
Changes in:
Current receivables 236 200
Inventories (193) (127)
Current accounts payable and accrued expenses (33) (284)
All other - net (96) (48)
------ ------
Net cash provided from operating activities 1,050 804
------ ------
INVESTING ACTIVITIES:
Capital expenditures (686) (544)
Disposal of assets 45 397
Investments in equity affiliates - net (66) (152)
Withdrawals (deposits) of restricted cash - net (188) 94
All other - net 26 8
------ ------
Net cash used in investing activities (869) (197)
------ ------
FINANCING ACTIVITIES:
Commercial paper and revolving credit
arrangements - net (121) 7
Other debt - borrowings 842 -
- repayments (100) (433)
Common stock - issued 75 30
- repurchased (195) -
Dividends paid (170) (159)
------ ------
Net cash provided from (used in)
financing activities 331 (555)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (1)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 512 51
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 54 55
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $566 $106
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(144) $(201)
Income taxes paid (150) (197)
<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 second quarter and six months of 1998 was $294
million and $565 million, respectively. Total comprehensive income for the
same 1997 periods was $215 million and $410 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)
----------------------
June 30 December 31
1998 1997
-------- -----------
<S> <C> <C>
Raw materials $925 $582
Semi-finished products 332 331
Finished products 1,335 922
Supplies and sundry items 152 134
------ ------
Total (at cost) 2,744 1,969
Less inventory market valuation reserve 256 284
------ ------
Net inventory carrying value $2,488 $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
Second Quarter Ended
June 30
1998 1997
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
Marathon Group
- --------------
Net income (millions) $162 $162 $118 $118
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 289,591 289,591 287,838 287,838
Effect of dilutive securities:
Convertible debentures - - - 1,106
Stock options - 672 - 452
------ ------ ------ ------
Average common shares and dilutive effect 289,591 290,263 287,838 289,396
====== ====== ====== ======
Net income per share $.56 $.56 $.41 $.41
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (millions):
Net income $136 $136 $97 $97
Dividends on preferred stock (3) - (2) -
Noncash credit from exchange of preferred stock - - 10 -
------ ------ ------ ------
Net income applicable to Steel Stock 133 136 105 97
Effect of dilutive convertible securities - 2 - 3
------ ------ ------ ------
Net income assuming conversions $133 $138 $105 $100
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 86,953 86,953 85,614 85,614
Effect of dilutive securities:
Trust preferred securities - 4,256 - 2,128
Preferred stock - 3,211 - 5,345
Convertible debentures - - - 876
Stock options - 87 - 20
------ ------ ------ ------
Average common shares and dilutive effect 86,953 94,507 85,614 93,983
====== ====== ====== ======
Net income per share $1.53 $1.46 $1.23 $1.06
====== ====== ====== ======
</TABLE>
<PAGE> 12
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
5. (Continued)
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER COMMON SHARE
Six Months Ended
June 30
1998 1997
Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS
Marathon Group
- --------------
Net income (millions) $345 $345 $226 $226
Effect of dilutive securities -
Convertible debentures - - - 2
------ ------ ------ ------
Net income assuming conversions $345 $345 $226 $228
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 289,220 289,220 287,729 287,729
Effect of dilutive securities:
Convertible debentures - - - 3,873
Stock options - 659 - 411
------ ------ ------ ------
Average common shares and dilutive effect 289,220 289,879 287,729 292,013
====== ====== ====== ======
Net income per share $1.19 $1.19 $.78 $.78
====== ====== ====== ======
U. S. Steel Group
- -----------------
Net income (millions):
Net income $223 $223 $184 $184
Dividends on preferred stock (5) - (8) -
Noncash credit from exchange of preferred stock - - 10 -
------ ------ ------ ------
Net income applicable to Steel Stock 218 223 186 184
Effect of dilutive convertible securities - 4 - 4
------ ------ ------ ------
Net income assuming conversions $218 $227 $186 $188
====== ====== ====== ======
Shares of common stock outstanding (thousands):
Average number of common shares outstanding 86,777 86,777 85,307 85,307
Effect of dilutive securities:
Trust preferred securities - 4,256 - 1,064
Preferred stock - 3,211 - 6,412
Convertible debentures - - - 1,485
Stock options - 70 - 16
------ ------ ------ ------
Average common shares and dilutive effect 86,777 94,314 85,307 94,284
====== ====== ====== ======
Net income per share $2.51 $2.41 $2.19 $1.99
====== ====== ====== ======
</TABLE>
<PAGE> 13
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
6. The items below are included in both revenues and costs and expenses,
resulting in no effect on income.
<TABLE>
<CAPTION>
(In millions)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Matching crude oil and refined product
buy/sell transactions settled in cash $994 $551 $1,982 $1,306
Consumer excise taxes on petroleum
products and merchandise 887 664 1,651 1,319
</TABLE>
7. During 1997, Marathon Oil Company (Marathon) and Ashland Inc.
(Ashland) agreed to combine the major elements of their refining, marketing
and transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland Petroleum LLC
(MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon
acquired certain RM&T net assets from Ashland in exchange for a 38%
interest in MAP. The acquisition was accounted for under the purchase
method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $246 million, which is
included in the first six months 1998 revenues.
The following unaudited pro forma data for USX includes the results of
operations for the Ashland RM&T net assets, giving effect to the
acquisition as if it had been consummated at January 1, 1997. 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)
Second Quarter Six Months
Ended Ended
June 30, 1997(a) June 30, 1997(a)
---------------------------------
<S> <C> <C>
Revenues $7,345 $14,992
Net income 228 (b) 418 (b)
Net income per common share of
Marathon Stock:
Basic and diluted .46 .81
<FN>
(a) Pro forma data is based on USX and Ashland RM&T results of
operations for the quarter and six months ended June 30, 1997.
(b) Excluding the pro forma inventory market valuation reserve
adjustment, pro forma net income would have been $263 million and $519
million for the 1997 second quarter and six months, respectively.
Reported 1997 net income for the second quarter and six months, excluding
the reported inventory market valuation reserve adjustment, was $254
million and $522 million, respectively, which excludes the results of
operations for the Ashland RM&T net assets.
</TABLE>
<PAGE> 14
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
8. Income from operations includes net periodic pension credits of $98
million and $75 million in the first six months of 1998 and 1997,
respectively ($48 million and $37 million in the second 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 second quarter and
six 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 June 30, 1998, USX had no borrowings against its $2,350 million
long-term revolving credit agreement.
USX has a short-term credit agreement totaling $125 million at June
30, 1998. Interest is based on the bank's prime rate or London Interbank
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 June 30, 1998,
there were no borrowings against these facilities.
In the event of a change in control of USX, debt obligations totaling
$3,368 million at June 30, 1998, may be declared immediately due and
payable.
For a discussion of transactions under the revolving credit agreement
subsequent to the balance sheet date, see Note 14.
11. In the first quarter of 1998, USX issued $400 million in aggregate
principal amount of 6.85% Notes due 2008.
On June 9, 1998, Marathon entered into a Cdn$550 million short-term
loan agreement to initially finance a portion of the acquisition of
Tarragon Oil and Gas Limited. At June 30, 1998, the proceeds from this
loan (U.S. $379 million) were restricted and were invested in short-term
instruments. For a discussion of transactions under the Cdn$550 million
loan agreement subsequent to the balance sheet date, see Note 14.
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 June 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.
<PAGE> 15
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
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 June 30, 1998, and December
31, 1997, accrued liabilities for remediation totaled $157 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 June 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 six months of 1998 and for the years 1997
and 1996, such capital expenditures totaled $69 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 June 30, 1998, and December 31, 1997, accrued liabilities for
platform abandonment and dismantlement totaled $134 million and $128
million, respectively.
Guarantees by USX of the liabilities of affiliated entities totaled
$129 million at June 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 June 30, 1998, the largest guarantee for a single affiliate was $66
million.
At June 30, 1998, USX's pro rata share of obligations of LOOP LLC and
various pipeline affiliates secured by throughput and deficiency agreements
totaled $165 million. Under the agreements, USX is required to advance
funds if the affiliates are unable to service debt. Any such advances are
prepayments of future transportation charges.
Contract commitments to acquire property, plant and equipment and
long-term investments at June 30, 1998, totaled $888 million compared
with $533 million at December 31, 1997.
<PAGE> 16
USX CORPORATION AND SUBSIDIARY COMPANIES
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
---------------------------------------------------------------
(Unaudited)
14. On June 20, 1998, Marathon entered into a definitive agreement to
acquire Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas
exploration and production company. At a special meeting held August 11,
1998, the Tarragon securityholders approved the transaction.
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. These shares are exchangeable on
a one-for-one basis into Marathon Stock. The total purchase price was
approximately $1.1 billion, which includes the assumption of
approximately $346 million in debt. USX will account for the
acquisition using the purchase method of accounting.
On August 10, 1998, USX borrowed $1.0 billion under its
revolving credit agreement to complete the acquisition of Tarragon and to
repay borrowings under the Cdn$550 million short-term loan agreement
and certain existing Tarragon debt.
<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>
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
4.70 3.59 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>
<CAPTION>
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
-------------------------------------------------
Six Months Ended
June 30 Year Ended December 31
- --------------------- -------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
4.87 3.81 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 second quarter and first six 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, see Note 7 to the USX
Consolidated Financial Statements.
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 second quarter and first six months of 1998 and 1997 are
set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<C> <C> <C> <C> <C>
Revenues (a)
Marathon Group $5,562 $3,787 $11,060 $7,890
U. S. Steel Group 1,733 1,737 3,429 3,368
Eliminations (3) (22) (10) (61)
------ ------ ------- -------
Total USX Corporation revenues $7,292 $5,502 $14,479 $11,197
Less:
Excise taxes (b)(c) 887 664 1,651 1,319
Matching buy/sell transactions (b)(d) 994 551 1,982 1,306
------ ------ ------ ------
Revenues excluding above items $5,411 $4,287 $10,846 $8,572
====== ====== ====== ======
- ------
<FN>
(a) Amounts for the second quarter and first six 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 $1,124 million in the second quarter of 1998 as compared with the
second quarter of 1997, primarily reflecting an increase of $1,109 million for
the Marathon Group. Revenues (excluding excise taxes and matching buy/sell
transactions) increased by $2,274 million in the first six months of 1998 as
compared with the first six months of 1997, reflecting increases of $2,162
million for the Marathon Group and $61 million for the U. S. Steel Group.
For discussion of revenues by group see Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Marathon
Group, 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
second quarter and first six months of 1997, and the U. S. Steel Group.
<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 second quarter and first six months of 1998 and 1997 are set forth in
the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income from operations (a) $670 $436 $1,234 $802
Less: certain favorable (unfavorable) items for
Marathon Group
Inventory market valuation reserve adjustment (b) 3 (64) 28 (178)
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) (2) - 223 -
U. S. Steel Group
Insurance litigation settlement for Gary Works
No. 8 blast furnace (net of related charges and
reserves) (e) 30 - 30 -
Partial insurance settlement related to the
1996 hearth breakout at Gary Works No. 13 blast
furnace - - - 15
Effect of adoption of SOP 96-1 (f) - - - (20)
Other environmental accrual adjustments - net - - - 11
----- ----- ----- -----
Subtotal 31 (64) 205 (172)
----- ----- ----- -----
Income from operations adjusted to exclude
above items $639 $500 $1,029 $974
===== ===== ===== =====
- ------
<FN>
(a) Amounts for the second quarter and first six 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 7 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 increased by $139 million in the
second quarter of 1998 as compared with the second quarter of 1997, reflecting
an increase of $145 million for the Marathon Group, partially offset by a
decrease of $6 million for the U. S. Steel Group. Adjusted income from
operations increased by $55 million in the first six months of 1998 as compared
with the first six months of 1997, reflecting increases of $31 million for the
U. S. Steel Group and $24 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
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 second quarter and first six months of 1997,
and the U. S. Steel Group.
Net interest and other financial costs for the second quarter and first six
months of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and other financial income $15 $1 $22 $(1)
Interest and other financial costs (86) (106) (175) (185)
----- ------ ------ ------
Net interest and other financial costs (71) (105) (153) (186)
Less:
Adjustment to carrying value of indexed debt(a) - (10) (4) 6
----- ------ ------ ------
Net interest and other financial costs
adjusted to exclude above item $(71) $(95) $(149) $(192)
===== ====== ====== ======
- ------
<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 RMI Titanium Company ("RMI") (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 RMI 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 RMI 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 $24 million and $43 million in
the second quarter and first six months of 1998, respectively, as compared with
the second quarter and first six 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 second quarter and first six
months of 1998 was decreased by a $9 million foreign tax adjustment as a result
of a favorable resolution of foreign tax litigation for the U. S. Steel Group.
Net income increased $84 million and $158 million in the second and first
six months of 1998, as compared to the second quarter and first six months of
1997, mainly due to the items discussed above.
<PAGE> 22
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Noncash credit from exchange of preferred stock was $10 million in the second
quarter and first six 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 July 28, 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 September 10, 1998, to stockholders of record at the close
of business on August 19, 1998. The Board also declared a dividend of $0.8125
per share on USX's 6.50% Cumulative Convertible Preferred Stock, payable
September 30, 1998, to stockholders of record at the close of business on August
31, 1998.
Cash Flows
- ----------
Net cash provided from operating activities totaled $1,050 million in the
first six months of 1998, compared with $804 million in the first six months of
1997. The Marathon Group had a $300 million increase in net cash provided from
operating activities in the first six months of 1998 as compared to the first
six months of 1997. The increase was primarily due to favorable working capital
changes resulting from a temporary change in excise tax payment patterns. The
U. S. Steel Group had a $52 million decrease in net cash provided from operating
activities in the first six months of 1998 as compared to the first six months
of 1997. The decrease was primarily due to unfavorable working capital changes.
Cash from the disposal of assets was $45 million in the first six months of
1998, compared with $397 million in the first six 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 its U. S. Steel Group's Clairton Works.
The net deposits of restricted cash were $188 million in the first six
months of 1998, compared to net withdrawals of restricted cash of $94 million in
the first six months of 1997. The 1998 amount primarily represents proceeds
from the Cdn$550 short-term million loan agreement Marathon entered into in
anticipation of the Tarragon Oil and Gas Limited ("Tarragon") acquisition. At
June 30, 1998, the proceeds from this loan (U.S. $379 million) were
restricted for acuquisition funding purposes and invested in short-term
instruments. This deposit was partially offset by the withdrawal from
restricted cash of $195 million for the redemption of all of the
shares of Delhi Stock in the first quarter of 1998. The $94 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.
On August 10, 1998, USX borrowed $1,000 million against its $2,350
million long-term revolving credit agreement primarily for the funding of the
Tarragon acquisition. A portion of these funds was used to repay the
Cdn$550 million (U.S. $379 million) loan discussed above.
<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 six
months of 1998 were $686 million, compared with $544 million in the first six
months of 1997. For further details, see USX Corporation - Financial Statistics
on page 27, and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Marathon Group and the U. S. Steel Group.
Contract commitments to acquire property, plant and equipment and long-term
investments at June 30, 1998, totaled $888 million compared with $533 million at
December 31, 1997.
Net investments in equity affiliates was $66 million in the first six
months of 1998, compared with $152 million in the first six months of 1997. Net
investments in equity affiliates in 1998 decreased $134 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 investments in the Nautilus natural gas pipeline system in the Gulf of
Mexico and the purchase of a 50 percent interest in an Ecuadorian power
generation company. Cash invested in equity affiliates for the U. S. Steel Group
increased $48 million, primarily due to the funding for the entry into a joint
venture in Slovakia.
USX's total long-term debt, preferred stock of subsidiary, USX obligated
preferred securities of a subsidiary trust and notes payable was $4,576 million
at June 30, 1998, an increase of $620 million from December 31, 1997. Excluding
$379 million of short-term borrowings related to the Tarragon acquisition,
the proceeds of which are reported as restricted cash, the increase from
December 31, 1997, was $241 million primarily the result of the issuance of
$400 million of 6.85% notes due in 2008.
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 preferred stock to Ba1 from Ba2.
Liquidity
- ---------
At June 30, 1998, USX had no borrowings against its $2,350 million long-
term revolving credit agreement, its $125 million short-term credit agreement
and additional short-term lines of credit totaling $200 million.
On August 10, 1998, USX borrowed $1,000 million against its $2,350 million
long-term revolving credit agreement in relation to the funding of the Tarragon
acquisition.
Effective as of July 31, 1998, MAP entered into two revolving credit
agreements totaling $500 million.
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, equity securities 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 has a total of $1.543 billion available under existing shelf
registration statements.
<PAGE> 24
USX CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
USX management believes that its short-term and long-term liquidity is
adequate to satisfy its obligations as of June 30, 1998, and to complete
currently authorized capital spending programs and the acquisition of Tarragon.
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 June 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.
There are also 127 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 which 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.
<PAGE> 25
USX CORPORATION AND SUBSIDIARY COMPANIES
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 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
- ---------
See Year 2000 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 industry segments of an enterprise. USX plans to 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 plans to 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 within Stockholders' Equity as a result of
recording unrecognized gains and losses within Other Comprehensive Income. USX
may also have to recognize gains or losses from hedging activities in its
results of operations in periods different than would be the case under existing
guidance. Based upon the hedging 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> 26
USX CORPORATION AND SUBSIDIARY COMPANIES
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
As of June 30, 1998, the discussion of USX's commodity price risk, interest
rate risk, foreign currency exchange rate risk and 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. For
additional discussion on market risk for USX, see Quantitative and Qualitative
Disclosures About Market Risk in the USX 1997 Form 10-K.
<PAGE> 27
<TABLE>
<CAPTION>
USX CORPORATION
FINANCIAL STATISTICS (Unaudited)
--------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
-------------- --------------
(Dollars in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
REVENUES
Marathon Group (a) $5,562 $3,787 $11,060 $7,890
U. S. Steel Group 1,733 1,737 3,429 3,368
Eliminations (3) (22) (10) (61)
------- ------- ------- -------
Total $7,292 $5,502 $14,479 $11,197
INCOME FROM OPERATIONS
Marathon Group (a) $453 $243 $855 $478
U. S. Steel Group 217 193 379 324
------ ------ ------ ------
Total $670 $436 $1,234 $802
CAPITAL EXPENDITURES
Marathon Group (a) $331 $271 $550 $389
U. S. Steel Group 79 67 136 117
Discontinued Operations - 21 - 38
------ ------ ------ ------
Total $410 $359 $686 $544
INVESTMENTS IN (RETURNS FROM) EQUITY AFFILIATES - NET
Marathon Group $(22) $80 $3 $137
U. S. Steel Group - 16 63 15
------ ------ ------ ------
Total $(22) $96 $66 $152
- ------
<FN>
(a) Amounts in 1998 include 100 percent of MAP.
</TABLE>
<PAGE> 28
Part I - Financial Information (Continued):
B. Marathon Group
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
-----------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $5,528 $3,768 $10,752 $7,849
Dividend and affiliate income 18 9 28 16
Gain on disposal of assets 13 7 16 19
Gain on ownership change in Marathon Ashland
Petroleum LLC (2) - 246 -
Other income 5 3 18 6
------ ------ ------ -------
Total revenues 5,562 3,787 11,060 7,890
------ ------ ------ -------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 3,765 2,479 7,587 5,237
Selling, general and administrative expenses 120 83 251 167
Depreciation, depletion and amortization 209 163 479 334
Taxes other than income taxes 943 714 1,759 1,422
Exploration expenses 75 41 157 74
Inventory market valuation charges (credits) (3) 64 (28) 178
------ ------ ------ -------
Total costs and expenses 5,109 3,544 10,205 7,412
------ ------ ------ -------
INCOME FROM OPERATIONS 453 243 855 478
Net interest and other financial costs 49 68 103 138
Minority interest in income of Marathon Ashland
Petroleum LLC 158 - 212 -
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 246 175 540 340
Provision for estimated income taxes 84 57 195 114
------ ------ ------ ------
NET INCOME $162 $118 $345 $226
====== ====== ====== ======
MARATHON STOCK DATA:
Net income per share - basic and diluted $.56 $.41 $1.19 $.78
Dividends paid per share .21 .19 .42 .38
Weighted average shares, in thousands
- Basic 289,591 287,838 289,220 287,729
- Diluted 290,263 289,396 289,879 292,013
<FN>
Selected notes to financial statements appear on pages 31-36.
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
---------------------------------
June 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $550 $36
Restricted cash 379 -
Receivables, less allowance for doubtful
accounts of $7 and $2 1,327 856
Inventories 1,750 980
Other current assets 167 146
------ ------
Total current assets 4,173 2,018
Investments and long-term receivables 536 455
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$9,926 and $9,667 9,097 7,566
Prepaid pensions 296 290
Other noncurrent assets 299 236
------ ------
Total assets $14,401 $10,565
====== ======
LIABILITIES
Current liabilities:
Notes payable $379 $108
Accounts payable 2,222 1,348
Payroll and benefits payable 147 142
Accrued taxes 107 102
Deferred income taxes 70 61
Accrued interest 95 84
Long-term debt due within one year 409 417
------ ------
Total current liabilities 3,429 2,262
Long-term debt, less unamortized discount 2,879 2,476
Long-term deferred income taxes 1,396 1,318
Employee benefits 552 375
Deferred credits and other liabilities 331 332
Preferred stock of subsidiary 184 184
Minority interest in Marathon Ashland Petroleum LLC 1,737 -
COMMON STOCKHOLDERS' EQUITY 3,893 3,618
------ ------
Total liabilities and common stockholders' equity $14,401 $10,565
====== ======
<FN>
Selected notes to financial statements appear on pages 31-36.
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
-----------------------------------
Six Months Ended
June 30
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $345 $226
Adjustments to reconcile to net cash provided from
operating activities:
Minority interest in income of Marathon Ashland
Petroleum LLC - net of distributions 82 -
Depreciation, depletion and amortization 479 334
Exploratory dry well costs 97 30
Inventory market valuation charges (credits) (28) 178
Pensions (5) (9)
Postretirement benefits other than pensions 11 5
Deferred income taxes 91 34
Gain on disposal of assets (16) (19)
Gain on ownership change in Marathon Ashland
Petroleum LLC (246) -
Changes in:
Current receivables 161 95
Inventories (160) (71)
Current accounts payable and accrued expenses 66 (289)
All other - net (69) (6)
------ ------
Net cash provided from operating activities 808 508
------ ------
INVESTING ACTIVITIES:
Capital expenditures (550) (389)
Disposal of assets 30 22
Investments in equity affiliates - net (3) (137)
Withdrawals (deposits) of restricted cash - net (383) 94
All other - net 13 -
------ ------
Net cash used in investing activities (893) (410)
------ ------
FINANCING ACTIVITIES:
Increase in Marathon Group's portion of USX
consolidated debt 292 101
Specifically attributed debt - borrowings 379 -
- repayments - (40)
Marathon Stock issued 50 9
Dividends paid (122) (109)
------ ------
Net cash provided from (used in)
financing activities 599 (39)
------ ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH - (1)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 514 58
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 36 32
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $550 $90
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(105) $(131)
Income taxes paid, including settlements with other
groups (136) (152)
<FN>
Selected notes to financial statements appear on pages 31-36.
</TABLE>
<PAGE> 31
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 second quarter and six months of
1998 was $160 million and $344 million, respectively. Total comprehensive
income for the same 1997 periods was $119 million and $227 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 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> 32
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.
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.
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)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Matching crude oil and refined product
buy/sell transactions settled in cash $994 $551 $1,982 $1,306
Consumer excise taxes on petroleum
products and merchandise 887 664 1,651 1,319
</TABLE>
<PAGE> 33
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
6. During 1997, Marathon Oil Company (Marathon) and Ashland Inc.
(Ashland) agreed to combine the major elements of their refining, marketing
and transportation (RM&T) operations. On January 1, 1998, Marathon
transferred certain RM&T net assets to Marathon Ashland Petroleum LLC
(MAP), a new consolidated subsidiary. Also on January 1, 1998, Marathon
acquired certain RM&T net assets from Ashland in exchange for a 38%
interest in MAP. The acquisition was accounted for under the purchase
method of accounting. The purchase price was determined to be
$1.9 billion, based upon an external valuation. The change in Marathon's
ownership interest in MAP resulted in a gain of $246 million, which is
included in the first six months 1998 revenues.
The following unaudited pro forma data for the Marathon Group includes
the results of operations for the Ashland RM&T net assets, giving effect to
the acquisition as if it had been consummated at January 1, 1997. 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)
Second Quarter Six Months
Ended Ended
June 30, 1997(a) June 30, 1997(a)
---------------------------------
<S> <C> <C>
Revenues $5,630 $11,685
Net income 132 (b) 234 (b)
Net income per common share -
Basic and diluted .46 .81
<FN>
(a) Pro forma data is based on Marathon Group and Ashland RM&T results
of operations for the quarter and six months ended June 30, 1997.
(b) Excluding the pro forma inventory market valuation reserve
adjustment, pro forma net income would have been $167 million and $335
million for the 1997 second quarter and six months, respectively.
Reported 1997 net income for the second quarter and six months, excluding
the reported inventory market valuation reserve adjustment, was $158
million and $338 million, respectively, which excludes the results of
operations for the Ashland RM&T net assets.
</TABLE>
7. 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.
<PAGE> 34
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. Inventories are carried at the lower of cost or market. Cost of
inventories of crude oil and refined products is determined under the last-
in, first-out (LIFO) method.
<TABLE>
<CAPTION>
(In millions)
----------------------
June 30 December 31
1998 1997
-------- -----------
<S> <C> <C>
Crude oil and natural gas liquids $790 $452
Refined products and merchandise 1,116 735
Supplies and sundry items 100 77
------ ------
Total (at cost) 2,006 1,264
Less inventory market valuation reserve 256 284
------ ------
Net inventory carrying value $1,750 $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.
9. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the
Marathon Group involving a variety of matters, including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the Marathon Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the Marathon Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The Marathon Group is subject to federal, state, local and foreign
laws and regulations relating to the environment. These laws generally
provide for control of pollutants released into the environment and require
responsible parties to undertake remediation of hazardous waste disposal
sites. Penalties may be imposed for noncompliance. At June 30, 1998, and
December 31, 1997, accrued liabilities for remediation totaled $50 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 June 30, 1998, and $42 million at December 31, 1997.
<PAGE> 35
MARATHON GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
9. (Continued)
For a number of years, the Marathon Group has made substantial capital
expenditures to bring existing facilities into compliance with various laws
relating to the environment. In the six months of 1998 and for the years
1997 and 1996, such capital expenditures totaled $44 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 June 30, 1998, and December 31, 1997, accrued liabilities for
platform abandonment and dismantlement totaled $134 million and $128
million, respectively.
Guarantees by USX of the liabilities of affiliated entities of the
Marathon Group totaled $66 million at June 30, 1998. As of June 30, 1998,
the largest guarantee for a single affiliate was $66 million.
At June 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 $165 million. Under the agreements, the
Marathon Group is required to advance funds if the affiliates are unable to
service debt. Any such advances are prepayments of future transportation
charges.
The Marathon Group's contract commitments to acquire property, plant
and equipment and long-term investments at June 30, 1998, totaled $666
million compared with $377 million at December 31, 1997.
10. On June 20, 1998, Marathon entered into a definitive agreement to
acquire Tarragon Oil and Gas Limited (Tarragon), a Canadian oil and gas
exploration and production company. At a special meeting held August 11,
1998, the Tarragon securityholders approved the transaction.
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. These shares are exchangeable on
a one-for-one basis into Marathon Stock. The total purchase price was
approximately $1.1 billion, which includes the assumption of approximately
$346 million in debt. Marathon will account for the acquisition using the
purchase method of accounting.
On June 9, 1998, Marathon entered into a Cdn$550 short-term million
loan agreement to initially finance a portion of the acquisition. At
June 30, 1998, the proceeds from this loan (U.S. $379 million) were
restricted and were invested in short-term instruments.
<PAGE> 36
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 second quarter and first six 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 48 and 49.
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.
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> 37
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Revenues for the second quarter and first six months of 1998 and 1997 are
summarized in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Refined products $2,416 $1,724 $4,641 $3,410
Merchandise 473 266 876 504
Liquid hydrocarbons 419 242 839 508
Natural gas 270 282 615 720
Transportation and other (a) 105 58 210 123
Gain on ownership change in MAP (b) (2) 0 246 0
------ ------ ------ ------
Subtotal 3,681 2,572 7,427 5,265
Excise taxes (c) (e) 887 664 1,651 1,319
Matching buy/sell transactions (d) (e) 994 551 1,982 1,306
------ ------ ------ ------
Total Revenues (a) $5,562 $3,787 $11,060 $7,890
====== ====== ====== ======
- --------
<FN>
(a)Amounts for second quarter and first six 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 and pro forma 1997 revenue information.
(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, revenues included 100 percent of MAP. On a pro forma basis,
giving effect to the assumed acquisition of Ashland's RM&T net assets on
January 1, 1997, revenues (excluding matching buy/sell transactions and excise
taxes) for the second quarter and first six months of 1997 were $3,951
million and $7,980 million, respectively. Revenues in the second quarter and
first six months of 1998 are 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
six 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 49.
<PAGE> 38
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 second quarter and first six months of 1998 and 1997 are set forth in
the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Income from Operations (a) $453 $243 $855 $478
Less: certain favorable (unfavorable) items
IMV reserve adjustment (b) 3 (64) 28 (178)
Write-off of certain international investments net
of a favorable domestic contract settlement (c) 0 0 (76) 0
Gain on ownership change net of one-time
transition charges - MAP (d) (2) 0 223 0
------ ------ ------ ------
Subtotal 1 (64) 175 (178)
------ ------ ------ ------
Income from operations adjusted to exclude
above items $452 $307 $680 $656
====== ====== ====== ======
- --------
<FN>
(a)Amounts for second quarter and first six 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, income from operations included 100 percent of MAP. 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 second quarter 1997,
excluding the effects of the pro forma IMV reserve adjustment, was $431 million.
Second quarter 1998 adjusted income from operations of $452 million was higher
than adjusted pro forma income from operations for second quarter 1997 primarily
due to increased RM&T income from operations and lower administrative expenses.
These increases were partially offset by lower worldwide exploration and
production income from operations.
<PAGE> 39
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 six
months of 1997, excluding the effects of the pro forma IMV reserve adjustment,
was $794 million. The first six months of 1998 adjusted income from operations
of $680 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 in 1998, partially offset by increased RM&T
income from operations and lower administrative expenses in 1998. For
additional information regarding pro forma income from operations, see
Supplemental Statistics on page 49.
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.
Second quarter income from operations for domestic exploration and
production ("upstream") decreased by $65 million in 1998 from 1997. Results in
the first six months, excluding a favorable natural gas contract settlement,
decreased $174 million from the same period in 1997. The decreases in both
periods were due mainly to lower liquid hydrocarbon and natural gas prices and
higher exploration expenses, partially offset by increased liquid hydrocarbon
volumes.
Second quarter income from operations for international upstream operations
decreased by $43 million in 1998 from 1997. The decline was mainly due to lower
liquid hydrocarbon prices, higher depreciation, depletion and amortization and
higher exploration expenses, partially offset by increased liquid hydrocarbon
sales volumes. Results in the first six months, excluding the write-off of
certain international investments in the first quarter, decreased $97 million
from the same period in 1997. In addition to the factors discussed
previously, the decrease was also due to lower natural gas volumes, mainly
attributable to offshore operations in Ireland and Norway.
<PAGE> 40
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
In 1998, income from operations for refining, marketing, and transportation
("downstream") operations included 100 percent of MAP. Second quarter 1998
income from operations for downstream operations, excluding the effects of
special items, was $397 million, compared to $165 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 second quarter
1997, excluding the effects of the pro forma IMV reserve adjustment, was $284
million. Income from operations for the first six months of 1998, for
downstream operations excluding the gain on ownership change, was $525 million
compared to $244 million in the prior-year period. On a pro forma basis,
downstream income from operations for the first six months of 1997, excluding
the effects of the pro forma IMV reserve adjustment, was $371 million.
Downstream results in the second quarter and first six months of 1998 reflect
strong refined product margins in second quarter 1998. For
additional information regarding pro forma downstream income from operations,
see Supplemental Statistics on page 49.
Other energy related businesses recorded income from operations of $3
million in second quarter 1998 compared to $9 million for the prior-year period.
Income from operations for the first six months of 1998 was $17 million compared
to $31 million for the prior-year period. The first six months 1997 included an
$8 million gain on the sale of the Marathon Group's interest in a domestic
pipeline company.
Administrative expenses in the second quarter decreased by $27 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. In addition, second quarter 1998 decreased due to lower
accruals for employee benefit and compensation plans and litigation.
Administrative expenses for the first six months of 1998 decreased $28 million
from the same period in 1997. The decrease was due to the factors discussed
previously.
Net interest and other financial costs for the second quarter and first six
months of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Interest and other financial income $13 $1 $18 $(2)
Interest and other financial costs (62) (69) (121) (136)
------ ------ ------ ------
Net interest and other financial costs $(49) $(68) $(103) $(138)
====== ====== ===== =====
</TABLE>
The decreases in the second quarter and first six months of 1998 were
mainly due to increased interest income and capitalized interest on upstream
projects.
Net income for second quarter 1998 was $162 million compared to $118
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, second
quarter 1997 net income was $132 million. Net income for the first six months
of 1998 was $345 million compared to $226 million in the prior-year period
and $234 million on a pro forma basis. For additional information, see
Note 6 to the Marathon Group Financial Statements.
<PAGE> 41
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Cash Flows
- ----------
Net cash provided from operating activities was $808 million in the first
six months of 1998, compared with $508 million in the first six months of 1997.
The $300 million increase mainly reflected favorable working capital changes and
an increase in net income (excluding the IMV reserve adjustment and other
noncash items), partially offset by distributions by MAP to Ashland. The
favorable working capital effect reflects a temporary change in excise tax
payment patterns.
Capital expenditures in the first six months of 1998 totaled $550 million,
compared with $389 million in the comparable 1997 period. Although capital
expenditures in 1998 include 100 percent of MAP, the increase in 1998, was
primarily for upstream projects.
The deposits of restricted cash were $383 million in the first six months
of 1998 compared to withdrawals of $94 million in the comparable 1997 period.
The 1998 amount primarily represents the proceeds from a Cdn$550 million short-
term loan agreement Marathon entered into in anticipation of the Tarragon Oil
and Gas Limited ("Tarragon") acquisition. At June 30, 1998, the proceeds
from this loan (U.S. $379 million) were restricted for acquisition funding
purposes and invested in short-term instruments. 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.
On August 10, 1998, USX borrowed $1,000 million against its $2,350 million
long-term revolving credit agreement primarily for the funding of the Tarragon
acquisition. A portion of these funds was used to repay the Cdn$550 million
(U.S. $379 million) loan discussed above.
Net investments in equity affiliates were $3 million in the first six
months of 1998, compared with $137 million in the comparable 1997 period. 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
investments in the Nautilus natural gas pipeline system 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 June 30, 1998, totaled $666 million compared with $377
million at December 31, 1997.
Financial obligations increased by $671 million in the first six 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 six months of 1998 increased by $13 million
from the first six 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.
<PAGE> 42
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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.
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 June 30,
1998. In addition, there are eight 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 90 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 which 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.
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 9 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.
<PAGE> 43
MARATHON GROUP OF USX CORPORATION
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
driven by unpredictable changes in supply and demand resulting from fluctuations
in economic activity and political developments in the world's major oil and gas
producing areas, including OPEC member countries. During second quarter 1998,
liquid hydrocarbon prices declined significantly from first quarter 1998 and
second quarter 1997 prices. This decline had an adverse effect on the Marathon
Group's upstream results in second quarter 1998. Upstream results will continue
to be adversely effected 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.
On June 20, 1998, Marathon entered into an agreement to acquire Tarragon
Oil and Gas Limited ("Tarragon"), a Canadian oil and gas exploration and
production company. Following approvals on August 11, 1998, by the
Tarragon shareholders and the Ontario Court, the transaction was completed.
The total purchase price of the acquisition, including assumed debt, was
approximately $1.1 billion. USX will account for the acquisition using
the purchase method of accounting.
Payments to Tarragon shareholders receiving Cdn$14.25 cash per
share were approximately Cdn$814 million (U.S. $535 million), which was
funded from proceeds drawn from the Cdn$550 million loan and
USX's revolving credit facility. Tarragon shareholders representing
approximately 3.1 million shares elected to receive exchangeable shares
of Marathon Oil Canada Limited, an indirect Canadian subsidiary of Marathon.
Approximately 878 thousand exchangeable shares will be issued to
these shareholders. These shares are exchangeable on a one-for-one basis for
shares of Marathon Stock. Tarragon shareholders holding approximately 14.5
million shares exercised dissenter rights and are entitled to be paid the fair
value for their shares in cash in accordance with applicable Canadian law.
At the time of closing the transaction, Tarragon had approximately
$346 million of debt outstanding. USX anticipates refinancing some or all,
of this debt through its revolving credit facility. USX is presently studying
available alternatives for permanently financing the Tarragon acquisition,
including the refinancing of the assumed debt. USX has not made a decision
regarding long term financing at this time. Available refinancing options
include all possible combinations of debt and equity.
<PAGE> 44
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group's current estimate of 1998 worldwide liquid hydrocarbon
production is approximately 209,000 barrels per day ("bpd"). Natural gas
volumes are expected to be approximately 1.3 billion cubic feet per day
("bcfpd"). These estimates are above previous estimates, primarily due to the
Tarragon acquisition. In 1999, the Marathon Group estimates liquid hydrocarbon
production to be approximately 245,000 bpd and natural gas volumes to be
approximately 1.4 bcfpd. The 1999 estimates include the effects of the Tarragon
acquisition.
On May 25, 1998, production from the Ewing Bank 963 Arnold project in the
Gulf of Mexico began and is currently producing at gross daily rates of 23,000
barrels of oil and 16 million cubic feet of natural gas. Recoverable reserves
are estimated to be 25 million gross barrels of oil equivalent. Marathon has a
62.5 percent working interest.
In June 1998, Marathon announced an oil discovery on the East Orovinyare
prospect, four miles offshore Gabon, West Africa. The East Orovinyare No. 1
wildcat well encountered an oil column in excess of 400 feet. The first
appraisal well, East Orovinyare No. 2, was drilled and tested at a combined
daily flow rate of 2,460 barrels of oil. This discovery is located
approximately 40 miles north of Marathon's Tchatamba Marin production
facilities. Marathon currently has a 75 percent working interest in this
discovery. The Gabonese government has the option to obtain a 25 percent
interest in the entire project, which would reduce Marathon's working interest
in this discovery to 56.25 percent.
The above discussion includes forward-looking statements with respect to
projected liquid hydrocarbon production levels 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, supply and demand, regulatory constraints, reserve estimates,
production decline rates of mature fields, timing of commencing production from
new wells, timing and results of future development drilling, reserve
replacement rates, and other geological and operating considerations. In
addition, development of new production properties in countries outside the
United States may require protracted negotiations with host governments and is
frequently subject to political considerations, such as tax regulations, which
could adversely affect the economics of projects. To the extent these
assumptions prove inaccurate and/or negotiations and other considerations are
not satisfactorily resolved, actual results could be materially different than
present expectations.
Downstream income of the Marathon Group is largely dependent upon 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. During second quarter 1998,
refined product margins were strong; however, margins could weaken in
future periods due to the factors discussed above.
<PAGE> 45
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The integration process at MAP continues and management anticipates MAP
will exceed its goal of deriving efficiencies of $200 million annually on a
pretax basis. While part of these efficiencies, approximately $80 million, are
expected to be achieved in 1998, full realization of efficiencies should occur
over the next few years as MAP's integration plans are implemented. 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. In July, MAP announced plans to locate
the corporate headquarters of Speedway SuperAmerica LLC to existing facilities
in Enon, Ohio.
The above discussion includes forward-looking statements with respect to
the amount and timing of efficiencies to be realized by MAP. Some factors that
could potentially cause actual results to differ materially from present
expectations include unanticipated costs to implement shared technology,
difficulties in integrating corporate structures, delays in leveraging volume
procurement advantages or delays in personnel rationalization.
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, which will be
substantially completed by the end of 1998, will result in the scheduled
shutdown of certain production units at various times. MAP does not expect
product shortages as a result of this downtime. The costs of the program, as
well as the effects of reduced production levels, will have a negative impact on
MAP profitability during the remainder of 1998; however, such effects are not
expected to be material to the Marathon Group.
The above discussion includes forward-looking statements with respect to
maintenance and safety programs. These statements are based on a number of
assumptions, including (among others) the time required to complete the
programs, costs and downtime related to these activities, and the effect of
reduced production on profitability. To the extent these assumptions prove
inaccurate, actual results could be materially different than present
expectations.
Year 2000
- ---------
The Marathon Group continues to identify, analyze, modify, and/or replace
systems, equipment, and other devices that utilize date/time oriented software
or computer chips to determine readiness with Year 2000 transition requirements.
Critical systems, mainframe and non-mainframe, have been identified and are
being scheduled for testing. Testing of mainframe systems began in April 1998
and testing on these systems is progressing well. Remediation of internally
developed systems are being handled in-house and the modifications are
progressing on schedule with the goal to be ready by the end of 1998. The
replacement of the Downstream billing system will be completed by the second
quarter 1999.
<PAGE> 46
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Marathon Group includes Year 2000 provisions in its contractual
agreements. In additon, letters have been sent to critical suppliers of
materials, services and third party software and their responses are
being evaluated. Those suppliers not responding or not ready are
being contacted to determine their ability to be a supplier for
the Marathon Group in the Year 2000 and beyond.
Each business unit is responsible for preparing a contingency plan and each
business unit is in some phase of developing one. All business units will have
a well defined contingency plan by the end of August 1999. The plans will then
be consolidated at the corporate level.
To date, significant internal resources have been used for the Year 2000
effort. These resources are being supplemented with outside consultants and
contractors, as business priorities and conditions warrant.
The incremental costs associated with these efforts have not been material,
and, in management's opinion, future incremental costs associated with Year 2000
readiness are not expected to be material to the operating results of the
Marathon Group. However, Marathon has limited control over corrective actions
by proprietary software vendors and other entities with which it interacts. To
the extent that these entities are unable to satisfactorily resolve their
readiness problems, the operating results of the Marathon Group could be
adversely affected.
This 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 industry segments of an enterprise. USX plans to 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 plans to adopt the standard,
effective with its 1998 annual financial statements.
<PAGE> 47
MARATHON GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
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 within Stockholders' Equity as a result of
recording unrecognized gains and losses within Other Comprehensive Income. USX
may also have to recognize gains or losses from hedging activities in its
results of operations in periods different than would be the case under existing
guidance. Based upon the hedging 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.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------------------
As of June 30, 1998, the discussion of the Marathon Group's commodity price
risk, interest rate risk, foreign currency exchange rate risk and 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.
For additional discussion on market risk for USX, see Quantitative and
Qualitative Disclosures About Market Risk for the Marathon Group in the USX 1997
Form 10-K.
<PAGE> 48
<TABLE>
<CAPTION>
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
-----------------------------------
Second Quarter Six Months
Ended June 30 Ended June 30
(Dollars in millions) 1998 1997(a) 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM OPERATIONS (b)
Exploration & Production
Domestic $41 $106 $115 $289
International 32 75 82 179
Refining, Marketing & Transportation(c) 397 165 525 244
Other Energy Related Businesses(d) 3 9 17 31
Administrative (21) (48) (59) (87)
------ ------ ------ ------
$452 $307 $680 $656
Int'l. Impairment & Domestic Contract Settlement 0 0 (76) 0
Gain on Ownership Chg. & Transition Charges-MAP (2) 0 223 0
Inventory Market Val. Res. Adjustment 3 (64) 28 (178)
------ ------ ------ ------
Total Marathon Group $453 $243 $855 $478
CAPITAL EXPENDITURES (c) $331 $271 $550 $389
INVEST. IN(RETURNS FROM) EQUITY AFFILIATES-NET (22) 80 3 137
OPERATING STATISTICS
Net Liquid Hydrocarbon Production (e):
Domestic 137.9 113.3 131.9 114.0
International (Liftings) 59.4 50.9 52.8 52.2
------ ------ ------ ------
Worldwide 197.3 164.2 184.7 166.2
Net Natural Gas Production (f):
Domestic 723.2 694.2 735.6 726.2
International - Equity 391.0 401.6 415.7 469.0
International - Other (g) 24.5 25.9 25.2 31.8
------- ------- ------- -------
Total Consolidated 1138.7 1121.7 1176.5 1227.0
Equity Affiliate 36.6 39.4 39.6 47.1
------- ------- ------- -------
Worldwide 1175.3 1161.1 1216.1 1274.1
Average Equity Sales Prices (h):
Liquid Hydrocarbons (per Bbl)
Domestic $9.97 $16.10 $10.98 $17.69
International 12.85 17.11 13.24 19.25
Natural Gas (per Mcf)
Domestic $1.87 $1.98 $1.89 $2.27
International 2.05 1.90 2.11 2.05
Natural Gas Sales (f) (i):
Domestic 1067.9 1123.8 1149.6 1184.3
International 415.5 427.5 440.9 500.8
------- ------- ------- -------
Total Consolidated 1483.4 1551.3 1590.5 1685.1
Equity Affiliate 36.6 39.4 39.6 47.1
------- ------- ------- -------
Worldwide 1520.0 1590.7 1630.1 1732.2
Crude Oil Refined (e) (c) 923.2 499.9 914.3 488.0
Refined Products Sold (e) (c) 1178.9 758.2 1160.8 741.2
Matching buy/sell volumes included in refined
products sold (e) (c) 32.1 45.9 39.8 54.8
- --------------
<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 Financial Statements.
(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
</TABLE>
<PAGE> 49
MARATHON GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS
-----------------------------------
The following unaudited pro forma data include the results of operations for the
Ashland RM&T net assets acquired by Marathon, giving effect to the acquisition
as if it had been consummated on January 1, 1997. 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. Pro forma data include reduced depreciation charges as a result of
purchase accounting and other pro forma adjustments. The pro forma data do not
include any of the potential efficiencies expected to be derived by MAP. See
Note 6 to the Marathon Group financial statements for additional pro forma
information.
<TABLE>
<CAPTION>
Quarter Six Months
Ended Ended
June 30 June 30
1997 1997
Pro Forma Pro Forma
---------- ----------
(Dollars in millions)
<S> <C> <C>
Marathon Group - Revenues (c) $5,630 $11,685
Marathon Group - Income from operations (a) 431 794
RM&T - Income from operations (a) (b) 284 371
Thousands of barrels per day
Crude Oil refined 856.0 828.3
Refined products sold 1,182.4 1,145.5
Matching buy/sell volumes included
in refined products sold 69.2 78.7
<FN>
(a) Excludes the pro forma IMV reserve adjustment
(b) Includes income from operations from RM&T assets transferred to MAP
by Marathon and Ashland, purchase accounting effects and other pro forma
adjustments and reclassifications
(c) Includes matching buy/sell transactions and excise taxes
</TABLE>
<PAGE> 50
Part I - Financial Information (Continued):
C. U. S. Steel Group
<TABLE>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
------------------------------------
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $1,689 $1,715 $3,359 $3,334
Income from affiliates 28 16 43 27
Gain on disposal of assets 17 6 28 7
Other income (loss) (1) - (1) -
------ ------ ------ -------
Total revenues 1,733 1,737 3,429 3,368
------ ------ ------ -------
COSTS AND EXPENSES:
Cost of sales (excludes items shown below) 1,436 1,438 2,891 2,842
Selling, general and administrative expenses
(credits) (53) (33) (99) (70)
Depreciation, depletion and amortization 72 79 149 153
Taxes other than income taxes 61 60 109 119
------ ------ ------ -------
Total costs and expenses 1,516 1,544 3,050 3,044
------ ------ ------ -------
INCOME FROM OPERATIONS 217 193 379 324
Net interest and other financial costs 22 37 50 48
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 195 156 329 276
Provision for estimated income taxes 59 59 106 92
------ ------ ------ ------
NET INCOME 136 97 223 184
Noncash credit from exchange of preferred stock - 10 - 10
Dividends on preferred stock (3) (2) (5) (8)
------ ------ ------ ------
NET INCOME APPLICABLE TO STEEL STOCK $133 $105 $218 $186
====== ====== ====== ======
STEEL STOCK DATA:
Net income per share
- Basic $1.53 $1.23 $2.51 $2.19
- Diluted 1.46 1.06 2.41 1.99
Dividends paid per share .25 .25 .50 .50
Weighted average shares, in thousands
- Basic 86,953 85,614 86,777 85,307
- Diluted 94,507 93,983 94,314 94,284
<FN>
Selected notes to financial statements appear on pages 53-56.
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
BALANCE SHEET (Unaudited)
------------------------------------
June 30 December 31
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16 $18
Receivables, less allowance for doubtful
accounts of $5 and $13 483 588
Inventories 738 705
Deferred income tax benefits 219 220
Other current assets 1 -
------ ------
Total current assets 1,457 1,531
Investments and long-term receivables,
less reserves of $15 and $15 758 670
Property, plant and equipment, less accumulated
depreciation, depletion and amortization of
$5,837 and $5,799 2,468 2,496
Prepaid pensions 2,070 1,957
Other noncurrent assets 31 40
------ ------
Total assets $6,784 $6,694
====== ======
LIABILITIES
Current liabilities:
Notes payable $- $13
Accounts payable 634 687
Payroll and benefits payable 353 379
Accrued taxes 159 190
Accrued interest 10 11
Long-term debt due within one year 45 54
------ ------
Total current liabilities 1,201 1,334
Long-term debt, less unamortized discount 432 456
Employee benefits 2,331 2,338
Deferred credits and other liabilities 589 536
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 1,980 1,779
------ ------
Total stockholders' equity 1,983 1,782
------ ------
Total liabilities and stockholders' equity $6,784 $6,694
====== ======
<FN>
Selected notes to financial statements appear on pages 53-56.
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
U. S. STEEL GROUP OF USX CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
------------------------------------
Six Months Ended
June 30
(Dollars in millions) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
OPERATING ACTIVITIES:
Net income $223 $184
Adjustments to reconcile to net cash provided
from operating activities:
Depreciation, depletion and amortization 149 153
Pensions (105) (82)
Postretirement benefits other than pensions (2) (1)
Deferred income taxes 89 24
Gain on disposal of assets (28) (7)
Changes in:
Current receivables 94 89
Inventories (33) (58)
Current accounts payable and accrued expenses (116) 28
All other - net (29) (36)
------ ------
Net cash provided from operating activities 242 294
------ ------
INVESTING ACTIVITIES:
Capital expenditures (136) (117)
Disposal of assets 15 374
Investments in equity affiliates - net (63) (15)
All other - net 13 8
------ ------
Net cash provided from (used in)
investing activities (171) 250
------ ------
FINANCING ACTIVITIES:
Decrease in U. S. Steel Group's portion of USX
consolidated debt (47) (517)
Specifically attributed debt repayments (3) (6)
Steel Stock issued 25 21
Dividends paid (48) (49)
------ ------
Net cash used in financing activities (73) (551)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2) (7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 18 23
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16 $16
====== ======
Cash used in operating activities included:
Interest and other financial costs paid (net of
amount capitalized) $(39) $(59)
Income taxes paid, including settlements
with other groups (14) (45)
<FN>
Selected notes to financial statements appear on pages 53-56.
</TABLE>
<PAGE> 53
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 second quarter and six months of
1998 was $134 million and $221 million, respectively. Total comprehensive
income for the same 1997 periods was $97 million and $183 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.
<PAGE> 54
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
3. (Continued)
These financial statements are prepared using the amounts included in
the USX consolidated financial statements. Corporate amounts reflected in
these financial statements are determined based upon methods which
management believes to be reasonable. The accounting policies applicable
to the preparation of the financial statements of the U. S. Steel Group may
be modified or rescinded in the sole discretion of the Board of Directors
of USX (Board), although the Board has no present intention to do so. The
Board may also adopt additional policies depending on the circumstances.
Although the financial statements of the U. S. Steel Group and the
Marathon Group separately report the assets, liabilities (including
contingent liabilities) and stockholders' equity of USX attributed to each
such Group, such attribution of assets, liabilities (including contingent
liabilities) and stockholders' equity 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.
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.
<PAGE> 55
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
5. Income from operations includes net periodic pension credits of $102
million and $74 million in the first six months of 1998 and 1997,
respectively, ($51 million and $36 million in the second 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. 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 second quarter and six 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.
7. 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)
-----------------------
June 30 December 31
1998 1997
-------- -----------
<S> <C> <C>
Raw materials $135 $130
Semi-finished products 332 331
Finished products 219 187
Supplies and sundry items 52 57
---- ----
Total $738 $705
==== ====
</TABLE>
8. The U. S. Steel Group participates in an agreement (the program) to
sell an undivided interest in certain accounts receivable. Payments are
collected from the sold accounts receivable; the collections are reinvested
in new accounts receivable for the buyers; and a yield, based on defined
short-term market rates, is transferred to the buyers. At June 30, 1998,
the amount sold under the program that had not been collected was
$350 million, which will be
<PAGE> 56
U. S. STEEL GROUP OF USX CORPORATION
SELECTED NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------
(Unaudited)
8. (Continued)
forwarded to the buyers at the end of the agreement, or in the event
of earlier contract termination. If the U. S. Steel Group does not have a
sufficient quantity of eligible accounts receivable to reinvest in for the
buyers, the size of the program will be reduced accordingly. The buyers
have rights to a pool of receivables that must be maintained at a level of
at least 115% of the program size. In the event of a change in control of
USX, as defined in the agreement, the U. S. Steel Group may be required to
forward payments collected on sold accounts receivable to the buyers.
9. USX is the subject of, or a party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the U.
S. Steel Group involving a variety of matters including laws and
regulations relating to the environment. Certain of these matters are
discussed below. The ultimate resolution of these contingencies could,
individually or in the aggregate, be material to the U. S. Steel Group
financial statements. However, management believes that USX will remain a
viable and competitive enterprise even though it is possible that these
contingencies could be resolved unfavorably to the U. S. Steel Group. See
discussion of Liquidity in USX Consolidated Management's Discussion and
Analysis of Financial Condition and Results of Operations.
The U. S. Steel Group is subject to federal, state and local laws and
regulations relating to the environment. These laws generally provide for
control of pollutants released into the environment and require responsible
parties to undertake remediation of hazardous waste disposal sites.
Penalties may be imposed for noncompliance. At June 30, 1998, and December
31, 1997, accrued liabilities for remediation totaled $107 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 six months of 1998
and for the years 1997 and 1996, such capital expenditures totaled $25
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 $63 million at June 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 June 30, 1998, the largest guarantee for a
single affiliate was $35 million.
The U. S. Steel Group's contract commitments to acquire property,
plant and equipment at June 30, 1998, totaled $222 million compared with
$156 million at December 31, 1997.
<PAGE> 57
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 second quarter
and first six 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 66.
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 second quarter and first six months of 1998 and 1997 are
set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Steel & Related Businesses $1,672 $1,699 $3,341 $3,307
Steel & Related - Equity Affiliates 18 12 29 21
----- ----- ----- -----
Subtotal - Steel & Related 1,690 1,711 3,370 3,328
Administrative & Other Businesses 43 26 59 40
----- ----- ----- -----
Total Revenues (a) $1,733 $1,737 $3,429 $3,368
===== ===== ===== =====
- ------
<FN>
(a) Consists of sales, 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.
</TABLE>
Total revenues decreased $4 million in the second quarter of 1998 compared
with the second quarter of 1997. Total revenues increased $61 million in the
first six months of 1998 compared with the same period in 1997.
<PAGE> 58
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 second quarter and first six months of 1998 and 1997 are set
forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total income from operations (a) $217 $193 $379 $324
Less: certain favorable (unfavorable) items for
Insurance litigation settlement No. 8 blast
furnace (net of related charges and reserves)(b) 30 - 30 -
Partial insurance settlement related to the 1996
hearth breakout at the Gary Works No. 13
blast furnace - - - 15
Effect of adoption of SOP 96-1 (c) - - - (20)
Other environmental accrual adjustments - net - - - 11
----- ----- ----- -----
Subtotal 30 - 30 6
----- ----- ----- -----
IFO adjusted to exclude above items $187 $193 $349 $318
===== ===== ===== =====
- -----
<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 $6
million in the second quarter of 1998 compared with the second quarter of 1997.
The decrease was primarily due to lower results from Steel and Related
Businesses, partially offset by higher results from Administrative and Other
Businesses. Adjusted income from operations for the first six months of 1998
increased $31 million compared with the first six months of 1997, primarily due
to higher results from Administrative and Other Businesses, partially offset by
lower results from Steel and Related Businesses.
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Steel & Related Businesses $114 $127 $203 $214
Steel & Related - Equity Affiliates 18 12 29 21
----- ----- ----- -----
Subtotal - Steel & Related 132 139 232 235
Administrative & Other Businesses 85 54 147 89
----- ----- ----- -----
Total income from operations $217 $193 $379 $324
===== ===== ===== =====
</TABLE>
<PAGE> 59
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 $13 million
in the second quarter of 1998 compared with the second quarter of 1997. Results
in the second quarter 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. Excluding the settlement, income from
operations for the second quarter 1998 decreased $43 million from the same
period in 1997. The decrease was primarily due to the cost effects of the
planned reline at Gary Works No. 6 blast furnace which began in mid-May and the
10 day outage at Gary Works No. 13 blast furnace following a tap hole failure,
lower average steel prices and lower steel shipments. Income from operations for
Steel & Related Businesses decreased $11 million in the first six months of 1998
compared with the same period in 1997. Results in the first six months of 1998
included $30 million in insurance litigation settlements (discussed above).
Results in the first six months of 1997 included a favorable $15 million partial
insurance settlement related to a 1996 hearth breakout at Gary Works No. 13
blast furnace. Excluding these favorable items, income from operations for the
first six months of 1998 decreased $26 million from the same period in 1997.
The decrease was primarily due to lower average steel prices, the cost effects
of the Gary Works blast furnace outages, and lower steel shipments. The sharp
increase in steel imports and the General Motors strike contributed to lower
average steel prices and reduced shipments in the second quarter and first six
months of 1998.
Income from operations for Steel and Related - Equity Affiliates increased
$6 and $8 million in the second quarter and first six months of 1998,
respectively, compared with the same periods in 1997. These increases were
mainly due to higher income generated by USS/Kobe and 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 61), partially offset by lower
income from USS-POSCO and PRO-TEC.
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 $31
million and $58 million in the second quarter and first six months of 1998,
respectively, compared with the same periods in 1997. Income from operations
for Administrative and Other Businesses for the first six 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 six months of 1998 increased $49 million from the same period in 1997
primarily due to higher pension credits, higher equity income from RMI Titanium
Company 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 $102
million and $74 million in the first six months of 1998 and 1997, respectively.
To the extent that these credits decline in the future, income from operations
would be adversely affected.
<PAGE> 60
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 second quarter and first six
months of 1998 and 1997 are set forth in the following table:
<TABLE>
<CAPTION>
Second Quarter Six Months
Ended Ended
June 30 June 30
(Dollars in millions) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and other financial income $2 $- $4 $1
Interest and other financial costs (24) (37) (54) (49)
----- ----- ----- -----
Net interest and other financial costs (22) (37) (50) (48)
Less:
Favorable (unfavorable) adjustments to
carrying value of indexed debt (a) - (10) (4) 6
----- ----- ----- -----
Net interest and other financial costs
adjusted to exclude above item $(22) $(27) $(46) $(54)
===== ===== ===== =====
- -----
<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 RMI
Titanium Company ("RMI") common stock. At maturity, USX must exchange
these notes for shares of RMI 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
RMI common stock. Any resulting adjustment is charged or credited to
income and included in interest and other financial costs. USX's 27%
interest in RMI continues to be accounted for under the equity method.
</TABLE>
Adjusted net interest and other financial costs decreased by $5 million and
$8 million in the second quarter and first six 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 second quarter and first
six months of 1998 included a $9 million favorable foreign tax adjustment as a
result of a favorable resolution of foreign tax litigation. The provision for
estimated income taxes for the second quarter 1997 included the six month effect
of a reduction in estimated tax credits for 1997.
Net income increased $39 million in both the second quarter and first six
months of 1998, as compared with the same periods in 1997.
Noncash credit from exchange of preferred stock totaled $10 million in the
second quarter and first six 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> 61
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
--------------------------------------------
Operating Statistics
- --------------------
Second quarter 1998 steel shipments of 2.9 million tons and raw steel
production of 2.9 million tons decreased 3% and 8%, respectively, from the same
period in 1997. First six months of 1998 steel shipments of 5.8 million tons and
raw steel production of 6.0 million tons decreased 0.3% and 3%, respectively,
from the same period in 1997. Raw steel capability utilization in the second
quarter and first six months of 1998 averaged 90.9% and 95.2%, respectively,
compared to 99.4% and 98.3% in the same period in 1997. Production and raw
steel capability utilization in the second quarter and first six months of 1998
were negatively affected by the planned and unplanned blast furnace outages at
Gary Works.
Cash Flows
- -----------
Net cash provided from operating activities in the first six months of 1998
was $242 million, compared with $294 million in the same period in 1997. The
first six months of 1998 included proceeds of $38 million for the insurance
litigation settlement pertaining to the 1995 Gary Works No. 8 blast furnace
explosion. The first six months of 1997 included proceeds of $15 million for
the partial insurance recovery pertaining to the Gary Works No. 13 blast furnace
breakout. Excluding these items, net cash provided from operating activities
decreased $75 million due to unfavorable working capital changes.
Capital expenditures in the first six months of 1998 were $136 million,
compared with $117 million in the same period in 1997. Contract commitments to
acquire property, plant and equipment at June 30, 1998, totaled $222 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 $63 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 (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.
Financial obligations decreased by $50 million in the first six 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> 62
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 June
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 37 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> 63
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 in the third quarter for U. S. Steel Group and its
domestic joint ventures are expected to be lower than the second quarter of 1998
due to the sharp increase in steel imports, selected customer inventory
reduction plans, the effects of the recently settled General Motors strike, and
normal seasonal demand patterns. Growing domestic production and
finishing capability for flat-rolled products and continuing high levels of
imports could continue to have an adverse effect on the U. S. Steel Group's
product prices and shipment levels.
The U. S. Steel Group anticipates production levels and manufacturing costs
will be unfavorably affected by the No. 6 blast furnace reline outage and the
lingering effects of the No. 13 blast furnace tap hole failure.
Based on the continuing strong demand for plate products (plate shipments
accounted for approximately 9% of U. S. Steel's total shipments), U. S. Steel
Group announced a price increase that took effect in late June of 1998.
Steel imports to the United States accounted for an estimated 25%, 24% and
23% of the domestic steel market in the first five months of 1998, and for the
years 1997 and 1996, respectively. During April and May of 1998, steel imports
increased sharply and accounted for 27% and 30%, respectively, of the domestic
steel market. The domestic steel industry has, in the past, been adversely
affected by unfairly traded imports, and higher levels of imported steel may
have an adverse effect on product prices, shipment levels and results of
operations.
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.
Year 2000
- ---------
The U. S. Steel Group Year 2000 task force continues to pursue the
implementation of its preparedness plan to mitigate the risks associated to the
Year 2000. The inventory of both information technology (IT) systems (e.g.
hardware, software & networking for mainframe, mid-range, PCs and other such
computing platforms) and non-IT systems (e.g. process control, automation,
instrumentation, embedded chip facilities and processes) is complete. The
analysis of this inventory to determine the impact of the Year 2000 problem has
been essentially completed for IT systems but the assessment of date
functionality and embedded chip technology for non-IT systems is continuing for
automation and process control systems used in the manufacturing processes. The
renovation/replacement initiatives and related testing for Year 2000 readiness
are roughly 70% complete for the U. S. Steel Group with IT systems well over
three-quarters complete and non-IT systems approximately one-half complete. The
U. S. Steel Group's objective is to achieve Year 2000 readiness by the end of
1998 except for certain IT and non-IT systems that are scheduled to be replaced
with Year 2000 ready third-party vendor systems in 1999.
In conjunction with the above Year 2000 initiatives, the U. S. Steel Group
is also monitoring the Year 2000 readiness efforts of entities with which it
does business and is participating with steel industry and other trade
associations to collect information on the readiness of such entities. Letters,
with
<PAGE> 64
U. S. STEEL GROUP OF USX CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
questionnaires, are being sent to those critical entities in the supply chain
with which the U. S. Steel Group does business to assess their Year 2000
readiness. It is anticipated that this will be an on-going process for the
remainder of 1998 and all of 1999, and that it will include the use of survey
techniques and follow-up telephone interviews and on-site assessments on the
Year 2000 readiness progress for certain critical entities in the U. S. Steel
Group supply chain.
As part of U. S. Steel Group's Year 2000 preparedness plan, back-up
recovery and contingency requirements are being evaluated and guidelines are
being established for critical IT and non-IT systems/processes in the event of
unanticipated Year 2000 problems. Guidelines for verifying Year 2000 readiness
are also being developed for those IT and non-IT systems/processes that are
critical to the U. S. Steel Group business operations and it is expected that
they will be implemented throughout 1999 along with continued integration
testing of such systems/processes. To-date, the U. S. Steel Group's Year 2000
efforts have been executed primarily by internal resources. These resources are
being supplemented with outside consultants and contractors, as business
priorities and conditions warrant. Based on information available at this time,
management believes that the incremental costs associated with achieving Year
2000 readiness will not be material to the operating results of the U. S. Steel
Group.
Since certain businesses of the U. S. Steel Group develop and sell IT and
non-IT systems, the Year 2000 preparedness plan and associated guidelines are
also being applied and executed for such products produced by those businesses.
Internal audits of U. S. Steel Group's Year 2000 preparedness plan and readiness
progress are periodically performed for those businesses that sell IT and non-IT
systems as well as for all other business operations of the company.
The discussion of the U. S. Steel Group's efforts, and management's
expectations, relating to Year 2000 readiness, includes forward-looking
statements. The U. S. 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. The U. S. Steel Group has limited or no control over the
actions of proprietary hardware and software vendors and other entities with
which it interacts. Therefore, problems experienced by these entities in
becoming Year 2000 ready could adversely affect the operating results of the
U. S. Steel Group.
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 industry segments of an enterprise. USX plans to 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 plans to 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> 65
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 within Stockholders' Equity as a result of
recording unrecognized gains and losses within Other Comprehensive Income. USX
may also have to recognize gains or losses from hedging activities in its
results of operations in periods different than would be the case under existing
guidance. Based upon the hedging 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.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
-----------------------------
As of June 30, 1998, the discussion of the U. S. Steel Group's commodity
price risk, interest rate risk, foreign currency exchange rate risk and 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.
For additional discussion on market risk for USX, see Quantitative and
Qualitative Disclosures About Market Risk for the U. S. Steel Group in the USX
1997 Form 10-K.
<PAGE> 66
<TABLE>
U. S. STEEL GROUP OF USX CORPORATION
SUPPLEMENTAL STATISTICS (Unaudited)
------------------------------------
($ in Millions)
<CAPTION>
Second Quarter Six Months
Ended June 30 Ended June 30
1998 1997(e) 1998 1997(e)
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES $1,733 $1,737 $3,429 $3,368
INCOME FROM OPERATIONS
Steel and Related Businesses (a) $114 $127 $203 $214
Steel and Related-Equity Affiliates 18 12 29 21
---- ---- ---- ----
Subtotal - Steel & Related $132 $139 $232 $235
Administrative and Other (b) 85 54 147 89
---- ---- ---- ----
Total U. S. Steel Group $217 $193 $379 $324
CAPITAL EXPENDITURES $79 $67 $136 $117
OPERATING STATISTICS (Steel & Related Businesses)
Steel Shipments (c) 2,857 2,943 5,790 5,809
Raw Steel-Production (c) 2,902 3,171 6,045 6,242
Raw Steel-Capability Utilization (d) 90.9% 99.4% 95.2% 98.3%
- ------------
<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 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> 67
Part II - Other Information
- ----------------------------
Item 1. LEGAL PROCEEDINGS
Marathon Group
Posted Price Litigation
The Marathon Group, alone or with other energy companies, has been
named in a number of lawsuits in State and Federal courts alleging
various causes of action related to crude oil royalty payments based
on posted prices, including underpayment of royalty interests,
underpayment of severance taxes, antitrust violations, and violation
of the Texas common purchaser statute. Plaintiffs in these actions
include governmental entities and private entities or individuals,
and some seek class action status. All of these cases are in various
stages of preliminary activities. No class certification has been
determined as to Marathon in any case to date.
During November 1997, Marathon and over twenty other defendants
entered into a proposed class settlement agreement covering antitrust
and contract claims from January 1, 1986, through September 30, 1997,
excluding federal and Indian royalty claims, common purchaser claims
and severance tax claims. A new settlement agreement was
filed with the U. S. District Court in Texas on June 26, 1998 which
replaces the November 1997 Settlement Agreement. The new settlement
agreement omits from the settlement class all State entities which
receive royalty payments and only covers private claimants. The
settlement agreement is pending approval by a U.S. District Court
in Texas (Southern District) and is subject to a fairness hearing.
If the Court approves the settlement, Marathon's payment, which is not
expected to be material, should be made in the second half of 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held April 28, 1998. In
connection with the meeting, proxies were solicited pursuant to the
Securities Exchange Act. The following are the voting results on
proposals considered and voted upon at the meeting, all of which were
described in the proxy statement.
1. All nominees for director listed in the proxy statement were
elected.
The following is a tabulation of votes with respect to each
nominee for director:
Votes For Votes Withheld
Victor G. Beghini 320,406,320 4,534,427
Charles R. Lee 320,413,177 4,527,570
Ray Marshall 320,207,709 4,733,038
Thomas J. Usher 320,398,182 4,542,565
Paul J. Wilhelm 320,425,323 4,515,424
2. PricewaterhouseCoopers LLP was elected as the independent
accountants for 1998. (For, 323,052,262; against, 727,495;
abstained, 1,160,990).
3. Approval of Amendments to the USX Corporation Senior
Executive Officer Annual Incentive Compensation Plan (For,
308,995,227; against, 12,692,557; abstained, 3,252,962).
4. Approval of Amendments to the USX Corporation 1990 Stock
Plan. (For, 279,793,056; against, 41,884,174; abstain, 3,263,517).
<PAGE> 68
Part II - Other Information (continued)
- ----------------------------------------
Item 5. OTHER INFORMATION
USX Corporation
Proposals of security holders intended to be presented at the
1999 annual meeting of stockholders, scheduled to be held on April 27,
1999, must be received no later than November 9, 1998 for inclusion in
the proxy statement and proxy for that meeting. In addition, the By-
Laws provide that only such business as is properly brought before the
annual meeting will be conducted. For business to be properly brought
before the meeting by a stockholder, the By-Laws require that notice
be received by the Secretary at least 60, but not more than 90, days
prior to the meeting and that such notice provide certain information
regarding the business desired to be brought before the annual meeting
and about the stockholder giving the notice.
Thomas J. Usher, chairman and chief executive officer, has
undergone surgery and treatment for a melanoma on his back. He is
currently working and is continuing to discharge all of his corporate
responsibilities. Due to early discovery, prospects for full recovery
are excellent and will be monitored through periodic checkups.
<PAGE> 69
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)
-------------------------------
Second Quarter Six Months
Ended Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
INCOME DATA:
<S> <C> <C> <C> <C>
Revenues $5,556 $3,772 $11,045 $7,868
Income from operations 460 249 868 491
Net income 148 106 321 204
</TABLE>
<TABLE>
<CAPTION>
(In millions)
-----------------------
June 30 December 31
1998 1997
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Assets:
Current assets $5,540 $3,436
Noncurrent assets 10,087 8,413
------ ------
Total assets $15,627 $11,849
====== ======
Liabilities and Stockholder's Equity:
Current liabilities $3,357 $1,997
Noncurrent liabilities 7,930 7,569
Minority interest in consolidated subsidiary 1,737 -
Stockholder's equity 2,603 2,283
------- -------
Total liabilities and stockholder's equity $15,627 $11,849
======= =======
</TABLE>
<PAGE> 70
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.
4.1 Amended and Restated Rights
Agreement..................... Incorporated by reference
to USX's Form 8 Amendment to
Form 8-A filed on October 9,
1992 (File No. 1-5153).
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 May 29, 1998, reporting under Item 5. Other Events,
announcing that the Marathon Oil Company subsidiary of USX Corporation
had entered into an agreement to acquire Tarragon Oil and Gas Limited for
a total consideration of approximately $1.1 billion.
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
August 13, 1998
<TABLE>
<CAPTION>
Exhibit 12.1
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
----------------------------------------------------------
(Dollars in Millions)
Six Months
Ended Year Ended December 31
June 30 --------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $41 $40 $82 $78 $76 $83 $81
Capitalized interest 23 10 31 11 13 58 105
Other interest and fixed
charges 150 167 312 382 452 456 365
Pretax earnings which would
be required to cover
preferred stock dividend
requirements of parent 8 13 20 36 46 49 44
---- ---- ---- ---- ---- ---- ----
Combined fixed charges
and preferred stock
dividends (A) $222 $230 $445 $507 $587 $646 $595
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $1043 $826 $1745 $1837 $877 $1300 $239
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 4.70 3.59 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>
<CAPTION>
Exhibit 12.2
USX CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
TOTAL ENTERPRISE BASIS - (Unaudited)
Continuing Operations
-------------------------------------------------
(Dollars in Millions)
Six Months
Ended Year Ended December 31
June 30 --------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Portion of rentals
representing interest $41 $40 $82 $78 $76 $83 $81
Capitalized interest 23 10 31 11 13 58 105
Other interest and fixed
charges 150 167 312 382 452 456 365
---- ---- ---- ---- ----- ---- ----
Total fixed charges (A) $214 $217 $425 $471 $541 $597 $551
==== ==== ==== ==== ==== ==== ====
Earnings-pretax income
with applicable
adjustments (B) $1043 $826 $1745 $1837 $877 $1300 $239
==== ==== ==== ==== ==== ==== ====
Ratio of (B) to (A) 4.87 3.81 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 945
<SECURITIES> 0
<RECEIVABLES> 1814
<ALLOWANCES> 12
<INVENTORY> 2488
<CURRENT-ASSETS> 5574
<PP&E> 27328
<DEPRECIATION> 15763
<TOTAL-ASSETS> 21032
<CURRENT-LIABILITIES> 4574
<BONDS> 3311
182
3
<COMMON> 377<F1>
<OTHER-SE> 5496
<TOTAL-LIABILITY-AND-EQUITY> 21032
<SALES> 7214
<TOTAL-REVENUES> 7292
<CGS> 6622
<TOTAL-COSTS> 6622
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> 441
<INCOME-TAX> 143
<INCOME-CONTINUING> 298
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 298
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Consists of Marathon Stock issued, $290; Steel Stock issued, $87.
<F2>Basic earnings per share applicable to Marathon Stock, $1.19; Steel Stock,
$2.51.
<F3>Diluted earnings per share applicable to Marathon Stock, $1.19; Steel Stock,
$2.41.
</FN>
</TABLE>
